[LISA][1] (long PDF) uses [interferometry][2]. This is a method that allows very accurate measurement of the difference between two lengths.  
Basically, a laser beam is split. Each half of the beam travels a different path. At the end of the paths, both beams are combined again. A small difference in path lengths causes a phase difference in the beam. This becomes visible as an interference pattern. From this pattern, you can deduce the difference in path lengths.  
Because visible light has a very short wavelength (on the order of 400 nm), tiny differences in path length show up as a visible interference pattern. In effect, the path length difference is magnified. 


  [1]: http://lisa.nasa.gov/Documentation/LISA-PRJ-RP-0001.pdf
  [2]: http://en.wikipedia.org/wiki/Interferometry