The first observation is made when the rotating mirror (RM) is not rotating. Light from a He-Ne laser is focused to a point at S by lens L1. Lens L2 is positioned so that the image of S is reflected from the rotating mirror (RM) and focused onto the fixed mirror (FM). The fixed mirror reflects the image back onto the rotating mirror, which in turn reflects the light back through the lenses, to reform the point image at S. However, the light also passes through a beam splitter (BS), which forms a mirror image at S', where it can be observed with the microscope.
The second observation is made when the rotating mirror is rotating. Since it takes a finite amount of time for the light to traverse the distance D, between the fixed and rotating mirrors, the rotating mirror is in a slightly different position when the light returns after reflecting off the fixed mirror. This produces a displacement in the position of S', which can be measured with the microscope.
The displacement of S' between the first and second observations (DS') is proportional to the transit time of the light over the distance D, and to the angular velocity of the rotating mirror.