Conceptual improvements to a non-contact optical strain measurement technique for high-speed flywheels are presented. The improvements include a novel reflective pattern that allows for greater displacement sensitivity, the ability to measure rigid body vibrations and separate the associated vibration-induced displacement from the strain-induced displacement, and the ability to compensate for potential sensor drift during flywheel operation. The effects of rigid body rotor vibrations and sensor drift have been modeled and techniques to compensate for the errors associated with such effects are presented. Experimental results validate the ability of the technique to separate such vibrations from axisymmetric flexible body displacements, and to compensate for errors due to in-plane and out-of-plane pattern misalignment and sensor drift. Displacement measurements made on an aluminum rotor operating at a maximum speed of 16 krpm (255 m/s at the point of measurement) were made with ±1 μm accuracy. At this speed, hoop strains were found to be within 40–125 μe of theoretical predictions, provided a proper accounting is made for thermal strains. Relative to the theoretical hoop strains, the measured hoop strains differed by 5.0 to 6.4% at 16 krpm.