An interferometer is presented which is capable of measuring the free-surface velocities and displacements of both specular and diffuse surfaces. The setup utilizes a previously used principle of producing a virtual image of one mirror at the same distance from the photodiode as the second mirror of the interferometer, albeit with considerable simplification. It is shown that use of a He-Ne laser of only 5-mW power can produce high contrast displacement fringes from surfaces of materials with nonuniform microstructure, including composites. Substrates of carbon-carbon composites and polycrystalline alumina with nonuniform microstructure on the scale of 5-10 mum, and with peak velocities up to 150 m/s were considered. An experimental strategy which allows one to covert the optical setup to either a velocity or a displacement interferometer is also discussed. It is further shown that use of a fast photodiode and a high-speed digitizer with a 5-ps rise time provides a time resolution of 0.2 ns for recording the displacement fringes, and allows measuring free surface velocities up to 800 m/s. This is demonstrated by measuring such transient surface velocities with rise times of 1 ns on a specular Si surface. In all the experiments reported here, the surface velocities were produced by the reflection of a stress wave, which in turn was generated on the back surface of the substrate, using a Nd:YAG laser pulse.