Micromachined microphones with diffraction-based optical displacement detection are presented. A compliant membrane is made part of a phase sensitive diffraction grating, and the deflection resulting from external acoustic pressure alters the intensities of the diffracted orders which are monitored with integrated photodiodes. The scheme provides the displacement sensitivity of a Michelson interferometer and can be integrated without beam splitters or critical alignment problems into volumes on the order of 1mm³. The method is implemented and characterized using microphone membranes with integrated diffraction grating back electrodes fabricated on silicon using Sandia National Laboratories' dedicated processing platform. Detailed response characterization in both air and vacuum environments is performed to extract the diaphragm properties and high frequency cutoff frequencies of the microphone. Results from a finite element model of the microphone structure are in good agreement with measured data. The sensor's internal noise is characterized with measurements performed in the anechoic acoustic test facility at Georgia Tech. While utilizing 2.4mW of laser power, an (A) weighted displacement resolution of 6×10⁻⁴Å/√Hz is measured which is limited by thermal acoustic noise caused by the microphone's back-plate flow resistance.