If a planet crosses (transits) in front of its parent star's disk, then the observed visual brightness of the star drops a small amount. The amount the brightness of the star drops by is determined by the size of the star and the size of the planet that transits the star. If the distance and luminosity of the star is known, then the brightness can be calculated by the formula, 
Where B is the Brightness, L is the Luminosity and d is the distance to the star. By observing a change in brightness of a star, it can be suggested that there is a transit taking place. The brightness change can be very small (~0.01% change in some cases), but is still detectable using CCD cameras.
The Kepler space based telescope is one such telescope that is looking at stars variable brightness and when brightness variations are detected, a planet is predicted to be orbiting the star.
There are 4 main stages in a transit
First contact: the smaller body is entirely outside the larger body, moving inward...
Second contact: the smaller body is entirely inside the larger body, moving further inward…
Third contact: the smaller body is entirely inside the larger body, moving outward…
Fourth contact: the smaller body is entirely outside the larger body, moving outward
The limits to detecting planets by this method
To detect an Earth-size planet, the photometer must be able to sense a drop in brightness of only 1/100 of a percent (That is a 0.01% drop). This is like sensing the drop in brightness of a car’s headlight when a gnat flies in front of it! The photometer must be space based to obtain this precision. Telescopes from earth can detect Jupiter sized or larger planets, but even these are very hard to detect due the earths atmosphere interfering with the light from the star.
How can observation of transits tell us about the size of a planet?
Kepler scientists will be able to tell the size of a planet by carefully measuring the drop in brightness of the star during the transit; bigger planets block more starlight and cause a bigger drop in brightness. Kepler is poised to find planets 30 to 600 times less massive than Jupiter. Combining results of transit spectrometry and Doppler data, the mass, orbit and therefore likely atmosphere can be predicted.
Latest images of transits:
55 Cancri Double Transit:
