A precision optical encoder is under development to achieve an accuracy of better than 0.1 arc second over 360 degrees of rotation, or 1 part in 107. The optical encoder basically consists of a drum grating, a Displacement Sensor (also known as Vibration Sensorl 1,2), and an Angular Alignment Sensor'. The rotation of the drum is accurately measured by sen-sing the "sliding" motion of the drum grating with respect to the Displacement Sensor3. The focused displacement sensing beam (HeNe Laser at 633 nm) from the Displacement Sensor has an incidence angle 0 to the grating and coincides with a diffracted beam from the grating. The grating is ruled in the direction of the drum axis and completely around the cylindrical surface of the drum. The Displacement Sensor output measures the "sliding" distance of the rotating drum in the direction of the laser beam and can be expressed as the time integra-tion of γ(R(sine), where 'j( is the time derivative of the rotation angle and R is the radius of the drum. This integration becomes 2ηR(sineθ) for 360 degrees rotation, and this rotation angle can be determined accurately to better than 0.001 arc second with the assistance of the Angular Alignment Sensor. Taking the ratio of the time integration of '7R(sine) and the previously measured 27R(sineθ), the instantaneous drum rotation angle y can be determined. The accuracy of this optical encoder (Δγ) is estimated to be 0.1 arc second (Ay=AD/R(sine) = 4.86 x 10-7 radians) for a Displacement Sensor accuracy of 0.02 μm(AD), a drum radius of 6.5 cm (R) and an incidence angle of 39.3 degrees (θ). Laboratory subsystem tests have verified potential system performance. Many precision optical encoder applications exist which include precision angle measurement and calibration in numerous ground and space areas.