A new method--difference frequency sub-division technique is proposed to process the signals of a group of phase (or frequency)-modulated sensors(e.g. inductosyn). The new method can achieve the measuring resolution as high as O.07M (or 0, 04 rim). A new system, based on the above method, is developed, with a 8098 microprocessor and circle inductosyn, for measuring transmission chain kinematic error of gear bobbing machine.The long and adjacent period error can be obtained simultaneously with the measuring accuracy of 1. This system provides an effective means for measurement and improvement of transmission chain accuracy of machine tools. Keywords:Transmission chain accuracy, Inductosyn,Difference frequency,Sub-division, On-line measurement.