Because of the frequency of microwave is so high that it's difficult to direct analysis of the attenuation of microwave energy to know the water content in crude oil. However, it is simple to use a 1 KHz square wave to modulate it and analysis the amplitude changes of low frequency square wave which output from demodulation to measure the water content in crude oil. So this paper designs a modulation and demodulation microwave measurement signal processing system, including detector, selected frequency amplifier, rectifier circuit, filter circuit, A/D converter, MCU system and so on, to realize the detect of microwave measurement signal. After software simulation and experimental demonstration, this system can detect microwave measurement signal which are modulated and demodulated accurately and digital display the water content in crude oil. It has some advantages, such as good stability, little error, low cost and so on.