The miniaturization trend has enhanced the rapid development of small precision machines. The operational performance of a precision machine is mainly determined by its bearing clearance, the balancing quality of its shafts, and the actuation smoothness of the rotating shafts. In comparison with large shafts, small shafts are more susceptible to external interference and the loading effects of the measurement equipment. Accordingly, the inspection concepts for small shafts should be quite different from those for large shafts. This paper presents our approach to developing an economical optical measurement system with which the error motions of small rotating shafts can be inspected. The shadow method is applied as the measurement concept for the radial error motion. Two perpendicularly installed laser beams are partially shaded by the shaft, and the radial error motion is transformed into the alternations of light and shade on two photodiode arrays. For measuring the tilt error motion, a reflective method is realized to transform a tilt error motion into a 2-D movement of a reflective cross-hair pattern, which is detected by two photodiode arrays. To increase the measurement sensitivity, a novel bilateral configuration using offset pairs of photodiode detectors is developed; the signals of the detectors are processed by the differential principle. The shadow method shows better sensitivity and faster measuring speed than the reflective method because of its distinct projected beam.