A circuit design method was proposed to compress the space of circuit in a photoelectric encoder and to reduce its size, then the signal processing of the circuit was studied. The basic principle, signal characteristics and signal processing requirements of the photoelectric encoder was introduced and the characteristic of traditional process circuit was analyzed. It points out that the traditional scheme based on amplifiers and comparators is the reason that the circuit structure is larger. To improve the traditional scheme, the methods of A/D through processing and time sharing driving photoelectric signal acquisition were proposed to replace the traditional hardware scheme to compress the space of circuit. The design principle of high integrated circuit of encoder was explained, then a 16-bit smaller encoder with the circuit board area of 415 mm2 and the volume of Ф25 mm×16 mm was designed. Obtained results demonstrate that the circuit design technique for high integrated photoelectric encoders based on SOC single-chip is a better way to compress the circuit space, for it has fewer components, simple circuits and higher integration.