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A new kind of the rotary encoder based on the magneto-optical (MO) storage is proposed. Using the MO methods, a small high-precision high-response rotary encoder can be realized. High precision is achieved by a two-stage process in which the code disk is firstly written using the direct transfer recording, and then rewritten using the corrections based on the measured errors. The systems for writing to, reading from, and evaluating the MO encoder are developed, with the optimal MO encoder reading and writing parameters determined experimentally. A trial MO encoder with a resolution of 9000 pulses/revolutions is created directly from a reference encoder, delivering an accuracy of approximately 2.8 in. The maximum resolution and response frequencies achieved are 18000 p/r and 400 kHz. After the corrected transfer recording, accuracies of 1.3 in at a resolution of 2250 p/r and 1.7 in at 9000 p/r are achieved.