A signal conditioning circuit for capacitive displacement sensors was developed using a high frequency modulation/demodulation method, and its performance was evaluated. Since capacitive displacement sensors can achieve high resolution and linearity, they have been widely used as precision sensors within the range of several hundred micrometers. However, they inherently have a limitation in low frequency range and some nonlinearity characteristics and so a specially designed signal conditioning circuit is needed to handle these properties. The developed signal processing circuit consists of three parts: linearization, modulation/demodulation, and nonlinearity compensation. Each part was constructed discretely using several IC chips and passive elements. An evaluation system for precision displacement sensors was developed using a laser interferometer, a precision stage, and a PID position controller. The signal processing circuit was tested using the evaluation system in the respect of resolution, repeatability, linearity, and so on. From the experimental results, we know that a highly linear voltage output can be obtained successfully, which is proportional to displacement and the nonlinearity of output is less than 0.02% of full range. However, in the future, further investigation is required to reduce noise level and phase delay due to a low-pass filter. The evaluation system also can be applied effectively to calibration and evaluation of precision sensors and stages.