Because the position transducers commonly used (optical encoders and electromagnetic resolvers) do not inherently produce a true, instantaneous velocity measurement, some signal processing techniques are generally used to estimate the velocity at each sample instant. This estimated signal is then used as the velocity feedback signal for the velocity loop control. An analysis is presented of the limitations of such approaches, and a technique which optimally estimates the velocity at each sample instant is presented. The method is shown to offer a significant improvement in command-driven systems and to reduce the effect of quantized angular resolution which limits the ultimate performance of all digital servo drives. The noise reduction is especially relevant for AC servo drives due to the high current loop bandwidths required for their correct operation. The method demonstrates improved measurement performance over a classical DC tachometer.