In this paper, general ideas for the systematic design of smart sensors and processors are presented. Although the ideas are based on classical theory, their consequent and systematic application has been shown to result in novel, simple and accurate processors. The concept is demonstrated by a new design for a position-sensitive detector (PSD) displacement transducer. With a simple low-cost circuit, based on the use of opamps, the processor inaccuracy is less than 10(-4) for a displacement range of 3 mm, which is ten times better than that of the PSD itself. Besides the opamp version, a BICMOS design for operation at a single supply voltage of 5 V has also been presented.