I recently completed a Digital ReadOut for a lathe, using an AVR microprocessor and incremental encoder bars. You can find details here. Simple encoders with reasonable resolution (at least for hobby mills) can be found in old printers.
The ruler which can be seen in this disassembled HP deskjet was taken out and will be mounted on my MiniMill. An AVR tiny2313 is big enough to hold the software for a 3-axis position display plus a few extra features.
The picture shows a test version of the software. The two columns will eventually display absolute and relative position, while the bottom line will show the functions of the 4 keys mounted directly below the display. Functions will include zeroing abs and rel position display, An uncommon but handy feature I want to include is a display of the position of the 'edges' of the mill-bit. Normally, a DRO shows the center position of the mill, which makes it necessary to (mentally) subtract or add the mill radius from the position shown, which is bound to go wrong sometime causing too much material being removed.