The split cycle engine is a new reciprocating internal combustion engine with a potential of a radical efficiency improvement. In this engine, the compression and combustion-expansion processes occur in different cylinders. In the compression cylinder, the charge air is compressed through a quasi-isothermal process by direct cooling of the air. The high pressure air is then heated in a recuperator using the waste heat of exhaust gas before induction to the combustion cylinder. The combustion process occurs during the expansion stroke, in a quasi-isobaric process. In this paper, a fundamental theoretical cycle analysis and one-dimensional engine simulation of the split cycle engine was undertaken. The results show that the thermal efficiency (eta) is mainly decided by the CR (compression ratio) and ER (expansion ratio), the regeneration effectiveness (sigma), and the temperature rising ratio (N). Based on the above analysis, a system optimization of the engine was conducted. The results showed that by increasing CR from 23 to 25, the combustion and recuperation processes could be improved. By increasing the expansion ratio to 26, the heat losses during the gas exchange stroke were further reduced. Furthermore, the coolant temperatures of the compression and expansion chambers can be controlled separately to reduce the wall heat transfer losses. Compared to a conventional engine, a 21% total efficiency improvement was achieved when the split cycle was applied. It was concluded that through the system optimization, a total thermal efficiency of 53% can be achieved on split cycle engine. (C) 2016 Elsevier Ltd. All rights reserved.