A novel position measurement system, the so-called image grating system, is presented in this research paper. It features an adjustable measurement range, flexible standoff distance and in-line measurement capabilities. The developed position measurement system includes an image grating attached to the moving stage as the target feature and a line scan camera as the stationary displacement reader. By observing the position of the target feature in the image and applying subpixel image registration, the position of the moving stage can be determined. In order to improve the measurement efficiency, the computations for pattern correlation and subpixel registration are performed in the frequency domain. Calibration and error correction methods are also developed to compensate for the measurement error caused by optical distortion. Experimental data confirms the capability of the image grating technology of ±0.2 μm measurement accuracy within 25 mm measurement range. By applying different optics, the standoff distance and the measurement range can be customized for different precision measurement applications.