A new compact pneumatic cylinder with a micro position sensor, named intelligent pneumatic cylinder was developed. It consists of a piston rod with stripe codes and a micro optical MEMS encoder. The stripe codes were fabricated through a selective oxidization process by irradiating with a YAG laser. The cylinder realizes a compact pneumatic position servo system. The servo experimental results were very promising. The piston rod position is easily controlled at any desired position between both ends of the rod stroke. This paper reports also an adaptive servo algorithm which was newly developed for stepping positioning of the intelligent pneumatic cylinder, realizing about 0.3 to 1 mm positioning accuracy without overshooting.