Abstract: Pseudolite-based positioning systems have a bright outlook in providing users higher precision navigation information due to the stronger anti-jamming capability and flexibility compared with orbiting satellites. A nonliearity compensation algorithm was studied for the pseudolite/inertial navigation system(INS) integrated navigation. The influence of pseudolite measurement nonlinearity is more severe than that of satellites since the distances between pseudolites and users are much closer. By utilizing the second-order items correction, the algorithm to a certain extent overcame the problems of large modeling errors and bad filtering performance or even divergence when using conventional linear algorithm. And a two-stage cascaded estimation method was employed to avoid the difficulty of solving nonlinear equations, which greatly decreased the computational complexity of the compensation algorithm. The simulation results indicate that the algorithm can greatly enhance the precision and reliability of the pseudolite/ INS integrated system, hence is of great value in practice.