This thesis develops a Dynamic Positioning (DP) system for small marine craft by using the LQR controller approach. Development has been done with a 'Viknes 830' vessel in mind, which is operated by the company 'Maritime Robotics AS' and will be equipped for DP operation the during summer of 2008. A Matlab-based simulator designed for DP simulations has been developed, and is used throughout the thesis. Furthermore, a Hardware-In-the-Loop (HIL) simulator has been used in order to localize and resolve as many implementation issues as possible prior to full-scale installation. A discussion on the general use of a HIL simulator for DP is included. Three variations of a feedback LQR station-keeping controller have been implemented and compared; a simple LQR controller, an LQR controller with modeled actuator dynamics, and nally an LQR controller with actuator dynamics and integral action. A feedforward controller has been added in order to provide enhanced station-keeping performance, as well as bumpless transfer from station keeping to low-speed maneuvering. A reference model has been created for smooth transfer in-between station-keeping reference points, and as input for the feedforward controller. A passive Luenberger DP observer has been applied in order to lter out high-frequency wave loads. Simulation results reveal that the LQR controller with actuator dynamics and integral action is most likely to perform well in real-life application. The largest performance enhancement is gained from the inclusion of actuator dynamics in the controller. It is discovered that the performance turns out better if the actuator dynamics is modeled faster in the controller due to unmodeled actuator saturation limits. V