This paper describes nonlinear receding horizon control of an underactuated hovercraft with discrete-valued inputs and its hardware implementation. The hovercraft has two fixed thrusters, and the thrusters generate thrusts of only three discrete values, that is, forward, backward and zero thrusts. Nonlinear receding horizon control is applied to position control of the hovercraft with the discrete-valued inputs approximated by constrained continuous-valued inputs. Although nonlinear receding horizon control requires real-time constrained optimization, a fast algorithm is successfully implemented for the hardware experiment. Copyright (C) 2003 John Wiley Sons, Ltd.