A new inversion inhomogeneous atmosphere (IA) method that is more stable than Fernald's method for two-component (molecule and aerosol) scattering analysis of polarized Mie lidar signals is proposed and examined. The backscattering coefficient and the extinction-to-backscattering ratio (EBR) can be calculated for specified regions at which the depolarization ratio is less than that of molecule without further assumptions. The inversion procedure can be extended to both inward stepwise and outward stepwise integration algorithms. Simulation results indicate that a higher precision was achieved with the IA method than with Fernald's method in terms of error and random noise in estimating boundary value and EBR. Experimental results were also better with the IA method than with Fernald's method. (C) 2001 Optical Society of America OCIS codes: 280.0280, 280.3640, 280.1100.