Softsensors or virtual sensors are key technologies in industry because important variables such as product quality are not always measured on-line. In the present work, two-stage subspace identification (SSID) is proposed to develop highly accurate softsensors that can take into account the influence of unmeasured disturbances on estimated key variables explicitly. The proposed two-stage SSID method can estimate unmeasured disturbances without the assumptions that the conventional Kalman filtering technique must make. Therefore, it can outperform the Kalman filtering technique when innovations are not Gaussian white noises or the characteristics of disturbances do not stay constant with time. The superiority of the proposed method over the conventional methods is demonstrated through numerical examples and application to an industrial ethylene fractionator. (C) 2008 Elsevier Ltd. All rights reserved.