This paper is concerned with a transfer alignment method for the SDINS under ship motions. Major error sources of transfer alignment are data transfer time-delay, lever-arm velocity and ship body flexure. Specifically, to reduce alignment errors induced by measurement time-delay effects, the error compensation method through delay state augmentation is suggested. A linearized error model for the velocity and attitude matching transfer alignment system is first derived by linearizing the nonliner measurement equation with respect to its time delay and augmenting the delay state into the conventional linear state equations. And then it is shown via observability analysis and computer simulations that the delay state can be estimated and compensated during ship motions resulting in considerably less alignment errors.