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This paper proposes a hardware in-the-loop simulation (HILS) system as a new method to develop and test control algorithms and operation strategies for a microgrid. The HILS system is composed of a real-time digital simulator (RTDS) for real-time simulation of the microgrid, a prototype microgrid management system (MMS) under test, and a communication emulator for interface between the prototype MMS and the RTDS. The prototype MMS is designed to operate microsources of microgrid and to control power flow at the point of common coupling (PCC) in the grid-connected mode, and voltages and frequency in the islanded mode of the microgrid. The MMS is tested in the grid-connected mode and in the islanded mode, respectively, to show the validation of the proposed HILS system.