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This paper presents a hardware implementation of three-phase distribution static compensator (DSTATCOM) using an adaptive theory-based improved linear sinusoidal tracer (ILST) control algorithm for different functions of DSTATCOM such as reactive power compensation for power factor correction, harmonics elimination, load balancing, and zero-voltage regulation under linear/nonlinear loads. An ILST-based control algorithm is used for the extraction of fundamental load currents and their active and reactive power components. These components are used for the estimation of reference source currents. A prototype of DSTATCOM is developed and its real-time performance is studied using a digital signal processor. The performance of DSTATCOM is found satisfactory with the proposed control algorithm under various types of loads.