This paper presents a novel compensation scheme based on two active filters to improve power quality in distribution networks. The scheme provides voltage compensation at the load for source voltage sags, and swell, as well as minimizing the impact of the load harmonics on the distribution network. The topology and control principles for the compensation system are described and the implementation of the control strategy for the voltage source inverters in the active filters is presented. Simulation results, based on SIMULINK modeling of the compensation scheme are presented in the paper. It is shown that the proposed scheme is simple, and capable of maintaining constant load voltage for extreme supply voltage sag and swell, and of decoupling the load harmonics from the supply for nonlinear loads.