Recent developments in power electronics technology have spurred interest in the use of renewable energy sources as distributed generation (DG) generators. The key component in DG generators is a grid-connected inverter that serves as an effective interface between the renewable energy source and the utility grid. The multifunctional inverter (MFI) is special type of grid-connected inverter that has elicited much attention in recent years. MFIs not only generate power for DGs but also provide increased functionality through improved power quality and voltage and reactive power support; thus, the capability of the auxiliary service for the utility grid is improved. This paper presents a comprehensive review of the various MFI system configurations for single-phase (two-wire) and three-phase (three- or four-wire) systems and control strategies for the compensation of different power quality problems. The advances in practical applications and recent research on MFIs are presented through a review of nearly 200 papers.