IN RECENT YEARS, POWER QUALITY IS A SUBJECT OF INCREASING CONCERN. GROWTH IN THE USE OF SENSITIVE LOADS, ELECTRONIC DEVICES AND MICRO-PROCESSOR BASED EQUIPMENTS HAS CHANGED OVERVIEW OF ELECTRICAL CUSTOMERS IN POWER QUALITY SUBJECTS; WHICH WAS NOT IMPORTANT IN THE PAST. EVEN VOLTAGE SAGS OR SHORT INTERRUPTIONS LASTING ONLY A FEW MILLISECONDS ARE ENOUGH TO BRING ENTIRE PRODUCTION LINES TO A STANDSTILL, CAUSING CONSIDERABLE ECONOMIC DAMAGE FOR SUCH INDUSTRIES AND MANUFACTURERS THAT EMPLOYS ELECTRONIC EQUIPMENTS. FOR MITIGATION OF POWER QUALITY PROBLEMS ,CUSTOM POWER DEVICES HAVE BEEN PROPOSED .THE CONCEPT OF CUSTOM POWER IS THE EMPLOYMENT OF VOLTAGE SOURCE CONVERTERS OR OR STATIC CONTROLLER IN MEDIUM VOLTAGE DISTRIBUTION SYSTEMS FOR THE PURPOSE OF SUPPLYING A LEVEL OF RELIABILITY AND/OR POWER QUALITY. ONE OF THIS DEVICES IS DYNAMIC VOLTAGE RESTORER (DVR) THAT IS A VERY EFFECTIVE SERIES-COMPENSATION DEVICE FOR MITIGATION OF VOLTAGE SAGS ,SWELLS AND UNBALANCED VOLTAGE. THE PURPOSE OF THIS PAPER IS TO IMPROVE THE VOLTAGE SAGS/SWELLS PROBLEM IN A DISTRIBUTION SYSTEM WITH SENSITIVE LOADS ,WITH OPTIMAL PLACEMENT OF DVR’S USING SIMULATED ANNEALING ALGORITHM. THE PROPOSED METHOD HAS BEEN APPLIED TO 35 AND 69 BUS DISTRIBUTION SYSTEMS .TO SHOW THE SUPERIORITY OF THE PROPOSED METHOD, THE SIMULATION RESULT OF 35-BUS SYSTEM IS COMPARED WITH TABU SEARCH METHOD.