This paper deals with an ac-ac voltage regulator/compensator based on a hybrid transformer with a matrix converter realizing electrical coupling in the hybrid transformer unit. The parameters of electrical energy, such as voltage amplitude, are very important, particularly from the viewpoint of the final consumer and sensitive loads connected to the grid. Furthermore, a hybrid transformer using a matrix converter can be used for power-flow control and for transient stability improvement in ac transmission systems. Active power flow and voltage magnitude in transmission lines can vary by using a conventional mechanical or thyristor-controlled regulator. However, the control parameters can be executed only in steps depending on the taps available in the electromagnetic transformer. An approach for obtaining continuous control of the voltage magnitude and phase shift using a conventional transformer with two windings and a pulsewidth-modulated matrix converter is presented in this paper. The operating principles and steady-state properties are discussed. Detailed computer simulation results are presented in this paper. Furthermore, experimental test results obtained from a three-phase 3 kVA laboratory model are also presented.