This paper presents a distributed multi-agent scheme for enhancing the cyber security of smart grids which integrates computational resources, physical processes, and communication capabilities. Smart grid infrastructures are vulnerable to various cyber attacks and noises whose influences are significant for reliable and secure operations. A distributed agent-based framework is developed to investigate the interactions between physical processes and cyber activities where the attacks are considered as additive sensor fault signals and noises as randomly generated disturbance signals. A model of innovative physical process-oriented counter-measure and abnormal angle-state observer is designed for detection and mitigation against integrity attacks. Furthermore, this model helps to identify if the observation errors are caused either by attacks or noises.