This report outlines the need for new tools for the simulation of fractured carbonate reservoirs. Several problems are identified that call for the development of new reservoir simulation physical models and numerical techniques. These include: karst and vuggy media wherein Darcy`s and traditional multi-phase flow laws do not apply; the need for predicting the preproduction state of fracturing and stress so that the later response of effective stress-dependent reservoirs can be predicted; and methods for predicting the fracturing and collapse of vuggy and karst reservoirs in response to draw-down pressure created during production. Specific research directions for addressing each problem are outlined and preliminary results are noted.