Abstract Many difference equations used to approximate reservoir flow problems treat the phase pressures implicitly but not the mobility-density coefficients. Such difference equations are neither wholly explicit nor implicit, but might be described as mixed. Mixed equations are relatively easy to apply. But the associated time truncation error is relatively large, and when used to solve problems characterized by high flow rates, these equations may be unstable for practical size time steps. This paper outlines the development of a completely implicit difference analogue for reservoir simulation, along with a Newtonian iterative method for solving the resulting nonlinear set of algebraic equations that arise at each time step. While this implicit equation requires two to three times more work than does the mixed equation, it is shown to markedly decrease the time truncation error and to yield a stable solution for much larger time steps than does the mixed equation. Introduction Calculation of multiphase, multidimensional flow in porous media is generally accomplished by numerical methods that involve approximating systems of particle differential equations by systems of partial difference equations. The early development of difference equation techniques was directed toward the solution of linear differential systems. However, the equations of multiphase fluid flow through porous media are highly nonlinear in that mobility and density often are strong functions of pressure and saturation. Thus, solution of the flow pressure and saturation. Thus, solution of the flow problems by difference equations involves solving problems by difference equations involves solving sets of algebraic equations whose coefficients change from step to step of the calculations. Current practice is to evaluate most coefficients at the beginning of a time step and then to apply difference methods well suited for solving linear problems. At least two major difficulties arise from problems. At least two major difficulties arise from the use of this practice. First, evaluation of coefficients at the old time level and evaluation of pressures at the new time level results in larger pressures at the new time level results in larger time truncation errors near displacement fronts than if all quantities in the distance derivative were evaluated at the same time level. Second, evaluation of mobility coefficients at old time levels results in an unstable difference equation in regions of high flow rate. The first of these difficulties often results in optimistic recovery behind the displacement front, and the second requires the use of small time steps or special techniques in solving coning problems or problems of gas percolation. Evaluation of all quantities in the distance differences at the new time level results in a completely implicit difference system. Such a difference system has a lower time truncation error than equations in which mobilities are evaluated at the old level and pressures evaluated at the net, level. The algebraic equations resulting from the fully implicit difference equation are, in this case, nonlinear and require some iterative method for their solution. This paper develops fully implicit difference equations for two-phase flow in porous media, describes their solution by Newtonian iteration, and gives examples of problems more easily solved by the new method than by previous methods.