For many rocks of high economic interest such as chalk, diatomite, tight gas sands or coal, nanometer scale resolution is needed to resolve the 3D-pore structure, which controls the flow and trapping of fluids in the rocks. Such resolutions cannot be achieved with existing tomographic technologies. A new 3D imaging method, based on serial sectioning and using the Focused Ion Beam (FIB) technology has been developed. FIB allows for the milling of layers as thin as 10 nanometers by using accelerated Ga+ ions to sputter atoms from the sample surface. After each milling step, as a new surface is exposed, a 2D image of this surface is generated. Next, the 2D images are stacked to reconstruct the 3D pore or grain structure. Resolutions as high as 10 nm are achievable using this technique. A new image processing method uses direct morphological analysis of the pore space to characterize the petrophysical properties of diverse formations. In addition to estimation of the petrophysical properties (porosity, permeability, relative permeability and capillary pressures), the method is used for simulation of fluid displacement processes, such as those encountered in various improved oil recovery (IOR) approaches. Computed with the new method capillary pressure curves are in good agreement with laboratory data. The method has also been applied for visualization of the fluid distribution at various saturations from the new FIB data.