Recently, underbalanced drilling has been utilized as a technique to minimize invasive formation damage in both horizontal and vertical wells. While it is widely accepted that underbalanced drilling greatly reduces the propensity for formation damage, particularly with respect to the potential for whole mud losses and invasion of mud solids, the potential for formation damage still exists in situations where the original saturation in the reservoir (either hydrocarbon or water), is less than the irreducible saturation of the phase utilized in drilling and the capillary pressure and wettability characteristics can cause spontaneous imbibition. This often occurs when drilling in an underbalanced mode in low permeability gas reservoirs that have abnormally low initial water saturations. Although fluid flow is occurring from the formation, circulating drilling fluids are in dynamic continual contact with the formation face. At abnormally low initial saturations, there exists the ability for strong, spontaneous imbibition effects which can, in some situations, counteract pressures that are far greater than the apparent underbalance pressure occurring during the drilling process. If the formation contains potentially sensitive clay materials, deflocculatable fines, the potential for emulsions or permeability reductions due to aqueous phase trapping, these phenomena could possibly occur and reduce permeability. The fact that a stable filter cake is not developed during underbalanced drilling, due to continual inflow from the formation face, could increase the severity of these phenomena as a fully exposed formation face which remains unshielded by any type of bridging or sealing filter cake is exposed for potential imbibition effects at all times. In addition, if any overbalanced pulses occur during drilling or completion, the potential for severe and damaging fluid and solids losses to the unprotected formation can be significant. This paper documents potential damage scenarios based on the results of specific laboratory tests and reviews new techniques designed to evaluate and pre-screen underbalanced drilling operations prior to costly implementation in the field.