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We develop a new approach based on the finite-difference time-domain (FDTD) method for simulating dynamics of modelocked VCSELs. Our FDTD model, transcends the limitation of a widely used traveling-wave technique, and can be used to determine both the sub-wavelength spatial features of the optical field, as well as its temporal dynamics on a sub-cycle time-scale. The thermal effects are included through coupled lattice and plasma temperature equations. The material response is incorporated via the effective Bloch equations. A VCSEL with gain and saturable absorber is simulated and stable modelocking obtained. Fine features of the pulses spatial profile are also studied.