The last several years have witnessed a surge of activity involving the interaction of clusters with intense ultrashort pulse lasers. The interest in laser–cluster interaction has not been only of academic interest, but also because of the wide variety of potential applications. Clusters can be used as a compact source of X-rays, incoherent as well as coherent, and of fast ions capable of driving a fusion reaction in deuterium plasmas. In one set of xenon cluster experiments, in particular, amplification of ∼2.8 Å X-rays has been observed [28]. X-ray amplification in cluster media is a phenomenon of critical importance and may lead to applications such as EUV lithography, EUV and X-ray microscopy, X-ray tomography, and variety of applications in biology and material sciences. However, while amplification of ∼2.8 Å X-rays has been documented in experiments, the mechanism for producing it remains to be fully understood. In this talk, a xenon model of laser–cluster interaction dynamics is presented to shed light on the processes responsible for amplification. The focus of this research is on the feasibility of creating population inversions and gain in some of the inner-shell hole state transitions within the M-shell of highly ionized xenon. The model couples a molecular dynamics (MD) treatment of the explosively-driven, non-Maxwellian cluster expansion to a comprehensive multiphoton-radiative ionization dynamic (ID) model including single- and double-hole state production within the Co- and Fe-like ionization stages of xenon. The hole-state dynamics is self-consistently coupled to a detailed valence-state collisional-radiative dynamics of the Ni-, Co-, and Fe-like ionization stages of xenon. In addition, the model includes tunneling ionization rates that confirm an initial condition assumption that Ni-like ground states can be created almost instantaneously, on the order of a femtosecond or less, i.e., at laser intensities larger than 1019 W/cm2, all of the N-shell, n = 4 electrons are striped from a xenon atom in less than a femtosecond. Because of the abundance of these ground states, large numbers of n = 2, inner-shell hole states and large population inversions can be created when the Ni-like ground states are photo- or collisionally ionized. Once the M-shell is entered, tunneling ionization slows down as does collisional ionization due to the fall in ion density as the cluster expands. Moreover, as the cluster density goes down, our combined MD and ID calculations show that so do the calculated population inversions. Thus, our calculations do not support the initial experimental data interpretations in which the measured gains have been associated with double holes in more highly ionized stages of xenon (Xe32+, Xe34+, Xe35+, and Xe37+), which our calculations suggest would require laser intensities in excess of 1.5 × 1020 W/cm2, for a 248 nm, ∼250 fs laser pulse focused in a gas of xenon clusters. At laser intensities used in the experiment, such ionization stages would be reached, but only later in time when cluster densities have fallen by several orders of magnitude from their initial values to values where pumping rates are too low and gains cannot be generated.