The three-dimensional finite-difference time-domain method that can handle dispersive and dynamic nonlinear-gain media is proposed and realized. The effect of carrier diffusion is included through the laser rate equations. Through this three-dimensional nonlinear gain FDTD method, rich laser-dynamics behaviors, such as the lasing threshold, the relaxation oscillation, and the spatial hole burning, are directly observed from a hexapole mode. (c) 2005 Optical Society of America.