The generation mechanism of self-sustained pulsation in vertical-cavity surface-emitting lasers (VCSEL's) is analyzed with the influence of lateral loss effects, such as selffocusing, lateral diffraction loss, and spatial hole burning, taken into consideration. The condition for self-sustained pulsation is also derived in an analytical form. It is shown that the lateral loss effects have significant influence on the excitation of self-sustained pulsation, especially for devices with small size. Furthermore, the possibility of using diffused quantum-well (QW) structures in VCSEL's to enhance self-sustained pulsation is studied. It is found that by using diffused QW structures, the range of core area to obtain self-sustained pulsation is increased. In addition, peak power and repetition frequency of the pulses can also be improved.