Silicon nanoclusters exhibit novel and interesting optical and electrical properties that are not observed in bulk silicon. Moreover, it has been discovered that there exists a strong coupling between nanoclusters and rare–earth ions that results in efficient energy exchange between the two species. This paper presents a review of recent work at University College London in this area, in which we have studied the optical properties of silicon nanoclusters in silica with rare–earth co–dopants and have developed a model for the excitation of erbium ions in erbium–doped silicon nanocrystals via coupling from optically generated excitons confined within the silicon nanoclusters. The model provides a phenomenological description of the exchange mechanism and allows us to evaluate an effective absorption cross–section for erbium that is up to four orders of magnitude higher than the corresponding value in stoichiometric silica. This paper also discusses the origin of the 1.6eV emission band associated with the silicon nanoclusters and determines absorption cross–sections and excitonic lifetimes for nanoclusters in silica.