The physics of the two-photon absorption process is investigated for a three-state system. The density-matrix equations for the two-photon interaction are solved in the steady-state limit assuming that the pump laser radiation is monochromatic. Collisional broadening, saturation, and Stark shifting of the two-photon resonance are investigated in detail by numerical solution of the steady-state density-matrix equations. Analytical expressions for the saturation intensity and the Stark shift are derived for the case where the single-photon transitions between the intermediate state and the initial and final states are far from resonance with the pump laser. For this case, it is found that the direction of the Stark shift is dependent on the relative magnitudes of the dipole-moment matrix elements for the single-photon transitions that couple the intermediate state with the initial and final states. Saturation and Stark shifting are also investigated for the case where the single-photon transitions between the intermediate state and the initial and final states are close to resonance with the pump laser. (C) 2004 American Institute of Physics.