Femtosecond pump-probe experiments performed on squaraines demonstrate strong couplings between the first excited state and high-lying two-photon states. The experimental data agree well with our earlier quantum many-electron calculations based on multiple-excited configuration interactions. We show that high-lying twophoton states in squaraines are critically important to understanding the observed third-order optical properties and that two-level models are inadequate even for molecules with negative third-order optical susceptibilities.