Thermo-optical bistability in amplitude-dividing two-beam interferometers is analysed both theoretically and experimentally. If properly designed, the dividing film exhibits strong interference effects upon its absorption. The combination of such interference effects and thermal phase shifting due to either expansion or a variation in the refractive index of the film substrate constitutes the feedback mechanism responsible for pronounced nonlinearities in the interferometer response. The intrinsic contradiction between internal absorption and finesse that occurs in conventional thermo-optical bistable cavities is absent in the two-beam interferometer scheme and, therefore, hysteresis cycles of larger width may easily be obtained. We present nonlinear characteristics exhibiting up to seven stable output states for a given input power. © 1988 Journal Of Modern Optics, All Rights Resereved.