Nonlinear optical properties of laser‐excited semiconductors are discussed, and the applications to optical bistability and optical logic are reviewed. The physical origin of the nonlinearities is analyzed in terms of the many‐body interactions in the system of electron‐hole pairs, causing effects such as plasma screening of the Coulomb interaction, band‐gap renormalization, and band filling. Theoretical results for absorption and refractive‐index spectra are compared to experimental data obtained for room‐temperature GaAs and other semiconductors. The experimental and theoretical results for dispersive optical bistability in semiconductors are summarized, and recent experiments on optical logic gating and pattern recognition are discussed.