The red fluorescent protein mCherry is of considerable interest for fluorescence fluctuation spectroscopy (FFS), because the wide separation in color between mCherry and green fluorescent protein provides excellent conditions for identifying protein interactions inside cells. This two-photon study reveals that mCherry exists in more than a single brightness state. Unbiased analysis of the data needs to account for the presence of multiple states. We introduce a two-state model that successfully describes the brightness and fluctuation amplitude of mCherry. The properties of the two states are characterized by FFS and fluorescence lifetime experiments. No interconversion between the two states was observed over the experimentally probed timescales. The effect of fluorescence resonance energy transfer between enhanced green fluorescent protein (EGFP) and mCherry is incorporated into the two-state model to describe protein hetero-oligomerization. The model is verified by comparing the predicted and measured brightness and fluctuation amplitude of several fusion proteins that contain mCherry and EGFP. In addition, hetero-fluorescence resonance energy transfer between mCherry molecules in different states is detected, but its influence on FFS parameters is small enough to be negligible. Finally, the two-state model is applied to study protein oligomerization in living cells. We demonstrate that the model successfully describes the homodimerization of nuclear receptors. In addition, we resolved a mixture of interacting and noninteracting proteins labeled with EGFP and mCherry. These results provide the foundation for quantitative applications of mCherry in FFS studies.