The non-equilibrium fluid mechanics and thermodynamics of two-phase vapour-droplet and gas-particle flow are considered. The formation of the droplets as well as their subsequent interaction with the vapour are discussed. A new theory of nucleation in steam turbines is developed that reproduces many aspects of measured droplet size spectra which cannot be explained by any available steady-flow theories. (Steam turbines are responsible for 80% of global electricity production and the presence of moisture significantly reduces the turbine efficiency costing 50 million pounds per annum in UK alone.) The topics on the fluid dynamic interactions include flow instabilities induced by condensation, condensation wave theory, relaxation gas dynamics for vapour-droplet flow, thermal choking due to non-equilibrium condensation, the structure of shock waves and their development through unsteady processes, and, jump conditions and the interpretation of total pressure in two-phase flows.