Research is underway to investigate basic processes of fundamental importance in the operation of a "magnetic" liquid-metal two-phase flow magnetohydrohynamic generator. Parallel theoretical and experimental efforts are proposed to study the mechanical, electromagnetic, and heat transfer properties of a mercury-based magnetic fluid (Hg-ML) under two-phase flow generator coditions. A major goal of this research is to show that magnetic stabilization leads to a homogeneous bubble flow pattern in the generator channel, with greatly enhanced physical properties in respect to generator efficiency.