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A two-phase thermal energy conversion system employs an evaporable liquid such as water, and a gas which is not liquefiable within the operating temperature and pressure ranges, such as air. The water and air are mixed and one of the two or both are heated so that the water evaporates and is absorbed by the air to result in a pressure increase. The increase of pressure or volume can be converted into mechanical energy by a prime mover such as a turbine or reciprocating piston engine. The heat of condensation is utilized and converted into mechanical power while the temperature and pressure are reduced. The liquid, such as water, may be below its boiling point. If the water consists of salt water, fresh water is derived as a condensation product from the prime mover.