A model of a two-stage thruster with anode layer is developed based on a two-dimensional hydrodynamic approach. Each stage is considered separately, while the solution of the first stage provides the boundary conditions for the second stage. Current-voltage characteristic of the discharge in the first stage is calculated and is found to be in agreement with experiment. In the acceleration channel the plasma-wall interactions are studied and expansion of the high-voltage sheath near the acceleration channel wall is investigated. It is predicted that under the typical conditions the sheath expands significantly and the quasi-neutral plasma region is confined in the middle of the channel. For instance, in the case of a 3 kV discharge voltage, the sheath thickness is about 1 cm, which is a significant portion of the channel width. It is shown that near-wall sheath expansion leads to a shorter acceleration region. Wall erosion by the energetic ions is calculated. The erosion profiles and the total erosion rate generally agree well with available experimental data. Plasma flow analysis provides the boundary conditions for the plume expansion study. The plume model is partially validated by comparison of the ion current density distribution with experimental data. Nomenclature A = cross section of the acceleration channel C s = sound speed d a = acceleration layer length E z = axial component of the electric field I a = acceleration stage current j d = discharge (ionization stage) current density j e = electron current density j th e = electron thermal current density m i = ion mass N s = plasma density at the sheath edge n = plasma density n a = neutral density Q ion = ionization energy losses Q j = joule heat Q w = electron energy losses to the walls s = sheath thickness T e = electron temperature U = voltage across the sheath U a = acceleration stage voltage U d = ionization stage voltage U i = ionization potential V = velocity V s = ion velocity at the sheath edge = ionization rate ' w = voltage drop across the sheath near the channel wall " = permittivity of vacuum ef = effective electron collision frequency w = frequency of electron collisions with walls i, a, e = subscript for ions, neutral atoms, and electrons, respectively