Wind-driven ice-ocean processes in the marginal ice zone are studied when thermodynamics is included into a coupled ice-ocean model. The ocean is considered to be a two-layer ocean, where a ''fresh'' and cold (freezing) mixing layer is lying above the stagnant, warm, and saline lower layer. The essential part of the thermodynamics is the entrainment between the mixed layer and the lower layer which is parameterized using the frictional velocity at the ocean surface, a Kraus-Turner type parameterization. It is shown that upwelling at the ice edge, which is generated by the difference in the air-ice and air-water surface stress, will give rise to a strong entrainment by bringing the pycnocline nearer to the surface. Furthermore, the entrainment is negligible outside the areas affected by the ice edge upwelling. When cooling at the top is included, the heat and salt exchange are further enhanced in the upwelling areas because the entrainment depends inversely on the density difference between the layers. New ice formation occurs in the area which is not affected by ice edge upwelling (that is, no entrainment of the warm lower-layer fluid, so the mixed layer temperature stays at the freezing point). The ice growth will give rise to a large salt flux to the upper layer, but the subsequent salinity change is not as large as the due to the entrainment of the lower-layer fluid. The mixed layer in the areas affected by the ice edge upwelling is only slightly less saline than the lower layer. It is suggested that these high-salinity mixed layer regions, with a scale of a few Rossby radii of deformation (~10 km), will overturn due to cooling, possibly as a plume, and may this contribute to the formation of deep water. ¿ American Geophysical Union 1987