Small drops of water are produced on the inside of the top cup because of the evaporated water from the hot water in the bottom cup and then condensed inside of the top cup. Condensation actually happens one of two ways, it is either the air is chilled to its dew point or when it becomes very saturated with water vapor that it could not hold any more water. Furthermore, condensation could also create water droplets on the outside of glasses of cold drinks or soda cans. When warm air reaches the cold surface, it gets to its dew point then it condenses. This is why there will be droplets of water on the can or glass.