Numerical calculations of gravity wave propagation through a two-component thermosphere with vertically-varying inter-species collision frequencies are performed using a direct integration method. Reflection of upgoing gravity wave energy into downgoing gravity waves appears to be small though nonegligible at typical thermospheric periods and wavelengths. Coupling into diffusion waves is completely insignificant in most cases and may be determined in part by the relative abundance of the minor species. Temperature perturbation differences between species can be >10% above 300 km altitude even though coupling into diffusion waves is small. Diffusive dissipation of gravity wave energy can be significant in the lower thermosphere and may be comparable to dissipation by viscosity and heat conduction below ~225 km altitude. Heating by diffusive dissipation may also be comparalbe to direct heating by solar radiation in the lower thermosphere. As a result of dissipative filtering of long-period and short-wavelength waves and the sensivity of He-N2 density perturbation phase differences to diffusion, the AE-C satellite wave observations can only be fit by internal gravity waves with periods ≲25 min and horizontal wavelengths >200 km.