The two-fluid model with bubble oscillations, proposed by Egashira et al. (2004), can explain the properties of cavitating bubbly flow and pressure wave propagation in the bubbly liquid. However, the viscous effect as well as energy conservation leading to temperature changes inside the bubble with bubble oscillations have not yet been considered. Hence, this study aimed to incorporate the viscous (bulk viscosity and drag) and thermal effects to the previously proposed two-fluid model with bubble oscillations. Bulk viscosity was considered by averaging the shear stress term in the single-phase momentum conservation for a Newtonian fluid, and the drag was introduced by transforming the interfacial shear stress. We derived the averaged energy conservation for a general two-phase flow with a thermal conduction inside bubbles and heat transfer between the two phases, and limited this equation to that for a bubbly flow by closing the interfacial temperature gradient term via constitutive equations for a single bubble. Furthermore, we investigated the stability of our proposed one-dimensional model equations using the dispersion analysis. This analysis provided the following insight: (i) The difference in the temperature gradient models had a slight effect on the stability of the proposed model equations; (ii) the thermal conduction inside the bubbles was dominant in the thermal damping in bubbly flows rather than the heat transfer between the two phases; (iii) incorporating both the bulk viscosity and drag stabilized the proposed model equations. Our results provide insights into the development of mathematical models to investigate the thermal effects in bubbly flow with bubble oscillations, such as cavitating bubbly flow and wave propagation in bubbly liquids. •Two-fluid model with bubble oscillations was analytically derived by volume average.•Interfacial term of energy conservation was closed by temperature gradient model.•Stability analysis revealed that thermal conduction inside bubble was dominant.•Viscosity and drag play an important role in stability of our derived two-fluid model.