The local ensemble transform (ET) analysis perturbation scheme is adapted to generate perturbations to both atmospheric variables and sea-surface temperature (SST). The adapted local ET scheme is used in conjunction with a prognostic model of SST diurnal variation and the Navy Operational Global Atmospheric Prediction System (NOGAPS) global spectral model to generate a medium-range forecast ensemble. When compared to a control ensemble, the new forecast ensemble with SST variation exhibits notable differences in various physical properties including the spatial patterns of surface fluxes, outgoing longwave radiation (OLR), cloud radiative forcing, near-surface air temperature and wind speed, and 24-h accumulated precipitation. The structure of the daily cycle of precipitation also is substantially changed, generally exhibiting a more realistic midday peak of precipitation. Diagnostics of ensemble performance indicate that the inclusion of SST variation is very favorable to forecasts in the Tropics. The forecast ensemble with SST variation outscores the control ensemble in the Tropics across a broad set of metrics and variables. The SST variation has much less impact in the Midlatitudes. Further comparison shows that SST diurnal variation and the SST analysis perturbations are each individually beneficial to the forecast from an overall standpoint. The SST analysis perturbations have broader benefit in the Tropics than the SST diurnal variation, and inclusion of the SST analysis perturbations together with the SST diurnal variation is essential to realize the greatest gains in forecast performance.