Variation of sea surface temperature (SST) in the region between Australia and Indonesia is of crucial importance to Australian winter rainfall. To gain insight into how the SST is maintained and changed, the present study provides a comprehensive description of ocean dynamics in the region, using results from a seasonal ocean general circulation model run by Semtner and Chervin [1988,1992]. We also investigate the heat budget of the surface layer (0–50 m). Indonesian topography is heavily simplified in this model, but some simple results which probably do not depend strongly on topographic detail are obtained. The currents in the model are verified by comparison to observed annual mean and seasonal thermal structures and circulations determined from the expendable bathythermograph data collected in the region since 1983. We found a distinctive difference in the model circulations and heat budgets in two regions: one between the coast of Indonesia and 13°S (called the northern region) and the other between the northwest coast of Australia and 13°S (called the southern region). Net surface heat fluxes in the model's northern region are low compared to those in most climatologies, possibly because the model does not allow for strong tidal mixing within the Indonesian archipelago. The annual mean vertical velocity in the upper 500 m shows strong upwelling in the northern region and weak downwelling in the southern region. The annual variation in the vertical motion near the surface (<50 m) is driven by local wind stress in both regions. Within the depth range of the thermocline, vertical motion is dominated by a remotely forced semiannual signal in the northern region and a local response to wind stress in the southern region. The surface heat flux and advection in the annual mean heat budget are very small, at least an order of magnitude smaller than those in the seasonal budget. In the southern region the model may represent the ocean heat budget quite well: here the primary control on the seasonal variation on SST is the surface heat flux. However, about half of the flux is balanced by advection in the southern region. This suggests that ocean circulation could also play a role in the generation of the SST anomalies north of Australia, which are critical for Australian climate variation as documented by Nicholls (1989). In the northern region, cold advection due to upwelling is largely cancelled by warm advection from within the Indonesian archipelago. This may explain the fact that observed sea surface temperature depressions south of Indonesia are quite small compared to those in other eastern-boundary upwelling regions. However, model heat fluxes in the northern region may be in error owing to the absence of tidal mixing. In the model the largest terms show that heat transport by Indonesian throughflow and Ekman current is the main heating process and this process is largely balanced by cooling due to upwelling near the coast of Indonesia, and by release of heat to the atmosphere near the northwest coast of Australia.