The Indian Ocean underwent substantial changes in 1997--1998. The observations show not only the appearance of a dipole mode in the tropical region but also a persistent basin-scale warming. We present in this study an analysis of the basin-scale sea surface temperature (SST) variations during 1997--1998 using satellite observations, in situ temperature measurements, and National Centers for Environmental Prediction reanalyses. We find that the Indian SST anomaly peaks occurred at two periods, i.e., November--December--January coinciding with the Ni¿o3 peak and the following April--May--June, and were phase locked to the Indian Ocean seasonal cycle. The changes of SST in the equatorial ocean were related to a coupled interaction between the atmosphere and the ocean. Oceanic upwelling in the east and downwelling in the west played a major role in giving rise to the SST anomalies associated with the dipole mode structure. The upwelling off the coast of Sumatra elevated the regional thermocline by more than 80 m in December 1997. On the other hand, the changes of SST in the southern Indian Ocean were largely induced by the changes of local latent flux. During boreal fall--winter of 1997 the southeasterly trades were displaced and abnormally prolonged in their northernmost equatorial position. This shifted the center of the trades toward the equator, weakened the winds in the central Southern Ocean, reduced the latent heat flux in the region, and subsequently induced a surface warming. The total change of the SST anomalies integrated over the two periods, July--December 1997 and January--May 1998, were explained well by the same period latent flux integral in both intensity and pattern. The cross-basin upper ocean temperature sections show that the extratropical warming was rather uniformly distributed in the upper 60 m, further supporting the role of mixed-layer processes in the warming. ¿ 2000 American Geophysical Union