An assimilation of satellite-derived sea surface temperature (SST) observations into the Poseidon quasi-isopycnal ocean model is conducted to study the seasonal cycle of surface thermodynamics of the equatorial Pacific Ocean and to estimate the sea surface heat flux inversely from the SST observations. A simplified approach in the use of the thermodynamic submodel that separates the momentum and the temperature fields in the variational assimilation procedure proves successful in improving the model simulation of the observed SST. From a comparison with several existing bulk estimates, it is seen that the seasonal cycle of sea surface heat flux has been captured well by the inversion except in the eastern equatorial Pacific, where the optimized surface heat flux shows an upward flux during the boreal summer/fall season when the cold tongue SST starts to decrease dramatically. This spurious upward surface heat flux is inconsistent with the bulk estimates and is determined to be due to model deficiencies in calculating vertical turbulent diffusion. The SST data assimilation is shown to have improved the model simulation of horizontal temperature advection significantly. A comparison of the inferred heat budget is made with an analysis by Wang and McPhaden <1999> from TAO mooring observations.