Here we report on the trophodynamics of the bacteria-containing coral reef sponge Halisarca caerulea. The assimilation and respiration of the 13C-enriched substrates glucose, algal-derived dissolved and particulate organic matter (diatom-DOM and -POM), and bacteria were followed in 1- and 6-h incubations. Except for glucose, all substrates were readily processed by the sponge, with assimilation being the major fate. 13C-Enrichment patterns in fatty acid biomarkers revealed that sponge dissolved organic 13C assimilation was both direct and bacteria mediated as tracer carbon was recovered both in bacteria-specific and nonbacterial fatty acid. This is the first direct evidence of DOM incorporation by sponges. The present study demonstrates that the encrusting sponge H. caerulea feeds on both DOM and POM and given their dominant coverage of the largest coral reef habitat (coral cavities) it is proposed that organic matter assimilation by cryptic reef sponges may represent an important, largely overlooked ecological function. Quantitatively significant DOM processing may not be the exclusive function of the microbial world on coral reefs; sponges transform DOM to biomass, and thus retain and store organic matter in the reef system.