Coral reef ecosystems in Indonesia are among the most diverse in the world. Conservation, restoration and management of marine biodiversity hotspots such as Indonesia’s coral reefs require accurate baseline knowledge of the constituent species and the environmental conditions under which these species thrive. Here we present a study on the habitat structure and diversity, composition and abundance of reef sponges in the Derawan Islands, East Kalimantan, Indonesia. Mean live coral cover across depths and sites was just under 30%, while the mean cover of rubble and dead coral exceeded 40%. The distribution of live coral cover was patchy; the inshore sites had the lowest cover, while some offshore sites also had very low coral cover due to the effects of blast fishing. Rubble cover was highest inshore and beyond the barrier reef, whereas dead coral was most abundant in shallow-water and midshore reefs. A total of 168 sponge species or morphospecies were identified, of which Stelletta clavosa, Lamellodysidea herbacea, Niphates sp., Ircinia ramosa and Petrosia nigricans were the most common. Sponge composition varied in relation to distance from the Berau River and water visibility, in addition to sand cover and cover of encrusting corals. Importantly, sponges in the Derawan Islands appeared to thrive in inshore reefs that already had depauperate coral communities. This is in marked contrast to findings elsewhere in Indonesia (NW Java, SW Sulawesi) where inshore communities were depauperate for all taxa sampled.