The characteristics and development of thermophilic anaerobic sludge in upflow staged sludge bed (USSB) reactors were studied. The compartmentalized reactors were inoculated with partially crushed mesophilic granular sludge and then fed with either a mixture of volatile fatty acids (VFA) or a mixture of sucrose and VFA. The staged degradation of the soluble substrate in the various compartments led to a clear segregation of specific types of biomass along the height of the reactor, particularly in reactors fed with the sucrose-VFA mixture. Both the biological as well as the physical properties of the cultivated sludge were affected by the fraction of nonacidified substrate, The sludge in the first compartment of the reactor treating the sucrose-VFA mixture was whitish and fluffy, most likely resulting from the development of acidifying bacteria, Sludge granules which developed in the top part of this reactor possessed the highest acetogenic and methanogenic activity and the highest granule strength as well. The experiments also revealed that the conversion of the sucrose-VFA mixture into methane gradually deteriorated at prolonged operation at high organic loading rates (50 to 100 g COD . L(-1). day(-1)). Stable long-term performance of a reactor can only be achieved by preserving the sludge segregation along the height of the reactor. in the reactor fed solely with the VFA mixture little formation of granular sludge occurred. In this reactor, large differences in sludge characteristics were also observed along the reactor height. Li+-tracer experiments indicated that the hydraulic regime in the USSB reactor is best characterized by a series of at least five completely mixed reactors. The formation of granular sludge was found to influence the liquid flow pattern.