The state of the art for upflow anaerobic sludge blanket (UASB) reactors is discussed, focusing on the microbiology of immobilized anaerobic bacteria and the mechanism of granule formation. The development of granular sludge is the key factor for successful operation of the UASB reactors. Criteria for determining if granular sludge has developed in a UASB reactor is given based on the densities and diameters of the granular sludge. The shape and composition of granular sludge can vary significantly. Granules typically have a spherical form with a diameter from 0.14 to 5 mm. The inorganic mineral content varies from 10 to 90% of the dry weight of the granules, depending on the wastewater composition etc. The main components of the ash are calcium, potassium, and iron. The extracellular polymers in the granular sludge are important for the structure and maintenance of granules, while the inorganic composition seems to be of less importance. The extracellular polymer content varies between 0.6 and 20% of the volatile suspended solids and consists mainly of protein and polysaccharides. Both Methanosaeta spp. (formerly Methanothrix) and Methanosarcina spp. have been identified as important aceticlastic methanogens for the initial granulation and development of granular sludge. Immunological methods have been used to identify other methanogens in the granules. The results have showed that, besides the aceticlastic methanogens Methanosaeta spp. and Methanosarcina spp., hydrogen and formate utilizing bacteria are also present, e.g., Methanobacterium formicicum, Methanobacterium thermoautotrophicum, and Methanobrevibacter spp. Microcolonies of syntrophic bacteria are often observed in the granules, and the significant electron transfer in these microcolonies occurs through interspecies hydrogen transfer. The internal organization of the various groups of bacteria in the granules depends on the wastewater composition and the dominating metabolic pathways in the granules. Internal organization is observed in granules where such an arrangement is beneficial for an optimal degradation of the wastewater. A four-step model is given for the initial development of granular sludge.; The upflow anaerobic sludge blanket (UASB) reactor which was developed in the seventies is considered today as the most popular reactor for anaerobic biological treatment of wastewater. For the past few years, several research in the area of the UASB reactors have been conducted. Nevertheless, the mechanisms by which granules are formed are not yet well understood. This in this article, the state of the art for upflow anaerobic sludge blanket (UASB) reactors is discussed with emphasis on the microbiology of immobilized anaerobic bacteria and the mechanism of granule formation.