The basic mechanism of the granular sludge formation which is the most important factor in the start-up and stable operaton is not confirmed yet. In this study, the effect of granular sludge formation was investigated with the different substrate concentrations and the various ratios of substrate supply/deficiency. The granular sludge formation in the UASB reactor was closely related to the substrate concentrations and the ratio of substrate supply/deficiency. The granular sludge formation was not accelerated at low substrate concentration. It was convinced that granular sludge formation was accelerated when the substrate supply with high concentration was stopped at UASB reactor. From this experiment, it was estimated that granular sludge was formed by the combination of hydrogen utilizing bacteria that form hydrogen condition and acid forming bacteria at substrate deficit condition by mutual symbiosis. Though the removal efficiency of organic matter was decreased as the influent substrate concentration was increased, the higher the influent substrate the better the granular sludge formation.