Catalytic two-stage hydrocracking of Arabian vacuum residue was studied using commercial Ni-Mo catalysts in a batch autoclave to achieve a higher conversion above 50% to °C-distillate without producing “dry sludge”, which is defined as insoluble substances in the product oil matrix. The hydrogenation at 390 °C of the first stage was found to be very effective in suppressing sludge formation in the second stage at higher temperatures, 430-450 °C, where the cracking to produce the distillate dominantly proceeded. The larger pore size catalyst (KFR-10) was suitable for these purposes, while the smaller pore size catalyst (KF-842) failed to suppress the sludge formation. The shorter contact time of the second stage at a relatively higher temperature appears favorable to increase the conversion without producing the sludge. The mechanism of sludge formation and the storage stability of the hydrocracked product are preliminarily examined. © 1990, American Chemical Society. All rights reserved.