In this work, nitrogen loss in the nitrite oxidation step of the nitrification process in an aerobic-granule-based reactor was characterized with both experimental and modeling approaches. Experimental results showed that soluble microbial products (SMP) were released from the nitrite-oxidizing granules and were utilized as a carbon source by the heterotrophs for denitrification. This was verified by the fluorescence in situ hybridization (FISH) analysis. Microelectrode tests showed that oxygen diffusion limitation did result in an anoxic micro-zone in the granules and allowed sequential utilization of nitrate as an electron acceptor for heterotrophic denitrification with SMP as a carbon source. To further elucidate the nitrogen loss mechanisms, a mathematic model was formulated to describe the growth of nitrite oxidizers, the formation and consumption of SMP, the anoxic heterotrophic growth on SMP and nitrate, as well as the oxygen transfer and the substrate diffusion in the granules. The results clearly indicate that the heterotrophs grown on the SMP released by the autotrophs are responsible for the nitrogen loss in the nitrifying granules, and give us a better understanding of the aerobic granules for nitrogen removal. Biotechnol. Bioeng. 2011;108: 2844–2852. © 2011 Wiley Periodicals, Inc.