Aerobic granules offer enhanced biological nutrient removal and are compact and dense structures resulting in efficient settling properties. Granule instability, however, is still a challenge as understanding of the drivers of instability is poorly understood. In this study, transient instability of aerobic granules, associated with filamentous outgrowth, was observed in laboratory-scale sequencing batch reactors (SBRs). The transient phase was followed by the formation of stable granules. Loosely bound, dispersed, and pinpoint seed flocs gradually turned into granular flocs within 60 days of SBR operation. In stage 1, the granular flocs were compact in structure and typically 0.2 mm in diameter, with excellent settling properties. Filaments appeared and dominated by stage 2, resulting in poor settleability. By stage 3, the SBRs were selected for larger granules and better settling structures, which included filaments that became enmeshed within the granule, eventually forming structures 2-5 mm in diameter. Corresponding changes in sludge volume index were observed that reflected changes in settleability. The protein-to-polysaccharide ratio in the extracted extracellular polymeric substance (EPS) from stage 1 and stage 3 granules was higher (2.8 and 5.7, respectively), as compared to stage 2 filamentous bulking (1.5). Confocal laser scanning microscopic (CLSM) imaging of the biomass samples, coupled with molecule-specific fluorescent staining, confirmed that protein was predominant in stage 1 and stage 3 granules. During stage 2 bulking, there was a decrease in live cells; dead cells predominated. Denaturing gradient gel electrophoresis (DGGE) fingerprint results indicated a shift in bacterial community composition during granulation, which was confirmed by 16S rRNA gene sequencing. In particular, Janthinobacterium (known denitrifier and producer of antimicrobial pigment) and Auxenochlorella protothecoides (mixotrophic green algae) were predominant during stage 2 bulking. The chitinolytic activity of Chitinophaga is likely antagonistic towards Auxenochlorella and may have contributed to stage 3 stable granule formation. Rhodanobacter, known to support complete denitrification, were predominant in stage 1 and stage 3 granules. The relative abundance of Rhodanobacter coincided with high protein concentrations in EPS, suggesting a role in microbial aggregation and granule formation.