The purpose of this study was (a) to evaluate the factors affecting the form conversion of anhydrous lactose to the monohydrate form during wet granulation using water as the granulating agent and (b) study the effect of lactose form conversion on its compaction properties. A two-level full factorial design with two center points was used to evaluate the factors affecting form conversion. The three variables evaluated were percentage of microcrystalline cellulose (low 0 and high 20), water to intragranular solids ratio (low 0.10 and high 0.18) and drying conditions (tray drying and fluid bed drying). The presence of microcrystalline cellulose in the formulation did not provide any benefit in reducing the percent lactose conversion. But, the conversion was significantly reduced by decreasing the amount of water added to the granulation and/or by decreasing the drying time, using a fluid bed dryer compared to a tray dryer. In the second part of the study, complete conversion of the anhydrous lactose to monohydrate was achieved by storing the anhydrous form under 25 °C/97% RH for 4 weeks. Physical characterization (compactibility, surface area and surface morphology) was performed on the form converted material and compared to the as received anhydrous lactose. The physical characterization results indicated that even though anhydrous lactose undergoes complete form conversion to monohydrate form under high humidity and/or during wet granulation, it retains its inherent higher as received material compactibility and the BET surface area and porosity of the form converted material are higher than that of the as received anhydrous lactose.