Phenytoin sodium (PS) is a narrow therapeutic index drug that dictates maintenance of narrow plasma concentration of the drug. This requires a good quality product that meets regulatory specifications throughout shelf-life as well as during the usage period. Quality of the drug product may change if not develop in a scientific fashion which may have ramifications on clinical outcome. The focus of the study was to understand the effect of process variables and storage conditions on the disproportionation and phase transformation of the drug, and dissolution of extended-release capsules of PS. Four formulations were prepared to contain either powder blend or granules of PS with commonly used excipients. The granules were prepared in a high shear mixture by granulating with water, ethanol or mixture thereof. The capsules were stored in pharmacy vials for 4-weeks at 40 °C/75% RH and 30 °C/65% RH. Formulations were characterized by spectroscopies (FTIR, NIR, and chemical imaging), X-ray powder diffraction (XRPD), dissolution and assay. Granules filled capsule did not meet USP dissolution specifications and there was a significant decrease in dissolution on exposure to stability conditions. Dissolution decreased from 77.56 ± 3.83% to 42.34 ± 4.31%, and 63.96 ± 6.12 to 46.53 ± 2.91 in physical mixture and water granulated formulations, respectively, after four weeks exposure at 40 °C/75% RH. Spectroscopic (NIR, FTIR, and chemical imaging) data indicated disproportionation of the drug during the storage period. Moreover, XRPD data explained a decrease in dissolution in the initial granules filled capsules as well as temperature and humidity exposed samples. It indicated the phase transformation of the drug and/or excipients, disproportionation and/or interactions. These changes further accelerated on exposure to stability conditions. In conclusion, our studies indicated the significant effect of process variables and stability conditions on the critical quality attributes of PS extended-release capsule that has the potential impact on the clinical performance of the product.