The quality control of drug products during manufacturing processes is important, particularly the presence of different polymorphic forms in active pharmaceutical ingredients (APIs) during production, which could affect the performance of the formulated products. The objective of this study was to investigate the phase transformation of fexofenadine hydrochloride (FXD) and its influence on the quality and performance of the drug. Water addition was key controlling factor for the polymorphic conversion from Form I to Form II (hydrate) during the wet granulation process of FXD. Water-induced phase transformation of FXD was studied and quantified with XRD and thermal analysis. When FXD was mixed with water, it rapidly converted to Form II, while the conversion is retarded when FXD is formulated with excipients. In addition, the conversion was totally inhibited when the water content was <15% w/w. The relationship between phase transformation and water content was studied at the small scale, and it was also applicable for the scale-up during wet granulation. The effect of phase transition on the FXD tablet performance was investigated by evaluating granule characterization and dissolution behavior. It was shown that, during the transition, the dissolved FXD acted as a binder to improve the properties of granules, such as density and flowability. However, if the water was over added, it can lead to the incomplete release of the FXD during dissolution. In order to balance the quality attributes and the dissolution of granules, the phase transition of FXD and the water amount added should be controlled during wet granulation.