The effect of anhydrous lactose particle size distribution on its performance in the wet granulation process was evaluated. Three grades of anhydrous lactose were used in the study: "as is" manufacturer grade and 2 particle size fractions obtained by screening of the 60M lactose. Particle growth behavior of the 3 lactose grades was evaluated in a high shear mixer. Compactibility and porosity of the resulting granules were also evaluated. A uniaxial compression test on moist agglomerates of the 3 lactose grades was performed in an attempt to explain the mechanism of particle size effect observed in the high shear mixer. Particle growth of anhydrous lactose in the high shear mixer was inversely related to the particle size of the starting material. In addition, granulation manufactured using the grade with the smallest particle size was more porous and demonstrated enhanced compactibility compared with the other grades. Compacts with similar porosity and low liquid saturation demonstrated brittle behavior and their breakage strength was inversely related to lactose particle size in the uniaxial compression test, suggesting that material with smaller particle size may exhibit more pronounced nucleation behavior during wet granulation. On the other hand, compacts prepared at higher liquid saturation and similar compression force exhibited more plastic behavior and showed lower yield stress for the grade with smallest particle size. The lower yield stress of compacts prepared with this grade may indicate a higher coalescence tendency for its granules during wet granulation.