Since the quality and performance of a pharmaceutical solid formulation depend on solid state of the drug and excipients, a thorough investigation of potential processing-induced transformations (PITs) of the ingredients is required. In this study, the physical phenomena taking place during formulation of erythromycin (EM) dihydrate solid dispersions with polyethylene glycol (PEG) 6000 by melting were investigated. PITs were monitored in situ using variable temperature X-ray powder diffraction (VT-XRPD), differential scanning calorimetry (DSC), and hot-stage microscopy (HSM). Possible intermolecular interactions between the drug and polymer in the solid state were further studied by Fourier transform infrared (FTIR) spectroscopy. While in the absence of PEG the dehydration was the only transformation observed, hot-melt processing with the polymer caused the drug to undergo multiple phase transformations (EM dihydrate --> EM dehydrate --> EM anhydrate). This alteration in phase behavior of EM was attributed to the ability of PEG in promoting nucleation and crystal growth of the EM anhydrate through a solvent-mediated route. In situ monitoring of solid dispersion formation, especially by VT-XRPD and HSM, enabled both early-stage detection of phase transformations during the hot-melt processing and better process understanding.