Many drugs exist in the crystalline solid state due to reasons of stability and ease of handling during the various stages of drug development. Crystalline solids can exist in the form of polymorphs, solvates or hydrates. Phase transitions such as polymorph interconversion, desolvation of solvate, formation of hydrate and conversion of crystalline to amorphous form may occur during various pharmaceutical processes, which may alter the dissolution rate and transport characteristics of the drug. Hence it is desirable to choose the most suitable and stable form of the drug in the initial stages of drug development. The current focus of research in the solid-state area is to understand the origins of polymorphism at the molecular level, and to predict and prepare the most stable polymorph of a drug. The recent advances in computational tools allow the prediction of possible polymorphs of the drug from its molecular structure. Sensitive analytical methods are being developed to understand the nature of polymorphism and to characterize the various crystalline forms of a drug in its dosage form. The aim of this review is to emphasize the recent advances made in the area of prediction and characterization of polymorphs and solvates, to address the current challenges faced by pharmaceutical scientists and to anticipate future developments.