Galacto-oligosaccharides have become the focus of a great deal of attention in the field of functional foods, owing to their known health benefits and potential to improve the quality of many foods. Because of these properties, they are currently used as low-calorie sweeteners in fermented milk products, confectioneries, breads, and beverages. In this article, the characterization and product inhibition of many microbial beta-galactosidases with transgalactosylation activities, their galacto-oligosaccharide production from lactose, and the application of galacto-oligosaccharides are reviewed. A method for increasing galacto-oligosaccharide production by reducing product inhibition properties via the immobilization and structure modification of the enzymes is also introduced herein.