Valorization of lactose is achieved by enzymatic conversion to lactose derivatives with nutraceutical properties. This review summarizes recent developments on composition and functional properties of lactose-derived oligosaccharides. Lactose conversion by β-galactosidase yields galacto-oligosaccharides (GOS); hetero-oligosaccharides with structural and/or functional similarity to human milk oligosaccharides are synthesized by transglycosylation with β-galactosidase, sialidase, glucansucrase, fructansucrase or α-fucosidase using lactose as donor or acceptor sugar. Application development for GOS was based on their prebiotic properties; intestinal fermentation of GOS to short-chain fatty acids confers health benefits. Several novel oligosaccharides exhibit additional potent biological activities that are based on direct interaction of oligosaccharides with glycan-binding domains of bacterial adhesins and toxins, and are highly specific to the oligosaccharide structure. Particularly the use of lactose-derived oligosaccharides to prevent binding of bacterial toxins or adhesins is supported by in vivo studies.