Experiments were carried out to study factors affecting the enzyme activity of β-galactosidase of Saccharomyces fragilis NRRL Y-1109 in milk products. Both the type of lactose-containing substrates and their method of preparation greatly affected β-galactosidase activity. Lactose in an aqueous solution was hydrolyzed more easily than it was in milk products. Of milk products tested, whey was the best substrate for the enzyme. Milk solids, other than lactose, exhibited some inhibitory effect on hydrolysis of lactose by the S. fragilis β-galactosidase. The maximum rate of hydrolysis in milk products was obtained when milk or whey was fortified with 0.1 M potassium sulfate and 10−4 M manganese chloride. Nonfat dry milk and whey powders, in which portions of the lactose were hydrolyzed to simple sugars, were prepared. These products were of good flavor, appearance, and stability.