A novel gene encoding transglycosylating beta-galactosidase (BGase) was cloned from Penicillium expansum F3. The sequence contained a 3,036-bp open reading frame encoding a 1,011-amino-acid protein. This gene was subsequently expressed on the cell surface of Saccharomyces cerevisiae EBY-100 by galactose induction. The BGase-anchored yeast could directly utilize lactose to produce galactooligosaccharide (GOS), as well as the by-products glucose and a small quantity of galactose. The glucose was consumed by the yeast, and the galactose was used for BGase expression, thus greatly facilitating GOS synthesis. The GOS yield reached 43.64% when the recombinant yeast was cultivated in yeast nitrogen base-Casamino Acids medium containing 100 g/liter initial lactose at 25 degrees C for 5 days. The yeast cells were harvested and recycled for the next batch of GOS synthesis. During sequential operations, both oligosaccharide synthesis and BGase expression were maintained at high levels with GOS yields of over 40%, and approximately 8 U/ml of BGase was detected in each batch.