Lactulose, a ketose disaccharide, is used in both pharmaceutical and food industries. This study was undertaken to screen and isolate potent β-galactosidase-producing bacteria and to evaluate their enzymatic production of lactulose. Soil samples from fruit gardens were collected. One isolate designated LAS was identified whose cell extract could convert lactose and fructose into lactulose. The 16S rDNA gene analysis of LAS revealed its phylogenetic relatedness to Arthrobacter sp. The β-galactosidase produced by LAS was purified 15.7-fold by ammonium sulfate precipitation and subsequent Phenyl-Sepharose hydrophobic chromatography. The optimum pH and temperature for lactulose synthesis by this β-galactosidase were 6.0 and 20 °C, respectively. The low optimum temperature of this enzyme compared to the currently used ones for lactulose production has the advantage of reducing the nonenzymatic browning in biotransformations. The results indicated that Arthrobacter could be used as a novel bacterial β-galactosidase source for lactulose production.