Lactulose a "bifidus factor" is composed of galactose and fructose, which can be produced by the isomerization of lactose. It is a prebiotic carbohydrate which stimulates the growth of health-promoting bacteria in the gastrointestinal tract, such as bifidobacteria and lactobacilli and at the same time inhibits growth of pathogenic bacteria such as Salmonella. It can also be used for the treatment of constipation, hepatic encephalopathy, tumour prevention, and to maintain blood glucose and insulin level. This review provides comprehensive information on the different techniques used for the production of lactulose, purification and analysis and besides this mechanism of action and its potential applications in food and pharmaceutical industries have also been discussed.