A novel beta-glucosidase, BglD1 with high beta-galactosidase and transglycosidation activities, was screened and cloned from the deep-sea bacterium Bacillus sp. D1. BglD1 exhibited the maximal beta-glucosidase and beta-galactosidase activities at 55-60 degrees C and pH 5.5-6.0. The enzyme maintained approximately 50% of its original activity at 35 degrees C and pH 6.0 after 120-h incubation. When applied to synthesize galacto-oligosaccharides (GOS), BglD1 generated 118.3 g/L GOS (33.8% (w/w)) from 350 g/L lactose, with trisaccharide Gal-beta(1 -> 3)-Lac and disaccharide Gal-beta(1 -> 4)-Gal as the main components. Furthermore, BglD1 could hydrolyze lactose in milk and produce GOS simultaneously. Using milk as the substrate, BglD1 hydrolyzed 88.5% lactose and produced 3.3 g/L GOS after incubation at 30 degrees C for 1 h. To improve the transglycosidation activity, a mutant BglD1:E224T was generated based on the semi-rational design. The GOS yield of BglD1:E224T was 11.5% higher than that of BglD1 when using lactose solution as the substrate. Thus, BglD1 and the mutant could be used as beneficial alternatives of the existing beta-galactosidases for the production of GOS.