A lipid-coated beta-D-galactosidase was prepared in which the enzyme surface is covered with a lipid monolayer and two long alkyl lipophilic tails serve to solubilize the enzyme in organic solvents. In a two-phase aqueous-organic system, a lipid-coated enzyme exists in the organic (2-propyl ether) phase and acts as an efficient transgalactosylation catalyst for various hydrophobic alcohols with lactose in the aqueous buffer solution. When a native beta-D-galactosidase was employed in the two-phase system, neither the transgalactosylation nor the hydrolysis reaction proceeded due to denaturation of the enzyme at the interface. Effects of coating lipid molecules, origins of enzymes, reaction in organic solvents, and chemical structures of acceptor alcohols on the transgalactosylation catalyzed by the lipid-coated enzyme were studied. This system could also be applied in a large-scale synthesis on the 0.1-1 g scale.