A strain of Bacillus coagulans RCS3 isolated from ahot‐water spring produced significant β‐galactosidase activity at 10 days of growth in a flask. While enzyme production was maximum at 50 °C, the highest activity was at 65 °C, where the half‐life was 2 h. A 2 °C decrease in temperature increased the half‐life to 15 h without significantly changing the activity, suggesting that 63 °C is the temperature of preference compared with 65 °C for a combination of good activity and stability. The β‐galactosidase was also stable over pH 5–8, with peak activity at pH 6–7. It was strongly and competitively inhibited by the hydrolysis product galactose. Bivalent cations (Cu2+, Ni2+ and Hg2+) in the concentration range of 0.5–2.0 mM also inhibited enzyme activity. Both lactose solution and whey could be hydrolysed substantially within 36 h at 50 °C. The thermostability and pH‐stability and good hydrolytic capability make this enzyme potentially useful in the dairy industry.