Milk-derived bioactive peptides have been found to exhibit various physiological activities such as angiotensin-converting enzyme (ACE) inhibitory, antibacterial, and antioxidative effects. Bioactive peptides can be used in the formulation of functional foods, nutraceuticals, and natural drugs because of their beneficial effects. However, the degree of variability in the composition, functionality, and sensory properties of such peptides has greatly limited their use in the food industry. In this review, we discuss the main peptides obtained from milk proteins and summarize findings from previous studies on the production and biological activities of these peptides. In addition, we compare the methods used to separate and identify the structure of the bioactive peptides and highlight current investigations into engineering and implementation of technologies that would allow more efficient isolation of bioactive peptides for functional food production. To improve human health, further molecular biology studies will also be required to elucidate the complex network of interactions between food microorganisms and the digestive system.