This study was conducted to isolate novel lactose utilizing Xanthomonas campestris mutants. Such a mutant will assist the utilization of whey as the sole carbon source for xanthan gum production, lower costs of fermentation process and set a precise application for whey as a waste. In this study, a mutant strain (NA1) was isolated from Xanthomonas campestris cells exposed to nitrous acid mutagenesis Environmental conditions were optimized and maximum activity of the β-galactosidase enzyme was obtained at pH 5.5 and 38°C following which the β-galactosidase activity in NA1 culture was increased 9.5 folds, compared to that of the wild type culture (336.1 U vs. 35.4 U). Xanthan gum production by NA1 using whey as carbon source was also studied. Using the experimental design of Plackett-Burman and statistical analysis, whey, as the main substrate and pH were the first factors affecting gum production among the seven parameters tested. Gum production using significant factors (such as substrate concentration and pH) was carried out in a lab-scale fermentor and 10 g L^-1 xanthan was obtained.