Dairy foods are a leading category in functional food development because they deliver naturally occurring functional ingredients and can be readily modified to meet newly identified health needs. The functionality of food can be addressed from the perspective of food components, whole foods or whole diets. Human clinical and observational research providing evidence for the functionality of dairy foods needs to focus on the whole food itself if the food category, rather than its component parts, is to be fully valued. Innovation in dairy food products needs to protect the natural nutritional quality of the food category, bearing in mind that increasing calorie value and reducing nutrient density of products intended for the general population may be detrimental from a functional food perspective. On the other hand, functional products targeting specific clinical conditions can focus on the particular nutritional needs of the target market which may be quite different to the general population.