Foods and related substances from diverse sources known to have a potential for disease risk reduction are called functional foods, while nutraceuticals are bioactive compounds isolated from food and sold in dosage form. Nutraceutical and functional food industries are rapidly growing in recent years and most of the cases development of these functional materials involves certain biotransformation processes. A number of bioactive compounds has been identified up to date and isolated from seafood related products through enzyme-mediated hydrolysis. The enzymatic bioconversion process require suitable biocatalysts and appropriate bioreactor systems to incubate byproducts with digestive enzymes. Membrane bioreactor technology is recently emerging for the development of bioactive compounds from seafood processing byproducts.