The global food industry generates approximately 1.3 billion tons of agro-waste annually, presenting both environmental challenges and economic opportunities. This comprehensive review examines the innovative utilization of agricultural waste materials in functional food development, focusing on the extraction of bioactive compounds and their incorporation into value-added food products. Agro-waste materials including fruit peels, vegetable pomace, cereal brans, and processing by-products contain significant concentrations of antioxidants, dietary fiber, phenolic compounds, and other bioactive substances with proven health benefits. This study analyzes current extraction technologies, bioactive compound characterization, and successful applications in functional food formulations. Research findings demonstrate that agro-waste utilization can reduce environmental burden by 30-50% while creating functional foods with enhanced nutritional profiles and health-promoting properties. The review synthesizes recent advances in waste valorization technologies and provides evidence-based recommendations for sustainable functional food development strategies.