A two-step catalytic process for woody biomass fractionation and valorization is presented. Both lignin and carbohydrate are converted to useful chemicals. Oak sawdust is effectively delignified in methanol using different homogeneous acids (sulphuric acid, aluminium triflate, p-methylbenzenesulfonic acid, hydrochloride acid and phosphoric acid) in the first step, resulting in a lignin oil and cellulose pulp. In the second step, the lignin oil is upgraded to phenolic monomers in methanol in a H2 atmosphere by a Pd/C catalyst. The degree of delignification correlates inversely with the aromatic monomer yield. Characterization of the lignin oil by gel permeation chromatography and heteronuclear single quantum coherence NMR revealed that the cleavage of β-O-4 bonds during acidolysis is accompanied by repolymerization of lignin fragments. A model compound study shows that species containing unsaturated aldehyde groups are prone to form high molecular-weight products due to repolymerization. The use of Pd/C in combination with H2SO4 or aluminium triflate did not lead to noticeable leaching, whereas severe leaching and Pd particle size growth occurred when HCl and p-TsOH were used as acid catalysts. H3PO4 is the suitable acid catalyst for the present process since the lignin repolymerization is minimized in the first step (160 °C, 2 h, atmospheric N2 pressure). Up to 25.0 wt% yield of mainly 4-n-propyl syringol/guaiacol and their derivatives was obtained over the Pd/C catalyst in the second step (180 °C, 2 h, 30 bar H2). The Pd/C catalyst can be recycled with no significant loss of activity and selectivity after four runs. The cellulose pulp can be easily separated from the other products and shows enhanced susceptibility to enzymatic hydrolysis, resulting in glucose yields as a high as 66 wt%.