In the present study thiol functionalized polymethacrylic acid-polyethylene glycol-chitosan (PCP)-based hydrogel microparticles were utilized to develop an oral insulin delivery system. Thiol modification was achieved by grafting cysteine to the activated surface carboxyl groups of PCP hydrogels (Cys-PCP). Swelling and insulin loading/release experiments were conducted on these particles. The ability of these particles to inhibit protease enzymes was evaluated under in vitro experimental conditions. Insulin transport experiments were performed on Caco-2 cell monolayers and excised intestinal tissue with an Ussing chamber set-up. Finally, the efficacy of insulin-loaded particles in reducing the blood glucose level in streptozotocin-induced diabetic rats was investigated. Thiolated hydrogel microparticles showed less swelling and had a lower insulin encapsulation efficiency as compared with unmodified PCP particles. PCP and Cys-PCP microparticles were able to inhibit protease enzymes under in vitro conditions. Thiolation was an effective strategy to improve insulin absorption across Caco-2 cell monolayers, however, the effect was reduced in the experiments using excised rat intestinal tissue. Nevertheless, functionalized microparticles were more effective in eliciting a pharmacological response in diabetic animal, as compared with unmodified PCP microparticles. From these studies thiolation of hydrogel microparticles seems to be a promising approach to improve oral delivery of proteins/peptides.