Hydrogel microspheres of chitosan (CS) and Pluronic F127 (PF-127) were prepared by the emulsion-crosslinking method employing glutaraldehyde (GA) as a crosslinker. 5-Fluorouracil (5-FU), an anticancer drug with good water solubility, was encapsulated into hydrogel microspheres. Various formulations were prepared by varying the ratio of CS and PF-127, % drug loading and amount of GA. Microspheres were characterized by Fourier transform infrared (FTIR) spectroscopy to confirm the absence of chemical interactions between drug, polymer and the crosslinking agent. Scanning electron microscopy (SEM) was performed to study the surface morphology of the microspheres. SEM showed that microspheres have smooth shiny surfaces. Particle size, as measured by laser light scattering technique, gave an average size ranging from 110 to 382 microm. Differential scanning calorimetry (DSC) and X-ray diffraction (X-RD) studies were performed to understand the crystalline nature of the drug after encapsulation into hydrogel microspheres. Encapsulation of the drug up to 86% achieved was measured by UV spectroscopy. Equilibrium swelling experiments were performed in distilled water. Diffusion coefficients (D) of water through microspheres were estimated by an empirical equation. In vitro release studies indicated the dependence of release rate on the extent of crosslinking, drug loading and the amount of PF-127 used to produce the microspheres; slow release was extended up to 24 h. The release data were also fitted to an empirical equation to compute the diffusional exponent (n), which indicated that the release mechanism followed the non-Fickian trend.