Protein hydrolysates from fish by-products have good process suitability and bioavailability in the food industry. The objective of this work was to develop a method for protein recovery from fish scales and evaluate the hydrolysis of the scale protein. The effect of the hydrothermal process on protein recovery, degree of hydrolysis (DH) and structural properties of the hydrolysates was investigated. Results showed that hydrothermal treatment could enhance protein recovery of tilapia scales without demineralization and dramatically improve the DH of the hydrolysates. The hydrothermal treated scales showed a better protein recovery (84.81%) and DH (12.88%) and released peptides more efficiently than that of the conventional treated samples. The obtained gelatin hydrolysates mainly distributed in the range of 200–2000 Da with an angiotensin I-converting enzyme (ACE) IC₅₀ value of 0.73 mg/mL. The ACE inhibitory activity of gelatin hydrolysates was stable under high temperature, pH and gastrointestinal proteases. Hydrothermal treatment followed by enzymatic hydrolysis offers a potential solution for preparation of gelatin hydrolysates for food ingredients from fish processing by-products.