<PAGE>   1

                                                                   Exhibit 10.3


                               SECURITY AGREEMENT

                           Dated as of April 26, 2001

                                     between

                                 GLIATECH INC.,
                                   as Grantor,

                                       and

                  PAUL CAPITAL ROYALTY ACQUISITION FUND, L.P.,
                                  as Purchaser




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                                TABLE OF CONTENTS
                                -----------------

<TABLE>
<CAPTION>

                                                                                                              PAGE
                                                                                                              ----
<S>                                                                                                          <C>
ARTICLE I DEFINITIONS..........................................................................................1

   Section 1.1.       Certain Terms............................................................................1
   Section 1.2.       Assignment Agreement Definitions.........................................................2
   Section 1.3.       UCC Definitions..........................................................................2
   Section 1.4.       Other Interpretive Provisions............................................................2

ARTICLE II SECURITY INTEREST...................................................................................3

   Section 2.1.       Grant of Security........................................................................3
   Section 2.2.       Continuing Security Interest; Transfer of Notes..........................................4
   Section 2.3.       Grantors Remains Liable..................................................................5

ARTICLE III REPRESENTATIONS AND WARRANTIES.....................................................................5

   Section 3.1.       Location of Collateral, etc..............................................................5
   Section 3.2.       Ownership; No Liens......................................................................5
   Section 3.3.       Validity.................................................................................6
   Section 3.4.       Authorization, Approval..................................................................6

ARTICLE IV COVENANTS...........................................................................................6

   Section 4.1.       As to Receivables........................................................................6
   Section 4.2.       Transfers and Other Liens................................................................7
   Section 4.3.       Further Assurances.......................................................................8
   Section 4.4.       General Covenants........................................................................8

ARTICLE V RIGHTS AND DUTIES OF THE PURCHASER...................................................................9

   Section 5.1.       Purchaser Appointed Attorney-in-Fact.....................................................9
   Section 5.2.       Purchaser May Perform....................................................................9
   Section 5.3.       Limitations on Duties of Purchaser......................................................10
   Section 5.4.       Reasonable Care.........................................................................10
   Section 5.5.       Indemnification.........................................................................10

ARTICLE VI REMEDIES...........................................................................................10

   Section 6.1.       Certain Remedies........................................................................10

ARTICLE VII MISCELLANEOUS PROVISIONS..........................................................................11

   Section 7.1.       Amendments..............................................................................11
   Section 7.2.       Release of Collateral...................................................................12
   Section 7.3.       Notices.................................................................................12
   Section 7.4.       Waiver; Cumulative Remedies.............................................................12
   Section 7.5.       Successors and Assigns..................................................................12

</TABLE>

                                       i

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<TABLE>
<CAPTION>
<S>                                                                                                          <C>
   Section 7.6.       Counterparts............................................................................12
   Section 7.7.       Severability............................................................................12
   Section 7.8.       Governing Law and Jurisdiction..........................................................13
   Section 7.9.       Waiver of Jury Trial....................................................................13



Schedules
---------

Schedule I                    -         Locations of Certain Collateral
Schedule II                   -         Offices For Filing Financing Statements
Schedule 3.1                            Names and Corporate Reorganizations and Mergers

</TABLE>



                                       ii

<PAGE>   4

                               SECURITY AGREEMENT

                  THIS SECURITY AGREEMENT (as amended, supplemented or otherwise
modified from time to time, this "SECURITY AGREEMENT"), is dated as of April 26,
2001 and entered into between GLIATECH INC., a Delaware corporation (the
"GRANTOR") and PAUL CAPITAL ROYALTY ACQUISITION FUND, L.P., a Delaware limited
partnership (the "PURCHASER").

                                    RECITALS

                  WHEREAS, the Grantor and the Purchaser have entered into the
Revenue Interests Assignment Agreement, dated as of April 26, 2001 (as amended,
modified or supplemented from time to time, the "ASSIGNMENT AGREEMENT"); and

                  WHEREAS, it is a condition precedent to the payment of the
Purchase Price by the Purchaser under the Assignment Agreement that the Grantor
shall have granted the security interests contemplated by this Security
Agreement.

                  NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Grantor hereby
agrees, for the benefit of the Purchaser, as follows:

                                   ARTICLE I

                                   DEFINITIONS

         SECTION 1.1. CERTAIN TERMS.

                  The following terms (whether or not underscored) when used in
this Security Agreement, including its preamble and recitals, shall have the
following meanings:

                  "ACCOUNT" shall have the meaning as provided in the UCC.

                  "ASSIGNMENT AGREEMENT" shall have the meaning set forth in the
recitals hereto.

                  "COLLATERAL" shall have the meaning set forth in Section 2.1.

                  "EVENT OF DEFAULT" shall mean a Funding Termination Event.

                  "GENERAL INTANGIBLE" shall have the meaning as provided in the
UCC.

                  "GRANTOR" shall have the meaning set forth in the preamble
hereto.

                  "JOINT CONCENTRATION ACCOUNT" shall have the meaning set forth
in the Assignment Agreement.



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                  "INSTRUMENT" shall have the meaning as provided in the UCC.

                  "LOCKBOX ACCOUNT" shall have the meaning set forth in the
Assignment Agreement.

                  "LOCKBOX AGREEMENT" shall have the meaning set forth in the
Assignment Agreement.

                  "LOCKBOX BANK" shall have the meaning set forth in the
Assignment Agreement.

                  "OBLIGATIONS" shall have the meaning set forth in the
Assignment Agreement.

                  "PLEDGED DEPOSIT ACCOUNTS" shall have the meaning set forth in
Section 2.1(g) hereof.

                  "PROCEEDS" shall have the meaning as provided in the UCC.

                  "PURCHASER CONCENTRATION ACCOUNT" shall have the meaning set
forth in the Assignment Agreement.

                  "RECEIVABLES" mean the Revenue Interests and the Related
Receivables.

                  "RELATED RECEIVABLES" shall have the meaning set forth in
Section 2.1(c).

                  "SECURITY AGREEMENT" shall have the meaning set forth in the
preamble hereto.

                  "SELLER CONCENTRATION ACCOUNT" shall have the meaning set
forth in the Assignment Agreement.

         SECTION 1.2. ASSIGNMENT AGREEMENT DEFINITIONS.

                  Unless otherwise defined herein or the context otherwise
requires, terms used in this Security Agreement, including its preamble and
recitals, have the meanings provided in the Assignment Agreement.

         SECTION 1.3. UCC DEFINITIONS.

                  Unless otherwise defined herein or the context otherwise
requires, terms for which meanings are provided in the UCC as in effect from
time to time in the State of New York are used in this Security Agreement,
including its preamble and recitals, with such meanings.

         SECTION 1.4. OTHER INTERPRETIVE PROVISIONS.

                  (a) The meanings of defined terms are equally applicable to
the singular and plural forms of the defined terms.

                  (b) The words "hereof," "herein," "hereunder" and similar
words refer to this Security Agreement as a whole and not to any particular
provision of this Security Agreement;




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<PAGE>   6

and subsection, Section, Schedule, and Exhibit references are to this Security
Agreement unless otherwise specified.

                  (c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.

                      (ii) The term "including" is not limiting and means
"including without limitation".

                      (iii) The term "property" includes any kind of property or
asset, personal or mixed, tangible or intangible, other than real property.

                  (d) Unless otherwise expressly provided herein, (i) references
to agreements (including this Security Agreement) and other contractual
instruments shall be deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the terms of any Transaction Document, and
(ii) references to any statute or regulation are to be construed as including
all statutory and regulatory provisions consolidating, amending, replacing,
supplementing, or interpreting the statute or regulation.

                  (e) The captions and headings of this Security Agreement are
for convenience of reference only and shall not affect the interpretation of
this Security Agreement.

                                   ARTICLE II

                                SECURITY INTEREST

         SECTION 2.1. GRANT OF SECURITY.

                  As collateral security for the prompt and complete payment and
performance when due of the Obligations, the Grantor hereby assigns, pledges and
grants to the Purchaser a security interest in all of the Grantor's right,
title, and interest in and to the following property, whether now owned or
hereafter existing or acquired (the "COLLATERAL"):

                  (a) all Revenue Interests;

                  (b) all Assigned Interests;

                  (c) all License Agreements;

                  (d) all Accounts, contract rights, payment intangibles,
Instruments, and General Intangibles, in each case, constituting, comprising,
evidencing or otherwise relating to any of the foregoing in this Section 2.1(any
and all such Accounts, contract rights, payments intangibles, Instruments, and
General Intangibles being the "RELATED RECEIVABLES");

                  (e) all books, records, data bases, and information, in each
case, specifically relating to any of the foregoing in this Section 2.1;




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                  (f) all money now or at any time in the possession or under
the control of, or in transit to, the Lockbox Bank, the Purchaser or the Grantor
relating to any of the foregoing in this Section 2.1; and

                  (g) the Lockbox Account, the Joint Concentration Account and
the Purchaser Concentration Account (collectively, the "PLEDGED DEPOSIT
ACCOUNTS"), all funds on deposit in each such account, all investments arising
out of such funds, all claims thereunder or in connection therewith, and all
cash, securities, rights, and other property at any time and from time to time
received, receivable, or otherwise distributed in respect of such accounts, such
funds, or such investments; and

                  (h) all products and Proceeds of and from any and all of the
foregoing Collateral, all proceeds which constitute property of the types
described in clauses (a) through (g) and, to the extent not otherwise included,
all payments under insurance (whether or not the Purchaser is the loss payee
thereof), including return premiums with respect thereto, or any indemnity,
warranty, or guaranty payable by reason of loss or damage to or otherwise with
respect to any of the foregoing Collateral;

PROVIDED, HOWEVER, that the term "Collateral" shall not include, and the Grantor
shall not be deemed to have granted a security interest in, any of the Grantor's
right, title or interest in, or any rights under, (i) any contract or other
agreement existing on the Closing Date to the extent that such grant would
result in a breach of a term of such contract or agreement prohibiting such
grant without the consent of the other party thereto, other than to the extent
that any such term would be rendered ineffective pursuant to Section 9-318 of
the Uniform Commercial Code of any relevant jurisdiction and (ii) any
Intellectual Property of the Grantor.

         SECTION 2.2. CONTINUING SECURITY INTEREST.

                  This Security Agreement shall create a continuing security
interest in the Collateral and shall:

                  (a) remain in full force and effect until the payment and
performance in full of all the Obligations;

                  (b) be binding upon the Grantor and its successors,
transferees and assigns; and

                  (c) inure, together with the rights and remedies of the
Purchaser, to the benefit of the Purchaser and its successors and assigns.

Upon the payment and performance in full of the Obligations, the security
interest granted herein shall terminate and all rights to the Collateral shall
revert to the Grantor. Upon any such termination, the Purchaser will, at the
Grantor's sole expense, promptly execute and deliver to the Grantor such
instruments and documents necessary and as the Grantor shall reasonably request
to evidence such termination.




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<PAGE>   8

         SECTION 2.3. GRANTOR REMAINS LIABLE.

                  Anything herein to the contrary notwithstanding:

                  (a) the Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein and shall
perform all of its duties and obligations under such contracts and agreements to
the same extent as if this Security Agreement had not been executed;

                  (b) the exercise by the Purchaser of any of its rights and
remedies hereunder shall not release the Grantor from any of its duties or
obligations under any such contracts or agreements included in the Collateral;
and

                  (c) the Purchaser shall have no obligation or liability under
any such contracts or agreements included in the Collateral by reason of this
Security Agreement, and the Purchaser shall not be obligated to perform any of
the obligations or duties of the Grantor thereunder or to take any action to
collect or enforce any claim for payment assigned hereunder.

                                  ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

                  The Grantor represents and warrants to the Purchaser as
follows:

         SECTION 3.1. LOCATION OF COLLATERAL, ETC.

                  (a) On the date hereof, the place(s) of business and chief
executive office of the Grantor and the office(s) where the Grantor keeps its
records concerning the Receivables are located at the addresses set forth on
Item A of SCHEDULE I.

                  (b) The Grantor has no trade name.

                  (c) Except as set forth on SCHEDULE 3.1, during the past five
years, the Grantor has not been known by any name different from the one set
forth on the signature page hereto, and the Grantor has not been the subject of
any merger or other corporate reorganization.

                  (d) None of the Receivables is evidenced by a promissory note
or other instrument.

         SECTION 3.2. OWNERSHIP; NO LIENS.

                  The Grantor owns the Collateral free and clear of any Liens
except for the security interest created by this Security Agreement. No
effective financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any recording office, except such as
may have been filed in favor of the Purchaser relating to this Security
Agreement.




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<PAGE>   9

         SECTION 3.3. VALIDITY.

                  This Security Agreement creates a valid security interest in
the Collateral securing the payment and performance in full of the Obligations.
Upon the filing of appropriate financing statements in the applicable filing
offices in the jurisdictions listed in SCHEDULE II, all filings, registrations
and recordings necessary or appropriate to create, preserve, protect and perfect
the first priority security interest granted by the Grantor to the Purchaser in
the Collateral will have been accomplished and will create a perfected security
interest therein prior to the rights of all other Persons therein and subject to
no other Liens, except as set forth in SCHEDULE 3.04 to the Assignment
Agreement.

         SECTION 3.4. AUTHORIZATION, APPROVAL.

                  No authorization, approval, or other action by, and no notice
to or filing with, any Government Authority or other Person is required either:

                  (a) for the grant by the Grantor of the security interest
granted hereby or for the execution, delivery, and performance of this Security
Agreement by the Grantor; or

                  (b) for the perfection of or exercise by the Purchaser of its
rights and remedies hereunder, other than (i) the filing of financing statements
in the offices listed in Item B of SCHEDULE I and (ii) the establishment of the
Pledged Deposit Accounts and the Seller Concentration Account in accordance with
Section 5.10 of the Assignment Agreement.

                                   ARTICLE IV

                                    COVENANTS

                  The Grantor hereby covenants and agrees that, so long as this
Security Agreement shall remain in effect, the Grantor agrees to the following:

         SECTION 4.1. AS TO RECEIVABLES.

                  (a) The Grantor shall keep its place(s) of business and its
chief executive office and the office(s) where it keeps its books and records
(including those concerning the Receivables) and all original copies of the
Distribution Agreements located, in each case, at its address specified in Item
A of SCHEDULE I, or, upon 30 days' prior written notice to the Purchaser, at
such other locations in a jurisdiction where all actions required by the first
sentence of Section 4.4 shall have been taken with respect to the Receivables
and the Distribution Agreements; not change its name or its state or place of
incorporation or organization except upon 30 days' prior written notice to the
Purchaser; and hold and preserve such books and records.

                  (b) Except as otherwise provided in this subsection (b), until
an Event of Default has occurred and is continuing, the Grantor shall, subject
to Section 5.10 of the Assignment Agreement, continue to collect, at its own
expense, all amounts due or to become due the Grantor under the Distribution
Agreements. In connection with such collections, provided no Event of Default
shall have occurred and be continuing, the Grantor may, subject to



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Section 5.10 of the Assignment Agreement, take (and, at the Purchaser's
direction, shall take) such action as the Grantor may deem necessary or
advisable to enforce collection of the applicable Distribution Agreement. At any
time after an Event of Default has occurred and is continuing, the Purchaser
shall have the right to notify the account debtors or obligors under any
Receivables of the security interest of the Purchaser in such Receivables to the
Purchaser and to direct such account debtors or obligors to make payment to the
Purchaser of any amounts due or to become due thereunder and enforce collection
of any of the Receivables by suit or otherwise and surrender, release or
exchange all or any part thereof, or adjust, settle or compromise or extend or
renew for any period (whether or not longer than the original period) any
indebtedness thereunder or evidenced thereby. If an Event of Default has
occurred and is continuing, upon the request of the Purchaser, the Grantor will,
at its own expense, notify any parties obligated on any of the Receivables to
make payment to the Purchaser of any amounts due or to become due thereunder,
and in such event, the Purchaser is authorized to endorse, in the name of the
Grantor, any item representing any payment on or other proceeds of any of the
Receivables.

                  (c) After delivery to the Grantor by the Purchaser of a notice
that an Event of Default has occurred and is continuing: (i) all amounts and
proceeds (including Instruments) received by the Grantor in respect of any
Receivables shall be received in trust for the benefit of the Purchaser
hereunder, shall be segregated from other funds of the Grantor, and shall be
forthwith paid over to the Purchaser in the same form as so received (with any
necessary endorsements) to be held as cash collateral and applied as provided by
this Security Agreement; and (ii) subject to Section 5.10 of the Assignment
Agreement, the Grantor shall not adjust, settle, or compromise the amount or
payment of any Receivable, or release wholly or partly any account debtor or
obligor thereof, or allow any credit or discount thereon.

                  (d) After the occurrence and during the continuance of an
Event of Default, (A) the Purchaser may in its own name or in the name of others
communicate with account debtors in order to verify with them to the Purchaser's
reasonable satisfaction the existence, amount and terms of any Receivables and
(B) the Purchaser shall have the right, at the Grantor's expense, to make test
verifications of the Receivables in any reasonable manner and through any medium
that it considers advisable, and the Grantor agrees to furnish all such
assistance as the Purchaser may reasonably require in connection therewith.

         SECTION 4.2. INSURANCE.

                  The Grantor will maintain or cause to be maintained at all
times insurance against loss or damage sufficient to cover all the Collateral
that are of an insurable nature to the same extent assets of a similar character
are usually so insured by companies similarly situated and owning like assets,
with insurers believed by the Grantor to be responsible and reputable. If an
Event of Default exists at the time any insurance proceeds relating to the
Collateral are received, all such proceeds shall be paid to the Purchaser for
application in accordance with the terms and conditions of the Assignment
Agreement and this Security Agreement.

         SECTION 4.3. TRANSFERS AND OTHER LIENS.

                  The Grantor shall not:




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<PAGE>   11

                  (a) create or suffer to exist any Lien or other charge or
encumbrance upon or with respect to any of the Collateral, except for the
security interest created by this Security Agreement and except as otherwise
permitted by the Assignment Agreement.

                  (b) sell, assign (by operation of law or otherwise) or
otherwise dispose of any of the Collateral, except as otherwise permitted by the
Assignment Agreement; or

         SECTION 4.4. FURTHER ASSURANCES.

                  The Grantor agrees that, from time to time at its own expense,
the Grantor will promptly execute and deliver all further instruments,
assignments, agreements and documents, and take all further action, that may be
reasonably necessary or desirable, or that the Purchaser may reasonably request,
in order to perfect, preserve, and protect any security interest granted or
purported to be granted hereby and the priority thereof or to enable the
Purchaser to exercise and enforce its rights and remedies hereunder with respect
to any Collateral. Without limiting the generality of the foregoing the Grantor
will:

                  (a) if any Collateral shall be evidenced by a promissory note
or other instrument or negotiable document, deliver and pledge to the Purchaser
hereunder such promissory note, instrument or negotiable document duly endorsed
and accompanied by duly executed instruments of transfer or assignment, all in
form and substance reasonably satisfactory to the Purchaser;

                  (b) execute and file such financing or continuation
statements, or amendments thereto, and such other instruments, assignments or
notices, as may be necessary or desirable, or as the Purchaser may request, in
order to perfect and preserve the security interests and other rights granted or
purported to be granted to the Purchaser;

                  (c) furnish to the Purchaser, from time to time, statements
and schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Purchaser may reasonably
request, and all in reasonable detail and in accordance with the terms of the
Assignment Agreement.

With respect to the foregoing and the grant of the security interest hereunder,
the Grantor hereby authorizes the Purchaser to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of the Grantor where permitted by law. A
carbon, photographic, or other reproduction of this Security Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.

         SECTION 4.5. GENERAL COVENANTS.

                  Without limiting any of the foregoing covenants, the Grantor
agrees (a) not to use or permit any Collateral to be used unlawfully or in
material violation of any provision of the Assignment Agreement, this Security
Agreement, any other Transaction Document, or any applicable statute, regulation
or ordinance or any policy of insurance covering the Collateral; and (b) to pay
promptly when due all taxes, assessments, charges, encumbrances and Liens now or
hereafter imposed upon or affecting any Collateral.




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<PAGE>   12

                                   ARTICLE V

                       RIGHTS AND DUTIES OF THE PURCHASER

         SECTION 5.1. PURCHASER APPOINTED ATTORNEY-IN-FACT.

                  The Grantor hereby irrevocably appoints the Purchaser as the
Grantor's attorney-in-fact, with full authority in the place and stead of the
Grantor and in the name of the Grantor or otherwise, from time to time in the
Purchaser's discretion when an Event of Default has occurred and is continuing,
to take any appropriate action and to execute any instrument that the Purchaser
may deem reasonably necessary or advisable to accomplish the purposes of this
Security Agreement (but the Purchaser shall not be obligated to and shall have
no liability to the Grantor or any third party for failure so to do) including,
without limitation:

                  (a) to ask, demand, collect, sue for, recover, compromise,
receive, and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;

                  (b) to receive, endorse, and collect any drafts or other
instruments, documents, and chattel paper in connection with clause (a) above;

                  (c) to file any claims or take any action or institute any
proceedings that the Purchaser may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of the
Purchaser with respect to any of the Collateral;

                  (d) to perform the affirmative obligations of the Grantor
hereunder (including all obligations of the Grantor pursuant to Section 4.4);

                  (e) to execute and deliver for and on behalf of the Grantor
any and all instruments, documents, agreements, and other writings necessary or
advisable for the exercise on behalf of the Grantor of any rights, benefits or
options created or existing under or pursuant to the Collateral; and

                  (f) to execute endorsements, assignments, or other instruments
of conveyance and transfer.

The Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section 5.1 is irrevocable and coupled with an
interest.

         SECTION 5.2. PURCHASER MAY PERFORM.

                  If the Grantor fails to perform any agreement contained
herein, the Purchaser may itself perform, or cause performance of, such
agreement, PROVIDED that the Purchaser shall in any event first have given the
Grantor written notice of its intent to do the same and the Grantor shall not
have, within 30 days of such notice (or such shorter period as the Purchaser may
reasonably determine is necessary in order to preserve the benefits of this
Security Agreement with respect to any material portion of the Collateral), paid
such claim or obtained to the Purchaser's satisfaction the release of the claim
or Lien to which such notice relates. The




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<PAGE>   13

Grantor agrees to reimburse the Purchaser upon demand for any costs and
expenses, including, without limitation, reasonable attorneys' fees, the
Purchaser incurs while acting as the Grantor's attorney-in-fact hereunder, all
of which costs and expenses are included in the Obligations secured hereby.

         SECTION 5.3. LIMITATIONS ON DUTIES OF PURCHASER.

                  The Purchaser shall be obligated to perform such duties and
only such duties as are specifically set forth in this Security Agreement, and
no implied covenants or obligations shall be read into this Security Agreement
against the Purchaser. If an Event of Default has occurred and is continuing,
the Purchaser shall exercise the rights and powers vested in it by this Security
Agreement, and shall not be liable (except for its gross negligence or willful
misconduct) with respect to any action taken by it, or omitted to be taken by
it, in accordance with, and subject to the limitations contained in, the
Assignment Agreement.

          SECTION 5.4. REASONABLE CARE.

                  It is understood and agreed between the parties hereto that
the Purchaser's duty with respect to the custody, safekeeping, and physical
preservation of the Collateral in its possession should be to deal with it in
the same manner as the Purchaser deals with similar property for its own
account; PROVIDED, HOWEVER, that the Purchaser shall not be required to make any
presentment, demand, or protest, or give any notice, and need not take any
action to preserve any rights against any other Person with respect to the
Collateral.

                                   ARTICLE VI

                                    REMEDIES

         SECTION 6.1. CERTAIN REMEDIES.

                  If any Event of Default shall have occurred and is continuing:

                  (a) The Purchaser may exercise in respect of the Collateral,
in addition to other rights available to it at law or in equity or otherwise,
all the rights and remedies of a secured party on default under the UCC (whether
or not the UCC applies to the affected Collateral) and also may (i) require the
Grantor to, and the Grantor hereby agrees that it will, at its expense and upon
request of the Purchaser forthwith, assemble all or part of the Collateral as
directed by the Purchaser and make it available to the Purchaser at a place to
be designated by the Purchaser that is reasonably convenient to both parties,
(ii) exercise any and all rights and remedies of the Grantor under or in
connection with the Collateral, (iii) withdraw all monies, securities and other
property in the Pledged Deposit Accounts for application to the Obligations,
(iv) foreclose or otherwise enforce the Purchaser's security interest in any
manner permitted by law or provided for in this Security Agreement, (v) without
notice except as specified below, sell the Collateral or any part thereof in one
or more parcels at public or private sale, at any place or places for cash, on
credit, or for future delivery, and upon such other terms as the Purchaser may
reasonably determine, (vi) recover from the Grantor all costs and expenses,
including, without limitation, reasonable attorneys' fees, incurred or paid by
the Purchaser in exercising any right,




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<PAGE>   14

power, privilege or remedy provided by this Security Agreement or by law, (vii)
enter into property where any Collateral is located and take possession thereof,
and (viii) prior to the disposition of the Collateral, prepare it for
disposition in any manner and to the extent the Purchaser deems appropriate;
PROVIDED, HOWEVER, that notwithstanding the foregoing to the contrary, the
Purchaser may sell or otherwise dispose the Collateral or any portion thereof in
its then condition without any preparation or processing. The Grantor agrees
that, to the extent notice of sale shall be required by law, at least ten (10)
days' prior notice to the Grantor of the time and place of any public sale or
the time after which any private sale is to be made shall constitute reasonable
notification. The Purchaser shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Purchaser may
adjourn any public or private sale from time to time by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was so adjourned. Upon any sale or other
disposition pursuant to this Security Agreement, the Purchaser shall have the
right to deliver, assign and transfer to the purchaser thereof the Collateral or
portion thereof and transfer to the purchaser thereof the Collateral or portion
thereof so sold or disposed of. Each purchaser at any such sale or other
disposition (including the Purchaser) shall hold the Collateral free from any
claim or right of whatever kind, including any equity or right of redemption of
the Grantor and the Grantor specifically waives (to the extent permitted by law)
all rights of redemption, stay or appraisal which it has or may have under any
rule of law or statute now existing or hereafter adopted.

                  (b) All cash proceeds received by the Purchaser in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral shall be applied to the Obligations. If any non-cash proceeds are
received in connection with any sale of Collateral, the Purchaser shall not
apply such non-cash proceeds to the Obligations unless and until such proceeds
are converted to cash; PROVIDED, HOWEVER, that if such non-cash proceeds are not
expected on the date of receipt thereof to be converted to cash within one year
after such date, the Purchaser shall nonetheless use commercially reasonable
efforts to convert such non-cash proceeds to cash within such one-year period.
Any surplus of such cash or cash proceeds held by the Purchaser after payment in
full of all the Obligations shall be paid over to the Grantor or to whomsoever
may be lawfully entitled to receive such surplus.

                                  ARTICLE VII

                            MISCELLANEOUS PROVISIONS

         SECTION 7.1. AMENDMENTS.

                  No amendment to or waiver of any provision of this Security
Agreement and no consent to any departure by the Grantor herefrom shall in any
event be effective unless the same shall be in writing and signed by the
Purchaser, and then such waiver or consent shall be effective only in the
specific instance and for the specific purpose for which given.




                                       11
<PAGE>   15

         SECTION 7.2. RELEASE OF COLLATERAL.

                  If any of the Collateral shall be sold, transferred, or
otherwise disposed of by the Grantor in a transaction not expressly prohibited
by the Assignment Agreement, then the Purchaser shall, at the Grantor's written
request, promptly execute and deliver to the Grantor (at the sole cost and
expense of the Grantor) such instruments or documents necessary and as the
Grantor shall reasonably request to release the Liens created hereby on such
Collateral, including any necessary UCC amendment, termination statement or
partial termination statement.

         SECTION 7.3. NOTICES.

                  All notices and other communications shall be given as set
forth in Section 8.03 of the Assignment Agreement.

         SECTION 7.4. WAIVER; CUMULATIVE REMEDIES.

                  (a) No failure to exercise and no delay in exercising, on the
part of the Purchaser, any right, remedy, power, or privilege hereunder, shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof, or the exercise of any other right, remedy, power or
privilege.

                  (b) The Grantor waives any right to require the Purchaser to
proceed against any Person or to exhaust any Collateral or to pursue any remedy
in such Purchaser's power.

                  (c) The rights, powers and remedies of the Purchaser under
this Security Agreement shall be in addition to all rights, powers and remedies
given to the Purchaser by virtue of any statute or rule of law, the Assignment
Agreement or any other agreement, all of which rights, powers and remedies shall
be cumulative and may be exercised successively or concurrently without
impairing the Purchaser's security interest in the Collateral.

         SECTION 7.5. SUCCESSORS AND ASSIGNS.

                  The provisions of this Security Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Grantor may not assign or transfer any
of its rights or obligations under this Security Agreement without the prior
written consent of the Purchaser.

         SECTION 7.6. COUNTERPARTS.

                  This Security Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.

         SECTION 7.7. SEVERABILITY.

                  The illegality or unenforceability of any provision of this
Security Agreement or any instrument or agreement required hereunder shall not
in any way affect or impair the legality



                                       12
<PAGE>   16


or enforceability of the remaining provisions of this Security Agreement or any
instrument or agreement required hereunder.

         SECTION 7.8. GOVERNING LAW AND JURISDICTION.

                  (a) THIS SECURITY AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK (WITHOUT GIVING
EFFECT TO ITS CONFLICTS OF LAW PRINCIPLES).

                  (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
SECURITY AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTION AND
DELIVERY OF THIS SECURITY AGREEMENT, THE GRANTOR HEREBY IRREVOCABLY CONSENTS TO
AND ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY THE NON-EXCLUSIVE JURISDICTION OF SUCH COURTS. THE GRANTOR
HEREBY FURTHER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE
LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY
NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH
JURISDICTION IN RESPECT OF THIS SECURITY AGREEMENT OR ANY DOCUMENT RELATED
HERETO.

         SECTION 7.9. WAIVER OF JURY TRIAL.

                  EACH OF THE GRANTOR AND THE PURCHASER HEREBY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS SECURITY AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS SECURITY AGREEMENT.

                            [Signature page follows]



                                       13
<PAGE>   17


                  IN WITNESS WHEREOF, the Grantor and the Purchaser have caused
this Security Agreement to be duly executed and delivered by their respective
duly authorized officers as of the date first above written.

GRANTOR:                            GLIATECH INC.



                                    By: /s/ STEVEN L. BASTA
                                        -------------------------------
                                         Name: Steven L. Basta
                                         Title: President

PURCHASER:                          PAUL CAPITAL ROYALTY ACQUISITION FUND, L.P.

                                    By:  Paul Capital Management, LLC,
                                         its General Partner


                                         By: /s/ WALTER FLAMENBAUM
                                             ------------------------------
                                             Name:  Walter Flamenbaum, M.D.
                                             Title: Managing Member



                     [SIGNATURE PAGE TO SECURITY AGREEMENT]