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                                                                   Exhibit 10.40


                                    AGREEMENT
                                    ---------


         THIS AGREEMENT (this "Agreement"), is dated July 24,2001, by and
between Gliatech Inc. (the "Company"), located at 23420 Commerce Park Road,
Cleveland, Ohio 44122 and Rodney E. Dausch ("Employee"), residing at 16350 Misty
Lake Glen, Chagrin Falls, Ohio 44023.

                                   WITNESSETH:
                                   -----------

         WHEREAS, prior to the Effective Date (as defined below), Employee was
the Executive Vice President and Chief Operating Officer of the Company;

         WHEREAS, effective on the Effective Date, Employee's employment with
the Company shall terminate, and Employee shall resign from any and all offices
of the Company, and any other position, office or directorship of any other
entity for which Employee was serving at the request of the Company;

         WHEREAS, the Company accepts Employee's resignations as of the
Effective Date;

         WHEREAS, the Company and Employee desire to set forth the payments and
benefits that Employee will be entitled to receive from the Company and the
continuing obligations that each party has undertaken in connection with the
cessation of Employee's employment with the Company; and

         WHEREAS, the Company and Employee wish to resolve, settle and/or
compromise certain matters, claims and issues between them, including, without
limitation, Employee's resignation from the offices he held and from the
termination of his employment with the Company.

         NOW, THEREFORE, in consideration of the promises and agreements
contained herein and other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, and intending to be legally bound, the
Company and Employee hereby agree as follows:

     1. CESSATION OF EMPLOYMENT. Within 60 days from the date of this Agreement
(the "Effective Date"), Employee shall terminate his employment with the Company
and its subsidiaries and related or affiliated companies. Employee hereby
resigns, effective on the Effective Date: (a) from all offices of the Company to
which he has been elected by the Board of Directors of the Company (or to which
he has otherwise been appointed), (b) from all offices of any entity that is a
subsidiary of, or is otherwise related to or affiliated with, the Company, (c)
from all administrative, fiduciary or other positions he may hold with respect
to arrangements or plans for, of or relating to the Company, and (d) from any
other directorship, office or position of any corporation, partnership, joint
venture, trust or other enterprise (each, an "Other Entity") insofar as Employee
is serving in the directorship, office or position of the Other Entity at the


<PAGE>










request of the Company. The Company hereby consents to and accepts, effective as
of the Effective Date, said resignations.

     2. COMPENSATION AND BENEFITS. Subject to the execution by Employee of the
release substantially in the form attached hereto as Exhibit A (the "Release")
and the other conditions hereof, the Company and Employee agree to the
following:

         a. SEVERANCE COMPENSATION. As severance compensation, the Company shall
pay Employee:

                  (i) An amount equal to Employee's annual base salary of
     $220,000. Such amount shall be paid in a lump sum on the day after which
     Employee's right of revocation under Subparagraph 3(d) of the Release
     expires (the "Payment Date");

                  (ii) An amount equal to no more than $33,000, which amount
     represents a portion of Employee's target bonus for calendar year 2001.
     Employee's target bonus amount may be adjusted further in a manner
     consistent with any adjustments by the Compensation Committee of the Board
     of Directors of the Company (the "Compensation Committee") of bonuses for
     2001 for all executive officers of the Company, except for the President.
     Notwithstanding the foregoing, in no event will Employee be entitled to
     receive the bonus described in this Subparagraph 2.a.(ii) unless the
     Company begins the commercial sale of Adcon-L(R) in the United States prior
     to July 1, 2002 (the "Re-Launch"). In the event Employee becomes entitled
     to receive payment of the bonus described in this Subparagraph 2.a.(ii),
     the bonus shall be paid to Employee as soon as practicable following the
     Re-Launch or, if earlier, the date on which all executive officers of the
     Company receive payment of bonuses for calendar year 2001; and

                  (iii) An amount equal to $31,680, which amount represents the
     deferred amount of the annual bonus earned by Employee for the calendar
     year 2000, the payment of which, together with the payment of annual
     bonuses earned by all other employees of the Company for calendar year
     2000, has been deferred until the Compensation Committee determines that
     such bonuses shall be paid (the "2000 Bonus"); PROVIDED, HOWEVER, that in
     no event will Employee be entitled to receive the 2000 Bonus described in
     this Subparagraph 2.a.(iii) unless the Compensation Committee determines
     prior to July 1, 2002 that the Company will pay bonuses to its employees
     for services rendered in 2000. In the event Employee becomes entitled to
     receive payment of the 2000 Bonus, the 2000 Bonus shall be paid to Employee
     as soon as practicable following the date on which the Committee determines
     that the Company will pay bonuses to all of its employees for services
     rendered in 2000.

         b. STOCK OPTIONS. Employee has certain stock options that were granted
to Employee prior to the Effective Date. Except as provided in this Subparagraph
2.b., Employee's eligibility to exercise such stock options is governed and will
continue to be governed by the terms and conditions of the Company's Amended and
Restated 1989 Stock Option Plan (the "1989 Plan") and/or the Company's 2001
Stock Incentive Plan (the "2001 Plan") and the agreements previously entered
into between the Company and Employee with respect to such stock options.
Notwithstanding the foregoing:



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                  (i) 25% of the options granted to Employee under the 1989 Plan
     on September 21, 2000 shall vest on the Payment Date;

                  (ii) 50% of the options granted to Employee under the 2001
     Plan on March 1, 2001 (as reduced with the consent of Employee on March 30,
     2001) shall vest on the Payment Date;

                  (iii) 100% of the options granted to Employee under the 1989
     Plan on March 1, 2001 shall vest on the Payment Date; and

                  (iv) Employee shall have a period of eighteen months following
     the Payment Date (the "Exercise Period") in which to exercise or forfeit
     stock options that are vested.

         Employee agrees and acknowledges that he is ineligible for any other
stock options, grants or awards, and that, except as provided in this
Subparagraph 2.b., he forfeits upon the Effective Date any rights in or to any
other stock option grants, including, without limitation, any right to vest
after the Effective Date in any stock options that are not already vested as of
the Effective Date.

         c. MEDICAL COVERAGE. Employee and his eligible dependents shall be
allowed to continue as a plan participant in the Company's group health plan
(medical, dental and vision coverage) (the "Health Plan") during the Exercise
Period on the same basis that the Company's active employees participate in such
plan during that period. Employee agrees that such continued participation in
the Health Plan will satisfy the Health Plan's obligation to provide Employee
the right to continuation coverage under the Health Plan pursuant to federal law
and that, as a result, Employee's (and his dependents') coverage under the
Health Plan will terminate at the end of the Exercise Period.

         d. PROFESSIONAL FEES. The Company and Employee acknowledge and agree
that each shall be responsible for the payment of their respective legal fees
and costs (and related disbursements) incurred in connection with Employee's
cessation of employment and all matters relating to the negotiation and
execution of the Release and all other matters covered by this Agreement.

         e. COMPANY BENEFIT PLANS. Except as provided above in Subparagraph 2.c.
of this Agreement, Employee's post-Effective Date eligibility for benefits, if
any, as a past employee of the Company under the Company's retirement and
welfare benefit plans shall be as set forth in the respective plan documents and
shall be based on his employment termination on the Effective Date, and his
entitlement to benefits for the period of his participation therein shall be
determined pursuant to the terms thereof.

         f. BUSINESS EXPENSES. The Company will reimburse Employee for any
reasonable business expenses incurred by Employee prior to the Effective Date
that are reimbursable pursuant to the Company's expense reimbursement policies.

         g. VACATION PAY. Employee shall be paid for accrued but unused vacation
time determined as of the Effective Date, with such payment to be made on the
Payment Date.


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         h. ACCRUED SALARY. In accordance with the Company's normal payroll
cycle, Employee shall be paid any base salary amount earned but unpaid as of the
Effective Date.

         i. OUTPLACEMENT. Employee shall be entitled to reimbursement by the
Company for the costs of outplacement services utilized by Employee for a period
of six months after the Effective Date up to $15,000 in total, promptly after
Employee provides receipts or other documentation establishing that he has
incurred such costs and the amount thereof.

         j. WITHHOLDING. The Company shall withhold such amounts from the
payments described herein as are required by applicable tax or other law.

         k. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE. The Company shall
maintain, for a period of not less than six years from the Effective Date, the
Company's current directors' and officers' liability insurance policy (or a
successor policy providing substantially comparable coverage) to the extent that
it provides coverage for events occurring prior to the Effective Date.

         l. MITIGATION. Employee shall not be required to mitigate the amount of
any payment or benefit provided for in this Agreement by seeking other
employment or otherwise.

         m. REFERENCES. The Company shall provide to any potential future
employer of Employee which requests information from the Company with respect to
Employee, the period of Employee's employment with the Company and his title
with the Company.

     3. NON-COMPETITION.

         a. During the Exercise Period, Employee shall not, directly or
indirectly, do or suffer to be done any of the following: own, manage, control
or participate in the ownership, management, or control of, or be employed or
engaged by or otherwise affiliated or associated as a consultant, independent
contractor or otherwise with any other corporation, partnership, proprietorship,
firm, association, or other business entity, or otherwise engage in any
business, which is in competition with the Company's business in the United
States; provided, however, that the ownership of not more than one percent of
any class of publicly-traded securities of any entity shall not be deemed a
violation of this Agreement. For purposes of this Agreement, the "Company's
business" shall mean any business in which the Company actively engages now, and
any business in which the Company has actively engaged in the two (2) year
period prior to the date hereof; including, without limitation, the discovery
and development of (i) products designed to inhibit post surgical scarring and
adhesions, (ii) a proprietary monoclonal antibody to treat anti-inflammatory
disorders and (iii) small molecule drug candidates to the modulate cognitive
state of the nervous system and to treat symptoms of schizophrenia.

         b. In the event Employee shall violate any provision of this Paragraph
3 as to which there is a specific time period during which he is prohibited from
taking certain actions or from engaging in certain activities as set forth in
such provision, then, in such event, such violation shall toll the running of
such time period from the date of such violation until such violation shall
cease. The foregoing shall in no way limit the Company's rights under Paragraph
7 of this Agreement.


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         c. Employee has carefully considered the nature and extent of the
restrictions upon him and the rights and remedies conferred upon the Company
under this Paragraph 3 and this Agreement, and hereby acknowledges and agrees
that the same are reasonable in time and territory, are designed to eliminate
competition which otherwise would be unfair to the Company, do not stifle the
inherent skill and experience of Employee, would not operate as a bar to
Employee's sole means of support, are fully required to protect the legitimate
interests of the Company and do not confer a benefit upon the Company
disproportionate to the detriment of Employee. Employee further acknowledges
that his obligations in this Paragraph 3 are made in consideration of, and are
adequately supported by the payments by the Company to Employee described
herein.

         d. Employee's obligations under this Paragraph 3 shall terminate in the
event the Company breaches any of its obligations under this Agreement and fails
to cure such breach within fifteen days after written notice by Employee to the
Company specifying the circumstances that constitute such breach.

     4. NO SOLICITATION OF EMPLOYEES. Employee agrees that he will not:

         (i) Employ, assist in employing, or otherwise associate in business
     with any person who is, or has been in the 12 month period prior to such
     individual's association with Employee an employee, officer or agent of the
     Company, or any of its affiliated, related or subsidiary entities, unless
     such employee was involuntarily terminated by the Company.

         (ii) Induce any person who is an employee, officer or agent of the
     Company, or any of its affiliated, related or subsidiary entities to
     terminate such relationship.

     5. CONFIDENTIAL INFORMATION.

         a. Employee acknowledges and agrees that in the performance of his
duties as an officer, director and employee of the Company he was brought into
frequent contact with, had or may have had access to, and/or became informed of
confidential and proprietary information of the Company and/or information which
is a competitive asset of the Company (collectively, "Confidential Information")
and the disclosure of which would be harmful to the interests of the Company or
its subsidiaries. Confidential Information shall include, without limitation:
(a) customer and distributor information such as names, addresses, sales
histories, purchasing habits, credit status, pricing levels, etc., (b) certain
prospective customer and distributor information lists, etc., (c) product and
systems specifications, schematics, designs, concepts for new or improved
products and services and other products and services data, (d) product and
material costs, (e) suppliers' and prospective suppliers' names, addresses and
contacts, (f) future corporate planning data, (g) production methods and
equipment, (h) marketing strategies, (i) the Company's financial results and
business condition, (j) any of the foregoing which belong to any other person or
company but to which Employee has had access by reason of his employment with,
or service as a director of, the Company or any subsidiary of the Company, (k)
pre-clinical and clinical testing procedures and other related information, and
(l) any other information which constitutes a "trade secret" under federal or
state law. Such Confidential Information is more fully described in Subparagraph
5.b. Employee acknowledges that the Confidential Information of the Company
gained by Employee during his association


                                       5
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with the Company was developed by and/or for the Company through substantial
expenditure of time, effort and money and constitutes valuable and unique
property of the Company.

         b. Employee will keep in strict confidence, and will not, directly or
indirectly, at any time, disclose, furnish, disseminate, make available, use or
suffer to be used in any manner any Confidential Information of the Company,
including, without limitation, as to when or how Employee may have acquired such
Confidential Information. Employee specifically acknowledges that Confidential
Information includes any and all information, whether reduced to writing (or in
a form from which information can be obtained, translated or derived into
reasonably usable form), or maintained in the mind or memory of Employee and
whether compiled or created by the Company, which derives independent economic
value front not being readily known to or ascertainable by proper means by
others who can obtain economic value from the disclosure or use of such
information, that reasonable efforts have been put forth by the Company to
maintain the secrecy of confidential or proprietary or trade secret information,
that such information is and will remain the sole property of the Company, and
that any retention or use by Employee of confidential or proprietary or trade
secret information after the termination of Employee's employment with and
services for the Company shall constitute a misappropriation of the Company's
Confidential Information.

         c. On or prior to the Effective Date, Employee will return to the
Company (to the extent he has not already returned), equipment, software,
electronic files, computers, exclusive of the Palm(TM) handheld organizer, in
good condition, all property of the Company, including, without limitation,
property, documents and/or all other materials (including copies, reproductions,
summaries and/or analyses) which constitute, refer or relate to Confidential
Information of the Company.

         d. Employee further acknowledges that his obligation of confidentiality
shall survive, regardless of any other breach of this Agreement or any other
agreement, by any party hereto, until and unless such Confidential Information
of the Company shall have become, through no fault of Employee generally known
to the public or Employee is required by law (after providing the Company with
notice and opportunity to contest such requirement) to make disclosure.
Employee's obligations under this Paragraph 5 are in addition to, and not in
limitation or preemption of, all other obligations of confidentiality which
Employee may have to the Company under general legal or equitable principles or
statutes.

     6. DISCLOSURE.

         a. From the date of this Agreement through the end of the Exercise
Period, Employee will communicate the contents of Paragraphs 3, 4, 5, 7.b., 8
and 10 of this Agreement to any person, firm, association or corporation other
than the Company which he intends to be employed by, associated in business
with, or represent.

         b. Employee shall take no action with respect to the Company's common
stock that is in violation of the federal securities laws.


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     7. BREACH.

         a. If Employee breaches any of the provisions of this Agreement (and in
the case of a breach that is capable of being cured, fails to cure such breach
within fifteen days after written notice by the Company to Employee specifying
the circumstances that constitute such breach), then the Company may, at its
sole option, immediately terminate all remaining payments and benefits described
in this Agreement, including the vesting or exercisability of any stock options
under Subparagraph 2.b., and obtain reimbursement from Employee of all payments
and benefits already provided pursuant to Paragraph 2 of this Agreement, plus
any expenses and damages incurred as a result of the breach (including, without
limitation, reasonable attorneys' fees), with the remainder of this Agreement,
and all promises and covenants herein, remaining in full force and effect.

         (i) Notwithstanding the foregoing, the Company will not terminate
     pursuant to Subparagraph 7.a. above any benefits to which Employee is
     entitled under any tax-qualified retirement plan of the Company, and
     Employee's rights under Part 6 of Subtitle B of Title I of the Employee
     Retirement Income Security Act of 1974 as amended, if any, will not be
     reduced by any action taken by the Company under Subparagraph 7.a. above.

         (ii) Employee may challenge any Company action under Subparagraph 7.a.
     above.

         b. Employee acknowledges and agrees that the remedy at law available to
the Company for breach by Employee of any of his obligations under Paragraphs 3,
4, 5 and 6 of this Agreement would be inadequate and that damages flowing from
such a breach would not readily be susceptible to being measured in monetary
terms. Accordingly, Employee acknowledges, consents and agrees that, in addition
to any other rights or remedies which the Company may have at law, in equity or
under this Agreement, upon adequate proof of Employee's violation of any
provision of Paragraphs 3, 4, 5 or 6 of this Agreement, the Company shall be
entitled to immediate injunctive relief and may obtain a temporary order
restraining any threatened or further breach, without the necessity of proof of
actual damage.

     8. CONTINUED AVAILABILITY AND COOPERATION.

         a. Employee shall cooperate fully in all reasonable respects with the
Company, with the Company's counsel, and with the Company's insurer in
connection with any present and future actual or threatened litigation or
administrative proceeding involving the Company that relates to events,
occurrences or conduct occurring (or claimed to have occurred) during the period
of Employee's employment by the Company. This cooperation by Employee shall
include, but not be limited to:

         (i) making himself reasonably available for interviews and discussions
     with the Company's counsel as well as for depositions and trial testimony;

         (ii) if depositions or trial testimony are to occur, making himself
     reasonably available and cooperating in the preparation therefor as and to
     the extent that the Company or the Company's counsel reasonably requests;


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         (iii) refraining from impeding in any way the Company's prosecution or
     defense of such litigation or administrative proceeding; and

         (iv) cooperating fully in the development and presentation of the
     Company's prosecution or defense of such litigation or administrative
     proceeding.

         b. Employee shall be reimbursed by the Company for reasonable travel,
lodging, telephone and similar expenses incurred in connection with such
cooperation, which the Company shall reasonably endeavor to schedule at times
not conflicting with the reasonable requirements of any employer of Employee, or
with the requirements of any third party with whom Employee has a business
relationship permitted hereunder that provides remuneration to Employee.
Employee shall not unreasonably withhold his availability for such cooperation.
Employee shall not be entitled to compensation from the Company for such
cooperation during the Exercise Period, and shall be compensated at a reasonable
hourly rate mutually agreed to by Employee and the Company for such cooperation
following the Exercise Period.

     9. SUCCESSORS AND BINDING AGREEMENT

         a. This Agreement shall be binding upon and inure to the benefit of the
Company and any successor of or to the Company, including, without limitation,
any persons acquiring, directly or indirectly, all or substantially all of the
business and/or assets of the Company whether by purchase, merger,
consolidation, reorganization, or otherwise (and such successor shall thereafter
be deemed included in the definition of "the Company" for purposes of this
Agreement), but shall not otherwise be assignable or delegable by the Company.

         b. This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, and/or legatees.

         c. This Agreement is personal in nature and none of the parties hereto
shall, without the consent of the other parties, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as expressly
provided in Subparagraphs 9.a. and 9.b.

         d. This Agreement is intended to be for the exclusive benefit of the
parties hereto, and except as provided in Subparagraphs 9.a. and 9.b., no third
party shall have any rights hereunder.

     10. NON-DISCLOSURE; STATEMENTS TO THIRD PARTIES.

         a. Except as otherwise provided in Paragraph 6, all provisions of this
Agreement and the circumstances giving rise hereto are and shall remain
confidential and shall not be disclosed to any person not a party hereto (other
than (i) Employee's spouse, if any, (ii) each party's attorney, financial
advisor and/or tax advisor to the extent necessary for such advisor to render
appropriate legal, financial and tax advice, and (iii) persons or entities that
fall within the scope of Paragraphs 3 and 4 of this Agreement, but only to the
extent required thereby), except as necessary to carry out the provisions of
this Agreement, and except as may be required by law. Notwithstanding the
foregoing, this Agreement may be disclosed and described as well as filed with
or provided to the Securities and Exchange Commission or any other governmental


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instrumentality or agency, including the Internal Revenue Service, if the
Company deems such filing or provision to be necessary.

         b. Because the purpose of this Agreement is to settle amicably any and
all potential disputes or claims among the parties, neither Employee nor the
Company shall, directly or indirectly, make or cause to be made any statements
to any third parties criticizing or disparaging the other or commenting on the
character or business reputation of the other. Employee further hereby agrees
not: (i) to comment to others concerning the status, plans or prospects of the
business of the Company, or (ii) to engage in any act or omission that would be
detrimental, financially or otherwise, to the Company, or that would subject the
Company to public disrespect, scandal, or ridicule. For purposes of this
Subparagraph 10.b., the "Company" shall mean the Company and its present and
former predecessors, subsidiaries, divisions, related or affiliated companies,
officers, directors, stockholders, members, employees, heirs, successors,
assigns, representatives, agents, accountants and counsel.

     11. NOTICES. For all purposes of this Agreement, all communications
provided for herein shall be in writing and shall be deemed to have been duly
given when delivered, addressed to the Company (to the attention of the
President) at its principal executive offices and to Employee at his principal
residence, 16350 Misty Lake Glen, Chagrin Falls, Ohio 44023, or to such other
address as any party may have furnished to the other in writing and in
accordance herewith. Notices of change of address shall be effective only upon
receipt.

     12. MISCELLANEOUS. No provision of this Agreement may be modified, waived
or discharged unless such modification, waiver or discharge is agreed to in
writing signed by Employee and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, expressed or implied with respect to the subject matter
hereof have been made by any of the parties that are not set forth expressly in
this Agreement and every one of them (if, in fact, there have been any) is
hereby terminated without liability or any other legal effect whatsoever.

     13. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement
among the parties hereto with respect to the subject matter hereof and shall
supersede all prior verbal or written agreements, covenants, communications,
understandings, commitments, representations or warranties, whether oral or
written, by any party hereto or any of its representatives pertaining to such
subject matter including, without limitation, the Letter Agreement between the
Company and Employee, dated February 7, 1995, the Change in Control Letter
Agreement between the Company and Employee, dated March 13, 2000 and the
Severance Agreement between the Company and Employee, dated March 15, 2001;
provided, however, that the Indemnification Agreement between the Company and
Employee, dated February 5, 1998, shall not be superceded by this Agreement and
shall continue in full force and effect pursuant to the terms of such agreement.

     14. GOVERNING LAW. Any dispute, controversy, or claim of whatever nature
arising out of or relating to this Agreement or breach thereof shall be governed
by and under the laws of the State of Ohio. The parties agree that any and all
disputes, controversies, or claims of


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whatever nature arising out of or relating to this agreement or breach thereof
shall be resolved by a court of general jurisdiction in Cleveland, Ohio, and the
parties hereby consent to the exclusive jurisdiction of such court in any action
or proceeding arising under or brought to challenge, enforce, or interpret any
of the terms of this Agreement.

         15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall nevertheless remain in full force and
effect. Employee understands and acknowledges that he has been advised by the
Company to consult with legal counsel prior to executing this Agreement, he has
had an opportunity to consult with and to be advised by legal counsel of his
choice, he fully understands the terms of this Agreement and he enters into this
Agreement freely, voluntarily and intending to be bound.

         16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same Agreement.

         17. CAPTIONS AND PARAGRAPH HEADINGS. Captions and Paragraph headings
used herein are for convenience and are not part of this Agreement and shall not
be used in construing it.

         18. FURTHER ASSURANCES. Each party hereto shall execute such additional
documents, and do such additional things, as may reasonably be requested by the
other party to effectuate the purposes and provisions of this Agreement.


         IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first set forth above.



                                          GLIATECH INC.


                                          By:   /s/ illegible
                                             ----------------------------------
                                               Name:
                                               Title:


                                          Date:    7/27/01
                                               --------------------------------


                                                /s/ Rodney E. Dausch
                                          --------------------------------------
                                                    Rodney E. Dausch


                                          Date:    7/27/01
                                               --------------------------------


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