<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

         (mark one)
         [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

         FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                       OR

         [  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM _______________ TO _____________

                         COMMISSION FILE NUMBER 0-20096

                                  GLIATECH INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                    34-1587242
(State or other jurisdiction               (I.R.S. Employer Identification No.)
 of incorporation or organization)

        23420 COMMERCE PARK ROAD
           CLEVELAND, OHIO                                44122
(Address of principal executive offices)                (Zip Code)

                                 (216) 831-3200
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                           YES   X       NO
                                               -----        -----

THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, $0.01 PAR
VALUE PER SHARE, AS OF MAY 7, 2001 WAS 9,682,637 SHARES.


<PAGE>   2





                         GLIATECH INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>

PART I.                                FINANCIAL INFORMATION                                            PAGE
                                                                                                        ----

<S>          <C>                                                                                        <C>
Item 1        Financial Statements (unaudited):

              Consolidated Balance Sheets -
              March 31, 2001 and December 31, 2000

              Consolidated Statements of Operations -
              for the three months ended March 31, 2001 and 2000

              Consolidated Statements of Cash Flows - for the three months ended
              March 31, 2001 and 2000

              Notes to Consolidated Financial Statements

Item 2        Management's Discussion and Analysis of Financial Condition
              and Results of Operations

Item 3        Quantitative and Qualitative Disclosures About Market Risk


PART II.                               OTHER INFORMATION

Item 1        Legal Proceedings

Item 2        Changes in Securities

Item 6        Exhibits and Reports on Form 8-K
</TABLE>

<PAGE>   3


                         PART I - FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS

                         GLIATECH INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
 (In thousands)                                                                MARCH 31,         DECEMBER 31,
                                                                                  2001               2000
                                                                             ------------------------------
<S>                                                                                   <C>                 <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                     $   2,893          $     960
 Short-term investments                                                            6,283              7,504
 Accounts receivable, less allowances of
     $200 in 2001 and $1,585 in 2000                                                 329              1,771
 Inventories                                                                       2,348              2,315
 Prepaid expenses and other                                                          506                744
                                                                               ---------          ---------
Total current assets                                                              12,359             13,294

Long term investments                                                                                 3,642
Property and equipment, net                                                        3,046              3,197
Other assets, net                                                                  1,064              1,043
                                                                               ---------          ---------
TOTAL ASSETS                                                                 $    16,469        $    21,176
                                                                             ===========        ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                            $     3,644         $    1,026
 Accrued expenses                                                                  2,468              2,814
 Reserve for product recall                                                                           1,015
 Accrued research contracts                                                           46                154
 Accrued clinical trial costs                                                        646                664
                                                                               ---------          ---------
 Total current liabilities                                                         6,804              5,673

Stockholders' equity:
 Common stock                                                                         97                 97
 Additional paid-in capital                                                       74,476             74,465
 Accumulated other comprehensive income                                               42                 27
 Accumulated deficit                                                            (64,950)           (59,086)
                                                                               ---------          ---------
 Total stockholders' equity                                                        9,665             15,503
                                                                               ---------          ---------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $    16,469        $    21,176
                                                                             ===========        ===========
</TABLE>

See notes to consolidated financial statements




                                       1
<PAGE>   4




                         GLIATECH INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                        THREE MONTHS ENDED
(In thousands, except share and per share data)                                              MARCH 31,
                                                                                      2001               2000
                                                                                   -----------          ---------
<S>                                                                                <C>                  <C>
REVENUES
Net product sales                                                                  $          -        $    6,831
Government grants                                                                             -               243
                                                                                    -----------         ---------
          Total revenues                                                                      -             7,074

OPERATING COSTS AND EXPENSES
Cost of products sold (see Note 5)                                                        1,365             1,202
Research and development                                                                  2,362             2,573
Selling, general and administrative                                                       2,336             3,452
                                                                                    -----------         ---------
          Total operating costs and expenses                                              6,063             7,227
                                                                                    -----------         ---------
Loss from operations                                                                     (6,063)             (153)
Interest income, net                                                                        199               270
                                                                                    -----------         ---------
NET (LOSS) INCOME                                                                   $    (5,864)        $     117
                                                                                    ===========         =========
(Loss) earnings per share
          Basic                                                                     $     (0.61)        $    0.01
                                                                                    ===========         =========
          Diluted                                                                   $     (0.61)        $    0.01
                                                                                    ===========         =========
Average shares outstanding
          Basic                                                                       9,682,637         9,489,341
                                                                                    ===========         =========
          Diluted                                                                     9,682,637         9,698,465
                                                                                    ===========         =========
</TABLE>



See notes to consolidated financial statements.



                                       2
<PAGE>   5



                         GLIATECH INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (UNAUDITED)
<TABLE>
<CAPTION>
          (In thousands)                                                THREE MONTHS ENDED
                                                                             MARCH 31,
                                                                      2001                2000
                                                                    -------             -------
<S>                                                                 <C>                 <C>
OPERATING ACTIVITIES
Net (loss) income                                                   $(5,864)            $   117
Adjustments to reconcile net (loss) income to cash
  used in operating activities:
   Depreciation and amortization                                        201                 159
   Provision for losses on accounts receivable                           --                  17
   Compensation from issuance of stock and stock options                 11                  52
   Changes in operating assets and liabilities:
     Accounts receivable                                              1,442              (2,226)
     Inventories                                                        (33)                 (5)
     Government grants receivable and other assets                      238                (155)
     Accounts payable and other liabilities                           1,257                (602)
     Accrued research and clinical trial costs                         (126)               (707)
                                                                    -------             -------
Net cash used in operating activities                                (2,874)             (3,350)
INVESTING ACTIVITIES
Sale of investments                                                   7,977              10,683
Purchase of investments                                              (3,100)             (2,999)
Payment for patent rights and trademarks                                (27)                (57)
Purchase of property and equipment                                      (43)               (276)
                                                                    -------             -------
Net cash provided by investing activities                             4,807               7,351
FINANCING ACTIVITIES
Proceeds from exercise of stock options                                  --                 204
                                                                    -------             -------
Net cash provided by financing activities                                --                 204
                                                                    -------             -------
Increase in cash and cash equivalents                                 1,933               4,205
Cash and cash equivalents at beginning of period                        960               3,350
                                                                    -------             -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $ 2,893             $ 7,555
                                                                    =======             =======
</TABLE>

See notes to consolidated financial statements



                                       3
<PAGE>   6


                         GLIATECH INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

Note 1.           Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 2001
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2001. These financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Annual Report on Form 10-K of Gliatech Inc. for the fiscal year
ended December 31, 2000 filed with the Securities and Exchange Commission.
Certain fiscal 2000 amounts have been reclassified to conform to fiscal 2001
presentation.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred annual losses and
negative cash flows from operations since inception and has an accumulated
deficit of $65.0 million at March 31, 2001. In January 2001, the Company
recalled its primary products, ADCON-L and ADCON-T/N, and discontinued sale of
these products due to a recall by a supplier of a raw material used in the
production of these products. These factors raise substantial doubt about its
ability to continue as a going concern. In April 2001, the Company entered into
a financing agreement (see Note 12). The Company's continued operations will
depend on its ability to raise additional funds through various potential
sources such as equity and debt financing, collaborative agreements, strategic
alliances, recommencing commercial sales of its products, validation of the
Solon, Ohio manufacturing facility for commercial distribution in the U.S., the
outcome of pending litigation (see Note 8) and its ability to realize the full
potential of its technology and its drug candidates. The Company is in
discussion with several potential strategic alliance partners to further the
development of drug candidates in its pipeline. In addition, management is
pursuing other equity and debt financing alternatives to raise additional funds.
However, there can be no assurance that any alliances or funding alternatives
will be consummated as these alternatives may be dependent upon other factors
including, without limitation, market conditions, and such alliances or
financing may not be available or be available on acceptable terms. The
Company's ability to raise additional funds through these alternatives may also
depend upon obtaining regulatory approval to recommence sales of ADCON-L and
ADCON-T/N, which is dependent upon the outcomes of the FDA review and assessment
of the Company's clinical data and the timeliness of FDA review due to the
Application Integrity Policy ("AIP") status.


                                       4
<PAGE>   7

There can be no assurance that the Company will obtain these additional funds to
continue as a going concern. No adjustments to the amounts or classifications of
assets and liabilities, which could result from the outcome of this uncertainty,
are reflected in the financial statements.


Note 2.           Investments

Short-term and long-term investments classified as available-for-sale at March
31, 2001 and December 31, 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                      Gross Unrealized
                                            Amortized Cost        Holding Gain       Holding Loss         Fair Value
                                            -------------         ------------       ------------         ----------
<S>                                                <C>                     <C>                <C>          <C>
March 31, 2001
Corporate debt securities                          $3,241                  $26                $ -             $3,267
U.S. Treasury securities                            3,000                   16                  -              3,016
                                                  -------                  ---                ---            -------
                                                   $6,241                  $42                $ -             $6,283
                                                   ======                  ===                ===             ======
December 31, 2000
Corporate debt securities                          $7,240                  $19                $ -             $7,259
U.S. Treasury securities                            3,879                   13                $(5)             3,887
                                                  -------                  ---                ---            -------
                                                  $11,119                  $32                $(5)           $11,146
                                                  =======                  ===                ====           =======
</TABLE>

All of the Company's investments are classified as available-for-sale. Such
investments are carried at fair value with unrealized holding gains and losses
charged or credited to stockholders' equity. The fair value of each investment
is determined by the most recent quoted market price. The amortized cost of
corporate debt securities and U.S. treasury securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization or accretion is included in interest income.

Realized gains and losses on available-for-sale securities are determined on a
specific identification basis. Any decline in market value below cost that is
determined to be other than temporary is an impairment that would result in a
reduction in the carrying amount to fair value. Such impairment, if any, is
charged to current earnings, and an adjusted cost for the security is
established.

Maturities of short-term investments classified as available-for-sale securities
at March 31, 2001 were as follows (in thousands):
<TABLE>
<CAPTION>

                                         Amortized Cost          Fair Value
                                         --------------          ----------
<S>                                          <C>                   <C>
Due in 1 year or less                        $2,501                $2,509
Due in 1-3 years                              3,740                 3,774
                                              -----                 -----
                                             $6,241                $6,283
                                             ======                ======
</TABLE>



                                       5
<PAGE>   8

Investments with maturities in excess of one year have been classified as
short-term investments due to management's intentions to utilize these
investments to fund current operations.


Note 3.           Inventories

At March 31, 2001 and December 31, 2000, inventories, net of reserves, consisted
of (in thousands):
<TABLE>
<CAPTION>

                              March 31,                 December 31,
                                2001                        2000
                                ----                        ----
<S>                          <C>                       <C>
Raw material                 $     2,348               $       2,315
Work in process
Finished goods
                             -----------               -------------
                             $     2,348               $       2,315
                             ===========               =============
</TABLE>

The Company records reserves for obsolete and impaired inventory when items are
identified that will not meet either the Company's quality or regulatory
validation requirements. The inventory obsolescence reserve was $2.1 million and
$2.4 million at March 31, 2001 and December 31, 2000, respectively.


Note 4.           Other Assets

At March 31, 2001 and December 31, 2000, other assets consisted of (in
thousands):
<TABLE>
<CAPTION>
                                                             March 31,        December 31,
                                                               2001              2000
                                                              ------            ------
<S>                                                           <C>               <C>
Patent cost, net of accumulated amortization of $156
   at March 31, 2001 and $138 at December 31, 2000            $1,014            $  992
Trademark cost, net of accumulated amortization of $31
   at March 31, 2001 and $30 at December 31, 2000                 36                37
Other                                                             14                14
                                                              ------            ------
                                                              $1,064            $1,043
                                                              ======            ======
</TABLE>

Patents are amortized on the straight-line basis over the shorter of the
estimated useful life of the patented technology or seventeen years, beginning
at the time the patent is issued. The Company reviews its patents to determine
if the expected future operating cash flows to be derived from a patent is less
than the carrying value. If an impairment has occurred, the patent is
written-down to its expected future cash flows or, if abandoned, it is
written-off in its entirety. There was no patent expense due to impairments or
abandonments for the three-month periods ended March 31, 2001 and 2000,
respectively.


                                       6
<PAGE>   9

Trademark costs are amortized on the straight-line basis over the shorter of the
estimated useful life of the trademark or ten years beginning at the time the
trademark is granted.

Note 5. Cost of Products Sold

Cost of products sold for the three months ended March 31, 2001 includes $1.1
million of operating and validation costs incurred at the Company's
manufacturing facility in Solon, Ohio and its third party contract manufacturer,
European Medical Contract Manufacturing B.V., as well as $0.3 million of product
recall costs. Cost of products sold for the three months ended March 31, 2000
includes $0.4 million of operating costs incurred at the Company's Solon, Ohio
manufacturing facility.


Note 6. Business Segment

The Company operates in one business segment. It is engaged in the development
and commercialization of the Company's principal products, the ADCON(R) family,
which are medical devices designed to inhibit scarring and adhesion following
surgery. Prior to the product recall, the Company sold ADCON(R) products to
independent medical device distributors in approximately 33 countries outside
the United States and directly to surgeons and hospitals in the United States.
The Company does not have foreign facilities and therefore does not measure
operating profit or loss from foreign sales.

Domestic and foreign net product sales are as follows (in thousands):
<TABLE>
<CAPTION>
                              Three Months Ended
                                   March 31,
                             2001             2000
                             ----             ----
<S>                          <C>
Domestic                     $  -            $5,859
Foreign                         -               972
                             ----            ------
Net product sales            $  -            $6,831
                             ====            ======
</TABLE>

In January 2001, the Company recalled its primary products, ADCON-L and
ADCON-T/N, and discontinued sale of these products due to a recall by a supplier
of a raw material used in the production of these products.


Note 7. Financial Instruments

Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Financial Instruments and
Hedging Activities." The adoption of SFAS 133 did not have an effect on the
Company's financial position, results of operations or cash flows.


                                       7
<PAGE>   10

Note 8. Litigation

To date, eleven plaintiffs, on behalf of each such party and all other persons
similarly situated, have filed ten class action lawsuits against the Company,
certain of its officers and certain former officers in the United States
District Court for the Northern District of Ohio alleging violation of the
federal securities laws. These complaints allege that the Company, certain
officers and certain former officers failed to disclose material facts in
connection with the termination of the merger agreement that had been entered
into with Guilford and from certain inspectional observations by the FDA
contained in a Form 483. These complaints seek compensatory damages in an
unspecific amount, fees and expenses related to such class action and the
granting of extraordinary equitable and/or injunctive relief, including, without
limitation, rescission.

The Company, certain officers and certain former officers filed a motion to
consolidate these actions and certain plaintiffs have moved for the appointment
of lead plaintiff and lead counsel. The Company has been granted leave to
respond to the complaints until after appointment of lead plaintiff. These
motions are currently pending in the United States District Court for the
Northern District of Ohio.

On March 13, 2001, Geri Fried filed on behalf of the Company, as a nominal
defendant, a derivative stockholder lawsuit against certain members and former
members of the board of directors of the Company and certain former officers of
the Company in the Court of Common Pleas of Cuyahoga County, Ohio. The complaint
alleges, among other things, breach of fiduciary duty, gross mismanagement and
constructive fraud. The complaint seeks unspecific compensatory and punitive
damages from the individual defendants and fees and expenses.

On January 29, 2001, Kenneth Rubenstein filed a lawsuit against the Company,
Clinipad Corporation and Lutheran General Hospital in the Circuit Court of Cook
County, Illinois County Department, Law Division alleging certain product
liability claims as a result of the use of ADCON(R)-L during surgery. The
complaint alleges that as a result of being administered ADCON(R)-L during
lumbar disc surgery, Mr. Rubenstein suffered a post-surgical infection resulting
in continuous pain, discomfort and permanent injury. The complaint seeks
unspecified monetary damages from the Company in an amount in excess of $0.05
million.

On October 20, 2000, Mark A. Reichl filed a lawsuit against the Company and
certain of its subsidiaries, officers, directors and employees, Praxa
Pharmaceuticals and one of its employees, John A. Kona, M.D. and The
Williamsburg Community Hospital, Incorporated in the Circuit Court for the City
of Williamsburg, Virginia alleging certain products liability claims as a result
of the use of ADCON(R)-L during surgery. The lawsuit alleges that as a result of
being administered ADCON(R)-L during lumbar spinal surgery, Mr. Reichl has
suffered personal injury, pain and suffering, disability and loss of income. The
demand for judgment seeks compensatory and consequential damages in the amount
of $30.0 million and punitive damages in the amount of $100.0 million.

The Department of Justice and the FDA are conducting an ongoing investigation
related to, among other things, the Company's handling of potential medical
device report events and the U.S. clinical study of Adcon-L. Although the full
scope of this


                                       8
<PAGE>   11

investigation is not known at this time, this investigation could result in
potential civil or criminal penalties being filed against the Company or its
employees. The Company intends to cooperate with this investigation to resolve
these questions as quickly as possible.

The National Association of Securities Dealers (the "NASD") is conducting a
review of certain trading activity in Company stock prior to the August 2000
announcement of the termination of the proposed merger with Guilford. The
Company is cooperating with the NASD in this review.

Each of the above lawsuits is in the early stages of development. As a result,
management is unable to estimate the probability or the amount of loss, if any,
of these lawsuits. In addition, from time to time, the Company may be involved
in various disputes arising in the ordinary course of business. In management's
opinion, if an unfavorable resolution of these matters occurs, depending on the
amount and timing, the Company's financial position, results of operations or
cash flows could be materially impacted.


Note 9.  Comprehensive (Loss) Income

The components of comprehensive (loss) income are as follows (in thousands):
<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                         March 31,
                                                   2001                2000
                                                 -------             -------
<S>                                              <C>                 <C>
Net (loss) income                                $(5,864)            $   117
Unrealized gain (loss) on investments                 15                  (2)
                                                 -------             -------
Total comprehensive (loss) income                $(5,849)            $   115
                                                 =======             =======
</TABLE>

Accumulated other comprehensive gain, which is shown as a separate charge to
stockholders' equity, was $0.04 million and $0.03 million at March 31, 2001 and
December 31, 2000, respectively, and consists entirely of unrealized gains and
losses on investments.




                                       9
<PAGE>   12


Note 10. (Loss) Earnings Per Share Calculation

The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
                                                          Three Months Ended
                                                              March 31,
                                                     2001                    2000
                                                  -----------             -----------
<S>                                               <C>                     <C>
Basic Earnings Per Share Computation
Net (Loss) Income                                 $    (5,864)            $       117
                                                  ===========             ===========
Average Common
     Shares outstanding                             9,682,637               9,489,341
                                                  ===========             ===========
Basic (Loss) Earnings Per Share                   $     (0.61)            $      0.01
                                                  ===========             ===========
Diluted Earnings Per Share Computation
Net (Loss) Income                                 $    (5,864)            $       117
                                                  ===========             ===========
Basic Shares Outstanding                            9,682,637               9,489,341
Stock Options Calculated Under
     the Treasury Stock Method                                                209,124
                                                  -----------             -----------
Total Shares                                        9,682,637               9,698,465
                                                  ===========             ===========
Diluted (Loss) Earnings Per Share                 $     (0.61)            $      0.01
                                                  ===========             ===========
</TABLE>

For the three-month period ended March 31, 2001, there were no securities that
could potentially dilute earnings per share in future periods.


Note 11. Stock-Based Compensation to Employees and Non-employees

The Company accounts for stock-based compensation related to employees in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
stock issued to Employees." The Company recognized compensation cost for fixed
stock options issued to employees or directors of $0.01 million and $0 for the
three-month periods ended March 31, 2001 and 2000, respectively.

The Company accounts for stock-based compensation related to non-employees in
accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for
Equity Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services." Accordingly, the Company
recognized compensation expense related to stock options issued to non-employee
consultants of $0 and $0.05 million for the three-month periods ended March 31,
2001 and 2000, respectively.




                                       10
<PAGE>   13


Note 12. Subsequent Development

On April 26, 2001, the Company entered into an agreement with Paul Capital
Royalty Acquisition Fund, L.P. ("PCRAF") for up to $15 million to be invested in
stages, with a future option for up to $15 million of additional funds. The
Company received an initial $5 million cash infusion under the agreement. The
Company's agreement further provides that the Company will receive an additional
$2.5 million from PCRAF upon satisfaction of certain conditions, including the
commercial relaunch of ADCON(R)-L outside of the U.S. and an additional $7.5
million upon satisfaction of certain conditions, including the commercial
relaunch of ADCON(R)-L in the U.S.

In consideration for the first $15 million, PCRAF will receive royalties on
ADCON(R) products equal to the greater of i) approximately 2.5% of net sales or
ii) certain guaranteed minimum annual royalty payments beginning in 2003 at a
rate of $1.6 million annually and increasing in future years until December 31,
2012. The percentage of net sales and guaranteed minimum royalty payment amounts
are subject to modification under certain conditions. In addition, PCRAF
received a warrant to purchase 300,000 shares of common stock of the Company at
$2.00 per share. The Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the U.S., to obtain, subject to the
satisfaction of certain other conditions, an additional $15 million from PCRAF
on the same general economic terms. The Company also has the option to
repurchase PCRAF's royalty interest beginning in 2003.



                                       11
<PAGE>   14

ITEM 2               MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Gliatech Inc. is engaged in the discovery and development of biosurgery and
pharmaceutical products. The biosurgery products include ADCON(R) gel and
ADCON(R) solution, which are proprietary, resorbable, carbohydrate polymer
medical devices designed to inhibit scarring and adhesions following surgery.
Gliatech's pharmaceutical product candidates include small molecule drugs to
modulate the cognitive state of the nervous system and proprietary monoclonal
antibodies designed to treat inflammatory disorders. Based on European pivotal
clinical studies and other compliance efforts and submission of data, the
Company obtained regulatory clearance to affix CE Marking on ADCON(R)-L and
ADCON(R)-T/N in August 1995 and January 1996, respectively, thereby allowing
ADCON(R)-L and ADCON(R)-T/N to be marketed in the 19 European countries which
recognize CE Marking for lumbar disc surgery and tendon and peripheral nerve
surgeries, respectively. In addition, the Company signed a development and
exclusive license agreement in December 1996 with Chugai for the sale of
ADCON(R)-L and ADCON(R)-T/N in Japan. The Company is engaged in ongoing
discussions with Chugai regarding the licensing and sale of ADCON(R)-L and
ADCON(R)-T/N in Japan.

The Company anticipates that a significant portion of revenue from product sales
will continue to be derived from its ADCON(R) family of products, primarily
ADCON(R)-L. After receiving FDA approval in May 1998, the Company commenced
sales of ADCON(R)-L in the United States in June 1998. Other revenues have
included various government grants awarded to the Company. The Company has not
recognized any grant revenue since the third quarter of 2000. The Company is
also engaged in the research and development of small molecule compounds for the
treatment of several neurological disorders and antibody therapies to inhibit
inflammation. These products may potentially treat disorders such as, Attention
Deficit Hyperactive Disorder, sleep disorders, anxiety, schizophrenia,
rheumatoid arthritis, cardiopulmonary bypass surgery complications and
Alzheimer's Disease.

In September 1999, the FDA issued a warning letter to European Medical Contract
Manufacturing B.V. ("EMCM"), the Company's third party manufacturer, which led
to an import ban on all ADCON(R)-L shipments to the United States. After a
successful re-inspection of EMCM's facilities, the import ban was lifted in
December 1999 and the Company resumed shipments of ADCON(R)-L to the United
States in January 2000. After an audit by the FDA of a post-approval clinical
study of ADCON(R)-L, the FDA issued a Form 483 to the Company in August 2000.
The Form 483 identified certain items relating to the recording of data and the
process the Company used in recording and presenting this data to the FDA with
respect to the U.S. clinical trial of ADCON(R)-L. On September 14, 2000, the
Company filed a response to the Form 483. In December 2000, the FDA placed the
Company on Application Integrity Policy ("AIP") status due to violations of good
clinical practices in the conduct, analysis and reporting of data from the U.S.
clinical study of ADCON(R)-L. The FDA has also communicated to the Company
concerns regarding the Company's potential handling of medical device report
events. In January 2001, the Company voluntarily discontinued the worldwide sale
of ADCON(R)-L and ADCON(R)-T/N and recalled such products due to the voluntary
recall by a supplier of a raw material used in the manufacture of these
products. In January 2001, the FDA issued an import alert with respect to
ADCON(R)-L due to the supplier recall. Prior to the product recall, the Company
marketed ADCON(R)-L and ADCON(R)-T/N through independent medical device



                                       12
<PAGE>   15

distributors in approximately 33 countries outside the United States, including
the major countries in the European Union pursuant to its CE Marking. In
addition, in the United States, the Company marketed ADCON(R)-L through a
network of 31 independent manufacturer's agents that serve the orthopaedic and
neurosurgical markets.

In April 2001, the Company successfully completed an International Standards
Organization 9001 audit that was conducted by KEMA Registered Quality B.V., a
European Notified Body. In addition, the Company has completed process
development work relating to a raw material used in the manufacture of
ADCON(R)-L and initiated manufacturing validation runs. The Company anticipates
relaunch of ADCON(R)-L outside the U.S. in June 2001.

On April 26, 2001, the Company entered into an agreement with Paul Capital
Royalty Acquisition Fund, L.P. ("PCRAF") for up to $15.0 million to be invested
in stages, with a future option for up to $15.0 million of additional funds. The
Company received an initial $5.0 million cash infusion under the agreement. The
agreement further provides that the Company will receive an additional $2.5
million from PCRAF upon satisfaction of certain conditions, including the
commercial relaunch of ADCON(R)-L outside of the U.S. and an additional $7.5
million upon satisfaction of certain conditions, including the commercial
relaunch of ADCON(R)-L in the U.S.

In consideration for the first $15 million, PCRAF will receive royalties on
ADCON(R) products equal to the greater of i) approximately 2.5% of net sales or
ii) certain guaranteed minimum annual royalty payments beginning in 2003 at a
rate of $1.6 million annually and increasing in future years until December 31,
2012. The percentage of net sales and guaranteed minimum royalty payment amounts
are subject to modification under certain conditions. In addition, PCRAF
received a warrant to purchase 300,000 shares of common stock of the Company at
$2.00 per share. The Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the U.S., to obtain, subject to the
satisfaction of certain other conditions, an additional $15.0 million from PCRAF
on the same general economic terms. The Company also has the option to
repurchase PCRAF's royalty interest beginning in 2003.

RESULTS OF OPERATIONS

For the three month periods ended March 31, 2001 and 2000.

REVENUES

In January 2001, the Company voluntarily recalled and discontinued worldwide
sale of its primary products, ADCON(R)-L and ADCON(R)-T/N, due to a recall by a
supplier of a raw material used in the production of these products. In
addition, no government grant revenue was recognized in the first quarter of
2001. Thus, there were no net revenues in the first quarter of 2001 compared to
$6.8 million of net product sales and $0.2 million of government grant revenue
in the first quarter of 2000. The government grant revenue in the first quarter
of 2000 related to two Phase II Small Business Innovation Research ("SBIR")
grants whose related costs were incurred during that period.




                                       13

<PAGE>   16


OPERATING COSTS AND EXPENSES

Total operating costs decreased 16.1% to $6.1 million in the first quarter of
2001 compared to $7.2 million in the first quarter of 2000. Cost of products
sold increased to $1.4 million in the first quarter of 2001 compared to $1.2
million in the first quarter of 2000. Cost of products sold in the first quarter
of 2001 includes $1.1 million of operating and validation costs incurred at the
Company's manufacturing facility in Solon, Ohio and its third party contract
manufacturer, EMCM, as well as $0.3 million of product recall costs. Cost of
products sold in the first quarter of 2000 includes $0.4 million of operating
costs incurred at the Company's Solon, Ohio manufacturing facility.

Research and development expenses decreased 8.2% to $2.4 million in the first
quarter of 2001 compared to $2.6 million in the first quarter of 2000. Costs
related to the ADCON-P pivotal trial decreased by $0.5 million as patient
enrollment and related consulting costs were completed in 2000. These decreases
were partially offset by $0.3 million of clinical development costs related to
the GT-2331 Phase II clinical trial, because of increased patient enrollment and
related costs in the first quarter of 2001. In the first quarter of 2000, there
was no patient enrollment in the GT-2331 Phase II clinical trial.

Selling, general and administrative expenses decreased 32.3% to $2.3 million in
the first quarter of 2001 compared to $3.5 million in the first quarter of 2000
primarily due to a $1.2 million reduction in commission expense because of the
discontinuance of sales in January 2001.

INTEREST INCOME

Interest income, net, decreased to $0.2 million in the first quarter of 2001
compared to $0.3 in the first quarter of 2000 primarily due to a reduction in
cash, cash equivalents and investment balances used to fund operations in the
absence of product sales.

NET (LOSS) INCOME

The Company recorded a net loss of $5.9 million or $(0.61) per share in the
first quarter of 2001 compared to net income of $0.1 million or $0.01 per share
in the first quarter of 2000 due to the discontinuance of sales.

LIQUIDITY AND CAPITAL RESOURCES

Prior to the commercialization of ADCON(R)-L in the United States, the Company
historically financed its operations primarily through the private placement and
public offering of its equity securities, research contract licensing fees, and,
to a lesser extent, through federally sponsored research grants. No government
grant revenues, however, have been recognized since the third quarter of 2000.
In October 1995, the Company received net proceeds of $19.7 million from its
initial public offering in which it sold 2,300,000 shares of its Common Stock.
In June 1998, the Company raised additional funds through a public


                                       14
<PAGE>   17

offering of 1,725,000 shares of its Common Stock, including the exercise of the
over-allotment option of 225,000 shares. The net proceeds to the Company from
this offering were $18.9 million.

In order to preserve principal and maintain liquidity, the Company's funds are
invested primarily in commercial paper and other short-term investments. The
Company's cash, cash equivalents and investments decreased by $2.9 million to
$9.2 million at March 31, 2001 compared to $12.1 million at December 31, 2000
primarily due to cash used to fund operations. The Company does not expect to
generate a positive cash flow from operations in 2001 as sales of ADCON(R)-L in
the U.S. have been discontinued for an indefinite period. Although sales of
ADCON(R)-L and ADCON(R)-T/N outside the U.S. have also been discontinued, the
Company anticipates relaunch of ADCON(R)-L outside the U.S. in June 2001.

In addition, on April 26, 2001, the Company entered into an agreement with
PCRAF for up to $15.0 million to be invested in stages, with a future option
for up to $15.0 million of additional funds. The Company received an initial
$5.0 million cash infusion under the agreement. The agreement further provides
that the Company will receive an additional $2.5 million from PCRAF upon
satisfaction of certain conditions, including the commercial relaunch of
ADCON(R)-L outside of the U.S. and an additional $7.5 million upon satisfaction
of certain conditions, including the commercial relaunch of ADCON(R)-L in the
U.S.

In consideration for the first $15 million, PCRAF will receive royalties on
ADCON(R) products equal to the greater of i) approximately 2.5% of net sales or
ii) certain guaranteed minimum annual royalty payments beginning in 2003 at a
rate of $1.6 million annually and increasing in future years until December 31,
2012. The percentage of net sales and guaranteed minimum royalty payment amounts
are subject to modification under certain conditions. In addition, PCRAF
received a warrant to purchase 300,000 shares of common stock of the Company at
$2.00 per share. The Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the U.S., to obtain, subject to the
satisfaction of certain other conditions, an additional $15.0 million from PCRAF
on the same general economic terms. The Company also has the option to
repurchase PCRAF's royalty interest beginning in 2003. Given these
recent developments, the Company believes that it has sufficient cash, cash
equivalents and short-term investments on hand to meet operating requirements
into the first quarter of 2002.

As sales of ADCON(R)-L and ADCON(R)-T/N, which have historically represented
substantially all of the revenues of the Company, have been discontinued, there
is substantial doubt about the Company's ability to continue as a going concern.
The Company's continued operations will depend on its ability to raise
additional funds through various potential sources such as equity and debt
financing, collaborative agreements, strategic alliances, recommencing
commercial sales of its products, validation of the Solon, Ohio manufacturing
facility for commercial distribution, the outcome of pending litigation and its
ability to realize the full potential of its technology and its drug candidates.
The Company is in discussion with several potential strategic alliance partners
to further the development of drug candidates in its pipeline. In addition,
management is pursuing certain equity and debt financing alternatives to raise
additional funds. However, there can be no assurance that any alliances or
funding alternatives will be consummated as these alternatives may be dependent
upon other factors including, without limitation, market conditions, and such
alliances or financing may not be available or be available on acceptable terms.
The Company's ability to raise additional funds through these alternatives may
also depend upon obtaining regulatory approval to recommence sales of ADCON(R)-L
and ADCON(R)-T/N in the U.S., which is dependent upon the outcome of the FDA
review and assessment of the Company's clinical data and the timeliness of FDA
review due to the AIP status of the Company.

The Company's future capital requirements will depend on, and could increase as
a result of many factors, including, but not limited to, the cost for
recommercialization of ADCON(R)-L in the U.S., the future commercialization
success of its ADCON family of products, the progress of the Company's research
and development, including the costs related to its Cognition Modulation
GT-2331, Alzheimer's Disease, antibody, schizophrenia and other pharmaceutical
programs, the scope, timing and results of preclinical studies and clinical
trials, the cost and timing of obtaining regulatory approvals and resolution of
the issues outlined in the FDA Form 483, the outcome of pending litigation, the
Company's success in obtaining the strategic alliances required to fund certain
of its programs, the rate of technological advances, determinations as to the
commercial potential of certain of the Company's product candidates, the
status of competitive products and

                                       15
<PAGE>   18

the establishment of additional manufacturing capacity. The Company may reduce
or even eliminate certain programs or activities based on management's
assessment of the status of the FDA review of clinical data, AIP status,
manufacturing and other test results as well as the financial condition of the
Company in order to decrease future capital requirements.

The Company from time to time is involved in various stages of discussion or
negotiation regarding acquisitions or mergers and from time to time other
strategic alternatives. As of the date hereof, the Company has not entered into
a definitive agreement with respect to any such financing transaction or other
strategic alternative, other than with PCRAF. The Company is pursuing the
issuance of additional equity securities or debt instruments and may pursue
corporate collaborative agreements or strategic alliances, as required, to meet
its capital requirements. The issuance of additional equity securities, if any,
could result in substantial dilution to the Company's stockholders. There can be
no assurance that the additional funding will be available on terms acceptable
to the Company, if at all. The failure to fund the Company's capital
requirements would have a material adverse effect on its business, financial
condition and results of operations.


EURO CONVERSION

On January 1, 1999, eleven of the fifteen countries (the "Participating
Countries") that are members of the European Union established a new uniform
currency known as the "Euro." The currencies existing prior to such date in the
Participating Countries will be phased out during the transition period
commencing January 1, 1999 and ending January 1, 2002. During such transition
period both the Euro and the existing currencies will be available in the
Participating Countries. Although certain of the Company's products are being
sold in the Participating Countries through independent distributors, the
Company receives revenues from such sales in U.S. dollars. As a result, the
Company does not anticipate that the introduction and use of the Euro will
materially affect the Company's business, prospects, results of operations or
financial condition


FORWARD-LOOKING STATEMENTS. Certain statements in this Quarterly Report on Form
10-Q constitute "forward-looking statements." When used in this Form 10-Q, the
words "believes," "anticipates," "expects," "intends" and other predictive,
interpretive and similar expressions are intended to identify such
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
of the Company to be different from expectations expressed or implied by such
forward-looking statements. Such factors include, but are not limited to,
commercial uncertainty of regulatory approvals of the Company's ADCON products,
including the timing and content of decisions made by the FDA, relating to,
among other things, decisions regarding the sale of ADCON-L, product recalls,
the import alert and inspectional observations, commercial uncertainty of market
acceptance of the Company's ADCON family of products, delays in product
development of additional ADCON products, uncertainty of outcomes of future FDA
audits and inspections, the uncertainty of the status of the Company with
respect to AIP status, the uncertainty of expenses associated with clinical
trials and research efforts, which may affect the profitability of the


                                       16
<PAGE>   19

Company, uncertainty due to the early stage of development for the
pharmaceutical programs, the possible need for additional funding, the ability
of the Company to establish and maintain collaborative arrangements with others,
the potential market size for ADCON products, the ability of the Company to
obtain an adequate supply of the materials used in the manufacture of its ADCON
products, the productivity of distributors of ADCON products, shortages of
supply of ADCON products from the Company's sole manufacturer, the ability of
the Company to manufacture ADCON products at its Solon, Ohio facility, the lack
of supply of raw materials for the Company's products, uncertainty of future
profitability, uncertainties related to the Company's proprietary rights in its
products, the outcome of pending litigation, technological change and the
ability of the Company to fund its capital requirements through cash from
operations or the issuance of debt or equity securities, the ability of the
Company to consummate strategic collaborations or other strategic alternatives
on terms satisfactory to the Company, or at all. These statements are based on
certain assumptions and analysis made by the Company in light of its experience
and its perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the circumstances.
Such statements are subject to a number of other assumptions, risks,
uncertainties, general economic and business conditions, and the business
opportunities (or lack thereof) that may be presented to and pursued by the
Company. Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in the forward-looking statements.




                                       17
<PAGE>   20


ITEM 3              QUANTITATIVE AND QUALITATIVE DISCLOSURES
                                ABOUT MARKET RISK

The Company does not enter into derivative financial instruments. The Company
primarily invests in commercial paper and corporate bonds that have short-term
maturities. The Company has no outstanding debt. Exposure to foreign currency
has been minimal because the Company's foreign product sales are in U.S.
currency. As a result, the Company believes that its market risk exposure is not
material to the Company's financial position, liquidity or results of
operations.






                                       18
<PAGE>   21


                                     PART II
                                OTHER INFORMATION



ITEM 1: LEGAL PROCEEDINGS

As reported in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000, the following actions have been instituted against the
Company, of which two were commenced during the period covered by this Quarterly
Report on Form 10-Q.

To date, the following plaintiffs, on behalf of each such party and all other
persons similarly situated, have filed ten class action lawsuits against the
Company, certain of its officers and certain former officers in the United
States District Court for the Northern District of Ohio alleging violation of
the federal securities laws. These complaints allege that the Company, certain
officers and certain former officers failed to disclose material facts in
connection with the termination of the merger agreement that had been entered
into with Guilford and from certain inspectional observations by the FDA
contained in a Form 483. These complaints seek compensatory damages in an
unspecific amount, fees and expenses related to such class action and the
granting of extraordinary equitable and/or injunctive relief, including, without
limitation, rescission. For each of these class actions, the date each complaint
was filed and the name of the plaintiff is as follows:
<TABLE>
<CAPTION>

                  Date                      Plaintiff
                  ----                      ---------
<S>                                       <C>
                  September 5, 2000         Avrom Gart
                  September 7, 2000         Jason Raker
                  September 12, 2000        Jon Burgermeister
                  September 13, 2000        Carl L. Evans
                  September 27, 2000        WPG Merger Arbitrage Fund, L.P.
                                            and WPG  Merger  Arbitrage
                                            Overseas Fund, Ltd.
                  October 4, 2000           Eric Ford
                  October 5, 2000           Steven R. Graupner
                  October 19, 2000          James Berman
                  October 20, 2000          Atul Verma
                  November 1, 2000          Daniel Triefler
</TABLE>

The Company, certain officers and certain former officers filed a motion to
consolidate these actions and certain plaintiffs have moved for the appointment
of lead plaintiff and lead counsel. These motions are currently pending in the
United States District Court for the Northern District of Ohio. The Company has
been granted leave to respond to the complaints until after appointment of lead
plaintiff and the filing of a consolidated amended complaint. As of November
2000, each of these actions was pending before a single judge.

On March 13, 2001, Geri Fried filed on behalf of the Company, as a nominal
defendant, a derivative stockholder lawsuit against certain members and former
members of the board of directors of the Company and certain former officers of
the Company in the Court of Common Pleas of Cuyahoga County, Ohio. With respect
to the Company, the complaint alleges, among other things, breach of fiduciary
duty, gross mismanagement and constructive fraud. The


                                       19
<PAGE>   22

complaint seeks unspecific compensatory and punitive damages from the individual
defendants and fees and expenses.

On January 29, 2001, Kenneth Rubenstein filed a lawsuit against the Company,
Clinipad Corporation and Lutheran General Hospital in the Circuit Court of Cook
County, Illinois County Department, Law Division alleging certain product
liability claims as a result of the use of ADCON(R)-L during surgery. With
respect to the Company, the complaint alleges that as a result of being
administered ADCON(R)-L during lumbar disc surgery, Mr. Rubenstein suffered a
post-surgical infection resulting in continuous pain, discomfort and permanent
injury. The complaint seeks unspecified monetary damages from the Company in an
amount in excess of $0.05 million.

On October 20, 2000, Mark A. Reichl filed a lawsuit against the Company and
certain of its subsidiaries, officers, directors and employees, Praxa
Pharmaceuticals and one of its employees, John A. Kona, M.D. and The
Williamsburg Community Hospital, Incorporated in the Circuit Court for the City
of Williamsburg, Virginia alleging certain products liability claims as a result
of the use of ADCON(R)-L during surgery. The lawsuit alleges that as a result of
being administered ADCON(R)-L during lumbar spinal surgery, Mr. Reichl has
suffered personal injury, pain and suffering, disability and loss of income. The
demand for judgment seeks compensatory and consequential damages in the amount
of $30.0 million and punitive damages in the amount of $100.0 million.

The Department of Justice and the FDA are conducting an ongoing investigation
related to, among other things, the Company's handling of potential medical
device report events and the U.S. clinical study of Adcon-L. Although the full
scope of this investigation is not known at this time, this investigation could
result in potential civil or criminal penalties being filed against the Company
or its employees. The Company intends to cooperate with this investigation to
resolve these questions as quickly as possible.

The NASD is conducting a review of certain trading activity in Company stock
prior to the August 2000 announcement of the termination of the proposed merger
with Guilford. The Company is cooperating with the NASD in this review.

Each of the above lawsuits is in the early stages of development. As a result,
management is unable to estimate the probability or the amount of loss, if any,
of these lawsuits. In addition, from time to time, the Company may be involved
in various disputes arising in the ordinary course of business. In management's
opinion, if an unfavorable resolution of these matters occurs, depending on the
amount and timing, the Company's financial position, results of operations or
cash flows could be materially impacted.




                                       20
<PAGE>   23


ITEM 2: CHANGES IN SECURITIES

On April 26, 2001, the Company issued a warrant to purchase 300,000 shares of
Common Stock of the Company to Paul Capital Royalty Acquisition Fund, L.P.
("PCRAF") in a transaction exempt from the registration requirements of the
Securities Act of 1933 in reliance on Section 4(2) of such Act. This warrant was
issued in connection with Revenue Interests Assignment Agreement, dated as of
April 26, 2001, by and between the Company and PCRAF.




                                       21
<PAGE>   24


ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)    Exhibits

10.1   Manufacturing Agreement, dated as of March 1, 2001, by and between
       Gliatech Medical Inc. and European Medical Contract Manufacturing B.V.

10.2   Warrant, dated April 26, 2001, by and between the Company and Paul
       Capital Royalty Acquisition Fund, L.P.

10.3   Security Agreement, dated as of April 26, 2001, by and between the
       Company and Paul Capital Royalty Acqusition Fund, L.P.

10.4   Revenue Interests Assignment Agreement, dated as of April 26, 2001, by
       and between the Company and Paul Capital Royalty Acquisition Fund, L.P.
       (certain portions of this exhibit have been omitted and were filed
       separately with the Securities and Exchange Commission pursuant to a
       request by the Company for confidential treatment).

(b)    The Company did not file any Current Reports on Form 8-K during the three
       months ended March 31, 2001.




                                       22
<PAGE>   25


                                   SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Date: May 15, 2001             GLIATECH INC.




                              By:    /s/Rodney E. Dausch
                                 ----------------------------------
                              Rodney E. Dausch, Chief Operating
                              Officer and Secretary
                                   (Duly Authorized Officer)

                                     /s/Thomas F. Barnish
                                 ----------------------------------
                              Thomas F. Barnish, Chief Financial Officer
                                    (Duly Authorized Officer and Principal
                                       Financial and Accounting Officer)






                                       23
<PAGE>   26


                                  EXHIBIT INDEX


Exhibit No.           Description of Exhibit
-----------           ----------------------


10.1   Manufacturing Agreement, dated as of March 1, 2001, by and between
       Gliatech Medical Inc. and European Medical Contract Manufacturing B.V.

10.2   Warrant, dated April 26, 2001, by and between the Company and Paul
       Capital Royalty Acquisition Fund, L.P.

10.3   Security Agreement, dated as of April 26, 2001, by and between the
       Company and Paul Capital Royalty Acqusition Fund, L.P.

10.4   Revenue Interests Assignment Agreement, dated as of April 26, 2001, by
       and between the Company and Paul Capital Royalty Acquisition Fund, L.P.
       (certain portions of this exhibit have been omitted and were filed
       separately with the Securities and Exchange Commission pursuant to a
       request by the Company for confidential treatment).






                                       24