<PAGE>
                                  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 SEPTEMBER 30, 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 NOVEMBER 12, 2001 WAS 9,682,637 SHARES.


<PAGE>


                         GLIATECH INC. AND SUBSIDIARIES

                                      INDEX


PART I.                                FINANCIAL INFORMATION

Item 1        Financial Statements: (unaudited)

              Consolidated Balance Sheets -
              September 30, 2001 and December 31, 2000

              Consolidated Statements of Operations - for the three month and
              nine month periods ended September 30, 2001 and 2000

              Consolidated Statements of Cash Flows -
              for the nine month periods ended September 30, 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 6        Exhibits and Reports on Form 8-K


<PAGE>


                         PART I - FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS
                         GLIATECH INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
 (In thousands)                                                                 SEPTEMBER 30,       DECEMBER 31,
                                                                                    2001                2000
                                                                             ------------------- -------------------
<S>                                                                                  <C>                  <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                           $     4,511          $     960
 Short-term investments                                                                    1,765              7,504
 Accounts receivable, less allowances of $156 in 2001 and
  $1,585 in 2000                                                                            923              1,771
 Inventories                                                                               3,279              2,315
 Prepaid expenses and other                                                                  184                744
                                                                             ------------------- -------------------
Total current assets                                                                      10,662             13,294

Long term investments                                                                                         3,642
Property and equipment, net                                                                2,638              3,197
Other assets, net                                                                          1,322              1,043
                                                                             ------------------- -------------------
TOTAL ASSETS                                                                         $    14,622        $    21,176
                                                                             =================== ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                                    $     2,487         $    1,026
 Accrued expenses                                                                          2,446              2,814
 Product recall returns payable                                                            2,019              1,015
 Accrued research contracts                                                                   44                154
 Accrued clinical trial costs                                                                560                664
                                                                             ------------------- -------------------
 Total current liabilities                                                                 7,556              5,673

 Long-term obligations                                                                     7,268

Stockholders' equity:
 Common stock                                                                                 97                 97
 Additional paid-in capital                                                               75,506             74,465
 Accumulated other comprehensive income                                                       26                 27
 Accumulated deficit                                                                    (75,831)           (59,086)
                                                                             ------------------- -------------------
 Total stockholders' equity                                                                (202)             15,503
                                                                             ------------------- -------------------
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                          $    14,622        $    21,176
                                                                             =================== ===================
</TABLE>


See notes to consolidated financial statements


                                       1
<PAGE>


                         GLIATECH INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except share and per share data)
                                                        THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                          SEPTEMBER 30,                          SEPTEMBER 30,
                                              --------------------------------------- --------------------------------------
                                                     2001                2000               2001                2000
                                              -------------------- ------------------ ------------------- ------------------
<S>                                                     <C>              <C>                 <C>                <C>
REVENUES
Product sales                                           $     614        $     6,087         $     1,708        $    19,954
Government grants                                                                 57                                    542
                                              -------------------- ------------------ ------------------- ------------------
          Total revenues                                      614              6,144               1,708             20,496

OPERATING COSTS AND EXPENSES
Cost of products sold                                         728              2,386               3,381              4,753
Research and development                                    2,433              1,564               7,689              7,196
Selling, general and administrative                         2,508              2,320               7,158              8,604
Merger related and severance costs                                             6,817                                  7,541
                                              -------------------- ------------------ ------------------- ------------------
          Total operating costs and expenses                5,669             13,087              18,228             28,094
                                              -------------------- ------------------ ------------------- ------------------
Operating loss                                            (5,055)            (6,943)            (16,520)            (7,598)
Net interest (expense) income                               (326)                266               (225)                808
                                              -------------------- ------------------ ------------------- ------------------
NET LOSS                                             $    (5,381)       $    (6,677)     $      (16,745)        $   (6,790)
                                              ==================== ================== =================== ==================

Loss per share
          Basic                                      $     (0.56)       $     (0.70)     $        (1.73)        $    (0.71)
                                              ==================== ================== =================== ==================
          Diluted                                    $     (0.56)       $     (0.70)     $        (1.73)        $    (0.71)
                                              ==================== ================== =================== ==================

Average shares outstanding
          Basic                                         9,682,637          9,597,912           9,682,637          9,536,819
                                              ==================== ================== =================== ==================
          Diluted                                       9,682,637          9,597,912           9,682,637          9,536,819
                                              ==================== ================== =================== ==================
</TABLE>


See notes to consolidated financial statements.


                                       2
<PAGE>


                         GLIATECH INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                         NINE MONTHS ENDED
                                                                                            SEPTEMBER 30,
                                                                                   2001                      2000
                                                                      -------------------------- --------------------------
<S>                                                                            <C>                  <C>
OPERATING ACTIVITIES
Net loss                                                                       $ (16,745)           $       (6,790)
Adjustments to reconcile net loss to net cash used in
  Operating activities:
   Depreciation and amortization                                                      669                       540
   Provision for losses on accounts receivable                                                                   17
   Compensation from issuance of stock and stock options                              193                       131
   Gain on sale of investments                                                                                 (22)
   Changes in operating assets and liabilities:
     Accounts receivable                                                            2,233                   (2,792)
     Inventories                                                                    (964)                       615
     Government grants receivable and other assets                                    560                       309
     Accounts payable and other liabilities                                           712                       455
     Accrued research and clinical trial costs                                      (214)                   (1,561)
     Other long-term items                                                            614
                                                                      -------------------------- --------------------------
Net cash used in operating activities                                            (12,942)                   (9,098)
INVESTING ACTIVITIES
Sale of investments                                                                15,981                    17,397
Purchase of investments                                                           (6,600)                  (11,899)
Payment for patent rights and trademarks                                            (150)                     (217)
Purchase of property and equipment                                                   (73)                     (556)
                                                                      -------------------------- --------------------------
Net cash provided by investing activities                                           9,158                     4,725
FINANCING ACTIVITIES
Proceeds from long-term borrowings                                                  7,500
Debt issuance costs                                                                 (166)
Proceeds from exercise of stock options                                                                       1,468
                                                                      -------------------------- --------------------------
Net cash provided by financing activities                                           7,334                     1,468
                                                                      -------------------------- --------------------------

Increase (decrease) in cash and cash equivalents                                    3,551                   (2,905)
Cash and cash equivalents at beginning of period                                      960                     3,350
                                                                      -------------------------- --------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                 $        4,511             $         445
                                                                      ========================== ==========================
</TABLE>


See notes to consolidated financial statements


                                       3
<PAGE>


                         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 nine month period ended September 30,
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 notes 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 $75.8 million at September 30, 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.

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 in the U.S., the outcome of pending litigation
and investigations (see Note 8) and its ability to realize the full potential of
its technology and its drug candidates. The Company has taken the following
actions in 2001: (i) entered into a financing agreement (see Note 5) in April
2001, (ii) relaunched ADCON-L internationally in May 2001 and (iii) entered into
a license agreement (see Note 11) in November 2001.

The Company is in discussion with potential strategic alliance partners to
further the development of the remaining drug candidates in its pipeline. The
Company is seeking additional financing, including debt and equity financing,
and considering other strategic alternatives in order to continue operations.
The Company is taking significant steps to reduce costs which is expected to
include a reduction in the Company's workforce. However, there can be no
assurance that any alliances, financing or strategic alternatives or other
alternatives will be consummated as these alternatives may be dependent upon
many other factors including, without limitation, market conditions, and such
alternatives may not be available in a timely manner or be available on
acceptable terms, if at all. The Company's ability to raise additional funds
through these alternatives may also depend upon obtaining regulatory approval
to recommence sales of


                                       4
<PAGE>


ADCON-L in the U.S., which is dependent upon the outcomes of the Food and Drug
Administration's ("FDA") review, assessment of the Company's clinical data and
the timeliness of FDA review due to Application Integrity Policy ("AIP") status.

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
September 30, 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>
September 30, 2001
Corporate debt securities                        $    739                $  21                              $    760
U.S. Treasury securities                            1,000                    5                                 1,005
                                                 --------                -----                              --------
                                                 $  1,739                $  26                              $  1,765
                                                 ========                =====                              ========

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
credited or charged 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 September 30, 2001 were as follows (in thousands):

                                        Amortized Cost          Fair Value
                                        --------------          ----------

Due in 1-3 years                            $ 1,739               $ 1,765

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.


                                       5
<PAGE>


Note 3.           Inventories

At September 30, 2001 and December 31, 2000, inventories, net of reserves,
consisted of (in thousands):

                                                   September 30,    December 31,
                                                        2001            2000
                                                        ----            ----

Raw material                                          $ 1,559           $ 2,315
Work in process                                         1,542
Finished goods                                            178
                                                    ---------         ---------

                                                      $ 3,279           $ 2,315
                                                    =========         =========

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 decreased to $0.4
million at September 30, 2001 compared to $2.4 million at December 31, 2000 due
to the elimination of inventory which contained raw material from a supplier
which may have been contaminated with aluminum particulates.

Note 4.           Other Assets

At September 30, 2001 and December 31, 2000, other assets consisted of (in
thousands):


<TABLE>
<CAPTION>
                                                                         September 30,           December 31,
                                                                             2001                   2000
                                                                             ----                   ----
<S>                                                                    <C>                       <C>
Patent cost, net of accumulated amortization of  $168
   at September 30, 2001 and $138 at December 31, 2000                  $      1,112              $      992
Trademark cost, net of accumulated amortization of  $33
   at September 30, 2001 and $30 at December 31, 2000                             34                      37
Debt issuance costs                                                              163
Other                                                                             13                      14
                                                                        ------------              ----------

                                                                        $      1,322              $    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 or nine month periods ended September 30, 2001
and 2000, respectively.

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.


                                       6
<PAGE>


Debt issuance costs represent professional services incurred related to the
financing with Paul Capital Royalty Acquisition Fund, L.P. ("PCRAF"). These
costs are being amortized on a straight-line basis over the life of the
obligation.

Note 5.           Long-Term Obligations

The Company has long-term obligations, net of unamortized discount of $0.7
million (effective interest rate, 20.6%) of $7.3 million at September 30,
2001.

On April 26, 2001, the Company entered into a financing agreement with PCRAF
that provides the Company will initially receive up to $15.0 million in stages.
In addition, the Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the United States, to obtain, subject
to the satisfaction of certain other conditions, an additional $15.0 million
from PCRAF on the same general economic terms as the initial arrangement. As of
September 30, 2001, the Company has received $7.5 million of the initial $15.0
million and may receive the remaining $7.5 million upon satisfaction of certain
conditions, including, without limitation, the commercial relaunch of ADCON(R)-L
in the United States.

In consideration for the first $15.0 million, PCRAF will receive royalty
payments based on future sales of ADCON(R) products equal to the greater of i)
2.5% of net product sales or ii) certain guaranteed minimum annual royalty
payments beginning in 2003 at a rate of $1.6 million annually and increasing in
stages during future years up to $9.0 million annually. Royalty payments to
PCRAF end on December 31, 2012. The royalty payments based on the percentage of
net sales and the guaranteed minimum annual payment are subject to modification
under certain conditions. If, among other things, ADCON(R)-L is not relaunched
in the United States by a certain date and at a certain level, then: (i) the
revenue interest would change to an increased percentage of future sales outside
of the United States; (ii) guaranteed minimum annual royalty payments would be
reduced; (iii) PCRAF's future funding obligations to the Company would be
terminated; and (iv) the Company's option to receive additional capital would be
terminated. Guaranteed minimum annual royalty payments due over the next five
years at the current $7.5 million level of investment are as follows: $0 in
2001, $0 in 2002, $0.8 million in 2003, $0.8 million in 2004 and $2.1 million in
2005.

As part of the agreement, PCRAF received a warrant to purchase 300,000 shares of
common stock of the Company at $2.00 per share valued at $0.8 million. In
accordance with Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt issued with Stock Purchase Warrants", the value of the
warrants have been recorded as a discount to the debt proceeds and as additional
paid in capital. The discount will be amortized to interest expense using the
interest method over the life of the obligations under the financing agreement.

In the event of a change in control in the Company or upon the occurrence of
certain other events as defined in the financing agreement, PCRAF has the option
to put its revenue interest back to the Company at a specified rate of return,
which is dependent upon the date at which PCRAF exercises this option and the
level of investment by PCRAF. The Company also has the option to repurchase
PCRAF's royalty interest beginning in 2003 for a specified rate of return.


                                       7
<PAGE>


Note 6.           Cost of Products Sold

Cost of products sold for the three and nine months ended September 30, 2001
includes $0.3 million and $1.8 million, respectively, 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. In addition, cost of products sold for the nine months ended
September 30, 2001 includes $0.6 million of product recall costs. Cost of
products sold for the three and nine months ended September 30, 2000 includes
$0.4 million and $0.8 million, respectively, of operating costs incurred at the
Company's Solon, Ohio manufacturing facility.

Note 7.           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. 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. In May 2001, the
Company recommenced commercial sale of ADCON-L outside the United States. The
Company is currently selling ADCON(R)-L through independent medical device
distributors in 34 countries outside the U.S. 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                     Nine Months Ended
                               September 30,                          September 30,
                          2001                    2000          2001                   2000
                          ----                    ----          ----                   ----
<S>                   <C>                <C>                <C>                 <C>
Domestic                                 $         4,997                        $       16,710
Foreign               $        614                 1,090    $     1,708                  3,244
                      ------------       ----------------   -----------         --------------
Net product sales     $        614       $         6,087    $     1,708         $       19,954
                      ============       ===============    ===========         ==============
</TABLE>


Note 8.           Litigation

To date, eleven plaintiffs, on behalf of themselves 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. The actions were consolidated as IN RE GLIATECH INC.
SECURITIES LITIGATION, Case No. 1:00 CV 2236, and the court appointed lead
plaintiffs. Lead plaintiffs filed a Consolidated Amended Complaint on October 5,
2001, seeking to represent a class of all purchasers of stock of the Company
during the period between April 9, 1998 and August 29, 2000 (the "Class
Period"). This Consolidated Amended Complaint sets forth claims against the


                                       8
<PAGE>


Company and certain of its officers under Section 10(b) of the Securities
Exchange Act of 1934 and Section 20(a) as to the individuals under Section
20(a). The Consolidated Amended Complaint alleges that the defendants made false
and misleading statements during the Class Period and failed to disclose
material facts in connection with, among other things, the termination of the
merger agreement that had been entered into with Guilford Pharmaceuticals, Inc.
("Guilford") and certain inspectional observations by the FDA contained in its
Form 483 relating to matters during the Class Period. The lead plaintiffs seek
unspecified damages, equitable relief in the form of asset attachment and
attorney's fees. The defendants have not yet responded to the Consolidated
Amended Complaint.

On May 5, 2001, Norman V. Woods filed a lawsuit against the Company and its
wholly owned subsidiaries, Gliatech Medical Inc. and GIC, Inc. in the United
States District Court for the Western District of Virginia alleging, among other
things, certain product liability claims as a result of the use of ADCON-L
during surgery. The complaint seeks $5.0 million in damages plus $0.4 million in
punitive damages from each defendant, plus costs and expenses, including,
without limitation, legal fees.

On March 13, 2001, Geri Fried filed a derivative stockholder lawsuit on behalf
of the Company 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 Company is named as a nominal
defendant. The complaint alleges, among other things, breach of fiduciary duty,
gross mismanagement and constructive fraud arising out of, inter alia, the
termination of the proposed merger with Guilford, the inspectional observations
by the FDA in its Form 483 relating to the U.S. clinical study of ADCON-L, and
the Company's handling of potential medical device reports to the FDA. The
complaint seeks unspecified 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 product liability claims as a result
of the use of ADCON(R)-L during surgery. With respect to the Company, 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.


                                       9
<PAGE>


The Department of Justice and the FDA are conducting an ongoing government
investigation related to, among other things, the Company's handling of
potential product complaints, reporting of medical device report events and the
U.S. clinical study of ADCON-L. This investigation could result in potential
civil or criminal penalties being filed against the Company or its employees.
The Company has been cooperating and intends to continue to cooperate with this
investigation to resolve these questions as quickly as possible.

The National Association of Securities Dealers (the "NASD") conducted a review
of certain trading activity in Company stock prior to the August 2000
announcement of the termination of the proposed merger with Guilford. Gliatech
cooperated with the NASD in their review. The NASD has referred this matter to
the Securities and Exchange Commission ("SEC") and the SEC has begun a
non-public inquiry into this matter. The SEC inquiry could result in potential
civil or criminal penalties against the Company and some of its current and
former employees.

Each of the above matters 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 matters and the investigation. 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

The components of comprehensive loss are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Three Months Ended                Nine Months Ended
                                                     September 30,                   September 30,
                                                2001              2000            2001           2000
                                                ----              ----            ----           ----
<S>                                         <C>               <C>               <C>            <C>
Net loss                                    $  (5,381)        $   (6,677)       $(16,745)      $(6,790)
Unrealized (loss) gain on investments              (3)                38              (1)          44
                                            ---------         ----------        --------       -------
Total comprehensive loss                    $  (5,384)        $   (6,639)       $(16,746)      $(6,746)
                                            =========         ==========        ========       =======
</TABLE>

Accumulated other comprehensive gain, which is shown as a separate credit to
stockholders' equity, was $0.03 million at September 30, 2001 and December 31,
2000, respectively, and consists entirely of net unrealized gains on
investments.

Note 10. 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 and directors of $0.02 million and $0.2
million for the three and nine month periods ended September 30, 2001,
respectively. No compensation cost for fixed stock options issued to employees
and directors was recognized for the three or nine months ended September 30,
2000.


                                       10
<PAGE>


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." The Company recognized
compensation expense related to stock options issued to non-employee consultants
of $0.02 million and $0.02 million for the three and nine month periods ended
September 30, 2001, respectively. The Company recognized compensation expense
related to stock options issued to non-employee consultants of $0.03 million and
$0.1 million for the three and nine months ended September 30, 2000,
respectively.

Note 11. Subsequent Events

In November 2001, Abgenix, Inc. and Gliatech entered into an agreement that
provides Abgenix with exclusive worldwide rights to human monoclonal antibody
therapies against the complement protein properdin as potential treatments for
cardiovascular and inflammatory diseases. Abgenix has generated lead antibody
product candidates for Gliatech under a prior agreement that was entered into in
January 2000. Under the November 2001 agreement, Abgenix will now assume
responsibility for development and commercialization of these antibodies.

Under the terms of the agreement, Abgenix obtains an exclusive license to
develop and commercialize anti-properdin antibody therapies for all indications
and will be responsible for clinical development, regulatory activities,
manufacturing, marketing and sales. Gliatech has received from Abgenix an
upfront license fee of $1.5 million and a commitment for a future equity
investment and will receive potential milestone payments for multiple clinical
indications, research funding for two years and royalties on net sales of any
resulting products. Collectively, the total non-royalty payments could reach
approximately $40 million, if a product is successfully commercialized.

In October 2001, Gliatech announced results of the independent re-evaluation of
the magnetic resonance imaging ("MRI") data from the U.S. clinical study of
ADCON(R)-L, which demonstrated there was no significant difference in maximum
scar scores between the treatment group and the untreated control group. In this
study, each of two neuroradiologists evaluated the MRI films to score the amount
of post-operative scar evident for each patient six months after their surgery.
The inter-reader and intra-reader reliability analyses in this re-evaluation
indicated considerable variability in the MRI scar score measurements. As a
result, the variability evident in this data reduced the utility of the MRI
re-evaluation in this study as a valid measure of the effectiveness of
ADCON(R)-L.

Gliatech subsequently announced an additional clinical outcome result of the
U.S. clinical study of ADCON(R)-L. The results of the U.S. clinical study of
ADCON(R)-L also indicated that the use of ADCON(R)-L resulted in a statistically
significant reduction of radicular pain in patients one month following surgery
as measured by two of three pain evaluation methods used in this study. At
two months and six months, the ADCON(R)-L treated patients maintained a
numerical advantage compared to the untreated control group on two of the
measures, but these differences were not statistically significant.


                                       11
<PAGE>


Gliatech has reviewed in summary form all available data regarding ADCON(R)-L
with the FDA. Based on these discussions, the FDA suggested the Company make a
formal submission of the data for a thorough review by the FDA. The Company is
considering alternatives for submitting this data including submitting either a
supplement to its existing ADCON Pre-Market Approval ("PMA") application or
submitting a new PMA to reflect the currently available data on ADCON(R)-L. The
FDA has indicated that it will review the proposed PMA application following
resolution of the Company's AIP status. Following a review of the data, the FDA
has indicated that a FDA Advisory Panel meeting may be called to review the new
data set and provide recommendations to FDA on whether the Company will be
allowed to recommence distribution of ADCON(R)-L in the U.S.

After review of the submitted data, the FDA Advisory Panel may recommend that
the Company not be allowed to resume distribution of ADCON(R)-L in the U.S., and
there can be no assurance that the FDA will reach a decision on this matter in a
time frame suitable for the Company's continued development and
commercialization of ADCON(R)-L.

As part of its ongoing work related to the Company's AIP status, the Company's
independent auditor, Health Policy Associates ("HPA"), has completed its
previously announced audits of selected U.S. clinical study sites and will
submit its report to the FDA and Gliatech when available. In addition, at the
FDA's request, HPA has completed its investigation of past package sealing
deficiencies described in the warning letter issued in September 1999. The
report expresses concern, in HPA's opinion, regarding communications made by
Gliatech to the FDA during 1999 related to this matter. The Department of
Justice has included this matter in its ongoing investigation. Current product
shipments are being made in a different package format and therefore the prior
packaging issues are not applicable to the current commercial product.

In November 2001, Gliatech submitted its AIP Corrective Action Plan ("AIP CAP")
for FDA review. Gliatech and the FDA have been working closely to resolve the
Company's AIP status. Gliatech believes that key elements of resolution of the
Company's AIP status involve ongoing audits by HPA, the Company's implementation
of the AIP CAP, which establishes policies and procedures with respect to
Gliatech's data integrity compliance activities, and an AIP inspection of
Gliatech by the FDA.

In August 2001, the Company filed a registration statement on Form S-3 for a
proposed rights offering and later withdrew the registration statement due to
business and market conditions.


                                       12
<PAGE>


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 for lumbar disc surgery and tendon
and peripheral nerve surgeries in the 19 European countries which recognize CE
Marking. In December 1996, the Company signed a development and exclusive
license agreement with Chugai for the sale of ADCON(R)-L and ADCON(R)-T/N in
Japan. The Company is currently in discussions with Chugai to terminate this
agreement.

The Company's primary source of revenue has been the sales of ADCON(R)-L
throughout the world, which were primarily in the U.S. from June 1998 until the
voluntary recall in January 2001, as described below. 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
potential treatment of several neurological disorders including Attention
Deficit Hyperactive Disorder, sleep disorders, anxiety, schizophrenia and
Alzheimer's Disease. In addition, the Company and Abgenix entered into an
agreement in November 2001 to develop human monoclonal antibody therapies
against the complement protein properdin as potential treatments for
cardiovascular and inflammatory diseases.

After receiving FDA approval in May 1998, the Company commenced sales of
ADCON(R)-L in the U.S. in June 1998. 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. In
December 2000, the FDA placed the Company on Application Integrity Policy
("AIP") status due to, among other things, 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
several other matters, including, without limitation, the Company's handling of
potential product complaints, reporting of medical device reports and
manufacturing deficiencies.


                                       13
<PAGE>


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 recall, the Company sold
ADCON(R)-L through a network of independent manufacturer's agents that served
the orthopaedic and neurosurgical markets in the U.S. The Company, in
cooperation with the supplier of the raw material, has validated the production
of ADCON(R)-L for distribution outside the U.S., with the raw material in a
modified container. 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 May 2001, the Company
successfully relaunched ADCON(R)-L internationally. The Company is currently
selling ADCON(R)-L through independent medical device distributors in 34
countries outside the U.S.

On April 26, 2001, the Company entered into a financing agreement with PCRAF
that provides the Company will initially receive up to $15.0 million in stages.
In addition, the Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the United States, to obtain, subject
to the satisfaction of certain other conditions, an additional $15.0 million
from PCRAF on the same general economic terms as the initial arrangement. As of
September 30, 2001, the Company has received $7.5 million of the initial $15.0
million and may receive the remaining $7.5 million upon satisfaction of certain
conditions, including, without limitation, the commercial relaunch of ADCON(R)-L
in the United States.

In consideration for the first $15.0 million, PCRAF will receive royalty
payments based on future sales of ADCON(R) products equal to the greater of i)
2.5% of net product sales or ii) certain guaranteed minimum annual royalty
payments beginning in 2003 at a rate of $1.6 million annually and increasing in
stages during future years up to $9.0 million annually. Royalty payments to
PCRAF end on December 31, 2012. The royalty payments based on the percentage of
net sales and the guaranteed minimum annual payment 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. In the event
of a change in control in the Company or upon the occurrence of certain other
events as defined in the financing agreement, PCRAF has the option to put its
revenue interest back to the Company at a specified rate of return, which is
dependent upon the date at which PCRAF exercises this option and the level of
investment by PCRAF. The Company also has the option to repurchase PCRAF's
royalty interest beginning in 2003.

In August 2001, the Company filed a registration statement on Form S-3 for a
proposed rights offering and later withdrew the registration statement due to
business and market conditions.

In November 2001, Abgenix, Inc. and Gliatech entered into an agreement that
provides Abgenix with exclusive worldwide rights to human monoclonal antibody
therapies against the complement protein properdin as potential treatments for
cardiovascular and inflammatory diseases. Abgenix has generated lead antibody
product candidates for Gliatech under a prior agreement that was entered into in
January 2000. Under the November 2001 agreement, Abgenix will now assume
responsibility for development and commercialization of these antibodies.


                                       14
<PAGE>


Under the terms of the agreement, Abgenix obtains an exclusive license to
develop and commercialize anti-properdin antibody therapies for all indications
and will be responsible for clinical development, regulatory activities,
manufacturing, marketing and sales. Gliatech has received from Abgenix an
upfront license fee of $1.5 million and a commitment for a future equity
investment and will receive potential milestone payments for multiple clinical
indications, research funding for two years and royalties on net sales of any
resulting products. Collectively, the total non-royalty payments could reach
approximately $40 million, if a product is successfully commercialized.

REGULATORY AND FDA UPDATE

In July 2001, an 847 patient multi-center retrospective evaluation of ADCON(R)-L
for inhibition of post-operative peridural fibrosis following spinal root
decompression was completed on our behalf by an independent third party research
organization. Results from this evaluation indicated that the incidence rates of
adverse events in this study were similar to those seen in the ADCON(R)-L
treated and control group patient population of our previous clinical trials for
ADCON(R)-L.

In September 2001, the Company submitted its Corrective Action Plan ("the
Manufacturing CAP") to the FDA, who had recently identified approval of an
acceptable Manufacturing CAP as one of the key items required for FDA to grant
permission to relaunch ADCON(R)-L in the U.S. markets. The manufacturing
corrective actions relate to a switch to new packaging for a raw material used
in ADCON(R)-L production and the implementation of new manufacturing inspection
and test procedures. The FDA has indicated that it will review this report and
will inspect the corrective actions. The FDA may require additional steps in
manufacturing or other areas prior to granting permission to relaunch ADCON(R)-L
in the U.S. markets.

In October 2001, the Company announced results of the independent re-evaluation
of the magnetic resonance imaging ("MRI") data from the U.S. clinical study of
ADCON(R)-L. In June 2001, the Company received permission from the FDA to
initiate the independent re-evaluation MRI data in response to the Form FDA 483
received by the Company on August 23, 2000 concerning the post approval U.S.
clinical trial of ADCON(R)-L and the FDA's guidance regarding key steps for the
Company to both resume commercial distribution of ADCON(R)-L in the U.S. and
resolve its AIP status. The independent re-evaluation of the study was
established in cooperation with the FDA to ensure the integrity of the data for
FDA review purposes. The re-evaluation was audited by the independent auditor,
Health Policy Associates retained by the Company pursuant to its AIP status.

In this study, each of two neuroradiologists evaluated the MRI films to score
the amount of post-operative scar evident for each patient six months after
their surgery. The data set of scores by each neuroradiologist was analyzed as
an independent outcome measure. No statistically significant differences between
ADCON(R)-L treated and control patients were evident in the analysis of MRI scar
scores rated by either neuroradiologist. The inter-reader and intra-reader
reliability analyses in this re-evaluation indicated considerable variability in
the MRI scar score


                                       15
<PAGE>


measurements. The variability evident in this data may reduce the utility of the
MRI re-evaluation in this study as a valid measure of the effectiveness of
ADCON(R)-L.

Gliatech announced an additional clinical outcome result of the U.S. clinical
study of ADCON(R)-L. The results of the U.S. clinical study of ADCON(R)-L also
indicated that the use of ADCON(R)-L resulted in a statistically significant
reduction of radicular pain in patients one month following surgery as measured
by two of three pain evaluation methods used in this study. At two months and
six months, the ADCON(R)-L treated patients maintained a numerical advantage
compared to the untreated control group on two of the measures, but these
differences were not statistically significant.

Gliatech has reviewed in summary form all available data regarding ADCON(R)-L
with the FDA. Based on these discussions, the FDA suggested the Company make a
formal submission of the data for thorough review by the FDA. The Company is
considering alternatives for submitting this data including submitting either a
supplement to its existing ADCON Pre-Market Approval ("PMA") application or
submitting a new PMA to reflect the currently available data on ADCON(R)-L. The
FDA has indicated that it will review the proposed PMA application following
resolution of the Company's AIP status. Following a review of the data, the FDA
has indicated that a FDA Advisory Panel meeting may be called to review the new
data and provide recommendations to FDA on whether the Company will be allowed
to recommence distribution of ADCON(R)-L in the U.S.

After review of the submitted data, the FDA Advisory Panel may recommend that
the Company not be allowed to resume distribution of ADCON(R)-L in the U.S., and
there can be no assurance that the FDA will come to a decision on this matter in
a time frame suitable for the Company's continued development and
commercialization of ADCON(R)-L.

As part of its ongoing work related to the Company's AIP status, the Company's
independent auditor, Health Policy Associates ("HPA"), has completed its
previously announced audits of selected U.S. clinical study sites and will
submit its report to the FDA and Gliatech when available. In addition, at the
FDA's request, HPA has completed its investigation of past package sealing
deficiencies described in the warning letter issued in September 1999. The
report expresses concern, in HPA's opinion, regarding communications made by
Gliatech to the FDA during 1999 related to this matter. The Department of
Justice has included this matter in its ongoing investigation. Current product
shipments are being made in a different package format and therefore prior
packaging issues are not applicable to the current commercial product.

In November 2001, Gliatech submitted its AIP Corrective Action Plan ("AIP CAP")
for FDA review. Gliatech and the FDA have been working closely to resolve the
Company's AIP status. Gliatech believes that key elements of resolution of the
Company's AIP status involve ongoing audits by HPA, the Company's implementation
of the AIP CAP, which establishes policies and procedures with respect to
Gliatech's data integrity compliance activities, and an AIP inspection of
Gliatech by the FDA.


                                       16
<PAGE>


RESULTS OF OPERATIONS

For the three month and nine month periods ended September 30, 2001 and 2000.

REVENUES

Total revenues, which consisted entirely of net product sales in 2001, decreased
90.0% to $0.6 million in the third quarter of 2001 compared to $6.1 million in
the third quarter of 2000 and decreased 91.7% to $1.7 million in the first nine
months of 2001 compared to $20.5 million in the first nine months of 2000. 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 May
2001, the Company relaunched sales of ADCON(R)-L internationally. International
net product sales, which have accounted for all product sales in 2001, were $0.6
million in the third quarter and $1.7 million in the first nine months of 2001.
In the third quarter and first nine months of 2000, domestic net product sales
were $5.0 million and $16.7 million, respectively, and international net product
sales were $1.1 million and $3.2 million, respectively. Gliatech is currently
selling ADCON(R)-L in 34 countries outside of the U.S. and international product
sales are continuing to build following the relaunch in May 2001. No government
grant revenue has been recognized in 2001. In the third quarter and first nine
months of 2000, government grant revenue was $0.06 million and $0.5 million,
respectively, which related to two Phase II Small Business Innovation Research
("SBIR") grants whose related costs were incurred during those periods.

OPERATING COSTS AND EXPENSES

Total operating costs decreased 56.7% to $5.7 million in the third quarter of
2001 compared to $13.1 million in the third quarter of 2000 and 35.1% to $18.2
million in the first nine months of 2001 compared to $28.1 million in the first
nine months of 2000. Cost of products sold decreased to $0.7 million in the
third quarter of 2001 compared to $2.4 million in the third quarter of 2000.
Cost of products sold in the first nine months of 2001 decreased to $3.4 million
compared to $4.8 million in the first nine months of 2000. Cost of products sold
in the third quarter and first nine months of 2001 was unfavorably impacted by
$0.3 million and $1.8 million, respectively, of operating and validation costs
incurred at the Company's manufacturing facility in Solon, Ohio and its third
party contract manufacturer, EMCM. Cost of products sold was also negatively
impacted by $0.6 million of product recall costs, which were incurred in the
first six months of 2001. Cost of products sold in the third quarter and first
nine months of 2000 included $0.4 million and $0.8 million, respectively, of
operating costs incurred at the Company's Solon, Ohio manufacturing facility.

Excluding the operating, validation and product recall costs, cost of products
sold as a percentage of net product sales was 76.2% and 59.1% for the third
quarter and first nine months of 2001, respectively and 32.9% and 19.6% for the
third quarter and first nine months of 2000, respectively. Cost of products sold
as a percentage of net product sales was unfavorably impacted in 2001 by sales
mix. In the first nine months of 2001, net product sales consisted


                                       17
<PAGE>


entirely of lower margin international sales, whereas in 2000 net product sales
consisted primarily of higher margin domestic sales.

Research and development expenses increased 55.6% to $2.4 million in the third
quarter of 2001 compared to $1.6 million in the third quarter of 2000 and
increased 6.9% to $7.7 million for the first nine months of 2001 compared to
$7.2 million for the first nine months of 2000. Research and development costs
increased in the third quarter and first nine months of 2001 compared to the
third quarter and first nine months of 2000 primarily due to increased costs of
$0.3 million and $0.8 million, respectively, related to H3 research programs and
increased enrollment in the Phase II clinical trial of GT-2331, $0.2 million and
$0.6 million, respectively, of costs related to the re-evaluation of the MRI
data from the U.S. clinical study of ADCON(R)-L, $0.4 million of costs related
to the retrospective U.S. study of ADCON(R)-L and $0.4 million and $1.1 million,
respectively, of regulatory costs associated with the Company's AIP status and
its Corrective Action Plan submission to the FDA. These increases were partially
offset by a reduction of $0.8 million of costs related to the ADCON-P pivotal
trial, which were incurred primarily in the first six months of 2000, as patient
enrollment and certain related consulting costs were completed in 2000.

Selling, general and administrative expenses increased 8.1% to $2.5 million in
the third quarter of 2001 compared to $2.3 million in the third quarter of 2000
and decreased 16.8% to $7.2 million in the first nine months of 2001 compared to
$8.6 million in the first nine months of 2000. Legal, professional and
consulting services related to litigation against the Company and matters
regarding the Company's AIP status with the FDA increased by $1.0 million and
$1.5 million, respectively, in the third quarter and first nine months of 2001
compared to the third quarter and first nine months of 2000. Due to the
discontinuance of U.S. sales since January 2001, commission expense decreased by
$0.8 million and $3.0 million, respectively, in the third quarter and the first
nine months of 2001 compared to the third quarter and first nine months of 2000.

The third quarter and first nine months of 2000 also included non-recurring
costs related to a terminated merger and severance of $6.8 million and $7.5
million, respectively.

INTEREST INCOME (EXPENSE)

Interest income (expense), net, decreased to $(0.3) million in the third quarter
of 2001 compared to $0.3 million in the third quarter of 2000 and decreased to
$(0.2) million for the first nine months of 2001 compared to $0.8 million in the
first nine months of 2000. The decreases were due to a reduction in cash, cash
equivalents and investment balances used to fund operations due to reduced net
product sales and non-cash interest charges of $0.4 million in the third quarter
of 2001 and $0.7 million in the first nine months of 2001 related to the
long-term obligation with PCRAF.

NET LOSS

The Company's net loss decreased to $(5.4) million or $(0.56) per share in the
third quarter of 2001 compared to $(6.7) million or $(0.70) per share in the
third quarter of 2000 and increased to


                                       18
<PAGE>


$(16.7) million or $(1.73) per share for the first nine months of 2001 compared
to $(6.8) million or $(0.71) per share. The net loss in third quarter and first
nine months of 2001 primarily resulted from the lack of U.S. sales in 2001.
Excluding the impact of the non-recurring costs related to the terminated merger
and severance of $6.8 million in the third quarter of 2000 and $7.5 million in
the first nine months of 2000, the Company would have achieved net income of
$0.1 million in third quarter of 2000 and $0.8 million in the first nine months
of 2000.

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. The Company has
not received any government grant revenue since the third quarter of 2000. The
Company has applied for new grant funding, however, there can be no assurance
that the Company will be awarded any new grants. 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 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 August
2001, the Company filed a registration statement on Form S-3 for a proposed
rights offering and later withdrew the registration statement due to business
and market conditions.

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 $5.8 million to
$6.3 million at September 30, 2001 compared to $12.1 million at December 31,
2000 due to cash used to fund operations, which was partially offset by a
capital infusion of $7.5 million from PCRAF in the second quarter of 2001.
Although sales of ADCON(R)-L outside the U.S. resumed in May 2001, the Company
does not expect to generate positive cash flow from operations for the
foreseeable future as sales of ADCON(R)-L in the U.S. have been discontinued for
an indefinite period.

On April 26, 2001, the Company entered into a financing agreement with PCRAF
that provides the Company will initially receive up to $15.0 million in stages.
In addition, the Company will have the option for the 12 months following
the commercial relaunch of ADCON(R)-L in the United States, to obtain, subject
to the satisfaction of certain other conditions, an additional $15.0 million
from PCRAF on the same general economic terms as the initial arrangement. As of
September 30, 2001, the Company has received $7.5 million of the initial $15.0
million and may receive the remaining $7.5 million upon satisfaction of certain
conditions, including, without limitation, the commercial relaunch of ADCON(R)-L
in the United States.

In consideration for the first $15.0 million, PCRAF will receive royalty
payments based on future sales of ADCON(R) products equal to the greater of i)
2.5% of net product sales or ii) certain guaranteed minimum annual royalty
payments beginning in 2003 at a rate of $1.6 million annually and increasing in
stages during future years up to $9.0 million annually. Royalty payments to
PCRAF end on December 31, 2012. The royalty payments based on the percentage


                                       19
<PAGE>

of net sales and the guaranteed minimum annual payment are subject to
modification under certain conditions. If, among other things, ADCON(R)-L is not
relaunched in the United States by a certain date and at a certain level, then:
(i) the revenue interest would change to an increased percentage of future sales
outside of the United States; (ii) guaranteed minimum annual royalty payments
would be reduced; (iii) PCRAF's future funding obligations to the Company would
be terminated; and (iv) the Company's option to receive additional capital would
be terminated. In addition, PCRAF received a warrant to purchase 300,000 shares
of common stock of the Company at $2.00 per share. In the event of a change in
control in the Company or upon the occurrence of certain other events as defined
in the financing agreement, PCRAF has the option to put its revenue interest
back to the Company at a specified rate of return, which is dependent upon the
date at which PCRAF exercises this option and the level of investment by PCRAF.
The Company also has the option to repurchase PCRAF's royalty interest beginning
in 2003.

In November 2001, Abgenix, Inc. and Gliatech entered into an agreement that
provides Abgenix with exclusive worldwide rights to human monoclonal antibody
therapies against the complement protein properdin as potential treatments for
cardiovascular and inflammatory diseases. Abgenix has generated lead antibody
product candidates for Gliatech under a prior agreement that was entered into in
January 2000. Under the November 2001 agreement, Abgenix will now assume
responsibility for development and commercialization of these antibodies.

Under the terms of the agreement, Abgenix obtains an exclusive license to
develop and commercialize anti-properdin antibody therapies for all indications
and will be responsible for clinical development, regulatory activities,
manufacturing, marketing and sales. Gliatech has received from Abgenix an
upfront license fee of $1.5 million and a commitment for a future equity
investment and will receive potential milestone payments for multiple clinical
indications, research funding for two years and royalties on net sales of any
resulting products. Collectively, the total non-royalty payments could reach
approximately $40 million, if a product is successfully commercialized. Given
the infusions of capital in 2001, the Company believes that it currently has
sufficient cash, cash equivalents and short-term investments on hand to meet
operating requirements through March 2002.

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 in the U.S., the outcome of pending litigation
and investigations and its ability to realize the full potential of its
technology and its drug candidates. The Company is in discussion with potential
strategic alliance partners to further the development of the remaining drug
candidates in its pipeline. The Company is seeking additional financing,
including debt and equity financing, and considering other strategic
alternatives in order to continue operations. The Company is taking significant
steps to reduce costs which is expected to include a reduction in the Company's
workforce. However, there can be no assurance that any alliances, financing or
strategic alternatives or other alternatives will be consummated as these
alternatives may be dependent upon many other factors including, without
limitation, market conditions, and such alternatives may not be available in a
timely manner or be available on acceptable terms, if at all. The Company's
ability to raise additional funds through these alternatives may also depend
upon obtaining regulatory approval to recommence


                                       20
<PAGE>


sales of ADCON-L in the U.S., which is dependent upon the outcomes of the Food
and Drug Administration's ("FDA") review, assessment of the Company's clinical
data and the timeliness of the FDA review due to Application Integrity Policy
("AIP") status.

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, 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 FDA Forms 483, the outcome of pending litigation and investigations,
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 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 and Abgenix. 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.


                                       21
<PAGE>
 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, the uncertainty of
the outcome of FDA's review of clinical data, 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
regulations, the uncertainty of timing and decisions of the FDA Advisory Panel
and/or the FDA following a review of data regarding resuming sales of ADCON-L in
the U.S., the uncertainty of expenses associated with clinical trials and
research efforts, which may affect the profitability of the Company, uncertainty
due to the early stage of development for the pharmaceutical programs, the
ability of the Company to raise 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 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 and investigations, 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.


                                       22
<PAGE>


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. 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.





                                       23
<PAGE>

                                     PART II
                                OTHER INFORMATION


ITEM 1: LEGAL PROCEEDINGS

As reported in the Company's previous periodic reports, including the Annual
Report on Form 10-K for the fiscal year ended December 31, 2000, the following
actions have commenced against the Company. None of these actions commenced
during the period covered by this Quarterly Report of Form 10-Q.

To date, the following plaintiffs, on behalf of themselves 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. The actions were consolidated as In re Gliatech Inc.
Securities Litigation, Case No. 1:00 CV 2236, and the court appointed lead
plaintiffs. Lead plaintiffs filed a Consolidated Amended Complaint on October 5,
2001, seeking to represent a class of all purchasers of stock of the Company
during the period between April 9, 1998 and August 29, 2000 (the "Class
Period"). This Consolidated Amended Complaint sets forth claims against the
Company and certain of its officers under Section 10(b) of the Securities
Exchange Act of 1934 and Section 20(a) as to the individuals under Section
20(a). The Consolidated Amended Complaint alleges that the defendants made false
and misleading statements during the Class Period and failed to disclose
material facts in connection with, among other things, the termination of the
merger agreement that had been entered into with Guilford Pharmaceuticals, Inc.
("Guilford") and certain inspectional observations by the FDA contained in its
Form 483 relating to matters during the Class Period. The lead plaintiffs seek
unspecified damages, equitable relief in the form of asset attachment and
attorney's fees. The defendants have not yet responded to the Consolidated
Amended Complaint.

On May 5, 2001, Norman V. Woods filed a lawsuit against the Company and its
wholly owned subsidiaries, Gliatech Medical Inc. and GIC, Inc. in the United
States District Court for the Western District of Virginia alleging, among other
things, certain product liability claims as a result of the use of ADCON-L
during surgery. The complaint seeks $5.0 million in damages plus $0.4 million in
punitive damages from each defendant, plus costs and expenses, including,
without limitation, legal fees.

On March 13, 2001, Geri Fried filed a derivative stockholder lawsuit on behalf
of the Company 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 Company is named as a nominal
defendant. The complaint alleges, among other things, breach of fiduciary duty,
gross mismanagement and constructive fraud arising out of, inter alia, the
termination of the proposed merger with Guilford, the inspectional observations
by the FDA in its Form 483 relating to the U.S. clinical study of ADCON-L, and
the Company's handling of potential medical device reports to the FDA. The
complaint seeks unspecified compensatory and punitive damages from the
individual defendants and fees and expenses.


                                       24
<PAGE>

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 product liability claims as a result
of the use of ADCON(R)-L during surgery. With respect to the Company, 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 government
investigation related to, among other things, the Company's handling of
potential product complaints, reporting of medical device report events and the
U.S. clinical study of ADCON-L. This investigation could result in potential
civil or criminal penalties being filed against the Company or its employees.
The Company has been cooperating and intends to continue to cooperate with this
investigation to resolve these questions as quickly as possible.

The National Association of Securities Dealers (the "NASD") conducted a review
of certain trading activity in Company stock prior to the August 2000
announcement of the termination of the proposed merger with Guilford. Gliatech
cooperated with the NASD in their review. The NASD has referred this matter to
the Securities and Exchange Commission ("SEC") and the SEC has begun a
non-public inquiry into this matter. The SEC inquiry could result in potential
civil or criminal penalties against the Company and some of its current and
former employees.

Each of the above matters 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 matters and the investigation. 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.


                                       25
<PAGE>


ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits

10.1     Licensing, Development and Commercialization Agreement, dated as of
         November 1, 2001, by and between the Company and Abgenix, Inc. (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)      Report on Form 8-K.

         The Company filed a Current Report on Form 8-K on September 27, 2001
         with respect to a press release describing the Company's submission of
         its Correction Action Plan to the Food and Drug Administration.





                                       26
<PAGE>


                                   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: November 14, 2001          GLIATECH INC.


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




                                       27
<PAGE>


                                  EXHIBIT INDEX


EXHIBIT NO.           DESCRIPTION OF EXHIBIT
-----------           ----------------------



10.1     Licensing, Development and Commercialization Agreement, dated as of
         November 1, 2001, by and between the Company and Abgenix, Inc. (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).






                                       28