SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C.
                              ____________________

                                    FORM 10-K
(Mark One)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]

                   For the Fiscal Year Ended December 31, 1997

[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

                         Commission File Number: 1-12590
                                                 -------
                            GABLES RESIDENTIAL TRUST
             (Exact name of Registrant as specified in its charter)
                              --------------------

           Maryland                                    58-2077868
(State or other jurisdiction of                     (I.R.S. employer
  incorporation or organization)                    identification no.)

 2859 Paces Ferry Road, Suite 1450
          Atlanta, Georgia                                 30339
(Address of principal executive offices)                 (Zip Code)

       Registrant's telephone number, including area code: (770) 436-4600
                                -----------------

           Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class                    Name of Each Exchange on which Registered
-------------------                    -----------------------------------------
Common Shares of Beneficial Interest,             New York Stock Exchange
     par value $0.01 per share

  8.30% Series A Cumulative Redeemable            New York Stock Exchange
Preferred Shares of Beneficial Interest,
     par value $0.01 per share

        Securities registered pursuant to Section 12(g) of the Act: None

     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.

                            (1) Yes   X        No
                                    -----         -----

                            (2) Yes   X        No
                                    -----         -----


     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K   X
          -----

     As of March 20, 1998, the aggregate  market value of the 21,782,299  Common
Shares held by non-affiliates of the Registrant was $571,785,349  based upon the
closing price  ($26.25) on the New York Stock  Exchange  composite  tape on such
date. (For this computation, the Registrant has excluded the market value of all
Common Shares reported as beneficially  owned by executive officers and trustees
of the Registrant; such exclusion shall not be deemed to constitute an admission
that any such person is an "affiliate" of the Registrant.) As of March 20, 1998,
there were outstanding 22,072,205 Common Shares.

                      DOCUMENTS INCORPORATED BY REFERENCE
     Certain information  contained in the Company's Proxy Statement relating to
its Annual Meeting of Shareholders to be held May 19, 1998 are
incorporated by reference in Part III, Items 10, 11, 12 and 13.
<PAGE>


                            FORM 10-K ANNUAL REPORT
                      FISCAL YEAR ENDED DECEMBER 31, 1997
                               TABLE OF CONTENTS


                                     PART I
                                     ------

Item                                                                       Page
 No.                                                                        No.
----                                                                       ----

1.      Business          ........................................            1
2.      Properties  ..............................................           10
3.      Legal Proceedings  .......................................           17
4.      Submission of Matters to a Vote of Security Holders ......           17

PART II

5.      Market for Registrant's Common Shares ....................           17
6.      Selected Financial and Operating Information .............           18
7.      Management's Discussion and Analysis of Financial Condition
           and Results of Operations .............................           21
8.      Financial Statements and Supplementary Data  .............           34
9.      Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure  ............................           34

PART III

10.     Directors and Executive Officers of the Registrant .......           34
11.     Executive Compensation  ..................................           34
12.     Security Ownership of Certain Beneficial Owners and
            Management  ..........................................           34
13.     Certain Relationships and Related Transactions  ..........           34

PART IV

14.     Exhibits, Financial Statements and Schedule and Reports on
            Form 8-K .............................................           34
<PAGE>
                                     Page-1

                                     PART I

ITEM 1.         BUSINESS

GENERAL
-------

Gables Residential Trust is one of the largest owners,  operators and developers
of multifamily  communities in the Southwestern  and Southeastern  region of the
United  States  (the   "Sunbelt"  or  "Sunbelt   Region").   The  Company  is  a
self-administered and self-managed real estate investment trust ("REIT") and has
elected  to be treated as a REIT under the  Internal  Revenue  Code of 1986,  as
amended (the "Code"),  beginning with its taxable year ending December 31, 1994.
The Company was formed in 1993 under  Maryland law to continue and to expand the
multifamily  apartment  community  management,  development,   construction  and
acquisition operations of its privately owned predecessor organization. The term
"Gables  Residential  Group" or "Group" as used herein  refers to the  privately
owned predecessor organization prior to the Company's initial public offering in
January, 1994 (the "Initial Offering" or "IPO") and the concurrent completion of
the various transactions that occurred simultaneously  therewith (the "Formation
Transactions").  The term  "Company"  or "Gables" as used  herein  means  Gables
Residential Trust and its subsidiaries on a consolidated basis (including Gables
Realty  Limited  Partnership  and its  subsidiaries)  or,  where the  context so
requires,  Gables Residential Trust only, and, as the context may require, their
predecessors.

Substantially all of the Company's business is conducted through, and all of the
Company's  interests in property are held by or through,  Gables Realty  Limited
Partnership  (the "Operating  Partnership").  The Company controls the Operating
Partnership through Gables GP, Inc. ("GGPI"), a wholly-owned  subsidiary and the
sole general  partner of the Operating  Partnership  (this structure is commonly
referred to as an umbrella partnership REIT or "UPREIT").  At December 31, 1997,
the Company was an 84.4% economic owner of the Operating Partnership  (excluding
the  Company's  ownership  of  100%  of the  Operating  Partnership's  Series  A
Preferred  Units).  As of such  date,  Gables  owned  59  multifamily  apartment
communities  and had an  indirect  25%  interest  in two  multifamily  apartment
communities  (collectively,  the "Current Communities") located in the following
major cities in Texas,  Georgia and  Tennessee:  Houston,  Dallas,  Austin,  San
Antonio,  Atlanta,  Memphis  and  Nashville  (the "Core  Markets").  The Current
Communities   totaled  18,479  apartment  homes  and  included  one  multifamily
apartment  community  in the final  stages of  lease-up.  Gables also owned five
multifamily  apartment  communities that were under construction at December 31,
1997 that Gables expects will comprise  1,409  apartment  homes upon  completion
(collectively,  the "Development Communities" and, with the Current Communities,
the "Communities"). Three of the Development Communities are located in Atlanta,
Austin  and  Houston  and two of the  Development  Communities  are  located  in
Orlando,  Florida.  Gables also owns sites (the "Undeveloped Sites") on which it
intends to develop  seven  additional  multifamily  apartment  communities  that
Gables expects will comprise an estimated  1,792  apartment homes and has rights
(the "Development  Rights") to acquire additional sites on which Gables believes
it could develop multifamily apartment communities comprising an estimated 2,596
apartment  homes.  Gables is pursuing the acquisition of additional  multifamily
apartment  communities.  See "Recent  Developments"  for acquisitions  that were
under contract as of March 16, 1998.

Gables'  executive  offices are  located at 2859 Paces  Ferry Road,  in Atlanta,
Georgia 30339 and its telephone  number is (770) 436-4600.  The Company's common
shares of beneficial interest,  par value $0.01 per share ("Common Shares"), are
listed on the New York Stock Exchange (the "NYSE") under the symbol "GBP."

MANAGEMENT STRUCTURE.   Gables  has  been  responsible  for the  development  or
acquisition of  approximately  42,700  apartment homes since 1982 and its senior
management  team has, on average,  in excess of fifteen years  experience in the
multifamily  industry.  Gables  provides a full range of integrated  real estate
services through a staff of  approximately  900 employees who have experience in
property operations, development, acquisition and construction. Gables maintains
offices in  Atlanta,  Houston  and  Dallas,  each with its own fully  integrated
organization,   including  experienced  in-house  management,   development  and
acquisition  staffs with specific  knowledge of the particular  markets  served.
Gables  believes  that its  competitive  strength  and growth  potential  lie in
management's in-depth knowledge of the changing opportunities  available in each
local market and in its locally  focused  management  structure,  which  enables
highly  experienced   development  and  acquisition   personnel  to  pursue  new
opportunities in each market and highly experienced on-site managers to make the
day-to-day  decisions needed to maximize the performance of existing properties.
The finance,  accounting and administrative  functions for Gables are controlled
by a central staff located in Atlanta.
<PAGE>
                                     Page-2

COMPETITIVE  ADVANTAGES.   Gables  believes  that  it  has  several  competitive
advantages. These advantages include:

     SERVICE-ORIENTED PHILOSOPHY: a service-oriented philosophy which focuses on
offering extensive resident amenities and services in quality apartment homes to
increase occupancy and rental rates and reduce resident turnover.

     GEOGRAPHIC  DIVERSIFICATION:  an  established  market  presence in multiple
major markets in the Sunbelt Region which are geographically  independent,  rely
on diverse  economic  foundations,  and during the past several years have shown
job growth substantially above national averages.

     PRODUCT  FOCUS:  a portfolio  concentration  of Class A properties  located
primarily in in-fill locations and  master-planned  communities,  which includes
garden,  townhome and higher density apartment  communities that were developed,
acquired,  rehabilitated or repositioned by Gables,  targeted toward a lifestyle
renter segment.

     LOCAL  PRESENCE IN MULTIPLE  MARKETS:  a local  presence for  approximately
fifteen  years in each of the Core  Markets  served by Gables  through  an
experienced  staff with superior  knowledge of local markets and a culture which
provides incentives for outstanding performance at all levels.

     FULLY INTEGRATED ORGANIZATION: a fully integrated organization with a track
record of  approximately  fifteen  years in all phases of real  estate  property
management, development, acquisition,  construction,  rehabilitation,  financing
(including tax- exempt bond financing) and marketing.

     INCREASED SIZE: Gables' increased size has allowed it to generate economies
of scale by spreading its corporate  overhead costs over a larger  portfolio and
increasing its buying power with vendors.

THE OPERATING PARTNERSHIP
-------------------------
The  Operating  Partnership  is the entity  through  which the Company  conducts
substantially  all  of  its  business  and  owns  (either  directly  or  through
subsidiaries)  all of its assets.  As of December  31,  1997,  the Company  held
directly,  or  indirectly  through GGPI,  84.4% of the  Operating  Partnership's
common  units of limited and general  partnership.  This  structure  is commonly
referred  to  as an  umbrella  partnership  REIT  or  UPREIT.  Through  GGPI,  a
wholly-owned  subsidiary  of the  Company  and the sole  general  partner of the
Operating Partnership, the Company controls the Operating Partnership. The board
of  directors  of GGPI,  the members of which are the same as the members of the
Board  of  Trustees  of the  Company,  manages  the  affairs  of  the  Operating
Partnership  by directing  the affairs of the general  partner of the  Operating
Partnership.   The  Company's  limited  partner  and  indirect  general  partner
interests in the Operating Partnership entitle it to share in cash distributions
from, and in the profits and losses of, the Operating  Partnership in proportion
to its economic  interest therein and entitle the Company to vote on all matters
requiring a vote of the limited partners.

The  other  limited  partners  of the  Operating  Partnership  are  persons  who
contributed  their  direct or indirect  interests in certain  properties  to the
Operating Partnership  primarily in connection with the Formation  Transactions.
The  Operating   Partnership  is  obligated  to  redeem  each  unit  of  limited
partnership  ("Unit") at the request of the holder thereof for cash equal to the
fair market  value of a Common  Share at the time of such  redemption,  provided
that the Company at its option may elect to acquire any such Unit  presented for
redemption for one Common Share or cash. The Company presently  anticipates that
it will elect to issue Common Shares to acquire Units  presented for redemption,
rather than paying cash.  With each such  redemption  the  Company's  percentage
ownership  interest in the Operating  Partnership  will  increase.  In addition,
whenever  the  Company  issues  Common  Shares,  the  Company  is  obligated  to
contribute  any net proceeds  therefrom  to the  Operating  Partnership  and the
Operating Partnership is obligated to issue an equivalent number of Units to the
Company.

The Company may cause the Operating  Partnership  to issue  additional  Units to
acquire land parcels for the  development of apartment  communities or operating
apartment  communities in transactions that in certain  circumstances defer some
or all of  the  sellers'  tax  consequences.  The  Company  believes  that  many
potential sellers of multifamily  residential properties have a low tax basis in
their   properties  and  would  be  more  willing  to  sell  the  properties  in
transactions that defer Federal income taxes. Offering Units instead of cash for
properties may provide potential sellers partial Federal income tax deferral.
<PAGE>
                                     Page-3

THE MANAGEMENT COMPANIES
------------------------
Gables'  management  operations  with respect to properties in which Gables does
not  have an  interest  are  conducted  through  subsidiaries  of the  Operating
Partnership (the "Management Companies").  The Management Companies also provide
other services to third parties,  including  construction and brokerage services
and the provision of corporate rental housing. Certain of these services are, or
may also be,  provided  by the  Operating  Partnership  directly,  to the extent
consistent  with the gross  income  requirements  for REITs  under the Code.  To
maintain the Company's  qualifications as a REIT while realizing income from its
fee management and related service business, the Operating Partnership owns 100%
of the nonvoting common stock (representing  98.99% of the total equity) of each
Management  Company and 1% of the voting common stock  (representing .01% of the
total equity) of each Management Company.  The nonvoting common stock and voting
common stock owned by the Company together represent 99% of the equity interests
in each  Management  Company.  Executive  officers of the Company  hold,  in the
aggregate,   the  remaining  1%  of  the  equity  in  each  Management  Company,
representing 99% of the voting interest therein. The voting common stock held by
such  executive  officers  is  subject  to a  provision  of the  by-laws of each
Management  Company  that is  designed  to ensure that the stock will be held by
officers of the Management  Companies at all times. This bylaw provision of each
Management Company cannot be amended without the vote of 100% of the outstanding
voting common stock of such company.

BRAND NAME STRATEGY
-------------------
Gables  is  continuing  to  pursue  a  long  standing  strategy  of  brand  name
development  by linking the "Gables"  name to its  properties.  This strategy is
intended  to  reinforce  Gables'  reputation  and to  build  recognition  of its
multifamily  communities as a high quality,  recognizable brand. Gables believes
that  increased  consumer  recognition of the "Gables" brand name in each of its
markets  has  enhanced  its  ability to attract  new  residents,  increased  the
markets' perception of the Communities as high quality residential  developments
and enhanced its relationships with local authorities.

BUSINESS OBJECTIVES AND STRATEGY OF GABLES
------------------------------------------
Gables' objective is to increase  shareowner value by being a dominant owner and
operator of Class A multifamily  communities in the Sunbelt  Region.  To achieve
its objective,  Gables employs a number of strategies  including  operating high
quality,  well-located  assets in a diverse set of select Sunbelt  markets which
have  similar  demographic   characteristics  such  as  diverse  economies  with
projected  job growth.  Gables'  primary  target  customer is the more  affluent
renter-by-choice,  which  requires a focus on customer  service  through  highly
trained  associates  and the  maintenance  of Gables' assets to a high standard.
Gables intends to grow cash flow from operating  communities through innovative,
proactive  property  management  that  focuses  on  resident   satisfaction  and
retention, increases in rents and occupancy levels, and the control of operating
expenses through improved  economies of scale. Due to the cyclical nature of the
real estate markets,  Gables has adopted an investment  strategy based on strong
local presence and expertise  which will allow for growth in assets through both
acquisition and development as warranted by underlying market fundamentals,  and
that will  provide  for both  favorable  initial  returns and  long-term  growth
prospects.  Gables  believes the  successful  execution of these  operating  and
investment strategies will result in consistent high quality growth in operating
cash flow.

Gables  believes that it is well positioned to achieve its objective as a result
of its  long-established  presence as a fully integrated real estate management,
development,  construction  and  acquisition  company  in each of  Gables'  Core
Markets for the past fifteen years.  Gables believes that this long-term,  local
market  presence gives it a competitive  advantage with regard to its ability to
generate increased cash flow from property  operations during different economic
cycles and to new investment  opportunities that involve site selection,  market
information and requests for entitlements and zoning petitions. The Core Markets
are geographically  independent,  rely on diverse economic  foundations and have
experienced job growth  substantially  above national averages.  Gables recently
entered the Orlando  market which has the common growth  characteristics  of the
Core Markets.

PROPERTY  OPERATIONS.  The property management group operates the Communities to
maximize  cash flow and create long- term value.  This is achieved by aggressive
marketing and leasing of apartment homes,  providing the best possible  resident
service and  maintaining the  Communities to the highest  standards.  Management
believes that excellent service will distinguish Gables from its competitors and
will retain current  residents and attract new  prospects.  Gables has a service
oriented   philosophy  which  is  reinforced  through  its  "College  of  Career
Development"  named Gables University.  This  comprehensive  training system for
Gables'  employees is overseen by  full-time  training  coordinators  and offers
classes in a variety of different schools, such as the School of Leasing, the

<PAGE>
                                     Page-4

School  of  People   Resources  and  the  School  of  Maintenance   Development.
Additionally,  there are "degree"  programs which are completed with  graduation
ceremonies.  Service is also  reinforced  with  quarterly "I Made a  Difference"
recognition ceremonies, where personal achievement by associates is acknowledged
by senior management in each of the markets where Gables operates.

Financial and marketing information is collected and distributed through on-site
computer  systems at all Communities and  effectively  summarizes  operating and
marketing  data critical for making  accurate daily  decisions.  The system also
compiles  demographic  profile information on prospective and current residents,
allowing Gables to effectively target its customer base.

The property management group is strategically focused on the following areas:

     EMPLOYEES. Hiring the highest quality associates possible through extensive
screening  and  proactive  recruiting,  and  encouraging  loyalty  and  reducing
employee turnover by providing  outstanding  training,  career opportunities and
benefit  programs.  The average tenure for vice presidents and regional managers
of the group is over eight years and the average tenure of property  managers is
over six years.

     RESIDENTS.  Providing  exceptional  services to Gables' relatively affluent
residents, who expect a service level commensurate with the high quality product
and resultant high level rents.

     FINANCIAL   PERFORMANCE.   Maximizing  revenues  from  the  Communities  by
empowering and inciting  property  managers to make decisions  regarding  rental
rates and  implementation of marketing programs to attract and retain residents;
reducing  property  operating  expenses by continuously  evaluating  vendors and
service contracts,  utilizing volume discount  purchasing programs and analyzing
tax and utility expenses;  and monitoring  overall  appearance and appeal of the
Communities by ensuring cleanliness,  investing wisely in major capital expenses
and ensuring the quality of the landscaping.

DEVELOPMENT. The development team has extensive experience in the identification
of sites,  land planning,  product  development and  construction in the Sunbelt
Region. In evaluating whether to develop an apartment community, the development
team analyzes current demographics and economic data such as household formation
rates,  income  levels,  rental  rates and  occupancies.  Gables  relies both on
internal and external market  research to determine the current  position of the
real estate cycle.

Successful  development has been instrumental to the growth of Gables and, since
1982, Gables has developed approximately 28,300 apartment homes. Gables seeks to
develop  properties in markets where it discerns a strong  demand,  which Gables
anticipates  will  enable it to achieve  its  targeted  initial  yields.  Gables
expects to  continue to focus on the Sunbelt  Region  which,  as a result of job
growth and household formation,  has generally experienced high occupancy levels
and rising rents in recent years.  The typical  submarket  where Gables develops
its communities is one where resident profiles, including relatively high income
households,  justify the development of Class A multifamily communities offering
extensive resident amenities and services. Fundamental to Gables' development is
its in-house  construction  group, which allows Gables to act as its own general
contractor,  which helps  control  quality,  scheduling  and cost.  In addition,
Gables'  development  and  construction  expertise  has  enabled it to develop a
variety  of  multifamily  communities,  including  Class  A  garden  apartments,
townhomes and higher density apartments in a variety of geographic areas.

ACQUISITION.  Gables also  focuses its  efforts on the  acquisition  of existing
multifamily  communities  which  management  believes  are  consistent  with the
characteristics of its existing portfolio or present  opportunities for creating
value,   including  properties   requiring  extensive   renovations  and  market
repositioning.  Since 1982,  Gables has  acquired and  repositioned  communities
comprising  a  total  of   approximately   14,400   apartment  homes,  of  which
approximately 3,000 apartment homes were value-added acquisitions which required
substantial redevelopment,  repositioning,  and strong management skills. Gables
will seek to invest in those  properties that management  believes are available
at prices below  estimated  replacement  cost, are located in submarkets  with a
relatively  high income  population  with close  proximity  to major  employment
centers,  and are capable of growth in cash flow through  application of Gables'
management ability and strategic capital improvements.
<PAGE>
                                     Page-5

FEE MANAGEMENT  BUSINESS AND RELATED  SERVICES.  As of December 31, 1997, Gables
managed for third parties 27 multifamily  communities  comprising  approximately
9,600  apartment  homes.  These fee management  contracts are maintained  with a
total of approximately 17 owners. In addition to contributing  modestly to funds
from  operations,  engaging in fee  management  allows  Gables to  leverage  its
management  operations  costs,  provides  access to development  and acquisition
opportunities and provides Gables with additional market knowledge.  In addition
to its fee management  business,  Gables  provides  other  services  through the
Management  Companies,  including  construction  and brokerage  services and the
provision of corporate rental housing.

COMPETITION
-----------
All of the  Communities  are  located  in  developed  areas that  include  other
apartment communities.  The number of competitive  multifamily  communities in a
particular  area  could  have a  material  effect on  Gables'  ability  to lease
apartment  homes  at the  Communities  or at any  newly  developed  or  acquired
community,  as  well  as on the  rents  charged.  Gables  may be  competing  for
development  and  acquisition   opportunities  with  others  that  have  greater
resources than Gables (including other REITs). In addition, the Communities must
compete for residents  with new and existing  homes and  condominiums.  The home
affordability  index in all of Gables'  markets is above the  national  average.
This  competitive  environment is partially offset by the propensity to rent for
households in Gables' markets which in all cases exceeds the national average.

The fee management business is highly competitive,  and Gables faces competition
from a variety of local,  regional and national firms.  Gables competes  against
these firms by  stressing  the  quality and  experience  of its  employees,  the
services  provided  by Gables  and the market  presence  and  experience  it has
developed over the past fifteen years.  Gables may,  nevertheless,  lose some of
its third party management business, particularly when such properties are sold.

ENVIRONMENTAL MATTERS
---------------------
Under  various  Federal,  state and local  environmental  laws,  ordinances  and
regulations,  a current or previous  owner or operator of real  property  may be
required to investigate and clean up hazardous or toxic  substances or petroleum
product  releases at such  property,  and may be held  liable to a  governmental
entity  or to third  parties  for  property  damage  and for  investigation  and
clean-up  costs incurred by such parties in connection  with the  contamination.
Such laws, ordinances and regulations  typically impose clean-up  responsibility
and liability without regard to whether the owner knew of or caused the presence
of the  contaminants,  and the liability under such laws has been interpreted to
be joint and  several  unless the harm is  divisible  and there is a  reasonable
basis for allocation of responsibility.  The cost of investigation,  remediation
or removal of such  substances  may be  substantial,  and the  presence  of such
substances,  or the  failure to properly  remediate  the  contamination  on such
property, may adversely affect the owner's ability to sell or rent such property
or to borrow  using such  property  as  collateral.  Persons who arrange for the
disposal or treatment of  hazardous or toxic  substances  also may be liable for
the costs of  removal or  remediation  of such  substances  at the  disposal  or
treatment  facility,  whether or not such  facility is owned or operated by such
person. In addition,  some  environmental laws create a lien on the contaminated
site in favor of the  government  for damages and costs it incurs in  connection
with the contamination.  Finally, the owner or operator of a site may be subject
to common law claims by third parties based on damages and costs  resulting from
environmental  contamination  emanating  from a site.  In  connection  with  the
ownership,  operation,  management and  development of the Communities and other
real properties, Gables may be potentially liable for such damages and costs.

Certain  Federal,  state and local laws,  ordinances and regulations  govern the
removal, encapsulation and disturbance of asbestos-containing materials ("ACMs")
when such  materials  are in poor  condition  or in the  event of  construction,
remodeling,  renovation or demolition of a building.  Such laws,  ordinances and
regulations  may impose  liability for release of ACMs and may provide for third
parties  to seek  recovery  from  owners or  operators  of real  properties  for
personal  injury  associated  with  ACMs.  In  connection  with  its  ownership,
operation,  management  and  development  of  the  Communities  and  other  real
properties, Gables may be potentially liable for such costs.

In addition, recent studies have linked radon, a naturally-occurring  substance,
to increased risks of lung cancer. While there are currently no state or Federal
requirements regarding the monitoring for, presence of, or exposure to, radon in
indoor air, the U.S.  Environmental  Protection  Agency  ("EPA") and the Surgeon
General  recommend  testing  residences for the presence of radon in indoor air,
and the EPA further  recommends  that  concentrations  of radon in indoor air be
limited to less than 4  picocuries  per liter of air (pCi/L)  (the  "Recommended
Action Level"). The presence of radon in concentrations equal to or greater than
the Recommended Action Level in a Community may adversely affect Gables' ability
to rent apartment homes in that Community and the market value of the Community.
<PAGE>
                                     Page-6

Finally, recently-enacted Federal legislation will eventually require owners and
landlords  of  residential  housing  constructed  prior to 1978 to  disclose  to
potential tenants or purchasers of the Communities any known lead-paint  hazards
and will impose treble damages for failure to so notify. In addition, lead-based
paint  in any of the  Communities  may  result  in lead  poisoning  in  children
residing in that  Community if chips or particles of such  lead-based  paint are
ingested,  and Gables may be held liable under state laws for any such  injuries
caused by ingestion of lead-based paint by children living at the Communities.

Gables'  assessments  of the  Communities  have not revealed  any  environmental
liability that Gables  believes would have a material  adverse effect on Gables'
business,  assets or  results  of  operations,  nor is Gables  aware of any such
material  environmental  liability.  Nevertheless,  it is possible  that Gables'
assessments  do not  reveal  all  environmental  liabilities  or that  there are
material environmental  liabilities of which Gables is unaware.  Moreover, there
can be no assurance  that (i) future laws,  ordinances or  regulations  will not
impose any material  environmental  liability or (ii) the current  environmental
condition of the Communities  will not be affected by tenants,  by the condition
of land or operations in the vicinity of the properties (such as the presence of
underground storage tanks), or by third parties unrelated to Gables.

Gables  believes that no ACMs were used in connection  with the  construction of
the  Communities or will be used in connection  with future  construction by the
Company.  Gables'  environmental  assessments  have  revealed  the  presence  of
"potentially  friable" ACMs at two Current  Communities and non-friable  ACMs at
four Current  Communities.  Gables has programs in place to maintain and monitor
ACMs.  Gables  believes that the  Communities  are in compliance in all material
respects  with all Federal,  state and local laws,  ordinances  and  regulations
regarding  hazardous or toxic substances or petroleum  products.  Gables has not
been notified by any governmental authority,  and is not otherwise aware, of any
material  noncompliance,  liability  or claim  relating  to  hazardous  or toxic
substances  or  petroleum  products  in  connection  with  any  of  its  present
properties  that would  involve  substantial  expenditure,  and Gables  does not
believe that compliance with applicable  environmental  laws or regulations will
have a material  adverse effect on Gables or its financial  condition or results
of operations.

COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT AND SIMILAR LAWS
-------------------------------------------------------------------------

Under the Americans  with  Disabilities  Act of 1990 (the "ADA"),  all places of
public  accommodation are required to meet certain Federal  requirements related
to access and use by disabled persons.  These  requirements  became effective in
1992.  Management of Gables believes that the Communities are  substantially  in
compliance  with present  requirements  of the ADA, as they apply to multifamily
dwellings. A number of additional Federal, state and local laws exist which also
may  require  modifications  to the  Communities,  or regulate  certain  further
renovations  thereof,  with respect to access thereto by disabled  persons.  For
example, the Fair Housing Amendments Act of 1988 (the "FHAA") requires apartment
communities  first  occupied  after  March  13,  1990  to be  accessible  to the
handicapped. Noncompliance with the FHAA could result in the imposition of fines
or  an  award  of  damages  to  private  litigants.  Gables  believes  that  the
Communities that are subject to the FHAA are in compliance with such law.

Additional legislation may impose further burdens or restrictions on owners with
respect  to access  by  disabled  persons.  The  ultimate  amount of the cost of
compliance with the ADA or such legislation is not currently ascertainable, and,
while such costs are not  expected  to have a  material  effect on Gables,  such
costs could be  substantial.  Limitations or  restrictions  on the completion of
certain  renovations  may limit  application of Gables'  investment  strategy in
certain instances or reduce overall returns on Gables' investments.

INSURANCE
---------

Gables carries comprehensive liability,  fire, extended coverage and rental loss
insurance  with  respect  to  all  of  the  Current  Communities,   with  policy
specifications,  insured limits and deductibles  customarily carried for similar
properties.   Gables  carries  similar  insurance  with  respect  to  its  other
properties,  but with such exceptions as are  appropriate  given the undeveloped
nature of certain of these  properties.  There are,  however,  certain  types of
losses (such as losses arising from acts of war) that are not generally  insured
because they are either  uninsurable or not  economically  insurable.  Should an
uninsured  loss or a loss in excess of insured  limits occur,  Gables could lose
its capital invested in a property,  as well as the anticipated  future revenues
from  such  property  and  would  continue  to  be  obligated  on  any  mortgage
indebtedness or other obligations  related to the property.  Any such loss would
adversely affect Gables.
<PAGE>
                                     Page-7

EMPLOYEES
---------
Gables  provides  a full  range  of real  estate  services  through  a staff  of
approximately 900 employees, including an experienced management team. There are
no collective bargaining agreements with any of Gables' employees.

TAX MATTERS
-----------
Gables elected to be taxed as a REIT under the Code, commencing with the taxable
year ended  December 31, 1994,  and intends to maintain its  qualification  as a
REIT in the future.  As a qualified REIT, with limited  exceptions,  Gables will
not be taxed under  Federal and certain  state income tax laws at the  corporate
level on its net income.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
-------------------------------------------
The  following  is a  discussion  of  certain  investment,  financing  and other
policies of Gables.  These  policies  have been  determined  by Gables' Board of
Trustees  and may be  amended  or  revised  from  time to time by the  Board  of
Trustees  without a vote of the  shareholders,  except  that (i)  Gables  cannot
change its policy of holding its assets and conducting its business only through
the  Operating  Partnership,   the  Management  Companies  and  other  permitted
subsidiaries  without  the  consent of the  holders of Units as  provided in the
partnership  agreement  of the  Operating  Partnership,  (ii) changes in certain
policies  with respect to conflicts of interest  must be  consistent  with legal
requirements,  and (iii) Gables cannot take any action intended to terminate its
qualification as a REIT without the approval of the holders of two-thirds of the
Common Shares.

INVESTMENT POLICIES.  Gables will conduct all its investment  activities through
the Operating  Partnership and its subsidiaries.  Gables' investment  objectives
are to provide  quarterly  cash  distributions  and  achieve  long-term  capital
appreciation  through  increases  in the value of Gables.  Gables  may  purchase
income-producing  multifamily  apartments  or  other  types  of  properties  for
long-term  investment,  expand and improve the  communities  presently  owned or
other properties  purchased,  or sell such communities or other  properties,  in
whole or in part, when circumstances  warrant.  Gables may also participate with
third parties in apartment community ownership,  through joint ventures or other
types of co-ownership.  Equity  investments may be subject to existing  mortgage
financing and other  indebtedness  or such financing or  indebtedness  as may be
incurred in connection  with acquiring or refinancing  these  investments.  Debt
service on such financing or  indebtedness  will have a priority over the Common
Shares and any distributions thereon.

While Gables emphasizes equity real estate investments in multifamily  apartment
communities, it may, in the discretion of the Board of Trustees, invest in other
types of equity real estate investments,  mortgages (including  participating or
convertible mortgages) and other real estate interests. Gables currently intends
to invest in  apartment  communities  in the  Sunbelt  Region.  However,  future
development or investment  activities will not be limited to any geographic area
or product type or to a specified percentage of Gables' assets.  Gables will not
have any limit on the amount or percent of its assets  invested in one property.
Subject to the  percentage of ownership  limitations  and gross income and asset
tests necessary for REIT qualification,  Gables also may invest in securities of
other REITs,  other entities engaged in real estate  activities or securities of
other  issuers,  including  for the  purpose  of  exercising  control  over such
entities,  although it does not presently intend to do so and it has not done so
in the past.  Gables may enter  into  joint  ventures  or  partnerships  for the
purpose of obtaining an equity  interest in a particular  property in accordance
with Gables'  investment  policies.  Such  investments  may permit Gables to own
interests in larger  assets  without  unduly  restricting  diversification  and,
therefore,  add flexibility in structuring its portfolio.  Gables will not enter
into a joint  venture  or  partnership  to make an  investment  that  would  not
otherwise meet its investment  policies.  Investment in these securities is also
subject to Gables'  policy not to be treated as an investment  company under the
Investment Company Act of 1940.

FINANCING  POLICIES.  The debt to total  market  capitalization  ratio of Gables
(i.e., the total consolidated debt of Gables as a percentage of the December 31,
1997 market  value of  outstanding  Common  Shares of the Company and  Operating
Partnership  Units,  plus  total  consolidated  debt  and  preferred  shares  at
liquidation  value)  was  approximately  34% at  December  31,  1997.  Excluding
construction-related indebtedness, this ratio was 30% at December 31, 1997. This
ratio will  fluctuate  with  changes in the price of the Common  Shares (and the
issuance of  additional  Common  Shares,  or other forms of shares of beneficial
interest,  if any) and differs from the debt to book capitalization ratio, which
is based  upon book  values.  This  percentage  will  increase  as  Gables  uses
financing to continue construction of the Development Communities and to acquire
additional multifamily apartment communities. As the debt to book capitalization
ratio may not reflect the current  income  potential  of a company's  assets and
operations,  Gables believes that the debt to total market  capitalization ratio
provides an  alternative  indication  of leverage for a company whose assets are
<PAGE>
                                     Page-8

primarily  income-producing  real estate and should be evaluated  along with the
debt service coverage and underlying components of Gables' indebtedness.  Gables
currently has a policy of incurring debt only if upon such  incurrence the ratio
of debt to total market capitalization would be 60% or less. Gables' Amended and
Restated  Declaration  of Trust and Second  Amended and Restated  Bylaws do not,
however,  limit the amount or percentage of indebtedness  that Gables may incur.
In  addition,  Gables may from time to time  modify its debt  policy in light of
current economic conditions,  relative costs of debt and equity capital,  market
values of its Communities,  general conditions in the market for debt and equity
securities,   fluctuations  in  the  market  price  of  Common  Shares,   growth
opportunities  and other factors.  Accordingly,  Gables may increase or decrease
its debt to total market capitalization ratio beyond the limits described above.
To the extent that the Board of Trustees decides to obtain  additional  capital,
Gables may raise such capital through  additional  equity  offerings  (including
offerings  of senior  securities),  debt  financings  or retention of Funds from
Operations  (subject to  satisfying  provisions in the Code,  requiring  minimum
distributions  of net income in order to  maintain  tax status as a REIT),  or a
combination of these methods.  Gables presently  anticipates that any additional
borrowings  would be made through the  Operating  Partnership,  although  Gables
might  incur  indebtedness,  the  proceeds  of which  would be  reloaned  to the
Operating  Partnership.  Borrowings may be unsecured or may be secured by any or
all of the assets of the Company,  the Operating  Partnership or any existing or
new property owning  partnership and may have full or limited recourse to all or
any  portion of the assets of the  Company,  the  Operating  Partnership  or any
existing or new property owning partnership. Indebtedness incurred by Gables may
be in the form of bank borrowings,  tax-exempt bonds, purchase money obligations
to sellers of apartment  communities or other properties,  publicly or privately
placed debt  instruments  or  financing  from  institutional  investors or other
lenders.  The  proceeds  from any  borrowings  by Gables may be used for working
capital,  to  refinance  existing  indebtedness  and  to  finance  acquisitions,
expansions or development of new communities and other  properties,  and for the
payment of distributions.  Gables has not established any limit on the number or
amount  of  mortgages  that  may be  placed  on any  single  property  or on its
portfolio as a whole.

Gables  currently  has a senior  unsecured  debt rating of BBB from Standard and
Poor's and Baa2 from  Moody's  Investors  Service.  Gables'  Series A  Preferred
Shares  currently  have a rating of BBB- from  Standard and Poor's and baa3 from
Moody's Investors  Service.  Gables intends to adhere to financing policies that
will allow it to maintain these investment grade credit ratings.

CONFLICT OF INTEREST POLICIES. As part of their employment  agreements,  each of
Messrs. Bromley,  Rippel, Clark and Banks is bound by a non-competition covenant
with Gables.  These  non-competition  covenants  provide that during the term of
employment,  and for a period of one year  following  termination  of employment
under certain  circumstances,  each individual is prohibited  from,  directly or
indirectly,  competing  with Gables with  respect to any  multifamily  apartment
residential  real estate  property  development,  construction,  acquisition  or
management  activities  then  undertaken or being  considered  by Gables.  These
employment agreements also contain certain non-solicitation  covenants,  whereby
each individual  subject to such an agreement is prohibited,  during the term of
employment and for a period of one year thereafter, from, directly or indirectly
(i)  soliciting  or inducing any present or future  employee of Gables to accept
employment  with such  individual or any person or entity  associated  with such
individual, (ii) employing, or causing any person or entity associated with such
individual to employ, any present or future employee of Gables without providing
Gables with prior written notice of such proposed employment or (iii) either for
himself or for any other person or entity, competing for or soliciting the third
party  owners with whom Gables has an existing  property  management  agreement.
Such employment  agreements  terminate on January 1, 1999 but are  automatically
extended for additional one-year periods unless notice is given by Gables or the
employee,  three months prior to the agreement's expiration,  that the agreement
will not be renewed.

Gables has  adopted a policy  that,  without  the  approval of a majority of the
trustees who are neither officers of Gables nor affiliated with Gables,  it will
not (i) acquire from or sell to any trustee,  officer or employee of Gables,  or
any entity in which a trustee,  officer or employee of Gables  beneficially owns
more than a 1% interest,  or acquire from or sell to any affiliate of any of the
foregoing,  any of the assets or other property of Gables, (ii) make any loan to
or  borrow  from any of the  foregoing  persons  or (iii)  engage  in any  other
transaction with any of the foregoing persons.

RECENT DEVELOPMENTS
-------------------
The following sections contain forward-looking  statements within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities  Exchange Act of 1934,  as amended.  Forward-looking  statements  are
inherently subject to risks and uncertainties, many of which cannot be predicted
with  accuracy.  Acquisitions  that  are  pursued  by  the  Company  may  not be
consummated  for a variety of reasons,  including the failure of either party to
meet the required conditions to closing.
<PAGE>
                                     Page-9


PENDING ACQUSITIONS - SOUTH FLORIDA
------------------------------------
Gables has entered into a Contribution Agreement with an effective date of March
16, 1998 (the "Contribution Agreement") to acquire the properties and operations
of Trammell Crow Residential South Florida ("TCR/SF"), which consist of up to 15
multifamily apartment communities (the "South Florida Communities") containing a
total of 4,197  apartment  homes  (assuming  completion  of three South  Florida
Communities  currently  under  construction),  and all of  TCR/SF's  residential
construction  and  development  and third party  management  activities in South
Florida (the "South Florida  Transaction").  The South Florida  Communities  are
located in Palm Beach County,  Broward  County and Dade County and encompass the
metropolitan areas of Palm Beach, Fort Lauderdale and Miami,  respectively.  The
South Florida Transaction is expected to be consummated in the second quarter of
1998.

Gables believes the South Florida Transaction,  if successfully completed,  will
facilitate the following goals:

-    establish a growth platform in the South Florida markets by integrating the
     existing operating, acquisition,  development and construction personnel of
     TCR/SF into Gables' existing management team;

-    allow Gables to enter into the South  Florida  markets with a critical mass
     of multifamily  apartment  communities  that have internal  earnings growth
     potential  and product  quality  characteristics  consistent  with  Gables'
     existing portfolio;

-    provide  further   geographic  and  economic   diversification  of  Gables'
     portfolio of  multifamily  apartment  communities,  thereby  enhancing  the
     stability  of Gables'  cash flow;

-    generate a pipeline of acquisition  and  development  opportunities  in the
     South Florida markets,  which are characterized by high job growth and high
     barriers to entry;

-    allow  Gables to generate  economies of scale by  spreading  its  corporate
     overhead costs over a larger portfolio and increasing its buying power with
     vendors;  and

-    produce immediate earnings growth and accelerate long-term earnings growth.

There can be no assurance that all South Florida Communities will be included in
the South  Florida  Transaction  or that the South Florida  Transaction  will be
consummated at all. Additionally, although Gables expects that the South Florida
Transaction  and  Gables'  entry into new  markets  will  provide  the  benefits
discussed above, there can be no assurance that these benefits will be realized.

At December  31, 1997,  12 of the South  Florida  Communities,  which were built
between  1984 and 1997,  were  stabilized  and had a weighted  average  physical
occupancy rate of approximately 94.8%, two of the South Florida Communities were
under  construction  and  lease-up,  and one South  Florida  Community was under
construction  but  had not  yet  commenced  leasing.  All of the  South  Florida
Communities under construction are anticipated to be substantially  completed by
September,  1998. The average unit size for all South Florida Communities is 984
square feet and the  scheduled  rent at December  31, 1997 was $875 per unit and
$0.89 per square foot. Gables currently expects it will also acquire from TCR/SF
third party management contracts for approximately 8,000 apartment homes.

Under the terms of the  Contribution  Agreement,  Gables will  acquire the South
Florida  Communities,  the third party management  business and other properties
and assets of TCR/SF in exchange for (i)  approximately  $149.0 million in cash,
(ii) the assumption of approximately  $135.9 million of tax-exempt debt (subject
to certain required  consents) and (iii) the initial issuance of Units valued at
up to  approximately  $71.1 million based on an agreed upon price of $27.625 per
Unit (the  "Share  Price").  The Share  Price is subject to  decrease in certain
circumstances  as  set  forth  in  the  Contribution   Agreement.  In  addition,
approximately  $12.5  million of the  purchase  price will be retained by Gables
until  January 1, 2000,  at which time Gables will issue to the sellers a number
of Units (the "Deferred  Units") equal in value to such retained amount (subject
to possible decrease pursuant to the terms of the Contribution  Agreement).  The
Deferred  Units will be valued based on the average of the closing prices of the
Common  Shares on the NYSE during a 15 trading day period  preceding the date of
issuance.

In the event that the South Florida Communities are not contributed by TCR/SF in
accordance with the terms of the  Contribution  Agreement,  Gables or TCR/SF may
elect to  terminate  the  Contribution  Agreement  in its  entirety,  subject to
certain payments specified in the Contribution  Agreement.  In addition,  if the
average  of the  closing  prices of the  Common  Shares on the NYSE  during a 15
trading day period  preceding the closing is less than $23.50,  either TCR/SF or
Gables may elect to terminate the Contribution Agreement.
<PAGE>
                                    Page-10


PENDING ACQUISITIONS - HOUSTON
------------------------------
On February 18, 1998,  Gables  entered into  contribution  agreements  with four
partnerships  under common  control  pursuant to which Gables expects to acquire
four multifamily apartment communities (the "Greystone  Communities") comprising
a total of 913 apartment homes located in the Houston  metropolitan  area, which
at  December  31,  1997  had a  weighted  average  physical  occupancy  rate  of
approximately  99.0% (the  "Greystone  Transaction").  In  connection  with such
acquisition,  Gables will assume approximately $28.0 million of indebtedness and
issue Units valued at up to approximately  $21.0 million, of which approximately
$2.0 million will be deferred for up to two years.  The closing of the Greystone
Transaction is subject to certain conditions, including receipt of certain third
party consents.  There can be no assurance that the Greystone  Transaction  will
close as contemplated,  that the required  conditions to closing will be met, or
that the contribution agreements will not be amended or terminated.

PENDING ACQUISITION - AUSTIN
----------------------------

On March 11, 1998,  Gables  entered  into an agreement to acquire a  multifamily
apartment  community in Austin comprising 308 apartment homes. The acquistion of
this  community is subject to the completion of due diligence as well as ongoing
business review by Gables.  No assurance can be made that the  acquisition  will
close.

ITEM 2.        PROPERTIES

As of  December  31,  1997,  Gables  owned  or had  an  interest  in 61  Current
Communities,  consisting of 18,479  apartment  homes, and owned five Development
Communities,  consisting of 1,409 apartment homes. The Communities, comprising a
total of 19,888 apartment homes,  are located in Texas,  Georgia,  Tennessee and
Florida.  The  following  table shows the locations of the  Communities  and the
number of apartment homes in each metropolitan area:
<TABLE>
<CAPTION>

                         Number of Communities           Number of Apartment Homes            Percent of
Location             Current  Development    Total     Current    Development    Total     Total Apt.Homes
--------             -------  -----------    -----     -------    -----------    -----     ---------------

<S>                  <C>       <C>           <C>       <C>         <C>           <C>        <C>

Houston, TX (1)        17           1          18       6,091          256        6,347           31.9%
Atlanta, GA            20           1          21       5,841          386        6,227           31.3%
Dallas, TX              9          --           9       2,085           --        2,085           10.5%
Memphis, TN (2)         5          --           5       1,799           --        1,799            9.0%
Austin, TX              4           1           5         953          256        1,209            6.1%
Nashville, TN           4          --           4       1,166           --        1,166            5.9%
San Antonio, TX         2          --           2         544           --          544            2.7%
Orlando, FL            --           2           2          --          511          511            2.6%
                    -----       -----       -----      ------        -----       ------          -----
                       61           5          66      18,479        1,409       19,888          100.0%
                    =====       =====       =====      ======        =====       ======          =====

<FN>

(1)  Includes a Current Community comprising 318 apartment homes in which Gables
     has a 25%  general  partner  interest.

(2)  Includes a Current Community comprising 345 apartment homes in which Gables
     has a 25% general partner interest.
</FN>
</TABLE>

CURRENT  COMMUNITIES.  Gables  developed 37 Current  Communities  (consisting of
10,353  apartment  homes),  and acquired 24 Current  Communities  (consisting of
8,126 apartment homes). All but one (Rivercrest) of the Current  Communities are
managed and operated by the Company.  The Current Communities  typically are two
and three story garden apartments,  townhomes and higher-density  apartments. As
of December 31, 1997, the Current  Communities had an average  scheduled monthly
rental rate per apartment home of approximately  $812 and, with the exception of
one Community in the final lease-up phase, had a physical occupancy rate of 95%.
The average age of the Current Communities is approximately 7.5 years.

Most of the Communities offer many attractive features designed to enhance their
market appeal,  such as vaulted ceilings,  fireplaces,  dishwashers,  disposals,
washer/dryer connections,  ice-makers, patios and decks. Recreational facilities
include swimming pools, fitness facilities, playgrounds, picnic areas and tennis
and racquetball courts. In many Communities, Gables makes amenities and services
available to residents,  such as aerobic  classes,  resident social events,  dry
cleaning pick up and delivery,  and the use of fax, computer and copy equipment.
In-depth  market  research,  including  periodic focus groups with residents and
feedback  from  on-site  management  personnel,  is used to refine  and  enhance
management services and community design.
<PAGE>
                                    Page-11


DEVELOPMENT  COMMUNITIES.  The  Development  Communities  have been  designed to
generally  resemble  the Current  Communities  developed  by Gables and to offer
similar  amenities.  The  Development  Communities  and the  recently  completed
Current Communities reflect Gables' continuing research of consumer  preferences
for upscale  multifamily  rental housing and  incorporate  and emphasize  garage
parking,  increased  privacy,  high quality  interiors and private telephone and
television systems.

UNDEVELOPED  SITES. At December 31, 1997,  Gables owned seven  Undeveloped Sites
and intends to develop multifamily communities at those sites in the future:

                                           Metropolitan       Estimated Number
Undeveloped Sites                             Area           of Apartment Homes
-----------------                             ----           ------------------
Gables Metropolitan I                     Atlanta,  GA                  365
Gables Metropolitan II                    Atlanta,  GA                  355
Gables at the Galleria                    Dallas,  TX                   222
Gables State Thomas                       Dallas,  TX                   202
Gables Green Oaks II                      Dallas, TX                    250
Gables Quail Ridge II                     Memphis,  TN                  148
Gables Colonnade II                       San Antonio, TX               250
                                                                      -----
                                                                      1,792
                                                                      =====

DEVELOPMENT  RIGHTS.  As of March 16, 1998,  Gables had nine Development  Rights
which are located in four cities:

                                         Metropolitan        Estimated Number
Development Right                           Area            of Apartment Homes
-----------------                           ----            ------------------
Gables Plaza                              Atlanta, GA                  200
Gables Sugarloaf II                       Atlanta, GA                  690 (1)
Gables at First Street                    Austin, TX                   400
Gables Meyer Park II                      Houston, TX                  200
Gables New Territory II                   Houston, TX                  240
Gables White Oak                          Houston, TX                  183
Gables at Little Lake Bryan II            Orlando, FL                  246 (1)
Gables at Little Lake Bryan III           Orlando, FL                  230 (1)
Gables at Little Lake Bryan IV            Orlando, FL                  207 (1)
                                                                     -----
                                                                     2,596
                                                                     =====

(1)  Gables has these land parcels under options with various termination dates.

There can be no  assurance of when or if Gables will  exercise  the  Development
Rights.

The  following  is a  "Safe  Harbor"  Statement  under  the  Private  Securities
Litigation Reform Act of 1995 and Section 21E of the Securities  Exchange Act of
1934,  as  amended.  The  projections  contained  in the tables  above under the
captions  "Undeveloped  Sites"  and  "Development  Rights"  are  forward-looking
statements. These forward-looking statements involve risks and uncertainties and
actual results may differ materially from those projected in the forward-looking
statements.  Risks  associated with Gables'  development,  construction and land
acquisition activities,  which could impact the forward-looking statements made,
include:   development   and   acquisition   opportunities   may  be  abandoned;
construction costs of a community may exceed original estimates, possibly making
the community  uneconomical;  and construction may not be completed on schedule,
resulting in increased debt service and construction  costs.  Development of the
Undeveloped  Sites and the  Development  Rights is subject to permits  and other
governmental  approvals, as well as ongoing business review by Gables. There can
be no  assurance  that Gables will decide or be able to develop the  Undeveloped
Sites, to complete  development of all or any of the communities  subject to the
Development Rights, or to complete the number of apartment homes shown above.

<PAGE>
                                    Page-12

DEVELOPMENT COMMUNITIES AS OF DECEMBER 31, 1997

Certain information  regarding Gables'  Development  Communities at December 31,
1997 is presented below.

<TABLE>
<CAPTION>


                     Number of  Total      Average                                           Actual or Estimated Quarter of
                     Apartment Budgeted   Apartment    Percent at December 31, 1997  Construction  Initial   Construction Stabilized
Community             Homes      Cost     Home Size     Complete  Leased  Occupied      Start     Occupancy      End      Occupancy
---------             -----      ----     ---------     --------  ------  --------      -----     ---------      ---      ---------
                              (millions)  (sq. ft.)
<S>                   <C>      <C>         <C>            <C>     <C>      <C>       <C>          <C>         <C>          <C>

ATLANTA, GA
Gables at Sugarloaf     386    $28.7       1,099           35%     ---       ---      2 Q 1997     2 Q 1998    1 Q 1999    2 Q 1999

AUSTIN, TX
Gables Bluffstone       256     20.5         984           87%       5%        2%     1 Q 1997     4 Q 1997    2 Q 1998    4 Q 1998

HOUSTON, TX
Gables New Territory    256     15.2         913           27%     ---       ---      3 Q 1997     2 Q 1998    4 Q 1998    2 Q 1999

ORLANDO, FL
The Commons at
   Little Lake Bryan I  280     21.7       1,034           54%     100%      ---      2 Q 1997     1 Q 1998    3 Q 1998    3 Q 1998
Gables Celebration      231     23.4       1,128           17%     ---       ---      3 Q 1997     2 Q 1998    4 Q 1998    4 Q 1998
                     ------   ------       -----
  TOTALS              1,409   $109.5       1,036
                     ======   ======       =====
<FN>



The  following  is a  "Safe  Harbor"  Statement  under  the  Private  Securities
Litigation Reform Act of 1995 and Section 21E of the Securities  Exchange Act of
1934, as amended. The projections and estimates contained in the table above are
forward-looking  statements.  These forward-looking statements involve risks and
uncertainties  and actual results may differ  materially from those projected in
such statements.  Risks associated with Gables' development,  construction,  and
lease-up  activities,  which could impact the  forward-looking  statements made,
include:  development  opportunities may be abandoned;  construction  costs of a
community  may  exceed  original   estimates,   possibly  making  the  community
uneconomical;  and  construction  and lease-up may not be completed on schedule,
resulting in increased debt service and construction costs.


Total Budgeted Cost includes all capitalized  costs incurred and projected to be
incurred  to develop the  respective  community  presented  in  accordance  with
generally  accepted  accounting  principles,  including land acquisition  costs,
construction  costs,  real  estate  taxes,  interest  and  loan  fees,  permits,
professional fees, allocated development overhead, and other regulatory fees.

Stabilized  occupancy  is  defined as the  earlier to occur of (i) 93%  physical
occupancy or (ii) one year after completion of construction.
</FN>
</TABLE>
<PAGE>
                                    Page-13

<TABLE>
<CAPTION>

                                              CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1997

                                    Number of  Approximate               Year                 Average               Scheduled Rent
                                    Apartment   Rentable      Total   Constructed/   Year    Unit Size  Occupancy   @ 12/31/97 Per
Community Name (1)                    Homes    Sq. Ft. (2)   Acreage   Renovated   Acquired  (Sq. Ft.)   12/31/97   Unit    Sq. Ft.
------------------                    -----    -----------   -------   ---------   --------  ---------   --------   ----    -------
<S>                                 <C>          <C>         <C>       <C>         <C>        <C>        <C>        <C>      <C>

HOUSTON, TX
Baybrook Village ...............         776     620,428      26.4       1981        1990       800        99%     $ 562    $ 0.70
Gables Bradford Place ..........         372     320,322      13.3       1991          --       861        95%       717      0.83
Gables Bradford Pointe .........         360     276,417      13.5       1990          --       768        96%       629      0.82
Gables Champions ...............         404     367,588      29.7       1995        1997       910        96%       774      0.85
Gables CityPlaza ...............         246     217,374       7.5       1995          --       884        98%       848      0.96
Gables Cityscape ...............         252     214,824       6.8       1991          --       852        93%       895      1.05
Gables CityWalk/Waterford Square         317     255,823       8.7    1990/85     --/1992       807        94%       893      1.11
Gables Edgewater ...............         292     257,339      12.2       1990          --       881        93%       816      0.93
Gables Meyer Park ..............         345     297,054      11.0       1993          --       861        95%       852      0.99
Gables of First Colony .........         324     321,848      13.3       1996        1997       993        94%       919      0.93
Gables Piney Point .............         246     227,880       7.5       1994          --       926        97%       907      0.98
Gables Pin Oak Green ...........         582     593,478      14.4       1990        1996     1,020        93%       944      0.93
Gables Pin Oak Park ............         477     486,308      11.9       1992        1996     1,020        95%       975      0.96
Gables River Oaks ..............         228     277,908       5.7       1993        1996     1,219        98%     1,332      1.09
Metropolitan Uptown (3) ........         318     290,141       8.9       1995          --       912        94%       986      1.08
Rivercrest .....................         140     118,020       5.1       1982        1987       843        99%       710      0.84
Westhollow Park ................         412     370,640      18.3    1978-79        1990       900        92%       591      0.66
                                     -------    --------    ------                             ----      ----      -----     -----
 Totals/ Weighted Averages ....        6,091   5,513,392     214.2                              905        95%     $ 819     $0.90
                                     =======   =========    ======                             ====      ====      =====     =====
ATLANTA, GA
Briarcliff Gables ..............         104     128,976       5.2       1995          --     1,240        96%     1,081      0.87
Buckhead Gables ................         162     122,548       3.5       1994 (4)    1994       756        99%       783      1.04
Dunwoody Gables ................         311     290,396      10.4       1995          --       934        98%       797      0.85
Gables Cinnamon Ridge ..........         200     192,016      14.5       1980        1994       960        96%       637      0.66
Gables Cityscape ...............         192     159,360       5.5       1989        1994       830        95%       805      0.97
Gables Mill ....................         438     406,676      36.1       1988        1997       928        95%       787      0.85
Gables Northcliff ..............          82     127,990      12.7       1978        1997     1,561       100%     1,097      0.70
Gables Over Peachtree ..........         263     239,814(5)    1.4       1996 (4)    1995       912        94%     1,009      1.11
Gables Vinings .................         315     336,735      15.2       1997          --     1,069        97%       939      0.88
Gables Walk ....................         310     367,226      19.7    1996-97        1997     1,185        89%       974      0.82
Gables Wood Arbor ..............         140     127,540       9.9       1987          --       911        98%       683      0.75
Gables Wood Crossing ...........         268     257,012      22.3    1985-86          --       959        97%       735      0.77
Gables Wood Glen ...............         380     377,340      23.8       1983          --       993        94%       653      0.66
Gables Wood Knoll ..............         312     311,064      19.6       1984          --       997        92%       679      0.68
Lakes at Indian Creek ..........         603     552,384      49.8    1969-72        1993       916        94%       563      0.61
Rock Springs Estates ...........         295     298,302      28.7    1945-92        1997     1,011        96%       871      0.86
Roswell Gables I ...............         384     417,288      28.3       1995          --     1,087        95%       793      0.73
Roswell Gables II ..............         284     334,268      28.3       1997          --     1,177        93%       831      0.71
Spalding Gables ................         252     249,333      11.2       1995          --       989        99%       839      0.85
Wildwood Gables ................         546     619,710      37.9    1992-93 (4)    1991     1,135        95%       822      0.72
                                      ------   ---------    ------                          -------      ----      -----     -----
 Totals/ Weighted Averages ....        5,841   5,915,978     384.0                            1,013        95%     $ 790     $0.78
                                      ======   =========    ======                          =======      ====      =====     =====
DALLAS, TX
Arborstone .....................         536     383,360      24.5       1985        1993       715        96%       480      0.67
Gables at Pearl Street .........         108     117,688       3.6       1995          --     1,090        96%     1,390      1.28
Gables CityPlace ...............         232     244,056       7.1       1995        1997     1,052        99%     1,324      1.26
Gables Green Oaks I ............         300     286,740      12.8       1996          --       956        95%       822      0.86
Gables Mirabella ...............         126     114,902       1.4       1996        1997       912        97%     1,190      1.30
Gables Preston .................         126     138,107      10.6       1995          --     1,096        93%     1,030      0.94
Gables Spring Park .............         188     198,178      12.3       1996          --     1,054        97%       939      0.89
Gables Turtle Creek ............         150     150,930       3.1       1995        1996     1,006        95%     1,165      1.16
Gables Valley Ranch ............         319     325,534      14.8       1994          --     1,020        97%       927      0.91
                                       -----   ---------     -----                           ------      ----      -----     -----
  Totals/ Weighted Averages ....       2,085   1,959,495      90.2                              940        96%     $ 906     $0.96
                                       =====   =========     =====                           ======      ====      =====     =====


<PAGE>
                                    Page-14

                                              CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1997

<CAPTION>

                                   Number of   Approximate              Year               Average                   Scheduled Rent
                                   Apartment     Rentable    Total   Constructed/    Year  Unit Size   Occupancy     @ 12/31/97 Per
Community Name (1)                   Homes      Sq. Ft.(2)  Acreage   Renovated   Acquired (Sq. Ft.)   12/31/97      Unit   Sq. Ft.
------------------                   -----        -------   -------   ---------   ------------------   --------      ----   -------
<S>                                  <C>         <C>        <C>       <C>         <C>       <C>          <C>       <C>       <C>

MEMPHIS, TN
Arbors of Harbortown (3) .......         345     341,258      15.0       1991          --       989        96%       841      0.85
Gables Cordova .................         464     434,461      32.2       1986          --       936        98%       661      0.71
Gables Germantown ..............         252     293,012      30.5       1997          --     1,163        98%       906      0.78
Gables Quail Ridge .............         238     283,848      20.3       1997          --     1,193        94%       794      0.67
Gables Stonebridge .............         500     439,646      34.0    1993-96        1996       879        95%       634      0.72
                                       -----   ---------    ------                           ------      ----      -----     -----
  Totals/ Weighted Averages ....       1,799   1,792,225     132.0                              996        96%     $ 740     $0.74
                                       =====   =========    ======                           ======      ====      =====     =====
NASHVILLE, TN
Brentwood Gables ..........              254     287,594      14.5       1996          --     1,132        96%       977      0.86
Gables Hendersonville .....              364     342,982      21.0       1991          --       942        97%       650      0.69
Gables Hickory Hollow I ...              272     247,322      19.0       1988          --       909        93%       618      0.68
Gables Hickory Hollow II ..              276     259,704      18.0       1987          --       941        93%       618      0.66
                                       -----   ---------    ------                           ------      ----      -----     -----
  Totals/ Weighted Averages            1,166   1,137,602      72.5                              976        95%     $ 684     $0.70
                                       =====   =========    ======                           ======      ====      =====     =====
AUSTIN, TX
Gables Central Park .......              273     257,043       6.9       1997          --       942        -- (6)  1,087      1.15
Gables Great Hills ........              276     228,930      23.7       1993          --       829        92%       793      0.96
Gables Park Mesa ..........              148     161,540      24.3       1992        1997     1,091        90%     1,092      1.00
Gables Town Lake ..........              256     239,264      12.0       1996          --       935        94%     1,083      1.16
                                       -----     -------     -----                           ------      ----     ------     -----
  Totals/ Weighted Averages              953     886,777      66.9                              931        93%    $1,001     $1.08
                                       =====     =======     =====                           ======      ====     ======     =====
SAN ANTONIO, TX
Gables Colonnade I ........              312     284,196      12.0       1995          --       911        95%       785      0.86
Gables Wall Street ........              232     220,180      16.2       1996          --       949        94%       799      0.84
                                       -----     -------     -----                           ------      ----     ------     -----
  Totals/ Weighted Averages              544     504,376      28.2                              927        94%     $ 791    $ 0.85
                                       =====     =======     =====                           ======      ====     ======     =====

  GRAND TOTALS/WEIGHTED AVERAGES      18,479  17,709,845       988                              958        95%     $ 812    $ 0.85
                                      ======  ==========     =====                           ======      ====     ======     =====

<FN>

(1)  Except as noted in footnote  (3) hereof,  Gables  holds fee simple title to
     each of the Communities.

(2)  In the Atlanta and Tennessee  markets,  rentable area is measured including
     any patio or balcony. In the Texas markets, rentable area is measured using
     only the heated  area.  In the Florida  market,  rentable  area is measured
     using only the air conditioned area.

(3)  Gables holds an indirect 25% general partner interest in these communities.

(4)  Year renovated;  these communities were originally  constructed as follows:
     Buckhead  Gables:  1964;  Gables Over  Peachtree:  1969-1970;  and Wildwood
     Gables: 1972.

(5)  This  rentable  area is exclusive of  approximately  18,000  square feet of
     rentable commercial space.

(6)  This  Community is in the lease-up stage and as of December 31, 1997 it was
     85% occupied.

</FN>
</TABLE>
<PAGE>
                                    Page-15

<TABLE>
<CAPTION>

                                                  DEBT SUMMARY AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)


                                                                           Projected
                                                                Projected    Annual
                                                    Principal    Principal  Interest      Scheduled Principal Payments
                               Interest  Maturity    Balance   Amortization  Payment              at Maturity                There-
Property Collateral             Rate     Date (1)   12/31/97 (2)   1998       1998    1998  1999  2000   2001     2002       after
-------------------             ----     --------   ------------   ----       ----    ----  ----  ----   ----     ----       -----
<S>                            <C>       <C>          <C>         <C>        <C>      <C>   <C>   <C>    <C>      <C>        <C>

SECURED CONVENTIONAL FIXED RATE

Gables Cityscape .............  7.13%    02/10/04      $9,099      $124      $ 635     $--   $--   $ --     $--     $--     $ 8,191

Gables Citywalk/Waterford Sq .  7.13%    02/10/04      11,528       156        805      --    --     --      --      --      10,377

Gables Stonebridge ...........  7.50%    05/01/03      19,419       265      1,425      --    --     --      --      --      17,746

NWML Properties (3) ..........  8.77%    12/01/09      52,385       670      4,501      --    --     --      --      --      38,940

Gables Northcliff ............  8.16%    12/01/20       3,704        58        295      --    --     --      --      --          --
                                                      -------     -----      -----    ----  ----   ----    ----    ----     -------
     SUBTOTAL                                          96,135     1,273      7,661       0     0      0       0       0      75,254
                                                      -------     -----      -----    ----  ----   ----    ----    ----     -------

UNSECURED CONVENTIONAL FIXED RATE

Unsecured term loan ..........  6.15%(4) 11/22/01      40,000        --      2,460      --    --     --  40,000      --          --

Unsecured TIAA Note 1 ........  8.30%    12/31/02      86,346       621      7,083      --    --     --      --  82,392          --

Unsecured TIAA Note 2 ........  8.62%    12/31/07      29,681       200      2,529      --    --     --      --      --      26,398

Unsecured other...............  6.10%    10/01/16       2,499        80        152      --    --     --      --      --          --
                                                      -------     -----     ------    ----  ----   ----  ------  ------      ------
     SUBTOTAL                                         158,526       901     12,224       0     0      0  40,000  82,392      26,398
                                                      -------     -----     ------    ----  ----   ----  ------  ------      ------

TAX-EXEMPT FIXED RATE

Providian Properties (5) .....  6.38%    08/01/04      48,365       538 (6)  3,083      --    --     --      --      --      48,365

Lakes at Indian Creek ........  7.03%(7) 01/31/25      11,785       155        802      --    --     --      --      --          --
                                                      -------     -----     ------    ----  ----   ----    ----    ----      ------
     SUBTOTAL                                          60,150       693      3,885       0     0      0       0       0      48,365
                                                      -------     -----     ------    ----  ----   ----    ----    ----      ------

TAX-EXEMPT FLOATING RATE

Gables Wood Crossing .........  (8)      10/01/02(9)   11,650        --        437      --    --     --      --  11,650         --

Gables Wood Arbor ............  (8)      10/01/02(9)    7,130        --        267      --    --     --      --   7,130         --

Gables Hickory Hollow I  .....  (8)      10/01/02(9)   12,750        --        503      --    --     --      --  12,750         --

Gables Hickory Hollow II .....  (8)      10/01/02(9)   13,400        --        478      --    --     --      --  13,400         --
                                                      -------      ----      -----    ----  ----  -----   -----  ------     ------
     SUBTOTAL                                          44,930         0      1,685       0     0      0       0  44,930          0
                                                      -------      ----      -----    ----  ----  -----   -----  ------     ------
CREDIT FACILITIES

$175 million unsecured ... LIBOR+0.80%   03/22/00(10)  60,000        --  Varies(11)    --     --  60,000      --     --         --

$20 million unsecured ...  LIBOR+0.80%   10/09/98(12)  15,621        --  Varies(11) 15,621    --      --      --     --         --
                                                       ------      ----  -------    ------  ----  ------    ----  -----     ------
     SUBTOTAL                                          75,621         0  Varies(11) 15,621     0  60,000       0      0          0
                                                       ------      ----  -------    ------  ----  ------    ----  -----     ------

TOTAL INDEBTEDNESS (13)                             $ 435,362   $ 2,867 $25,455    $15,621     0 $60,000 $40,000 $127,322 $150,017
                                                    =========   ======= =======    =======  ==== ======= ======= ======== ========
</TABLE>
<PAGE>
                                    Page-16


NOTES TO DEBT SUMMARY AS OF DECEMBER 31, 1997
---------------------------------------------

(1)  All of the mortgages can be prepaid at any time without penalty or premium,
     except for the  unsecured  TIAA  Notes and the  mortgages  encumbering  the
     Providian  Properties,  Lakes at Indian  Creek,  Gables  Cityscape,  Gables
     CityWalk/Waterford  Square and Gables  Stonebridge.

(2)  All of the debt is  recourse  to Gables in whole or in part  except for the
     mortgages encumbering Gables Cityscape,  Gables CityWalk/Waterford  Square,
     Gables Stonebridge and Gables Northcliff.

(3)  The NWML Properties (Wildwood Gables,  Gables Valley Ranch and Gables Piney
     Point)  together  secure the $53 million  mortgage  loan from  Northwestern
     Mutual Life Insurance Co.

(4)  This $40 million term loan  currently  bears  interest at LIBOR plus 0.80%.
     This  financing  is  effectively  fixed at 6.15% after  application  of $40
     million  of the  $44.53  million  interest  rate  swap  and cap  agreements
     described elsewhere herein.

(5)  The Providian  Properties  together secure the $48.4 million  mortgage loan
     from Providian  Corporation and are comprised of three  properties  induced
     for  tax-exempt  bond  financing  (Gables Wood Glen,  Gables Wood Knoll and
     Gables Cordova) and three  additional  properties  (Gables Bradford Pointe,
     Gables Hendersonville and Rivercrest).

(6)  Principal  amortization  payments are retained in an escrow account and are
     not  applied  to reduce  the  outstanding  principal  balance  of the loan.
     Interest earned on the escrow account accrues to Gables' benefit.

(7)  The interest  rate does not include  credit  enhancement  fees of 0.60% per
     annum, which fees were prepaid in January,  1995 for a period of ten years.
     In addition,  certain of the bond documents  require the payment of certain
     other customary fees ranging up to approximately 0.25% per annum.

(8)  These bonds bear interest at a variable rate of interest,  adjusted  weekly
     based upon a negotiated  rate. The payment  schedules  reflect a 3.75% rate
     which  represents   Gables'  budgeted  rate  for  1998.  The  average  rate
     experienced  for 1997 and  1996  were  3.7%  and  3.5%,  respectively.  The
     interest rates do not include the payment of credit  enhancement fees which
     are currently 0.95% per annum.  In addition,  certain of the bond documents
     require  the  payment  of  certain  other  customary  fees  ranging  up  to
     approximately 0.25% per annum.

(9)  The maturity date noted represents the date on which the credit enhancement
     facility for the bonds expires.  Such facility may be extended  pursuant to
     Gables' unlimited one-year extension options.  The stated maturity date for
     the loans range from December,  2007 to August, 2024.

(10) Gables has two remaining one-year extension options.

(11) Debt service will be variable based on the principal  balance which will be
     outstanding.

(12) Gables has  unlimited  one-year  extension  options.

(13) Excludes   $16.4  million  of   tax-exempt   bonds  and  $17.9  million  of
     conventional  indebtedness related to joint ventures in which Gables has an
     indirect 25% general partner interest.

Joint Venture Indebtedness
--------------------------

The Arbors of Harbortown  apartment community secures a $16.4 million tax-exempt
bond obligation,  which is recourse to Gables up to $1.0 million (this amount is
fully  cash-collateralized  and is held by the Arbors of Harbortown  JV),  bears
interest at a variable low-floater rate, has a maturity date of April, 2013, and
is payable in monthly  installments of interest only. The credit enhancement for
the bond  obligation  expires in May, 2001. The  Metropolitan  Uptown  apartment
community secures a conventional  fixed-rate loan with $17.9 million outstanding
at December 31, 1997, 25% of which has been guaranteed by Gables. The loan has a
maturity date of December 31, 2002, and bears interest at a rate of 7.18%.
<PAGE>
                                    Page-17


ITEM  3.        LEGAL PROCEEDINGS

Neither Gables nor any of the  Communities is presently  subject to any material
litigation or, to Gables' knowledge, is any litigation threatened against Gables
or any of the  Communities,  other than routine  actions for negligence or other
claims  and  administrative  proceedings  arising  in  the  ordinary  course  of
business,  some of which are expected to be covered by liability  insurance  and
all of which  collectively are not expected to have a material adverse effect on
the business or financial condition of Gables.

ITEM 4.         SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the year ended December 31, 1997.



                                    PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON SHARES

The Company's Common Shares began trading on the NYSE on January 19, 1994, under
the symbol "GBP."  The following  table sets forth the high and low sales prices
per share of the Common  Shares for the  periods  indicated,  as reported by the
NYSE, as well as the Company's quarterly per share dividends to shareholders for
the period indicated.

                                                                     Dividend
Quarter Ended                              High           Low        Declared
-------------                              ----           ---        --------


March 31, 1996                           $25.6250      $ 22.3750       $0.48
June 30, 1996                             24.6250        22.5000        0.48
September 30, 1996                        24.7500        22.7500        0.49
December 31, 1996                         29.0000        23.7500        0.49
March 31, 1997                            28.7500        25.1250        0.49
June 30, 1997                             26.6250        23.6250        0.49
September 30, 1997                        27.5625        25.1250        0.50
December 31, 1997                         28.2500        25.5625        0.50
March 31, 1998 (through March 20, 1998)   28.0000        25.9375        0.50


The Company has determined that, for Federal income tax purposes,  approximately
76.5% of the  distributions  for each of the four  quarters of 1997  represented
ordinary dividend income to its shareholders and the remaining 23.5% represented
return of capital to its shareholders.

Distributions  are declared at the  discretion of the Board of Trustees and will
depend on actual funds from operations of the Company,  its financial condition,
capital  requirements,  the  annual  distribution  requirements  under  the REIT
provisions  of the Code and such other factors as the Board of Trustees may deem
relevant.  The Board of Trustees may modify the  Company's  distribution  policy
from time to time.

Certain of the Company's  loan  agreements  contain  customary  representations,
covenants and events of default,  including covenants which restrict the ability
of the Operating  Partnership to make distributions in excess of stated amounts,
which in turn  restricts  the  discretion  of the  Company  to  declare  and pay
dividends. In general, during any fiscal year the Operating Partnership may only
distribute  up  to  95%  of  the  Operating  Partnership's  consolidated  income
available for  distribution (as defined in the related  agreement)  exclusive of
distributions  of capital gains for such year.  The applicable  loan  agreements
contain  exceptions to these  limitations to allow the Operating  Partnership to
make any distributions  necessary to allow the Company to maintain its status as
a REIT.  The Company does not  anticipate  that this  provision  will  adversely
effect the ability of the Operating  Partnership  to make  distributions  or the
Company to declare dividends, as currently anticipated.
<PAGE>
                                    Page-18


On March 20, 1998 there were 323 holders of record of the  Company's  22,072,205
outstanding Common Shares. This does not include beneficial owners for whom Cede
& Co. or others act as nominee.

The Company has implemented a dividend  reinvestment plan under which holders of
Common Shares may elect  automatically  to reinvest  distributions in additional
Common Shares at a 2% discount to the then current market price of Common Shares
and may purchase  additional  Common Shares for cash (up to $20,000 per quarter)
at 100% of the then current market price.

On August 21, 1997,  the  Operating  Partnership  issued 94,869 Units (valued at
approximately  $2,545,000  at the  time of  issuance)  in  connection  with  the
acquisition of an apartment community  comprising 82 apartment homes. Such Units
were issued in reliance on an exemption from registration  under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations promulgated thereunder.

On October 17, 1997, the Operating  Partnership  issued 453,272 Units (valued at
approximately  $12,180,000  at the  time of  issuance)  in  connection  with the
acquisition of an apartment community comprising 295 apartment homes. Such Units
were issued in reliance on an exemption from registration  under Section 4(2) of
the Securities Act and the rules and regulation promulgated thereunder.

Under the terms of the Operating Partnership's agreement of limited partnership,
the Operating Partnership is obligated to redeem each Unit at the request of the
holder  thereof for cash equal to the fair market value of a Common Share at the
time of such  redemption,  provided  that the Company at its option may elect to
acquire any such Unit presented for redemption for one Common Share or cash.

ITEM 6.        SELECTED FINANCIAL AND OPERATING INFORMATION

The following table sets forth selected financial and operating information on a
historical  basis for the  Company  and on a combined  historical  and pro forma
basis for the Company's  predecessors as applicable.  The following  information
should be read in  conjunction  with all of the financial  statements  and notes
thereto included elsewhere herein. The consolidated operating information of the
Company for the years ended  December 31, 1997,  1996 and 1995 have been derived
from the financial statements audited by Arthur Andersen LLP, independent public
accountants, whose report with respect thereto is included elsewhere herein. The
consolidated  operating information of the Group for the period from January 26,
1994 to December 31, 1994 and the combined  operating  information  of the Group
for the period  form  January 1, 1994 to January 25, 1994 and for the year ended
December 31, 1993 has been derived from audited combined financial statements of
the Group not included in such report.

The unaudited selected pro forma financial operating information is presented as
if (i) the  Initial  Offering  and  Formation  Transactions  occurred  as of the
beginning  of the period  presented  and (ii) the Company  qualified  as a REIT,
distributed  all of its taxable  income and,  therefore,  incurred no income tax
expense  during  the  period.  The  pro  forma  financial   information  is  not
necessarily  indicative  of what the actual  financial  position  and results of
operations  of the  Company  would  have  been as of the date or for the  period
indicated,  nor does it purport to  represent  the  Company's  future  financial
position and results of operations.
<PAGE>
                                    Page-19

<TABLE>
<CAPTION>
                                                        SELECTED FINANCIAL AND OPERATING INFORMATION



                                                                    Gables Residential Trust and its Predecessors
                                                                    ---------------------------------------------

                                                                    Historical              Pro Forma          Historical
                                                          1997        1996         1995      1994 (1)     1994 (2)    1993
                                                          ----        ----         ----      --------     --------    ----
                                                                                           (Unaudited)
                                                               (in thousands, except property and per share information)
<S>                                                     <C>          <C>          <C>       <C>         <C>         <C>
OPERATING INFORMATION:
Rental revenues ......................................  $132,371     $104,543    $72,703    $57,291     $57,201     $41,330
Other property revenues ..............................     6,322        4,928      3,268      2,228       2,225       1,462
                                                           -----        -----      -----      -----       -----       -----
     Total property revenues .........................   138,693      109,471     75,971     59,519      59,426      42,792
Other revenues .......................................     4,745        6,710      5,789      7,350       7,396       8,373
                                                           -----        -----      -----      -----       -----       -----
     Total revenues ..................................   143,438      116,181     81,760     66,869      66,822      51,165
                                                         -------      -------     ------     ------      ------      ------

Property operating and maintenance expenses
  (exclusive of items shown separately below) ........    47,592       38,693     28,228     22,868      22,847      18,295
Depreciation and amortization ........................    25,194       18,892     12,669      9,974       9,906       7,635
Property management expenses (owned and third party) .     5,696        5,617      5,348      5,603       5,774       6,175
General and administrative expenses ..................     3,248        3,045      2,869      1,779       1,742       1,078
Interest and credit enhancement fees .................    25,313       21,688     13,798      9,584      10,084      12,844
Amortization of deferred financing costs .............       992        1,348        932      1,057       1,127       1,132
Loss on treasury lock extension ......................(3)  1,178            0          0          0           0           0
                                                         -------      -------    -------    -------      ------      ------
     Total expenses ..................................   109,213       89,283     63,844     50,865      51,480      47,159
                                                         -------      -------    -------    -------      ------      ------

Equity in income of joint ventures ...................       320          280         64        270         270         251
Interest income ......................................       371          363        389        268         268         263
                                                         -------      -------    -------    -------      ------      ------
Income before gain on sale of real estate assets .....    34,916       27,541     18,369     16,542      15,880       4,520

Gain on sale of real estate assets ...................     5,349            0          0          0           0           0
                                                         -------      -------    -------    -------      ------      ------

Income before minority interest and extraordinary loss    40,265       27,541     18,369     16,542      15,880       4,520
Minority interest ....................................    (5,611)      (4,640)    (4,029)    (3,904)     (3,768)          0
                                                         -------      -------    -------    -------      ------      ------

Income before extraordinary loss, net ................    34,654       22,901     14,340     12,638      12,112       4,520
Extraordinary loss, net of minority interest .........      (602)        (520)      (784)      (148)       (148)          0
                                                         -------      -------    -------    -------      ------      ------

Net income ...........................................    34,052       22,381     13,556     12,490      11,964       4,520

Dividends to preferred shareholders ..................    (4,163)           0          0          0           0           0
                                                         -------      -------    -------    -------      ------      ------

Net income available to common shareholders ..........   $29,889      $22,381    $13,556    $12,490     $11,964      $4,520
                                                         =======      =======    =======    =======     =======      ======

Weighted average shares outstanding - basic ..........    19,788       16,788     11,436     10,236      10,243
Weighted average shares outstanding - diluted ........    19,938       16,877     11,452     10,253      10,260

PER COMMON SHARE INFORMATION:
Income before extraordinary loss, net - basic ........    $ 1.54       $ 1.36     $ 1.25     $ 1.23     $  1.19
Net income - basic ...................................      1.51         1.33       1.19       1.22        1.18
Income before extraordinary loss, net - diluted ......      1.53         1.35       1.25       1.23        1.19
Net income - diluted .................................      1.50         1.32       1.18       1.22        1.18
Dividends paid .......................................(4)   2.47         1.93       1.83        N/A       1.225
Dividends declared ...................................(4)   1.98         1.94       1.86        N/A       1.675

OTHER INFORMATION:
Cash flows provided by operating activities ..........   $69,519      $51,629    $29,088    $28,868     $28,868     $13,407
Cash flows used in investing activities ..............  (228,969)    (213,596)  (148,234)  (150,534)   (150,534)    (67,043)
Cash flows provided by financing activities ..........   158,244      157,823    123,619    114,245     114,245      54,054
Funds from operations ................................(5) 56,866       46,238     30,927     26,313      25,561      11,749
Gross operating margin ...............................(6)  65.7%        64.7%      62.8%      61.6%       61.6%       57.3%
Completed communities at year-end ..................          61           48         38         29          29          24
Apartment homes in completed communities at year-end      18,479       15,244     11,946      9,785       9,785       8,666
Average monthly revenue per apartment home ........(7)    $  755        $ 700      $ 620      $ 574       $ 574       $ 560

Balance Sheet Information:
Real estate, before accumulated depreciation ......(8) 1,056,228     $784,600   $591,233   $437,782    $437,782    $290,903
Total assets ......................................(8)   981,167      759,660    562,827    416,847     416,847     277,420
Total debt ........................................      435,362      390,321    286,259    229,305     229,305     261,294
Shareholders' equity and minority/predecessor's
     interest .....................................      513,497      334,637    248,010    161,594     161,594       1,236

Funds From Operations Reconciliation:
Net income available to common shareholders .......      $29,889      $22,381    $13,556    $12,490     $11,964      $4,520
Extraordinary loss, net of minority interest ......(9)       602          520        832        148         148           0
Minority interest .................................        5,611        4,640      4,029      3,904       3,768           0
Gain on sale of real estate assets ................       (5,349)           0          0          0           0           0
Loss on treasury lock extension ...................(3)     1,178            0          0          0           0           0
Real estate depreciation ..........................(9)    24,935       18,697     12,510      9,771       9,681       7,229
                                                          ------       ------     ------      -----       -----       -----

Funds from operations .................................. $56,866      $46,238    $30,927    $26,313     $25,561     $11,749
                                                         =======      =======    =======    =======     =======     =======
</TABLE>
<PAGE>
                                    Page-20


             NOTES TO SELECTED FINANCIAL AND OPERATING INFORMATION
           (In Thousands, except Property and Per Share Information)

(1)  The  pro  forma   information   reflects   adjustments  to  the  historical
     information of the Company's  predecessors  from January 1, 1994 to January
     25,  1994  related  to the  Initial  Offering  and  Formation  Transactions
     principally  for the  acquisition  of  certain  properties  and  additional
     expenses  associated  with  reporting  as a public  company,  reduction  of
     interest expense due to debt repayment and increased depreciation.

(2)  The historical  information for the year ended December 31, 1994 represents
     the combined  historical  information  of the Company's  predecessors  from
     January  1,  1994 to  January  25,  1994  and the  consolidated  historical
     information  of the Company from January 26, 1994 to December 31, 1994. The
     weighted average number of shares outstanding and the per share information
     pertains only to the period from January 26, 1994 to December 31, 1994.

(3)  Gables extended its $75 million forward seven-year  treasury lock agreement
     in December, 1997. The loss recognized for GAAP purposes in connection with
     such  extension is added back for FFO purposes as Gables intends to account
     for such amount for FFO  purposes as a finance cost which will be amortized
     over  the life of the debt  transaction  for  which  the  treasury  lock is
     intended to hedge.

(4)  The  Company's  dividends  paid and declared  include the  Company's  first
     quarterly  dividend of $0.325 per share for the period  January 26, 1994 to
     March 31, 1994.  These  dividends  were the equivalent of a $1.80 per share
     dividend for the year.

(5)  Gables considers funds from operations  ("FFO") to be a useful  performance
     measure of the operating  performance  of an equity REIT because,  together
     with net income and cash flows,  FFO provides  investors with an additional
     basis to evaluate  the  ability of a REIT to incur and service  debt and to
     fund acquisitions and other capital  expenditures.  Gables believes that in
     order to facilitate a clear  understanding  of its operating  results,  FFO
     should be  examined  in  conjunction  with net income as  presented  in the
     financial  statements  and data included  elsewhere in this report.  Gables
     computes  FFO in  accordance  with  standards  established  by the National
     Association of Real Estate Investment Trusts ("NAREIT").  FFO as defined by
     NAREIT  represents  net income (loss)  determined in accordance  with GAAP,
     excluding gains or losses from sales of assets or debt restructuring,  plus
     certain  non-cash  items,  primarily  real estate  depreciation,  and after
     adjustments  for  unconsolidated   partnerships  and  joint  ventures.  FFO
     presented  herein is not  necessarily  comparable to FFO presented by other
     real estate  companies  due to the fact that not all real estate  companies
     use the same definition.  However,  Gables' FFO is comparable to the FFO of
     real estate  companies  that use the NAREIT  definition.  FFO should not be
     considered  as an  alternative  to net  income as an  indicator  of Gables'
     operating  performance  or as an  alternative  to cash flows as measures of
     liquidity. FFO does not measure whether cash flow is sufficient to fund all
     of  Gables'   cash  needs   including   principal   amortization,   capital
     expenditures,   and   distributions   to  shareholders   and   unitholders.
     Additionally,  FFO does not represent cash flows from operating,  investing
     or  financing   activities  as  defined  by  GAAP.  Reference  is  made  to
     "Management's Discussion and Analysis of Financial Condition and Results of
     Operations - Liquidity and Capital  Resources"  for a discussion of Gables'
     cash needs and cash flows.

(6)  Gross operating margin represents (i) total property revenues less property
     operating and maintenance expenses (exclusive of depreciation expense) as a
     percentage of (ii) total property revenues.

(7)  Average  monthly revenue per apartment home is equal to the average monthly
     rental revenue collected during the period,  divided by the average monthly
     number of apartment homes occupied during the period.

(8)  In  an  UPREIT   structure,   the  value  attributed  to  Units  issued  to
     controlling,  continuing investors is not reflected because such accounting
     is not allowed  under GAAP.  On a pro forma basis,  the real estate  assets
     before  accumulated  depreciation  and total assets as of December 31, 1997
     would be $1,168,722 and $1,093,661,  respectively, if such value (exclusive
     of the effect of depreciation) was reflected.

(9)  Reflects   extraordinary  loss  and  real  estate   depreciation  for  both
     wholly-owned communities and joint ventures, as applicable.

<PAGE>
                                    Page-21

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS
           (Dollars in Thousands, Except Per Share Amounts)
           ------------------------------------------------


OVERVIEW
--------
Gables is a  self-administered  and self-managed real estate investment trust (a
"REIT")  focused  within the  multifamily  industry in the Sunbelt region of the
United  States.  Gables'  operating  performance  relies  predominantly  on  net
operating income from its apartment communities. Gables' net operating income is
influenced by operating expenses and rental revenues,  which are affected by the
supply and demand dynamics within Gables' markets.  Gables'  performance is also
affected by the general  availability  and cost of capital and by its ability to
develop and to acquire additional  apartment  communities with returns in excess
of its blended cost of equity and debt capital.

Gables' objective is to increase  shareowner value by being a dominant owner and
operator of Class A multifamily  communities in the Sunbelt  Region.  To achieve
its objective,  Gables employs a number of strategies  including  operating high
quality,  well-located  assets in a diverse set of select Sunbelt  markets which
have  similar  demographic   characteristics  such  as  diverse  economies  with
projected  job growth.  Gables'  primary  target  customer is the more  affluent
renter-by-choice,  which  requires a focus on customer  service  through  highly
trained  associates  and the  maintenance  of Gables' assets to a high standard.
Gables intends to grow cash flow from operating  communities through innovative,
proactive  property  management  that  focuses  on  resident   satisfaction  and
retention, increases in rents and occupancy levels, and the control of operating
expenses through improved  economies of scale. Due to the cyclical nature of the
real estate markets,  Gables has adopted an investment  strategy based on strong
local presence and expertise  which will allow for growth in assets through both
acquisition and development as warranted by underlying market fundamentals,  and
that will  provide  for both  favorable  initial  returns and  long-term  growth
prospects.  Gables  believes the  successful  execution of these  operating  and
investment strategies will result in consistent high quality growth in operating
cash flow.

Gables  believes that it is well positioned to achieve its objective as a result
of its  long-established  presence as a fully integrated real estate management,
development,  construction  and  acquisition  company  in each of  Gables'  core
markets for the past fifteen years.  Gables believes that this long-term,  local
market  presence gives it a competitive  advantage with regard to its ability to
generate increased cash flow from property  operations during different economic
cycles and to new investment  opportunities that involve site selection,  market
information and requests for entitlements and zoning petitions. The core markets
are geographically  independent,  rely on diverse economic  foundations and have
experienced job growth  substantially  above national averages.  Gables recently
entered the Orlando  market which has the common growth  characteristics  of the
core markets.

Portfolio  wide  occupancy  levels have remained high and portfolio  wide rental
rates have continued to increase  during each of the last several years.  Gables
expects  portfolio wide rental  expenses to increase at a rate slightly ahead of
inflation,  but less than the  increase  in  property  revenues,  for the coming
twelve  months.  In certain  situations,  management's  evaluation of the growth
prospects for a specific asset may result in a  determination  to dispose of the
asset. In this event,  management would intend to sell the asset and utilize the
net  proceeds  from any such sale to invest in new assets  which are expected to
have  better  growth  prospects  or to  reduce  indebtedness.  Gables  maintains
staffing levels sufficient to meet the existing construction,  acquisition,  and
leasing activities.  If market conditions  warrant,  management would anticipate
adjusting   staffing  levels  to  mitigate  a  negative  impact  on  results  of
operations.

The following  discussion and analysis of the financial condition and results of
operations should be read in conjunction with the accompanying  consolidated and
combined financial statements and the notes thereto.

This Report on Form 10-K contains forward-looking  statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities  Exchange Act of 1934,  as amended.  Actual  results or  developments
could differ  materially  from those projected in such statements as a result of
the  risk  factors  set  forth  in  the  relevant  paragraphs  of  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
elsewhere in this report.
<PAGE>
                                    Page-22

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

FORMATION OF GABLES AND INITIAL PUBLIC OFFERING
-----------------------------------------------
Gables  Residential  Trust was formed in 1993 under Maryland law to continue and
to  expand  the  multifamily   apartment  community   management,   development,
construction,  and  acquisition  operations of its privately  owned  predecessor
organization.  The term  "Company"  or  "Gables"  as used  herein  means  Gables
Residential Trust and its subsidiaries on a consolidated basis (including Gables
Realty  Limited  Partnership  and its  subsidiaries),  or,  where the context so
requires,  Gables Residential Trust only, and, as the context may require, their
predecessors.  At the  completion of the Company's  initial  public  offering on
January 26, 1994 (the "IPO"),  Gables sold  9,430,000  Common Shares  (including
1,230,000 shares as a result of the exercise of an over-allotment  option by the
underwriters)  at a price to the public of $22.50 per share. The net proceeds to
Gables from such sale totaled  approximately $190 million, the majority of which
were used to reduce  indebtedness and to purchase minority  interests in certain
property partnerships.

SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS
----------------------------------------------------------------
SECONDARY COMMON SHARE OFFERINGS
--------------------------------

Since the IPO, the Company has had the following Common Share offerings:

                                 Number of               Net
          Closing Date         Shares Issued           Proceeds
          ------------         -------------           --------

          October 7, 1994         444,500               $9,876
                                  =======               ======

          October 31, 1995      4,600,000              $94,364
                                =========              =======

          March 25, 1996          879,068              $20,630
          September 17, 1996    1,725,000               38,600
          September 27, 1996    1,435,000               34,254
                                ---------              -------
                1996 Totals     4,039,068              $93,484
                                =========              =======

          September 16, 1997      737,040              $18,698
          December 1, 1997      1,700,000               43,819
                                ---------              -------
                1997 Totals     2,437,040              $62,517
                                =========              =======


The net  proceeds  from  these  offerings  were  generally  used  (i) to  reduce
outstanding  indebtedness  under  interim  financing  vehicles  utilized to fund
Gables'  development  and  acquisition  activities and (ii) for general  working
capital   purposesincluding   funding  of  future  development  and  acquisition
activities.

PREFERRED SHARE OFFERING
------------------------
On July 24, 1997,  Gables issued  4,600,000  shares of 8.30% Series A Cumulative
Redeemable  Preferred  Shares  (liquidation  preference  $25.00 per share)  (the
"Series  A  Preferred   Shares").   The  net  proceeds  from  this  offering  of
approximately  $111 million were used to reduce  outstanding  indebtedness under
the interim financing vehicles discussed above.

ISSUANCES OF OPERATING PARTNERSHIP UNITS
----------------------------------------
On December 5, 1995,  Gables acquired a parcel of land for the development of an
apartment  community,  financed in part through the issuance of 111,074 minority
units of limited partnership interest in the Operating Partnership ("Units"). On
July 26, 1996, Gables acquired an apartment  community  comprising 500 apartment
homes,  financed in part  through the issuance of 243,787  Units.  On August 21,
1997,  Gables  acquired an apartment  community  comprising 82 apartment  homes,
financed in part  through the  issuance of 94,869  Units.  On October 17,  1997,
Gables acquired an apartment community comprising 295 apartment homes,  financed
in part through the issuance of 453,272 Units.
<PAGE>
                                    Page-23

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

RESULTS OF OPERATIONS
---------------------
COMPARISON OF OPERATING  RESULTS OF GABLES FOR THE YEAR ENDED  DECEMBER 31, 1997
(THE "1997 PERIOD") TO THE YEAR ENDED DECEMBER 31, 1996 (THE "1996 PERIOD").

Gables' net income is generated  primarily  from the  operation of its apartment
communities.  For  purposes of  evaluating  comparative  operating  performance,
Gables  categorizes its operating  communities based on the period in which each
community reaches stabilized  occupancy.  A community is considered by Gables to
have achieved stabilized  occupancy on the earlier to occur of (i) attainment of
93% physical  occupancy or (ii) one year after completion of  construction.  The
operating  performance for all of Gables' apartment communities combined for the
years ended December 31, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                         Years Ended December 31,

                                                                            ----------- ----------- ----------- --------------
                                                                                                        $             %
                                                                               1997        1996       Change       Change
                                                                            ----------- ----------- ----------- --------------
<S>                                                                         <C>           <C>        <C>          <C>

Rental and other revenue:
Same store communities (1)                                                     $73,973     $71,983      $1,990       2.8%
Communities  stabilized  during the 1997  Period,  but not during the 1996      20,848      19,220       1,628       8.5%
     Period (2)
Development and lease-up communities (3)                                        13,103       3,920       9,183     234.3%
Acquired communities (4)                                                        30,591      11,009      19,582     177.9%
Sold communities (5)                                                               178       3,339      -3,161     -94.7%
                                                                              --------     -------    --------    -------
Total property revenues                                                       $138,693    $109,471     $29,222      26.7%
                                                                              --------     -------    --------    -------


Property operating and maintenance expense (exclusive of depreciation and
amortization):
Same store communities (1)                                                     $26,434     $25,637       $797        3.1%
Communities stabilized during the 1997 Period, but not during the 1996           6,360       6,223        137        2.2%
   Period  (2)
Development and lease-up communities (3)                                         4,703       1,476      3,227      218.6%
Acquired communities (4)                                                         9,980       3,887      6,093      156.8%
Sold communities (5)                                                               115       1,470     -1,355      -92.2%
                                                                              --------     -------     ------     -------
Total specified expenses                                                       $47,592     $38,693     $8,899       23.0%
                                                                              --------     -------     ------     -------

Revenues in excess of specified expenses                                       $91,101     $70,778    $20,323       28.7%
                                                                              ========     =======    =======     =======

Revenues in excess of specified expenses as a percentage of total                65.7%       64.7%        ---        1.0%
property revenues                                                             ========     =======    =======     =======
<FN>


(1)  Communities which were owned and fully stabilized  throughout both the 1997
     Period and 1996 Period.

(2)  Communities  which were  completed and fully  stabilized  during all of the
     1997 Period,  but were not completed and fully stabilized during all of the
     1996 Period.

(3)  Communities  in  the  development/lease-up   phase  which  were  not  fully
     stabilized during all or any of the 1997 Period.

(4)  Communities which were acquired subsequent to January 1, 1996.

(5)  Communities which were sold subsequent to January 1, 1996.

</FN>
</TABLE>
<PAGE>
                                    Page-24

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Total property revenues increased  $29,222,  or 26.7%, from $109,471 to $138,693
due primarily to increases in the number of apartment  homes  resulting from the
development and acquisition of additional communities and to increases in rental
rates on communities stabilized throughout both periods ("same store"). Below is
additional  information  regarding the increases in total property  revenues for
three of the five community categories presented in the preceding table:
<TABLE>

Same store communities:
<CAPTION>
                                                                     Percent
                                                       Increase      Increase
                                                      (Decrease)    (Decrease)                    Increase
                          Number of                    in Total      in Total     Occupancy      (Decrease)
              Number of   Apartment      Percent       Property      Property     During the         in
  Market      Properties    Homes       of Total       Revenues      Revenues     1997 Period     Occupancy
  ------      ----------    -----       --------       --------      --------     -----------     ---------
<S>           <C>         <C>            <C>          <C>            <C>           <C>             <C>

Houston         10        3,512           37%          $1,125           4.3%           94.3%         -0.8%
Atlanta         11        3,159           33%             597           2.4%           94.7%          0.1%
Dallas           4        1,089           12%             245           2.8%           94.0%          0.0%
Nashville        3          912           10%              -7          -0.1%           95.9%          0.0%
Memphis          1          464            5%              44           1.4%           94.5%          0.0%
Austin           1          276            3%             -14          -0.6%           92.3%          0.7%
                --        -----          ---           ------           ---            ----           ---
                30        9,412          100%          $1,990           2.8%           94.5%         -0.2%
                ==        =====          ===           ======           ===            ====           ===

</TABLE>

Communities stabilized during the 1997 Period but not during the 1996 Period:

                                                        Increase
                                                       (Decrease)
                             Number of                  in Total    Occupancy
               Number of     Apartment     Percent      Property    During the
Market        Properties       Homes       of Total     Revenues   1997 Period
------        ----------       -----       --------     --------   -----------

Atlanta            2            695         32%           $-45          95.0%
San Antonio        2            544         25%            497          92.9%
Austin             1            256         12%            327          95.6%
Nashville          1            254         12%            338          96.1%
Houston            1            246         11%            205          95.0%
Dallas             1            188          8%            306          93.4%
                   -          -----        ---          ------          ----
                   8          2,183        100%         $1,628          94.6%
                   =          =====        ===          ======          ====


Development and lease-up communities:

                                                     Increase
                         Number of                   in Total      Occupancy
             Number of   Apartment     Percent       Property      During the
 Market     Properties     Homes       of Total      Revenues     1997 Period
 ------     ----------     -----       --------      --------     -----------

Atlanta          3         862            40%         $2,985         55.5%
Austin           2         529            24%          1,586         42.0%
Memphis          2         490            22%          3,185         84.6%
Dallas           1         300            14%          1,427         87.4%
                 -       -----           ---          ------         ----
                 8       2,181           100%         $9,183         64.3%
                 =       =====           ===          ======         ====

<PAGE>
                                    Page-25

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Other revenues decreased $1,965, or 29.3%, from $6,710 to $4,745 due to (i) $900
of non-recurring net revenues  generated from certain  corporate  apartment home
leases  entered into in connection  with the 1996 Olympic games held in Atlanta,
(ii)  $557 of  interest  earned on an  investment  Gables  made in an  apartment
community on October 1, 1996 via a mortgage note  receivable (in January,  1997,
Gables acquired the apartment  community from the borrower and the mortgage note
receivable  was repaid in full),  and (iii) a decrease  in  property  management
revenues of $839, or 21.7%,  from $3,871 to $3,032 resulting from a net decrease
of  properties  managed  by Gables  for  third  parties  primarily  due to these
properties  being sold by the owners.  Such  decreases were offset in part by an
increase  in revenues in the 1997  Period  related to the  provision  of certain
ancillary services.

Property  operating  and  maintenance  expense  (exclusive of  depreciation  and
amortization)  increased  $8,899,  or 23.0%,  from  $38,693 to $47,592 due to an
increase in apartment  homes  resulting from the  development and acquisition of
additional  communities  and an increase in property  operating and  maintenance
expense for same store communities of 3.1%. The same store increase in operating
expenses represents  inflationary  increases in expenses and increased marketing
and  redecorating  expenses  in  certain  of  Gables'  markets.  Such same store
increases  have been  offset  in part by  certain  decreases  in  landscape  and
utilities  costs.  Gables  anticipates  that property  operating and maintenance
expense for same store  communities  will generally  increase at a rate slightly
ahead of inflation for the coming twelve months.

Depreciation and amortization  expense  increased $6,302, or 33.4%, from $18,892
to $25,194 due primarily to the completion of newly  developed  communities  and
acquisition of other communities.

Property  management expense for owned communities and third party properties on
a combined basis  increased $79, or 1.4%, from $5,617 to $5,696 due primarily to
inflationary  increases  in  expenses,  offset in part by certain  non-recurring
expense  savings  in the  1997  Period.  Gables  allocates  property  management
expenses to both owned communities and  third/related  party properties based on
the proportionate share of total apartment homes and units managed.

General and  administrative  expense  increased  $203,  or 6.7%,  from $3,045 to
$3,248 due primarily to increases in certain costs  associated with increases in
Gables' size and inflationary increases in expenses.

Interest expense  increased  $3,692, or 17.5%, from $21,112 to $24,804 due to an
increase  in  operating  debt   associated  with  newly  developed  or  acquired
communities in addition to communities  currently in the lease-up  phase.  These
increases  in  interest  expense  have  been  offset  in part as a result of the
offerings the Company has  consummated  between  periods,  the proceeds of which
have been primarily used to reduce indebtedness.

Loss on treasury  lock  extension  of $1,178 in the 1997 Period  represents  the
amount  Gables  would  have paid in  December,  1997 to settle  its $75  million
forward seven-year  treasury lock agreement had it not been extended.  Generally
accepted accounting principles ("GAAP") requires that such amount be recorded as
an expense  upon  extension  and that the  market  rate in effect on the date of
extension be used as the  "locked-in  rate" for  purposes of recording  interest
expense over the life of the debt  instrument  the treasury lock was  originally
intended to hedge.

Gain on sale of real estate assets of $5,349 in the 1997 Period  represents  the
gain generated in connection with (i) the January, 1997 sale of Club Candlewood,
a community  comprised of 486 apartment  homes and (ii) the July, 1997 sale of 2
acres of Gables' 12-acre Gables Colonnade Phase II land parcel.

Extraordinary  loss,  net in the 1997 Period  represents  (i) the  write-off  of
unamortized  deferred  financing  costs  and  prepaid  credit  enhancement  fees
associated with the defeasance of the tax-exempt bond financing  encumbering the
Club Candlewood  property that was sold in January,  1997 and (ii) the write-off
of unamortized  deferred  financing costs  associated with the February 28, 1997
retirement of a conventional  mortgage note payable that was scheduled to mature
on September 1, 1997. The  extraordinary  loss totaling $712 is presented net of
the $110 portion of the loss attributable to the minority  interest  unitholders
in the Operating Partnership.

Net income available to common  shareholders  increased  $7,508,  or 33.5%, from
$22,381 to $29,889 primarily due to the reasons discussed above.
<PAGE>
                                    Page-26
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

RESULTS OF OPERATIONS
---------------------
COMPARISON OF OPERATING  RESULTS OF GABLES FOR THE YEAR ENDED  DECEMBER 31, 1996
(THE "1996 PERIOD") TO THE YEAR ENDED DECEMBER 31, 1995 (THE "1995 PERIOD").

Gables' net income is generated  primarily  from the  operation of its apartment
communities.  For  purposes of  evaluating  comparative  operating  performance,
Gables  categorizes its operating  communities based on the period in which each
community reaches stabilized  occupancy.  A community is considered by Gables to
have achieved stabilized  occupancy on the earlier to occur of (i) attainment of
93% physical  occupancy or (ii) one year after completion of  construction.  The
operating  performance for all of Gables' apartment communities combined for the
years ended December 31, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                        Years Ended December 31,

                                                                               ---------- --------- ----------- ----------
                                                                                                         $          %
                                                                                   1996      1995     Change     Change
                                                                               ---------- --------- ----------- ----------
<S>                                                                              <C>       <C>        <C>        <C>
Rental and other revenue:
Fully stabilized communities (1)                                                 $68,610   $66,755      $1,855       2.8%
Communities stabilized during the 1996 Period, but not during the 1995             6,495     2,626       3,869     147.3%
   Period (2)
Development and lease-up communities (3)                                          23,141     5,699      17,442     306.1%
Acquired communities (4)                                                          11,007         0      11,007         --
Sold community (5)                                                                   218       891        -673     -75.5%
                                                                               --------- ---------     -------    -------
Total property revenues                                                         $109,471   $75,971     $33,500      44.1%
                                                                               --------- ---------     --------   -------

Property operating and maintenance expense (exclusive of depreciation and
amortization):
Fully stabilized communities (1)                                                 $25,088   $25,108        $-20     - 0.1%
Communities stabilized during the 1996 Period, but not during the 1995             1,966       869       1,097     126.2%
   Period  (2)
Development and lease-up communities (3)                                           7,624     1,815       5,809     320.1%
Acquired communities (4)                                                           3,887         0       3,887         --
Sold community (5)                                                                   128       436        -308     -70.6%
                                                                               --------- ---------   ---------    -------
Total specified expenses                                                         $38,693   $28,228     $10,465      37.1%
                                                                               --------- ---------   ---------    -------

Revenues in excess of specified expenses                                         $70,778   $47,743     $23,035      48.2%
                                                                               ========= =========   =========    =======
Revenues in excess of specified expenses as a percentage of total  property
revenues                                                                           64.7%     62.8%          --       1.9%
                                                                               ========= =========   =========    =======
<FN>

(1)  Communities which were owned and fully stabilized  throughout both the 1996
     Period and 1995 Period.

(2)  Communities  which were  completed and fully  stabilized  during all of the
     1996 Period,  but were not completed and fully stabilized during all of the
     1995 Period.

(3)  Communities in the  development  and/or lease-up phase which were not fully
     stabilized during all or any of the 1996 Period.

(4)  Communities which were acquired subsequent to January 1, 1995.

(5)  Community which was sold subsequent to January 1, 1995.


</FN>
</TABLE>
<PAGE>
                                    Page-27
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Total property revenues  increased  $33,500,  or 44.1%, from $75,971 to $109,471
due primarily to increases in the number of apartment  homes  resulting from the
development and acquisition of additional communities and to increases in rental
rates on communities stabilized throughout both periods ("same store"). Below is
additional  information  regarding the increases in total property  revenues for
three of the five community categories presented in the preceding table:

  Fully stabilized communities ("same store"):

                                              Percent
                                 Increase     Increase
            Number               (Decrease)  (Decrease)  Occupancy
             of                  in Total     in Total   During the   Increase
          Apartment   Percent    Property     Property     1996     (Decrease)in
Market      Homes     of Total   Revenues     Revenues    Period      Occupancy
------      -----     --------   --------     --------    ------      ---------


Houston       3,512        38%        $444          1.7%     95.2%         0.6%
Atlanta       3,289        35%       1,040          4.4%     94.3%        -0.3%
Nashville       912        10%         198          3.1%     95.9%         0.1%
Dallas          855         9%         107          1.9%     92.9%        -1.3%
Memphis         464         5%         106          3.4%     94.6%         0.6%
Austin          276         3%         -40         -1.7%     91.6%        -1.2%
             ------     ------       -----        ------     -----        -----
              9,308       100%      $1,855          2.8%     94.6%         0.0%
             ======     ======       =====        ======     =====        =====


  Communities stabilized during the 1996 Period but not during the 1995 Period:

                                        Increase
            Number of                   in Total      Occupancy
            Apartment      Percent      Property     During the
Market        Homes       of Total      Revenues     1996 Period
------        -----       --------      --------     -----------

Atlanta        356            60%        $2,218         96.0%
Dallas         234            40%         1,651         94.9%
               ---           ----         -----         -----
               590           100%        $3,869         95.5%
               ===           ====         =====         =====


  Development and lease-up communities:

                                        Increase
              Number of                 In Total      Occupancy
              Apartment     Percent     Property     During the
Market          Homes       of Total    Revenues     1996 Period
------          -----       --------    --------     -----------

Atlanta            958          30%      $5,364          82.8%
San Antonio        544          17%       2,904          84.7%
Memphis            490          15%         759          22.6%
Dallas             488          15%       2,405          54.1%
Austin             256           8%       2,615          89.5%
Nashville          254           8%       2,092          83.0%
Houston            246           7%       1,303          89.9%
                 -----        -----     -------         -----
                 3,236         100%     $17,442          79.4%
                 =====        =====     =======         =====


Other revenues  increased $921, or 15.9%,  from $5,789 to $6,710 due to (i) $900
of non-recurring net revenues  generated from certain  corporate  apartment home
leases  entered into in  connection  with the 1996 Olympic games held in Atlanta
and (ii) $557 of interest  earned on an  investment  Gables made in an apartment
community on October 1, 1996 via a mortgage note receivable.  In January,  1997,
Gables acquired the apartment community from the borrower, and the mortgage note
receivable  was repaid in full.  Such increases in other revenues were offset in
part by a decrease in property management revenues of $418, or 9.8%, from $4,289
to $3,871 due  primarily to a net decrease of  properties  managed by Gables for
third  parties  primarily  as a result  of these  properties  being  sold by the
owners.
<PAGE>
                                    Page-28

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Property  operating  and  maintenance  expense  (exclusive of  depreciation  and
amortization)  increased  $10,465,  or 37.1%,  from $28,228 to $38,693 due to an
increase in apartment  homes  resulting from the  development and acquisition of
additional  communities partially offset by a decrease in property operating and
maintenance  expense for same store communities of 0.1%. The same store decrease
in  operating  expenses  represents  reduced  health  and  workers  compensation
expenses,  offset by inflationary increases in expenses. Gables anticipates that
property  operating  and  maintenance  expense for same store  communities  will
generally increase at a rate slightly ahead of inflation.

Depreciation and amortization  expense  increased $6,223, or 49.1%, from $12,669
to $18,892 due primarily to the completion of newly  developed  communities  and
acquisition of other communities.

Property  management expense for owned communities and third party properties on
a combined basis increased $269, or 5.0%, from $5,348 to $5,617 due primarily to
increased data processing costs.  Gables allocates property  management expenses
to both  owned  communities  and  third/related  party  properties  based on the
proportionate share of total apartment homes and units managed.

General and  administrative  expense  increased  $176,  or 6.1%,  from $2,869 to
$3,045 due to increased personnel and administrative  costs associated primarily
with the  appointment of the new Chief  Operating  Officer and Vice President of
Portfolio  Management  positions  effective  January 1, 1996,  offset in part by
certain  non-recurring  costs  incurred  during  the 1995  Period  that were not
incurred during the 1996 Period.

Interest expense  increased  $8,024, or 61.3%, from $13,088 to $21,112 due to an
increase  in  operating  debt   associated  with  newly  developed  or  acquired
communities  in  addition  to  communities  currently  in  the  lease-up  phase.
Additionally,  interest  costs  increased  due to  the  refinancing  of  certain
variable  rate debt to a higher fixed rate cost  structure.  These  increases in
interest  expense  have been  offset in part as a result  of the  offerings  the
Company  has  consummated  between  periods,  the  proceeds  of which  have been
primarily used to reduce indebtedness.

Extraordinary  loss, net of $520 for the year ended December 31, 1996 represents
the write-off of unamortized  deferred  financing costs totaling $631 associated
with the early retirement of the Gables'  Original Credit  Facility,  net of the
$111 portion of the loss attributable to the minority interest unitholders.  The
Original  Credit  Facility  that was scheduled to mature in January,  1997,  was
refinanced in March,  1996 with a new $175 million  unsecured  revolving  credit
facility (the "New Credit Facility").

Net income increased  $8,825, or 65.1%, from $13,556 to $22,381 primarily due to
the reasons discussed above.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Gables' net cash provided by operating activities increased from $51,629 for the
year ended  December  31, 1996 to $69,519 for the year ended  December 31, 1997,
due to (i) an  increase  of  $14,625 in income  before  certain  non-cash  items
including  depreciation,  amortization,  equity  in  income  of joint  ventures,
minority interest of unitholders in Operating Partnership,  gain on sale of real
estate assets,  long-term  compensation expense, loss on treasury lock extension
and net  extraordinary  losses and (ii) the change in  restricted  cash  between
periods of $6,982. Such increases were offset in part by (i) the change in other
assets between periods of $773 and (ii) the change in other liabilities  between
periods of $2,944.

Gables' net cash used in investing  activities  increased  from $213,596 for the
year ended  December 31, 1996 to $228,969 for the year ended  December 31, 1997,
due primarily to increased  development and acquisition  activities in 1997 when
compared to 1996, offset in part by increased net proceeds from the sale of real
estate assets in 1997 when compared to 1996.  During the year ended December 31,
1997,  Gables  expended  approximately  $93.6  million  related  to  development
expenditures, including related land acquisitions;  approximately $137.9 million
for the  acquisition  of  existing  apartment  communities;  approximately  $4.9
million related to capital expenditures for operating apartment communities; and
approximately $5.2 million related to renovation expenditures.

Gables' net cash provided by financing  activities  increased  from $157,823 for
the year ended  December  31, 1996 to $158,244  for the year ended  December 31,
1997.  During the year ended  December 31, 1997,  Gables had net  borrowings  of
$45.0 million  which were used in  conjunction  with $173.5  million of proceeds
from  the  common  and  preferred  share  offerings  primarily  to fund  Gables'
development and acquisition activities discussed previously. These proceeds from
financing  activities  were  offset  in part by the  payment  of  dividends  and
distributions totaling approximately $62.4 million.
<PAGE>
                                    Page-29
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Gables  elected  to be taxed as a REIT  under  Section  856  through  860 of the
Internal  Revenue  Code of 1986,  as amended,  commencing  with its taxable year
ended  December 31, 1994.  REITs are subject to a number of  organizational  and
operational requirements, including a requirement that they currently distribute
95%  of  their  ordinary   taxable  income.   Provided   Gables   maintains  its
qualification  as a REIT,  the Company  generally will not be subject to Federal
income tax on distributed net income.

As of December 31, 1997,  Gables had total  indebtedness  of $435,362,  cash and
cash equivalents of $3,179 and principal escrow deposits reflected in restricted
cash of $1,902. Gables' indebtedness includes $96,135 in conventional fixed-rate
mortgage   notes  payable   secured  by  individual   properties,   $118,526  in
conventional  fixed-rate unsecured notes payable, a $40,000 unsecured term loan,
$105,080 in tax-exempt bond  indebtedness and $75,621 in borrowings  outstanding
under its Credit Facilities. Gables' indebtedness has an average of 6.6 years to
maturity  at  December  31,  1997.  Excluding  monthly  principal   amortization
payments,  over the next five years  Gables  has the  following  scheduled  debt
maturities for indebtedness outstanding at December 31, 1997:

                           1998            $15,621
                           1999                  0
                           2000             60,000
                           2001             40,000
                           2002            127,322

The debt maturities in 1998 of $15,621 relate to outstanding  indebtedness under
the $20 Million Credit Facility which has unlimited  one-year extension options.
The debt maturities in 2000 of $60,000 relate to outstanding  indebtedness under
the $175 Million  Credit  Facility  which has two remaining  one-year  extension
options.  The  debt  maturities  in 2002  include  $44,930  of  tax-exempt  bond
indebtedness  credit-enhanced  through  a letter of  credit  facility  which has
unlimited one-year extension options.

Gables'  dividends  through the fourth  quarter of 1997 have been paid from cash
provided  by  operating  activities.  Gables  anticipates  that  dividends  will
continue  to be paid on a  quarterly  basis  from  cash  provided  by  operating
activities.

In  March,  1998,  Gables  closed a $100.0  million  offering  of the  Operating
Partnership's  senior unsecured notes and used the net proceeds of approximately
$98.8 million to reduce borrowings under its Credit  Facilities.  The notes will
bear interest at 6.80% and will mature in March, 2005.

Gables  has  met and  expects  to  continue  to meet  its  short-term  liquidity
requirements generally through net cash provided by operations. Gables' net cash
provided  by  operations  has been  adequate  and Gables  believes  that it will
continue  to be  adequate  to meet both  operating  requirements  and payment of
dividends in accordance with REIT  requirements.  The budgeted  expenditures for
improvements  and  renovations  to  the  communities,  in  addition  to  monthly
principal  amortization  payments,  are also expected to be funded from net cash
provided  by  operations.   Gables  anticipates   construction  and  development
activities  and  land  purchases  will be  initially  funded  primarily  through
borrowings under its Credit Facilities described below.

Gables expects to meet certain of its long-term liquidity requirements,  such as
scheduled debt maturities, repayment of short-term financing of construction and
development  activities and possible  property  acquisitions,  through long-term
secured  and  unsecured  borrowings  and  the  issuance  of debt  securities  or
additional  equity  securities or through the  disposition  of assets which,  in
management's evaluation, may no longer meet Gables' investment requirements.

$175 MILLION CREDIT FACILITY
----------------------------
In conjunction with the IPO, Gables closed a $175 million  three-year  revolving
credit facility (the "Original  Credit  Facility") which had an initial maturity
of January,  1997. In March,  1996,  Gables closed a new $175 million  unsecured
revolving  credit  facility (the "New Credit  Facility" or "$175 Million  Credit
Facility") that replaced the Original Credit  Facility.  Although the New Credit
Facility is unsecured, there were certain designated real estate assets that had
escrowed  mortgages that were released  promptly after the attainment of implied
senior  unsecured  debt  ratings of BBB from  Standard  and Poor's and Baa2 from
Moody's Investors Service (the "Credit Ratings"). The New Credit Facility has an
initial term of three years and three  one-year  extension  options.  Gables has
exercised the first of its one-year  extension  options  resulting in a maturity
date for the facility of March, 2000.
<PAGE>
                                    Page-30

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

Borrowings  bore  interest at LIBOR plus 1.50%  (reduced from 1.65% in November,
1996) through April,  1997. In April,  1997,  Gables'  borrowing costs under the
facility were reduced to LIBOR plus 1.10% in connection  with the  attainment of
the Credit Ratings.  In August,  1997, Gables' borrowing costs were renegotiated
and were reduced to LIBOR plus 0.80%. Additionally, a competitive bid option was
added for up to 50% of the $175 million commitment.

Gables'  availability  under the  facility is limited to the lesser of the total
$175 million  commitment or the borrowing  base.  The borrowing  base  available
under the facility is currently based on the value of Gables'  unencumbered real
estate assets as compared to the amount of Gables' unsecured indebtedness. As of
December 31, 1997,  Gables had $60 million in borrowings  outstanding  under the
facility  and,  therefore,  had $115 million of  remaining  capacity on the $175
million available commitment.

$20 MILLION CREDIT FACILITY
---------------------------
In November,  1996,  Gables closed an unsecured  revolving  credit facility that
currently  provides for up to $20 million in  borrowings.  This  facility has an
initial term of one year and has unlimited one-year  extension  options.  Gables
has  exercised  the  first of its  one-year  extension  options  resulting  in a
maturity date for the facility of October,  1998. Borrowings bore interest under
this facility at LIBOR plus 1.50% through April,  1997. In April,  1997, Gables'
borrowing  costs  were  reduced  to  LIBOR  plus  1.10% in  connection  with the
attainment of the Credit Ratings. In August,  1997, Gables' borrowing costs were
renegotiated  and were  reduced to LIBOR plus 0.80%.  As of December  31,  1997,
Gables had  approximately  $15.6  million in borrowings  outstanding  under this
facility.

RESTRICTIVE COVENANTS
---------------------
Certain of Gables' debt agreements contain customary representations,  covenants
and events of default,  including  covenants  which  restrict the ability of the
Operating  Partnership to make distributions in excess of stated amounts,  which
in turn restricts the discretion of the Company to declare and pay dividends. In
general, during any fiscal year the Operating Partnership may only distribute up
to  95%  of  the  Operating  Partnership's  consolidated  income  available  for
distribution (as defined in the related agreement) exclusive of distributions of
capital gains for such year. The applicable debt agreements  contain  exceptions
to  these   limitations   to  allow  the  Operating   Partnership  to  make  any
distributions  necessary  to allow the Company to maintain its status as a REIT.
Gables does not anticipate that this provision will adversely effect the ability
of the Operating  Partnership  to make  distributions  or the Company to declare
dividends, as currently anticipated.
<PAGE>
                                    Page-31


MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

PORTFOLIO INDEBTEDNESS SUMMARY AND INTEREST RATE PROTECTION AGREEMENT SUMMARY

A summary  of  Gables'  portfolio  indebtedness  and  interest  rate  protection
agreements as of December 31, 1997 follows:

PORTFOLIO INDEBTEDNESS SUMMARY

<TABLE>
<CAPTION>
                                                      Percentage    Interest          Total        Years to
Type of Indebtedness                    Balance         of Total    Rate (1)         Rate (2)      Maturity
--------------------                    -------         --------    --------         --------      --------

<S>                                    <C>            <C>           <C>              <C>            <C>

Secured conventional fixed-rate        $96,135         22.1%           8.14%           8.14%           9.84
Unsecured conventional fixed-rate (3)  158,526         36.4%           7.78%           7.78%           5.94
Tax-exempt fixed-rate                   60,150         13.8%           6.50%           6.62%          10.67
                                      --------       -------          ------         -------         ------
     Total fixed-rate                 $314,811         72.3%           7.65%           7.67%           8.03
                                      --------       -------          ------         -------         ------

Tax-exempt variable-rate               $44,930         10.3%           4.20%           5.15%           4.67
                                      --------       -------          ------         -------         ------

Unsecured credit facilities            $75,621         17.4%           6.62%           6.62%           1.94
                                      --------       -------          ------         -------         ------

Total portfolio debt (4), (5)         $435,362        100.0%           7.11%           7.23%           6.63
                                      ========       =======          ======         =======         ======
<FN>

(1)  Interest Rate represents the weighted average interest rate incurred on the
     indebtedness,  exclusive of deferred financing cost amortization and credit
     enhancement fees, as applicable.

(2)  Total Rate represents the Interest Rate (1) plus credit  enhancement  fees,
     as applicable.

(3)  Unsecured conventional  fixed-rate debt includes $40,000 of financing which
     bears  interest  at  LIBOR  plus a  spread  of  0.80%.  Such  financing  is
     effectively  fixed at an  all-in  rate of 6.15%  after the  application  of
     $40,000 of the  $44,530  interest  rate cap and swap  agreements  described
     below.

(4)  Interest  associated with construction  activities is capitalized as a cost
     of  development  and does  not  impact  current  earnings.  The  qualifying
     construction  expenditures  at December  31, 1997 for  purposes of interest
     capitalization were $74,225.

(5)  Excludes $16.4 million of tax-exempt bonds and $17.9 million of outstanding
     conventional  indebtedness related to joint ventures in which Gables owns a
     25% interest.
</FN>
</TABLE>

INTEREST RATE PROTECTION AGREEMENT SUMMARY
<TABLE>
<CAPTION>

                                       Notional         Strike/Swap/       Effective      Termination
Description of Agreement                Amount          Lock Price           Date             Date
------------------------                ------          ----------           ----             ----
<S>                                      <C>             <C>               <C>              <C>

LIBOR, 30-day    - "Rate Cap"           $44,530         6.25%   (6)        01/27/94          01/30/99

LIBOR, 30-day    - "Rate Swap"          $44,530         5.35%   (6)        08/30/96          08/30/99  (7)

LIBOR, 30-day    - "Rate Swap"          $25,000         5.76%   (6)        02/27/98          02/27/00  (8)

Treasury, 7-year - "Treasury Lock"      $75,000         6.18%              09/22/97          05/28/98

Treasury, 7-year - "Treasury Lock"      $25,000         5.88%              12/17/97          05/28/98
<FN>

(6)  The 30-day LIBOR rate in effect at December 31, 1997 was 6.0%.

(7)  This is a knock-out swap agreement  which fixes Gables'  underlying  30-day
     LIBOR rate at 5.35%.  The swap  terminates upon the earlier to occur of (i)
     the  termination  date or (ii) a rate reset date on which the 30-day  LIBOR
     rate is 6.26% or higher.

(8)  This is a knock-out swap agreement  which fixes Gables'  underlying  30-day
     LIBOR rate at 5.76%.  The swap  terminates upon the earlier to occur of (i)
     the  termination  date or (ii) a rate reset date on which the 30-day  LIBOR
     rate is 6.70% or higher.
</FN>
</TABLE>
<PAGE>
                                    Page-32

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

BOOK VALUE OF ASSETS AND EQUITY
-------------------------------
The  application  of historical  cost  accounting  in  accordance  with GAAP for
Gables' UPREIT structure results in an understatement of total assets and equity
compared to the amounts that would be recorded via the  application  of purchase
accounting in accordance  with GAAP had Gables not been  organized as an UPREIT.
Management  believes  it  is  imperative  to  understand  this  difference  when
evaluating  the book value of assets and  equity.  The  understatement  of basis
related to this difference in  organizational  structure at December 31, 1997 is
$112,494,  exclusive of the effect of depreciation.  Accordingly, on a pro forma
basis, the real estate assets before accumulated depreciation,  total assets and
total  shareholders'  equity  plus  minority  interest  of  unitholders  in  the
Operating  Partnership as of December 31, 1997 would be $1,168,722,  $1,093,661,
and $625,991, respectively, if such $112,494 value was reflected.

INFLATION
---------
Substantially  all of Gables'  leases at the  communities  are for a term of one
year or less,  which may enable Gables to seek  increased  rents upon renewal of
existing  leases or  commencement  of new leases in times of rising prices.  The
short-term  nature of these leases generally serves to lessen the impact of cost
increases arising from inflation.

CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
--------------------------------------------------
This Report on Form 10-K contains forward-looking  statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities  Exchange Act of 1934,  as amended.  The words  "believe,"  "expect,"
"anticipate," "intend," "estimate," "assume" and other similar expressions which
are  predictions of or indicate future events and trends and which do not relate
solely to  historical  matters  identify  forward-looking  statements.  Reliance
should not be placed on  forward-looking  statements  because they involve known
and unknown  risks,  uncertainties  and other  factors,  which are in some cases
beyond the control of Gables and may cause the actual  results,  performance  or
achievements  of Gables to differ  materially from  anticipated  future results,
performance  or  achievements  expressed  or  implied  by  such  forward-looking
statements.

Factors that might cause such a difference include,  but are not limited to, the
following:  Gables  may fail to secure  or  abandon  development  opportunities;
construction  costs of a community may exceed original  estimates;  construction
and  lease-up may not be  completed  on  schedule,  resulting in increased  debt
service expense and construction  costs and reduced rental  revenues;  occupancy
rates and market  rents may be adversely  affected by local  economic and market
conditions  which  are  beyond  management's  control;   financing  may  not  be
available,  or may not be available on favorable terms; Gables' cash flow may be
insufficient to meet required  payments of principal and interest;  and existing
indebtedness may mature in an unfavorable  credit  environment,  preventing such
indebtedness from being refinanced, or, if financed, causing such refinancing to
occur on terms that are not as favorable as the terms of existing indebtedness.

OTHER MATTERS
-------------
Gables has assessed  the impact of the year 2000 issue on its  computer  systems
and is in the process of  remediating  the affected  hardware and software.  The
year 2000  issue is the  result of many  computer  programs  recognizing  a date
ending with "00" as the year 1900 rather than the year 2000,  causing  potential
system failures or  miscalculations  which could result in disruptions of normal
business  operations.  Gables'  primary  financial  and  operating  systems  are
supplied by third party  suppliers  and its hardware  and  software  systems are
either  currently  year 2000  compliant or will be compliant  well in advance of
January  1,  2000.  Gables'  costs of  addressing  the year  2000  issue are not
expected  to be  material  and  will  relate  primarily  to  costs  of  existing
information system personnel.

<PAGE>
                                    Page-33

MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in Thousands, Except Per Share Amounts)
------------------------------------------------

SUPPLEMENTAL  DISCUSSION  -  Funds  From  Operations  and  Adjusted  Funds  From
Operations

Gables  considers  funds  from  operations  ("FFO")  to be a useful  performance
measure of the operating  performance  of an equity REIT because,  together with
net income and cash flows,  FFO provides  investors with an additional  basis to
evaluate  the  ability  of a  REIT  to  incur  and  service  debt  and  to  fund
acquisitions  and other capital  expenditures.  Gables believes that in order to
facilitate  a clear  understanding  of its  operating  results,  FFO  should  be
examined in conjunction with net income as presented in the financial statements
and data included  elsewhere in this report.  Gables  computes FFO in accordance
with standards established by the National Association of Real Estate Investment
Trusts  ("NAREIT").  FFO as  defined  by NAREIT  represents  net  income  (loss)
determined  in  accordance  with GAAP,  excluding  gains or losses from sales of
assets or debt restructuring, plus certain non-cash items, primarily real estate
depreciation,  and after adjustments for  unconsolidated  partnerships and joint
ventures. FFO presented herein is not necessarily comparable to FFO presented by
other real estate  companies due to the fact that not all real estate  companies
use the same definition.  However,  Gables' FFO is comparable to the FFO of real
estate companies that use the NAREIT definition.  Adjusted funds from operations
("AFFO") is defined as FFO less capital  expenditures funded by operations.  FFO
and AFFO should not be considered as alternatives to net income as indicators of
Gables'  operating  performance or as  alternatives to cash flows as measures of
liquidity.  FFO does not measure  whether cash flow is sufficient to fund all of
Gables' cash needs including principal amortization,  capital expenditures,  and
distributions  to  shareholders  and  unitholders.  Additionally,  FFO  does not
represent  cash flows from  operating,  investing  or  financing  activities  as
defined by GAAP.  Reference is made to "Management's  Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
for a discussion of Gables' cash needs and cash flows.

A  reconciliation  of funds from  operations and adjusted funds from  operations
follows:
                                                        Years ended December 31,
                                                           1997          1996
                                                           ----          ----

Net income available to common shareholders               $29,889       $22,381
Extraordinary loss, net of minority interest                  602           520
Minority interest of unitholders in Operating Partnership   5,611         4,640
Loss on treasury lock extension (1)                         1,178             0
Gain on sale of real estate assets                         (5,349)            0
Real estate asset depreciation:
     Wholly-owned real estate assets                       24,712        18,477
     Joint venture real estate assets                         223           220
                                                           ------        ------
            Total                                          24,935        18,697
                                                           ------        ------

FUNDS FROM OPERATIONS                                     $56,866       $46,238
                                                          =======       =======

Capital expenditures for operating apartment communities:
      Carpet                                                1,860         1,245
      Roofing                                                 139           297
      Exterior painting                                       283           145
      Appliances                                              204           179
      Other additions and improvements                      2,392         1,988
                                                            -----         -----
           Total                                            4,878         3,854
                                                            -----         -----

ADJUSTED FUNDS FROM OPERATIONS                            $51,988       $42,384
                                                          =======       =======

(1)  Gables extended its $75 million forward seven-year  treasury lock agreement
     in December, 1997. The loss recognized for GAAP purposes in connection with
     such  extension is added back for FFO purposes as Gables intends to account
     for such amount for FFO  purposes as a finance cost which will be amortized
     over  the life of the debt  transaction  for  which  the  treasury  lock is
     intended to hedge.
<PAGE>
                                    Page-34

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial  statements and supplementary data are listed under Item 14(a) and
filed as part of this report on the pages indicated.


ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

                                    PART III


ITEM 10.        DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information   concerning  the  Directors  and  Executive  Officers  of  the
Registrant  required by Item 10 shall be included in the Proxy  Statement  to be
filed relating to the 1998 Annual Meeting of the  Registrant's  Shareholders and
is incorporated herein by reference.

ITEM 11.        EXECUTIVE COMPENSATION

The information  concerning Executive  Compensation required by Item 11 shall be
included in the Proxy  Statement to be filed relating to the 1998 Annual Meeting
of the Registrant's Shareholders and is incorporated herein by reference.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT

The information  concerning  Security Ownership of Certain Beneficial Owners and
Management  required by Item 12 shall be included in the Proxy  Statement  to be
filed relating to the 1998 Annual Meeting of the  Registrant's  Shareholders and
is incorporated herein by reference.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  concerning  Certain  Relationships  and  Related  Transactions
required  by Item 13  shall  be  included  in the  Proxy  Statement  to be filed
relating  to the 1998 Annual  Meeting of the  Registrant's  Shareholders  and is
incorporated herein by reference.


                                     PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENTS AND  SCHEDULE AND REPORTS ON
               FORM 8-K

14(A)(1)AND (2)     FINANCIAL STATEMENTS AND SCHEDULE

The  financial  statements  and schedule  listed below are filed as part of this
annual report on the pages indicated.

Report of Independent Public Accountants                                      39

Consolidated Balance Sheets as of December 31, 1997 and
     December 31, 1996                                                        40

Consolidated Statements of Operations for the years ended
     December 31, 1997, 1996 and 1995                                         41

Consolidated Statements of Shareholders' Equity  for the years
     ended December 31, 1997, 1996 and 1995                                   42

Consolidated Statements of Cash Flows for the years ended
     December 31, 1997, 1996 and 1995                                         43

Notes to Consolidated Financial Statements                                    44

Schedule III - Real Estate Investments and Accumulated Depreciation
     as of December 31, 1997                                                  56

<PAGE>
                                    Page-35

14(A)(3) EXHIBITS

Certain of the exhibits  required by Item 601 of Regulation  S-K have been filed
with previous reports by the Registrant and are incorporated herein by reference
to the filing indicated in the corresponding numbered footnote.


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

     3.1(i)(a)  --- Amended and  Restated Declaration of Trust of the Company(1)

     3.1(ii)(a) --- Articles  Supplementary  to the  Company's  Amended and
                    Restated Declaration of Trust creating a series of preferred
                    shares of  beneficial  interest,  par value $0.01 per share,
                    called the 8.30%  Series A Cumulative  Redeemable  Preferred
                    Shares (2)

     3.1(iii)(a)--- Second Amended and Restated Bylaws of the Company (3)

     10.1       --- Second  Amended and  Restated  Agreement of Limited
                    Partnership of the Operating Partnership (4)

     10.2       --- Registration Rights and Lock-Up Agreement by and among the
                    Company and the persons named therein (5)

     10.3       --- Articles of Incorporation of East Apartment Management, Inc.
                    (5)

     10.4       --- Bylaws of East Apartment Management, Inc. (5)

     10.5       --- Articles of Incorporation of Central  Apartment  Management,
                    Inc.(5)

     10.6       --- Bylaws of Central Apartment Management, Inc. (5)

     10.7       --- Articles of Incorporation of Gables GP, Inc. (5)

     10.8       --- Bylaws of Gables GP, Inc. (5)

     10.9       --- Second Amended and Restated 1994 Share Option and Incentive
                    Plan, as amended (6)

     10.10      --- Form of Employment  Agreement as signed by the Company and
                    each of Marcus  E.  Bromley  (Chairman  of the  Board of
                    Trustees  and  Chief Executive  Officer;  1997 base  salary
                    of  $180,000),  John T.  Rippel(President and Chief
                    Operating Officer; 1997 base salary of $160,000), William
                    M.  Hammond (Senior  Vice  President;  1997  base  salary of
                    $152,000), C. Jordan Clark (Senior Vice President; 1997 base
                    salary of $152,000),  and Marvin R. Banks,  Jr. (Chief
                    Financial Officer;  1997 base salary of $152,000) (6)

     10.11*     --- Form of  Employment  Agreement as signed by the Company and
                    each of Marcus E.  Bromley  (Chairman  of the Board of
                    Trustees  and Chief Executive  Officer;  1998 base  salary
                    of $220,000),  John T. Rippel (President and Chief Operating
                    Officer; 1998 base salary of $200,000), C. Jordan Clark
                    (Senior Vice President and Chief  Investment  Officer;
                    1998 base salary of $160,000),  and Marvin R. Banks,  Jr.
                    (Senior Vice President and Chief Financial  Officer;  1998
                    base salary of $160,000)

     10.12      --- Severance  Agreement  between the  Company and Perry M.
                    Parrott, Jr., dated November 11, 1996 (6)

     10.13*     --- Severance  Agreement  between the Company and William M.
                    Hammond dated  February  10,  1998

     10.14      --- Form of Restricted  Share Award Agreement as signed by the
                    Company and each of Marcus E.  Bromley  (with  respect  to
                    4,000  Unrestricted Shares and 8,000 Restricted  Shares),
                    John T. Rippel (with respect to 3,300  Unrestricted  Shares
                    and 6,600 Restricted  Shares),  William M. Hammond  (with
                    respect  to  1,700   Unrestricted   Shares  and  3,400
                    Restricted   Shares),   C.  Jordan   Clark  (with   respect
                    to 3,000 Unrestricted Shares and 6,000 Restricted Shares),
                    and Marvin R. Banks, Jr. (with respect to 3,000
                    Unrestricted Shares and 6,000  Restricted Shares) (7)

     10.15*     --- Form of  Restricted  Share  Award  Agreement  as  signed  by
                    the Company  and  each  of  Marcus  E.  Bromley  (with
                    respect  to  1,200 Unrestricted Shares and 3,600 Restricted
                    Shares), John T. Rippel (with respect to 1,000 Unrestricted
                    Shares and 3,000 Restricted Shares), C.Jordan  Clark  (with
                    respect to 2,200  Unrestricted  Shares and 6,600 Restricted
                    Shares),  and Marvin R. Banks,  Jr. (with respect to 1,000
                    Unrestricted Shares and 3,000 Restricted Shares)

     10.16      --- Form of  Indemnification  Agreement  as signed by the
                    Company and each of Marcus E. Bromley,  John T. Rippel, C.
                    Jordan Clark, Marvin R. Banks, Jr., David M. Holland,
                    Lauralee E. Martin, John W. McIntyre and D.Raymond Riddle(5)

     10.17      --- Interest   rate   protection   agreement   (notional  amount
                    of $44,530,000)  between the Operating  Partnership  and
                    NationsBank  of North  Carolina,  N.A.  dated  January 25,
                    1994 (8)

     10.18      --- Interest   rate   protection   agreement   (notional  amount
                    of $44,530,000)  between  the  Operating   Partnership  and
                    First  Union National Bank of Georgia, dated August 21, 1996
                    (6)

     10.19      --- Interest   rate   protection   agreement   (notional  amount
                    of $25,000,000)  between  the  Operating   Partnership  and
                    First  Union National  Bank of  Georgia, dated as of May 23,
                    1997 (9)

<PAGE>
                                    Page-36

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

     10.20     --- Forward  Treasury Lock Agreement  (notional amount of
                   $75,000,000)between the Operating  Partnership  and J.P.
                   Morgan  Securities,  Inc. dated as of September 22, 1997 (9)

     10.21*    --- Forward   Treasury   Lock   Agreement   (notional   amount
                   of $75,000,000)  between  the  Operating   Partnership  and
                   J.P.  Morgan Securities,  Inc.  dated  as of  September  22,
                   1997 and  amended  on December 17, 1997

     10.22*    --- Forward   Treasury   Lock   Agreement   (notional   amount
                   of $75,000,000)  between  the  Operating   Partnership  and
                   J.P.  Morgan Securities,  Inc.  dated  as of  September  22,
                   1997 and  amended  on February 11, 1998

     10.23*    --- Forward Treasury Lock Agreement (notional amount of
                   $25,000,000)between the Operating  Partnership  and J.P.
                   Morgan  Securities,  Inc. dated as of December 17, 1997

     10.24*    --- Forward   Treasury   Lock   Agreement   (notional   amount
                   of $25,000,000)  between  the  Operating   Partnership  and
                   J.P.  Morgan Securities, Inc. dated as of December 17, 1997
                   and amended on February 11, 1998

     10.25     --- Loan  Application  and  Commitment   Agreement  between
                   Teachers Insurance  and  Annuity  Association  of  America
                   ("lender") and the Operating Partnership and Gables-Tennessee
                   Properties (the "Tennessee Partnership")(collectively,  the
                   borrower) for a  $130,689,000  loan (10)

     10.26     --- Loan Agreement,  Conversion and Note Agreement, Security Deed
                   Note and  Deed of  Trust  Notes  between  Teachers  Insurance
                   and  Annuity Association of America ("lender") and the
                   Operating  Partnership  and the  Tennessee   Partnership
                   (collectively,   the  borrower)  for  a $130,689,000 loan,
                   dated December 29, 1995 (11)

     10.27     --- First  Amendment  to  Conversion  and  Note  Agreement
                   effective December 30, 1996 between the  Operating
                   Partnership,  the  Tennessee Partnership,   the  Company  and
                   Teachers   Insurance  and  Annuity Association of America (9)

     10.28     --- Second  Amendment  to  Conversion  and Note  Agreement
                   effective August 13,  1997  between the  Operating
                   Partnership,  the  Tennessee Partnership,   the  Company  and
                   Teachers   Insurance  and  Annuity Association of America (9)

     10.29     --- Unsecured Note No. 1 for $86,346,000  date August 13, 1997
                   between the  Operating  Partnership,  the Tennessee
                   Partnership  and Teachers Insurance and Annuity Association
                   of America (9)

     10.30     --- Unsecured  Note No.  2 for  $29,681,000  dated  August  13,
                   1997 between the  Operating  Partnership,  the  Tennessee
                   Partnership  and Teachers Insurance and Annuity Association
                   of America (9)

     10.31     --- $175,000,000  Credit  Agreement  dated as of March 28, 1996
                   among the Operating  Partnership (as Borrower) and Wachovia
                   Bank of Georgia, N.A., First Union  National Bank of Georgia,
                   Guaranty  Federal Bank, AmSouth  Bank  of  Alabama,   and
                   Commerzbank  AG,  Atlanta  Agency (collectively,  as Lenders)
                   and  Wachovia  Bank of Georgia,  N.A. (as Agent) (12)

     10.32     --- Guaranty  Agreement  dated as of March 28, 1996 among  Gables
                   GP, Inc., the Company and the Tennessee Partnership in favor
                   of the Agent,for the ratable benefit of the Lenders,  under
                   the $175,000,000 Credit Agreement dated as of March 28, 1996
                   (12)

     10.33     --- First Amendment to the  $175,000,000  Credit Agreement dated
                   as of November 22, 1996 among the Operating Partnership and
                   the Lenders (6)

     10.34     --- Second Amendment to the $175,000,000  Credit Amendment dated
                   as of March 18, 1997 among the Operating Partnership and the
                   Lenders (6)

     10.35     --- $175,000,000  Amended and Restated  Credit  Agreement dated
                   as of August 5, 1997 among the Operating Partnership and the
                   Lenders (9)

     10.36     --- $45,820,180  Letter of Credit  Facility  Reimbursement
                   Agreement dated as of  October  1, 1997  among  the Operating
                   Partnership  (as Borrower), and Wachovia Bank, N.A., Guaranty
                   Federal Bank, F.S.B. and AmSouth  Bank of Alabama (as
                   Lenders)  and  Wachovia  Bank,  N.A. (as Agent) (9)

     10.37     --- $40,000,000  Term Loan Credit  Agreement dated as of November
                   20, 1996 between the Operating Partnership (as Borrower) and
                   Wachovia Bank of Georgia, N.A. (as Agent and Lender) (6)

     10.38     --- First  Amendment  to the  $40,000,000  Term Loan Credit
                   Agreement dated as of August 5,  1997  between  the Operating
                   Partnership  and Wachovia Bank of Georgia, N.A. (9)

     10.39     --- Promissory Note dated November 29, 1994 for a $53,000,000
                   mortgage loan from the Northwestern Mutual Life Insurance
                   Company to the Operating Partnership (8)



<PAGE>
                                    Page-37

     21.1 *    --- Schedule of Subsidiaries of the Company

     23.1 *    --- Consent of Arthur Andersen LLP

     27.1 *    --- Financial Data Schedule for the fiscal year ended December
                   31, 1997

     27.2 *    --- Financial Data Schedule for the fiscal year ended December
                   31, 1996, the six months ended June 30, 1996 and the nine
                   months ended September 30, 1996

     27.3 *    --- Financial Data Schedule for the three months ended March 31,
                   1997, the six months ended June 30, 1997 and the nine months
                   ended September 30, 1997

     ---------------------
*  Filed  herewith

(1)  The Company's Registration  Statement on Form S-11 (File No. 33-70570),  as
     amended.

(2)  The  Company's  Current  Report on Form 8-K dated  July 24, 1997.

(3)  The Company's Registration Statement on Form 8-A/A-2.

(4)  The Operating Partnership's Registration Statement on Form 10/A-1 (File No.
     000-22683).

(5)  The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1993.

(6)  The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1996.

(7)  The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
     1997.

(8)  The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.

(9)  The Company's Quarterly Report on Form 10-Q for the quarter ended September
     30, 1997.

(10) The Company's  Quarterly Report on Form 10-Q for the quarter ended June 30,
     1995.

(11) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1995.

(12) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
     1996.

The registrant's  proxy statement is to be filed with the Commission on or about
March 31, 1998.

14(B) REPORTS ON FORM 8-K

A Form 8-K dated  November  24,  1997 was  filed  with the  Commission  with the
required  financial  information  regarding the acquisition of certain apartment
communities.

A Form 8-K  dated  December  1,  1997 was  filed  with the  Commission  with the
underwriting  agreement  executed in connection with the Company's  Common Share
offering that closed December 1, 1997.

14(C)  EXHIBITS

See Item 14(a)(3) above.




<PAGE>
                                    Page-38

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, Gables Residential Trust certifies that it has duly caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.
                                              GABLES RESIDENTIAL TRUST


                                              By  /s/ Marcus E. Bromley
                                                 ------------------------------
                                                 Marcus E. Bromley, Chairman of
                                                 the Board of Trustees and Chief
                                                 Executive Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following persons on behalf of Gables  Residential
Trust and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

         Signatures                     Title                                           Date
         ----------                     -----                                           ----

<S>                                     <C>                                            <C>

/s/ Marcus E. Bromley                   Chairman of the Board of Trustees               March  25, 1998
------------------------                and Chief Executive Officer
Marcus E. Bromley                       (Principal Executive Officer)


/s/ Marvin R. Banks, Jr.                Chief Financial Officer (Principal Financial    March  25, 1998
------------------------                Officer and Principal Accounting Officer)
Marvin R. Banks, Jr.


/s/ John T. Rippel                      President, Chief Operating Officer              March  25, 1998
------------------------                and Trustee
John T. Rippel

/s/ David M. Holland                    Trustee                                         March  25, 1998
------------------------
David M. Holland


/s/ Lauralee E. Martin                  Trustee                                         March  25, 1998
------------------------
Lauralee E. Martin


/s/ John W. McIntyre                    Trustee                                         March  25, 1998
------------------------
John W. McIntyre


/s/ D. Raymond Riddle                   Trustee                                         March 25, 1998
------------------------
D. Raymond Riddle
</TABLE>
<PAGE>
                                    Page-39


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Gables Residential Trust:

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Gables
Residential  Trust and  subsidiaries  as of  December  31, 1997 and 1996 and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for the years ended  December 31,  1997,  1996 and 1995.  These  financial
statements  and  schedule are the  responsibility  of the  management  of Gables
Residential  Trust.  Our  responsibility  is to  express  an  opinion  on  these
financial statements and schedule based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Gables Residential
Trust and subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997,  1996 and
1995, in conformity with generally accepted accounting principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements  taken as a whole.  The  schedule  listed  in the index to
financial  statements is presented for purposes of complying with the Securities
and  Exchange  Commission's  rules  and  is not  part  of  the  basic  financial
statements.  This schedule has been subjected to the auditing procedures applied
in the audit of the basic  financial  statements  and,  in our  opinion,  fairly
states in all material  respects  the  financial  data  required to be set forth
therein in relation to the basic financial statements taken as a whole.


/s/ Arthur Andersen LLP

Atlanta, Georgia
March 6, 1998
<PAGE>
                                    Page-40

                            GABLES RESIDENTIAL TRUST
                          CONSOLIDATED BALANCE SHEETS
                (Amounts in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                            1997            1996
                                                                            ----            ----
<S>                                                                      <C>             <C>
ASSETS:
Real estate assets:
   Land .............................................................   $   150,894    $   102,762
   Buildings ........................................................       770,305        558,569
   Furniture, fixtures and equipment ................................        60,015         45,830
   Construction in progress .........................................        53,240         74,690
   Land held for future development .................................        21,774          2,749
                                                                          ---------       --------
      Real estate assets before accumulated depreciation ............     1,056,228        784,600
   Less:  accumulated depreciation ..................................       (98,236)       (74,903)
                                                                          ---------       --------
     Net real estate assets .........................................       957,992        709,697

Cash and cash equivalents ...........................................         3,179          4,385
Restricted cash .....................................................         4,498          8,430
Deferred charges, net of accumulated amortization of $2,735 and
    $3,328 at December 31, 1997 and 1996, respectively ..............         4,194          5,412
Other assets, net ...................................................        11,304         31,736
                                                                          ---------       --------
     Total assets ...................................................   $   981,167    $   759,660
                                                                          =========      =========


LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable .......................................................   $   435,362    $   390,321
Accrued interest payable ............................................         1,999          1,811
Common dividend payable .............................................             0          9,465
Preferred dividend payable ..........................................           424              0
Real estate taxes payable ...........................................        13,568          9,785
Accounts payable and accrued expenses - construction ................         8,505          6,218
Accounts payable and accrued expenses - operating ...................         5,552          5,455
Security deposits ...................................................         2,260          1,968
                                                                            -------        -------
     Total liabilities ..............................................       467,670        425,023
                                                                            -------        -------

Minority interest of unitholders in Operating Partnership ...........        62,059         53,143
                                                                            -------        -------

Commitments and contingencies

SHAREHOLDERS' EQUITY:
  Excess shares, $0.01 par value, 51,000 shares authorized
  Preferred shares at $25.00 liquidation preference, $0.01 par value,
    10,000 shares authorized, 4,600 shares issued and outstanding
    at December 31, 1997 ............................................       115,000              0
  Common shares, $0.01 par value, 100,000 shares authorized,
    21,991 and 19,317 shares issued and outstanding at December
    31, 1997 and 1996, respectively .................................           220            193
  Additional paid-in capital ........................................       339,009        315,670
  Deferred long-term compensation ...................................          (594)             0
  Accumulated earnings (deficit) ....................................        (2,197)       (34,369)
                                                                           --------       --------
     Total shareholders' equity .....................................       451,438        281,494
                                                                           --------       --------
     Total liabilities and shareholders' equity .....................   $   981,167    $   759,660
                                                                           ========       ========


<FN>
 The accompanying notes are an integral part of these balance sheets.
</FN>
</TABLE>
<PAGE>
                                    Page-41

                            GABLES RESIDENTIAL TRUST
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (Amounts in Thousands, Except Per Share Amounts)

 <TABLE>
<CAPTION>

                                                                              Years ended December 31,
                                                                            1997         1996         1995
                                                                            ----         ----         ----
<S>                                                                     <C>          <C>           <C>
Rental revenues ....................................................   $ 132,371    $ 104,543    $  72,703
Other property revenues ............................................       6,322        4,928        3,268
                                                                         -------      -------      -------
     Total property revenues .......................................     138,693      109,471       75,971
                                                                         -------      -------      -------
Property management - third party ..................................       2,173        2,960        3,324
Property management - related party ................................         859          911          965
                                                                         -------      -------      -------
  Total property management revenues ...............................       3,032        3,871        4,289
Non-recurring Olympic revenues, net ................................           0          900            0
Other ..............................................................       1,713        1,939        1,500
                                                                         -------      -------      -------
     Total other revenues ..........................................       4,745        6,710        5,789
                                                                         -------      -------      -------
     Total revenues ................................................     143,438      116,181       81,760
                                                                         -------      -------      -------

Property operating and maintenance (exclusive of items shown
     separately below) .............................................      47,592       38,693       28,228
Depreciation and amortization ......................................      25,194       18,892       12,669
Amortization of deferred financing costs ...........................         992        1,348          932
Property management - owned ........................................       3,364        2,824        2,170
Property management - third/related party...........................       2,332        2,793        3,178
General and administrative .........................................       3,248        3,045        2,869
Interest ...........................................................      24,804       21,112       13,088
Credit enhancement fees ............................................         509          576          710
Loss on treasury lock extension ....................................       1,178            0            0
                                                                         -------      -------      -------
     Total expenses ................................................     109,213       89,283       63,844
                                                                         -------      -------      -------

Income before equity in income of joint ventures and interest income      34,225       26,898       17,916
Equity in income of joint ventures .................................         320          280           64
Interest income ....................................................         371          363          389
                                                                         -------      -------      -------
Income before gain on sale of real estate assets ...................      34,916       27,541       18,369
Gain on sale of real estate assets .................................       5,349            0            0
                                                                         -------      -------      -------
Income before minority interest and extraordinary loss, net ........      40,265       27,541       18,369
Minority interest of unitholders in Operating Partnership ..........      (5,611)      (4,640)      (4,029)
                                                                         -------      -------      -------
Income before extraordinary loss, net ..............................      34,654       22,901       14,340

Extraordinary loss, net of minority interest .......................        (602)        (520)        (784)
                                                                         -------      -------      -------
Net income .........................................................      34,052       22,381       13,556
Dividends to preferred shareholders ................................      (4,163)           0            0
                                                                         -------      -------      -------
Net income available to common shareholders ........................   $  29,889    $  22,381    $  13,556
                                                                         =======      =======      =======

Weighted average number of common shares outstanding - basic .......      19,788       16,788       11,436
Weighted average number of common shares outstanding - diluted .....      19,938       16,877       11,452

PER COMMON SHARE INFORMATION:
Income before extraordinary loss, net - basic ......................   $    1.54    $    1.36    $    1.25
Extraordinary loss, net - basic ....................................  ($    0.03)  ($    0.03)  ($    0.06)
Net income - basic .................................................   $    1.51    $    1.33    $    1.19

Income before extraordinary loss, net - diluted ....................   $    1.53    $    1.35    $    1.25
Extraordinary loss, net - diluted ..................................  ($    0.03)  ($    0.03)  ($    0.07)
Net income - diluted ...............................................   $    1.50    $    1.32    $    1.18
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
                                    Page-42
                            GABLES RESIDENTIAL TRUST
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                (Amounts in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>


                                                              Preferred
                                                              Shares at           Additional     Deferred    Accumulated
                                                             Liquidation   Common   Paid-in     Long-Term     Earnings
                                                             Preference    Shares   Capital    Compensation   (Deficit)    Total
                                                             ----------    ------   -------    ------------   --------     -----
<S>                                                          <C>          <C>        <C>         <C>           <C>         <C>

BALANCE, DECEMBER 31, 1994 .............................   $       0   $     106   $ 182,854    $       0    ($ 60,344)   $ 122,616

  Proceeds of 4,600 common share offering, net of
   $6,261 underwriting discounts and issuance costs ....           0          46      94,318            0            0       94,364
  Proceeds from Share Builder Plan .....................           0           0         177            0            0          177
  Filing costs for Share Builder Plan, Profit Sharing
    Plan and $200,000 shelf registration statement .....           0           0        (237)           0            0         (237)
  Adjustment for minority interest of unitholders in
   Operating Partnership for offering, issuance of
   Operating Partnership Units, and other activity .....           0           0           0            0       (6,282)      (6,282)
  Net income ...........................................           0           0           0            0       13,556       13,556
  Dividends paid ($1.38 per common share) ..............           0           0     (14,596)           0            0      (14,596)
  Dividends declared ($0.48 per common share) ..........           0           0      (7,288)           0            0       (7,288)
                                                              ------      ------    --------      -------      -------     --------

BALANCE, DECEMBER 31, 1995 .............................           0         152     255,228            0      (53,070)     202,310

  Proceeds of 4,039 common share offerings, net of
   $3,302 underwriting discounts and issuance costs ....           0          40      93,444            0            0       93,484
  Proceeds from exercise of share options ..............           0           1       1,429            0            0        1,430
  Proceeds from Share Builder Plan .....................           0           0          32            0            0           32
  Filing costs for $300,000 shelf registration statement           0           0         (97)           0            0          (97)
  Adjustment for minority interest of unitholders in
   Operating Partnership for offerings, issuance of
   Operating Partnership Units, and other activity .....           0           0           0            0       (3,680)      (3,680)
  Net income ...........................................           0           0           0            0       22,381       22,381
  Dividends paid ($1.45 per common share) ..............           0           0     (24,901)           0            0      (24,901)
  Dividends declared ($0.49 per common share) ..........           0           0      (9,465)           0            0       (9,465)
                                                              ------     -------     -------       ------      -------      -------

BALANCE, DECEMBER 31, 1996 .............................           0         193     315,670            0      (34,369)     281,494

  Proceeds of 2,437 common share offerings, net of
   $3,463 underwriting discounts and issuance costs ....           0          24      62,493            0            0       62,517
  Proceeds of 4,600 preferred share offering ...........     115,000           0      (4,009)           0            0      110,991
  Proceeds from exercise of share options ..............           0           2       3,119            0            0        3,121
  Proceeds from Share Builder Plan .....................           0           0          61            0            0           61
  Issuance of shares for trustee compensation ..........           0           0          25            0            0           25
  Issuance of share grants .............................           0           1       1,783            0            0        1,784
  Deferred long-term compensation, net of amortization .           0           0           0         (594)           0         (594)
  Adjustment for minority interest of unitholders in
   Operating Partnership for offerings, issuance of
   Operating Partnership Units, and other activity .....           0           0           0            0        2,283        2,283
  Net income available to common shareholders ..........           0           0           0            0       29,889       29,889
  Dividends paid ($1.98 per common share) ..............           0           0     (40,133)           0            0      (40,133)
                                                            --------     -------    --------      -------      -------      -------

Balance, December 31, 1997 .............................   $ 115,000   $     220   $ 339,009    ($    594)   ($  2,197)   $ 451,438
                                                            ========     =======    ========      =======      =======      =======

<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
                                    Page-43



                            GABLES RESIDENTIAL TRUST
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                (Amounts in Thousands, Except Per Share Amounts)

<TABLE>
<CAPTION>


                                                                         Years Ended December 31,
                                                                      1997         1996         1995
                                                                      ----         ----         ----
<S>                                                               <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................   $  34,052    $  22,381    $  13,556
Adjustments to reconcile net income to net cash provided
  by operating activities:
   Depreciation and amortization .............................      26,186       20,240       13,601
   Equity in income of joint ventures ........................        (320)        (280)         (64)
   Minority interest of unitholders in Operating Partnership .       5,611        4,640        4,029
   Gain on sale of real estate assets ........................      (5,349)           0            0
   Long-term compensation expense ............................         574          408            0
   Loss on treasury lock extension ...........................       1,178            0            0
   Extraordinary loss, net of minority interest ..............         602          520          784
   Change in operating assets and liabilities:
     Restricted cash .........................................       4,616       (2,366)      (1,695)
     Other assets ............................................      (1,055)        (282)        (260)
     Other liabilities, net ..................................       3,424        6,368         (863)
                                                                    ------       ------      -------
          Net cash provided by operating activities ..........      69,519       51,629       29,088
                                                                    ------       ------      -------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and construction of real estate assets ..............    (241,585)    (194,886)    (148,475)
Investment in mortgage note receivable .......................           0      (21,505)           0
Net proceeds from sale of real estate assets .................      13,174        3,968            0
Long-term land lease payments ................................      (1,000)      (1,500)           0
Distributions received from joint ventures ...................         442          327          241
                                                                   -------      -------      -------
     Net cash used in investing activities ...................    (228,969)    (213,596)    (148,234)
                                                                   -------      -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common share offerings, net of issuance costs ..      62,517       93,484       94,364
Proceeds from preferred share offerings, net of issuance costs     110,991            0            0
Proceeds from the exercise of share options ..................       3,121        1,430            0
Payments of filing costs for shelf registration statement ....           0          (97)        (237)
Share Builder Plan contributions .............................          61           32          177
Payments of deferred financing costs .........................        (440)      (1,668)      (1,777)
Notes payable proceeds .......................................     233,849      282,569      281,597
Notes payable repayments .....................................    (188,808)    (178,507)    (224,643)
Principal escrow deposits ....................................        (684)        (768)        (652)
Preferred dividends paid .....................................      (3,739)           0            0
Common dividends paid ($2.47, $1.93 and $1.83 per share) .....     (49,598)     (32,189)     (19,355)
Common distributions paid ($2.47, $1.93 and $1.83 per Unit) ..      (9,026)      (6,463)      (5,855)
                                                                   -------      -------      -------
     Net cash provided by financing activities ...............     158,244      157,823      123,619
                                                                   -------      -------      -------

Net change in cash and cash equivalents ......................      (1,206)      (4,144)       4,473
Cash and cash equivalents, beginning of period ...............       4,385        8,529        4,056
                                                                   -------      -------      -------
Cash and cash equivalents, end of period .....................   $   3,179    $   4,385    $   8,529
                                                                   =======      =======      =======

Supplemental disclosure of cash flow information:
     Cash paid for interest ..................................   $  29,777    $  24,749    $  20,669
     Interest capitalized ....................................       5,161        4,373        7,481
                                                                  --------     --------    ---------
     Cash paid for interest, net of amounts capitalized ......   $  24,616    $  20,376    $  13,188
                                                                  ========     ========    =========
<FN>
The accompanying notes are an integral part of these statements.
</FN>
</TABLE>
<PAGE>
                                    Page-44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

1.  ORGANIZATION AND FORMATION OF THE COMPANY

Gables  Residential  Trust is a  self-administered  and self-managed real estate
investment trust (a "REIT") formed in 1993 under Maryland law to continue and to
expand   the   multifamily   apartment   community   management,    development,
construction,  and  acquisition  operations of its privately  owned  predecessor
organization.  The term "Gables  Residential Group" as used herein refers to the
privately  owned  predecessor  organization  prior  to  the  completion  of  the
Company's  initial  public  offering on January 26, 1994 (the  "IPO").  The term
"Company"  or "Gables" as used herein  means  Gables  Residential  Trust and its
subsidiaries  on  a  consolidated   basis   (including   Gables  Realty  Limited
Partnership  and its  subsidiaries),  or, where the context so requires,  Gables
Residential Trust.

Gables engages in the multifamily  apartment community  mangement,  development,
construction,  and  acquisition  businesses,  including the provision of related
brokerage and corporate  rental  housing  services.  Substantially  all of these
businesses  are  conducted  through  Gables  Realty  Limited   Partnership  (the
"Operating Partnership"). The Company controls the Operating Partnership through
Gables GP, Inc. ("GGPI"), a wholly-owned subsidiary and the sole general partner
of the  Operating  Partnership  (this  structure  is commonly  referred to as an
umbrella partnership REIT or "UPREIT"). At December 31, 1997, the Company was an
84.4%  economic  owner of the  Operating  Partnership  (excluding  the Company's
ownership  of 100% of the  Operating  Partnership's  Series A Preferred  Units).
Gables' third party management businesses are conducted through two subsidiaries
of the  Operating  Partnership,  Central  Apartment  Management,  Inc.,  a Texas
corporation, and East Apartment Management, Inc., a Georgia corporation.

As of  December  31,  1997,  Gables  owned 59  completed  multifamily  apartment
communities comprising 17,816 apartment homes, of which 35 were developed and 24
were  acquired by Gables,  and an indirect 25% general  partner  interest in two
apartment communities developed by Gables comprising 663 apartment homes. One of
the completed  communities  comprising  273 apartment  homes was in the lease-up
stage at  December  31,  1997.  Gables  also  owned five  multifamily  apartment
communities that were under  construction at December 31, 1997 that are expected
to comprise  1,409  apartment  homes upon  completion.  As of December 31, 1997,
Gables  owned  parcels of land for the  future  development  of seven  apartment
communities   expected  to  comprise  an  estimated   1,792   apartment   homes.
Additionally,  Gables has contracts or options to acquire  additional parcels of
land.  There can be no assurance  that Gables will acquire  these land  parcels,
however it is Gables' intent to develop an apartment community on each such land
parcel, if purchased.

On February 18, 1998,  Gables  entered into  contribution  agreements  with four
partnerships  under common  control  pursuant to which Gables expects to acquire
four multifamily apartment communities comprising a total of 913 apartment homes
located in Houston,  Texas.  In connection  with such  acquisition,  Gables will
assume approximately $28 million of indebtedness and issue Units valued at up to
approximately  $21 million,  of which  approximately $2 million will be deferred
for up to two years.

On March 11, 1998,  Gables  entered  into an agreement to acquire a  multifamily
apartment community in Austin, Texas comprising 308 apartment homes.

Gables has entered into a Contribution Agreement with an effective date of March
16, 1998 (the "Contribution Agreement") to acquire the properties and operations
of Trammell Crow Residential South Florida ("TCR/SF"), which consist of up to 15
multifamily apartment communities (the "South Florida Communities") containing a
total of 4,197  apartment  homes  (assuming  completion  of three South  Florida
Communities  currently  under  construction),  and all of  TCR/SF's  residential
construction  and  development  and third party  management  activities in South
Florida (collectively,  the "South Florida  Transaction").  In consideration for
such properties and operations,  the Company will (i) pay  approximately  $149.0
million in cash, (ii) assume approximately $135.9 million of tax-exempt debt and
(iii) issue Units valued at up to  approximately  $83.6 million,  of which $12.5
million will be deferred  until January 1, 2000.  The South Florida  Communities
are located in Palm Beach County,  Broward  County and Dade County and encompass
the metropolitan  areas of Palm Beach, Ft.  Lauderdale and Miami,  respectively.
The South  Florida  Transaction  is  expected  to be  consummated  in the second
quarter of 1998.

There can be no assurance that the  acquisitions  described  above will close as
contemplated,  or that the  acquisitions  will be consummated at all.  Gables is
pursuing  other  acquisition  opportunities  in the ordinary  course of business
which have not yet been, or may never be, put under contract.
<PAGE>
                                    Page-45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

2.  SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS

Secondary Common Share Offerings
--------------------------------

Since the IPO, the Company has issued a total of 11,521  common  shares in seven
offerings  generating  $260,241 in net proceeds which were generally used (i) to
reduce  outstanding  indebtedness  under interim financing  vehicles utilized to
fund Gables' development and acquisition activities and (ii) for general working
capital  purposes  including  funding  of  future  development  and  acquisition
activities.

Preferred Share Offering
------------------------

On July 24, 1997,  the Company  issued 4,600 shares of 8.30% Series A Cumulative
Redeemable  Preferred  Shares  (liquidation  preference  $25.00 per share)  (the
"Series  A  Preferred   Shares").   The  net  proceeds  from  this  offering  of
approximately  $111 million were used to reduce  outstanding  indebtedness under
the interim financing  vehicles  discussed above. The Series A Preferred Shares,
which may be  redeemed  by the  Company at $25.00 per share,  plus  accrued  and
unpaid  dividends,  on or after July 24, 2002, have no stated maturity,  sinking
fund or mandatory  redemption and are not convertible  into any other securities
of the Company.

Issuances of Operating Partnership Units
----------------------------------------

On December 5, 1995,  Gables acquired a parcel of land for the development of an
apartment community, financed in part through the issuance of 111 Units. On July
26, 1996, Gables acquired an apartment community comprising 500 apartment homes,
financed in part through the issuance of 244 Units.  On August 21, 1997,  Gables
acquired an apartment community comprising 82 apartment homes,  financed in part
through  the  issuance  of 95 Units.  On October 17,  1997,  Gables  acquired an
apartment community comprising 295 apartment homes, financed in part through the
issuance of 453 Units.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations
--------------------

Gables engages in the multifamily apartment community  management,  development,
construction,  and  acquisition  businesses,  including the provision of related
brokerage and corporate rental housing services.  Gables' operating  performance
relies  predominantly  on net operating  income from the  multifamily  apartment
communities  it owns which are located in seven core  cities in Texas,  Georgia,
and  Tennessee.  Gables  recently  entered an eighth market,  Orlando,  Florida,
through an  association  with a subsidiary  of the Walt Disney  Company,  and in
connection therewith currently has two communities under development in Orlando.

Basis of Presentation
---------------------

The accompanying  consolidated  financial statements of Gables Residential Trust
include  the  consolidated   accounts  of  Gables   Residential  Trust  and  its
subsidiaries (including Gables Realty Limited Partnership and its subsidiaries).
As a result of the structure of the business  combination,  certain partners and
owners of the entities in Gables Residential Group received common shares of the
Company and/or Units in the Operating Partnership.  Pursuant to the terms of the
partnership agreement of the Operating Partnership,  as of January 26, 1995, the
Operating Partnership became obligated to redeem Units at a unitholder's request
for cash equal to the fair market  value of a common share of the Company at the
time of such  redemption,  provided  that the Company at its option may elect to
acquire any such Units  presented  for  redemption  for one common  share of the
Company.  The  Company  intends to acquire  such Units for common  shares of the
Company rather than to cause the Operating  Partnership to redeem such Units for
cash.  Purchase  accounting was applied to the acquisition of all non-controlled
interests.  The  acquisition  of all  other  interests  was  accounted  for as a
reorganization of entities under common control and, accordingly,  was reflected
at  historical  cost  in a  manner  similar  to  that in  pooling  of  interests
accounting.

<PAGE>
                                    Page-46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

All significant  intercompany  accounts and transactions have been eliminated in
consolidation. The consolidated financial statements of Gables Residential Trust
have been  adjusted for the minority  interest of  unitholders  in the Operating
Partnership.  Since  Units,  if  presented  for  redemption,  are  likely  to be
exchanged for the common shares of the Company on a one-for-one basis,  minority
interest of unitholders in the Operating  Partnership is calculated based on the
weighted average of common shares and Units outstanding during the period.

Use of Estimates
----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amount  of  assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Real Estate Assets and Depreciation
-----------------------------------

Real estate  assets are stated at  depreciated  cost.  The cost of buildings and
improvements  includes  interest,   property  taxes,   insurance  and  allocated
development overhead incurred during the construction  period.  Ordinary repairs
and maintenance are expensed as incurred; major replacements and betterments are
capitalized and depreciated over their useful lives. Depreciation is computed on
a straight-line basis over the useful lives of the real estate assets (buildings
and improvements 19-40 years; furniture, fixtures and equipment 5-10 years).

Gables adopted  Statement of Financial  Accounting  Standards No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," effective  January 1, 1996. FAS 121  established  new standards
for determining  when impairment  losses on long-lived  assets have occurred and
how  impairment  losses  should be measured.  There was no  financial  statement
impact  resulting  from  the  adoption  of FAS  121.  In  addition,  Gables  has
determined that no impairment provision is necessary at December 31, 1997.

Other Assets
------------

Gables invested $21.5 million in an apartment community comprising 232 apartment
homes on October 1, 1996 via a mortgage note receivable. The note receivable and
related costs are included in other assets in the accompanying  balance sheet at
December  31,  1996 and  interest  income  earned  thereon is  included in other
revenues in the accompanying statement of operations for the year ended December
31, 1996. In January,  1997,  Gables  acquired the apartment  community from the
borrower, and the mortgage note receivable was repaid in full.

Investment in Joint Ventures
----------------------------

Gables'  25%  general   partner   interests  in  Arbors  of  Harbortown  JV  and
Metropolitan Apartments JV are accounted for on the equity method of accounting.

Revenue Recognition
-------------------

     Rental:  Gables leases its residential  properties  under operating  leases
with terms generally equal to one year or less. Rental income is recognized when
earned which  materially  approximates  revenue  recognition on a  straight-line
basis.

     Property  Management:  Gables  provides  property  management  services for
properties in which it does not own a controlling interest. Income is recognized
when earned.

     Development and Construction  Services:      Gables  periodically  provides
development and construction  services for properties in which it does not own a
controlling  interest.  Income is  recognized  when  earned on a  percentage  of
completion basis.
<PAGE>
                                    Page-47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

Cash and Cash Equivalents
-------------------------

For purposes of the statement of cash flows,  all investments  purchased with an
original maturity of three months or less are considered to be cash equivalents.

Restricted Cash
---------------

Restricted cash is primarily  comprised of residential  security  deposits,  tax
escrow funds,  repairs and maintenance  reserve funds, and principal escrow bond
funds.

Deferred Financing Costs and Amortization
-----------------------------------------

Deferred financing costs include fees and costs incurred to obtain financing and
are  capitalized  and amortized  over the terms of the related notes payable and
are written off upon the expiration thereof.

Interest Rate Protection Agreements
-----------------------------------

Gables uses interest rate  protection  agreements in the form of "rate caps" and
"rate swaps" to manage its exposure to interest rate changes.  These  agreements
are considered  hedges of Gables'  borrowings.  Upfront amounts paid to purchase
rate cap agreements are  capitalized and amortized over the terms of the related
agreements and are written off upon the expiration thereof. Such amortization is
included  in  amortization  of  deferred  financing  costs  in the  accompanying
statements of  operations.  Monthly  amounts paid or received under rate cap and
rate swap agreements are recognized as adjustments to interest expense.

Gables uses forward treasury lock agreements to lock-in its effective  borrowing
rate for prospectve debt transactions. Payments made or received upon settlement
of such agreements that represent an effective hedge of a specific borrowing are
deferred and amortized as an adjustment to interest expense over the life of the
related debt  instrument.  To the extent a forward  treasury lock agreement does
not represent an effective hedge of a specific borrowing,  the settlement amount
is  recorded  as a gain or loss  upon  settlement.  In  December,  1997,  Gables
extended its $75 million  forward  seven-year  treasury lock  agreement.  On the
extension  date,  Gables  would  have paid  $1,178 to settle the  treasury  lock
agreement  had it not been  extended.  Such  amount  was  recorded  as a loss on
treasury lock extension in December, 1997 and Gables will use the market rate in
effect on the extension date as its  "locked-in  rate" for purposes of recording
interest  expense over the life of the debt  instrument  the  treasury  lock was
originally intended to hedge. Gables currently expects that the debt transaction
for which the treasury lock was originally intended to hedge will be consummated
in 1998.

Property Management Expenses
----------------------------

Gables manages its owned  properties,  as well as properties  owned by third and
related  parties  for  which  Gables  provides  services  for  a  fee.  Property
management  expenses have been allocated between owned and  third/related  party
properties  in  the   accompanying   statements  of  operations   based  on  the
proportionate number of owned and third/related party apartment homes managed by
Gables during the applicable periods.

Income Taxes
------------

Gables  has  elected to be taxed as a REIT under the  Internal  Revenue  Code of
1986, as amended (the "Code"),  commencing  with the taxable year ended December
31, 1994. As a result,  Gables  generally  will not be subject to Federal income
taxation at the corporate  level to the extent it distributes  annually at least
95% of its REIT taxable  income,  as defined in the Code, to its  shareholders
and satisfies  certain other  requirements.  Accordingly,  no provision has been
made  for  Federal  income  taxes  in the  accompanying  consolidated  financial
statements for the years ended December 31, 1997,  1996 and 1995.  Additionally,
certain subsidiaries of Gables,  formed to provide management and other services
to third and related  parties,  are taxed based on  reportable  income.  The tax
attributes of these  entities are  immaterial to the  accompanying  consolidated
financial statements.
<PAGE>
                                    Page-48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

4.  NOTES PAYABLE

Notes payable consist of the following:
                                              December 31,
                                          1997            1996
                                          ----            ----

    Secured conventional fixed-rate     $ 96,135        $219,046
    Unsecured conventional fixed-rate    158,526          40,000
    Tax-exempt fixed-rate                 60,150          67,270
                                        --------        --------
            Total fixed-rate             314,811         326,316
    Tax-exempt variable-rate              44,930          44,930
    Unsecured credit facilities           75,621          19,075
                                        --------        --------
            Total notes payable         $435,362        $390,321
                                        ========        ========

Secured Conventional Fixed-Rate Notes Payable
---------------------------------------------

At December 31, 1996,  the  fixed-rate  notes payable were comprised of thirteen
loans  collateralized by fifteen apartment  communities  included in real estate
assets.  At December 31, 1996,  the interest rates on these notes payable ranged
from 7.00% to 8.77%  (weighted  average of 8.11%) and the maturity  dates ranged
from September, 1997 through December, 2009.

In February,  1997, Gables repaid a $9,452 loan which was scheduled to mature in
September,  1997. In August,  1997, eight loans financed with Teachers Insurance
and Annuity Association totaling $116,027 (the "TIAA Loans") were converted from
secured to unsecured as a result of Gables'  attainment of senior unsecured debt
ratings of BBB from Standard and Poor's and Baa2 from Moody's  Investors Service
(the  "Credit  Ratings").  Accordingly,  this  indebtedness  is  included in the
unsecured  conventional  fixed-rate  category at December 31,  1997.  In August,
1997, Gables acquired an apartment  community and assumed a $3,722 mortgage note
payable in connection with that acquisition.

At December 31, 1997, the  fixed-rate  notes payable are comprised of five loans
collateralized by seven apartment communities included in real estate assets. At
December 31, 1997,  the interest  rates on these notes payable ranged from 7.13%
to 8.77%  (weighted  average of 8.14%) and the  maturity  dates ranged from May,
2003 to  December,  2020.  Principal  amortization  payments  are  required on a
monthly basis for all notes payable based on amortization schedules ranging from
25 to 27 years.

Unsecured Conventional Fixed-Rate Notes Payable
-----------------------------------------------

At  December  31,  1996,  the  unsecured  conventional  fixed-rate  indebtedness
represented  a five-year  $40,000 term loan with a maturity of  November,  2001,
that bore interest at LIBOR plus 1.25%.  In April,  1997, the borrowing costs on
this loan were reduced to LIBOR plus 1.10% in connection  with the attainment of
the Credit Ratings.  In August,  1997, the borrowing costs were renegotiated and
were reduced to LIBOR plus 0.80%. At December 31, 1997, this loan is effectively
fixed at an all-in  rate of 6.15%  after  application  of $40,000 of the $44,530
interest rate protection agreements discussed elsewhere herein.

In  January,  1997,  Gables  acquired  a parcel  of land and  assumed  $2,646 of
indebtedness associated with that acquisition.  Such indebtedness bears interest
at 6.10%, requires annual principal amortization payments over its 20 year term,
and has a maturity of October, 2016.

In August,  1997, the eight TIAA Loans were  converted into two unsecured  notes
payable.  The first such note  payable for $86,346  bears  interest at 8.30% and
matures in  December,  2002.  The second such note  payable  for  $29,681  bears
interest at 8.62% and  matures in  December,  2007.  Beginning  February,  1998,
monthly principal amortization payments will be required for these notes payable
based on a 30 year amortization schedule.
<PAGE>
                                    Page-49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

Tax-Exempt Fixed-Rate Notes Payable
-----------------------------------

At December  31, 1997 and 1996,  the  tax-exempt,  fixed-rate  indebtedness  was
comprised of two and three loans,  respectively.  One such loan  outstanding  at
December  31,  1997  and  1996  has a  principal  balance  of  $48,365,  and  is
collateralized by three communities  induced for tax-exempt  financing and three
additional  communities.  Principal  amortization  payments  based  on a 30 year
amortization  schedule  are  required on a monthly  basis.  These  payments  are
retained  in an escrow  account  and are not  applied to reduce the  outstanding
principal balance of the loan.  Principal payments through December 31, 1997 and
1996 are included in restricted cash in the  accompanying  balance  sheets.  The
note  payable  bears  interest at 6.38% and matures in August,  2004.  The three
underlying  tax-exempt  bond issues mature in August,  2024. The other two loans
outstanding at December 31, 1996 represented a $19,020 tax-exempt bond financing
secured by two apartment communities.  Both bond issues were credit enhanced for
an annual fee of 0.60%.  The bonds bear  interest at a weighted  average rate of
7.03% on a fixed basis for 30 years.  Principal amortization payments are due in
January  each  year  pursuant  to the  terms of the bond  documents.  Gables  is
required to make monthly escrow payments each year totaling the annual principal
payment  due to the  bondholders  in the month of  January  thereafter.  Monthly
principal  escrow  payments  are included in  restricted  cash until the January
payments are made. One of these loans, with an outstanding  principal balance of
$6,975 at December  31,  1996,  was  economically  defeased in January,  1997 in
connection with the sale of the property.  The tax-exempt  bonds contain certain
covenants which require minimum rentals to individuals  based upon income levels
specified by U.S. government programs, as defined.

Tax-Exempt Variable-Rate Notes Payable
--------------------------------------

At December 31, 1997 and 1996, the variable-rate mortgage notes payable securing
tax-exempt bonds were comprised of four loans,  each of which is  collateralized
by an apartment  community  included in real estate assets. The tax-exempt bonds
contain certain  covenants  which require  minimum rentals to individuals  based
upon income levels  specified by U.S.  government  programs,  as defined.  These
bonds bear interest at a variable rate of interest, adjusted weekly based upon a
negotiated  rate.  The interest rate in effect at December 31, 1997 and 1996 was
4.2%.  Tax-exempt variable rates are, and historically have been,  significantly
higher at year-end than during the year. The effective interest rates were 3.7%,
3.5% and 3.9% for the years ended  December 31, 1997,  1996 and 1995.  The bonds
are currently  secured by four letters of credit  provided by a letter of credit
facility entered into in October,  1997. The fee for these letters of credit was
1.5% per annum through June 30, 1995, 1.25% per annum through March,  1996, 1.0%
through  September,  1997 and is currently 0.95% per annum. The letter of credit
facility has an initial  term of 5 years and has  unlimited  one-year  extension
options.  Three of the underlying  bond issues mature in December,  2007 and the
fourth underlying bond issue matures in August, 2024.

$175 Million Credit Facility
----------------------------

In conjunction with the IPO, Gables closed a $175 million  three-year  revolving
credit facility (the "Original  Credit  Facility") which had an initial maturity
of January,  1997. In March,  1996,  Gables closed a new $175 million  unsecured
revolving  credit  facility (the "New Credit  Facility" or "$175 Million  Credit
Facility") that replaced the Original Credit  Facility.  Although the New Credit
Facility is unsecured, there were certain designated real estate assets that had
escrowed  mortgages  that were  released  promptly  after the  attainment of the
Credit  Rating.  The New Credit  Facility has an initial term of three years and
three one-year extension options. Gables has exercised the first of its one-year
extension options resulting in a maturity date for the facility of March, 2000.

Borrowings  bore  interest at LIBOR plus 1.50%  (reduced from 1.65% in November,
1996) through April,  1997. In April,  1997,  Gables'  borrowing costs under the
facility were reduced to LIBOR plus 1.10% in connection  with the  attainment of
the Credit Ratings.  In August,  1997, Gables' borrowing costs were renegotiated
and were reduced to LIBOR plus 0.80%. Additionally, a competitive bid option was
added for up to 50% of the $175 million commitment.

Gables'  availability  under the  facility is limited to the lesser of the total
$175 million  commitment or the borrowing  base.  The borrowing  base  available
under the facility is currently based on the value of Gables'  unencumbered real
estate assets as compared to the amount of Gables' unsecured indebtedness. As of
December 31, 1997, Gables had $60.0 million in borrowings  outstanding under the
facility and,  therefore,  had $115 .0 million of remaining capacity on the $175
million available commitment.
<PAGE>
                                    Page-50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

$20 Million Credit Facility
---------------------------

In November,  1996,  Gables closed an unsecured  revolving  credit facility that
currently  provides for up to $20 million in  borrowings.  This  facility has an
initial term of one year and has unlimited one-year  extension  options.  Gables
has  exercised  the  first of its  one-year  extension  options  resulting  in a
maturity date for the facility of October,  1998. Borrowings bore interest under
this facility at LIBOR plus 1.50% through April,  1997. In April,  1997, Gables'
borrowing  costs  were  reduced  to  LIBOR  plus  1.10% in  connection  with the
attainment of the Credit Ratings. In August,  1997, Gables' borrowing costs were
negotiated and were reduced to LIBOR plus 0.80%. As of December 31, 1997, Gables
had approximately $15.6 million in borrowings outstanding under this facility.

Restrictive Covenants
---------------------

Certain  of the  Gables'  debt  agreements  contain  customary  representations,
covenants and events of default,  including covenants which restrict the ability
of the Operating  Partnership to make distributions in excess of stated amounts,
which in turn  restricts  the  discretion  of the  Company  to  declare  and pay
dividends. In general, during any fiscal year the Operating Partnership may only
distribute  up  to  95%  of  the  Operating  Partnership's  consolidated  income
available for  distribution (as defined in the related  agreement)  exclusive of
distributions  of capital gains for such year.  The applicable  debt  agreements
contain  exceptions to these  limitations to allow the Operating  Partnership to
make any distributions  necessary to allow the Company to maintain its status as
a REIT. Gables does not anticipate that this provision will adversely effect the
ability of the Operating  Partnership  to make  distributions  or the Company to
declare dividends, as currently anticipated.

Maturities
----------

The aggregate maturities of notes payable at December 31, 1997 are as follows:

                         1998                    $17,950
                         1999                      2,596
                         2000                     62,810
                         2001                     43,046
                         2002                    130,620
                         2003 and thereafter     178,340
                                                 -------
                                                $435,362
                                                 =======

The debt  maturities in 1998 include $15,621 of outstanding  indebtedness  under
the $20 Million Credit Facility which has unlimited  one-year extension options.
The debt  maturities in 2000 include $60,000 of outstanding  indebtedness  under
the $175 Million  Credit  Facility  which has two remaining  one-year  extension
options.  The  debt  maturities  in 2002  include  $44,930  of  tax-exempt  bond
indebtedness  credit-enhanced  through  a letter of  credit  facility  which has
unlimited one-year extension options. Three of the underlying bond issues mature
in December, 2007 and the fourth underlying bond issue matures in August, 2024.

Joint Venture Indebtedness
--------------------------

The Arbors of Harbortown  apartment community secures a $16.4 million tax-exempt
bond obligation,  which is recourse to Gables up to $1.0 million (this amount is
fully  cash-collateralized  and is held by the Arbors of Harbortown  JV),  bears
interest at a variable low-floater rate, has a maturity date of April, 2013, and
is payable in monthly  installments of interest only. The credit enhancement for
the bond  obligation  expires in May, 2001. The  Metropolitan  Uptown  apartment
community secures a conventional  fixed-rate loan with $17.9 million outstanding
at December 31, 1997, 25% of which has been guaranteed by Gables. The loan has a
maturity date of December 31, 2002 and bears interest at a rate of 7.18%.
<PAGE>
                                    Page-51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------


Interest Rate Protection Agreements
-----------------------------------

Gables has five  interest  rate  protection  agreements in place at December 31,
1997, the current terms of which are discussed below:

                                     Notional   Strike   Effective Termination
 Description of Agreement             Amount    Price     Date       Date
 ------------------------             ------    -----     ----       ----

LIBOR, 30-day - "Rate Cap"             $44,530  6.25%(a)  01/27/94  01/30/99
LIBOR, 30-day - "Knock-out Rate Swap"  $44,530  5.35%(a)  08/30/96  08/30/99(b)
LIBOR, 30-day - "Knock-out Rate Swap"  $25,000  5.76%(a)  02/27/98  02/27/00(c)
Treasury, 7-year - "Treasury Lock"     $75,000  6.18%     09/22/97  05/28/98
Treasury, 7-year - "Treasury Lock"     $25,000  5.88%     12/17/97  05/28/98


(a)  The 30-day LIBOR rate in effect at December 31, 1997 was 6.0%.

(b)  This  agreement  fixes  Gables'  underlying  30-day LIBOR rate at 5.35% and
     terminates upon the earlier to occur of (i) the termination  date or (ii) a
     rate reset date on which the 30-day LIBOR rate is 6.26% or higher.

(c)  This  agreement  fixes  Gables'  underlying  30-day LIBOR rate at 5.76% and
     terminates upon the earlier to occur of (i) the termination  date or (ii) a
     rate reset date on which the 30-day LIBOR rate is 6.70% or higher.


5.  COMMITMENTS AND CONTINGENCIES

Office Leases
-------------

Gables is party to office  operating  leases with various terms.  Future minimum
lease payments and rent expense for such leases are not material.

Contingencies
-------------

The various entities  comprising Gables are subject to various legal proceedings
and claims that arise in the  ordinary  course of  business.  These  matters are
generally covered by insurance.  While the resolution of these matters cannot be
predicted  with  certainty,  management  believes that the final outcome of such
matters will not have a material  adverse  effect on the  financial  position or
results of operations of Gables.

6.  EXTRAORDINARY LOSS, NET

Extraordinary  loss, net for the year ended December 31, 1997 represents (i) the
write-off of unamortized deferred financing costs and prepaid credit enhancement
fees associated with the defeasance of the tax-exempt bond financing encumbering
the  Club  Candlewood  property  that  was  sold in  January,  1997 and (ii) the
write-off of unamortized  deferred  financing costs associated with the February
28, 1997  retirement of a conventional  mortgage note payable that was scheduled
to  mature on  September  1,  1997.  The  extraordinary  loss  totaling  $712 is
presented  net of the $110  portion  of the loss  attributable  to the  minority
interest unitholders.

Extraordinary  loss, net of $520 for the year ended December 31, 1996 represents
the write-off of unamortized  deferred  financing costs totaling $631 associated
with the early retirement of Gables'  Original Credit Facility,  net of the $111
portion of the loss  attributable  to the  minority  interest  unitholders.  The
Original  Credit  Facility  that was scheduled to mature in January,  1997,  was
refinanced in March, 1996 with the New Credit Facility.

Extraordinary  loss, net of $784 for the year ended December 31, 1995 represents
the write-off of unamortized  deferred  financing costs totaling $955 associated
with the early retirement of Gables' construction loans, net of the $171 portion
of the loss attributable to the minority interest unitholders.
<PAGE>
                                    Page-52

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

7.  EARNINGS PER SHARE

Basic  earnings per share are computed  based on net income  available to common
shareholders  and the  weighted  average  number of common  shares  outstanding.
Diluted  earnings per share reflect the assumed  issuance of common shares under
share option and incentive  plans.  In February,  1997, the FASB issued SFAS No.
128,  "Earnings Per Share," which specifies the  computation,  presentation  and
disclosure  requirements for earnings per share. Gables adopted SFAS No. 128 for
the year ended December 31, 1997. All prior period  earnings per share data were
restated to conform with the  provisions  of SFAS No. 128. The per share amounts
reported under SFAS No. 128 are not materially  different from those  calculated
and presented under APB Opinion No. 15.

The numerator and denominator used for both basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                                 1997         1996         1995
                                                                 ----         ----         ----
<S>                                                            <C>         <C>          <C>
BASIC AND DILUTED INCOME AVAILABLE TO
COMMON SHAREHOLDERS (NUMERATOR):
Income before extraordinary loss, net ......................   $ 30,491    $ 22,901    $ 14,340
Extraordinary loss, net ....................................       (602)       (520)       (784)
Net income ................................................      29,889      22,381      13,556

COMMON SHARES (DENOMINATOR):
Average shares outstanding - basic .........................     19,788      16,788      11,436
Incremental shares from assumed
   conversions of stock options ............................        150          16          89
                                                                -------      ------     -------
Average shares outstanding - diluted .......................     19,938      16,877      11,452
                                                                =======      ======     =======
</TABLE>


8.  DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

Disclosure  about the estimated fair value of financial  instruments is based on
pertinent  information  available to  management  as of December 31, 1997.  Such
amounts have not been  comprehensively  revalued for purposes of these financial
statements  since  that date and  current  estimates  of fair  value may  differ
significantly from the amounts presented herein.

Cash equivalents
----------------

Gables estimates that the fair value of cash equivalents  approximates  carrying
value due to the relatively short maturity of these instruments.

Notes payable
-------------

Gables  estimates  that the fair value of notes  payable  approximates  carrying
value based upon its effective  current borrowing rate for issuance of debt with
similar terms and remaining maturities.

Interest rate protection agreements
-----------------------------------

The estimated fair value and the net carrying value of the $44,530 interest rate
cap agreement at December 31, 1997 is $31 and $186, respectively.  The estimated
fair value of the two  interest  rate swap  agreements  is $404 at December  31,
1997.  The  estimated  fair value for these  agreements is based on the value of
cash flows arising in the  difference in the strike price per the agreements and
projected LIBOR rates over the remaining term of these agreements.

The estimated fair value of the $75,000 and $25,000 forward seven-year  treasury
lock  agreements at December 31, 1997 is ($1,717) and ($136),  respectively.  In
December,  1997, the $75,000 treasury lock agreement was extended, and a loss of
$1,178 was accrued as of December 31, 1997.  The estimated  fair value for these
agreements is based on the difference  between the  seven-year  treasury rate in
effect on December 31, 1997 and the locked-in rate per the agreements.
<PAGE>
                                    Page-53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

9.  PROFIT SHARING PLAN

Eligible  employees of Gables may  participate in a profit sharing plan pursuant
to Section 401(k) of the Internal  Revenue Code.  Under the plan,  employees may
defer a  portion  of  their  salary  on a  pre-tax  basis.  Gables  also has the
discretion  to  make  matching  contributions,  currently  equal  to  50%  of an
employee's first 4% salary deferral  contribution.  Expenses under this plan for
the years ended December 31, 1997, 1996 and 1995 were not material.

During January,  1996, the Company added the Gables Residential Trust Stock Fund
(the  "Fund") as an  investment  option for the plan.  The Fund is  comprised of
common shares of the Company.  In connection  therewith,  100 common shares were
registered for issuance  under the plan.  The plan trustee will purchase  common
shares of the  Company for the Fund,  at the  direction  of the plan  investment
committee, either on the open market or directly from the Company.

10. DIVIDENDS AND SHARE BUILDER PLAN

The Company has declared  and paid  dividends  for the years ended  December 31,
1997, 1996 and 1995 as follows:

               Per Share Dividends           Shareholder Tax Treatment
               -------------------           -------------------------

          First Qtr. to    Fourth                  Return of         Ordinary
Year        Fourth Qtr.      Qtr.                   Capital           Income
----        -----------     -----                   -------           ------

1997           $1.98        $0.50  (a)              23.5%              76.5%
1996            1.94         0.49  (b)              29.1%              70.9%
1995            1.86         0.48  (b)              28.7%              71.3%

(a)  The fourth quarter dividends in 1997 were declared and paid in December.

(b)  The  fourth  quarter  dividends  for each year  denoted  were  declared  in
     December of the related year and were paid in the January thereafter.

In 1995, the Company implemented its Share Builder Plan, a dividend reinvestment
and share  purchase  program that provides its  shareholders  a method,  without
brokerage  commissions  or service  charges,  of  investing  cash  dividends  or
optional cash payments in additional common shares. Under the plan, shareholders
may elect to reinvest  dividends in additional common shares at a 2% discount to
the then  current  market  price of common  shares and may  purchase  additional
common  shares  for cash  (up to $20 per  quarter)  at 100% of the then  current
market price.

11.  1994 SHARE OPTION AND INCENTIVE PLAN

The Company  adopted the 1994 Share  Option and  Incentive  Plan (the "Plan") to
provide incentives to officers,  employees and non-employee  trustees.  The Plan
provides  for the grant of options  to  purchase  a  specified  number of common
shares  ("Options")  or the grant of  restricted or  unrestricted  common shares
("Restricted Shares" or "Unrestricted Shares").  Under the Plan, as amended, the
total number of shares  available  for grant is 8% of the total number of common
shares and Units  (other than common  shares or Units held by the Company or its
subsidiaries) outstanding at any time, and the number of common shares which may
be issued as  Restricted  Shares or  Unrestricted  Shares is equal to 50% of the
number of shares available for issuance under the Plan at such time.

To date, Options have been granted in two series during each of 1994, 1995, 1996
and 1997 with an exercise price equal to the fair value of the Company's  common
shares on the dates the Options were granted.  The Options granted are generally
exercisable in  installments  over three years beginning one year after the date
of grant.  At December 31, 1997,  937 common  shares are subject to  outstanding
Options  granted to officers,  employees  and trustees of the Company,  of which
Options to purchase approximately 550 shares are currently exercisable.

The total  number of  common  shares  reserved  for  issuance  under the Plan at
December  31, 1997 is 2,084, which is equal to 8% of the total  number of common
shares and Units outstanding at that time.

<PAGE>
                                    Page-54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

                                  1997               1996                1995
                                  ----               ----                ----
Balance, beginning of year         904                773                 678
Granted                            235                270                 110
Forfeited                          (55)               (72)                (15)
Exercised                         (147)               (67)                  0
                                ------              -----              ------
Balance, end of year               937                904                 773
                                ======              =====              ======

Option prices:
   Granted            $25.000-  $25.50   $22.750-  $23.00   $19.125 - $20.375
   Forfeited           19.500-   25.50    19.500-   22.75    19.500 -  22.500
   Exercised           19.500-   22.75    19.500-   22.50                 N/A
Balance, end of year   19.125-   25.50    19.125-   23.00    19.125 -  22.500

Gables  accounts for stock options issued under the Plan in accordance  with APB
Opinion  No. 25,  "Accounting  for Stock  Issued to  Employees,"  under which no
compensation cost has been recognized,  since all options have been granted with
an exercise price equal to the fair value of the Company's  common shares on the
date of grant. Had compensation cost for these plans been determined  consistent
with Statement of Financial  Accounting  Standards No. 123 (FAS 123) "Accounting
for Stock-Based  Compensation,"  the Company's net income and earnings per share
would have been reduced to the following pro forma amounts:

                                           1997      1996        1995
                                           ----      ----        ----
Income available to
common shareholders:       As Reported   $29,889   $22,381    $13,556
                           Pro Forma      29,669    22,258     13,522

Basic earnings per share:  As Reported      1.51      1.33       1.19
                           Pro Forma        1.50      1.33       1.18

Diluted earnings per share:As Reported      1.50      1.32       1.18
                           Pro Forma        1.49      1.32       1.18

Because the FAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma  compensation  cost may not be
representative of that to be expected in future years.

The weighted average fair value of options granted is $2.14, $1.91 and $1.45 for
1997, 1996 and 1995, respectively. The fair value of each option grant as of the
date of grant has been estimated using the  Black-Scholes  option pricing models
with the following  weighted-average  assumptions  for grants in 1997,  1996 and
1995, respectively: risk free interest rates of 6.45%, 6.44% and 6.42%; expected
lives of 3.91,  4.90 and 6.64;  dividend yields of 7.99%,  8.43% and 8.94%,  and
expected volatility of 18%, 19% and 19%.

On  February  21,  1997,  the  Company  granted  23  Unrestricted  Shares and 46
Restricted  Shares  (collectively,  the "1997 Share Grants") to certain officers
and employees of Gables. The 1997 Share Grants were awarded based on the closing
price of the Company's common shares on February 21, 1997 of $25.875. Gables had
accrued  $595 as of  December  31,  1996 equal to the value of the  Unrestricted
Shares. The Restricted Shares vest in two equal annual installments beginning on
January 1, 1998. Upon issuance of the Share Grants, the $1,784 value of the 1997
Share Grants was recorded in  shareholders'  equity and the  approximate  $1,189
value of the Restricted Shares was recorded to a deferred compensation component
of shareholders'  equity. Such deferred  compensation is being amortized ratably
over the two-year vesting period.

<PAGE>
                                    Page-55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts in Thousands, Except Property and Per Share Information
---------------------------------------------------------------

On  February  12,  1998,  the  Company  granted  13  Unrestricted  Shares and 40
Restricted  Shares  (collectively,  the "1998 Share Grants") to certain officers
and employees of Gables. The 1998 Share Grants were awarded based on the closing
price of the Company's  common  shares on February 12, 1998 of $26.6875.  Gables
has accrued approximately $350 as of December 31, 1997 equal to the value of the
Unrestricted   Shares.   The  Restricted  Shares  vest  in  three  equal  annual
installments  beginning on January 1, 1999. Upon issuance of the Share Grants in
1998,  the  approximate  $1,400  value of the Share  Grants  will be recorded in
shareholders'  equity and the approximate  $1,050 value of the Restricted Shares
will be recorded to a deferred  compensation  component of shareholders' equity.
Such deferred compensation will be amortized ratably over the three-year vesting
period.


12.  QUARTERLY FINANCIAL INFORMATION (Unaudited)

Quarterly  financial  information for the years ended December 31, 1997 and 1996
is as follows:
<TABLE>
<CAPTION>

                                                       Year Ended Deecember 31, 1997
                                                       -----------------------------
                                                  First     Second      Third      Fourth
                                                 Quarter    Quarter    Quarter     Quarter
                                                 -----------------------------------------
<S>                                             <C>        <C>        <C>       <C>
Total revenues .............................   $ 32,232    $ 33,741   $ 36,893   $ 40,572
Gain on sale of real estate assets .........      4,858           0        491          0
Loss on treasury lock extension ............          0           0          0     (1,178)
Income before extraordinary loss, net ......     10,410       6,706      9,235      8,303
Extraordinary loss, net of minority interest       (602)          0          0          0
Net income .................................      9,808       6,706      9,235      8,303
Net income available to common shareholders       9,808       6,706      7,460      5,915
Basic earnings per common share:
   Income before extraordinary loss, net ...       0.54        0.34       0.38       0.28
   Net income ..............................       0.51        0.34       0.38       0.28
Diluted earnings per common share:
   Income before extraordinary loss, net ...       0.53        0.34       0.38       0.28
   Net income ..............................       0.50        0.34       0.38       0.28


</TABLE>
<TABLE>
<CAPTION>
                                                       Year Ended Deecember 31, 1997
                                                       -----------------------------
                                                  First     Second      Third      Fourth
                                                 Quarter    Quarter    Quarter     Quarter
                                                 -----------------------------------------
<S>                                             <C>         <C>        <C>        <C>

Total revenues .............................   $ 24,442    $ 28,143   $ 31,768   $ 31,828
Non-recurring Olympic revenues, net ........          0         230        670          0
Income before extraordinary loss, net ......      5,200       5,432      5,790      6,479
Extraordinary loss, net of minority interest       (520)          0          0          0
Net income .................................      4,680       5,432      5,790      6,479
Basic earnings per common share:
   Income before extraordinary loss, net ...       0.34        0.34       0.35       0.33
   Net income ..............................       0.31        0.34       0.35       0.33
Diluted earnings per common share:
   Income before extraordinary loss, net ...       0.33        0.34       0.35       0.33
   Net income ..............................       0.30        0.34       0.35       0.33
</TABLE>
<PAGE>
                                    Page-56

<TABLE>
<CAPTION>
GABLES RESIDENTIAL TRUST                                                                              SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)


                                                                             Gross Amount at Which          Year
                                              Initial Costs    Costs Cap-  Carried at Close of Period   Construction/
                         Number of Related    -------------   italized Sub- ------------------------     Substantial         Acqui-
                         Apartment  Encum-          Bldg.and   sequent to        Bldg.and         Accum.  Renovation  Year   sition
Apartment Description      Homes   brances  Land  Improvement Acquisition  Land Improvement Total Deprec. Complete Acquired Comments
---------------------    --------  -------  ----  ----------- -----------  ---- ----------- ----- ------- -------- -------- --------
<S>                        <C>     <C>     <C>    <C>         <C>        <C>    <C>         <C>   <C>     <C>      <C>       <C>

Completed Communities:
----------------------
HOUSTON, TEXAS
Baybrook Village ............ 776 $    --   $2,875  $17,479   $3,223    $ 2,875  $20,702  $23,577  $4,936  1981     1990       (3)
Gables Bradford Place ....... 372      --    2,072        0   15,375      2,072   15,375   17,447   2,959  1991     1990       (4)
Gables Bradford Pointe ...... 360   7,637(1) 1,660        0    9,694      1,660    9,694   11,354   2,508  1990     1989       (4)
Gables Champions ............ 404      --    3,463   19,038      133      3,463   19,171   22,634     214  1995     1997       (3)
Gables CityPlaza ............ 246      --    2,889        0   10,476      2,889   10,476   13,365     991  1995     1994       (4)
Gables Cityscape ............ 252   9,100    4,313        0   12,665      4,313   12,665   16,978   2,336  1991     1990       (4)
Gables CityWalk/Waterford Sq. 317  11,528    4,246    3,441   12,050      5,055   14,682   19,737   3,006  1990/85  1989/92  (4),(3)
Gables Edgewater ............ 292      --    1,607        0   11,441      1,838   11,210   13,048   2,337  1990     1990       (4)
Gables Meyer Park ........... 345      --    3,398        0   13,679      3,418   13,659   17,077   2,370  1993     1992       (4)
Gables of First Colony ...... 324      --    2,607   19,875      111      2,607   19,986   22,593     167  1996     1997       (3)
Gables Piney Point .......... 246  10,965(2) 2,794        0   10,868      2,794   10,868   13,662   1,495  1994     1992       (4)
Gables Pin Oak Green ........ 582      --    7,511   28,543      351      7,511   28,894   36,405   1,700  1990     1996       (3)
Gables Pin Oak Park ......... 477      --    6,234   23,288      288      6,234   23,576   29,810   1,393  1992     1996       (3)
Gables River Oaks ........... 228      --    4,935   16,200      430      4,935   16,630   21,565     920  1993     1996       (3)
Rivercrest .................. 140   3,403(1)   500    3,706    1,043        582    4,667    5,249   1,287  1982     1987       (3)
Westhollow Park ............. 412      --    2,000    5,790    2,899      2,000    8,689   10,689   2,037  1978-79  1990       (4)

ATLANTA, GEORGIA
Briarcliff Gables ........... 104      --    1,322        0    6,505      1,322    6,505    7,827     570  1995     1994       (4)
Buckhead Gables ............. 162      --    2,978      993    3,731      2,978    4,724    7,702     661  1964/94  1993     (3),(5)
Dunwoody Gables ... ......... 311      --    3,567        0   14,295      3,567   14,295   17,862   1,067  1995     1994       (4)
Gables Cinnamon Ridge........ 200      --    1,500    6,239      474      1,500    6,713    8,213     889  1980     1994       (3)
Gables Cityscape ............ 192      --    2,250    5,750      767      2,250    6,517    8,767   1,028  1989     1994       (3)
Gables Mill ................. 438      --    6,570   22,381      386      6,570   22,767   29,337     462  1988     1997       (3)
Gables Northcliff ...........  82   3,704    1,230    5,366       97      1,230    5,463    6,693      69  1978     1997       (3)
Gables Over Peachtree........ 263      --    2,644    8,400    9,522      2,644   17,922   20,566   1,468  1970/96  1995     (3),(5)
Gables Vinings .............. 315      --    3,679        0   20,547      3,718   20,508   24,226     312  1997     1995       (4)
Gables Walk ................. 310      --    4,650   22,667       59      4,650   22,726   27,376     192  1997     1997       (3)
Gables Wood Arbor ........... 140   7,130      915        0    6,079        915    6,079    6,994   1,972  1987     1985       (4)
Gables Wood Crossing......... 268  11,650    1,605        0   12,339      1,605   12,339   13,944   4,591  1985-86  1983       (4)
Gables Wood Glen ............ 380   9,387(1) 1,323        0   16,510      1,487   16,346   17,833   5,499  1983     1983       (4)
Gables Wood Knoll ........... 312   7,744(1) 1,865   10,856    1,921      1,865   12,777   14,642   3,049  1984     1990       (6)
Lakes at Indian Creek........ 603  11,785    1,400    9,100    3,704      1,391   12,813   14,204   2,463  1969-72  1993       (3)
Rock Springs Estates......... 295      --   11,822    7,932       29     11,822    7,961   19,783      61  1945,    1997       (3)
                                                                                                           87,92
Roswell Gables I ............ 384      --    3,231        0   18,180      3,231   18,180   21,411   1,476  1995     1994       (4)
Roswell Gables II ........... 284      --    3,275        0   18,005      3,313   17,967   21,280     183  1997     1996       (4)
Spalding Gables.............. 252      --    2,292        0   13,908      2,292   13,908   16,200   1,071  1995     1994       (4)
Wildwood Gables.............. 546  27,173(2) 4,810    1,100   22,198      4,810   23,298   28,108   3,742  1972/    1991   (3),(5)
                                                                                                           92-93

DALLAS, TEXAS
Arborstone .................. 536      --    1,022    7,815    1,642      1,022    9,457   10,479   1,393  1985     1993       (3)
Gables at Pearl Street....... 108      --    1,680        0    7,486      1,680    7,486    9,166     694  1995     1994       (4)
Gables CityPlace ............ 232      --    4,914   16,511      147      4,914   16,658   21,572     520  1995     1997       (3)
Gables Green Oaks ........... 300      --      737        0   15,704        737   15,704   16,441     783  1996     1994       (4)
Gables Mirabella ............ 126      --    1,917   10,722       61      1,917   10,783   12,700     152  1996     1997       (3)
Gables Preston .............. 126      --    1,056        0    7,839      1,056    7,839    8,895     625  1995     1994       (4)
Gables Spring Park........... 188      --      901        0   11,375        901   11,375   12,276     750  1996     1994       (4)
Gables Turtle Creek.......... 150      --    2,181   11,001       47      2,181   11,048   13,229     487  1995     1996       (3)
Gables Valley Ranch.......... 319  14,247(2) 1,899        0   14,721      1,899   14,721   16,620   1,798  1994     1993       (4)

<PAGE>
                                    Page-57

<CAPTION>
GABLES RESIDENTIAL TRUST                                                                                                SCHEDULE III
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)


                                                                             Gross Amount at Which          Year
                                              Initial Costs    Costs Cap-  Carried at Close of Period   Construction/
                         Number of Related    -------------   italized Sub- ------------------------     Substantial         Acqui-
                         Apartment  Encum-          Bldg.and   sequent to        Bldg.and         Accum.  Renovation  Year   sition
Apartment Description      Homes   brances  Land  Improvement Acquisition  Land Improvement Total Deprec. Complete Acquired Comments
---------------------    --------  -------  ----  ----------- -----------  ---- ----------- ----- ------- -------- -------- --------
<S>                        <C>     <C>     <C>    <C>         <C>        <C>    <C>         <C>   <C>     <C>      <C>       <C>

Completed Communities:
----------------------
MEMPHIS, TENNESSEE
Gables Cordova .............  464  $10,487(1)$1,865        0  $24,231   $1,865  $24,231    $26,096  $7,648  1986     1985       (4)
Gables Germantown ..........  252       --    1,478        0   18,430    1,478   18,430     19,908     676  1997     1994       (4)
Gables Quail Ridge .........  238       --    1,053        0   16,109    1,053   16,109     17,162     585  1997     1994       (4)
Gables Stonebridge .........  500   19,419    2,312   23,674      954    2,312   24,628     26,940   1,285  1993-96  1996       (3)

NASHVILLE, TENNESSEE
Brentwood Gables ...........  254       --      849        0   15,690      849   15,690     16,539     994  1996     1994       (4)
Gables Hendersonville ......  364    9,706(1) 1,182        0   14,801    1,237   14,746     15,983   3,359  1991     1989       (4)
Gables Hickory Hollow I       272   12,750      974        0   12,521      974   12,521     13,495   4,802  1988     1985       (4)
Gables Hickory Hollow II ...  276   13,400    1,027        0   12,539    1,027   12,539     13,566   5,221  1987     1985       (4)

SAN ANTONIO, TEXAS
Gables Colonnade I .........  312       --    1,616        0   13,734    1,616   13,734     15,350   1,209  1995     1994       (4)
Gables Wall Street .........  232       --    1,223        0   11,410    1,223   11,410     12,633     873  1996     1994       (4)

AUSTIN, TEXAS
Gables Central Park ........  273       --        0        0   15,986        0   15,986     15,986     280  1997     1996    (4),(7)
Gables Great Hills .........  276       --    1,475        0   10,277    1,475   10,277     11,752   1,541  1993     1992       (4)
Gables Park Mesa ...........  148       --    2,072   10,331      137    2,072   10,468     12,540     116  1992     1997       (3)
Gables Town Lake ...........  256       --        0        0   13,728        0   13,728     13,728     964  1996     1994    (4),(7)
                          -------  -------  -------- ------- --------- -------  -------    -------    ----
Category Total ............17,816 $201,215 $149,465 $318,198 $513,551 $150,894 $830,320   $981,214 $98,236
                          ======= ======== ======== ========  =======  =======  =======    =======  ======

DEVELOPMENT COMMUNITIES:
ATLANTA, GEORGIA
Gables at Sugarloaf .......   386       --    3,249        0    7,511    3,249    7,511     10,760       0  1999(8)  1996       (4)
AUSTIN, TEXAS
Gables Bluffstone .........   256       --    2,129        0   14,217    2,129   14,217     16,346       0  1998(8)  1996       (4)
HOUSTON, TEXAS
Gables New Territory.......   256       --    1,338        0    3,806    1,338    3,806      5,144       0  1998(8)  1997       (4)
ORLANDO, FLORIDA
Gables Celebration ........   231       --    3,235        0    4,704    3,235    4,704      7,939       0  1998(8)  1997       (4)
The Commons at Little
      Lake Bryan I ........   280       --    2,477        0   10,574    2,477   10,574     13,051       0  1998(8)  1996       (4)
                            -----    -----  -------    -----  -------  -------  -------    -------  ------
Category Total ............ 1,409        0  $12,428       $0  $40,812  $12,428  $40,812    $53,240      $0
                            =====    =====  =======    =====  =======  =======  =======    =======  ======

LAND HELD FOR FUTURE DEVELOPMENT:
ATLANTA,  GEORGIA
Gables Metropolitan I and II  720       --   12,452        0        0   12,452        0     12,452       0   (9)     1997       (4)
DALLAS, TEXAS
Gables Green Oaks II .......  250       --      606        0        0      606        0        606       0   (9)     1994       (4)
Gables State Thomas ........  202       --    4,120        0        0    4,120        0      4,120       0   (9)     1997       (4)
Gables at the Galleria .....  222       --    2,800        0        0    2,800        0      2,800       0   (9)     1997       (4)
SAN ANTONIO, TEXAS
Gables Colonnade II ........  250       --    1,549        0     (353)   1,196        0      1,196       0   (9)     1994       (4)
MEMPHIS, TENNESSEE
Gables Quail Ridge II ......  148       --      600        0        0      600        0        600       0   (9)     1996       (4)
                           ------   ------  -------    -----   ------  -------  -------    -------  ------
Category Total .............1,792     $  0  $22,127       $0    ($353) $21,774       $0    $21,774      $0
                           ======   ======  =======    =====  =======  =======  =======    =======  ======

GRAND TOTALS ...........   21,017 $201,215 $184,020 $318,198 $554,010 $185,096 $871,132 $1,056,228 $98,236
                           ====== ======== ======== ======== ======== ======== ======== ========== =======
<PAGE>
                                    Page-58
<FN>
                                                                                                            SCHEDULE III
GABLES RESIDENTIAL TRUST
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)

Notes to preceding two pages:

(1)  These properties  together secure a $48,365  tax-exempt fixed rate mortgage
     note payable.  The principal  balance  outstanding  under the note has been
     allocated to these properties proportionately based on each property's 1997
     net  operating  income  (equal to total  property  revenues  less  property
     operating and maintenance expenses, exclusive of depreciation expense).

(2)  These properties together secure a $52,385 conventional fixed rate mortgage
     note payable.  The principal  balance  outstanding  under the note has been
     allocated to these properties proportionately based on each property's 1997
     net  operating  income  (equal to total  property  revenues  less  property
     operating and maintenance expenses, exclusive of depreciation expense).

(3)  Acquisition of existing apartment community.

(4)  Acquisition of land for development.

(5)  Property was substantially renovated following acquisition.

(6)  Property was developed by Gables, sold and subsequently  reacquired through
     foreclosure.

(7)  Land subject to a long-term lease.

(8)  Represents the year in which construction is expected to be completed.

(9)  The   development   timetable  has  not  yet  been   determined  for  these
     communities.

Depreciation  is calculated  on a straight  line basis over an estimated  useful
life ranging from 19 to 40 years for buildings and improvements and an estimated
useful life ranging from 5 to 10 years for furniture, fixtures and equipment.

A summary of activity for real estate  investments and accumulated  depreciation
is as follows:

</FN>
</TABLE>
<TABLE>
<CAPTION>
                                                                                   Years ended December 31
                                                                                   -----------------------
                                                                          1997             1996           1995
                                                                          ----             ----           ----
REAL ESTATE INVESTMENTS:
<S>                                                                     <C>              <C>            <C>

Balance, beginning of year ......................................   $   784,600       $   591,233   $   437,782
Additions:
  Acquisitions, including renovation expenditures ...............       179,346           128,472        18,727
  Development costs incurred, including related land acquisitions        96,551            65,867       131,725
  Capital expenditures for completed communities ................         4,878             3,854         2,999
                                                                      ---------          --------      --------
    Total additions .............................................       280,775           198,193       153,451
Sales ...........................................................        (9,147)           (4,826)            0
                                                                      ---------          --------      --------
Balance, end of year ............................................   $ 1,056,228       $   784,600   $   591,233
                                                                      =========          ========      ========

ACCUMULATED DEPRECIATION:

Balance, beginning of year ......................................      $ 74,903         $  57,343      $45,010
Depreciation ....................................................        24,655            18,457       12,333
Sales ...........................................................        (1,322)             (897)           0
                                                                       --------           -------       ------
Balance, end of year ............................................       $98,236         $  74,903      $57,343
                                                                       ========           =======       ======
</TABLE>