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, 1998

[   ]    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
         -------

     As of March 18, 1999, the aggregate  market value of the 25,990,919  Common
Shares held by non-affiliates of the Registrant was $571,800,218  based upon the
closing price  ($22.00) 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 18, 1999,
there were outstanding 26,361,558 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 25, 1999 are  incorporated by
reference in Part III, Items 10, 11 and 12.
<PAGE>

                            FORM 10-K ANNUAL REPORT
                      FISCAL YEAR ENDED DECEMBER 31, 1998
                               TABLE OF CONTENTS


                                     PART I

Item                                                                        Page
 No.                                                                         No.
-----                                                                       ----
1.   Business  ..............................................................  1
2.   Properties..............................................................  9
3.   Legal Proceedings ...................................................... 14
4.   Submission of Matters to a Vote of Security Holders .................... 14

                                    PART II
        
5.   Market for Registrant's Common Equity and Related Shareholder Matters... 14
6.   Selected Financial and Operating Information ........................... 15
7.   Management's Discussion and Analysis of Financial Condition and
         Results of Operations .............................................. 18
7.A  Quantitative and Qualitative Disclosures About Market Risk.............. 33
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>
                                       1

                                     PART I

ITEM 1.         BUSINESS

General
-------

Gables  Residential  Trust (the  "Company"  or  "Gables")  is one of the largest
owners,  operators and  developers of multifamily  apartment  communities in the
Southwestern  and  Southeastern  region of the United  States (the  "Sunbelt" or
"Sunbelt  Region").  The  Company is a real estate  investment  trust (a "REIT")
formed in 1993  under  Maryland  law to  continue  and  expand  the  multifamily
apartment  community  management,  development,   construction  and  acquisition
operations of its privately owned predecessor organization. Gables completed its
initial public  offering on January 26, 1994 (the "IPO").  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, 1998, the Company was an
80.3% economic owner of the common equity of the Operating Partnership.

GEOGRAPHIC  EXPANSION AND  ACQUISITION.  On April 1, 1998,  Gables  acquired the
properties and operations of Trammell Crow Residential South Florida ("TCR/SF"),
which consisted of fifteen multifamily apartment communities  containing a total
of 4,197  apartment  homes,  and all of TCR/SF's  residential  construction  and
development   and  third   party   management   activities   in  South   Florida
(collectively, the "South Florida Acquisition"). The communities acquired in the
South Florida  Acquisition are located in Palm Beach County,  Broward County and
Dade County and encompass the metropolitan  areas of Palm Beach, Fort Lauderdale
and Miami,  respectively.  Such locations are collectively referred to herein as
"Boca Raton" or "South  Florida."  Gables'  management  believes  that the South
Florida Acquisition facilitated the following goals:

     -    Establishing  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.
     -    Allowing 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.
     -    Providing further geographic and economic  diversification  of Gables'
          portfolio of multifamily apartment communities,  thereby enhancing the
          stability of Gables' cash flow.
     -    Generating a pipeline of acquisition and development opportunities  in
          the South Florida markets,  which are characterized by high job growth
          and high barriers to entry.
     -    Allowing  Gables  to  generate economies  of  scale by  spreading  its
          corporate  overhead  costs over a larger  portfolio and increasing its
          buying power with vendors.
     -    Producing   immediate  earnings  growth  and  accelerating   long-term
          earnings growth.

As of December 31, 1998, Gables owned 84 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, Florida and Tennessee:  Houston, Dallas, Austin, San Antonio,
Atlanta,  Boca Raton, Orlando,  Memphis and Nashville (the "Core Markets").  The
Current  Communities totaled 25,288 apartment homes and included two multifamily
apartment  communities  in the final stages of lease-up.  Gables also owned five
multifamily  apartment  communities that were under construction at December 31,
1998 that Gables expects will comprise  1,613  apartment  homes upon  completion
(collectively,  the "Development Communities" and, with the Current Communities,
the "Communities"). Gables also owns sites (the "Undeveloped Sites") on which it
intends to develop seventeen additional  multifamily  apartment communities that
Gables expects will comprise an estimated  4,093  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 1,570
apartment  homes.  See  "Recent  Developments"  on  page  9 for  certain  events
occurring subsequent to December 31, 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."
<PAGE>
                                       2

MANAGEMENT  STRUCTURE.  Gables  has  been  responsible  for the  development  or
acquisition of  approximately  50,000  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 1,350 employees who have experience in
property operations, development, acquisition and construction. Gables maintains
offices in  Atlanta,  Boca Raton,  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.

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

     -    A fully integrated organization:  a fully integrated organization with
          a track record of  approximately  sixteen  years in all phases of real
          estate property management,  development,  acquisition,  construction,
          rehabilitation, financing and marketing.
     -    Product  focus:  a  portfolio  concentration  of Class AA/A  apartment
          communities that are targeted toward the lifestyle renter, are located
          primarily in in-fill  locations and  master-planned  communities,  and
          include garden, townhome and higher density apartment communities.
     -    Local presence in multiple  markets:  an established local presence in
          each of its markets,  which Gables serves through an experienced staff
          with superior  knowledge of local markets and a culture which provides
          incentives for outstanding performance at all levels.
     -    Geographic  diversification:  an established  market  presence in nine
          major   markets  in  the  Sunbelt   Region  that  are   geographically
          independent, rely on diverse economic foundations, and during the past
          several  years  have  shown job growth  substantially  above  national
          averages.
     -    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.

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,  1998,  the Company  held
directly,  or  indirectly  through GGPI,  80.3% 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.

Generally,  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 IPO and the South Florida
Acquisition.  The Operating  Partnership is obligated to redeem each common unit
of  limited  partnership  interest  ("Unit")  held by a  person  other  than the
Company, 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 or preferred  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
common or preferred units, as applicable, to the Company.
<PAGE>
                                       3

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.

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, brokerage and 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 Internal Revenue Code of 1986, as amended (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  Operating
Partnership  together  represent 99% of the equity  interests in each Management
Company.  Executive officers of GGPI 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 GGPI 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  communities.  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
------------------------------------------

OVERVIEW.  Gables'  objective  is  to  increase  shareowner  value  by  being  a
profitable owner and operator of Class AA/A multifamily apartment communities in
the  Sunbelt  Region of the United  States.  To achieve  its  objective,  Gables
employs a number of business strategies.  First, Gables adheres to a strategy of
owning and operating Class AA/A apartment communities which should maintain high
levels of occupancy and rental  rates.  Gables  believes that such  communities,
when supplemented with high quality services and amenities, attract the affluent
renter-by-choice,  who is willing to pay a premium for conscientious service and
high quality  communities.  Accordingly,  Gables' communities possess innovative
architectural  designs and numerous  amenities and services that Gables believes
are desired by its target customers. Second, Gables seeks to grow cash flow from
operating  communities  through  innovative,  proactive property management that
focuses on resident satisfaction and retention,  increases in property rents and
occupancy  levels,  and the  control  of  operating  expenses  through  improved
economies of scale. Third, Gables develops and acquires  high-quality  apartment
communities  in in-fill  locations  and  master-planned  communities  near major
employment  centers  in the  Sunbelt  Region  with the  objective  of  achieving
critical mass in the most  desirable  submarkets.  Finally,  due to the cyclical
nature of the real estate  markets,  Gables has adopted an  investment  strategy
based on a strong local presence and expertise, which it believes will allow for
growth through  acquisitions and development (as warranted by underlying  market
fundamentals)  and will help ensure  favorable  initial and  long-term  returns.
Gables  believes the  successful  execution of these  operating  and  investment
strategies will result in operating cash flow growth.

Gables believes that it is well  positioned to continue  achieving its objective
because of its  long-established  presence  as a fully  integrated  real  estate
management,  development,  construction and acquisition  company in its markets.
Gables  believes  that  its   established,   local  market  presence  creates  a
competitive  advantage during different economic cycles in generating  increased
cash flow from (i) property  operations  and (ii) new  investment  opportunities
that  involve  local  market   knowledge,   site   selection  and  requests  for
entitlements   and  zoning   petitions.   Gables'  markets  are   geographically
independent,   rely  on  diverse  economic   foundations  and  have  experienced
above-average job growth.
<PAGE>
                                       4
 
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
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  encouraging   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 30,000 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  AA/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  AA/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   20,000   apartment  homes,  of  which
approximately 3,000 apartment homes were value-added acquisitions which required
substantial redevelopment,  repositioning,  and strong management skills. 
<PAGE>
                                       5

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.
 
FEE MANAGEMENT  BUSINESS AND RELATED  SERVICES.  As of December 31, 1998, Gables
managed for third parties 53 multifamily  communities  comprising  approximately
17,500  apartment  homes.  These fee management  contracts are maintained with a
total of  approximately  27 owners.  In  addition  to  contributing  modestly to
earnings,  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.
<PAGE>
                                       6
 
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.
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.
<PAGE>
                                       7

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.
 
Employees
---------
 
Gables  provides  a full  range  of real  estate  services  through  a staff  of
approximately 1,350 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.  The Company  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.
<PAGE>
                                       8
 
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,
1998 market  value of  outstanding  Common  Shares of the Company and  Operating
Partnership  Units, plus total  consolidated debt and preferred shares and units
at  liquidation  value) was  approximately  47% at December 31, 1998.  Excluding
construction-related indebtedness, this ratio was 42% at December 31, 1998. 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,  in most  circumstances,  the debt to total
market capitalization ratio provides an alternative indication of leverage for a
company  whose assets are 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, Banks and Wheeler 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.  The employment  agreements with Mssrs.
Bromley,  Rippel,  Clark  and  Banks  terminate  on  January  1,  2000  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.  The  employment  agreement with Mr. Wheeler
terminates  on September  30, 1999,  but also  provides for  automatic  one-year
extensions  subject to notice of non-renewal.  
<PAGE>
                                       9

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
-------------------

On  March 4,  1999,  Gables  sold an  apartment  community  located  in  Atlanta
comprising 213 apartment homes for $19.3 million.

On March 18, 1999,  Gables announced the resignation of John Rippel as President
and  Chief  Operating  Officer  effective  in May,  1999.  Marc  Bromley,  Chief
Executive  Officer,  will  oversee  property  operations  until the  position is
filled.

On March 22, 1999,  Gables announced a common share repurchase  program pursuant
to which Gables is authorized  to purchase up to $50 million of its  outstanding
Common  Shares.  Gables  plans to  repurchase  shares  from time to time in open
market and  privately  negotiated  transactions,  depending on market prices and
other conditions using proceeds from sales of selected assets.

On March 26,  1999,  Gables  entered into a joint venture  agreement with an
affiliate of J.P. Morgan Investment,  Inc. ("J.P. Morgan"). The business purpose
of the  venture is to  develop,  own and  operate  seven  multifamily  apartment
communities  located in four of Gables'  nine  markets,  which are  expected  to
comprise  2,181  apartment  homes.  As of  December  31,  1998,  Gables  (i) had
commenced  construction of four of the communities,  (ii) owned the land for the
future  development of two of the  communities  and (iii) owned the  acquisition
right for the land for the future  development  of one of the  communities.  The
capital  budget for the  development of the seven  communities is  approximately
$213 million and is anticipated  to be funded with 50% debt and 50% equity.  The
equity  component will be funded 80% by J.P.  Morgan and 20% by Gables.  Gables'
portion  of the  equity  will be  funded  through  a  contribution  of cash  and
property.  Gables will serve as the managing member of the venture and will have
responsibility  for all day-to-day  operating issues.  Gables will also serve as
the general contractor during construction and as the property manager.

ITEM 2. PROPERTIES

As of  December  31,  1998,  Gables  owned  or had  an  interest  in 86  Current
Communities,  consisting of 25,288  apartment  homes, and owned five Development
Communities,  consisting of 1,613 apartment homes. The Communities, comprising a
total of 26,901  apartment  homes,  are located in Texas,  Georgia,  Florida and
Tennessee.  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
                    --------------------------    ----------------------------     Total Apt.
Location           Current  Development Total     Current  Development   Total       Homes
--------           -------  ----------- -----     -------  -----------   -----       -----
<S>                  <C>    <C>       <C>      <C>             <C>        <C>       <C>
Houston, TX (1),(2)   22        1         23      7,260         382         7,642    28.4%     
Atlanta, GA (3),(2)   22        1         23      6,440         435         6,875    25.6%
Boca Raton, FL (2)    15        1         16      4,197         343         4,540    16.9%
Dallas, TX (2)         9        1         10      2,085         222         2,307     8.6%
Memphis, TN (4)        5       --          5      1,799          --         1,799     6.7%
Austin, TX             6       --          6      1,517          --         1,517     5.6%
Nashville, TN          4       --          4      1,166          --         1,166     4.3%
San Antonio, TX        2       --          2        544          --           544     2.0%
Orlando, FL            1        1          2        280         231           511     1.9%
                    ----     ----       ----     ------      ------        ------    -----     
       Total          86        5         91     25,288       1,613        26,901    100.0%
                    ====     ====       ====     ======      ======        ======    =====
<FN>
(1)  Includes a Current Community comprising 318 apartment homes in which Gables
     has a 25% general partner interest.

(2)  These locations include Development Communities, consisting of an aggregate
     1,382  apartment  homes that were  contributed  into the joint venture with
     J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.

(3)  Includes a Current  Community  comprising 213 apartment homes that was sold
     in March, 1999. See "Recent Developments" in Item 1.

(4)  Includes a Current Community comprising 345 apartment homes in which Gables
     has a 25% general partner interest.
</FN>
</TABLE>
<PAGE>
                                       10

CURRENT  COMMUNITIES.  Gables  developed 41 Current  Communities  (consisting of
11,531  apartment  homes),  and acquired 45 Current  Communities  (consisting of
13,757 apartment homes). All 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, 1998,
the  Current  Communities  had an  average  scheduled  monthly  rental  rate per
apartment  home of  approximately  $863 and,  with the  exception of two Current
Communities in the final lease-up phase,  had a physical  occupancy rate of 94%.
The average age of the Current Communities is approximately eight 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.

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.   Certain   information   regarding  Gables'   Development
Communities at December 31, 1998 is presented below:
<TABLE>
<CAPTION>

                                                                                     Actual or Estimated Quarter of
                        Number of     Total       Percent at December 31, 1998     ---------------------------------
                        Apartment    Budgeted     ----------------------------   Const.    Initial     Const.  Stabilized
      Community           Homes        Cost     Complete    Leased   Occupied    Start    Occupancy     End    Occupancy
      ---------          -------     -------    --------    ------   --------    -----    ---------   -------  ---------
                                    (millions)                                                                    (1)
<S>                       <C>        <C>           <C>        <C>       <C>      <C>      <C>         <C>       <C>     
WHOLLY-OWNED DEVELOPMENT
   COMMUNITY:
Orlando, FL
-----------
Gables Celebration           231           $27         84%       75%        52%     3Q '97    2Q '98     2Q '99    2Q '99
                            ----           ---       
CO-INVESTMENT DEVELOPMENT
COMMUNITIES (2):
Atlanta, GA
-----------
Gables Metropolitan I        435           $49 (3)     16%      ---        ---      2Q '98    3Q '99     3Q '00    4Q '00

Houston, TX
-----------
Gables Raveneaux             382            28 (3)     13%      ---        ---      3Q '98    2Q '99     2Q '00    3Q '00
                                           
Dallas,  TX
-----------
Gables San Raphael           222            17 (3)     39%      ---        ---      3Q '98    2Q '99     4Q '99    1Q '00

Boca Raton, FL
--------------
Gables San Michelle II       343            40 (3)      9%      ---        ---      3Q '98    2Q '99     3Q '00    4Q '00
                           -----          ----
     Totals                1,382          $134 (3)
                           =====          ====
     Grand Totals          1,613          $161
                           =====          ====
<FN>
(1)  Stabilized  occupancy  is  defined  as the  earlier  to  occur  of (i)  93%
     occupancy or (ii) one year after completion of construction.

(2)  These  communities were contributed into the joint venture with J.P. Morgan
     in March, 1999. See "Recent Developments" in Item 1.

(3)  Under the terms of the joint venture agreement with J.P. Morgan,  Gables is
     required to fund 10% of the total budgeted costs for these communities. See
     "Recent Developments" in Item 1.
</FN>
</TABLE>
<PAGE>
                                       11

UNDEVELOPED  SITES. As of December 31, 1998, Gables owned seventeen  Undeveloped
Sites and  intends  to develop  multifamily  communities  at those  sites in the
future:

                                          Metropolitan       Estimated Number
Undeveloped Sites                             Area          of Apartment Homes
-----------------                       ----------------    ------------------
Gables at Sugarloaf II                    Atlanta,  GA                  300
Gables at Sugarloaf III                   Atlanta,  GA                  300
Gables Metropolitan II                    Atlanta,  GA                  200
Gables Plaza                              Atlanta,  GA                  100
Gables Green Oaks II                      Dallas, TX                    200
Gables State Thomas I                     Dallas,  TX                   290  (1)
Gables State Thomas II                    Dallas,  TX                   123
Gables State Thomas III                   Dallas,  TX                   300
Gables State Thomas IV                    Dallas,  TX                   300
Gables at Little Lake Bryan II/III        Orlando,  FL                  448
Gables Celebration II                     Orlando,  FL                  315
Gables Meyer Park II                      Houston,  TX                  296
Gables New Territory II                   Houston,  TX                  248
Gables White Oak                          Houston,  TX                  186
Gables Colonnade II                       San Antonio, TX               150
Gables Palma Vista                        Boca Raton, FL                189  (1)
Gables Quail Ridge II                     Memphis,  TN                  148
                                                                      -----
     Total                                                            4,093
                                                                      =====

(1)  Represents an Undeveloped  Site that was contributed into the joint venture
     with J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.
 
There can be no assurance of when or if the Undeveloped Sites will be developed.

DEVELOPMENT  RIGHTS. As of December 31, 1998, Gables had five Development Rights
which are located in three cities:

                                          Metropolitan        Estimated Number
   Development  Right                        Area            of Apartment Homes
   ------------------                   ---------------     --------------------
   Gables at Grand Isle                     Boca Raton, FL           320 (1)
   Gables Crestwood                         Boca Raton, FL           290
   Gables Stuart                            Boca Raton, FL           220
   Gables at First Street                   Austin, TX               400
   Gables at Little Lake Bryan IV           Orlando, FL              340 (2)
                                                                   -----
          Total                                                    1,570
                                                                   =====

(1)  Represents a Development  Right that was contributed into the joint venture
     with J.P. Morgan in March, 1999. See "Recent Developments" in Item 1.

(2)  Gables has this land parcel under option.

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

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 "Development Communities," "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
and  lease-up 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  of the  underlying  real  estate
fundamentals and the impact on its capital structure.  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>

                                       12

                                                                                
               CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1998
               --------------------------------------------------
<TABLE>
<CAPTION>

                                                                                                                     Scheduled Rent 
                                   Number of   Approximate               Year                  Average               @ 12/31/98 Per 
                                   Apartment    Rentable     Total    Constructed/   Year     Unit Size   Occupancy  ---------------
   Community Name (1)                Homes      Sq. Ft. (2)  Acreage   Renovated   Acquired   (Sq. Ft.)  @ 12/31/98  Unit    Sq. Ft.
   ------------------                -----     -----------   -------   ---------   --------   ---------   ---------- ----    -------
<S>                               <C>        <C>             <C>         <C>        <C>       <C>            <C>    <C>      <C>
HOUSTON, TX
Austin Colony (3) ...........         237      231,621        11.0        1984        1998       977         98%    $880      $0.90
Baybrook Village ............         776      620,428        26.4        1981        1990       800         96%     584       0.73
Gables Bradford Place .......         372      320,322        13.3        1991          --       861         95%     757       0.88
Gables Bradford Pointe (3)...         360      276,417        13.5        1990          --       768         94%     660       0.86
Gables Champions ............         404      367,588        29.7        1995        1997       910         87%     824       0.91
Gables CityPlaza ............         246      217,374         7.5        1995          --       884         95%     913       1.03
Gables Cityscape (3).........         252      214,824         6.8        1991          --       852         94%     937       1.10
Gables CityWalk/Waterford Sq (3)      317      255,823         8.7     1990/85     --/1992       807         96%     920       1.14
Gables Edgewater ............         292      257,339        12.2        1990          --       881         90%     837       0.95
Gables Meyer Park ...........         345      297,054        11.0        1993          --       861         93%     889       1.03
Gables New Territory ........         256      233,652        15.0        1998          --       913         -- (4)  868       0.95
Gables of First Colony ......         324      321,848        13.3        1996        1997       993         91%     933       0.94
Gables Piney Point (3).......         246      227,880         7.5        1994          --       926         92%     965       1.04
Gables Pin Oak Green ........         582      593,478        14.4        1990        1996     1,020         91%     984       0.96
Gables Pin Oak Park .........         477      486,308        11.9        1992        1996     1,020         91%   1,010       0.99
Gables River Oaks ...........         228      277,908         5.7        1993        1996     1,219         95%   1,404       1.15
Lions Head(3)................         277      233,796        10.3        1983        1998       844         86%     757       0.90
Metropolitan Uptown (5)......         318      290,141         8.9        1995          --       912         92%   1,032       1.13
Rivercrest I (3).............         140      118,020         5.1        1982        1987       843         91%     744       0.88
Rivercrest II (3)............         140      118,020         5.0        1983        1998       843         86%     742       0.88
Westhollow Park .............         412      370,640        18.3     1978-79        1990       900         92%     668       0.74
Windmill Landing (3).........         259      224,689         9.8        1984        1998       868         94%     699       0.81
                                  -------    ---------       -----                             -----       ----    -----     ------
Totals/ Weighted Averages .         7,260    6,555,170       265.3                               903         93%    $848      $0.94
                                  =======    =========       =====                             =====       ====    =====     ======
ATLANTA, GA
Briarcliff Gables ...........         104      128,976         5.2        1995          --     1,240         99%  $1,081      $0.87
Buckhead Gables .............         162      122,548         3.5        1994(6)     1994       756         98%     817       1.08
Dunwoody Gables(3)...........         311      290,396        10.4        1995          --       934         98%     834       0.89
Gables at Sugarloaf .........         386      424,166        29.7        1998          --     1,099          --(4)  845       0.77
Gables Cinnamon Ridge .......         200      192,016        14.5        1980        1994       960         98%     685       0.71
Gables Cityscape ............         192      159,360         5.5        1989        1994       830         97%     833       1.00
Gables Heights (7)...........         213      265,721        17.4     1984/85        1998     1,248         88%   1,254       1.00
Gables Mill .................         438      406,676        36.1        1988        1997       928         97%     826       0.89
Gables Northcliff (3)........          82      127,990        12.7        1978        1997     1,561         99%   1,153       0.74
Gables Over Peachtree .......         263      239,814 (8)     1.4        1996(6)     1995       912         96%   1,039       1.14
Gables Vinings ..............         315      336,735        15.2        1997          --     1,069         97%     929       0.87
Gables Walk .................         310      367,226        19.7     1996-97        1997     1,185         91%   1,018       0.86
Gables Wood Arbor (3)........         140      127,540         9.9        1987          --       911         95%     699       0.77
Gables Wood Crossing (3).....         268      257,012        22.3     1985-86          --       959         97%     735       0.77
Gables Wood Glen (3).........         380      377,340        23.8        1983          --       993         88%     687       0.69
Gables Wood Knoll (3)........         312      311,064        19.6        1984          --       997         94%     718       0.72
Lakes at Indian Creek (3)....         603      552,384        49.8     1969-72        1993       916         95%     602       0.66
Rock Springs Estates ........         295      298,302        28.7     1945-92        1997     1,011         95%     934       0.92
Roswell Gables I ............         384      417,288        28.3        1995          --     1,087         94%     875       0.81
Roswell Gables II ...........         284      334,268        28.3        1997          --     1,177         94%     875       0.74
Spalding Gables (3)..........         252      249,333        11.2        1995          --       989         98%     867       0.88
Wildwood Gables (3)..........         546      619,710        37.9     1992-93(6)     1991     1,135         97%     863       0.76
                                   ------    ---------      ------                           -------       ----    -----     ------
Totals/ Weighted Averages .         6,440    6,605,865       431.1                             1,026         95%   $ 842      $0.82
                                   ======    =========      ======                           =======       ====    =====     ====== 
BOCA RATON, FL
Boca Place (3)...............         180      175,812         9.4        1984        1998       977         94%   $ 855      $0.87
Cotton Bay (3)...............         444      436,460        37.6        1986        1998       983         95%     696       0.71
Hampton Lakes (3)............         300      319,396        11.0        1986        1998     1,065         87%     756       0.71
Hampton Place ...............         368      352,528        14.1        1985        1998       958         92%     721       0.75
Kings Colony (3).............         480      426,590        18.8        1986        1998       889         96%     751       0.85
Mahogany Bay (3).............         328      330,928        25.4        1986        1998     1,009         95%     746       0.74
Mizner on the Green .........         246      311,176         8.9        1996        1998     1,265         91%   1,564       1.24
San Michele .................         249      332,683        32.4        1998        1998     1,336         96%   1,395       1.04
San Remo ....................         180      329,978        11.8        1995        1998     1,833         90%   1,239       0.68
Town Colony (3)..............         172      147,724        10.0        1985        1998       859         97%     822       0.96
Vinings at Boynton Beach I...         252      302,148        18.0        1996        1998     1,199         95%     842       0.70
Vinings at Boynton Beach II           296      357,653        15.9        1997        1998     1,208         93%     895       0.74
Vinings at Hampton Village(3)         168      202,752         8.6        1988        1998     1,207         92%     802       0.66
Vinings at Town Place ....(3)         312      260,192        13.0        1987        1998       834         94%     822       0.99
Vinings at Wellington .....           222      297,138        12.7        1998        1998     1,338         94%     991       0.74
                                   ------    ---------       -----                            ------      -----    -----     ------
Totals/ Weighted Averages           4,197    4,583,158       247.6                             1,092         93%   $ 892      $0.82
                                   ======    =========       =====                            ======      =====    =====     ======
</TABLE>
<PAGE>
                                       13
                                                     
               CURRENT COMMUNITY FEATURES AS OF DECEMBER 31, 1998
               --------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                                      Scheduled Rent
                                   Number of   Approximate               Year                  Average               @ 12/31/98 Per 
                                   Apartment    Rentable     Total    Constructed/   Year     Unit Size   Occupancy  ---------------
   Community Name (1)                Homes      Sq. Ft. (2)  Acreage   Renovated   Acquired   (Sq. Ft.)  @ 12/31/98   Unit   Sq. Ft.
   ------------------                -----     -----------   -------   ---------   --------   ---------   ----------  ----   -------
<S>                                <C>        <C>             <C>           <C>      <C>       <C>          <C>       <C>      <C>
DALLAS, TX
Arborstone ................           536      383,360        24.5        1985        1993       715         96%  $  501      $0.70
Gables at Pearl Street ....           108      117,688         3.6        1995          --     1,090         96%   1,432       1.31
Gables CityPlace ..........           232      244,056         7.1        1995        1997     1,052         94%   1,439       1.37
Gables Green Oaks I .......           300      286,740        12.8        1996          --       956         89%     836       0.87
Gables Mirabella ..........           126      114,902         1.4        1996        1997       912         99%   1,266       1.39
Gables Preston ............           126      138,107        10.6        1995          --     1,096         90%   1,074       0.98
Gables Spring Park ........           188      198,178        12.3        1996          --     1,054         93%     953       0.90
Gables Turtle Creek .......           150      150,930         3.1        1995        1996     1,006         77%   1,326       1.32
Gables Valley Ranch(3).....           319      325,534        14.8        1994          --     1,020         94%     943       0.92
                                   ------   ----------     -------                            ------       ----   ------     ------
Totals/ Weighted Averages           2,085    1,959,495        90.2                               940         93%   $ 950      $1.01
                                   ======   ==========     =======                            ======       ====   ======     ======

MEMPHIS, TN
Arbors of Harbortown (5)...           345      341,258        15.0        1991          --       989         91%    $847      $0.86
Gables Cordova (3).........           464      434,461        32.2        1986          --       936         92%     704       0.75
Gables Germantown .........           252      293,012        30.5        1997          --     1,163         90%     935       0.80
Gables Quail Ridge ........           238      283,848        20.3        1997          --     1,193         94%     917       0.77
Gables Stonebridge (3).....           500      439,646        34.0     1993-96        1996       879         93%     695       0.79
                                   ------   ----------    --------                            ------       ----     ----     ------
Totals/ Weighted Averages           1,799    1,792,225       132.0                               996         92%    $789      $0.79
                                   ======   ==========    ========                            ======       ====     ====     ======
NASHVILLE, TN
Brentwood Gables ..........           254      287,594        14.5        1996         --      1,132         93%    $893      $0.79
Gables Hendersonville (3)..           364      342,982        21.0        1991         --        942         92%     670       0.71
Gables Hickory Hollow I (3)           272      247,322        19.0        1988         --        909         94%     639       0.70
Gables Hickory Hollow II (3)          276      259,704        18.0        1987         --        941         94%     639       0.68
                                   ------   ----------    --------                             -----       ----    -----     ------
Totals/ Weighted Averages           1,166    1,137,602        72.5                               976         93%    $704      $0.72
                                   ======   ==========    ========                             =====       ====    =====     ======
AUSTIN, TX
Gables at the Terrace .....           308      292,292        18.6        1998       1998        949         94%  $1,043      $1.10
Gables Bluffstone .........           256      251,904        32.7        1998         --        984         95%   1,057       1.07
Gables Central Park .......           273      257,043         6.9        1997         --        942         94%   1,173       1.25
Gables Great Hills ........           276      228,930        23.7        1993         --        829         96%     816       0.98
Gables Park Mesa ..........           148      161,540        24.3        1992       1997      1,091         95%   1,115       1.02
Gables Town Lake ..........           256      239,264        12.0        1996         --        935         98%   1,195       1.28
                                   ------   ----------    --------                             -----       ----   ------     ------
Totals/ Weighted Averages           1,517    1,430,973       118.2                               943         95%  $1,060      $1.12
                                   ======   ==========    ========                             =====       =====  ======     ======
SAN ANTONIO, TX
Gables Colonnade I ........           312      284,196        12.0        1995         --        911         91%    $801      $0.88
Gables Wall Street ........           232      220,180        16.2        1996         --        949         90%     810       0.85
                                   ------   ----------    --------                             -----       ----    -----     ------
Totals/ Weighted Averages             544      504,376        28.2                               927         91%    $804      $0.87
                                   ======   ==========    ========                             =====       ====    =====     ======
ORLANDO, FL
Commons at Lake Bryan I ...           280      289,436        16.5        1998         --      1,034        100%     (9)        (9)
                                   ======   ==========    ========                             =====       ====    =====     ======

Grand Totals/Weighted Averages ... 25,288   24,858,300     1,401.6                               983         94%    $863      $0.88
                                   ======   ==========    ========                             =====       ====    =====     ======
<FN>

(1)  Except as noted in footnote  (5) hereof,  Gables  holds fee simple title to
     each of the  communities.  Except as noted in footnote  (3) and (5) hereof,
     the communities are unencumbered.

(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  markets,  rentable  area is measured
     using only the air conditioned area.

(3)  The denoted communities secure  indebtedness  totaling $366.3 million as of
     December 31, 1998.

(4)  These  communities  are in the  lease-up  stage and as of December 31, 1998
     occupancy  was  as  follows:  Gables  New  Territory:  76%  and  Gables  at
     Sugarloaf: 69%

(5)  Gables holds an indirect 25% general partner interest in these communities.
     These communities  secure  indebtedness  totaling $34.2 million at December
     31, 1998.

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

(7)  This community was sold in March,  1999. See "Recent  Developments" in Item
     1.

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

(9)  This  community  is leased to a single user group  pursuant to a triple net
     master lease.  Accordingly,  scheduled  rent data is not reflected as it is
     not comparable to the rest of Gables' portfolio.
</FN>
</TABLE>
<PAGE>
                                       14

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, 1998.


                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

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, 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                           28.1250        25.9375        0.50
June 30, 1998                            28.0625        26.2500        0.50
September 30, 1998                       28.3125        22.0000        0.51
December 31, 1998                        26.9375        21.7500        0.51
March 31, 1999 (through March 18, 1999)  24.5000        22.0000        0.51


The Company has determined that, for Federal income tax purposes,  approximately
67.6% of the  distributions  for each of the four  quarters of 1998  represented
ordinary dividend income to its shareholders and the remaining 32.4% 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 Gables' 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>
                                       15

On March 18, 1999 there were 349 holders of record of the  Company's  26,361,558
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 October 20, 1998,  the Company  issued to a limited  partner of the Operating
Partnership  226,575 Common Shares (valued at approximately  $6.0 million at the
time of  issuance)  in exchange  for 226,575  Units.  Such shares 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 November 12, 1998, the Operating Partnership issued 2,000,000 of its Series B
Preferred Units (the "Series B Units") to an  institutional  investor at a gross
price of $25.00 per unit, resulting in net proceeds to the Operating Partnership
of approximately  $48.7 million.  The Series B Units are  exchangeable  into the
Company's  8.625%  Series  B  Cumulative   Redeemable   Preferred  Shares  on  a
one-for-one basis. The exchange right is exercisable,  in whole but not in part,
at the  option  of  holders  of 51% of the  Series B Units (i) at any time on or
after November 15, 2008, (ii) at any time if full quarterly  distributions shall
not have been made for six quarters,  whether or not consecutive,  or (iii) upon
the  occurrence  of certain  specified  events  related to the  treatment of the
Series B Units for Federal  income tax purposes.  The Series B Units were issued
in  reliance  on an  exemption  from  registration  under  Section  4(2)  of the
Securities Act, and the rules and regulations promulgated thereunder.

On December 9, 1998,  the Operating  Partnership  issued 18,482 Units (valued at
approximately  $0.5  million at the time of  issuance)  in  connection  with the
April, 1998 acquisition of four apartment  communities  comprising 913 apartment
homes  located in Houston.  Such Units were  issued in reliance on an  exemption
from  registration  under Section 4(2) of the Securities  Act, and the rules and
regulations 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, 1998,  1997 and 1996 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 Company for the year ended December
31, 1995 and for the period from  January 26, 1994 to December  31, 1994 and the
combined operating information of the Company's predecessors for the period from
January 1, 1994 to January  25, 1994 has been  derived  from  audited  financial
statements not included in such report.

The unaudited selected pro forma financial operating information is presented as
if (i) the IPO and the various related 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>
                                       16
  
SELECTED FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
                                                                               Gables Residential Trust and its Predecessors
                                                                   ---------------------------------------------------------------
                                                                                  Historical             
                                                                   ---------------------------------------    Pro Forma   Historical
                                                                   1998         1997        1996      1995     1994 (1)     1994 (2)
                                                                   -----------------------------------------------------------------
                                                                                                             (Unaudited)
                                                                         (in thousands, except property and per share information)
<S>                                                             <C>          <C>        <C>        <C>        <C>         <C>
OPERATING INFORMATION:
Rental revenues ................................................ $199,292    $132,371   $104,543   $72,703     $57,291     $57,201
Other property revenues ........................................    9,988       6,322      4,928     3,268       2,228       2,225
                                                                 --------    --------   --------   -------    --------     -------
     Total property revenues ...................................  209,280     138,693    109,471    75,971      59,519      59,426
Other revenues .................................................    7,344       4,745      6,710     5,789       7,350       7,396
                                                                 --------    --------   --------   -------    --------     -------
     Total revenues ............................................  216,624     143,438    116,181    81,760      66,869      66,822
                                                                 --------    --------   --------   -------    --------     -------
Property operating and maintenance expenses
  (exclusive of items shown separately below) ..................   70,502      47,592     38,693    28,228      22,868      22,847
Depreciation and amortization ..................................   40,650      25,194     18,892    12,669       9,974       9,906
Property management expenses (owned and third party) ...........    7,977       5,696      5,617     5,348       5,603       5,774
General and administrative expenses ............................    6,242       3,248      3,045     2,869       1,779       1,742
Interest expense and credit enhancement fees ...................   39,974      25,313     21,688    13,798       9,584      10,084
Amortization of deferred financing costs .......................      984         992      1,348       932       1,057       1,127
                                                                 --------    --------   --------   -------    --------     -------  
     Total expenses ............................................  166,329     108,035     89,283    63,844      50,865      51,480
                                                                 --------    --------   --------   -------    --------     -------
Equity in income of joint ventures .............................      359         320        280        64         270         270
Interest income ................................................      417         371        363       389         268         268
Loss on treasury locks .........................................   (5,637)     (1,178)         0         0           0           0
                                                                 --------    --------   --------   -------    --------     -------
Income before gain on sale of real estate assets ...............   45,434      34,916     27,541    18,369      16,542      15,880
Gain on sale of real estate assets .............................        0       5,349          0         0           0           0
                                                                 --------    --------   --------   -------    --------     -------
Income before minority interest and extraordinary loss..........   45,434      40,265     27,541    18,369      16,542      15,880
Minority interest of common unitholders.........................   (7,142)     (5,611)    (4,640)   (4,029)     (3,904)     (3,768)
Minority interest of preferred unitholders......................     (587)          0          0         0           0           0
                                                                 --------    --------   --------   -------    --------     -------
Income before extraordinary loss, net ..........................   37,705      34,654     22,901    14,340      12,638      12,112  
Extraordinary loss, net of minority interest ...................        0        (602)      (520)     (784)       (148)       (148)
                                                                 --------    --------   --------   -------    --------     -------
Net income .....................................................   37,705      34,052     22,381    13,556      12,490      11,964
Dividends to preferred shareholders.............................   (9,665)     (4,163)         0         0           0           0
                                                                 --------    --------   --------   -------    --------     -------
Net income available to common shareholders.....................  $28,040     $29,889    $22,381   $13,556     $12,490     $11,964
                                                                 ========    ========   ========   =======    ========     =======

Weighted average shares outstanding - basic ....................   24,118      19,788     16,788    11,436      10,236      10,243
Weighted average shares outstanding - diluted ..................   30,340      23,591     20,283    14,660      13,452      13,459

PER COMMON SHARE INFORMATION:
Income before extraordinary loss - basic .......................    $1.16       $1.54      $1.36     $1.25       $1.23       $1.19
Net income - basic .............................................     1.16        1.51       1.33      1.19        1.22        1.18
Income before extraordinary loss - diluted .....................     1.16        1.53       1.35      1.25        1.23        1.19
Net income - diluted ...........................................     1.16        1.50       1.32      1.18        1.22        1.18
Dividends paid (3) .............................................     2.02        2.47       1.93      1.83         N/A        1.225
Dividends declared (3) .........................................     2.02        1.98       1.94      1.86         N/A        1.675

OTHER INFORMATION:
Cash flows provided by operating activities ..................... $90,147     $69,519    $51,629   $29,088     $28,868      $28,868
Cash flows used in investing activities .........................(358,855)   (228,969)  (213,596) (148,234)   (150,534)    (150,534)
Cash flows provided by financing activities ..................... 272,583     158,244    157,823   123,619     114,245      114,245
Funds from operations (4)........................................  80,989      56,866     46,238    30,927      26,313       25,561
Gross operating margin (5).......................................   66.3%       65.7%      64.7%     62.8%       61.6%        61.6%
Completed communities at year-end ...............................      86          61         48        38          29           29
Apartment homes in completed communities at year-end ............  25,288      18,479     15,244    11,946       9,785        9,785
Average monthly revenue per apartment home (6)...................   $ 780      $  755     $  700     $ 620       $ 574        $ 574

BALANCE SHEET INFORMATION:
Real estate, before accumulated depreciation(7)................$1,681,961  $1,056,228   $784,600  $591,233    $437,782     $437,782
Total assets (7)............................................... 1,586,317     981,167    759,660   562,827     416,847      416,847
Total debt .....................................................  812,788     435,362    390,321   286,259     229,305      229,305
Shareholders' equity, minority/predecessors' interest
     and Series Z Preferred Shares..............................  718,765     513,497    334,637   248,010     161,594      161,594

FUNDS FROM OPERATIONS RECONCILIATION:
Net income available to common shareholders.....................  $28,040     $29,889    $22,381   $13,556     $12,490      $11,964
Extraordinary loss, net of minority interest (8)................        0         602        520       832         148          148
Minority interest of common unitholders.........................    7,142       5,611      4,640     4,029       3,904        3,768
Gain on sale of real estate assets .............................        0      (5,349)         0         0           0            0
Loss on treasury locks (9)......................................    5,637       1,178          0         0           0            0
Amortization of loss on used treasury locks ....................     (142)          0          0         0           0            0
Real estate depreciation (8)....................................   40,312      24,935     18,697    12,510       9,771        9,681
                                                                 --------    --------   --------   -------    --------      -------

Funds from operations ..........................................  $80,989     $56,866    $46,238   $30,927     $26,313      $25,561
                                                                 ========    ========   ========   =======    ========      =======
<FN>
<PAGE>
                                       17

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 IPO  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)  The Company's  dividends  paid and declared for the year ended December 31,
     1994 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.

(4)  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 generally
     accepted  accounting  principles  ("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. In addition,  extraordinary
     or  unusual  items,  along  with  significant   non-recurring  events  that
     materially distort the comparative measure of FFO are typically disregarded
     in its calculation.  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 a measure 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.

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

(6)  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.

(7)  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, 1998
     would be $1,794,455 and $1,698,811,  respectively, if such value (exclusive
     of the effect of depreciation) was reflected.

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

(9)  This item is  disregarded  in the  calculation  of FFO as it  represents  a
     significant  non-recurring  event that materially  distorts the comparative
     measurement  of Gables'  performance  over time.  While  Gables may utilize
     derivative  financial  instruments,  such as rate locks,  to hedge interest
     rate exposure by modifying the interest rate characteristics of prospective
     financing  transactions,  it  believes  the events and  circumstances  that
     resulted in these losses are non-recurring in nature.

</FN>
</TABLE>
<PAGE>
                                       18

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

Gables  is a  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.

The Company's  objective is to increase  shareowner  value by being a profitable
owner and  operator  of Class  AA/A  multifamily  apartment  communities  in the
Sunbelt  Region.  To achieve its objective,  Gables employs a number of business
strategies.  First,  Gables adheres to a strategy of owning and operating  Class
AA/A apartment  communities  which should  maintain high levels of occupancy and
rental rates. Gables believes that such communities, when supplemented with high
quality services and amenities,  attract the affluent  renter-by-choice,  who is
willing to pay a premium for conscientious service and high quality communities.
Accordingly,  Gables' communities possess innovative  architectural  designs and
numerous amenities and services that Gables believes are desirable by its target
customers.  Second,  Gables seeks to grow cash flow from  operating  communities
through  innovative,  proactive  property  management  that  focuses on resident
satisfaction  and retention,  increases in property rents and occupancy  levels,
and the control of  operating  expenses  through  improved  economies  of scale.
Third,  Gables  develops  and acquires  high-quality  apartment  communities  in
in-fill locations and  master-planned  communities near major employment centers
in the  Sunbelt  with  the  objective  of  achieving  critical  mass in the most
desirable  submarkets.  Finally,  due to the cyclical  nature of the real estate
markets,  Gables  has  adopted  an  investment  strategy  based on strong  local
presence  and  expertise,  which it  believes  will  allow  for  growth  through
acquisition and development (as warranted by underlying market fundamentals) and
will help ensure favorable  initial and long-term  returns.  Gables believes the
successful execution of these operating and investment strategies will result in
operating cash flow growth.

Gables  believes it is well  positioned  to  continue  achieving  its  objective
because of its  long-established  presence  as a fully  integrated  real  estate
management,  development,  construction and acquisition  company in its markets.
Gables  believes  that  its   established,   local  market  presence  creates  a
competitive  advantage  in  generating  increased  cash flow  from (i)  property
operations   during   different   economic   cycles  and  (ii)  new   investment
opportunities  that involve site selection,  market information and requests for
entitlements   and  zoning   petitions.   Gables'  markets  are   geographically
independent,   rely  on  diverse  economic   foundations  and  have  experienced
above-average job growth.

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,  reduce indebtedness or, in certain  circumstances
with  appropriate  approval from the board of trustees,  repurchase  outstanding
common shares.  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
financial statements and the notes thereto.

This report 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>
                                       19

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

Recent Portfolio Acquisitions
-----------------------------

On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential  South Florida  ("TCR/SF"),  which consisted of fifteen  multifamily
apartment  communities  containing a total of 4,197 apartment  homes, and all of
TCR/SF's  residential  construction  and development and third party  management
activities in South Florida (collectively,  the "South Florida Acquisition"). In
consideration for such properties and operations, Gables (i) paid $155.0 million
in cash, (ii) assumed  approximately $135.9 million of tax-exempt debt and (iii)
issued  approximately 2,348 Units,  valued at approximately  $64.9 million.  The
cash portion of the purchase price was funded through  borrowings  under Gables'
unsecured credit facilities (the "Credit Facilities").  In addition, up to $12.5
million of the purchase  price was deferred by Gables until  January 1, 2000, at
which time Gables  will issue a number of Units equal in value to such  deferred
amount. The acquisition increased the size of Gables' portfolio under management
on April 1, 1998 from approximately 28,000 to 40,000 apartment homes.

In  April,  1998,  Gables  acquired  four  multifamily   apartment   communities
comprising  a total of 913  apartment  homes  located  in  Houston,  Texas  (the
"Greystone  Acquisition").  In connection with such acquisition,  Gables assumed
approximately  $31.0  million  of  indebtedness,   at  fair  value,  and  issued
approximately 665 Units valued at $18.0 million.

Secondary Offerings and Issuances of Operating Partnership Units
----------------------------------------------------------------

SECONDARY COMMON SHARE OFFERINGS

Since the IPO, the Company has issued a total of 14,831  common  shares in eight
offerings  generating  $347,771 in net proceeds which were generally used (i) to
reduce  outstanding  indebtedness  under interim financing  vehicles utilized to
fund Gables'  development  and acquisition  activities  (the "Interim  Financing
Vehicles") and (ii) for general working capital  purposes  including  funding of
future development and acquisition activities.

PREFERRED SHARE OFFERINGS

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 $111.0 million were used to reduce outstanding  indebtedness under
the Interim  Financing  Vehicles.  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.

On June 18,  1998,  the Company  issued 180 shares of 5.0%  Series Z  Cumulative
Redeemable  Preferred  Shares  (liquidation  preference  $25.00 per share)  (the
"Series Z Preferred  Shares") in connection  with the acquisition of a parcel of
land for  future  development.  The  Series Z  Preferred  Shares,  which  may be
redeemed by the Company at $25.00 per share,  plus accrued and unpaid dividends,
at any time, are subject to mandatory  redemption on June 18, 2018. The Series Z
Preferred  Shares are not  subject to any sinking  fund and are not  convertible
into any other securities of the Company.

ISSUANCES OF  COMMON OPERATING PARTNERSHIP UNITS

Since the IPO,  Gables has issued a total of 3,917 Units in connection  with the
South Florida  Acquisition,  the Greystone  Acquisition  and the  acquisition of
operating apartment communities and a parcel of land for future development.

ISSUANCE OF PREFERRED OPERATING PARTNERSHIP UNITS

On November  12,  1998,  the  Operating  Partnership  issued 2,000 of its 8.625%
Series B Preferred  Units (the "Series B Preferred  Units") to an  institutional
investor.  The net proceeds  from this issuance of  approximately  $48.7 million
were  used to  reduce  outstanding  indebtedness  under  the  Interim  Financing
Vehicles.  The Series B  Preferred  Units may be  redeemed by the Company at its
option after  November 14, 2003 and are  exchangeable  by the holder into 8.625%
Series B Cumulative  Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008.  The Series B Preferred  Units have no stated  maturity,  sinking fund, or
mandatory redemption.
<PAGE>
                                       20

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

RESULTS OF OPERATIONS
---------------------

COMPARISON OF OPERATING  RESULTS OF GABLES FOR THE YEAR ENDED  DECEMBER 31, 1998
(THE "1998 PERIOD") TO THE YEAR ENDED DECEMBER 31, 1997 (THE "1997 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 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, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                         ------------ ----------- ----------- -----------
                                                                                                       $            %
                                                                             1998         1997       Change      Change
                                                                          ------------ ----------- ----------- -----------
<S>                                                                        <C>          <C>           <C>        <C>
RENTAL AND OTHER REVENUE:
Same store communities (1)                                                   $119,156    $114,400      $4,756        4.2%
Communities stabilized during the 1998 Period, but not during the      
    1997 Period (2)                                                            19,700      15,108       4,592       30.4% 
Development and lease-up communities (3)                                        9,827       1,586       8,241      519.6%
Acquired communities (4)                                                       60,597       7,421      53,176      716.6%
Sold communities (5)                                                                0         178        (178)    -100.0%
                                                                          ------------ ----------- ----------- -----------
Total property revenues                                                      $209,280    $138,693     $70,587       50.9%
                                                                          ------------ ----------- ----------- -----------

PROPERTY OPERATING AND MAINTENANCE EXPENSE (EXCLUSIVE OF REAL ESTATE
DEPRECIATION AND AMORTIZATION):
Same store communities (1)                                                    $40,820     $39,727      $1,093        2.8%
Communities stabilized during the 1998 Period, but not during the           
   1997 Period (2)                                                              6,539       5,035       1,504       29.9%
Development and lease-up communities (3)                                        2,220         427       1,793      419.9%
Acquired communities (4)                                                       20,923       2,288      18,635      814.5%
Sold communities (5)                                                                0         115        (115)    -100.0%
                                                                           ------------ ----------- ------------ ----------
Total specified expenses                                                      $70,502     $47,592     $22,910       48.1%
                                                                          ------------ ----------- ----------- -----------

Revenues in excess of specified expenses                                     $138,778     $91,101     $47,677       52.3%
                                                                          ------------ ----------- ----------- -----------
Revenues in excess of specified expenses as a percentage of total
     property revenues                                                          66.3%       65.7%         ---        0.6%
                                                                          ------------ ----------- ----------- -----------
<FN>

(1)  Communities which were owned and fully stabilized  throughout both the 1998
     Period and 1997 Period.

(2)  Communities  which were  completed and fully  stabilized  during all of the
     1998 Period,  but were not completed and fully stabilized during all of the
     1997 Period.

(3)  Communities  in  the  development/lease-up   phase  which  were  not  fully
     stabilized during all or any of the 1998 Period.

(4)  Communities which were acquired subsequent to January 1, 1997.

(5)  Communities which were sold subsequent to January 1, 1997.

</FN>
</TABLE>
<PAGE>
                                       21



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

Total property revenues increased  $70,587,  or 50.9%, from $138,693 to $209,280
due primarily to increases in the number of apartment  homes  resulting from the
acquisition and development 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:

Same store communities:
<TABLE>
                                                                        Percent
                                                         Increase      Increase
                                                        (Decrease)    (Decrease)                    Increase
                            Number of                    in Total      in Total      Occupancy     (Decrease)
              Number of     Apartment      Percent        Property     Property      During the        in
  Market      Communities     Homes        of Total      Revenues      Revenues     1998 Period    Occupancy
  ------      ----------      -----        --------      --------      --------     -----------    ---------
<S>            <C>          <C>           <C>             <C>           <C>           <C>           <C>            
Houston           14           5,045         37.7%        $2,741          6.3%          94.8%         0.3%
Atlanta           12           3,470         25.9%           708          2.5%          95.8%         0.9%
Dallas             7           1,659         12.4%           942          5.9%          94.0%        -0.3%
Nashville          4           1,166          8.7%          -178         -1.9%          94.5%        -1.5%
Memphis            2             964          7.2%           231          3.4%          94.9%         0.7%
San Antonio        2             544          4.1%           111          2.4%          92.4%        -0.5%
Austin             2             532          4.0%           201          3.7%          94.0%        -0.2%
               -----          ------        -----         ------        -----          -----        ----- 
                  43          13,380        100.0%        $4,756          4.2%          94.8%         0.2%
               =====          ======        =====         ======        =====          =====        =====
</TABLE>

Communities stabilized during the 1998 Period but not during the 1997 Period:

                                                          Increase
                                Number of                 in Total    Occupancy
                  Number of     Apartment     Percent     Property    During the
Market           Communities      Homes       Of Total    Revenues   1998 Period
------           -----------      -----       --------    --------   -----------

Atlanta                 4         1,246         61.2%     $4,024         95.0%
Memphis                 2           490         24.1%        509         94.1%
Dallas                  1           300         14.7%         59         91.2%
                    -----        ------      -------      ------      -------
                        7         2,036        100.0%     $4,592         94.2%
                    =====        ======      =======      ======      =======

Development and lease-up communities:

                                                           Increase
                                 Number of                 In Total    Occupancy
                  Number of      Apartment     Percent     Property   During the
Market           Communities      Homes       Of Total     Revenues  1998 Period
------           ----------       -----       --------     --------  -----------

Austin                2            529          31.5%      $3,569         76.3%
Orlando               2            511          30.4%       2,521         48.7%
Atlanta               1            386          22.9%       1,164         29.5%
Houston               1            256          15.2%         987         34.8%
                  -----         ------       -------        -----       ------
                      6          1,682         100.0%      $8,241         50.8%
                  =====         ======       =======        =====       ======
<PAGE>
                                       22
MANAGEMENT'S DISCUSSION AND ANALYSIS 
(Amounts in Thousands, Except Property and Per Share Amounts)
------------------------------------------------------------

Other revenues  increased  $2,599, or 54.8%, from $4,745 to $7,344 due primarily
to an increase in property  management revenues of $1,501, or 49.5%, from $3,032
to $4,533  resulting  from a net  increase in  properties  managed by Gables for
third  parties  primarily  as a result  of the  South  Florida  Acquisition,  in
addition to an increase in income from certain ancillary services.

Property  operating  and  maintenance  expense  (exclusive of  depreciation  and
amortization)  increased  $22,910,  or 48.1%,  from $47,592 to $70,502 due to an
increase in apartment  homes  resulting from the  acquisition and development of
additional  communities  and an increase in property  operating and  maintenance
expense for same store communities of 2.8%. The same store increase in operating
expenses  represents  increased  payroll costs,  property taxes and  maintenance
costs, offset in part by reduced utilities, marketing and insurance expenses.

Real estate asset depreciation and amortization  expense increased  $15,375,  or
62.2%,  from $24,712 to $40,087 due primarily to the acquisition and development
of additional communities.

Property  management  expense  for owned  communities  and  third/related  party
properties on a combined basis increased $2,281, or 40.0%, from $5,696 to $7,977
due primarily to a net increase of 11,000 apartment homes managed from 27,000 in
the 1997 Period to 38,000 in the 1998 Period resulting  primarily from the South
Florida  Acquisition,  in addition to  inflationary  increases  in expenses  and
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 $2,994, or 92.2%, from $3,248 to
$6,242 due  primarily  to (i)  compensation  and other  costs for new  positions
associated with the South Florida Acquisition, (ii) increased compensation costs
and (iii) the expensing of internal costs of identifying and acquiring operating
apartment  communities  effective  March 20,  1998 in  accordance  with EITF No.
97-11.

Interest expense increased $13,715,  or 55.3%, from $24,804 to $38,519 due to an
increase in operating debt  associated  with the  acquisition and development of
additional communities,  including the debt assumed in connection with the South
Florida Acquisition and the Greystone  Acquisition.  These increases in interest
expense  have  been  offset  in part as a result  of the  offerings  Gables  has
consummated  between periods,  the proceeds of which have been primarily used to
reduce indebtedness.

Loss on treasury  locks of $5,637 in the 1998 Period  represents  mark to market
losses  recorded upon the  expiration  of the terms of treasury lock  agreements
that were (i) entered into in  anticipation  of a projected debt offering,  (ii)
subsequently  extended in connection with  modifications in the projected timing
of the debt offering and (iii) terminated due to economic  conditions  affecting
the unsecured debt market.
<PAGE>
                                       23

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

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 Period (2)                                                            20,848      19,220       1,628           8.5%
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 REAL ESTATE
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 Period (2)                                                             6,360       6,223         137           2.2%
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>
                                       24

MANAGEMENT'S DISCUSSION AND ANALYSIS 
(Amounts in Thousands, Except Property and 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:

Same store communities:
<TABLE>
<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    Communities      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            Communities        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       Communities       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>
                                       25

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

Other revenues decreased $1,965, or 29.3%, from $6,710 to $4,745 due to (i) $900
of net revenues  generated in the 1996 Period 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 in properties  managed by Gables for third parties primarily due to
the sale of such properties 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.

Real estate asset  depreciation and amortization  expense  increased  $6,235, or
33.7%,  from  $18,477  to  $24,712  due  primarily  to the  completion  of newly
developed communities and acquisition of other communities.

Property  management  expense  for owned  communities  and  third/related  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  Gables has consummated  between  periods,  the proceeds of which have
been primarily used to reduce indebtedness.

Loss on treasury  locks of $1,178 in the 1997 Period  represents  mark to market
losses  recorded upon the  expiration  of the term of a treasury lock  agreement
that was (i) entered into in  anticipation of a projected debt offering and (ii)
subsequently  extended in connection with  modifications in the projected timing
of the debt offering.

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.
<PAGE>
                                       26

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

Liquidity and Capital Resources
-------------------------------

Gables' net cash provided by operating activities increased from $69,519 for the
year ended  December  31, 1997 to $90,147 for the year ended  December 31, 1998,
due to (i) an  increase  of  $31,460 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 locks and net
extraordinary losses and (ii) the change in other liabilities between periods of
$7,771.  Such increases were offset in part by (i) the change in restricted cash
between periods of $7,438 and (ii) the change in other assets between periods of
$11,165.

Gables' net cash used in investing  activities  increased  from $228,969 for the
year ended  December 31, 1997 to $358,855 for the year ended  December 31, 1998,
due primarily to increased  acquisition and development  activities in 1998 when
compared to 1997,  and the net proceeds  from the sale of real estate  assets in
1997.  During the year ended December 31, 1998,  Gables  expended  approximately
$203.3  million  related to  acquisitions  of operating  apartment  communities,
including  those  acquired  in the South  Florida  Acquisition;  $138.1  million
related  to  development  expenditures,  including  related  land  acquisitions;
approximately $8.0 million related to recurring,  non-revenue enhancing, capital
expenditures for operating apartment communities; and approximately $8.9 million
related to non-recurring, renovation/revenue-enhancing, capital expenditures.

Gables' net cash provided by financing  activities  increased  from $158,244 for
the year ended  December  31, 1997 to $272,583  for the year ended  December 31,
1998 due to increased  acquisition and development  activities.  During the year
ended December 31, 1998,  Gables had net borrowings of $210.5 million which were
used in conjunction with $136.2 million of proceeds from a common share offering
and the Series B Preferred Unit offering  primarily to fund Gables'  acquisition
and development  activities discussed previously.  These proceeds from financing
activities  were offset in part by the payment of  dividends  and  distributions
totaling approximately $72.3 million.

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, 1998,  Gables had total  indebtedness  of $812,788,  cash and
cash equivalents of $7,054 and principal escrow deposits reflected in restricted
cash of $2,445.  Gables' indebtedness has an average of 5.9 years to maturity at
December 31, 1998. Excluding monthly principal amortization  payments,  over the
next  five  years  Gables  has  the  following  scheduled  debt  maturities  for
indebtedness outstanding at December 31, 1998:
 
                      1999            $13,000
                      2000             53,583
                      2001            165,000
                      2002             83,331
                      2003             62,801

The debt maturities in 2001 include $110,000 of outstanding  indebtedness  under
the $225 Million Credit Facility which has two one-year extension  options.  The
debt  maturities  in  2003  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.
<PAGE>
                                       27

MANAGEMENT'S DISCUSSION AND ANALYSIS 
(Amounts in Thousands, Except Property and Per Share Amounts)
------------------------------------------------------------
                                                                                
A summary  of  Gables'  portfolio  indebtedness  and  interest  rate  protection
agreements as of December 31, 1998 follows:
                                                                                
PORTFOLIO INDEBTEDNESS SUMMARY                                                  
                                                                               
                                          Percentage Interest  Total   Years to
Type of Indebtedness               Balance of Total   Rate(1) Rate(2)  Maturity 
--------------------               ----------------   ---------------  -------- 

Fixed-rate:
Secured notes ....................$125,546   15.4%    7.80%   7.80%     9.25
Unsecured notes .................. 323,442   39.8%    7.20%   7.20%     4.70
Tax-exempt .......................  90,730   11.2%    6.02%   6.32%     8.70
                                  --------  ------    -----   -----     ----
     Total fixed-rate ............$539,718   66.4%    7.14%   7.19%     6.43
                                  --------  ------    -----   -----     ----

Tax-exempt variable-rate .........$150,070   18.5%    3.90%   4.88%     7.39
                                  --------  ------    -----   -----     ----

Unsecured credit facilities ......$123,000   15.1%    6.38%   6.38%     2.01
                                  --------  ------    -----   -----     ----

Total portfolio debt (3), (4) ....$812,788  100.0%    6.43%   6.64%     5.94
                                  ========  ======    =====   =====     ====

                                                                                
(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)  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, 1998 for  purposes of interest
     capitalization were $144,122.
                                                                                
(4)  Excludes $16.4 million of tax-exempt bonds and $17.8 million of outstanding
     conventional  indebtedness related to joint ventures in which Gables owns a
     25% interest.
                                                                                
INTEREST RATE PROTECTION AGREEMENT SUMMARY                                      
                                                                                
                            Notional    Strike    Effective   Termination       
Description of Agreement     Amount     Price       Date          Date 
------------------------   ---------    ------    ---------   ------------      

LIBOR, 30-day - "Rate Cap"    $44,530   6.25%(5)   01/27/94   01/30/99

LIBOR, 30-day - "Rate Swap"   $44,530   5.35%(5)   08/30/96   08/30/99 (6)

LIBOR, 30-day - "Rate Swap"   $25,000   5.76%(5)   02/27/98   02/27/00 (7)

LIBOR, 30-day - "Rate Swap"   $40,000   4.79%(5)   11/30/98   09/29/00
                                                                                
(5)  The 30-day LIBOR rate in effect at December 31, 1998 was 5.63%.
                                                                                
(6)  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.
                                                                                
(7)  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.
                                                                               
<PAGE>
                                       28

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

Gables'  dividends  through the fourth  quarter of 1998 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.

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,  the issuance of debt  securities  or equity
securities, private equity investments in the form of joint ventures, or through
the disposition of assets which, in management's evaluation,  may no longer meet
Gables' investment requirements.

$225 MILLION CREDIT FACILITY

In  March,  1996,  Gables  closed  a $175  million  unsecured  revolving  credit
facility.  In May, 1998, the $175 million commitment level was increased to $225
million  and the  maturity  date was  extended  to May,  2001 with two  one-year
extension  options.  Gables'  availability  under the facility is limited to the
lesser of the total $225 million commitment or the borrowing base. The borrowing
base available under the facility is based on the value of Gables'  unencumbered
real estate assets as compared to the amount of Gables' unsecured  indebtedness.
As of December 31, 1998,  Gables had $110.0  million in  borrowings  outstanding
under the facility and,  therefore,  had $115.0 million of remaining capacity on
the $225 million  available  commitment.  Borrowings  currently bear interest at
LIBOR plus 0.80%. Additionally, a competitive bid option feature is in place for
up to 50% of the total commitment.

$25 MILLION CREDIT FACILITY

In November,  1996,  Gables closed an unsecured  revolving  credit facility that
currently  provides for up to $25 million in  borrowings.  This  facility has an
initial term of one year and has unlimited one-year  extension  options.  Gables
has exercised two of its one-year extension options resulting in a maturity date
for the facility of October, 1999. Borrowings currently bear interest under this
facility at LIBOR plus 0.80%. As of December 31, 1998,  Gables had no 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.

SHELF REGISTRATION STATEMENT

On  December  3, 1998,  Gables  filed a shelf  registration  statement  with the
Securities and Exchange  Commission to add an additional  $500 million of equity
capacity and an additional $300 million of debt capacity.  Gables believes it is
prudent to maintain shelf  registration  capacity in order to facilitate  future
capital raising activities.

<PAGE>
                                       29

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

PROPERTY SALE

On  March 4,  1999,  Gables  sold an  apartment  community  located  in  Atlanta
comprising  213  apartment  homes  for  $19.3  million.  The net  proceeds  were
initially  used  to  paydown   outstanding   borrowings   under  Gables'  Credit
Facilities.

COMMON SHARE REPURCHASE PROGRAM

On March 22, 1999,  Gables announced a common share repurchase  program pursuant
to which Gables is authorized  to purchase up to $50 million of its  outstanding
common  shares.  Gables  plans to  repurchase  shares  from time to time in open
market and  privately  negotiated  transactions,  depending on market prices and
other conditions, using proceeds from sales of selected assets.

JOINT VENTURE WITH J.P. MORGAN

On March 26,  1999,  Gables  entered into a joint venture  agreement with an
affiliate of J.P. Morgan Investment,  Inc. ("J.P. Morgan"). The business purpose
of the  venture is to  develop,  own and  operate  seven  multifamily  apartment
communities  located in four of Gables'  nine  markets,  which are  expected  to
comprise  2,181  apartment  homes.  As of  December  31,  1998,  Gables  (i) had
commenced  construction of four of the communities,  (ii) owned the land for the
future  development of two of the  communities  and (iii) owned the  acquisition
right for the land for the future  development  of one of the  communities.  The
capital  budget for the  development of the seven  communities is  approximately
$213 million and is anticipated  to be funded with 50% debt and 50% equity.  The
equity  component will be funded 80% by J.P.  Morgan and 20% by Gables.  Gables'
portion  of the  equity  will be  funded  through  a  contribution  of cash  and
property.  Gables will serve as the managing member of the venture and will have
responsibility  for all day-to-day  operating issues.  Gables will also serve as
the general contractor during construction and as the property manager.

Inflation
---------

Substantially  all of Gables'  leases at its  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.

Book Value of Assets and Shareholders' Equity
---------------------------------------------

The  application  of historical  cost  accounting in accordance  with  generally
accepted accounting  principles ("GAAP") for Gables' UPREIT structure results in
an  understatement  of total  assets and  shareholders'  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 shareholders' equity. The understatement of basis related to
this  difference in  organizational  structure at December 31, 1998 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 and Series Z Preferred  Shares at
liquidation value as of December 31, 1998 would be $1,794,455,  $1,698,811,  and
$831,259, respectively, if such $112,494 value were reflected.

Certain Factors Affecting Future Operating Results
--------------------------------------------------

This report 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.
<PAGE>
                                       30

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

Factors that might cause such a difference include,  but are not limited to, the
following:  Gables  may  abandon  or fail to secure  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.

Recent Accounting Pronouncements
--------------------------------

See Note 4 to Consolidated Financial Statements.

Year 2000 Compliance
--------------------

The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness  Disclosure Act of
1998.

The Year 2000 issue  occurs  when  business  application  software  or  embedded
microcontrollers  use  two  digits  to  specify  the  year,  rather  than  four.
Therefore,  on January 1, 2000, unless corrections are made, most computers with
time-sensitive  software programs will recognize the year as "00" and may assume
that  the  year  is  "1900".   This  could   result  in  a  system   failure  or
miscalculations which could result in disruptions of normal business operations.
The Year 2000 issue can also affect  embedded  microcontrollers  in non-computer
equipment such as elevators, HVAC and security systems. Gables is in the process
of  assessing  the  impact  of the  Year  2000  issue  on its  computer  systems
(hardware),   software  and  other  equipment  with  embedded   microcontrollers
(non-IT).  Gables' Year 2000  Project is divided into four phases,  as described
below:

Phase 1- Inventory assessment:  Identify all equipment that could potentially be
     affected  by  the  Year  2000  issue.   Equipment  is  divided  into  three
     categories: hardware, software and non-IT.

Phase2 - Contact vendors and third-party service providers:  Contact the vendors
     and  third-party   service  providers  that  maintain  and/or  support  the
     equipment   identified  in  Phase  I  to  obtain  a  Year  2000  compliance
     certification.

Phase3 -  Determine  scope of  non-compliance:  Based  on  vendor  response  and
     in-house  testing,  assemble a list of items that will not be compliant and
     prioritize the items to be either replaced or retrofitted.

Phase4 - Implementation,  identification  of alternative  solutions and testing:
     Replace or retrofit  items that are not Year 2000  compliant,  identify and
     implement  alternative  solutions  to items  that  cannot  be  replaced  or
     retrofitted, and perform testing thereof.

Gables' progress is described by category in the following table:

                                                Actual or Expected
            Category       Status             Phase 4 Completion Date
            --------       ------             -----------------------

            Hardware       Complete                   3/31/99
            Software       Complete                   3/31/99
            Non-IT         Working on Phase 3         5/31/99
                              
Gables'  costs of  addressing  the Year 2000  issue  have not been,  and are not
expected to be,  material and will relate  primarily to costs of upgrading older
equipment,  in addition to personnel resource allocation.  However, no estimates
can be made as to the potential  adverse  impact  resulting  from the failure of
third party  service  providers  and vendors to prepare for the Year 2000 issue.
Gables has included banks and utilities in its vendor survey,  as their services
are considered to be  mission-critical  to its business function.  As with other
vendors,  Gables is attempting  to attain  compliance  certification  from these
vendors to assure that there will be no business interruption to its customers.
<PAGE>
                                       31

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

on January 1, 2000. Based on vendor response and in-house  testing,  Gables will
develop  specific  contingency  plans,  if necessary.  In addition,  Gables will
design  a  general   contingency   plan  to  be  implemented  in  the  event  of
unanticipated equipment and systems failures. However, there can be no assurance
that such plan will be adequate or that  failures or delays by third  parties in
achieving   Year  2000   compliance   will  not  result  in  material   business
interruptions, loss of revenues or other adverse effects.

The   discussion   above   regarding   Gables'   Year  2000   Project   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. Gables' assessment of the impact of the Year 2000 issue may prove to
be  inaccurate  due to a number  of  factors  which  cannot be  determined  with
certainty,  including the receipt of inaccurate  compliance  certifications from
third party vendors,  inaccurate  testing or assessments by Gables' personnel of
its equipment or systems,  and  inaccurate  projections by Gables of the cost of
remediation  and/or  replacement of affected equipment and systems. A failure by
Gables to adequately  remediate or replace affected  equipment or systems due to
the factors cited above or for other reasons,  a material increase in the actual
cost of such remediation or replacement, or a failure by a third party vendor to
remediate  Year 2000  problems  in systems  that are vital to the  operation  of
Gables'  properties or financial systems,  could cause a material  disruption to
its  business  and  adversely  affect its results of  operations  and  financial
condition.

<PAGE>
                                       32

MANAGEMENT'S DISCUSSION AND ANALYSIS 
(Amounts in Thousands, Except Property and 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.  In addition,  extraordinary or unusual items,  along with significant
non-recurring  events that materially distort the comparative measure of FFO are
typically   disregarded  in  its  calculation.   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 recurring, non-revenue enhancing, capital expenditures. 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 FFO and AFFO follows:

                                                        Years ended December 31,
                                                         1998             1997
                                                        ------           ------
Net income available to common shareholders             $28,040         $29,889
Extraordinary loss, net of minority interest                  0             602
Minority interest of common unitholders in Operating      7,142           5,611
         Partnership
Loss on treasury locks (a)                                5,637           1,178
Amortization of loss on extension of used treasury locks   (142)              0
Gain on sale of real estate assets                            0          (5,349)
Real estate asset depreciation:
     Wholly-owned real estate assets                     40,087          24,712
      Joint venture real estate assets                      225             223
                                                       --------        --------
            Total                                        40,312          24,935
                                                       --------        --------
FUNDS FROM OPERATIONS - BASIC                           $80,989         $56,866
                                                       --------        --------
Amortization of discount on long-term liability (b)         576               0
                                                       --------        --------
FUNDS FROM OPERATIONS - DILUTED                         $81,565         $56,866
                                                       --------        --------

Capital expenditures for operating apartment communities:
      Carpet                                             $3,092          $1,860
      Roofing                                               246             139
      Exterior painting                                       0             283
      Appliances                                            394             204
      Other additions and improvements                    4,223           2,392
                                                        -------         -------
           Total                                         $7,955          $4,878
                                                        -------         -------

ADJUSTED FUNDS FROM OPERATIONS - DILUTED                $73,610         $51,988
                                                        -------         -------
AVERAGE COMMON SHARES AND UNITS OUTSTANDING - BASIC      30,212          23,441
                                                        -------         -------
AVERAGE COMMON SHARES AND UNITS OUTSTANDING - DILUTED    30,679          23,591
                                                        -------         -------

(a)  This item is  disregarded  in the  calculation  of FFO as it  represents  a
     significant  non-recurring  event that materially  distorts the comparative
     measurement  of Gables'  performance  over time.  While  Gables may utilize
     derivative  financial  instruments,  such as rate locks,  to hedge interest
     rate exposure by modifying the interest rate characteristics of prospective
     financing  transactions,  it  believes  the events and  circumstances  that
     resulted in these losses are non-recurring in nature.
(b)  This  obligation  will be settled with Units.  Such Units are excluded from
     basic shares and Units outstanding,  but are included in the calculation of
     diluted shares and Units outstanding.
<PAGE>
                                       33

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

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Gables'  capital  structure  includes  the use of  variable  rate and fixed rate
indebtedness.  As such,  Gables is exposed to the impact of changes in  interest
rates.  Gables'  senior  management  periodically  seeks  input from third party
consultants  regarding market interest rate and credit risk in order to evaluate
its interest rate exposure. In certain situations, Gables may utilize derivative
financial  instruments,  in the form of rate caps,  rate swaps or rate locks, to
hedge interest rate exposure by modifying the interest rate  characteristics  of
related balance sheet instruments and prospective financing transactions. Gables
does not utilize such instruments for trading or speculative purposes.

Gables typically  refinances  maturing debt instruments at then-existing  market
interest  rates and terms which may be more or less than the interest  rates and
terms on the maturing debt.

The following  table provides  information  about Gables'  derivative  financial
instruments  and other  financial  instruments  that are sensitive to changes in
interest rates and should be read in conjunction  with the Notes to Consolidated
Financial  Statements.  For debt obligations,  the table presents principal cash
flows and related weighted-average interest rates in effect at December 31, 1998
by expected  maturity dates.  For interest rate swaps and the interest rate cap,
the table presents the notional amounts and related  weighted-average  pay rates
by fiscal year of maturity.
<TABLE>
                                                                Expected Year of Maturity
                                 ------------------------------------------------------------------------------------
                                  1999          2000         2001         2002        2003     Thereafter      Total     Fair Value
                                 ------        ------       ------       ------      ------    ----------     -------    ----------
<S>                             <C>         <C>           <C>         <C>          <C>           <C>          <C>       <C>
DEBT:
Fixed-rate ...............   $    3,144    $   56,912    $  58,599    $  86,280    $  20,671    $ 314,112    $ 539,718    $ 539,718
Average interest rate ....        7.84%         6.73%        6.24%        8.28%        7.53%        7.04%        7.14%

Tax-exempt variable rate .   $        0    $        0    $       0    $       0    $  44,930    $ 105,140    $ 150,070    $ 150,070
Average interest rate ....                                                             4.10%        3.81%        3.90%

Credit facilities ........   $   13,000    $        0    $ 110,000    $       0    $       0    $       0    $ 123,000    $ 123,000
Average interest rate ....        6.00%                      6.43%                                               6.38%

Total debt ...............   $   16,144    $   56,912    $ 168,599    $  86,280    $  65,601    $ 419,252    $ 812,788    $ 812,788
Average interest rate ....        6.36%         6.73%        6.36%        8.28%        5.18%        6.23%        6.43%

INTEREST RATE SWAPS:
Pay fixed/receive variable   $   44,530    $   65,000    $       0    $       0    $       0    $       0    $ 109,530   ($     161)
Average pay rate .........        5.35%         5.16%                                                            5.24%
Receive rate .............        LIBOR         LIBOR                                                            LIBOR

INTEREST RATE CAP:
Pay fixed/receive variable   $   44,530    $        0    $       0    $       0    $       0    $       0    $  44,530    $       0
Maximum pay rate .........        6.25%                                                                          6.25%
Receive rate .............        LIBOR                                                                          LIBOR

</TABLE>

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

<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 1999 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 1999 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 1999 Annual Meeting of the  Registrant's  Shareholders and
is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.


                                     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, 1998 and December 31, 
     1997                                                                    40
Consolidated Statements of Operations for the years ended December 31, 
     1998, 1997 and 1996                                                     41
Consolidated Statements of Shareholders' Equity  for the years ended 
     December 31, 1998, 1997 and 1996                                        42
Consolidated Statements of Cash Flows for the years ended December 31, 
     1998, 1997 and 1996                                                     43
Notes to Consolidated Financial Statements                                   44

Schedule III - Real Estate Investments and Accumulated Depreciation as 
     of December 31, 1998                                                    59


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 or the Operating  Partnership  (File No.
000-22683)  and are  incorporated  herein  by  reference  to the  filing  in the
corresponding numbered footnote.
<PAGE>
                                       35

Exhibit No.        Description
-----------        -----------
3.1 (i)(a)     --- Amended and Restated Declaration of Trust of the Company (1)
3.1 (i)(b)     --- Articles of Amendment to the Company's Amended and Restated 
                   Declaration of Trust (2)
3.1 (i)(c)     --- Articles Supplementary to the Company's Amended and Restated 
                   Declaration of  Trust creating the 8.30% Series A Cumulative 
                   Redeemable Preferred Shares (3)
3.1 (i)(d)     --- Articles Supplementary to the Company's Amended and Restated 
                   Declaration of Trust creating the 5.00% Series Z Cumulative 
                   Redeemable Preferred Shares (2)
3.1 (i)(e)     --- Articles Supplementary to the Company's Amended and Restated
                   Declaration of Trust creating the 8.625% Series B Cumulative 
                   Redeemable Preferred Shares (4)
3.1 (ii)(a)    --- Second Amended and Restated Bylaws of the Company (5)
4.1            --- Indenture, dated as of March 23, 1998, between the Operating 
                   Partnership and First Union National Bank  (6)
4.2            --- Supplemental Indenture No. 1, dated March 23, 1998, between  
                   the  Operating Partnership and First Union National Bank (6)
4.3            --- The Operating Partnership 6.80% Senior Note due 2005  (6)
4.4            --- Supplemental Indenture No. 2, dated September 30,1998 between
                   the Operating Partnership and First Union National Bank (7)
4.5            --- The Operating Partnership 6.55% Senior Note due 2000 (7)
4.6            --- Supplemental Indenture No. 3, dated October 8, 1998, between 
                   the Operating Partnership and First Union National Bank (8)
4.7            --- The Operating Partnership 6.60% Senior Note due 2001 (8)
10.1           --- Fourth 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 (9)
10.3           --- Articles of Incorporation of East Apartment Management, 
                   Inc.(9)
10.4           --- Bylaws of East Apartment Management, Inc. (9)
10.5           --- Articles of Incorporation of Central Apartment Management, 
                   Inc. (9)
10.6           --- Bylaws of Central Apartment Management, Inc. (9)
10.7           --- Articles of Incorporation of Gables GP, Inc. (9)
10.8           --- Bylaws of Gables GP, Inc. (9)
10.9  *        --- Fourth Amended and Restated 1994 Share Option and Incentive 
                   Plan
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; 1999 base salary of $325,000),  
                   John T. Rippel  (President and Chief Operating Officer; 1999 
                   base salary of  $275,000),  C. Jordan  Clark  (Senior  Vice  
                   President  and Chief  Investment Officer; 1999 base salary of
                   $250,000),  and Marvin R. Banks, Jr. (Senior Vice  President 
                   and Chief Financial Officer; 1999 base salary of $225,000)
10.11          --- Employment Agreement between the Company and Chris D. Wheeler
                   dated March 16, 1998 (10)
10.12          --- Severance Agreement between the Company and William M. 
                   Hammond dated February 10, 1998 (11)
10.13          --- 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, Chris D. Wheeler and D. Raymond 
                   Riddle (9)
10.14          --- 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 (12)
10.15          --- 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 (13)
10.16          --- 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 (14)
10.17          --- 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 (14)
10.18          --- 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 (11)
<PAGE>
                                       36

Exhibit No.        Description
-----------        -----------
10.19          --- 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 (11)
10.20          --- 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 (11)
10.21          --- 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 (11)
10.22          --- Forward Treasury Lock Agreement (notional amount of 
                   $50,000,000) between Gables Realty Limited Partnership and 
                   J.P. Morgan  Securities  Inc., dated as of September 22, 1997
                   and amended on May 28, 1998 (2)
10.23          --- Forward  Treasury Lock Agreement  (notional amount of 
                   $50,000,000) between Gables Realty Limited  Partnership and 
                   J.P. Morgan  Securities  Inc., dated as of September 22, 1997
                   and amended on July 24, 1998 (2)
10.24          --- Forward  Treasury Lock Agreement  (notional amount of 
                   $50,000,000) between Gables Realty Limited Partnership and 
                   J.P. Morgan  Securities Inc., dated as of  September 22, 1997
                   and amended on August 19, 1998 (15)
10.25          --- Forward  Treasury Lock Agreement  (notional amount of 
                   $50,000,000) between Gables Realty Limited Partnership and 
                   J.P. Morgan  Securities Inc., dated as of  September 22, 1997
                   and amended on September 30, 1998 (15)
10.26          --- Interest Rate Swap Agreement (notional amount of $40,000,000)
                   between Gables Realty Limited Partnership and Morgan Guaranty
                   Trust Company of New York, dated as of September 28, 1998(15)
10.27          --- 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(16)
10.28          --- 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 (14)
10.29          --- 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 (14)
10.30          --- 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(14)
10.31          --- 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(14)
10.32          --- $225,000,000 Amended and Restated Credit Agreement dated as 
                   of May 13,1998 by and among Gables Realty Limited Partnership
                   (as Borrower) and Wachovia Bank, N.A., First Union National 
                   Bank, Chase Bank of Texas,   National Association, PNC Bank, 
                   National Association, Guaranty Federal Bank, F.S.B., AmSouth 
                   Bank of Alabama and Commerzbank AG, Atlanta  Agency 
                   (collectively, as lenders) and Wachovia Bank, N.A. (as Agent)
                   (2)
10.33          --- Promissory Note dated November 29, 1994 for a $53,000,000 
                   mortgage loan from the Northwestern Mutual Life Insurance 
                   Company to the Operating Partnership (12)
10.34          --- Contribution Agreement with an effective date of March 16, 
                   1998 between the Company, the Operating Partnership and 
                   specified representatives of Trammell Crow Residential("TCR")
                   executed in connection with the Company's April 1, 1998 
                   acquisition of the properties and operations of TCR-South 
                   Florida  (17)
10.35          --- Amendment No. 1 to Contribution Agreement dated April 1, 1998
                   (18)
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, 1998
         ___________ 

*        Filed herewith
<PAGE>
                                       37


(1)  The Company's Registration Statement on Form S-11 (File No. 33-70570), as 
     amended.
(2)  The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 
     1998.
(3)  The Company's Current Report on Form 8-K dated July 24, 1997.
(4)  The Company's Current Report on Form 8-K dated November 12, 1998.
(5)  The Company's Registration Statement on Form 8-A/A-2.
(6)  The  Operating  Partnership's  Current  Report on Form 8-K dated  March 23,
     1998.
(7)  The Operating Partnership's Current Report on Form 8-K dated October 5,
     1998.
(8)  The Operating Partnership's Current Report on Form 8-K dated October 8,
     1998.
(9)  The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1993.
(10) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
     1998.
(11) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1997.
(12) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1994.
(13) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1996.
(14) The Company's Quarterly Report on Form 10-Q for the quarter ended September
     30, 1997.
(15) The Company's Quarterly Report on Form 10-Q for the quarter ended September
     30, 1998.
(16) The Company's Annual Report on Form 10-K for the fiscal year ended December
     31, 1995.
(17) The Company's Current Report on Form 8-K dated March 16, 1998.
(18) The Company's Current Report on Form 8-K dated April 1, 1998, as amended.

The registrant's proxy statement is to be filed with the Securities and Exchange
Commission  not later  than 120 days  after  December  31,  1998 (the end of the
fiscal year covered by this Annual Report on Form 10-K).

14(b) Reports on Form 8-K

(i)   A Form 8-K dated October 5, 1998 was filed with the Securities and 
      Exchange Commission with the underwriting  agreement, indenture and other 
      related items executed in connection with the Operating Partnership's  
      issuance of $50 million of 6.55% Senior Unsecured Notes due October, 2000.

(ii)  A Form 8-K dated  October  8, 1998 was filed with the  Securities  and
      Exchange  Commission with the underwriting  agreement, indenture and other
      related  items  executed in  connection  with the  Operating Partnership's
      issuance of $15 million of 6.60% Senior Unsecured Notes due October, 2001.

(iii) A Form 8-K dated November 12, 1998 was filed with the Securities and 
      Exchange Commission with the Fourth Amended and Restated Agreement of
      Limited Partnership of the Operating Partnership and other related items
      executed in connection with the Operating Partnership's issuance of 
      $50 million of Series B Preferred Units.


14(c)  Exhibits

See Item 14(a)(3) above.

<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
 
                                             March 29, 1999

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.


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


/s/ Marcus E. Bromley     Chairman of the Board of Trustees   March 29, 1999
-----------------------   and Chief Executive Officer
Marcus E. Bromley         (Principal Executive Officer)


/s/ Marvin R. Banks, Jr.  Chief Financial Officer (Principal  March 29, 1999
-----------------------   Financial Officer and Principal 
Marvin R. Banks, Jr.      Accounting Officer)


/s/ John T. Rippel        President, Chief Operating Officer  March  29, 1999
-----------------------   and Trustee
John T. Rippel


/s/ David M. Holland      Trustee                             March  29, 1999
-----------------------
David M. Holland


/s/ Lauralee E. Martin    Trustee                             March  29, 1999
-----------------------
Lauralee E. Martin


/s/ John W. McIntyre      Trustee                             March  29, 1999
-----------------------
John W. McIntyre


/s/ D. Raymond Riddle     Trustee                             March 29, 1999
-----------------------
D. Raymond Riddle


/s/ Chris D. Wheeler      Trustee                             March 29, 1999
-----------------------
Chris D. Wheeler
<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, 1998 and 1997 and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the three years in the period ended  December 31, 1998.  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, 1998 and 1997 and the results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, 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 5, 1999


<PAGE>
                                       40

  
                            GABLES RESIDENTIAL TRUST
                          CONSOLIDATED BALANCE SHEETS
                (Amounts in Thousands, Except Per Share Amounts)
                                
<TABLE>
<CAPTION>
                                                                              December 31,     December 31,
                                                                                 1998              1997
                                                                              -----------      ------------
<S>                                                                             <C>            <C>
ASSETS:                         
Real estate assets:
   Land ....................................................................   $   229,960    $   150,894
   Buildings ...............................................................     1,218,782        770,305
   Furniture, fixtures and equipment .......................................        87,238         60,015
   Construction in progress ................................................        79,829         53,240
   Land held for future development ........................................        66,152         21,774
                                                                                ----------     ----------
      Real estate assets before accumulated depreciation ...................     1,681,961      1,056,228
   Less:  accumulated depreciation .........................................      (138,239)       (98,236)
                                                                                ----------     ----------
     Net real estate assets ................................................     1,543,722        957,992

Cash and cash equivalents ..................................................         7,054          3,179
Restricted cash ............................................................         8,017          4,498
Deferred financing costs, net of accumulated amortization of $3,946
  and $2,735 at December 31, 1998 and 1997, respectively ...................         4,696          4,194
Other assets, net ..........................................................        22,828         11,304
                                                                                ----------     ----------
     Total assets ..........................................................   $ 1,586,317    $   981,167
                                                                                ==========     ==========

LIABILITIES AND SHAREHOLDERS' EQUITY:
Notes payable ..............................................................   $   812,788    $   435,362
Accrued interest payable ...................................................         6,045          1,999
Preferred dividends payable ................................................           545            424
Real estate taxes payable ..................................................        16,224         13,568
Accounts payable and accrued expenses - construction .......................         8,402          8,505
Accounts payable and accrued expenses - operating ..........................         7,094          5,552
Security deposits ..........................................................         4,725          2,260
Other long-term liability, net .............................................        11,729              0
                                                                                ----------     ----------
     Total liabilities .....................................................       867,552        467,670

Minority interest of common unitholders in Operating Partnership ...........       108,110         62,059
Minority interest of Series B preferred unitholders in Operating Partnership        50,192              0
Series Z Preferred Shares at $25.00 liquidation preference,
  180 shares issued and outstanding at December 31, 1998 ...................         4,500              0

Commitments and contingencies

Shareholders' equity:
  Excess shares, $0.01 par value, 51,000 shares authorized .................             0              0
  Preferred shares, $0.01 par value, 20,000 shares authorized,
    Series A Preferred Shares at $25.00 liquidation preference,
      4,600 shares issued and outstanding at December 31, 1998
      and 1997; Series Z Preferred Shares and Series B Preferred
      Units, exchangeable into Series B Preferred Shares, reported above ...       115,000        115,000
  Common shares, $0.01 par value, 100,000 shares authorized,
    26,302 and 21,991 shares issued and outstanding at December
    31, 1998 and 1997, respectively ........................................           263            220
  Additional paid-in capital ...............................................       441,512        339,009
  Deferred long-term compensation ..........................................          (812)          (594)
  Accumulated earnings (deficit) ...........................................             0         (2,197)
                                                                                ----------     ----------
     Total shareholders' equity ............................................       555,963        451,438
                                                                                ----------     ----------
     Total liabilities and shareholders' equity ............................   $ 1,586,317    $   981,167
                                                                                ==========     ==========
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.                               

</FN>
</TABLE>
<PAGE>
                                       41
                            GABLES RESIDENTIAL TRUST
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                (Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>                                                           
                                                                              Years ended December 31,                              
                                                                          1998         1997        1996
                                                                        -------      -------     -------     
<S>                                                                  <C>           <C>          <C>  
Rental revenues ...................................................   $ 199,292    $ 132,371    $ 104,543
Other property revenues ...........................................       9,988        6,322        4,928
                                                                      ---------    ---------    ---------
     Total property revenues ......................................     209,280      138,693      109,471
                                                                      ---------    ---------    ---------

Property management - third party .................................       3,938        2,173        2,960
Property management - related party ...............................         595          859          911
                                                                      ---------    ---------    ---------
  Total property management revenues ..............................       4,533        3,032        3,871
Olympic revenues, net .............................................           0            0          900
Other .............................................................       2,811        1,713        1,939
                                                                      ---------    ---------    ---------
     Total other revenues .........................................       7,344        4,745        6,710
                                                                      ---------    ---------    ---------

     Total revenues ...............................................     216,624      143,438      116,181
                                                                      ---------    ---------    ---------
Property operating and maintenance (exclusive of items shown
     separately below) ............................................      70,502       47,592       38,693
Real estate asset depreciation and amortization ...................      40,087       24,712       18,477
Corporate asset depreciation and amortization .....................         563          482          415
Amortization of deferred financing costs ..........................         984          992        1,348
Property management - owned .......................................       4,758        3,364        2,824
Property management - third/related party .........................       3,219        2,332        2,793
General and administrative ........................................       6,242        3,248        3,045
Interest ..........................................................      38,519       24,804       21,112
Credit enhancement fees ...........................................       1,455          509          576
                                                                      ---------    ---------    ---------
     Total expenses ...............................................     166,329      108,035       89,283
                                                                      ---------    ---------    ---------     
Equity in income of joint ventures ................................         359          320          280
Interest income ...................................................         417          371          363
Loss on treasury locks ............................................      (5,637)      (1,178)           0
                                                                      ---------    ---------    ---------
Income before gain on sale of real estate assets ..................      45,434       34,916       27,541
                                                                      ---------    ---------    ---------
Gain on sale of real estate assets ................................           0        5,349            0

Income before minority interest and extraordinary loss, net .......      45,434       40,265       27,541
Minority interest of common unitholders in Operating Partnership ..      (7,142)      (5,611)      (4,640)
Minority interest of preferred unitholders in Operating Partnership        (587)           0            0
                                                                      ---------    ---------    ---------

Income before extraordinary loss, net .............................      37,705       34,654       22,901
Extraordinary loss, net of minority interest ......................           0         (602)        (520)
                                                                      ---------    ---------    ---------

Net income ........................................................      37,705       34,052       22,381

Dividends to preferred shareholders ...............................      (9,665)      (4,163)           0
                                                                      ---------    ---------    ---------

Net income available to common shareholders .......................   $  28,040    $  29,889    $  22,381
                                                                      =========    =========    =========
Weighted average number of common shares outstanding - basic ......      24,118       19,788       16,788
Weighted average number of common shares outstanding - diluted ....      30,340       23,591       20,283

Per Common Share Information:
Income before extraordinary loss, net - basic .....................   $    1.16    $    1.54    $    1.36
Extraordinary loss, net - basic ...................................   $    0.00    ($   0.03)   ($   0.03)
Net income - basic ................................................   $    1.16    $    1.51    $    1.33

Income before extraordinary loss, net - diluted ...................   $    1.16    $    1.53    $    1.35
Extraordinary loss, net - diluted .................................   $    0.00    ($   0.03)   ($   0.03)
Net income - diluted ..............................................   $    1.16    $    1.50    $    1.32
<FN>
The accompanying notes are an integral part of these consolidated statements.                                              
</FN>
</TABLE>
<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, 1995 .............................   $       0   $     152    $ 255,228    $     0    ($ 53,070)   $ 202,310

  Proceeds of 4,039 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 declared and paid ($1.45 per share) ........           0           0      (24,901)         0            0      (24,901)
  Dividends declared ($0.49 per 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 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 .................           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 declared and paid ($1.98 per share) ........           0           0      (40,133)         0            0      (40,133)
                                                            --------     -------     --------    -------      -------     --------
Balance, December 31, 1997 .............................     115,000         220      339,009       (594)      (2,197)     451,438

  Proceeds of 3,311 common share offering, net of
   $1,861 underwriting discount and issuance costs .....           0          33       87,497          0            0       87,530
  Proceeds from exercise of share options ..............           0           2        3,705          0            0        3,707
  Proceeds from Share Builder Plan .....................           0           2        3,547          0            0        3,549
  Issuance of shares for trustee compensation ..........           0           0           40          0            0           40
  Issuance of Share Grants .............................           0           0        1,746          0            0        1,746
  Forfeiture of Share Grants ...........................           0           0         (186)         0            0         (186)
  Deferred long-term compensation, net .................           0           0            0       (218)           0         (218)
  Adjustment for minority interest of unitholders in
   Operating Partnership for offerings, issuance of
   Operating Partnership Units, and other activity .....           0           6       30,648          0            0       30,654
  Net income available to common shareholders ..........           0           0            0          0       28,040       28,040
  Dividends declared and paid ($2.02 per share) ........           0           0      (24,494)         0      (25,843)     (50,337)
                                                            --------     -------     --------    -------      -------     --------
Balance, December 31, 1998 .............................   $ 115,000   $     263    $ 441,512  ($    812)   $       0    $ 555,963
                                                            ========     =======     ========    =======      =======     ========
<FN>
The accompanying notes are an integral part of these consolidated statements.                                                       
</FN>
</TABLE>
<PAGE>
                                       43

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

                                                                                      Years Ended December 31,                
                                                                                1998          1997         1996
                                                                              --------      -------      --------
<S>                                                                          <C>          <C>           <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:                                                   
Net income ...............................................................   $  37,705    $  34,052    $  22,381
Adjustments to reconcile net income to net cash provided
  by operating activities:
   Depreciation and amortization .........................................      41,634       26,186       20,240
   Equity in income of joint ventures ....................................        (359)        (320)        (280)
   Minority interest of unitholders in Operating Partnership .............       7,729        5,611        4,640
   Gain on sale of real estate assets ....................................           0       (5,349)           0
   Long-term compensation expense ........................................       1,072          574          408
   Loss on treasury locks ................................................       5,637        1,178            0
   Extraordinary loss, net of minority interest ..........................           0          602          520
   Amortization of discount on long-term liability .......................         576            0            0
   Change in operating assets and liabilities:
     Restricted cash .....................................................      (2,822)       4,616       (2,366)
     Other assets ........................................................     (12,220)      (1,055)        (282)
     Other liabilities, net ..............................................      11,195        3,424        6,368
                                                                               -------      -------      -------
          Net cash provided by operating activities ......................      90,147       69,519       51,629
                                                                               -------      -------      -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and construction of real estate assets .......................    (358,263)    (241,585)    (194,886)
Investment in mortgage note receivable ...................................           0            0      (21,505)
Net proceeds from sale of real estate assets .............................           0       13,174        3,968
Long-term land lease payments ............................................      (1,000)      (1,000)      (1,500)
Distributions received from joint ventures ...............................         408          442          327
                                                                               -------      -------      -------
     Net cash used in investing activities ...............................    (358,855)    (228,969)    (213,596)
                                                                               -------      -------      -------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from common share offerings, net of issuance costs ..............      87,530       62,517       93,484
Proceeds from preferred share offering, net of issuance costs ............           0      110,991            0
Proceeds from preferred unit offering, net of issuance costs .............      48,673            0            0
Proceeds from the exercise of share options ..............................       3,707        3,121        1,430
Share Builder Plan contributions .........................................       3,549           61           32
Payments of filing costs for shelf registration statement ................           0            0          (97)
Payments of deferred financing costs .....................................      (1,713)        (440)      (1,668)
Treasury lock settlement payments ........................................      (6,723)           0            0
Notes payable proceeds ...................................................     538,522      233,849      282,569
Notes payable repayments .................................................    (328,000)    (188,808)    (178,507)
Principal escrow deposits ................................................        (697)        (684)        (768)
Preferred dividends paid .................................................      (9,544)      (3,739)           0
Preferred distributions paid .............................................        (395)           0            0
Common dividends paid ($2.02, $2.47 and $1.93 per share, respectively) ...     (50,337)     (49,598)     (32,189)
Common distributions paid ($2.02, $2.47 and $1.93 per share, respectively)     (11,989)      (9,026)      (6,463)
                                                                               -------      -------      -------
     Net cash provided by financing activities ...........................     272,583      158,244      157,823
                                                                               -------      -------      -------

Net change in cash and cash equivalents ..................................       3,875       (1,206)      (4,144)
Cash and cash equivalents, beginning of period ...........................       3,179        4,385        8,529
                                                                               -------      -------      -------
Cash and cash equivalents, end of period .................................   $   7,054    $   3,179    $   4,385
                                                                               =======      =======      =======

Supplemental disclosure of cash flow information:
     Cash paid for interest ..............................................   $  43,210    $  29,777    $  24,749
     Interest capitalized ................................................       8,737        5,161        4,373
                                                                               -------      -------      -------
     Cash paid for interest, net of amounts capitalized ..................   $  34,473    $  24,616    $  20,376
                                                                               =======      =======      =======
<FN>
The accompanying notes are an integral part of these consolidated statements.                                                    
</FN>
</TABLE>
<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 (the "Company" or "Gables") is a real estate investment
trust (a "REIT")  formed in 1993 under  Maryland  law to continue and expand the
multifamily  apartment  community  management,  development,  construction,  and
acquisition operations of its privately owned predecessor  organization.  Gables
completed its initial public offering on January 26, 1994 (the "IPO").

Gables engages in the multifamily apartment community  management,  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, 1998, the Company was an
80.3% economic owner of the common equity of the Operating Partnership.  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.

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 ownership
interest therein and entitle the Company to vote on all matters requiring a vote
of the limited partners.  Generally, 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
IPO, the South Florida  Acquisition  and the Greystone  Acquisition  (as defined
herein).  The Operating  Partnership  is obligated to redeem each common unit of
limited  partnership  interest ("Unit") held by a person other than the Company,
at the request of the holder thereof, for cash equal to the fair market value of
a share of the Company's common shares 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  its  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 or preferred  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 common or preferred units, as applicable, to the Company.

As of  December  31,  1998,  Gables  owned 84  completed  multifamily  apartment
communities comprising 24,625 apartment homes, of which 39 were developed and 45
were  acquired by Gables,  and an indirect 25% general  partner  interest in two
apartment communities developed by Gables comprising 663 apartment homes. Two of
the completed  communities  comprising 642 apartment  homes were in the lease-up
stage at  December  31,  1998.  Gables  also  owned five  multifamily  apartment
communities that were under  construction at December 31, 1998 that are expected
to comprise  1,613  apartment  homes upon  completion.  As of December 31, 1998,
Gables owned parcels of land for the future  development of seventeen  apartment
communities  expected to comprise an estimated 4,093 apartment homes.  There can
be no assurance  that Gables will develop  such land.  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.
See Note 14 for certain events occurring subsequent to December 31, 1998.

2.  PORTFOLIO ACQUISITIONS

On April 1, 1998, Gables acquired the properties and operations of Trammell Crow
Residential  South Florida  ("TCR/SF"),  which consisted of fifteen  multifamily
apartment  communities  containing a total of 4,197 apartment  homes, and all of
TCR/SF's  residential  construction  and development and third party  management
activities in South Florida (collectively,  the "South Florida Acquisition"). In

<PAGE>

                                          45

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

consideration for such properties and operations, Gables (i) paid $155.0 million
in cash, (ii) assumed  approximately $135.9 million of tax-exempt debt and (iii)
issued  approximately  2,348 Units valued at  approximately  $64.9  million.  In
addition, up to $12.5 million of the purchase price was deferred by Gables until
January 1,  2000,  at which time  Gables  will issue a number of Units  equal in
value to such deferred  amount.  The  acquisition  increased the size of Gables'
portfolio under management on April 1, 1998 from approximately  28,000 to 40,000
apartment homes.

The South Florida  Acquisition  has been accounted for under the purchase method
of accounting in accordance  with  Accounting  Principles  Board Opinion No. 16.
Accordingly, assets acquired and liabilities assumed have been recorded at their
estimated fair values.  The accompanying  consolidated  statements of operations
include the operating results of TCR/SF since April 1, 1998, the closing date of
the South Florida Acquisition. The following unaudited pro forma information for
the years ended December 31, 1998 and 1997 has been prepared  assuming the South
Florida  Acquisition had been  consummated on January 1, 1997. The unaudited pro
forma  information  (i)  includes  the  historical   operating  results  of  the
properties and activities acquired and (ii) does not purport to be indicative of
the  results  which  actually  would have been  obtained  had the South  Florida
Acquisition  been  consummated  on January 1, 1997,  or which may be attained in
future periods.

                                                        Years Ended December 31,
                                                           1998          1997
                                                         -------       --------
Total revenues                                          $226,652       $180,671
Income available to common shareholders before 
     extraordinary loss, net                              26,948         28,711
Net income available to common shareholders               26,948         28,165
Per common share information:
          Income before extraordinary loss, net - basic    $1.12          $1.45
          Net income - basic                               $1.12          $1.42
          Income before extraordinary loss, net - diluted  $1.12          $1.44
          Net income - diluted                             $1.12          $1.41

In  April,  1998,  Gables  acquired  four  multifamily   apartment   communities
comprising  a total of 913  apartment  homes  located  in  Houston,  Texas  (the
"Greystone  Acquisition").  In connection with such acquisition,  Gables assumed
approximately  $31.0  million  of  indebtedness,   at  fair  value,  and  issued
approximately  665 Units valued at  approximately  $18.0  million.  In addition,
Gables has accrued  approximately  $0.5  million as of  December  31, 1998 for a
portion of the purchase price that was deferred by Gables,  the payment of which
is  contingent  upon 1999  economic  performance.  Gables will issue a number of
Units equal in value to the amount due once determined.

3. SECONDARY OFFERINGS AND ISSUANCES OF OPERATING PARTNERSHIP UNITS

SECONDARY COMMON SHARE OFFERINGS

Since the IPO, the Company has issued a total of 14,831  common  shares in eight
offerings  generating  $347,771 in net proceeds which were generally used (i) to
reduce  outstanding  indebtedness  under interim financing  vehicles utilized to
fund Gables'  development  and acquisition  activities  (the "Interim  Financing
Vehicles") and (ii) for general working capital  purposes  including  funding of
future development and acquisition activities.

PREFERRED SHARE OFFERINGS

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 $111.0 million were used to reduce outstanding  indebtedness under
<PAGE>
                                       46


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

the Interim  Financing  Vehicles.  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.

On June 18,  1998,  the Company  issued 180 shares of 5.0%  Series Z  Cumulative
Redeemable  Preferred  Shares  (liquidation  preference  $25.00 per share)  (the
"Series Z Preferred  Shares") in connection  with the acquisition of a parcel of
land for  future  development.  The  Series Z  Preferred  Shares,  which  may be
redeemed by the Company at $25.00 per share,  plus accrued and unpaid dividends,
at any time, are subject to mandatory  redemption on June 18, 2018. The Series Z
Preferred  Shares are not  subject to any sinking  fund and are not  convertible
into any other securities of the Company.

ISSUANCES OF COMMON OPERATING PARTNERSHIP UNITS

Since the IPO,  Gables has issued a total of 3,917 Units in connection  with the
South Florida  Acquisition,  the Greystone  Acquisition  and the  acquisition of
operating apartment communities and a parcel of land for future development.

ISSUANCE OF PREFERRED OPERATING PARTNERSHIP UNITS

On November  12,  1998,  the  Operating  Partnership  issued 2,000 of its 8.625%
Series B Preferred  Units (the "Series B Preferred  Units") to an  institutional
investor.  The net proceeds  from this issuance of  approximately  $48.7 million
were  used to  reduce  outstanding  indebtedness  under  the  Interim  Financing
Vehicles.  The Series B  Preferred  Units may be  redeemed by the Company at its
option after  November 14, 2003 and are  exchangeable  by the holder into 8.625%
Series B Cumulative  Redeemable Preferred Shares of the Company on a one-for-one
basis. This exchange right is generally not exercisable until after November 14,
2008.  The Series B Preferred  Units have no stated  maturity,  sinking fund, or
mandatory redemption.

4.  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 nine core  cities in Texas,  Georgia,
Florida and Tennessee.

BASIS OF PRESENTATION

The accompanying  consolidated  financial statements of Gables Residential Trust
include  the  consolidated   accounts  of  Gables   Residential  Trust  and  its
subsidiaries  (including the Operating  Partnership and its  subsidiaries).  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.  Because  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 common unitholders in the Operating  Partnership is calculated based
on the  weighted  average  of common  shares  and Units  outstanding  during the
applicable period.

RECLASSIFICATIONS

Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation.

<PAGE>
                                       47


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

USE OF ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles  ("GAAP")  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 the lower of depreciated cost or fair value, if
deemed  impaired.  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).

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.

CASH AND CASH EQUIVALENTS

For purposes of the statements 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.
<PAGE>
                                       48


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

INTEREST RATE PROTECTION AGREEMENTS

In the ordinary  course of business,  Gables is exposed to interest  rate risks.
Gables' senior management  periodically seeks input from third party consultants
regarding market interest rate and credit risk in order to evaluate its interest
rate exposure.  In certain situations,  Gables may utilize derivative  financial
instruments,  in the  form of rate  caps,  rate  swaps or rate  locks,  to hedge
interest rate exposure by modifying the interest rate characteristics of related
balance sheet instruments and prospective  financing  transactions.  Gables does
not utilize such  instruments for trading or speculative  purposes.  Derivatives
used as hedges  must be  effective  at  reducing  the risk  associated  with the
exposure  being hedged,  correlate in nominal  amount,  rate,  and term with the
balance sheet instrument being hedged,  and must be designated as a hedge at the
inception of the derivative contract.

Lump sum payments  made or received at the inception or settlement of derivative
instruments  designated as hedges are capitalized and amortized as an adjustment
to interest  expense over the life of the associated  balance sheet  instrument.
Monthly  amounts paid or received under rate cap and rate swap hedge  agreements
are recognized as adjustments to interest expense as incurred. In the event that
circumstances  arise that  indicate  that an existing  derivative  instrument no
longer meets the hedge  criteria  described  above,  the derivative is marked to
market in the statement of operations.

In anticipation of a projected seven-year debt offering, Gables entered into two
forward  treasury  lock  agreements  in late 1997.  The timing and amount of the
projected debt offering was modified  several times as a result of unanticipated
capital transactions, including the South Florida Acquisition. The treasury lock
agreements  were  extended  to  align  with  the  projected  timing  of the debt
offering. The treasury lock agreement in place in September, 1998 was terminated
due to certain economic conditions  affecting the unsecured debt market. For the
years ended December 31, 1998 and 1997,  Gables recognized mark to market losses
of $5,637 and $1,178,  respectively,  upon the  expiration  of the  original and
extended terms of the treasury lock agreements since the required hedge criteria
no longer existed at those dates.

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,  1998,  1997 and 1996.  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.

RECENT ACCOUNTING PRONOUNCEMENTS

Gables adopted SFAS No. 130, "Reporting Comprehensive Income," during 1998. SFAS
No. 130 established standards for reporting and disclosing  comprehensive income
(defined  as  revenues,  expenses,  gains and  losses  that  under  GAAP are not
included in net income) and its components.  As of December 31, 1998, Gables had
no items of other comprehensive income.
<PAGE>
                                       49


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

In June, 1998, SFAS No. 133, "Accounting for Derivative  Instruments and Hedging
Activities" was issued establishing accounting and reporting standards requiring
that every  derivative  instrument  (including  certain  derivative  instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability  measured at its fair value.  SFAS No. 133 requires that changes in
the derivative's fair value be recognized  currently in earnings unless specific
hedge  accounting  criteria are met.  Special  accounting for qualifying  hedges
allows a derivative's  gains and losses to offset related  results on the hedged
item in the statement of  operations,  and requires that a company must formally
document,  designate,  and assess the effectiveness of transactions that receive
hedge  accounting.  SFAS No. 133 is effective  for Gables  beginning  January 1,
2000. The impact of SFAS No. 133 on Gables' financial  statements will depend on
the extent, type and effectiveness of Gables' hedging  activities.  SFAS No. 133
could increase volatility in net income and other comprehensive income.

5.  NOTES PAYABLE

Notes payable consist of the following:
                                                     December 31,
                                               1998                 1997
                                             --------             --------
         Secured conventional fixed-rate     $125,546             $ 96,135
         Unsecured conventional fixed-rate    323,442              158,526
         Tax-exempt fixed-rate                 90,730               60,150
                                             --------             --------
                   Total fixed-rate           539,718              314,811
         Tax-exempt variable-rate             150,070               44,930
         Unsecured credit facilities          123,000               75,621
                                            ---------            ---------
                   Total notes payable       $812,788             $435,362
                                            =========            =========

SECURED CONVENTIONAL FIXED-RATE NOTES PAYABLE

At December 31, 1997, the fixed-rate  notes payable were 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, 2009.

In April,  1998,  Gables  assumed  $31,029 of  indebtedness,  at fair value,  in
connection with the Greystone Acquisition.

At December 31, 1998, the  fixed-rate  notes payable are comprised of nine loans
collateralized by eleven apartment  communities  included in real estate assets.
At December 31,  1998,  the interest  rates on these notes  payable  ranged from
6.75% to 8.77%  (weighted  average of 7.80%) and the maturity  dates ranged from
May, 2003 to December,  2015. Principal  amortization payments are required on a
monthly basis for all notes payable based on amortization schedules ranging from
25 to 30 years.

UNSECURED CONVENTIONAL FIXED-RATE NOTES PAYABLE

At December 31, 1997, the unsecured,  fixed-rate notes payable were comprised of
four loans.  At December 31, 1997,  the  interest  rates on these notes  payable
ranged from 6.10% to 8.62%  (weighted  average of 7.78%) and the maturity  dates
ranged from November, 2001 to December, 2007.

In March,  1998,  Gables issued  $100,000 of senior  unsecured  notes which bear
interest  at 6.80%,  were priced to yield  6.84% and mature in March,  2005.  In
October,  1998,  Gables issued (i) $50,000 of senior  unsecured notes which bear
interest at 6.55%,  were  priced to yield 6.59% and mature in October,  2000 and
(ii) $15,000 of senior unsecured notes which bear interest at 6.60%, were priced
at par and mature in October, 2001.

<PAGE>
                                       50


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

In  November,  1998,  Gables  acquired  a  parcel  of land and  assumed  $829 of
indebtedness  associated  therewith.  Such indebtedness bears interest at 5.25%,
requires  principal  amortization  payments  over  its 20 year  term,  and has a
maturity of November, 2018.

At December 31, 1998, the unsecured  fixed-rate  notes payable were comprised of
eight loans.  At December 31, 1998,  the interest  rates on these notes  payable
ranged from 5.25% to 8.62%  (weighted  average of 7.20%) and the maturity  dates
ranged from October, 2000 to November, 2018. Principal amortization payments are
required on certain of these loans based on amortization  schedules ranging from
20 to 30 years.

TAX-EXEMPT FIXED-RATE NOTES PAYABLE

At December  31, 1998 and 1997,  the  tax-exempt,  fixed-rate  indebtedness  was
comprised  of five and two loans,  respectively.  One such loan  outstanding  at
December  31,  1998  and  1997  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, 1998 and
1997 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 second loan, with
an outstanding  principal balance of $11,630 and $11,785 as of December 31, 1998
and 1997,  respectively,  represents a tax-exempt bond financing  secured by one
apartment  community.  The bond issue was credit  enhanced  for an annual fee of
0.60% and bears  interest at a weighted  average  rate of 7.03% on a fixed basis
for 30 years.  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.

On April  1,  1998,  Gables  assumed  three  bond  issues  totaling  $30,735  in
connection  with the South  Florida  Acquisition.  Two of the bond  issues  bear
interest at 4.75% and are enhanced by letters of credit  provided by a letter of
credit  facility  entered  into on  April  1,  1998  (the  "Florida  Enhancement
Facility").  The fee for the  letters of credit is 1.0% per annum.  The  Florida
Enhancement  Facility  has an initial  term of 10 years and has three  five-year
extension  options.  The third bond  issue  bears  interest  at 5.75% and is not
currently  enhanced by a letter of credit.  Such bond issue may be refunded  and
upon such refunding will be enhanced by the Florida  Enhancement  Facility.  The
Florida  Enhancement  Facility is collateralized by (i) each apartment community
induced  for  tax-exempt  financing  for which a letter of credit is issued  and
outstanding thereunder and (ii) two additional  communities.  The maturity dates
of the three bond issues range from February,  2004 to April, 2009. The bonds do
not require principal amortization payments.

TAX-EXEMPT VARIABLE-RATE NOTES PAYABLE TOTALING $44,930

At December 31, 1998 and 1997, the variable-rate mortgage notes payable securing
tax-exempt bonds totaling $44,930 were comprised of four loans, each of which is
collateralized by an apartment  community included in real estate assets.  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, 1998 and 1997 was
4.1% and 4.2%,  respectively.  Tax-exempt  variable rates are, and  historically
have been,  significantly higher at year-end than during the year. The effective
interest  rates were 3.5%,  3.7% and 3.5% for the years ended December 31, 1998,
1997 and 1996, respectively. The bonds are currently enhanced 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, 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 five years
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, 2003. Three of the underlying bond issues mature in December,  2007 and
the fourth underlying bond issue matures in August, 2024.

<PAGE>
                                       51


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

TAX-EXEMPT VARIABLE-RATE NOTES PAYABLE TOTALING $105,140

On April  1,  1998,  Gables  assumed  five  bond  issues  totaling  $105,140  in
connection  with the South  Florida  Acquisition.  At  December  31,  1998,  the
interest  rates on these bonds ranged from 3.45% to 4.05%  (weighted  average of
3.81%) and the maturity dates of the underlying  bond issues ranged from August,
2006 to September,  2008.  The effective  interest rate for these bonds averaged
3.6% for the  period  from April 1, 1998 to  December  31,  1998.  The bonds are
enhanced  by letters of credit  provided  by the  Florida  Enhancement  Facility
described above.

$225 MILLION CREDIT FACILITY

In  March,  1996,  Gables  closed  a $175  million  unsecured  revolving  credit
facility.  In May, 1998, the $175 million commitment level was increased to $225
million  and the  maturity  date was  extended  to May,  2001 with two  one-year
extension  options.  Gables'  availability  under the facility is limited to the
lesser of the total $225 million commitment or the borrowing base. The borrowing
base available under the facility is based on the value of Gables'  unencumbered
real estate assets as compared to the amount of Gables' unsecured indebtedness.

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 Gables'  attainment
of senior  unsecured  debt ratings of BBB from Standard and Poor's and Baa2 from
Moody's  Investors  Service (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 total
commitment.  As of December 31, 1998,  Gables had $110.0  million in  borrowings
outstanding under the facility and,  therefore,  had $115.0 million of remaining
capacity on the $225.0 million available commitment.

$25 MILLION CREDIT FACILITY

In November,  1996,  Gables closed an unsecured  revolving  credit facility that
currently  provides for up to $25 million in  borrowings.  This  facility has an
initial term of one year and has unlimited one-year  extension  options.  Gables
has exercised two of its one-year extension options resulting in a maturity date
for the facility of October,  1999. 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, 1998,  Gables had no borrowings
outstanding under this facility.

$25 MILLION BORROWING FACILITY

At December 31, 1998,  Gables had $13.0 million in borrowings  outstanding under
this  unsecured  credit  facility  at an  interest  rate of 6.0%.  The  facility
currently matures on April 28, 1999.

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>
                                       52


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

The  tax-exempt  bonds  contain  certain   covenants  which  require  a  certain
percentage of the apartments in such communities be rented to individuals  based
upon income levels specified by U.S. government programs, as defined.

MATURITIES

The aggregate maturities of notes payable at December 31, 1998 are as follows:

1999                                                   $16,144
2000                                                    56,912
2001                                                   168,599
2002                                                    86,280
2003                                                    65,601
2004 and thereafter                                    419,252
                                                      --------
                                                      $812,788
                                                      ========

The debt maturities in 2001 include $110,000 of outstanding  indebtedness  under
the $225 Million  Credit  Facility  which has two remaining  one-year  extension
options.  The  debt  maturities  in 2003  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 $17.8 million outstanding
at December 31, 1998, 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%.

INTEREST RATE PROTECTION AGREEMENTS

Gables has four  interest  rate  protection  agreements in place at December 31,
1998, 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)
LIBOR, 30-day - "Rate Swap"            40,000   4.79%(a)  11/30/98  09/29/00

(a)  The 30-day LIBOR rate in effect at December 31, 1998 was 5.63%.

(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.
<PAGE>
                                       53

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

PLEDGED ASSETS

The aggregate net book value at December 31, 1998 of real estate assets  pledged
as collateral for indebtedness was $473,336.

6.  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.

7.  EXTRAORDINARY LOSS, NET

Extraordinary  loss, net of $602 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 associated with the early
retirement of a credit facility that was refinanced.  The extraordinary  loss of
$631 is  presented  net of the  $111  portion  of the loss  attributable  to the
minority interest unitholders.

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, 1998.  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.

<PAGE>
                                       54


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

INTEREST RATE PROTECTION AGREEMENTS

The estimated fair value and the net carrying value of the $44,530 interest rate
cap  agreement at December 31, 1998 is $0 and $11,  respectively.  The estimated
fair value of the three interest rate swap  agreements is $(161) at December 31,
1998.  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.

9.  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 and upon conversion of units. The numerator and
denominator used for both basic and diluted earnings per share  computations are
as follows:

 
                                                    Years Ended December 31,
                                                  1998        1997      1996
                                                  ----        ----      ----
BASIC AND DILUTED INCOME AVAILABLE TO
   COMMON SHAREHOLDERS (NUMERATOR):
Income before extraordinary loss, net - basic   $28,040     $30,491    $22,901
Minority interest of  common unitholders     
     in Operating Partnership                     7,142       5,611      4,640
                                                -------     -------    -------
Income before extraordinary loss, net - diluted $35,182     $36,102    $27,541
                                                =======     =======    =======

Net income - basic                              $28,040     $29,889    $22,381
Minority interest of  common unitholders
     in Operating Partnership                     7,142       5,501      4,529
                                                -------     -------    -------
Net income - diluted                            $35,182     $35,390    $26,910
                                                =======     =======    =======

COMMON SHARES (DENOMINATOR):
Average shares outstanding - basic               24,118      19,788     16,788
Incremental shares from assumed conversions of:                                
   Stock options                                    128         150         89
   Outstanding common Units                       6,094       3,653      3,406
                                                -------     -------    -------  
Average shares outstanding - diluted             30,340      23,591     20,283
                                                =======     =======    =======

10.   SEGMENT REPORTING

Gables  adopted SFAS No. 131,  "Disclosures  about Segments of an Enterprise and
Related  Information,"  during  1998.  SFAS No. 131  established  standards  for
reporting  financial and descriptive  information  about  operating  segments in
annual financial statements.  Operating segments are defined as components of an
enterprise  about which  separate  financial  information  is available  that is
evaluated  regularly by the chief  operating  decision  maker in deciding how to
allocate  resources  and  in  assessing  performance.  Gables'  chief  operating
decision maker is its senior management group.

Gables owns,  operates and develops  multifamily  apartment  communities in nine
major markets located in Texas, Georgia,  Florida and Tennessee.  Such apartment
communities  generate  rental  revenue and other  income  through the leasing of
apartment homes to a diverse base of residents. Gables evaluates the performance
of each of its apartment  communities on an individual basis.  However,  because
each  of  the  apartment  communities  have  similar  economic  characteristics,
residents,  and products  and  services,  the  apartment  communities  have been
aggregated into one reportable  segment.  This segment  comprises 97% of Gables'
total revenues for the year ended December 31, 1998.

<PAGE>
                                       55

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

The primary  financial  measure for Gables'  reportable  business segment is net
operating income ("NOI"), which represents total property revenues less property
operating and maintenance expenses (as reflected in the accompanying  statements
of  operations).  Accordingly,  NOI excludes  certain  expenses  included in the
determination of net income.  Current year NOI is compared to prior year NOI and
current year budgeted NOI as a measure of financial  performance.  The NOI yield
or return on total  capitalized  costs is an  additional  measure  of  financial
performance.  NOI from  apartment  communities  totaled  $138,778,  $91,101  and
$70,778 for the years ended December 31, 1998, 1997 and 1996, respectively.  All
other  segment  measurements  are  disclosed in Gables'  consolidated  financial
statements.

Gables  also  provides  management,  brokerage,  corporate  apartment  home  and
development and construction  services to third parties.  These operations on an
individual  and  aggregate  basis do not meet the  quantitative  thresholds  for
segment reporting per SFAS No. 131.

11.  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, 1998, 1997 and 1996 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.

12.   DIVIDENDS AND SHARE BUILDER PLAN

The Company has declared and paid dividends to common shareholders for the years
ended December 31, 1998, 1997 and 1996 as follows:

                 Per Share Dividends               Shareholder Tax Treatment
                 -------------------               -------------------------
           First Qtr. to    Fourth                Return of         Ordinary
Year        Fourth Qtr.      Qtr.                  Capital           Income
----        ----------       ----                  -------          --------
1998           $2.02        $0.51  (a)              32.4%            67.6%
1997            1.98         0.50  (a)              23.5%            76.5%
1996            1.94         0.49  (b)              29.1%            70.9%


(a)  The fourth  quarter  dividends  in 1998 and 1997 were  declared and paid in
     December 1998 and 1997, respectively.

(b)  The fourth quarter  dividends for 1996 were declared in December,  1996 and
     were paid in January, 1997.

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.

<PAGE>
                                       56

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

13.  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 9% 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 or more series  during each of 1994
through  1998 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, 1998,  2,022  common  shares are subject to
outstanding Options granted to officers,  employees and trustees of the Company,
of which Options to purchase approximately 608 shares are currently exercisable.

The total  number of  common  shares  reserved  for  issuance  under the Plan at
December  31, 1998 is 2,948,  which is equal to 9% of the total number of common
shares and Units outstanding at that time.

A summary of the Options  activity for the years ended  December 31, 1998,  1997
and 1996 is as follows:
 
                                    1998               1997            1996
                                   ------             ------          ------
Outstanding at beginning of year    937                 904             773
Granted                           1,305                 235             270
Forfeited                           (56)                (55)            (72)
Exercised                          (164)               (147)            (67)
                                  -----               -----            ----
Outstanding at end of year        2,022                 937             904
                                  =====               =====            ====

Option prices:
Granted                    $26.750-$27.625  $25.000-$25.500  $22.750 -  $23.000
Forfeited                   19.500- 27.625   19.500- 25.500   19.500 -   22.750
Exercised                   19.125- 25.500   19.500- 22.750   19.500 -   22.500
Outstanding at end of year  19.125- 27.625   19.125- 25.500   19.125 -   23.000

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:

                                           1998       1997      1996
                                          ------     ------    ------
Net income available to
 common shareholders:       As Reported    $28,040   $29,889   $22,381
                            Pro Forma       27,607    29,669    22,258

Basic earnings per share:   As Reported       1.16      1.51      1.33
                            Pro Forma         1.14      1.50      1.33

Diluted earnings per share: As Reported       1.16      1.50      1.32   
                            Pro Forma         1.14      1.49      1.32
<PAGE>
                                       57

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

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 $1.92, $2.14 and $1.91 for
1998, 1997 and 1996, 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 1998,  1997 and
1996, respectively: risk free interest rates of 4.84%, 6.45% and 6.44%; expected
lives of 6.39,  3.91 and 4.90;  dividend yields of 7.55%,  7.99% and 8.43%,  and
expected volatility of 18%, 18% and 19%.

Gables has made the  following  grants of  Restricted  Shares  and  Unrestricted
Shares (the "Share  Grants")  under the Plan:  
<TABLE>
<CAPTION>

            Number of     Number of  
           Unrestricted   Restricted    Per Share 
Grant         Shares        Shares       Grant 
Date         Granted       Granted       Value       Vesting Period for Restricted Shares
----         -------       -------       -----       ------------------------------------
<S>           <C>           <C>         <C>           <C>  
2-21-97         23            46         $25.8750    Two equal annual installments beginning 1-1-98
2-12-98         13            40          26.6875    Three equal annual installments beginning 1-1-99
4-01-98          3             9          27.0625    Three equal annual installments beginning  4-1-99
2-09-99         11            34          23.2500    Three equal annual installments beginning 1-1-00
2-09-99          5             9          23.2500    Two equal annual installments beginning 1-1-00
</TABLE>

The  value  of  the   Unrestricted   Shares  granted  is  accrued  as  long-term
compensation expense in the year the related service was provided. Upon issuance
of the  Share  Grants,  the  value  of the  shares  issued  is  recorded  to the
additional  paid-in capital  component of shareholders'  equity and the value of
the  Restricted  Shares  is  recorded  to the  deferred  long-term  compensation
component of  shareholders'  equity.  Such  deferred  compensation  is amortized
ratably over the term of the vesting  period.  During 1998, 7 Restricted  Shares
were forfeited and the appropriate adjustments were made to shareholders' equity
and compensation expense.

14. SUBSEQUENT  EVENTS (Unaudited as to events occurring  subsequent to March 5,
1999)

On  March 4,  1999,  Gables  sold an  apartment  community  located  in  Atlanta
comprising  213  apartment  homes  for  $19.3  million.  The net  proceeds  were
initially  used to paydown  outstanding  borrowings  under  Gables' $225 Million
Credit Facility.

On March 22, 1999,  Gables announced a common share repurchase  program pursuant
to which Gables is authorized  to purchase up to $50 million of its  outstanding
common  shares.  Gables  plans to  repurchase  shares  from time to time in open
market and  privately  negotiated  transactions,  depending on market prices and
other conditions using proceeds from sales of selected assets.

On March  26,  1999,  Gables  entered  into a joint  venture  agreement  with an
affiliate of J.P. Morgan Investment,  Inc. ("J.P. Morgan"). The business purpose
of the  venture is to  develop,  own and  operate  seven  multifamily  apartment
communities  located in four of Gables'  nine  markets,  which are  expected  to
comprise  2,181  apartment  homes.  As of  December  31,  1998,  Gables  (i) had
commenced  construction of four of the communities,  (ii) owned the land for the
future  development of two of the  communities  and (iii) owned the  acquisition
right for the land for the future  development  of one of the  communities.  The
capital  budget for the  development of the seven  communities is  approximately
$213 million and is anticipated  to be funded with 50% debt and 50% equity.  The
equity  component will be funded 80% by J.P.  Morgan and 20% by Gables.  Gables'
portion  of the  equity  will be  funded  through  a  contribution  of cash  and
property.  Gables will serve as the managing member of the venture and will have
responsibility  for all day-to-day  operating issues.  Gables will also serve as
the general contractor during construction and as the property manager.
<PAGE>
                                       58

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

15.  QUARTERLY FINANCIAL INFORMATION (Unaudited)
 
Quarterly  financial  information for the years ended December 31, 1998 and 1997
is as follows:
 
                                                 Year Ended December 31, 1998
                                            ------------------------------------
                                             First    Second    Third    Fourth
                                            Quarter   Quarter  Quarter   Quarter
                                            ------------------------------------

Total revenues                               $41,490   $56,176  $59,214  $59,744
Gain on sale of real estate assets                 0         0        0        0
Loss on treasury locks                        (1,811)     (199)  (3,627)       0
Income before extraordinary loss, net          8,139     9,514    8,459   11,593
Extraordinary loss, net of minority interest       0         0        0        0
Net income                                     8,139     9,514    8,459   11,593
Net income available to common shareholders    5,753     7,120    6,017    9,150
Basic earnings per common share:
   Income before extraordinary loss, net        0.26      0.32     0.23     0.35
   Net income                                   0.26      0.32     0.23     0.35
Diluted earnings per common share:
   Income before extraordinary loss, net        0.26      0.32     0.23     0.35
   Net income                                   0.26      0.32     0.23     0.35



                                                 Year Ended December 31, 1997
                                            ------------------------------------
 
                                             First    Second    Third    Fourth
                                            Quarter   Quarter  Quarter   Quarter
                                            ------------------------------------
 
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 locks                             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

<PAGE>
                                       59

GABLES RESIDENTIAL TRUST                                            Schedule III
Real Estate  Investments  and  Accumulated  Depreciation as of December 31, 1998
(Dollars in Thousands)
                                                                               
<TABLE>
<CAPTION>
                                                          Costs
                                 Initial Costs           Capital-     Gross Amount at Which 
                                   to Gables              ized      Carried at Close of Period                  Year    
                                  -----------           Subsequent  --------------------------                Original       Year
Property Type           Related         Buildings and      to             Buildings and         Accumulated  Construction   Gables
and  Location         Encumbrances Land Improvements   Acquisition  Land  Improvements   Total  Depreciation  Complete     Acquired
-------------         ------------ ---- ------------  ------------  ---- --------------  -----  ------------  ---------    --------
<S>                    <C>        <C>      <C>        <C>         <C>       <C>       <C>        <C>          <C>         <C>       
COMPLETED APARTMENT COMMUNITIES:                                                                    (1)                       (2)   

Houston, TX ........... $75,092   $59,664  $183,231    $124,546   $60,806   $306,635   $367,441  $ 41,173     1981-1998   1987-1998
Atlanta, GA (3)........  76,629    70,437   114,575     198,350    70,670    312,692    383,362    40,960     1945-1998   1983-1998
Boca Raton, FL ........ 135,875    56,079   302,171       1,926    56,079    304,097    360,176     7,219     1984-1998        1998
Dallas, TX ............  14,021    16,306    46,050      60,007    16,306    106,057    122,363    10,957     1985-1996   1993-1997
Memphis, TN ...........  29,494     6,708    23,674      60,790     6,708     84,464     91,172    13,034     1986-1997   1985-1996
Nashville, TN .........  35,235     4,032         0      56,633     4,087     56,578     60,665    16,072     1987-1996   1985-1994
Austin, TX ............       0     9,988    32,242      58,992     9,988     91,234    101,222     5,164     1992-1998   1992-1998
San Antonio, TX........       0     2,839         0      25,194     2,839     25,194     28,033     3,021     1995-1996        1994
Orlando, FL ...........       0     2,477         0      19,069     2,477     19,069     21,546       447          1998        1996
                       -------- ---------  --------   --------- ---------  ---------  ---------  --------  
Total  ................$366,346 $ 228,530  $701,943   $ 605,507 $ 229,960 $1,306,020 $1,535,980  $138,047
                       -------- ---------  --------   --------- ---------  ---------  ---------- --------

APARTMENT COMMUNITIES UNDER CONSTRUCTION:

Houston, TX (4)........ $     0 $   4,233    $    0   $   3,467 $   4,233 $    3,467  $   7,700  $      0           n/a        1998
Atlanta, GA (4)........       0     8,667         0       7,351     8,667      7,351     16,018         0           n/a        1997
Boca Raton, FL (4).....       0    19,568         0       5,651    19,568      5,651     25,219         0           n/a        1998
Dallas, TX (4).........       0     2,800         0       5,494     2,800      5,494      8,294         0           n/a        1997
Orlando, FL ...........       0     3,235         0      19,363     3,235     19,363     22,598       192           n/a        1997
                       --------  --------  --------   ---------   -------  ---------  ---------   -------
Total .................$      0   $38,503    $    0   $  41,326 $  38,503 $   41,326  $  79,829  $    192
                       --------  --------  --------   ---------   -------  ---------  ---------   -------  

LAND HELD FOR FUTURE DEVELOPMENT OF APARTMENT COMMUNITIES:

Houston, TX ............$     0   $ 7,851  $      0    $      0  $  7,851 $        0  $   7,851  $      0           n/a        1998
Atlanta, GA ............      0    16,765         0           0    16,765          0     16,765         0           n/a   1997-1998
Boca Raton, FL (4)......      0     2,765         0           0     2,765          0      2,765         0           n/a        1998
Dallas, TX (4)..........      0    27,856         0           0    27,856          0     27,856         0           n/a   1994-1998
Memphis, TN ............      0       606         0           0       606          0        606         0           n/a        1996
San Antonio, TX  .......      0     1,549         0        (353)    1,196          0      1,196         0           n/a        1994
Orlando, FL ............      0     9,113         0           0     9,113          0      9,113         0           n/a        1998
                       --------  --------  --------   ---------  --------  ---------  ---------   -------
Total ..................$     0   $66,505  $      0    $   (353) $ 66,152         $0  $  66,152  $      0
                       --------  --------  --------   ---------  --------  ---------  ---------   ------- 
Grand Totals ..........$366,346  $333,538  $701,943    $646,480  $334,615 $1,347,346 $1,681,961  $138,239
                       ========  ========  ========   =========  ========  ========= ==========   =======                     
<FN>
(1)  Depreciation  of apartment  communities  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.
                                                                                        
(2)  The year acquired represents the year Gables acquired a completed community
     or the year Gables  acquired the land for the  development  of an apartment
     community.

(3)  This  location  includes one  apartment  community  that was sold in March,
     1999.

(4)  Each denoted location includes an apartment community under construction or
     a parcel of land for development of an apartment community,  as applicable,
     that was contributed  into a joint venture in March,  1999, in which Gables
     has an ownership interest.
</FN>
</TABLE>
<PAGE>
                                        60

GABLES RESIDENTIAL TRUST                                            Schedule III

Real Estate  Investments  and  Accumulated  Depreciation as of December 31, 1998
(Dollars in Thousands)
                                                                        
A summary of activity for real estate  investments and accumulated  depreciation
is as follows:
<TABLE>
<CAPTION>
                                                                     
                                                                                Years ended December 31, 
                                                                        -------------------------------------                      
                                                                         1998          1997           1996 
                                                                        ------       --------       --------- 
<S>                                                                   <C>          <C>             <C>   
REAL ESTATE INVESTMENTS:

Balance, beginning of year ......................................   $ 1,056,228    $  784,600     $  591,233
Additions:
  Acquisitions, including renovation expenditures ...............       462,237       179,346        128,472
  Development costs incurred, including related land acquisitions       155,541        96,551         65,867
  Capital expenditures for completed communities ................         7,955         4,878          3,854
                                                                    -----------    ----------     ----------
    Total additions .............................................       625,733       280,775        198,193
Sales ...........................................................             0        (9,147)        (4,826)
                                                                    -----------    ----------     ----------  
Balance, end of year ............................................   $ 1,681,961   $ 1,056,228    $   784,600
                                                                    ===========    ==========     ==========

ACCUMULATED DEPRECIATION:

Balance, beginning of year ......................................       $98,236       $74,903       $ 57,343
Depreciation ....................................................        40,003        24,655         18,457
Sales ...........................................................             0        (1,322)          (897)
                                                                    -----------   -----------     ----------
Balance, end of year ............................................      $138,239       $98,236        $74,903
                                                                    ===========   ===========     ==========

RECONCILIATION OF DEPRECIATION ABOVE TO STATEMENTS OF OPERATIONS:

Depreciation in rollforward of accumulated depreciation..........       $40,003       $24,655       $18,457
Amortization of prepaid land lease payments (1)..................            84            57            20
                                                                    -----------   -----------     ---------
  Real estate asset depreciation and amortization
    expense reflected in the accompanying statements of operations      $40,087       $24,712       $18,477
                                                                    ===========   ===========     =========               
Notes to table above:                                                                   
<FN>
(1)  Gables has leased two parcels of land pursuant to two long-term  land lease
     agreements. The prepaid lease payments, net of accumulated amortization, are
     included in other assets in the accompanying balance sheets.
</FN>
</TABLE>