Montana Terrace sits on a hardscrabble hill in Northeast Washington, bleak and barren, a grim reminder of the drugs wars and the government collapse that devastated the city's public housing.

Simple eulogies to fallen drug dealers -- R.I.P. Bates, R.I.P. Pope -- are scrawled in spray paint on the walls of gutted shells, echoes of bygone days when this sprawling little world of asphalt courtyards and brick box slums was a thriving cocaine market and notorious killing field.

But there's one block at Montana Terrace now where the town houses have been painted in soft pastels, alternating teal and beige, their little yards planted with sod by former street toughs. And there's another block, just across Montana Avenue from the housing complex, where new houses are selling briskly for $170,000 or more -- houses no bank would have financed before Montana Terrace was transformed.

Few would have believed this scene possible two or three years ago. But the work underway at Montana Terrace and dozens of other rebounding public housing complexes produced a remarkable milestone last week for D.C. public housing receiver David I. Gilmore: For the first time, his agency has escaped from the infamous "troubled" list maintained by the U.S. Department of Housing and Urban Development.

When Gilmore arrived from Seattle 2 1/2 years ago, the city's public housing system was considered the worst in the United States, plagued by growing abandonment, rampant crime, abysmal property management and a near total lack of routine maintenance.

HUD rated the agency's performance at 22.38 on a scale of 100, with 60 considered a passing score. District officials got F's on virtually all key indicators: the agency's vacancy rate, use of funds provided for modernization, uncollected rents, living conditions, inspections, processing of work orders.

Now, after a recent eight-day review, HUD inspectors confirmed the D.C. Housing Authority's self-assessed score of 65, a move that should officially take the agency off the troubled list once the inspection team files its formal report.

"I was, needless to say, excited, very excited," Gilmore said. "Say what you will, it's a benchmark for us. We're making progress here. I felt it a lot of ways -- supported, recognized and proud as hell of the staff."

Together, they've embarked on a construction blitzkrieg, backed by $180 million in previously unspent federal funds.

They have renovated thousands of occupied and abandoned units at dozens of developments, bringing on a huge, temporary work force of public housing residents and skilled craftsmen from the building trades unions. And at places such as Montana Terrace, they've gone even further, planning to remake whole neighborhoods in tandem with private developers.

Gilmore also has moved to improve property management, all but nonexistent when he arrived, turning 11 complexes over to private management firms while training a new corps of agency managers.

And he has built a housing police force from scratch that helped reduce the homicide rate in public housing by 50 percent last year.

"What he's done is just astounding, but he's still got a long way to go," said Lynn E. Cunningham, a George Washington University law professor who filed the lawsuit on behalf of tenants that put the agency into court-ordered receivership and led to Gilmore's appointment.

"There's still lots of tenants experiencing bad problems -- and he's well aware of that," Cunningham said. "But major heating problems appear to be a thing of the past. And they are spending that modernization money -- we visited many of the units that are being worked on. Clearly, he has made enormous progress." Andrew Botticello went to see Gilmore the day after he arrived in Washington in the summer of 1995. The subject: Montana Terrace.

Botticello was frustrated.

A developer, he had been working with District officials for months on a plan to build 35 single-family houses on a site adjacent to Montana Terrace. All the city had to do was commit to renovating the blighted complex, a drain on the entire neighborhood.

The only problem: Nothing ever happened -- until Gilmore arrived.

"We met with him -- there were still boxes in the office -- and he was on board from the beginning," Botticello recalled. "It wasn't this, Well, we can't do that because of this' kind of thing. It was, Yes, this is a good idea, and we'll figure out a way to do it.' "

Leveraging private funds by working with private developers to turn around entire neighborhoods, not just public housing, was precisely the kind of thing Gilmore believed in.

And the plan he crafted with Botticello to reinvent Montana Terrace showed his willingness to push the bounds of public housing. To wit: A third of the complex is now being renovated as rental housing, a third will be sold to low-income tenants as town house condominiums, and a third that is beyond repair will be demolished.

"He's got this vision -- and an ability to project it and get outside people involved in ways I don't think anybody else has been able to do," said D.C. Superior Court Judge Steffen W. Graae, who appointed Gilmore and oversees his work. "And he has developed some wonderful relationships with residents -- I have met a number of them -- and they really believe in him and trust him. And he believes in them."

Dorothea Ferrell, president of the Barry Farms Tenant Association, is a believer.

"We have had more done in the past two years than we have in a long time," she said. "He is the only one who takes the time to meet with residents twice a month."

So is Richard Green, a resident of the building for senior citizens at Edgewood Terrace.

"I know this is not instant coffee, what he is trying to do," Green said. "But I have seen a lot of changes. You can see it when you walk in the door. Our floors look like you can eat off them."

Being landlord to 11,000 rental units in 58 properties is a challenging task. There are 21,849 tenants -- reduced from 23,952 largely by finding Section 8 housing for residents whose units demanded renovation.

Gilmore, 54, cut his teeth as deputy housing receiver in Boston. After successful stops as the housing chief in San Francisco and Seattle, he saw Washington as an even bigger stage -- a chance to show doubting members of Congress that he could remake awful public housing a stone's throw from the Capitol.

"This is more than just the D.C. Housing Authority in David's mind; it's the future of public housing," said Larry Dwyer, a former top city official in Boston who serves as Gilmore's director of planning and development. "This is religion for the guy. It's about changing communities and changing lives. It's his passion for the job -- that's the fundamental thing about Gilmore."

Gilmore, for his part, says it all comes down to whether or not you deliver.

"One of the earliest things that you have to do in a reclamation program like this is, you've got to stake out your competence and gain the confidence of your client," he said last week, holding forth over lunch at his favorite haunt in Chinatown. "Otherwise, nobody is going to give you the time to do the job."

Beyond that, he said, a public manager out to salvage a government agency has got to lay out a plan in writing, recruit a team to make it happen and sell everybody on "the enormity of the task at hand. And then, pal, you just go -- crank up the old engine and move."

By the time D.C. police officer William K. Mack started walking the Montana Terrace beat back in August, there were no drug dealers left to arrest. They'd all been systematically removed by a massive federal undercover operation spearheaded eight months earlier by the Drug Enforcement Administration in conjunction with Gilmore.

So Mack went around to every house in the neighborhood, handed out fliers, gave residents his cell phone number and set about tackling the biggest problems left -- abandoned stolen cars and stray dogs.

"Two years ago, you probably would have seen cars constantly driving by attempting to make drug transactions," Mack said. "You would have seen illegal gambling. You would have heard loud music, as if there was a party going on 24 hours a day, and you may have even heard gunshots."

But his presence there, walking the courtyards, knocking on doors, calling in abandoned automobiles, has kept the dealers at bay. It's called community policing, and it's the theory underlying Gilmore's new police deployment -- his own 105-member police force and a dedicated public housing division of the D.C. police department, partly funded by the Housing Authority.

Together, they have officers walking the beat at 30 of 58 public housing developments. And after a full year in operation, the crime statistics look like this: Serious offenses in and around public housing were down almost 13 percent in 1997. The overall decline included a 50 percent reduction in homicides, from 95 in 1996 to 47 in 1997.

"The figures speak for themselves," said Ray J. Tarasovic, acting chief of the housing police. "We are seeing reductions in crime; we are seeing community involvement. Do {the criminals} know that we're there and we're serious? I would say yes."

Just ask Sallie Mayrant, a public housing resident whose apartment at Greenleaf Gardens in Southwest Washington was being used as a hangout by neighborhood drug dealers, according to housing police Lt. David P. Davis.

Acting on complaints from her neighbors, Davis said, police arrested Mayrant in March 1997 on a drug possession charge. The Housing Authority acted swiftly to evict her from Greenleaf Gardens -- one of 220 such eviction actions since the start of the housing police.

By July, Davis said, Mayrant was gone.

The new streetscape at Montana Terrace is now thick with green grass. Young men in blue uniforms finished laying strips of lush sod Friday afternoon. They are members of a Housing Authority landscape crew, Gilmore's crew.

"My sons," Gilmore said, watching as they worked.

A year ago, a different kind of "crew" -- a violent, drug-dealing street crew -- enforced a murderous code on the streets where they lived around another housing complex, Benning Terrace, in Southeast Washington.

But after a courageous group of neighborhood men stepped into the melee and brokered a truce between waring factions of neighborhood youths, Gilmore cemented the peace with an offer of jobs, the only thing that could prove to them that there was another way to live. And the peace has held, taking Damian Jewet, James Denny, Gary Denny, Keith Hawkins, Kevin Hawkins, Antoine Truesdale and LeJohn Watson from Benning Terrace to Montana Terrace and beyond.

"It's like, even when it rains, the sun shines for me," said Watson, who has graduated from the landscape crew to one of Gilmore's construction crews rehabilitating the town houses painted teal and beige. "I can do for my kids. I have health insurance for my kids. When my mother and father look at me now, they say, Hey, that's my son.' " Gilmore admits to being the only public housing manager in the United States who lays the sod before he renovates the houses. But there's a method to the madness. "It's like putting up a sign that tells people what's doing," he said. "But it isn't just a sign. It's real grass and real paint." CAPTION: Brothers James and Gary Denny, from left, put down sod at Montana Terrace. CAPTION: LeJohn Watson, a member of a construction crew, and D.C. housing receiver David I. Gilmore are in one of the units being renovated at Montana Terrace. Of his work, Watson said: "It's like, even when it rains, the sun shines for me. I can do for my kids."