An adiabatic concurrent vertical two-phase flow of air and water in vertical rectangular channels (12 x 260 mm) with narrow gaps of 0.3, 0.6-1.0 mm was investigated experimentally. Flow regimes were observed by using a CCD camera and were identified by examining the video images. The flow regimes for gaps of 1.0 and 0.6 mm were found to he similar to those in the existing literature which can be classified into bubbly flow, slug flow, churn-turbulent flow and annular flow. With the decrease of the channel gap, the transition from one flow regime to another occurs at smaller gas flow rates. However, flow regimes for micro-gaps of 0.3 mm or less are quite different from the previous studies: bubbly flow was never observed even at very low gas flow rates. Due to the increased influence of the surface tension force and the frictional shear stress in channels with a micro-gap, the liquid droplets adhered on: the wall surface and were pushed by the gas phase. Flow regimes in these micro-gaps can be classified into cap-bubbly flow, slug-droplet flow, churn flow and annular-droplet flow. A previous model has, been extended to predict the flow regime transitions from bubbly flow to slug flow, slug flow to churn flow using the bubble rising velocity and the increased frictional coefficient for rectangular channels. A new criterion has been developed to predict the transition of the annular flow. Comparisons of our prediction results with experimental data are discussed for gaps larger than 0.6 mm. With micro-gaps of 0.3 mm or smaller, a new theory needs to be developed.