<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the quarterly period ended March 31, 2001

                                       OR

/ /TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

For the transition period from _______________________ to ______________________

Commission file number: 0-13518

                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
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             (Exact name of Registrant as specified in its charter)

Texas                                           75-1933081
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(State or other jurisdiction of         (I.R.S. Employer Identification No.)
incorporation or organization)

One Seaport Plaza, New York, N.Y.               10292-0128
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(Address of principal executive offices)        (Zip Code)

Registrant's telephone number, including area code (212) 214-3500

                                      N/A
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   Former name, former address and former fiscal year, if changed since last
                                    report.

   Indicate by check CK whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _CK_  No __

<PAGE>
                         Part I. FINANCIAL INFORMATION
                          ITEM 1. FINANCIAL STATEMENTS
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                            STATEMENTS OF NET ASSETS
                          (in process of liquidation)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                        March 31,      December 31,
                                                                           2001            2000
<S>                                                                     <C>            <C>
---------------------------------------------------------------------------------------------------
ASSETS
Property held for sale                                                  $2,018,521      $2,018,521
Cash and cash equivalents                                                1,224,850       1,177,353
Other assets                                                               382,601         388,079
                                                                        ----------     ------------
Total assets                                                             3,625,972       3,583,953
                                                                        ----------     ------------
LIABILITIES
Estimated remediation costs                                                500,000         500,000
Estimated liquidation costs                                                340,239         407,616
                                                                        ----------     ------------
Total liabilities                                                          840,239         907,616
                                                                        ----------     ------------
Net assets available to limited and general partners                    $2,785,733      $2,676,337
                                                                        ----------     ------------
                                                                        ----------     ------------
Limited and equivalent partnership units issued and outstanding             51,818          51,818
                                                                        ----------     ------------
                                                                        ----------     ------------
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</TABLE>

                       STATEMENT OF CHANGES IN NET ASSETS
                          (in process of liquidation)
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                              LIMITED       GENERAL
                                                              PARTNERS      PARTNERS       TOTAL
<S>                                                          <C>            <C>          <C>
---------------------------------------------------------------------------------------------------
Net assets in liquidation--December 31, 2000                 $2,676,337     $ --         $2,676,337
Net income from liquidating activities                          109,396       --            109,396
                                                             ----------     --------     ----------
Net assets in liquidation--March 31, 2001                    $2,785,733     $ --         $2,785,733
                                                             ----------     --------     ----------
                                                             ----------     --------     ----------
---------------------------------------------------------------------------------------------------
                 The accompanying notes are an integral part of these statements.
</TABLE>
                                       2
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                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                       NOTES TO STATEMENTS OF NET ASSETS
                                 March 31, 2001
                                  (Unaudited)

A. General

   These financial statements have been prepared without audit. In the opinion
of Prudential-Bache Properties, Inc. ('Managing General Partner') ('PBP'), the
statements of net assets as of March 31, 2001 and December 31, 2000 contain all
adjustments necessary to present fairly such information in accordance with the
liquidation basis of accounting. Prudential-Bache/Watson & Taylor, Ltd.-2 (the
'Partnership') first adopted the liquidation basis of accounting as of October
1, 1996. Accordingly, the net assets of the Partnership are stated at
liquidation value, i.e., the assets have been valued at their estimated fair
values, net of selling expenses, and the liabilities include estimated amounts
to be incurred through the date of liquidation of the Partnership, which is in
conformity with accounting principles generally accepted in the United States.
Due to the nature of the Hampton Park environmental issue (see further
discussion below), the date of liquidation is uncertain; however, the
Partnership has utilized a September 30, 2001 date for purposes of estimating
costs through the conclusion of liquidation reflecting the Managing General
Partner's best estimate. The actual remaining net proceeds from liquidation will
depend upon a variety of factors and are likely to differ from the estimated
amounts reflected in the accompanying financial statements.

   Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Partnership's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
2000.

   In accordance with a consent statement dated September 17, 1996, the limited
partners approved, during October 1996, the proposed sale of all eight
miniwarehouse facilities owned by the Partnership to Public Storage, Inc.
('Public') and the liquidation and dissolution of the Partnership.

   Seven of the eight properties were sold to Public during December 1996. The
Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland as it was not sold to Public after Phase I and Phase II
Environmental Site Assessments performed during 1996 by Law Engineering and
Environmental Services, Inc. ('LAW') identified detectable levels of
tetrachloroethene ('PCE') in the soil and ground water samples collected at the
site. LAW, at the Partnership's request, reported the PCE release to the
Maryland Department of the Environment ('MDE').

   On November 21, 2000, MDE reached a determination that it was appropriate to
undertake an active remedial measure at the site. LAW, at the request of the
Partnership, submitted an application to enter the site into MDE's Voluntary
Cleanup Program ('VCP') during March 2001. During April 2001, MDE requested
additional information from the Partnership. MDE will not complete its
evaluation of the application until it receives a response to its latest
requests which are currently being reviewed by the Partnership. As of March 31,
2001, the Statement of Net Assets reflects an accrued liability of $500,000
which represents the Partnership's best estimate of the obligation regarding the
environmental issues mentioned above. The amount includes costs associated with
an active remediation program over a five-year period. It is reasonably possible
that the loss exposure will be in excess of the amount accrued and will be
material to the Partnership and may possibly change in the near future. However,
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property.

   The General Partners intend to offer the Hampton Park property to a select
group of potential buyers which specialize in the purchase of contaminated
properties, albeit at a discount. It is the intention of the Partnership to
obtain from any potential buyer as complete an indemnification for any liability
in connection with remediation of the contamination of the property as possible.
Due to the environmental problem and MDE oversight, it is uncertain when any
such sale could be consummated. The Partnership's liquidation and dissolution
will proceed upon the sale of the Hampton Park property.

   Net Assets in liquidation increased $109,000 during three months ended March
31, 2001. The increase was primarily the result of income from operations of the
Hampton Park property, and to a lesser extent, interest income.

                                       3
<PAGE>
B. Related Parties

   PBP and its affiliates perform services for the Partnership which include,
but are not limited to: accounting and financial management, transfer and
assignment functions, asset management, investor communications, printing and
other administrative services. PBP and its affiliates receive reimbursements for
costs incurred in connection with these services, the amount of which is limited
by the provisions of the Partnership Agreement.

   Affiliates of Messrs. Watson and Taylor, the individual General Partners,
also perform certain administrative and monitoring functions on behalf of the
Partnership for which they receive cost reimbursement.

   Additionally, Watson & Taylor Management, Inc., an affiliate of the
individual General Partners and the Partnership's property manager, receives
4.5% of the property's gross revenues (as defined in the management agreement)
as a management fee. Such management fees totalled $6,000 and $7,000 for the
three months ended March 31, 2001 and March 31, 2000, respectively.

   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of March 31, 2001 and December 31, 2000 for the estimated
costs expected to be incurred to liquidate the Partnership. Included in these
estimated liquidation costs is $103,000 and $161,000 as of March 31, 2001 and
December 31, 2000, respectively, expected to be payable to the General Partners
and their affiliates during the anticipated remaining liquidation period. The
actual charges to be incurred by the Partnership will depend primarily upon the
length of time required to liquidate the Partnership's remaining net assets, and
may differ from the amounts accrued as of March 31, 2001.

   PBP and the individual General Partners of the Partnership own 258, 130 and
130 equivalent limited partnership units, respectively. PBP receives funds from
the Partnership, such as General Partner distributions and reimbursement of
expenses, but has waived all of its rights resulting from its ownership of
equivalent limited partnership units. Accordingly, the 258 units owned by PBP
are not part of the 51,560 limited and equivalent units which receive
distributions and allocations of the Partnership's profits and losses.

   Prudential Securities Incorporated, an affiliate of PBP, owns 180 limited
partnership units at March 31, 2001.

                                       4
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
           ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

   In accordance with a consent statement dated September 17, 1996, the limited
partners approved, during October 1996, the proposed sale of all eight
miniwarehouse facilities owned by the Partnership to Public Storage, Inc.
('Public') and the liquidation and dissolution of the Partnership.

   Seven of the eight properties were sold to Public during December 1996. The
Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland as it was not sold to Public after Phase I and Phase II
Environmental Site Assessments performed during 1996 by Law Engineering and
Environmental Services, Inc. ('LAW') identified detectable levels of
tetrachloroethene ('PCE') in the soil and ground water samples collected at the
site. LAW, at the Partnership's request, reported the PCE release to the
Maryland Department of the Environment ('MDE').

   On November 21, 2000, MDE reached a determination that it was appropriate to
undertake an active remedial measure at the site. LAW, at the request of the
Partnership, submitted an application to enter the site into MDE's Voluntary
Cleanup Program ('VCP') during March 2001. During April 2001, MDE requested
additional information from the Partnership. MDE will not complete its
evaluation of the application until it receives a response to its latest
requests which are currently being reviewed by the Partnership. As of March 31,
2001, the Statement of Net Assets reflects an accrued liability of $500,000
which represents the Partnership's best estimate of the obligation regarding the
environmental issues mentioned above. The amount includes costs associated with
an active remediation program over a five-year period. It is reasonably possible
that the loss exposure will be in excess of the amount accrued and will be
material to the Partnership and may possibly change in the near future. However,
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property.

   The General Partners intend to offer the Hampton Park property to a select
group of potential buyers which specialize in the purchase of contaminated
properties, albeit at a discount. It is the intention of the Partnership to
obtain from any potential buyer as complete an indemnification for any liability
in connection with remediation of the contamination of the property as possible.
Due to the environmental problem and MDE oversight, it is uncertain when any
such sale could be consummated. The Partnership's liquidation and dissolution
will proceed upon the sale of the Hampton Park property.

   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of March 31, 2001 for the estimated costs expected to be
incurred to liquidate the Partnership. Due to the nature of the Hampton Park
environmental issue, the date of liquidation is uncertain. However, the
Partnership has utilized a September 30, 2001 date for purposes of estimating
costs through the conclusion of liquidation. The actual charges to be incurred
by the Partnership will depend primarily upon the length of time required to
liquidate the Partnership's remaining net assets, and may differ from the
amounts accrued as of March 31, 2001.

   Net Assets in liquidation increased $109,000 during the three months ended
March 31, 2001. The increase was primarily the result of income from operations
of the Hampton Park property, and to a lesser extent, interest income.

Results of Operations

   As a result of the Partnership adopting the liquidation basis of accounting
as of October 1, 1996, in accordance with accounting principles generally
accepted in the United States, the Partnership no longer reports results of
operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   Information regarding quantitative and qualitative disclosures about market
risk is not required pursuant to Item 305(e) of Regulation S-K.

                                       5
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                           PART II. OTHER INFORMATION

Item 1. Legal Proceedings--None

Item 2. Changes in Securities--None

Item 3. Defaults Upon Senior Securities--None

Item 4. Submission of Matters to a Vote of Security Holders--None

Item 5. Other Information--None

Item 6. Exhibits and Reports on Form 8-K

       (a) Exhibits

        Description:

         4.01 Revised Certificate of Limited Partnership Interest (filed as an
              exhibit to Registrant's Form 10-K for the year ended
              December 31, 1988 and incorporated herein by reference)

       (b) Reports on Form 8-K--None

                                       6
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                                   SIGNATURES

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

Prudential-Bache/Watson & Taylor, Ltd.-2

By: Prudential-Bache Properties, Inc.
    A Delaware corporation
    Managing General Partner

     By: /s/ Steven Carlino                       Date: May 11, 2001
     ----------------------------------------
     Steven Carlino
     Vice President
     Chief Accounting Officer for the Registrant

                                       7