<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 September 30, 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
--------------------------------------------------------------------------------
   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 __

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                         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>
                                                                      September 30,     December 31,
                                                                          2001              2000
<S>                                                                   <C>               <C>
----------------------------------------------------------------------------------------------------
ASSETS
Property held for sale                                                 $ 2,018,521       $2,018,521
Cash and cash equivalents                                                1,365,548        1,177,353
Other assets                                                               377,556          388,079
                                                                      -------------     ------------
Total assets                                                             3,761,625        3,583,953
                                                                      -------------     ------------
LIABILITIES
Estimated remediation costs                                                500,000          500,000
Estimated liquidation costs                                                485,115          407,616
                                                                      -------------     ------------
Total liabilities                                                          985,115          907,616
                                                                      -------------     ------------
Net assets available to limited and general partners                   $ 2,776,510       $2,676,337
                                                                      -------------     ------------
                                                                      -------------     ------------
Limited and equivalent partnership units issued and outstanding             51,818           51,818
                                                                      -------------     ------------
                                                                      -------------     ------------
----------------------------------------------------------------------------------------------------
</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                          100,173       --            100,173
                                                             ----------     --------     ----------
Net assets in liquidation--September 30, 2001                $2,776,510     $ --         $2,776,510
                                                             ----------     --------     ----------
                                                             ----------     --------     ----------
---------------------------------------------------------------------------------------------------
</Table>

       The accompanying notes are an integral part of these statements.

                                       2

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                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
                               September 30, 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 September 30, 2001 and December 31, 2000 contain
all adjustments necessary to state 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 December 31, 2002 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.

B. Partnership Liquidation

   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 a meeting on May 16, 2001
between the Partnership, LAW and MDE, to discuss MDE's comments on the
Partnership's application, it was determined that the Partnership would perform
a non-invasive Phase I Environmental Site Assessment Update and would
subsequently, upon review and agreement with MDE, move to perform certain Phase
II invasive sampling and analytical procedures. As a result of the Partnership's
agreement to perform the Phase I and Phase II procedures, with the anticipation
of entering the site into the VCP, the Partnership changed the estimated date of
liquidation to December 31, 2002. As of September 30, 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

                                       3

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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 $100,000 and $101,000 during the nine and
three months ended September 30, 2001, respectively. These increases resulted
from income from operations of the Hampton Park property, and to a lesser
extent, interest income. The year-to-date increase was partially offset by an
additional accrual of $216,000 made during the quarter ended June 30, 2001 which
was recorded within estimated liquidation costs. This additional accrual
reflected a change in the date utilized for estimating liquidation costs from
September 30, 2001 to December 31, 2002 and accrued $46,000 for the costs of
required Phase I and Phase II procedures (see discussion above).

C. 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 $20,000 and $19,000 for the
nine months ended September 30, 2001 and September 30, 2000, respectively, and
totalled $7,000 and $6,000 for the three months then ended, respectively.

   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of September 30, 2001 and December 31, 2000 for the
estimated costs expected to be incurred to liquidate the Partnership. Included
in these estimated liquidation costs is $206,000 and $161,000 as of September
30, 2001 and December 31, 2000, respectively, expected to be payable to the
General Partners and their affiliates during the anticipated remaining
liquidation periods. See Notes A and B for a further discussion regarding the
Partnership's estimated liquidation costs. 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 September 30, 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 September 30, 2001.

                                       4

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                    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 a meeting on May 16, 2001
between the Partnership, LAW and MDE, to discuss MDE's comments on the
Partnership's application, it was determined that the Partnership would perform
a non-invasive Phase I Environmental Site Assessment Update and would
subsequently, upon review and agreement with MDE, move to perform certain Phase
II invasive sampling and analytical procedures. As a result of the Partnership's
agreement to perform the Phase I and Phase II procedures, with the anticipation
of entering the site into the VCP, the Partnership changed the estimated date of
liquidation to December 31, 2002. As of September 30, 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 September 30, 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 December 31, 2002 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 September 30, 2001.

   Net assets in liquidation increased $100,000 and $101,000 during the nine and
three months ended September 30, 2001, respectively. These increases resulted
from income from operations of the Hampton Park property, and to a lesser
extent, interest income. The year-to-date increase was partially offset by an
additional accrual of $216,000 made during the quarter ended June 30, 2001 which
was recorded within estimated liquidation costs in the Statement of Net Assets.
This additional accrual reflected a change in the date utilized for estimating
liquidation costs from September 30, 2001 to December 31, 2002 and accrued
$46,000 for the costs of Phase I and Phase II procedures to be performed (see
discussion above).
                                       5

<Page>
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.

                                       6

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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

                                       7

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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: November 13, 2001
     ----------------------------------------
     Steven Carlino
     Vice President
     Chief Accounting Officer for the
     Registrant
                                       8