UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2006



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                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|751 Broad Street 2nd Floor, Newark, NJ                        |  | 07102                              
|(Address of principal executive offices)                      |  | (Zip Code)                         



Registrants
telephone number, including area code (973) 802-6000



N/A

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



Indicate by check ü
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. ü Yes     No



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                   |  |                        
|----------------------- |  | ----------------- |  | -----------------------
|Large accelerated filer |  | Accelerated filer |  | Non-accelerated filer ü



Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes    No
ü



SEC1296
(12-05) Potential persons who are to respond to the collection of information contained in

this form are
not required to respond unless the form displays a currently valid

OMB control number.







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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)



|                                                                                                  |  |                |           |                   |   |          
|------------------------------------------------------------------------------------------------- |  | -------------- | --------- | ----------------- | - | ---------
|                                                                                                  |  | March 31, 2006 |           | December 31, 2005
|ASSETS                                                                                            |  |                |           |                   |   |          
|Property held for sale                                                                            |  | $              | 2,018,521 |                   | $ | 2,018,521
|Cash and cash equivalents ($60,000 provided as collateral atMarch 31, 2006 and December 31, 2005) |  |                | 1,531,870 |                   |   | 1,608,754
|Other assets                                                                                      |  |                | 285,658   |                   |   | 314,338  
|                                                                                                  |  |                |           |                   |   |          
|Total assets                                                                                      |  |                | 3,836,049 |                   |   | 3,941,613
|                                                                                                  |  |                |           |                   |   |          
|LIABILITIES                                                                                       |  |                |           |                   |   |          
|Estimated liquidation costs                                                                       |  |                | 629,512   |                   |   | 731,649  
|Estimated remediation costs                                                                       |  |                | 258,100   |                   |   | 313,865  
|                                                                                                  |  |                |           |                   |   |          
|Total liabilities                                                                                 |  |                | 887,612   |                   |   | 1,045,514
|                                                                                                  |  |                |           |                   |   |          
|COMMITMENTS AND CONTINGENCIES                                                                     |  |                |           |                   |   |          
|Net assets available to limited and general partners                                              |  | $              | 2,948,437 |                   | $ | 2,896,099
|                                                                                                  |  |                |           |                   |   |          
|Limited and equivalent partnership units issued and outstanding                                   |  |                | 51,818    |                   |   | 51,818   
|                                                                                                  |  |                |           |                   |   |          
|Net asset value per limited and equivalent units                                                  |  | $              | 57.18     |                   | $ | 56.17    
|                                                                                                  |  |                |           |                   |   |          



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STATEMENT OF CHANGES IN NET ASSETS

(in process of liquidation)

(Unaudited)



|                                       |  |                  |           |                  |   |       |  |   |          
|-------------------------------------- |  | ---------------- | --------- | ---------------- | - | ----- |  | - | ---------
|                                       |  | LIMITED PARTNERS |           | GENERAL PARTNERS |   | TOTAL
|Net assetsDecember 31, 2005           |  | $                | 2,896,099 |                  | $ |      |  | $ | 2,896,099
|Net income from liquidating activities |  |                  | 52,338    |                  |   |      |  |   | 52,338   
|                                       |  |                  |           |                  |   |       |  |   |          
|Net assetsMarch 31, 2006              |  | $                | 2,948,437 |                  | $ |      |  | $ | 2,948,437
|                                       |  |                  |           |                  |   |       |  |   |          



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The accompanying notes are an integral part of these statements.



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PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2

(a limited partnership)



NOTES TO FINANCIAL STATEMENTS

March
31, 2006

(Unaudited)



A. General



These financial statements have been prepared without audit. In the opinion of Prudential-Bache Properties, Inc. (the Managing General Partner
or PBP), the statements of net assets as of March 31, 2006 and December 31, 2005 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, 2006 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 audited 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, 2005.



The general partners of the Partnership are PBP, George S. Watson and
A. Starke Taylor, III (collectively, the General Partners).



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 mini-warehouse 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
MACTEC Engineering and Consulting, Inc. (MACTEC) which identified detectable levels of tetrachloroethene (PCE) in the soil and ground water samples collected at the site. MACTEC, 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. MACTEC, 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, MACTEC 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 (Phase I Activities) and would subsequently, upon review and agreement with MDE, move to perform certain Phase II invasive sampling and analytical
procedures (Phase II Activities) with the anticipation of entering the site into the VCP. During the first quarter of 2002, MDE notified the Partnership that Phase I



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Activities were satisfactorily completed. Additionally, MACTEC completed the fieldwork for Phase II activities (under a work plan that MDE reviewed) during
2002. The procedures and findings were documented in a Phase II Site Characterization and Risk Assessment Report (the Report) that was sent to MDE on February 13, 2003. During April 2003, MDE requested supplemental soil-gas sampling
procedures be performed. These procedures were performed and reported to MDE during September 2003. MDE issued a response letter, dated October 24, 2003, in which it formally accepted the site into the VCP and informed the Partnership that some form
of remedial action is required to address elevated levels of PCE in soil and ground water. The MDE approved the plan for remedial action (the Plan) on November 24, 2004. In December 2004, an agreement was entered into with ATC Associates
Inc. (ATC), pursuant to which ATC will provide certain environmental services to perform the environmental cleanup as described in the Plan. During the first quarter of 2005, ATC began providing environmental services pursuant to the
Plan. Currently, the Partnership is working with ATC to prepare an addendum to the Plan that is currently in place. The purpose of this addendum is to propose to the MDE several feasible and effective options for completing site remediation and
obtaining a Certificate of Completion. The Managing General Partner is not presently able to determine whether, or to what extent, the presently estimated cost of the remediation will change upon the addendum implementation. The Statement of Net
Assets in process of liquidation reflects an accrued liability of $258,000 and $314,000, as of March 31, 2006 and December 31, 2005 respectively, which represents the Partnerships best estimate of the obligation regarding the environmental
issues mentioned above; however, it is reasonably possible that the loss exposure will be in excess of the amount accrued and may be material to the Partnership.



In 2005, the General Partners reported that the Partnership had placed its sole remaining property, Hampton Park, located in
Capitol Heights, Maryland, on the market for sale. A Purchase and Sale agreement was entered into and subsequently terminated. In light of the termination of the agreement, during 2005 the managing partner had changed its estimated liquidation date
to December 31, 2006.



The General Partners intend to remarket
the property in 2006 once additional testing and remediation work as well as certain capital improvements are completed. The General Partners plan to liquidate the Partnership once the remaining property is sold and to distribute any remaining funds
after payment of and reserves for all expenses and liabilities.



Net assets in process of liquidation increased $52,000 during the three months ended March 31, 2006. The increase resulted primarily from income from operations at the Hampton Park property.



C. Related Parties



PBP and its affiliates perform services for the Partnership which include, but are not limited to the following: accounting
and financial management, transfer and assignment functions, asset management, investor communications, certain 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. PBP is a wholly owned subsidiary of Prudential Securities Group, Inc. (PSG).



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 totaled $11,000 and $7,000 for the three months ended March 31, 2006 and 2005, respectively.



In conjunction with the liquidation basis of accounting, the Partnership has recorded an accrual as of March 31, 2006 and
December 31, 2005 for the estimated costs expected to be incurred to liquidate the Partnership. Included in these estimated liquidation costs is $76,000 and $112,000 as of March 31, 2006 and December 31,



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2005, 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, 2006 and such differences could be
material.



PBP and the two 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.



PSG, an affiliate of PBP, owns 180 limited partnership units at March 31,
2006, for which no such waivers on profit participation are in effect.



D.
Commitments and Contingencies



On January 18, 2005, the
Partnership had an irrevocable standby letter of credit established in the amount of $60,000 that expired on January 7, 2006, in favor of the MDE in connection with the Plan. The letter of credit has been extended through January 7, 2007.



E. Subsequent Event



In April 2006, the Managing General Partner authorized capital improvements
presented by the managing agent totaling approximately $100,000. These improvements are already reflected in the value of the property. Other capital improvements may be contemplated.



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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



Critical Accounting Policies



Preparation of
the financial statements and related disclosures in compliance with generally accepted accounting principles requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The Partnerships
application of these policies involves judgments which, in and of themselves, could materially impact the financial statements and disclosures. A future change in the assumptions or judgments applied in determining the following matters, among
others, could have a material impact on future financial results. As such, actual results may differ from the estimates used by management.



Date of Liquidation



In light of the termination of the Purchase and Sale Agreement in 2005 and other information, the managing general partner has changed its estimated
liquidation date of the Partnership from December 31, 2005 to December 31, 2006 during 2005, reflecting the Managing General Partners best estimate. Due to the nature of the environmental issue, the date of liquidation is uncertain and a
change to that assumption date could materially impact the financial statements and disclosures.



Assumption Regarding the Property Held for Sale



It is uncertain at this time what the Partnership will ultimately realize from the sale of the Hampton Park property due to the propertys
environmental issue (see discussion below). Additionally, there is uncertainty regarding the ultimate costs of environmental remediation at the Hampton Park property and significant changes to PBPs assumptions could materially impact the
financial statements and disclosures.



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 mini-warehouse 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 MACTEC Engineering and
Consulting, Inc. (MACTEC) which identified detectable levels of tetrachloroethene (PCE) in the soil and ground water samples collected at the site. MACTEC, 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. MACTEC, 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, MACTEC 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 (Phase I Activities) and would subsequently, upon review and agreement with MDE, move to perform certain Phase II invasive sampling and analytical procedures (Phase II
Activities) with the anticipation of entering the site into the VCP. During the first quarter of 2002, MDE notified the Partnership that Phase I Activities were satisfactorily completed. Additionally, MACTEC completed the fieldwork for Phase
II activities (under a work plan that MDE reviewed) during 2002. The procedures and findings were documented in a Phase II Site Characterization and Risk Assessment Report (the Report) that was sent to MDE on February 13, 2003. During
April 2003, MDE requested supplemental soil-gas sampling procedures be performed. These procedures



6



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were performed and reported to MDE during September 2003. MDE issued a response letter, dated October 24, 2003, in which it formally accepted the site into
the VCP and informed the Partnership that some form of remedial action is required to address elevated levels of PCE in soil and ground water. The MDE approved the plan for remedial action (the Plan) on November 24, 2004. In December
2004, an agreement was entered into with ATC Associates Inc. (ATC), pursuant to which ATC will provide certain environmental services to perform the environmental cleanup as described in the Plan. During the first quarter of 2005, ATC
began providing environmental services pursuant to the Plan. Currently, the Partnership is working with ATC to prepare an addendum to the Plan that is currently in place. The purpose of this addendum is to propose to the MDE several feasible and
effective options for completing site remediation and obtaining a Certificate of Completion. The Managing General Partner is not presently able to determine whether, or to what extent, the presently estimated cost of the remediation will change upon
the addendum implementation. The Statement of Net Assets in process of liquidation reflects an accrued liability of $258,000 and $314,000, as of March 31, 2006 and December 31, 2005 respectively, which represents the Partnerships best estimate
of the obligation regarding the environmental issues mentioned above; however, it is reasonably possible that the loss exposure will be in excess of the amount accrued and may be material to the Partnership.



In 2005, the General Partners reported that the partnership had placed its
sole remaining property, Hampton Park, located in Capitol Heights, Maryland, on the market for sale. A Purchase and Sale agreement was entered into and subsequently terminated. In light of the termination of the agreement, during 2005 the managing
partner had changed its estimated liquidation date to December 31, 2006.



The General Partners intend to remarket the property in 2006 once additional testing and remediation work as well as certain capital improvements are completed. The General Partners plan to liquidate the Partnership
once the remaining property is sold and to distribute any remaining funds after payment of and reserves for all expenses and liabilities.



Net assets in liquidation increased $52,000 during the three months ended March 31, 2006. The increase resulted primarily from income from operations at
the Hampton Park property.



As of March 31, 2006, the
Partnership has cash and cash equivalents of $1,532,000, which is sufficient to meet the working capital requirements of the Partnership for the foreseeable future. The future liquidation and dissolution of the Partnership will result in the sale of
the Hampton Park property and any other Partnership assets and the distribution to the limited partner in accordance with the partnership agreement provisions, after payment of all expenses and liabilities, of the net sales proceeds and remaining
cash.



Off-Balance Sheet Arrangements and Contractual Obligations



As of March 31, 2006, the Partnership had not utilized
special purpose entities to facilitate off-balance sheet financing arrangements and has no loan guarantee arrangements or off-balance sheet arrangements of any kind other than a standby letter of credit as further discussed in Note D and those that
are not likely to have a material current or future effect on the Partnerships financial position.



The Partnerships contractual obligations are primarily with service providers such as PBP, ATC, Watson & Taylor Management, Inc., and a
registered public accounting firm. A summary of the Partnerships significant contractual obligations as of March 31, 2006 is as follows:



|                        |  |                 |         |           |   |           |  |                  |   |  |   |  
|----------------------- |  | --------------- | ------- | --------- | - | --------- |  | ---------------- | - |  | - | -
|Contractual Obligations
|Payments due by period 
|Total                   |  | Less than1 year |         | 1-3 years |   | 3-5 years |  | More than5 years
|$395,000                |  | $               | 395,000 |           | $ |          |  | $                |  |  | $ | 
|                        |  |                 |         |           |   |           |  |                  |   |  |   |  



Results of Operations



As a result of the Partnership adopting the liquidation
basis of accounting in accordance with generally accepted accounting principles as of October 1, 1996, and thus not reporting results of operations thereafter, there is no management discussion comparing the results of operations.



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|ITEM  3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ----------------------------------------------------------



None.



|ITEM  4. | CONTROLS AND PROCEDURES
|-------- | -----------------------



As of the end of the period covered by this report, the Managing General Partner carried out an evaluation, under the supervision and with the
participation of the officers of the Managing General Partner, including the Managing General Partners chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Partnerships disclosure
controls and procedures. Based upon that evaluation, the Managing General Partners chief executive officer and chief financial officer concluded that the Partnerships disclosure controls and procedures are effective.



In designing and evaluating the Partnerships disclosure controls and
procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (Exchange Act)), the Managing General Partner recognized that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurances of achieving the desired control objectives, as the Partnerships are designed to do, and the Managing General Partner necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. We believe that the Partnerships disclosure controls and procedures provide such reasonable assurance.



There have not been any changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934, as amended) during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.



8



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PART II. OTHER INFORMATION



Item 1. Legal ProceedingsNone



Item 1A. Risk FactorsThere have been no material changes relating to the risk factors that were previously provided in the Companys Form 10-K for the period
ended December 31, 2005.



Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds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



| | 31.1 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
| | ---- | -------------------------------------------------------------------------------



| | 31.2 | Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 (filed herewith)
| | ---- | -------------------------------------------------------------------------------



| | 32.1 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the SARBANES-OXLEY Act of 2002 (furnished herewith)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------



| | 32.2 | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the SARBANES-OXLEY Act of 2002 (furnished herewith)
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------



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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 thereunto duly authorized.



|                                         |  |                                                                                 |  |                   
|---------------------------------------- |  | ------------------------------------------------------------------------------- |  | ------------------
|Prudential-Bache/Watson & Taylor, Ltd.-2 |  |                                                                                
|                                         |  |                                                                                
|By:                                      |  | Prudential-Bache Properties, Inc.A Delaware corporationManaging General
Partner |  |                   
|                                         |  |                                                                                
|                                         |  | By: /s/ Warren S. Hoffman                                                       |  | Date: May 15, 2006
|                                         |  | Warren S. Hoffman Chief Financial Officer
and Vice President                    |  |                   



10