<PAGE>

                                                   2000
--------------------------------------------------------------------
Prudential-Bache/                                  Annual
Watson & Taylor, Ltd.-2                            Report
(In Process Of Liquidation)

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                               2000 Annual Report


Letter to Limited Partners


                                       1

<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-2

We have audited the accompanying statements of net assets in process of
liquidation of Prudential-Bache/Watson & Taylor, Ltd.-2 as of December 31, 2000
and 1999, and the related statements of changes in net assets in process of
liquidation for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets in process of liquidation of
Prudential-Bache/Watson & Taylor, Ltd.-2 at December 31, 2000 and 1999, and the
changes in its net assets in process of liquidation for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note B to the financial statements, the Partnership adopted the
liquidation basis of accounting effective October 1, 1996.

/s/ Ernst & Young LLP
New York, New York
February 8, 2001

                                       2

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                             (limited partnership)
                            STATEMENTS OF NET ASSETS
                          (in process of liquidation)

<TABLE>
<CAPTION>
                                                                               December 31,
<S>                                                                      <C>            <C>
                                                                            2000           1999
--------------------------------------------------------------------------------------------------
ASSETS
Property held for sale                                                   $2,018,521     $2,018,521
Cash and cash equivalents                                                 1,177,353      1,036,053
Other assets                                                                388,079        277,922
                                                                         ----------     ----------
Total assets                                                              3,583,953      3,332,496
                                                                         ----------     ----------
LIABILITIES
Estimated liquidation costs                                                 407,616        366,078
Estimated remediation costs                                                 500,000        500,000
                                                                         ----------     ----------
Total liabilities                                                           907,616        866,078
                                                                         ----------     ----------
Net assets available to limited and general partners                     $2,676,337     $2,466,418
                                                                         ----------     ----------
                                                                         ----------     ----------
Limited and equivalent partnership units issued and outstanding              51,818         51,818
                                                                         ----------     ----------
                                                                         ----------     ----------
--------------------------------------------------------------------------------------------------
</TABLE>

                      STATEMENTS OF CHANGES IN NET ASSETS
                          (in process of liquidation)
<TABLE>
<CAPTION>
                                                             LIMITED        GENERAL
                                                             PARTNERS      PARTNERS        TOTAL
<S>                                                         <C>            <C>           <C>
---------------------------------------------------------------------------------------------------
Net assets--December 31, 1997                               $2,090,053      $ --         $2,090,053
Net income from liquidating activities                         239,844        --            239,844
                                                            ----------     ---------     ----------
Net assets--December 31, 1998                                2,329,897        --          2,329,897
Net income from liquidating activities                         136,521        --            136,521
                                                            ----------     ---------     ----------
Net assets--December 31, 1999                                2,466,418        --          2,466,418
Net income from liquidating activities                         209,919        --            209,919
                                                            ----------     ---------     ----------
Net assets--December 31, 2000                               $2,676,337      $            $2,676,337
                                                            ----------     ---------     ----------
                                                            ----------     ---------     ----------
---------------------------------------------------------------------------------------------------
                 The accompanying notes are an integral part of these statements.
</TABLE>
                                       3

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS
                           December 31, 2000 and 1999

A. General

   Prudential-Bache/Watson & Taylor, Ltd.-2 (the 'Partnership') is a Texas
limited partnership formed on November 14, 1983 which will terminate in
accordance with a vote of the limited partners as described below. The
Partnership was formed for the purpose of acquiring, developing, owning and
operating mini-storage and office/warehouse facilities. The general partners of
the Partnership are Prudential-Bache Properties, Inc. ('PBP'), a wholly owned
subsidiary of Prudential Securities Group Inc., George S. Watson, and A. Starke
Taylor, III (collectively, the 'General Partners'). PBP is the Managing General
Partner of the Partnership.

   In accordance with a consent statement dated September 17, 1996, the limited
partners approved 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 during October 1996.

   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') and has continued to cooperate
with 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, is in the process of submitting an application to enter the site
into MDE's Voluntary Cleanup Program ('VCP'). Based on VCP regulations, MDE is
required to notify the Partnership whether the site has been accepted into their
program within sixty days after receiving the application. As of December 31,
2000, 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 select a broker (after submitting the
application to enter the VCP) for the purpose of offering 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. The General Partners intend to have the broker offer the
property pursuant to a sealed bid process; however, because of 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.

   Effective February 28, 1998, American Office Park Properties, Inc., a
subsidiary of Public Storage, Inc., terminated its management of the Hampton
Park property. The Partnership entered into a management agreement ('Management
Agreement') with Watson & Taylor Management, Inc. ('WTMI'), an affiliate of the
individual General Partners, effective March 1, 1998. WTMI will continue to be
responsible for the day-to-day operation of the property, including the
supervision of the on-site managers and the establishment of rental policies and
rates for new rentals and renewals and will direct the marketing activity for
the property. The Management Agreement may be terminated by either party with 60
days' written notice, with or without cause, and can be terminated upon a sale
of the property. WTMI receives 4.5% of the property's gross revenues (as defined
in the Management Agreement) as a management fee.

                                       4
<PAGE>
B. Summary of Significant Accounting Policies

Basis of accounting

   The Partnership adopted the liquidation basis of accounting effective October
1, 1996. Accordingly, the net assets of the Partnership at December 31, 1998,
1999 and 2000 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, 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. Prior to October 1,
1996, the books and records of the Partnership were maintained on a
going-concern accrual basis of accounting. The Partnership's fiscal year for
both book and tax purposes ends on December 31.

Income taxes

   The Partnership is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual partners. The Partnership may be subject to other
state and local taxes in jurisdictions in which it operates.

Profit and loss allocations and distributions

   Income from a Terminating Sale, as defined in the Partnership Agreement, is
allocated first to all partners having negative capital account balances, to the
extent of such balances, and then to the limited partners until their capital
accounts equal their Adjusted Capital Contribution plus a Cumulative Preference
as those terms are defined in the Partnership Agreement. Sales proceeds from a
Terminating Sale are first used for the payment of any debts or obligations of
the Partnership, then any balance remaining is distributed to the partners
having positive capital account balances.

   PBP has waived its right to share in any limited partner cash distributions
and allocations of the Partnership's profits and losses with respect to the 258
equivalent units it holds (see Note E).

C. Property Held for Sale

   The Partnership's property as of December 31, 2000, 1999 and 1998 consisted
solely of Hampton Park, a miniwarehouse facility located in Capitol Heights,
Maryland. It is uncertain at this time what the Partnership will ultimately
realize from the sale of the property due to the property's environmental issue
(see Note A). However, the carrying amount of the property appears to be
recoverable based on a March 2000 appraised valuation of the property (reduced
by estimated costs to sell) less estimated costs to resolve the environmental
issue.

D. Net Income From Liquidating Activities

   Net income from liquidating activities consisted of the following:

<TABLE>
<CAPTION>
                                                           Year Ended      Year Ended      Year Ended
                                                          December 31,    December 31,    December 31,
                                                              2000            1999            1998
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Rental and other income                                     $599,874        $542,053        $504,300
                                                          ------------    ------------    ------------
Property operating expenses                                  221,982         198,593         224,936
General and administrative expenses                            1,343           4,467           6,493
Estimated liquidation expenses                               166,630         202,472          33,027
                                                          ------------    ------------    ------------
                                                             389,955         405,532         264,456
                                                          ------------    ------------    ------------
Net income from liquidating activities                      $209,919        $136,521        $239,844
                                                          ------------    ------------    ------------
                                                          ------------    ------------    ------------
</TABLE>

                                       5

<PAGE>
E. 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. The costs and expenses incurred
on behalf of the Partnership which are reimbursable to PBP and its affiliates
for the years ended December 31, 2000, 1999 and 1998 were $64,000, $92,000 and
$6,000, respectively.

   Affiliates of Messrs. Watson and Taylor, the individual General Partners,
also perform certain administrative and monitoring functions on behalf of the
Partnership. Costs incurred in 2000 and 1999 were $21,000 and $36,000,
respectively. No such costs were incurred in 1998.

   Additionally, WTMI receives 4.5% of the property's gross revenues (as defined
in the Management Agreement) as a management fee. Such management fees totalled
$26,000, $24,000 and $17,000 for the years ended December 31, 2000 and 1999 and
for the ten month period ended December 31, 1998, respectively.

   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of December 31, 2000 and 1999 for the estimated costs
expected to be incurred to liquidate the Partnership. Included in these
estimated liquidation costs is $161,000 and $137,000 as of December 31, 2000 and
1999, 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 December 31, 2000.

   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 ('PSI'), an affiliate of PBP, owns 180
limited partnership units at December 31, 2000.

F. Income Taxes

   The following is a reconciliation of net income for financial reporting
purposes to net income (loss) for tax reporting purposes:

<TABLE>
<CAPTION>
                                                                  For the year ended December 31
                                                               -------------------------------------
<S>                                                            <C>           <C>           <C>
                                                                 2000          1999          1998
                                                               ---------     ---------     ---------
Net income for financial reporting purposes (a)                $ 209,919     $ 136,521     $ 239,844
Estimated liquidation costs, deducted for books not tax          166,630       202,472        33,027
Liquidation costs incurred, deducted for tax not book           (125,092)     (101,192)     (146,248)
Tax depreciation and amortization in excess of book amounts     (139,570)     (138,418)     (138,605)
                                                               ---------     ---------     ---------
Tax basis net income (loss)                                    $ 111,887     $  99,383     $ (11,982)
                                                               ---------     ---------     ---------
                                                               ---------     ---------     ---------
</TABLE>

   (a) Represents net income from liquidating activities which is reflected in
       the Statement of Changes in Net Assets as well as Note D.

   The differences between the tax basis and book basis of partners' capital are
primarily attributable to the cumulative effect of the book to tax income
adjustments and the initial charge to partners' capital of syndication costs,
for book purposes, when the Partnership was formed.

                                       6

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
          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 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 during October 1996.

   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') and has continued to cooperate
with 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, is in the process of submitting an application to enter the site
into MDE's Voluntary Cleanup Program ('VCP'). Based on VCP regulations, MDE is
required to notify the Partnership whether the site has been accepted into their
program within sixty days after receiving the application. As of December 31,
2000, 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 select a broker (after submitting the
application to enter the VCP) for the purpose of offering 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. The General Partners intend to have the broker offer the
property pursuant to a sealed bid process; however, because of the environmental
problem and MDE oversight, it is uncertain when any such sale could be
consummated. The General Partners intend to liquidate the Partnership subject to
the Hampton Park property first being sold, and will distribute any remaining
funds at such time.

   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of December 31, 2000 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 reflecting the Managing General
Partner's best estimate. 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 December 31, 2000. Additional accruals totalling $167,000 were made during
the year ended December 31, 2000, reflecting changes in the date utilized for
estimating liquidation costs from December 31, 2000 to September 30, 2001.

   Net assets in liquidation increased $210,000 during the year ended December
31, 2000. The increase was primarily the result of income from operations of the
Hampton Park property, and to a lesser extent, interest income offset, in part,
by the additional $167,000 accrual of liquidation expenses discussed above.

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 corresponding 2000, 1999 and 1998 periods.

                                       7

<PAGE>
                               OTHER INFORMATION

The Partnership's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission is available to limited partners without charge upon written
request to:

        Prudential-Bache/Watson & Taylor, Ltd.-2
        P.O. Box 2016
        Peck Slip Station
        New York, New York 10272-2016

                                       8
<PAGE>
Peck Slip Station                                   PRESORTED
P.O. Box 2016                                       STANDARD
New York, NY 10272                                U.S. POSTAGE
                                                       PAID
                                                  Automatic Mail

PBW&T2/171650