<PAGE>
                                                          1997
--------------------------------------------------------------------------------
Prudential-Bache/                                         Annual
Watson & Taylor, Ltd.-2                                   Report

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                               1997 Annual Report

                                       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, 1997
and 1996, and the related statements of changes in net assets in process of
liquidation for the year ended December 31, 1997 and for the three months ended
December 31, 1996. In addition, we have audited the accompanying statements of
operations, changes in partners' capital and cash flows for the nine months
ended September 30, 1996 and the year ended December 31, 1995. Our audit also
included the financial statement schedules listed in the Index at Item 14(a).
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 generally accepted auditing
standards. 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 as of December 31, 1997 and 1996, the
changes in its net assets in process of liquidation for the year ended December
31, 1997 and for the three months ended December 31, 1996, and the results of
its operations and cash flows for the nine months ended September 30, 1996 and
the year ended December 31, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly, in all material respects the financial information
set forth therein.

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

/s/ Ernst & Young LLP
New York, New York
February 18, 1998, except for Note G
as to which the date is March 1, 1998

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

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                            1997           1996
--------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>
ASSETS
Property held for sale                                                   $1,518,521     $1,518,521
Cash and cash equivalents                                                   870,538      1,227,972
Other assets                                                                 78,983         63,620
                                                                         ----------     ----------
Total assets                                                              2,468,042      2,810,113
                                                                         ----------     ----------
LIABILITIES
Estimated liquidation costs                                                 377,989        385,000
Other liabilities                                                                --        368,769
Due to affiliates, net                                                           --         47,022
                                                                         ----------     ----------
Total liabilities                                                           377,989        800,791
                                                                         ----------     ----------
Net assets available to limited and general partners                     $2,090,053     $2,009,322
                                                                         ----------     ----------
                                                                         ----------     ----------
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--October 1, 1996                              $ 13,768,114     $(63,693 )    $ 13,704,421
Gain on sale of properties                                  3,472,042       61,300         3,533,342
Net income from liquidating activities                        236,833        2,393           239,226
Distributions                                             (15,467,667)       --          (15,467,667)
                                                         ------------     ---------     ------------
Net assets--December 31, 1996                               2,009,322        --            2,009,322
Net income from liquidating activities                         80,731        --               80,731
                                                         ------------     ---------     ------------
Net assets--December 31, 1997                            $  2,090,053     $  --         $  2,090,053
                                                         ------------     ---------     ------------
                                                         ------------     ---------     ------------
----------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of these statements.
</TABLE>
                                       3
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                            STATEMENTS OF OPERATIONS
                             (going concern basis)

<TABLE>
<CAPTION>
                                                                         Nine Months
                                                                            Ended          Year Ended
                                                                        September 30,     December 31,
                                                                            1996              1995
------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>               <C>
REVENUES
Rental income                                                            $ 2,190,501       $2,822,490
Interest                                                                      18,769           18,864
                                                                        -------------     ------------
                                                                           2,209,270        2,841,354
                                                                        -------------     ------------
EXPENSES
Property operating                                                           772,224        1,039,761
General and administrative                                                   631,977          298,370
Real estate taxes                                                            185,950          250,259
Depreciation                                                                      --          763,660
                                                                        -------------     ------------
                                                                           1,590,151        2,352,050
                                                                        -------------     ------------
Net income                                                               $   619,119       $  489,304
                                                                        -------------     ------------
                                                                        -------------     ------------
ALLOCATION OF NET INCOME
Limited partners                                                         $   612,928       $  484,411
                                                                        -------------     ------------
                                                                        -------------     ------------
General partners                                                         $     6,191       $    4,893
                                                                        -------------     ------------
                                                                        -------------     ------------
Net income per limited partnership unit                                  $     11.89       $     9.40
                                                                        -------------     ------------
                                                                        -------------     ------------
------------------------------------------------------------------------------------------------------
</TABLE>

                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
                             (going concern basis)
<TABLE>
<CAPTION>
                                                            LIMITED        GENERAL
                                                           PARTNERS       PARTNERS         TOTAL
<S>                                                       <C>             <C>           <C>
---------------------------------------------------------------------------------------------------
Partners' capital (deficit)--December 31, 1994            $14,011,448     $(61,235 )    $13,950,213
Net income                                                    484,411        4,893          489,304
Distributions                                                (766,147)      (7,739 )       (773,886)
                                                          -----------     ---------     -----------
Partners' capital (deficit)--December 31, 1995             13,729,712      (64,081 )     13,665,631
Net income                                                    612,928        6,191          619,119
Distributions                                                (574,526)      (5,803 )       (580,329)
                                                          -----------     ---------     -----------
Partners' capital (deficit)--September 30, 1996           $13,768,114     $(63,693 )    $13,704,421
                                                          -----------     ---------     -----------
                                                          -----------     ---------     -----------
---------------------------------------------------------------------------------------------------
                 The accompanying notes are an integral part of these statements.
</TABLE>
                                       4
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                            STATEMENTS OF CASH FLOWS
                             (going concern basis)
<TABLE>
<CAPTION>
                                                                        Nine Months
                                                                           Ended           Year Ended
                                                                       September 30,      December 31,
                                                                            1996              1995
<S>                                                     <C>            <C>                <C>
------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income and deposits received                                      $2,199,943       $ 2,836,953
Interest received                                                            18,769            18,864
Property operating expenses paid                                           (776,748)       (1,023,664 )
Real estate taxes paid                                                     (200,963)         (244,205 )
General and administrative expenses paid                                   (435,568)         (235,304 )
                                                                       --------------     ------------
Net cash provided by operating activities                                   805,433         1,352,644
CASH FLOWS FROM INVESTING ACTIVITIES
Property improvements                                                       (49,491)         (168,314 )
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners                                             (580,329)         (773,886 )
                                                                       --------------     ------------
Net increase in cash and cash equivalents                                   175,613           410,444

Cash and cash equivalents at beginning of period                            957,903           547,459
                                                                       --------------     ------------
Cash and cash equivalents at end of period                               $1,133,516       $   957,903
                                                                       --------------     ------------
                                                                       --------------     ------------
------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income                                                               $  619,119       $   489,304
                                                                       --------------     ------------
Adjustments to reconcile net income to net cash
  provided by operating activities:
Depreciation                                                                     --           763,660
Changes in:
Other assets                                                                (13,933)           (7,951 )
Accounts payable and accrued expenses                                       197,792            37,441
Due to affiliates, net                                                       (5,907)           41,723
Accrued real estate taxes                                                   (15,013)            6,053
Unearned rental income                                                       14,787            (3,836 )
Deposits due to tenants                                                       8,588            26,250
                                                                       --------------     ------------
Total adjustments                                                           186,314           863,340
                                                                       --------------     ------------
Net cash provided by operating activities                                $  805,433       $ 1,352,644
                                                                       --------------     ------------
                                                                       --------------     ------------
------------------------------------------------------------------------------------------------------
                   The accompanying notes are an integral part of these statements.
</TABLE>
                                       5
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                         NOTES TO FINANCIAL STATEMENTS

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 and is responsible for the day-to-day operations of the Partnership and
its investments.

   On December 15, 1995, the Management Committee of the Partnership determined
to seek bids for all the properties held by the Partnership. On June 13, 1996,
the Partnership entered into a contract with Public Storage, Inc., the property
manager of the Partnership's properties, for the sale of all the Partnership's
properties. This sale was subject to the approval by the limited partners
holding a majority of the limited partnership units and certain other conditions
and potential price adjustments.

   In accordance with a consent statement dated September 17, 1996 (the 'Consent
Statement'), the limited partners approved, on October 18, 1996, the sale to
Public Storage, Inc. of all eight miniwarehouse facilities owned by the
Partnership and the liquidation and dissolution of the Partnership. Seven of the
eight properties which were under contract were sold to Public Storage, Inc. and
its affiliates on December 16, 1996. The Partnership received, in cash, gross
sales proceeds of $16,000,000 reduced by certain selling expenses and pro
rations of approximately $433,000. The gross sales price was in excess of the
appraised value of the properties and resulted in a gain on sale of
approximately $3,533,000 for financial reporting purposes.

   The Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland. This property evidenced certain concentrations of hazardous
materials discovered in an environmental review of the property. The property
continues to be monitored by the State environmental regulatory department, but
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property. The Partnership intends to sell the
property as soon as possible; however, no buyer for the property has been
identified and it is uncertain when any such sale will be consummated.

   A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet the anticipated current and future operating costs until
the liquidation of the Partnership. The Partnership intends to liquidate in
1998, subject to and assuming the prior sale of the Hampton Park property, and
will distribute any remaining funds at such time. Estimated costs expected to be
incurred through the date of liquidation of the Partnership have been accrued in
the accompanying financial statements.

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, 1996 and
December 31, 1997 are stated at liquidation value, i.e., the assets have been
valued at their estimated net realizable values and the liabilities include
estimated amounts to be incurred through the date of liquidation of the
Partnership. 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.

Property

   Effective December 31, 1995, the Partnership reclassified its properties from
held for use to held for sale and ceased depreciating the properties for
financial reporting purposes only. Properties held for sale are recorded at the
lower of carrying amount or estimated fair value less costs to sell.

                                       6
<PAGE>
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

   Net income from operations is allocated and cash from operations is
distributed 99% to the limited partners and 1% to the General Partners. Net loss
from operations is allocated 92% to the limited partners and 8% to the General
Partners.

   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. However, the minimum
allocation to the General Partners of income from a Terminating Sale shall not
be less than 1%. 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.

   Net income per limited partnership unit is based on 51,560 limited and
equivalent units outstanding, which excludes 258 equivalent units held by PBP
(see Note E) for which PBP has waived all of its rights therein.

C. Property Held for Sale

   The Partnership's property as of December 31, 1997 and 1996 consisted solely
of Hampton Park, a miniwarehouse facility located in Capitol Heights, Maryland.

D. Net Income From Liquidating Activities

   Net income from liquidating activities consisted of the following:

<TABLE>
<CAPTION>
                                                               Year Ended          Three Months Ended
                                                            December 31, 1997      December 31, 1996
                                                            -----------------      ------------------
           <S>                                              <C>                    <C>
           Rental and other income                              $ 483,910              $  699,656
                                                            -----------------      ------------------
           Property operating expenses                            258,987                 370,952
           General and administrative expenses                     53,840                (295,522)
           Estimated liquidation expenses                          90,352                 385,000
                                                            -----------------      ------------------
                                                                  403,179                 460,430
                                                            -----------------      ------------------
           Net income from liquidating activities               $  80,731              $  239,226
                                                            -----------------      ------------------
                                                            -----------------      ------------------
</TABLE>

   The credit balance for general and administrative expenses resulted from the
reclassification in the three months ended December 31, 1996 of certain Consent
Statement costs which arose in the nine months ended September 30, 1996. These
consent costs were reclassified as a reduction of the gain on sale of the
property during the three months ended December 31, 1996.

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, 1997, 1996 and 1995 were $57,000, $140,000 and
$104,000, 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 1996 and 1995 were $39,000 and $24,000,
respectively.

                                       7

<PAGE>
   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of December 31, 1997 for the estimated costs expected to
be incurred to liquidate the Partnership. Included in these estimated
liquidation costs is $123,000 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, 1997.

   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
have been excluded from the calculation of net income per limited partnership
unit and distributions per limited partnership unit.

   Prudential Securities Incorporated ('PSI'), an affiliate of PBP, owns 180
limited partnership units at December 31, 1997.

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>
                                                                1997           1996          1995
                                                             ----------     ----------     ---------
Net income per financial statements                          $   80,731(a)  $4,391,687(b)  $ 489,304
Tax gain on sale of property in excess of book amount                --      3,997,311            --
Estimated liquidation costs, deducted for books not tax          90,352        385,000            --
Estimated liquidation costs, deducted for tax not book         (118,714)            --            --
Rent received in advance, net of reversal of prior year
  amount                                                             --        (46,167)       (3,836)
Bad debt (recovery) provision for book purposes                      --             --       (25,000)
Tax depreciation and amortization in excess of book
  amounts                                                      (138,810)      (913,542)     (234,947)
                                                             ----------     ----------     ---------
Tax basis net income (loss)                                  $  (86,441)    $7,814,289     $ 225,521
                                                             ----------     ----------     ---------
                                                             ----------     ----------     ---------
</TABLE>

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

   (b) Represents gain on sale of properties ($3,533,342) and net income from
       liquidating activities ($239,226) which are reflected in the Statement of
       Changes in Net Assets and net income from operations ($619,119) which is
       reflected in the Statement of Operations.

   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.

G. Subsequent Event

   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 has 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
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 will receive 4.5% of the property's gross revenues (as
defined in the Management Agreement) as a management fee.

                                       8
<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 the Consent Statement dated September 17, 1996, the
limited partners approved, on October 18, 1996, the sale to Public Storage, Inc.
of all eight miniwarehouse facilities owned by the Partnership and the
liquidation and dissolution of the Partnership. Seven of the eight properties
which were under contract were sold to Public Storage, Inc. and its affiliates
on December 16, 1996. The Partnership received, in cash, gross sales proceeds of
$16,000,000 reduced by certain selling expenses and pro rations of approximately
$433,000. The gross sales price was in excess of the appraised value of the
properties and resulted in a gain on sale of approximately $3,533,000 for
financial reporting purposes.

   The Partnership continues to own the Hampton Park property located in Capitol
Heights, Maryland. This property evidenced certain concentrations of hazardous
materials discovered in an environmental review of the property. The property
continues to be monitored by the State environmental regulatory department but
it is uncertain at this time what will ultimately be required to resolve the
environmental issue at the property. The Partnership intends to sell the
property as soon as possible; however, no buyer for the property has been
identified and it is uncertain when any such sale will be consummated.

   A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net sales proceeds reduced by a contingency reserve and
funds required to meet the anticipated current and future operating costs until
the liquidation of the Partnership. The Partnership intends to liquidate in
1998, subject to and assuming the prior sale of the Hampton Park property, and
will distribute any remaining funds at such time. Estimated costs expected to be
incurred through the date of liquidation of the Partnership have been accrued in
the accompanying financial statements.

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, and the sale of
substantially all of the properties in October 1996, there is no management
discussion comparing the corresponding 1997 and 1996 periods.

   All significant fluctuations between 1995 and 1996 were due to comparing 9
months in 1996 on a going-concern basis to 12 months in 1995, the sale of
substantially all the Partnership's properties during 1996 and the accrual at
year-end 1996 of estimated costs relating to the liquidation of the Partnership.

                                       9
<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

                                       10

<PAGE>
Peck Slip Station
                                   BULK RATE
P.O. Box 2016
                                  U.S. POSTAGE
New York, NY 10272
                                      PAID
                                 Automatic Mail
PBW&T2/171650