<PAGE>
                                                          1998
--------------------------------------------------------------------------------
Prudential-Bache/                                         Annual
Watson & Taylor, Ltd.-2                                   Report

<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                               1998 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, 1998
and 1997, and the related statements of changes in net assets in process of
liquidation for the years then ended and for the three months ended December 31,
1996. In addition, we have audited the related statements of operations, changes
in partners' capital and cash flows for the nine months ended September 30,
1996. 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, 1998 and 1997, the
changes in its net assets in process of liquidation for the years then ended 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, in conformity with
generally accepted accounting principles.
 
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 10, 1999
 
                                       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>
                                                                            1998           1997
--------------------------------------------------------------------------------------------------
ASSETS
Property held for sale                                                   $1,518,521     $1,518,521
Cash and cash equivalents                                                 1,019,613        870,538
Other assets                                                                 56,530         78,983
                                                                         ----------     ----------
Total assets                                                              2,594,664      2,468,042
                                                                         ----------     ----------
LIABILITIES
Estimated liquidation costs                                                 264,767        377,989
                                                                         ----------     ----------
Net assets available to limited and general partners                     $2,329,897     $2,090,053
                                                                         ----------     ----------
                                                                         ----------     ----------
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
Net income from liquidating activities                        239,844        --             239,844
                                                          -----------     ---------     -----------
Net assets--December 31, 1998                             $ 2,329,897     $  --         $ 2,329,897
                                                          -----------     ---------     -----------
                                                          -----------     ---------     -----------
---------------------------------------------------------------------------------------------------
                 The accompanying notes are an integral part of these statements.
</TABLE>
                                       3
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                            STATEMENT OF OPERATIONS
                             (going concern basis)
 
<TABLE>
<CAPTION>
                                                                                      Nine Months
                                                                                         Ended
                                                                                     September 30,
                                                                                         1996
<S>                                                                                  <C>
--------------------------------------------------------------------------------------------------
REVENUES
Rental income                                                                         $ 2,190,501
Interest                                                                                   18,769
                                                                                     -------------
                                                                                        2,209,270
                                                                                     -------------
EXPENSES
Property operating                                                                        772,224
General and administrative                                                                631,977
Real estate taxes                                                                         185,950
                                                                                     -------------
                                                                                        1,590,151
                                                                                     -------------
Net income                                                                            $   619,119
                                                                                     -------------
                                                                                     -------------
ALLOCATION OF NET INCOME
Limited partners                                                                      $   612,928
                                                                                     -------------
                                                                                     -------------
General partners                                                                      $     6,191
                                                                                     -------------
                                                                                     -------------
Net income per limited partnership unit                                               $     11.89
                                                                                     -------------
                                                                                     -------------
--------------------------------------------------------------------------------------------------
</TABLE>
 
                   STATEMENT OF CHANGES IN PARTNERS' CAPITAL
                             (going concern basis)
<TABLE>
<CAPTION>
                                                            LIMITED        GENERAL
                                                           PARTNERS       PARTNERS         TOTAL
<S>                                                       <C>             <C>           <C>
---------------------------------------------------------------------------------------------------
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)
                            STATEMENT OF CASH FLOWS
                             (going concern basis)
<TABLE>
<CAPTION>
                                                                                     Nine Months
                                                                                        Ended
                                                                                    September 30,
                                                                                         1996
<S>                                                                                 <C>
--------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Rental income and deposits received                                                   $2,199,943
Interest received                                                                         18,769
Property operating expenses paid                                                        (776,748)
Real estate taxes paid                                                                  (200,963)
General and administrative expenses paid                                                (435,568)
                                                                                    --------------
Net cash provided by operating activities                                                805,433
CASH FLOWS FROM INVESTING ACTIVITIES
Property improvements                                                                    (49,491)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions paid to partners                                                          (580,329)
                                                                                    --------------
Net increase in cash and cash equivalents                                                175,613
 
Cash and cash equivalents at beginning of period                                         957,903
                                                                                    --------------
Cash and cash equivalents at end of period                                            $1,133,516
                                                                                    --------------
                                                                                    --------------
--------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income                                                                            $  619,119
                                                                                    --------------
Adjustments to reconcile net income to net cash provided by operating
  activities:
Changes in:
Other assets                                                                             (13,933)
Accounts payable and accrued expenses                                                    197,792
Due to affiliates, net                                                                    (5,907)
Accrued real estate taxes                                                                (15,013)
Unearned rental income                                                                    14,787
Deposits due to tenants                                                                    8,588
                                                                                    --------------
Total adjustments                                                                        186,314
                                                                                    --------------
Net cash provided by operating activities                                             $  805,433
                                                                                    --------------
                                                                                    --------------
--------------------------------------------------------------------------------------------------
                  The accompanying notes are an integral part of this statement.
</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 of the Partnership.
 
   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 To
date, the concentrations have not improved and the Partnership is reviewing
certain remedial alternatives. However, 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. Estimated costs expected to be incurred
through the date of liquidation of the Partnership have been accrued in the
accompanying financial statements.
 
   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.
 
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,
December 31, 1997 and December 31, 1998 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
 
                                       6
 <PAGE>
<PAGE>
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.
 
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, 1998, 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           Year Ended        Three Months Ended
                                             December 31,         December 31,          December 31,
                                                 1998                 1997                  1996
                                           -----------------    -----------------    ------------------
<S>                                        <C>                  <C>                  <C>
Rental and other income                        $ 504,300            $ 483,910            $  699,656
                                           -----------------    -----------------    ------------------
Property operating expenses                      224,936              258,987               370,952
General and administrative expenses                6,493               53,840              (295,522)
Estimated liquidation expenses                    33,027               90,352               385,000
                                           -----------------    -----------------    ------------------
                                                 264,456              403,179               460,430
                                           -----------------    -----------------    ------------------
Net income from liquidating activities         $ 239,844            $  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.
 
                                       7
<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, 1998, 1997 and 1996 were $6,000, $57,000 and
$140,000, 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 was $39,000. No additional costs were
incurred in 1997 or 1998.
 
   In conjunction with the liquidation basis of accounting, the Partnership has
recorded an accrual as of December 31, 1998 for the estimated costs expected to
be incurred to liquidate the Partnership. Included in these estimated
liquidation costs is $59,000 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, 1998.
 
   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, 1998.
 
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>
                                                                1998          1997           1996
                                                              ---------     ---------     ----------
Net income per financial statements                           $ 239,844(a)  $  80,731(a)  $4,391,687(b)
Tax gain on sale of property in excess of book amount                --            --      3,997,311
Estimated liquidation costs, deducted for books not tax          33,027        90,352        385,000
Estimated liquidation costs, deducted for tax not book         (146,248)     (118,714)            --
Rent received in advance, net of reversal of prior year
  amount                                                             --            --        (46,167)
Tax depreciation and amortization in excess of book amounts    (138,605)     (138,810)      (913,542)
                                                              ---------     ---------     ----------
Tax basis net income (loss)                                   $ (11,982)    $ (86,441)    $7,814,289
                                                              ---------     ---------     ----------
                                                              ---------     ---------     ----------
</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.
 
                                       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. To
date, concentrations have not improved and the Partnership is reviewing certain
remedial alternatives. However, 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 after
the sale of the Hampton Park property, and will distribute any remaining funds
at such time. In accordance with the Partnership Agreement, such distributions
to partners will be made based upon each partners' capital account for Federal
income tax purposes. 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 1998, 1997 and 1996 periods.
 
Year 2000
 
   The Partnership has considered and is taking appropriate actions to address
the possible adverse effects of the Year 2000 on its systems and operations.
Accordingly, the Partnership believes the Year 2000 will not have significant
adverse effects on its systems and operations.
 
                                       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