<PAGE>
                                              1999
----------------------------------------------------------------------
Prudential-Bache/                             Annual
Watson & Taylor, Ltd.-2                       Report

<PAGE>

                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                               1999 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, 1999
and 1998, 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, 1999.
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, 1999 and 1998, and the
changes in its net assets in process of liquidation for each of the three years
in the period ended December 31, 1999, 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 9, 2000

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

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                            1999           1998
--------------------------------------------------------------------------------------------------
<S>                                                                      <C>            <C>
ASSETS
Property held for sale                                                   $2,018,521     $1,518,521
Cash and cash equivalents                                                 1,036,053      1,019,613
Other assets                                                                277,922         56,530
                                                                         ----------     ----------
Total assets                                                              3,332,496      2,594,664
                                                                         ----------     ----------
LIABILITIES
Estimated liquidation costs                                                 366,078        264,767
Estimated remediation costs                                                 500,000         --
                                                                         ----------     ----------
Total liabilities                                                           866,078        264,767
                                                                         ----------     ----------
Net assets available to limited and general partners                     $2,466,418     $2,329,897
                                                                         ----------     ----------
                                                                         ----------     ----------
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, 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
Net income from liquidating activities                         136,521        --            136,521
                                                            ----------     ---------     ----------
Net assets--December 31, 1999                               $2,466,418      $ --         $2,466,418
                                                            ----------     ---------     ----------
                                                            ----------     ---------     ----------
---------------------------------------------------------------------------------------------------
                 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, 1999 and 1998

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. In conjunction with the contract of sale of the Partnership's
properties to Public Storage, Inc. ('Public'), as described above, a Phase I
Environmental Site Assessment was performed in the first quarter of 1996 by Law
Engineering and Environmental Services, Inc. ('LAW'), which identified one of
the tenants as a potential environmental concern. As a result, the property was
not sold to Public.

   LAW, at the request of the Partnership, performed a Phase II Environmental
Site Assessment which was completed in June 1996. Analysis of soil and ground
water samples collected at the site in this assessment indicated detectable
levels of tetrachloroethene ('PCE'). LAW, at the request of the Partnership,
reported the PCE release to the Maryland Department of the Environment ('MDE').
The MDE requested that a limited subsurface assessment be performed to evaluate
the potential impact to subsurface soil and ground water. Since this 1996
assessment there have been fourteen additional quarterly groundwater sampling
events performed through the first quarter of 2000. Based upon the results of
these tests, the Partnership has continued its quarterly monitoring of the
property and will continue to do so until further direction is provided by the
MDE.

   The Partnership accrued a $500,000 liability which represents its best
estimate of the obligation as of December 31, 1999 in the Statement of Net
Assets regarding the environmental issues mentioned above. The amount includes
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. It is the Partnership's intention to sell
the property; however, because of the environmental problem it is uncertain when
any such sale could be consummated.

   In accordance with EITF 90-8: Capitalization of Costs to Treat Environmental
Contamination, costs to remove, contain, neutralize, or prevent existing or
future environmental contamination may be capitalized if (i) those costs are
recoverable and (ii) those costs are incurred in preparing for sale of that
property currently held for sale. The Partnership has determined that the
accrued environmental liabilities of $500,000 are recoverable based upon an
appraised valuation of the property received in the first quarter of 2000 that
is in excess of the sum of the carrying value of the property and the
environmental liability accrual. The property

                                       4
<PAGE>
is currently being held for sale as mentioned above. Therefore, the Partnership
increased the book value of the property on the Statement of Net Assets to
$2,018,521 as of December 31, 1999.

   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, 1997,
1998 and 1999 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 generally accepted accounting
principles in the United States. 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.

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.

                                       5
<PAGE>
C. Property Held for Sale

   The Partnership's property as of December 31, 1999, 1998 and 1997 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      Year Ended
                                                          December 31,    December 31,    December 31,
                                                              1999            1998            1997
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Rental and other income                                     $542,053        $504,300        $483,910
                                                          ------------    ------------    ------------
Property operating expenses                                  198,593         224,936         258,987
General and administrative expenses                            4,467           6,493          53,840
Estimated liquidation expenses                               202,472          33,027          90,352
                                                          ------------    ------------    ------------
                                                             405,532         264,456         403,179
                                                          ------------    ------------    ------------
Net income from liquidating activities                      $136,521        $239,844        $ 80,731
                                                          ------------    ------------    ------------
                                                          ------------    ------------    ------------
</TABLE>

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, 1999, 1998 and 1997 were $92,000, $6,000 and
$57,000, 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 1999 was $36,000. 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, 1999 and 1998 for the estimated costs
expected to be incurred to liquidate the Partnership. Included in these
estimated liquidation costs is $137,000 and $59,000 as of December 31, 1999 and
1998, respectively, expected to be payable to the General Partners and their
affiliates during the anticipated remaining liquidation period. The increase in
these estimated liquidation costs is a result of the lengthening of the
estimated holding 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, 1999.

   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, 1999.

                                       6
<PAGE>
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
                                                               -------------------------------------
                                                                 1999          1998          1997
                                                               ---------     ---------     ---------
<S>                                                            <C>           <C>           <C>
Net income per financial statements (a)                        $ 136,521     $ 239,844     $  80,731
Estimated liquidation costs, deducted for books not tax          202,472        33,027        90,352
Liquidation costs incurred, deducted for tax not book           (101,192)     (146,248)     (118,714)
Tax depreciation and amortization in excess of book amounts     (138,418)     (138,605)     (138,810)
                                                               ---------     ---------     ---------
Tax basis net income (loss)                                    $  99,383     $ (11,982)    $ (86,441)
                                                               ---------     ---------     ---------
                                                               ---------     ---------     ---------
</TABLE>

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

   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.

                                       7
<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. In conjunction with the contract of sale of the Partnership's
properties to Public Storage, Inc. ('Public'), as described above, a Phase I
Environmental Site Assessment was performed in the first quarter of 1996 by Law
Engineering and Environmental Services, Inc. ('LAW'), which identified one of
the tenants as a potential environmental concern. As a result, the property was
not sold to Public.

   LAW, at the request of the Partnership, performed a Phase II Environmental
Site Assessment which was completed in June 1996. Analysis of soil and ground
water samples collected at the site in this assessment indicated detectable
levels of tetrachloroethene ('PCE'). LAW, at the request of the Partnership,
reported the PCE release to the Maryland Department of the Environment ('MDE').
The MDE requested that a limited subsurface assessment be performed to evaluate
the potential impact to subsurface soil and ground water. Since this 1996
assessment there have been fourteen additional quarterly groundwater sampling
events performed through the first quarter of 2000. Based upon the results of
these tests, the Partnership has continued its quarterly monitoring of the
property and will continue to do so until further direction is provided by the
MDE.

   The Partnership accrued a $500,000 liability which represents its best
estimate of the obligation as of December 31, 1999 in the Statement of Net
Assets regarding the environmental issues mentioned above. The amount includes
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. It is the Partnership's intention to sell
the property; however, because of the environmental problem it is uncertain when
any such sale could be consummated.

   In accordance with EITF 90-8: Capitalization of Costs to Treat Environmental
Contamination, costs to remove, contain, neutralize, or prevent existing or
future environmental contamination may be capitalized if (i) those costs are
recoverable and (ii) those costs are incurred in preparing for sale of that
property currently held for sale. The Partnership has determined that the
accrued environmental liabilities of $500,000 are recoverable based upon an
appraised valuation of the property received in the first quarter of 2000 that
is in excess of the sum of the carrying value of the property and the
environmental liability accrual. The property is currently being held for sale
as mentioned above. Therefore, the Partnership increased the book value of the
property on the Statement of Net Assets to $2,018,521 as of December 31, 1999.

   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.

                                       8
<PAGE>
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 1999, 1998 and 1997 periods.

Impact of Year 2000

   The Partnership has received no reports of incidents of systems or facilities
malfunctions related to the inability of computers and/or computer software to
process and calculate date-related information from and after January 1, 2000.
The Partnership did not incur any costs during 1999 in connection with
remediating its systems. The Partnership is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Partnership will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.

                                       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