<PAGE>
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
 
                                   FORM 10-K
 
(Mark One)
 
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
 
For the fiscal year ended December 31, 1998
 
                                       OR
 
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
 
For the transition period from _______________________ to ______________________
 
Commission file number 0-13518
 
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)
 
Texas                                              75-1933081
--------------------------------------------------------------------------------
(State or other jurisdiction             (I.R.S. Employer Identification No.)
 of incorporation or organization)
                               
 
One Seaport Plaza, New York, N.Y.                       10292-0128
--------------------------------------------------------------------------------
(Address of principal executive offices)                (Zip Code)
 
Registrant's telephone number, including area code (212) 214-3500
 
Securities registered pursuant to Section 12(b) of the Act:
 
                                    None
--------------------------------------------------------------------------------
 
Securities registered pursuant to Section 12(g) of the Act:
 
                     Units of Limited Partnership Interest
--------------------------------------------------------------------------------
                                (Title of class)
 
   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes CK  No _
 
   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [CK]
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
   Registrant's Annual Report to Limited Partners for the year ended December
31, 1998 is incorporated by reference into Parts II and IV of this Annual Report
on Form 10-K.
 
   Amended and Restated Certificate and Agreement of Limited Partnership,
included as part of the Registration Statement on Form S-11 (File No. 2-88785)
filed with the Securities and Exchange Commission pursuant to Rule 424(b) of the
Securities Act of 1933, as amended, is incorporated by reference into Part IV of
this Annual Report on Form 10-K.
 
                                Index to exhibits can be found on pages 8 and 9.
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I                                                                                         PAGE
<S>        <C>                                                                                 <C>
Item  1    Business..........................................................................    3
Item  2    Properties........................................................................    4
Item  3    Legal Proceedings.................................................................    4
Item  4    Submission of Matters to a Vote of Limited Partners...............................    4
 
 
PART II
Item  5    Market for the Registrant's Units and Related Limited Partner Matters.............    4
Item  6    Selected Financial Data...........................................................    5
Item  7    Management's Discussion and Analysis of Financial Condition and Results of
             Operations......................................................................    5
Item 7A    Quantitative and Qualitative Disclosures About Market Risk........................    5
Item  8    Financial Statements and Supplementary Data.......................................    5
Item  9    Changes in and Disagreements with Accountants on Accounting and Financial
             Disclosure......................................................................    5
 
PART III
Item 10    Directors and Executive Officers of the Registrant................................    5
Item 11    Executive Compensation............................................................    7
Item 12    Security Ownership of Certain Beneficial Owners and Management....................    7
Item 13    Certain Relationships and Related Transactions....................................    7
 
PART IV
Item 14    Exhibits, Financial Statement Schedules and Reports on Form 8-K...................    8
           Financial Statements and Financial Statement Schedules............................    8
           Exhibits..........................................................................    8
           Reports on Form 8-K...............................................................    9
SIGNATURES...................................................................................   14
 
                                       2
<PAGE>
                                     PART I
 
Item 1. Business
 
General
 
   Prudential-Bache/Watson & Taylor, Ltd.-2 (the 'Registrant'), a Texas limited
partnership, was formed on November 14, 1983 and will terminate in accordance
with a vote of the limited partners as described below. The Registrant was
formed for the purpose of acquiring, developing, owning and operating
mini-storage and office/warehouse facilities with proceeds raised from the
initial sale of units of limited partnership interests ('Units'). The
Registrant's fiscal year for book and tax purposes ends on December 31.
 
   On December 15, 1995, the Management Committee of the Registrant determined
to seek bids for all the properties held by the Registrant. On June 13, 1996,
the Registrant entered into a contract with Public Storage, Inc., the property
manager of the Registrant's properties, for the sale of all the Registrant'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 limited
partners approved, on October 18, 1996, the sale to Public Storage, Inc. of all
eight miniwarehouse facilities owned by the Registrant and the liquidation and
dissolution of the Registrant. Seven of the eight properties which were under
contract were sold to Public Storage, Inc. and its affiliates on December 16,
1996. The Registrant received, in cash, gross sales proceeds of $16,000,000
reduced by certain selling expenses and prorations of approximately $433,000.
The gross sales price was in excess of the appraised value of the properties.
 
   The Registrant 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 Registrant 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
Registrant 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 Registrant.
 
   Effective February 28, 1998, American Office Park Properties, Inc., a
subsidiary of Public Storage, Inc., terminated its management of the Hampton
Park property. The Registrant 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.
 
General Partners
 
   The general partners of the Registrant are Prudential-Bache Properties, Inc.
('PBP'), 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 Registrant and its investments. See Note E of the
financial statements in the Registrant's Annual Report which is filed as an
exhibit hereto.
 
Employees
 
   The Registrant has no employees. Management and administrative services for
the Registrant are performed by the General Partners and their affiliates
pursuant to the Partnership Agreement. See Note E of the financial statements in
the Registrant's Annual Report which is filed as an exhibit hereto.
 
                                       3
<PAGE>
Item 2. Properties
 
   As of December 31, 1998, the Registrant owns the following property:
 

</TABLE>
<TABLE>
<CAPTION>
                                               Average                                          Monthly
                                           Occupancy Rates                                    Rental Rates
                                         for the year ended                                     Per Unit
                                            December 31,           Land       Rentable     as of December 31,
          Property Location                    1998(1)          (in acres)     Units              1998
--------------------------------------   -------------------    ----------    --------    --------------------
<S>                                      <C>                    <C>           <C>         <C>
Hampton Park (Capitol Heights,
  Maryland)
     Mini-warehouse                              93.1%             5.87          131         $  42 -   $280
     Commercial                                                                   51         $ 310 - $1,523
                                                                              --------
                                                                                 182
                                                                              --------
                                                                              --------
</TABLE>
 
(1) Average occupancy rates are calculated by averaging the monthly occupancies
    determined by dividing occupied square footage by available square footage
    as of each month-end.
 
   The Managing General Partner believes the Registrant's remaining property is
adequately insured.
 
   For the years ended December 31, 1998, 1997 and 1996, respectively, the
following properties' rental revenues exceeded 15% of the Registrant's total
revenue:
 
<TABLE>
<CAPTION>
                                1998     1997     1996
                                ----     ----     ----
<S>                             <C>      <C>      <C>
Hampton Park                     96%      95%      17%
Arapaho                          --       --       19
Arlington                        --       --       16
</TABLE>
 
Item 3. Legal Proceedings
 
   None
 
Item 4. Submission of Matters to a Vote of Limited Partners
 
   None
 
                                    PART II
 
Item 5. Market for the Registrant's Units and Related Limited Partner Matters
 
   As of March 4, 1999, there were 3,454 holders of record owning 51,818 Units,
inclusive of 258, 130 and 130 equivalent limited partnership units held by PBP
and Messrs. Watson and Taylor, respectively. A significant secondary market for
the Units has not developed, and it is not expected that one will develop in the
future. There are also certain restrictions set forth in Section 17.3 of the
Partnership Agreement limiting the ability of a limited partner to transfer
Units. Consequently, holders of Units may not be able to liquidate their
investments in the event of an emergency or for any other reason.
 
   There were no cash distributions paid to limited partners during 1998 and
1997.
 
   A distribution of $300 per limited partnership unit was made on December 19,
1996 representing the net proceeds from the sale of seven of the Registrant's
properties, reduced by a contingency reserve and funds required to meet the
anticipated current and future operating costs until the liquidation of the
Registrant. The Registrant intends to liquidate, subject to and assuming the
prior sale of the Hampton Park property, and will distribute any remaining funds
at such time.
 
                                       4
 <PAGE>
<PAGE>
Item 6. Selected Financial Data
 
   The following table presents selected financial data of the Registrant. This
data should be read in conjunction with the financial statements of the
Registrant and the notes thereto on pages 2 through 8 of the Registrant's Annual
Report which is filed as an exhibit hereto.
 
<TABLE>
<CAPTION>
                                                        Nine Months*
                                                            Ended           Year ended December 31,
                                                        September 30,     ---------------------------
                                                            1996             1995            1994
                                                        -------------     -----------     -----------
<S>                                                     <C>               <C>             <C>
Total revenues                                           $ 2,209,270      $ 2,841,354     $ 2,615,970
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
Net income                                               $   619,119      $   489,304     $   402,785
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
Limited partner net income per Unit                      $     11.89      $      9.40     $      7.73
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
Total assets                                             $14,325,486      $14,086,449     $14,263,400
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
Total distributions                                      $   580,329      $   773,886     $ 1,044,203
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
Limited partner distributions per Unit                   $     11.13      $     14.86     $     20.05
                                                        -------------     -----------     -----------
                                                        -------------     -----------     -----------
* As of October 1, 1996, the Partnership adopted the liquidation basis of accounting in accordance
  with generally accepted accounting principles and, therefore, there is no reporting of results of
  operations for the three months ended December 31, 1996 and for the years ended December 31, 1997
  and 1998. Total assets at December 31, 1996, 1997 and 1998 were $2,810,113, $2,468,042 and
  $2,594,664, respectively.
</TABLE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
        of Operations
 
   This information is incorporated by reference to page 9 of the Registrant's
Annual Report which is filed as an exhibit hereto.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
   The market risk disclosures are not being presented due to immateriality.
 
Item 8. Financial Statements and Supplementary Data
 
   The financial statements are incorporated by reference to pages 2 through 8
of the Registrant's Annual Report which is filed as an exhibit hereto.
 
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure
 
   None
 
                                    PART III
 
Item 10. Directors and Executive Officers of the Registrant
 
   There are no directors or executive officers of the Registrant. The
Registrant is managed by the Managing General Partner.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
   The Registrant, the Registrant's General Partners, PBP's directors and
executive officers and any persons holding more than 10% of the Registrant's
Units are required to report their initial ownership of such Units and any
subsequent changes in that ownership to the Securities and Exchange Commission
on Forms 3, 4 and 5. Such General Partners, executive officers, directors and
other persons who own greater than 10% of the Registrant's Units are required by
Securities and Exchange Commission regulations to furnish the Registrant with
copies of all Forms 3, 4 or 5 they file. All of these filing requirements were
satisfied on a timely basis. In making these disclosures, the Registrant has
relied solely on written representations of the General Partners, PBP's
directors and executive officers and other persons who own greater than 10% of
 
                                       5
 <PAGE>
<PAGE>
the Registrant's Units or copies of the reports they have filed with the
Securities and Exchange Commission during and with respect to its most recent
fiscal year.
 
Prudential-Bache Properties, Inc., Managing General Partner
 
   The directors and executive officers of PBP and their positions with regard
to managing the Registrant are as follows:
 
Name                            Position
Brian J. Martin                 President, Chief Executive Officer,
                                  Chairman of the Board of Directors 
                                  and Director
Barbara J. Brooks               Vice President--Finance and Chief 
                                  Financial Officer
Stephen A. Tolbert              Vice President and Chief Accounting Officer
Frank W. Giordano               Director
Nathalie P. Maio                Director
 
   BRIAN J. MARTIN, age 48, is the President, Chief Executive Officer, Chairman
of the Board of Directors and a Director of PBP. He is a Senior Vice President
of Prudential Securities Incorporated ('PSI'), an affiliate of PBP. Mr. Martin
also serves in various capacities for certain other affiliate companies. Mr.
Martin joined PSI in 1980. Mr. Martin is a member of the Pennsylvania Bar.
 
   BARBARA J. BROOKS, age 50, is the Vice President--Finance and Chief Financial
Officer of PBP. She is a Senior Vice President of PSI. Ms. Brooks also serves in
various capacities for other affiliated companies. She has held several
positions within PSI since 1983. Ms. Brooks is a certified public accountant.
 
   STEPHEN A. TOLBERT, age 36, is a Vice President of PBP. He is a First Vice
President of PSI. Mr. Tolbert also serves in various capacities for other
affiliated companies. He has held several positions within PSI since 1988.
 
   FRANK W. GIORDANO, age 56, is a Director of PBP. He is a Senior Vice
President of PSI. Mr. Giordano also serves in various capacities for other
affiliated companies. He has been with PSI since July 1967.
 
   NATHALIE P. MAIO, age 48, is a Director of PBP. She is a Senior Vice
President and Deputy General Counsel of PSI and supervises non-litigation legal
work for PSI. She joined PSI's Law Department in 1983; presently, she also
serves in various capacities for other affiliated companies.
 
   Effective November 10, 1998, Stephen A. Tolbert replaced Eugene D. Burak as
Chief Accounting Officer for the Registrant.
 
   There are no family relationships among any of the foregoing directors or
executive officers. All of the foregoing directors and executive officers have
indefinite terms.
 
Individual General Partners
 
   GEORGE S. WATSON, age 58, is a financial specialist and a certified public
accountant. He has been instrumental in the success of The Community Minority
Business Advancement Program sponsored by the University of Texas at Austin
College and Graduate Schools of Business. Mr. Watson is a member of the Advisory
Council of the University of Texas at Austin Business School and a member of its
Chancellor's Council. Mr. Watson attended the University of Texas at Austin,
graduating summa cum laude in 1963 with a BBA in accounting and finance. He
received his MBA in accounting and finance from the University of Texas in 1965,
graduating first in his class and summa cum laude. He also has received various
awards and scholarships and is a member of many fraternal organizations
including Phi Kappa Phi, the honorary scholastic society. Mr. Watson has over 25
years of experience in real estate and financial investments.
 
   A. STARKE TAYLOR, III, age 55, holds a bachelor of business administration
degree from Southern Methodist University which was awarded in 1966. He is past
president of the North Dallas Chamber of Commerce. Mr. Taylor is a member of the
boards of the Dallas Theological Seminary and the Northeast Texas Regional Board
of Young Life. He is president of Sovereign Corporation, a business investment
and
                                       6
<PAGE>
finance organization. Mr. Taylor has over 25 years of experience in real estate,
insurance and financial investments.
 
   The two individual General Partners are not related.
 
Item 11. Executive Compensation
 
   The Registrant does not pay or accrue any fees, salaries or any other form of
compensation to either individual General Partner or to directors and officers
of the Managing General Partner for their services. Certain officers and
directors of the Managing General Partner receive compensation from affiliates
of the Managing General Partner, not from the Registrant, for services performed
for various affiliated entities, which may include services performed for the
Registrant; however, the Managing General Partner believes that any compensation
attributable to services performed for the Registrant is immaterial. See also
Item 13 Certain Relationships and Related Transactions for information regarding
reimbursement to the General Partners for services provided to the Registrant.
 
Item 12. Security Ownership of Certain Beneficial Owners and Management
 
   As of March 4, 1999, no individual General Partner or director or officer of
the Managing General Partner owns directly or beneficially any interest in the
voting securities of the Managing General Partner.
 
   As of March 4, 1999, no individual General Partner or director or officer of
the Managing General Partner owns directly or beneficially any of the Units
issued by the Registrant. However, the General Partners have contributed to the
Registrant and, based on such contribution, they received 'equivalent units'
entitling them to participate in the distributions to the limited partners and
in the Registrant's profits and losses in the same proportion that the General
Partners' capital contribution bears to the total capital contributions of the
limited partners. The Managing General Partner has retained its right to receive
funds from the Registrant, such as General Partner distributions and
reimbursement of expenses, but has waived its right to share in any limited
partner cash distributions and allocations of Registrant's profits and losses
based upon such equivalent units.
 
   As of March 4, 1999, no limited partner beneficially owns more than 5% of the
outstanding Units issued by the Registrant.
 
Item 13. Certain Relationships and Related Transactions
 
   The Registrant has and will continue to have certain relationships with the
General Partners and their affiliates. However, there have been no direct
financial transactions between the Registrant and the individual General
Partners or the directors or officers of the Managing General Partner during
1998.
 
   Reference is made to Notes A and E of the financial statements in the
Registrant's Annual Report which is filed as an exhibit hereto, which identify
the related parties and discuss the services provided by these parties and the
amounts paid or payable for their services.
 
                                       7
<PAGE>
                                    PART IV
 
<TABLE>
<CAPTION>
                                                                                           Page
                                                                                         Number in
                                                                                       Annual Report
<S>    <C>        <C>                                                                 <C>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)            1. Financial Statements and Report of Independent
                  Auditors--incorporated by reference to the Registrant's Annual
                  Report which is filed as an exhibit hereto
 
                  Report of Independent Auditors                                             2
                  Financial Statements:
                  Statements of Net Assets--December 31, 1998 and 1997                       3
                  Statements of Changes in Net Assets--Years ended December 31,
                  1998 and 1997, and three months ended December 31, 1996                    3
                  Statement of Operations--Nine months ended September 30, 1996              4
                  Statement of Changes in Partners' Capital--Nine months ended
                  September 30, 1996                                                         4
                  Statement of Cash Flows--Nine months ended September 30, 1996              5
                  Notes to Financial Statements                                              6
 
               2. Financial Statement Schedules and Consent of Independent Auditors
                  Consent of Independent Auditors
                  Schedules:
                  II-- Valuation and Qualifying Accounts and Reserves--Three years
                  ended December 31, 1998
                  III--Real Estate and Accumulated Depreciation at December 31,
                  1998
                  Notes to Schedule III--Real Estate and Accumulated Depreciation
                  All other schedules have been omitted because they are not
                  applicable or the required information is included in the
                  financial statements and the notes thereto.
 
               3. Exhibits
                  Description:
                  2.01 Consent Statement dated September 17, 1996 (1)
                  3.01 Amended and Restated Certificate and Agreement of Limited
                  Partnership (2)
                  3.02 Amendment Number 8 to Amended and Restated Certificate and
                       Agreement of Limited Partnership (3)
                  4.01 Revised Form of Certificate of Limited Partnership Interest
                  (4)
                  10.01 Management Agreement (2)
                  10.02 Property Management Agreement dated as of November 1, 1988
                        by and between the Registrant and Public Storage Commercial
                        Properties Group, Inc. (4)
                  10.03 Property Management Agreement dated as of November 1, 1988
                        by and between the Registrant and Public Storage
                        Management, Inc. (4)
                  10.04 Agreement Relating to General Partner Interests (2)
                  10.05 Management Agreement dated March 1, 1998 by and between the
                        Registrant and Watson & Taylor Management, Inc., a Texas
                        corporation (filed herewith)
</TABLE>
 
                                       8

<PAGE>
<TABLE>
<S>    <C>        <C>                                                                 <C>
                  13.01 Registrant's Annual Report to Limited Partners for the year
                  ended December 31, 1998 (with the exception of the information
                        and data incorporated by reference in Items 7 and 8 of this
                        Annual Report on Form 10-K, no other information or data
                        appearing in the Registrant's Annual Report is to be deemed
                        filed as part of this report)
                  27   Financial Data Schedule (filed herewith)
(b)               Reports on Form 8-K--None
</TABLE>
 
------------------
(1)  Filed on the Registrant's Proxy Statement on Schedule 14A and incorporated
     herein by reference.
 
(2)  Filed as an exhibit to Registration Statement on Form S-11 (No. 2-88785)
     and incorporated herein by reference.
 
(3)  Filed as an exhibit to Registrant's Form 10-Q for the quarter ended March
     31, 1990 and incorporated herein by reference.
 
(4)  Filed as an exhibit to Registrant's Form 10-K for the year ended December
     31, 1988 and incorporated herein by reference.
 
                                       9
 <PAGE>
<PAGE>
                        CONSENT OF INDEPENDENT AUDITORS
 
To the Partners
Prudential-Bache/Watson & Taylor, Ltd.-2
 
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Prudential-Bache/Watson & Taylor, Ltd.-2 of our report dated February 10,
1999, included in the 1998 Annual Report to Limited Partners of
Prudential-Bache/Watson & Taylor, Ltd.-2.
 
Our audits also included the financial statement schedules of
Prudential-Bache/Watson & Taylor, Ltd.-2 listed in Item 14(a). These schedules
are the responsibility of the Partnership's management. Our responsibility is to
express an opinion based on our audits. In our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
 
/s/ Ernst & Young LLP
New York, New York
February 10, 1999
 
                                       10
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
 
          SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                               December 31, 1998
<TABLE>
-------------------------------------------------------------------------------------------------------
Allowance for Loss on Impairment of Assets
<CAPTION>
                                                                  Deductions - Amounts
 Year Ended         Balance at          Additions - Amounts        Written-off During       Balance at
December 31,     Beginning of Year      Reserved During Year              Year              End of Year
------------     -----------------      --------------------      --------------------      -----------
<S>              <C>                    <C>                       <C>                       <C>
    1996            $ 1,418,000               --                        --                  $ 1,418,000(1)
    1997            $ 1,418,000               --                        --                  $ 1,418,000(1)
    1998            $ 1,418,000               --                        --                  $ 1,418,000(1)
-------------------------------------------------------------------------------------------------------
(1) Shown as a direct deduction of carrying value of property held for sale.
</TABLE>
 
                                       11
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
             SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
                               December 31, 1998
<TABLE>
<CAPTION>
                                                                                              Amount at which carried at
                                                                                                     close of year
                                                                                    -----------------------------------------------
                                        Initial cost to                                                                Permanent
                                          Registrant                  Costs                                          writedown of
                                           (Note B)                capitalized                                      impaired assets
                                 -----------------------------      subsequent                                      and accumulated
         Description                            Buildings and           to                       Buildings and       depreciation
          (Note A)                  Land         Improvements      acquisition        Land        Improvements       (Notes C & D)
<S>                              <C>            <C>                <C>              <C>          <C>                <C>
-----------------------------    ----------     --------------     ------------     --------     --------------     ---------------
Hampton Park
(Capitol Heights, Maryland)      $  925,595       $       --       $ 3,274,366      $926,441       $3,273,520         $ 2,681,440
                                 ----------     --------------     ------------     --------     --------------     ---------------
                                 ----------     --------------     ------------     --------     --------------     ---------------
-----------------------------------------------------------------------------------------------------------------------------------
 
<CAPTION>
         Description             Total          Dates of          Date
          (Note A)              (Note C)      construction      acquired
<S>                              <C>          <C>               <C>
-----------------------------  ----------     -------------     --------
Hampton Park
(Capitol Heights, Maryland)    $1,518,521         1985/86         1984
                               ----------
                               ----------
---------------------------------------------------------------------------------
</TABLE>
                        See notes on the following page.
 
                                       12
<PAGE>
                    PRUDENTIAL-BACHE/WATSON & TAYLOR, LTD.-2
                            (a limited partnership)
                             NOTES TO SCHEDULE III
                               December 31, 1998
 
<TABLE>
NOTE A--There are no mortgages, deeds of trust or similar encumbrances against the remaining
  property.
NOTE B--Initial cost represents the initial purchase price of the property including acquisition
  fees.
NOTE C--RECONCILIATION SUMMARY OF TRANSACTIONS--REAL ESTATE
<CAPTION>

                                                                     Year ended December 31,
                                                             ----------------------------------------
                                                                1998          1997           1996
                                                             ----------    ----------    ------------
<S>                                                          <C>           <C>           <C>
Balance at beginning of year..............................   $1,518,521    $1,518,521    $ 22,792,224
Allocation of accumulated depreciation against the
  carrying amount of the properties based upon the
  reclassification of the properties as held for sale.....           --            --      (8,274,973)
Allocation of allowance for loss on impairment of assets
  against the carrying amount of the properties based upon
  the reclassification of the properties as held for
  sale....................................................           --            --      (1,418,000)
Additions during the year--property improvements                     --            --          51,988
Deductions during the year--costs of properties sold(1)...           --            --     (11,632,718)
                                                             ----------    ----------    ------------
Balance at close of year..................................   $1,518,521    $1,518,521    $  1,518,521
                                                             ----------    ----------    ------------
                                                             ----------    ----------    ------------
(1) In December 1996, the Registrant sold all of its properties except for Hampton Park.
</TABLE>
 
   The aggregate cost of land, buildings and improvements, and furniture and
fixtures, net of depreciation, for Federal income tax purposes as of December
31, 1998 was $2,148,203.
 
<TABLE>
NOTE D--RECONCILIATION SUMMARY OF TRANSACTIONS--ACCUMULATED DEPRECIATION
<CAPTION>
                                                                     Year ended December 31,
                                                             ----------------------------------------
                                                                1998          1997           1996
                                                             ----------    ----------    ------------
<S>                                                          <C>           <C>           <C>
Balance at beginning of year..............................   $       --    $       --    $  8,274,973
Depreciation during the year charged to expense(1)........           --            --              --
Allocation of accumulated depreciation against the
  carrying amount of the properties based upon the
  reclassification of the properties as held for sale.....           --            --      (8,274,973)
                                                             ----------    ----------    ------------
Balance at close of year..................................   $       --    $       --    $         --
                                                             ----------    ----------    ------------
                                                             ----------    ----------    ------------
</TABLE>
 
   (1) The Partnership ceased depreciating the properties for financial
reporting purposes when the properties were reclassified as held for sale as of
December 31, 1995.
 
                                       13
<PAGE>
                                   SIGNATURES
 
   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
Prudential-Bache/Watson & Taylor, Ltd.-2
 
By: Prudential-Bache Properties, Inc.,
    A Delaware corporation,
    Managing General Partner
 
     By: /s/ Stephen A. Tolbert                   Date: March 31, 1999
     ----------------------------------------
     Stephen A. Tolbert
     Vice President and
     Chief Accounting Officer
 
   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities (with respect to the General Partner) and on
the dates indicated.
 
By: Prudential-Bache Properties, Inc.,
    A Delaware corporation,
    Managing General Partner
 
    By: /s/ Brian J. Martin                       Date: March 31, 1999
    -----------------------------------------
    Brian J. Martin
    President, Chief Executive Officer,
    Chairman of the Board of Directors and
    Director
 
    By: /s/ Barbara J. Brooks                     Date: March 31, 1999
    -----------------------------------------
    Barbara J. Brooks
    Vice President-Finance and
    Chief Financial Officer
 
    By: /s/ Stephen A. Tolbert                    Date: March 31, 1999
    -----------------------------------------
    Stephen A. Tolbert
    Vice President
 
    By: /s/ Frank W. Giordano                     Date: March 31, 1999
    -----------------------------------------
    Frank W. Giordano
    Director
 
    By: /s/ Nathalie P. Maio                      Date: March 31, 1999
    -----------------------------------------
    Nathalie P. Maio
    Director
                                       14