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                                                                   EXHIBIT 10.26
 
                             EMPLOYMENT AGREEMENT
                             --------------------


     EMPLOYMENT AGREEMENT (the "Agreement"), effective as of the 14th day of
December 1998, between Prodigy Communications Corporation, a Delaware
corporation (the "Company"), with its principal place of business at 44 South
Broadway, White Plains, New York 10601, and David Trachtenberg, residing at 1827
19th St. NW, Washington, DC  20009 (the "Executive").

     WHEREAS, the Company desires to employ the Executive as President and Chief
Operating Officer of the Company, and the Executive desires to be employed in
that capacity;

     NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
agree as follows:

1.   Term of Employment.
     ------------------ 

     The Company hereby agrees to employ the Executive, and the Executive hereby
accepts employment with the Company, upon the terms set forth in this Agreement,
for the period commencing on December 14, 1998 (the "Commencement Date"), and
ending on December 31, 2001 (the "Employment Period"), unless sooner terminated
in accordance with the provisions of Section 4.

2.   Title; Capacity.
     --------------- 

     The Executive shall serve as President and Chief Operating Officer of the
Company.  The Executive shall be based in White Plains, New York or such other
place within the greater New York metropolitan area as the Board of Directors of
the Company (the "Board") shall determine.  The Executive shall report to and be
subject to the supervision of, and shall have such authority as is delegated to
Executive by the Company's Chief Executive Officer.

     The Executive hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position, and such other duties and
responsibilities as the Chief Executive Officer shall from time to time assign
to the Executive.  The Executive shall devote Executive's entire business time,
attention and energies to the business and interests of the Company during the
Employment Period.  The Executive shall abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company.

3.   Compensation and Benefits.
     ------------------------- 

     3.1  Salary.  The Company shall pay the Executive, in accordance with its
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     normal payroll practices, an annual base salary of $224,000 commencing on
     the Commencement Date. Based on performance, such salary shall be subject
     to increase consistent with existing merit increase guidelines.

     3.2  Performance Bonuses.  Effective January 1, 1999, the Executive shall 
          -------------------
     be eligible to participate in an annual bonus plan and receive up to 50% of
     his annual base salary as a
<PAGE>
 
     performance bonus during each calendar year of the Employment Period.
     During each such year, 50% of such bonus shall be contingent upon the
     successful completion of personal goals as mutually agreed between the
     Executive and the Chief Executive Officer, and 50% of such bonus shall be
     contingent upon the successful completion of corporate goals as determined
     by the Company. Such performance bonus shall be determined and paid within
     45 days after the end of each such calendar year during the Employment
     Period.

     3.3  Sign-On Bonus.  The Company shall pay the Executive a guaranteed 
          -------------
     sign-on bonus of $74,000, less applicable withholdings, payable on the
     Commencement Date.

     3.4  Option Grant.
          ------------ 

          (a)  The Company shall grant the Executive stock options to purchase
     375,000 shares of common stock of the Company at an exercise price equal to
     $1.00 per share, and 125,000 shares of common stock of the Company at an
     exercise price equal to $2.15 per share. These options shall vest in three
     (3) equal annual installments (except as otherwise provided in Section
     5.3), with the first vesting to occur on the first anniversary of the
     Commencement Date, and the second and third vestings to occur on the second
     and third anniversary dates, respectively. In the event of a change in
     control of the Company (as defined in Section 4.3) the vesting schedule for
     then unvested options will be accelerated so that a total of 50% of each
     option grant (or such lesser amount as may then be outstanding) will vest
     on the effective date of the change of control. Thereafter, the vesting
     schedule for the remaining outstanding options shall remain unchanged.

     (b)  In addition to the option grant set forth in the preceeding section,
     the Company agrees to consider in good faith on an annual bases the grant
     of additional stock options to Executive.

          (c)  The Executive, if requested by the Company and the managing
     underwriter of the initial public offering of the Company's securities (the
     "IPO"), shall not sell publicly or otherwise transfer or dispose of any
     securities of the Company held by the Executive for a specified period of
     time (not to exceed 270 days), following the effective date of the
     registration statement for the IPO; provided that all then executive
                                         -------------
     officers, directors and holders of 5% or more of the outstanding stock of
     the Company enter into similar agreements. The Executive acknowledges that
     no representations have been made to him concerning the size, occurrence,
     valuation or timing of any IPO.

     3.5  Fringe Benefits.  The Executive shall be entitled to participate in 
          ---------------
     all fringe benefit programs that the Company establishes and makes
     available to its employees from time to time to the extent that Executive's
     position, tenure, salary, age, health and other qualifications make him
     eligible to participate. The Executive's vacation entitlement shall be four
     weeks per year.

     3.6  Reimbursement of Expenses.  The Company shall reimburse the 
          -------------------------
     Executive for all reasonable travel, entertainment and other expenses
     incurred or paid by the Executive in connection with the performance of his
     duties hereunder, upon presentation by the Executive of documentation,
     expense statements, vouchers and/or such other supporting information as
     the Company may request; provided, however, that the nature and amount of
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     such expenses shall be subject to the Company's expense policies as in
     effect from time to time.
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     3.7  Commutation Expenses:  Executive shall use best reasonable efforts to
          ---------------------                                                
     relocate to the greater New York metropolitan area within six months of the
     Commencement Date.  For the first six months following the Commencement
     Date (the "Commutation Period") the Company shall reimburse the Executive
     for air or ground travel between Washington, D.C. and New York and related
     ground transportation costs, not to exceed one round trip per week.
     Executive agrees to use best efforts to minimize such commutation expenses
     through advance bookings.    Additionally, the Company will reimburse
     Executive for other, reasonable and appropriate business related expenses
     incurred during the Commutation Period, upon presentation by the Executive
     of documentation, expense statements, vouchers and/or such other supporting
     information as the Company may request.

     3.8  Relocation Expenses ; Housing Allowance.   During the Commutation 
          ---------------------------------------
     Period, the Company shall reimburse Executive for his reasonable housing
     expenses in the greater New York metropolitan area. The parties contemplate
     that during the first few weeks of employment such expenses shall be
     comprised of hotel charges. At such time as Executive identifies a suitable
     furnished corporate apartment for lease, the Company shall make the lease
     payments directly to the landlord for the remainder of the Commutation
     Period.

          The Company shall reimburse Executive for reasonable expenses incurred
     by Executive in relocating to the greater New York metropolitan area.
     Following relocation, the Company shall pay to Executive a housing
     allowance of $3,500 per month. The housing allowance will be included in
     the Executive's biweekly paychecks and will be subject to applicable
     withholding.

     3.9  Reimbursement for Legal Expenses.  The Company will reimburse
          --------------------------------                             
     Executive for reasonable attorneys' fees incurred in connection with the
     review of this Employment Agreement.

     3.10  Car Allowance.  The Company shall reimburse Executive for those
           -------------                                                  
     amounts paid by Executive in connection with the cancellation of his
     current car leasing arrangement, such amount not to exceed $5,000.
     Additionally, the Company shall provide Executive with a car allowance of
     $2,166 per month.  The car allowance will be included in the Executive's
     biweekly paychecks and will be subject to applicable withholding.
 
4.   Employment Termination
     ----------------------

     The employment of the Executive pursuant to this Agreement shall terminate
upon the occurrence of any of the following:

     4.1  At the election of the Company, for Cause (as hereinafter defined)
     immediately upon written notice by the Company to the Executive. For
     purposes of this Agreement, "Cause" shall mean (a) a good faith finding by
     the Board, after notice to the Executive and an opportunity to be heard, of
     the failure of the Executive to perform his reasonably assigned duties, or
     the Executive's gross dishonesty, gross negligence or gross misconduct, or
     (b) the conviction of the Executive of, or the entry of a plea of guilty or
     nolo contendere by the Executive to, any felony;
 
     4.2  Thirty days after the death or Disability (as hereinafter defined) of
     the Executive.
<PAGE>
 
     For purposes of this Agreement, "Disability" shall mean the inability of
     the Executive, due to a physical or mental disability, for a period of 90
     days, whether or not consecutive, during any 360-day period to perform,
     with or without reasonable accommodation, the services contemplated under
     this Agreement. A determination of Disability shall be made by a physician
     satisfactory to both the Executive and the Company; provided that if the
                                                         -------- ----
     Executive and the Company do not agree on a physician, the Executive and
     the Company shall each select a physician and these two together shall
     select a third physician, whose determination as to Disability shall be
     binding on all parties; or

     4.3  At the election of the Executive, upon written notice of termination,
     for Good Reason (as hereinafter defined). For purposes of this Agreement,
     "Good Reason" shall mean (i) any significant diminution in the duties of
     the Executive under this Agreement or (ii) the Company's requirement that
     the Executive relocate beyond the greater New York metropolitan area, or
     (iii) if there is a change in control of the Company so that a single
     person or entity or an affiliated group of persons or entities has control
     of the Company (as control is understood under the Internal Revenue Code or
     securities laws of the US) as a result of which Executive's employment with
     the Company is involuntarily terminated.

     4.4  At the election of the Executive, upon not less than four (4) weeks'
     prior written notice of termination, or at the election of the Company,
     upon written notice of termination.

     4.5  Upon the expiration of the Employment Contract.

5.   Effect of Termination.
     --------------------- 

     5.1  Termination for Cause or at Election of the Executive. In the event 
          -----------------------------------------------------
     the Executive's employment is terminated for Cause pursuant to Section 4.1,
     or the Executive's employment is terminated at the election of the
     Executive pursuant to Section 4.4, the Company shall, through the last day
     of his actual employment by the Company, continue to pay to the Executive
     his base salary as in effect on the date of notice of termination and
     continue to provide to the Executive the fringe benefits available to him
     under Section 3.5 hereof, as of the last day of actual employment.

     5.2  Termination for Death or Disability.  If the Executive's employment is
          -----------------------------------                                   
     terminated due to death or Disability pursuant to Section 4.2, the Company
     shall continue to pay to the estate of the Executive or to the Executive,
     as the case may be, for a period of 90 days after termination of employment
     due to death or Disability, the Executive's base salary as in effect on the
     date of termination.

     5.3  Termination by the Executive for Good Reason or at Election of the 
          ------------------------------------------------------------------
     Company. If the Executive's employment is terminated by the Executive for
     -------
     Good Reason pursuant to Section 4.3 or at the election of the Company
     pursuant to Section 4.4, the Company shall, during the Severance Period (as
     hereinafter defined), continue to pay to the Executive his base salary as
     in effect on the date of notice of termination and continue to provide to
     the Executive the fringe benefits available to him as of the date of notice
     of termination under Section 3.5. In addition, the Company shall, for the
     first six months of the Severance Period, continue to pay the allowances
     specified in Sections 3.8 and 3.10. . Further, a pro rata share of the
     performance bonus referenced in Section 3.2 shall be paid to the Executive
<PAGE>
 
     covering the period from the beginning of the calendar year up to the date
     of termination. For the purposes of this Section 5.3, the performance bonus
     referenced in Section 3.2 shall be calculated as 50% the Executive's annual
     base salary. For purposes of this Agreement, the "Severance Period" shall
     mean a period of six (6) months after such termination, increasing by one
     month for every six months (or part thereof) of Executive's employment with
     the Company, but in no event to exceed twelve months in the aggregate.
     Additionally, option vesting shall be accelerated so that as of the
     termination date, one-half of the then unvested options granted at each
     strike price shall be vested. No further options shall vest within the
     Severance Period. The Executive shall have one year after the termination
     date to exercise the vested options. If this paragraph conflicts with any
     applicable Stock Option Agreement, this paragraph shall control.

     5.4  Termination at Expiration of Contract.  If, prior to December 31, 
          -------------------------------------
     2001, the Company has not offered to renew the Employment Contract on terms
     at least equal to those contained herein as modified during the Employment
     Period by mutual agreement of the parties and for a term of not less than
     one (1) year, the Company shall continue to pay the Executive his base
     salary in effect on the date of termination for a period of six (6) months
     after such termination and Executive shall remain eligible to receive a
     performance bonus, calculated in accordance with Section 3.2. In addition,
     during this six-month period, the Company shall also provide to the
     Executive the fringe benefits available to him under Section 3.5 as well as
     pay to the Executive, during the first three months of the six-month
     period, the allowances specified in Sections 3.8 and 3.10. If Executive is
     terminated under this Section 5.4, the "Severance Period" for the purposes
     of Section 6 will be six (6) months.

     5.5  Survival.  The provisions of Sections 3.3, 5.2, 5.3 and 5.4 shall 
          --------
     survive the expiration or termination of this Agreement under the
     circumstances specified in those Sections for the periods specified in such
     Sections. Sections 6 and 7 shall survive the termination of this Agreement.

6.   Non-Compete.
     ----------- 

     (a)  During the Executive's active employment and for the Severance Period,
     the Executive will not:

          (i)    be a partner, stockholder (other than as the holder of not more
          than one percent (1%) of the total outstanding stock of), officer,
          employee, consultant, director, joint venturer, investor or lender of
          or to America Online, Inc., CompuServe Corporation, Microsoft Network,
          AT&T WorldNet, Netcom On-Line Communications Services, Inc., EarthLink
          Network, Inc., MindSpring Enterprises, Inc., or any corporation or
          other entity acquiring any of the foregoing; or involved in providing
          Internet Access ervices that compete directly with Prodigy; or

          (ii)   directly or indirectly recruit, solicit or induce, or attempt
          to induce, any employee or employees of the Company to terminate their
          employment with, or otherwise cease their relationship with the
          Company; or

          (iii)  directly or indirectly solicit, divert or take away, or attempt
          to divert or to take away, the business or patronage of any of the
          clients, customers or accounts,
  
<PAGE>
 
          or prospective clients, customers or accounts, of the Company,
          including but not limited to those clients, customers or accounts
          which were contacted, solicited or served by the Executive while
          employed by the Company.

     (b)  If any restriction set forth in this Section 6 is found by any court
     of competent jurisdiction to be unenforceable because it extends for too
     long a period of time or over too great a range of activities or in too
     broad a geographic area, it shall be interpreted to extend only over the
     maximum period of time, range of activities or geographic area as to which
     it may be enforceable.

     (c)  The restrictions contained in this Section 6 are necessary for the
     protection of the business and goodwill of the Company and are considered
     by the Executive to be reasonable for such purposes. The Executive agrees
     that any breach of this Section 6 will cause the Company substantial and
     irrevocable damage and therefore, in the event of any such breach, in
     addition to such other remedies which may be available, the Company shall
     have the right to seek specific performance and injunctive relief.

     (d)  Unless the context otherwise requires, all references in this Section
     6 and in Section 7 below to the "Company" shall include all current or
     future subsidiaries or affiliates of the Company.

7.   Proprietary Information and Developments.
     ---------------------------------------- 

     7.1  Proprietary Information.
          ----------------------- 

          (a)  The Executive agrees that all information and know-how related to
          the activities of the Company, whether or not in writing, of a
          private, secret or confidential nature concerning the Company's
          business or financial affairs (collectively, "Proprietary
          Information") is and shall be the exclusive property of the Company.
          By way of illustration, but not limitation, Proprietary Information
          may include inventions, products, processes, methods, techniques,
          formulas, compositions, compounds, projects, developments, plans,
          research data, clinical data, financial data, personnel data, computer
          programs, and customer and supplier lists. The Executive will not
          disclose any Proprietary Information to others outside the Company or
          use the same for any unauthorized purposes without written approval by
          an officer of the Company, either during or after his employment,
          unless and until such Proprietary information has become public
          knowledge without fault by the Executive.

          (b)  The Executive agrees that all files, letters, memoranda, reports,
          records, data, sketches, drawings, laboratory notebooks, program
          listings, or other written, photographic, or other tangible material
          containing Proprietary Information, whether created by the Executive
          or others, which shall come into his custody or possession, shall be
          and are the exclusive property of the Company to be used by the
          Executive only in the performance of his duties for the Company.

          (c)  The Executive agrees that his obligation not to disclose or use
          information, know-how and records of the types set forth in paragraphs
          (a) and (b) above, also extends to such types of information, know-
          how, records and tangible property of customers of the Company or
          suppliers to the Company or other third parties who 
<PAGE>
 
          may have disclosed or entrusted the same to the Company or to the
          Executive in the course of the Company's business.

     7.2  Developments.
          ------------ 

          (a)  The Executive will make full and prompt disclosure to the Company
          of all inventions, improvements, discoveries, methods, developments,
          software, and works of authorship, related to the activities of the
          Company, whether patentable or not, which are created, made, conceived
          or reduced to practice by the Executive or under his direction or
          jointly with others during his employment by the company, whether or
          not during normal working hours or on the premises of the Company (all
          of which are collectively referred to in this Agreement as
          "Developments").

          (b)  The Executive agrees to assign and does hereby assign to the
          Company (or any person or entity designated by the Company) all his
          right, title and interest in and to all Developments and all related
          patents, patent applications, copyrights and copyright applications.
          The Executive also acknowledges that all work fixed in a tangible
          medium of expression shall be deemed a work made for hire under the US
          Copyright Act such that the work is owned by the Company at the moment
          of creation.

          (c)  The Executive agrees to cooperate fully with the Company, both
          during and after his employment with the Company, with respect to the
          procurement, maintenance and enforcement of copyrights and patents
          (both in the United States and foreign countries) relating to
          Developments. The Executive shall sign all papers, including, without
          limitation, copyright applications, patent applications, declarations,
          oaths, formal assignments, assignment of priority rights, and powers
          of attorney, which the Company may deem necessary or desirable in
          order to protect its rights and interests in any Development.

     7.3  Other Agreements.  The Executive hereby represents that his 
          ---------------- 
     performance of all the terms of this Agreement and as an employee of the
     Company does not and will not breach the terms of any agreement with any
     previous employer or other party to refrain from using or disclosing any
     trade secret, confidential or proprietary information, knowledge or data
     acquired by him in confidence or in trust prior to his employment with the
     Company or to refrain from competing, directly or indirectly, with the
     business of such previous employer or any other party.

8.   Notices.  All notices required or permitted under this Agreement shall be 
     -------
in writing and shall be deemed effective upon personal delivery or upon sending,
by registered or certified mail, postage prepaid, addressed to the other party
at the address shown above, or at such other address or addresses as either
party shall designate to the other in accordance with this Section 8.

9.   Pronouns.  Whenever the context may require, any pronouns used in this
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Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.

10.  Entire Agreement.  This Agreement constitutes the entire agreement between
     ----------------                                                          
the parties and supersedes all prior agreements and understandings, whether
written or oral, relating to the 
<PAGE>
 
subject matter of this Agreement, except that the Agreement Regarding
Confidential Information, the Prodigy Business Conduct Guidelines, and other
documents executed on the commencement of employment, shall remain in full force
and effect.

11.  Amendment.    This Agreement may be amended or modified only by a written
     ---------                                                                
instrument executed by both the Company and the Executive.

12.  Governing Law.  This Agreement shall be construed, interpreted and enforced
     -------------                                                              
in accordance with the laws of the State of New York in the United States,
without reference to conflict of law principles.

13.  Successors and Assigns.  This Agreement shall be binding upon and inure to
     ----------------------                                                    
the benefit of both parties and their respective successors and assigns,
including any corporation with which or into which the Company may be merged or
which may succeed to its assets or business; provided, however, that the
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obligations of the Executive are personal and shall not be assigned by him.

14.  Miscellaneous.
     ------------- 

     14.1  No delay or omission by either the Company or the Executive in
     exercising any right under this Agreement shall operate as a waiver of that
     or any other right. A waiver or consent given by either the Company or the
     Executive on any one occasion shall be effective only in that instance and
     shall not be construed as a bar or waiver of any right on any other
     occasion.

     14.2  The captions of the sections of this Agreement are for convenience of
     reference only and in no way define, limit or affect the scope or substance
     of any section of this Agreement.

     14.3  In case any provision of this Agreement shall be invalid, illegal or
     otherwise unenforceable, the validity, legality and enforceability of the
     remaining provisions shall in no way be affected or impaired thereby.


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year set forth above.


                                             PRODIGY COMMUNICATIONS CORPORATION


                                             By: /s/ Samer Salameh
                                                 ------------------------

                                             Title:____________________________


                                             EXECUTIVE


                                             /s/ David Trachtenberg
                                             ----------------------------------
                                                     David Trachtenberg