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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                            ------------------------
                                   FORM 10-K

(MARK ONE)

<TABLE>
<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                       OR

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                       COMMISSION FILE NUMBER: 000-25333
                            ------------------------
                       PRODIGY COMMUNICATIONS CORPORATION

             (Exact Name of Registrant as Specified in Its Charter)

<TABLE>
<S>                                                                 <C>
                          DELAWARE                                               04-3323363
      (State or other jurisdiction of incorporation.)               (I.R.S. Employer Identification No.)
      6500 RIVER PLACE BLVD., BLDG. III, AUSTIN, TEXAS                             78730
          (Address of principal executive offices)                               (Zip Code)
</TABLE>

                                  512-527-1500
              Registrant's telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
               TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
               -------------------                 -----------------------------------------
<S>                                                <C>
                      None
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, par value $.01 per share

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                                (Title of Class)

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                                (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 /X/  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 the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. No / /

    The aggregate market value of the Class A common equity held by
non-affiliates of the Registrant as of March 15, 2001 was $76,670,536. For this
purpose, any officer, director and known 5% stockholder is deemed to be an
affiliate.

    The number of shares of the registrant's Class A Common Stock outstanding on
March 15, 2001 was 70,245,820.

                      DOCUMENTS INCORPORATED BY REFERENCE

    Specifically identified portions of the registrant's definitive proxy
statement to be filed in connection with the registrant's 2001 annual meeting of
stockholders are incorporated by reference into Part III.

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<PAGE>
                                     INDEX

<TABLE>
<CAPTION>
ITEM                    DESCRIPTION
----                    -----------
<S>                     <C>                                                           <C>
                                         PART I

Item 1                  Business....................................................    1
Item 2                  Properties..................................................   18
Item 3                  Legal Proceedings...........................................   18
Item 4                  Submission of Matters to a Vote of Security Holders.........   20

                                         PART II

Item 5                  Market for Registrant's Common Equity and Related
                          Stockholder Matters.......................................   21
Item 6                  Selected Financial Data and Supplementary Data..............   22
Item 7                  Management's Discussion and Analysis of Financial Condition
                          and Results of Operations.................................   26
                        Certain Factors That May Affect Future Operating Results....   36
Item 7A                 Quantitative and Qualitative Disclosures About Market
                          Risk......................................................   43
Item 8                  Financial Statements........................................   44
Item 9                  Changes in and Disagreements with Accountants on Accounting
                          and Financial Disclosure..................................   73

                                        PART III

Item 10                 Directors and Executive Officers of the Registrant..........   73
Item 11                 Executive Compensation......................................   73
Item 12                 Security Ownership of Certain Beneficial Owners and
                          Management................................................   73
Item 13                 Certain Relationships and Related Transactions..............   73

                                         PART IV

Item 14                 Exhibits, Financial Statement Schedules, and Reports on Form
                          8-K.......................................................   74
</TABLE>

    This report on Form 10-K includes "forward-looking statements," including
statements containing the words "believes", "anticipates", "expects", and words
of similar import. All statements other than statements of historical fact
included in this report including, without limitation, such statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" and elsewhere herein, regarding Prodigy or any of the
transactions described herein, including the timing, financing, strategies and
effects of such transactions and Prodigy's growth strategy and anticipated
actual results to differ materially from expectations are disclosed in this
report, including, without limitation, in conjunction with the forward-looking
statements in this report and under the heading "Certain Factors That May Affect
Future Operating Results" under Item 7.

    Prodigy, the Prodigy globe/orb logo and Prodigy Internet are registered
trademarks, and "Are You A Prodigy?", the "Are You A Prodigy?" logo, "It's a
tool for living", "Prodigy Classic", the Prodigy Internet logo, Prodigy Instant
Messaging-TM-, Prodigy Message Manager and Prodigy MailLink are trademarks of
Prodigy. All other brand or product names may be trademarks or registered
trademarks of their respective owners.
<PAGE>
PART I.

ITEM 1. BUSINESS

    Prodigy is a leading nationwide Internet service provider ("ISP") that
provides fast and reliable Internet access and other Internet-based services.
Prodigy's nationwide Internet service offering, customer base and
well-recognized brand name have resulted in 2.8 million owned and managed
subscribers as of December 31, 2000. Prodigy has nationwide brand recognition
and customer acquisition not available to regional and local Internet service
providers through its marketing and strategic relationship with SBC
Communications ("SBC"), one of the world's largest telecommunications providers.
Prodigy utilizes a nationwide network covering over 850 locations in all 50
states. This network allows approximately 90% of the United States population to
access Prodigy's services with a local telephone call. Prodigy believes its
scalable technology and business model allow it to grow cost-effectively without
significant capital expenditures.

    In 2000, Prodigy saw consumer adoption of broadband Internet access,
particularly digital subscriber line ("DSL") access, increase significantly
because it allows users to access the Internet at speeds up to 50 times faster
than a conventional dial-up connection. Faster connection speeds will allow
users to access richer media content, including movies, audio, video clips and
networked gaming. Prodigy introduced its Prodigy DSL access service in 2000. The
service includes a DSL line as well as access to Prodigy's DSL homepage.

    Effective January 1, 2001, Prodigy entered into an exclusive relationship
with SBC to provide Prodigy's DSL homepage and other services to SBC's DSL
customers in the 13 states served by SBC. The new arrangement allows Prodigy to
participate in the growth of the DSL marketplace without having to incur the
costs of the DSL line, customer acquisition, customer care and billing. Jupiter
research firm estimates there will be nearly 30 million broadband households
(DSL will account for 12 million of these) by the end of 2001. With its
relationship with SBC, Prodigy can grow its managed DSL subscriber base
primarily through SBC channels.

    Prodigy enables subscribers to use the Internet for communications,
information and entertainment. Prodigy users receive fast and reliable access to
the Internet, Prodigy-branded and partner-branded content; email, Prodigy
Instant Messaging-TM- and other communications tools; and many personalized
member services, including personal Web pages and communities. Prodigy is
expanding its Web-hosting and electronic commerce, transaction-based and
communication services for business customers. Prodigy believes that its
extensive experience in operating a large data center with electronic commerce
and communication applications position it well for growth in these areas.
Prodigy has introduced or is introducing various high-speed Internet offerings,
including its first broadband homepage, as well as Internet-based services such
as Web-based email, chat, personal Web pages, instant messaging, and bill
payment services.

    Prodigy has been an online pioneer since its inception in 1984. Prodigy
launched Prodigy Classic as the world's first consumer-focused online service in
1988. Prodigy Classic featured custom content, email and chat rooms, and was
based on technologies owned by Prodigy. In October 1996, Prodigy launched
Prodigy Internet, a service allowing consumers with any computer operating
system to access the Internet. Prodigy Classic was discontinued in
October 1999, when customers were transitioned to a new Prodigy homepage. Since
the autumn of 1997, Prodigy has focused on expanding its subscriber base and
introducing additional Internet-based services. Prodigy has also used outside
companies for network coverage, customer support and content. Due to these
initiatives, Prodigy has substantially reduced its fixed operating costs and has
robust new channels for dial-up and managed DSL subscriber growth.

                                       1
<PAGE>
INDUSTRY BACKGROUND

    GROWTH OF THE INTERNET AND ELECTRONIC COMMERCE

    The Internet is a collection of computer networks that links millions of
public and private computers to form the largest computer network in the world.
It has become an important global communications medium, enabling millions of
people to obtain and share information and conduct business electronically, and
a critical tool for information and communications for many users. The Internet
has grown rapidly in recent years, both in the number of Web users and Web
sites. Many factors are driving the growth in the number of Web users and Web
sites, including:

    - large and growing number of personal computers and other hand-held
      devices;

    - declining cost of computers and other devices;

    - advances in the performance and speed of personal computers and modems;

    - easier and alternative access to the Internet; and

    - increasing importance of the Internet for communications, information and
      commerce.

    EVOLUTION OF THE INTERNET SERVICES MARKETPLACE

    Today, the Internet services market consists primarily of Internet access.
Access services include dial-up access and high-speed broadband access. The
rapid development and growth of the Internet have resulted in a highly
fragmented industry, consisting of several thousand Internet service providers
in the United States, most of which operate as small, local businesses. The
Internet services industry is already experiencing consolidation, which is
expected to continue over the next few years.

    Internet service providers vary widely in geographic coverage, customer
focus, and the nature and quality of services provided to subscribers. Few
Internet service providers offer nationwide coverage, have a brand name with
nationwide recognition, or can grow significantly without additional investment
in infrastructure. Internet service providers may concentrate on specific types
of customers that differ from the target markets of other Internet service
providers. Services offered by Internet service providers can range from simple
dial-up access to highly organized, personalized access coupled with value-added
services. Prodigy believes that consumers generally focus on speed and
reliability of access, ease of use, customer service and price as they evaluate
an Internet service provider.

    Prodigy is seeing more consumers interested in high-speed broadband access
that provides an "instantly on" Internet environment, where consumers can access
their homepage, go to their favorite Web sites, send video files to family
members, or download new music files--quickly and conveniently. Prodigy believes
it will rapidly add managed DSL subscribers through its relationship with SBC.

THE PRODIGY SOLUTION

    Prodigy provides fast and reliable Internet access and other value-added
Internet-based services. Prodigy intends to meet the rapidly changing needs of
its customers by offering new products and additional Internet-based services as
demand arises. Prodigy believes the following competitive strengths position it
to meet this goal:

    NATIONWIDE BRAND NAME RECOGNITION:  Since the introduction of its original
service in 1988, Prodigy has established substantial nationwide brand
recognition it believes offers a significant competitive advantage in attracting
new subscribers. Prodigy and SBC, as the sales agent of Prodigy's services, use
a variety of advertising, promotional and distribution channels to leverage
their brand names. As part of their strategic marketing agreements, Prodigy
co-brands its service with SBC's, one of the world's most recognized and admired
telecommunications brands.

                                       2
<PAGE>
    NATIONWIDE CUSTOMER ACQUISITION CHANNELS:  Prodigy has a variety of
arrangements to acquire customers, including:

    - a relationship with SBC, including its family of companies that serve
      customers in 13 states (California, Nevada, Connecticut, Texas, Missouri,
      Arkansas, Oklahoma, Kansas, Illinois, Indiana, Ohio, Michigan and
      Wisconsin);

    - contract acquisition programs with selected major PC manufacturers;

    - bundling with PCs shipped by leading PC manufacturers;

    - a relationship with Microsoft that includes Prodigy software with every
      copy of Windows 98 and Windows 2000 for sale in retail channels and
      Prodigy's participation in Microsoft's Internet Referral Service Program;

    - Web-based marketing;

    - retail channels;

    - direct mail and telemarketing; and

    - television, radio, outdoor, online and print advertising.

    Prodigy believes many of these customer acquisition channels are not
available to regional and local Internet service providers that lack a
nationwide presence. For example, Prodigy is the exclusive ISP (dial-up and DSL)
marketed and promoted by SBC. Prodigy software is included on PCs shipped by
many leading PC manufacturers.

    SCALABLE BUSINESS MODEL:  Prodigy has created a business and operating model
that it believes can accommodate sustained subscriber growth cost-effectively
without significant capital expenditures. Prodigy out-sources major capital and
labor-intensive functions to companies that it believes can provide scalable and
dependable network coverage, customer service and organized content. Under
Prodigy's new agreement with SBC, SBC is responsible for networking, customer
care, billing and customer acquisition costs for SBC's DSL and business dial-up
customers. For Prodigy's dial-up Internet service, network usage and customer
cost are variable and generally increase only as the subscriber base increases.
In addition, Prodigy email, customer authentication and profiling systems have
been developed in-house to support a large number of customers. Prodigy's
existing data-hosting facilities have the capacity to support millions of
additional subscribers.

    FAST AND RELIABLE SERVICE:  Prodigy offers fast and reliable Internet
connections. Prodigy Internet dial-up subscribers have direct Internet access at
speeds of up to 56 kilobits per second. Prodigy DSL subscribers have access up
to 1.5mbs downstream and 128kbps upstream. Prodigy's email capabilities are
inherently reliable and stable with robust proprietary features to protect
members from spam email, computer virus outbreaks and the ability to handle
attachments in original formatting. Prodigy Everywhere-TM- allows users to
utilize any computer with an Internet connection to connect to their Prodigy
account and access email or personalized content. In 2000, Prodigy reported
99.9% network uptime, allowing customers to connect to the Internet and stay
connected.

    NATIONWIDE NETWORK COVERAGE:  The networks used to offer the Prodigy service
cover over 850 locations in all 50 states, and Prodigy offers high-speed DSL
access in 48 states. The networks can provide dial-up access, with a local
telephone call, to approximately 90% of the households in the United States.
Prodigy also offers network access via an 800 telephone number for $.10 per
minute without an additional enrollment charge. Prodigy believes there is a
significant competitive advantage to offering nationwide, dial-up Internet
access capabilities to DSL subscribers when they travel away from their DSL
connection. With Prodigy MailLink-TM-, Prodigy subscribers can access their
Prodigy email and homepage from any computer with an Internet connection.

                                       3
<PAGE>
    SUPERIOR CUSTOMER EXPERIENCE:  In addition to being easy to use and highly
reliable, Prodigy believes Prodigy Internet offers a productive and rewarding
customer experience. Prodigy's customer services include toll-free telephone
support, various online support options and an online "members helping members"
program. Prodigy manages a distributed call center policy over multiple
outsourcing partners which distributes its customer service calls to
significantly reduce call-waiting times. Prodigy accepts banner advertisements
and sponsorships, but does not currently generate pop-up advertisements, which
appear on smaller screens that automatically overlay the user's PC screen.
Prodigy also offers a program that rewards subscribers for their loyalty with
points that can be redeemed for gift certificates at selected retail stores.

BUSINESS STRATEGY

    Prodigy's objectives are to strengthen its position as a leading nationwide
Internet service provider, to maintain its leadership as the ISP serving the
largest number of DSL subscribers, and to expand the range of services it offers
and markets it serves. Key elements of Prodigy's business strategy include:

    LEVERAGE STRONG BRAND NAME:  Prodigy intends to increase its brand equity by
promoting the Prodigy brand in marketing and advertising activities, as well as
in co-branding opportunities with SBC within its 13-state region. SBC's family
of operating companies, including Southwestern Bell, Pacific Bell, Nevada Bell,
Ameritech, and Southern New England Telephone, has significant brand awareness
and brand loyalty among customers.

    INTRODUCE NEW SERVICES:  In 2000, Prodigy introduced new communications and
entertainment tools, including Message Manager-TM-, Prodigy Everywhere-TM-,
Prodigy Radio-Registered Trademark- powered by Windows Media-TM- Technology and
Prodigy Media Player. Prodigy also introduced its high-speed access Prodigy DSL
in 2000. Through its relationship with SBC and on its own, Prodigy acquired
425,000 billable and managed DSL customers in 2000.

    EVALUATE PARTNERSHIPS:  Prodigy evaluates potential partnerships that offer
new and different customer experiences and content for Prodigy subscribers. In
2000, Prodigy announced plans to partner with Varsity Television ("VTV"), the
first and only online television network exclusively dedicated to real high
school life. Prodigy provides Web hosting and technical support to VTV, and
promotes VTV on the Prodigy homepage. VTV promotes Prodigy's high-speed DSL
service on its site, and co-markets Web-based products for teens and high
schools. Prodigy has exclusive rights to certain content available on myvtv.com.
Prodigy also owns ten percent of VTV.

    EVALUATE ACQUISITION OPPORTUNITIES:  Prodigy evaluates acquisition
opportunities on an ongoing basis. At any given time, Prodigy may be engaged in
discussions with respect to possible acquisitions or other business
combinations. Prodigy may seek strategic acquisitions that can complement its
current or planned business activities. The Internet services industry is
expected to undergo substantial consolidation over the next few years, and
Prodigy may also seek to acquire other Internet service providers as an
additional means of customer acquisition or to enter into new markets.

PRODUCTS AND SERVICES

    PRODIGY INTERNET

    Prodigy offers Internet service, with dedicated homepages, for both dial-up
and DSL customers. Prodigy is an open standards-based Internet access service,
allowing consumers with any computer and/or operating system to access the
Internet. The Prodigy service combines the depth and breadth of the Internet
with the ease-of-use and clean, simple organization of a traditional online
service. Prodigy users receive fast and reliable access to the Internet,
Prodigy-branded and partner-branded content, and other Prodigy member services.

                                       4
<PAGE>
    The Prodigy dial-up service provides subscribers with, among other services:

    - direct Internet access;

    - multiple electronic mailboxes enabling subscribers to send and receive an
      unlimited number of text, graphics and multimedia messages;

    - SpamShield-TM---a powerful software program that blocks unsolicited junk
      email ("Spam-mail");

    - 6MB of space on the Prodigy service to host a personal web page or family
      photos;

    - Web-based email and financial portfolio services;

    - a personalized homepage for each subscriber which includes personalized
      news services through MSNBC, stock portfolios, weather through
      Accuweather, local TV listings and sports scores;

    - 24x7 live customer service and self-enlightening online member support,
      including help files, tutorials and help communities;

    - content generated by community members using communication tools such as
      chat, message boards, news groups, bulletin boards and personal Web pages;

    - access to online e-commerce retail brands for shopping and electronic bill
      payment; and

    - access to their personal email and "event" alerts (i.e. stock price
      changes, anniversary reminders, etc.) from their wireless phone, pager or
      PDA.

    Prodigy DSL offers subscribers all the listed services of the dial-up
service offering, plus:

    - instant-on access;

    - unlimited usage for one price;

    - high-speed access up to 1.5mbs downstream;

    - modem, filters and splitters;

    - high quality audio and video media streaming in a high-speed optimized
      homepage environment;

    - personal computer firewall protection; and

    - a dial-up Internet access account so that users can use their Prodigy
      account when traveling or in the office.

    The Prodigy service is compatible with Internet standards and protocols,
allowing use of industry-standard client/server software. Unlike some online
services that use proprietary technologies, Prodigy Internet merges seamlessly
with Web content and can be regularly updated to incorporate advances in
Internet technologies such as new browsers, RealAudio players and security
devices for electronic commerce. Prodigy is compatible with the Microsoft
Internet Explorer and Netscape Navigator browsers on the Windows 98, Windows 95
and Windows 3.1 operating systems, and on Macintosh computers. Microsoft
Internet Explorer is the primary browser shipped on disks that contain the
Prodigy Internet software.

    The price plans for the Prodigy Internet service vary and are subject to
change. Prodigy Internet's principal price plans currently are:

    - $19.95 per month for unlimited dial-up usage, with a 30-day money-back
      guarantee;

    - a discounted prepaid annual plan of $198 for one year of unlimited dial-up
      usage, equivalent to $16.50 per month;

    - $9.95 per month for three months of unlimited dial-up usage, and $19.95
      per month thereafter;

                                       5
<PAGE>
    - $21.95 per month for unlimited dial-up usage plus five mailboxes; and

    - $49.95 for unlimited use DSL service outside of SBC's 13-state region.

    BUSINESS SERVICES

    In October 1999, Prodigy acquired BizOnThe.Net, a Web-hosting business, and
combined it with Prodigy's existing Web-hosting business. The combined operation
is called ProdigyBiz. The majority of the ProdigyBiz business is the sale of Web
sites with standardized forms and artwork to customers. Prodigy also offers
these Web-hosting customers e-commerce capabilities, which permit the customer
to set up an online store to promote, sell, bill for and collect payments
relating to its products and services. In October 2000, Prodigy ceased the
outbound telemarketing efforts of ProdigyBiz.

    SPANISH-SPEAKING AND HISPANIC MARKET

    In April 1999, Prodigy launched Prodigy en Espanol, the first completely
bilingual Spanish-English Internet access service offered nationwide in the
United States. Prodigy en Espanol is tailored to meet the needs of the large and
growing Hispanic community in the United States.

    As of December 31, 2000, Prodigy managed approximately 572,000 Prodigy
Internet de Telmex subscribers. Telmex is the leading provider of local and
long-distance telephone services in Mexico, and is the principal full-service
telecommunications provider in Mexico. Telmex owns the nationwide network of
local telephone lines and the principal public long-distance telephone
transmission facilities in Mexico, and has built a nationwide data transmission
network. Carso Global Telecom currently controls Telmex. Carso Global Telecom
and Telmex are among Prodigy's principal shareholders.

    ELECTRONIC COMMERCE

    Prodigy was a pioneer in electronic commerce through its establishment of
standards and creation of applications that facilitated online shopping and
transacting such as online banking and securities trading. Prodigy currently has
the capability to provide the fundamental elements of electronic commerce--
Web-hosting, hosting of intranets/extranets and high-speed dial-up access using
fast modems to send and to receive information to and from the Internet.
Prodigy's strategy is to provide its customers with a bundle of products and
services containing everything needed to access the Web and to set up online
stores to promote, sell, bill for and collect payments relating to its products
and services.

    BROADBAND/DSL SERVICES

    Prodigy's broadband strategy is designed to provide customers with a suite
of Internet access and other Internet-based services in conjunction with
selected technology and marketing partners. Prodigy has entered into agreements
with Verizon and Covad Communications for the provisioning of DSL services in
states outside of the 13 state region served by SBC.

    Effective January 1, 2001, Prodigy agreed to provide wholesale DSL services
to SBC to allow SBC to provide DSL services to SBC's customers. Under this
arrangement, SBC pays Prodigy a monthly fee per subscriber ($5 per subscriber
per month in 2001) and SBC is responsible for the costs of customer acquisition,
DSL lines, billing and customer care and networking. The new agreement will last
until December 31, 2009 during which SBC has guaranteed that it will pay Prodigy
fees to serve a minimum of 3.75 million DSL customers. See "SBC Transaction"
below.

CUSTOMER ACQUISITION AND MARKETING

    Prodigy uses a variety of methods to acquire customers. Prodigy believes
that the strong national brand recognition of the Prodigy name (together with
SBC's brand names), and the nationwide network

                                       6
<PAGE>
used by Prodigy, provide it with access to customer acquisition methods not
available to local and regional Internet service providers.

    The Prodigy Internet dial-up service is marketed through a variety of media
outlets, including television, radio and outdoor advertising, and, effective
January 1, 2001, in SBC's Internet advertising. The target audiences for Prodigy
Internet are:

    - purchasers of new desktop consumer PCs;

    - existing subscribers to online services who may be interested in moving to
      an Internet service provider;

    - existing Internet service subscribers who are dissatisfied with their
      current service or attracted to the performance and features of Prodigy
      Internet; and

    - SBC telephone subscribers.

    Prodigy's marketing efforts position the Prodigy dial-up service as the
correct Internet choice and as a tool for communications, information and
entertainment. Prodigy's marketing themes emphasize that the Prodigy Internet
service is superior in terms of:

    - availability and reliability;

    - speed of both dial-up and DSL services;

    - technology--a network architecture that places asynchronous transfer mode
      switching devices at local phone access sites instead of backhauling the
      data to a central location;

    - product features, email capabilities (including email attachments),
      instant messaging and personal web pages; and

    - individualization of content, news and products.

PRODIGY'S CUSTOMER ACQUISITION CHANNELS INCLUDE THE FOLLOWING:

    SBC RELATIONSHIP:  On May 31, 2000, Prodigy and SBC consummated a strategic
relationship in which SBC acquired an approximate 43% indirect interest in
Prodigy and Prodigy became the exclusive retail Internet service marketed by SBC
to consumers and small businesses in the United States. See "SBC Transaction"
below.

    Effective January 1, 2001, Prodigy and SBC announced revised marketing
agreements, which extend the original marketing relationship from 3 to 9 years
(through 2009). Under these agreements, SBC has agreed to provide the following
minimum number of DSL and dial-up customers:

<TABLE>
<CAPTION>
                                                    DSL SUBSCRIBER   DIAL-UP SUBSCRIBER
PERIOD                                                COMMITMENT         COMMITMENT
------                                              --------------   ------------------
<S>                                                 <C>              <C>
January 1, 2001 to December 31, 2001..............       700,000           100,000
January 1, 2002 to December 31, 2002..............       650,000            75,000
January 1, 2003 to December 31, 2003..............       600,000            50,000
January 1, 2004 to December 31, 2004..............       500,000            25,000
January 1, 2005 to December 31, 2005..............       500,000            25,000
January 1, 2006 to December 31, 2006..............       400,000            25,000
January 1, 2007 to December 31, 2007..............       200,000            25,000
January 1, 2008 to December 31, 2008..............       100,000            25,000
January 1, 2009 to December 31, 2009..............       100,000            25,000
                                                       ---------           -------
    TOTAL.........................................     3,750,000           375,000
                                                       =========           =======
</TABLE>

                                       7
<PAGE>
    CONTRACT ACQUISITION PROGRAMS:  Prodigy previously had relationships with
selected major PC retailers that enabled the retailers to offer incentives to
consumers who purchased new PCs. Under these agreements, Prodigy made a payment
to the retailer in exchange for the retailer enrolling a customer onto Prodigy
and obtaining a signed contractual commitment from the customer to a term
subscription to Prodigy. These payments range up to $400 for a term subscription
of up to three years. During 2000, Prodigy phased out these agreements due to
their high upfront costs as well as the difficulty Prodigy encountered in
financing the underlying subscriber contracts on favorable terms.

    PC BUNDLING:  The Prodigy service is bundled with PCs under arrangements
where Prodigy pays a negotiated fee to the PC manufacturer only if a subscriber
enrolls from the PC and continues as a service customer beyond an introductory
period. PC bundling is attractive to Prodigy because the supplier bears the
distribution cost and bundling reaches many more potential subscribers than
through most other acquisition channels. The Prodigy Internet software is
currently pre-loaded on selected PC models shipped by Hewlett Packard and Sony.

    MICROSOFT RELATIONSHIP:  Microsoft includes the Prodigy service in the
online services folder of every copy of the Windows 98 shipped by Microsoft for
sale in retail channels or for loading on new PCs. Prodigy Internet, Microsoft
Network, AOL/Time Warner, CompuServe and AT&T WorldNet are the only services in
the online services folders of Windows 98. Microsoft also includes Prodigy in
Microsoft's Internet service providers Internet Referral Service Program.
Prodigy believes that these arrangements enhance Prodigy's nationwide brand
presence.

    WEB-BASED:  Prodigy maintains a Web site--www.Prodigy.com--that provides
Internet users with the opportunity to learn about and enroll in the Prodigy
service. Prodigy believes its advertising and other programs help target
consumers interested in switching providers.

    DIRECT:  Prodigy pursues targeted audiences in its direct mailing and
telemarketing efforts. Prodigy targets its direct mail to highly qualified
prospects such as known Internet users and new PC purchasers. Prodigy's inbound
telemarketing program fulfills customer orders, 24 hours a day, 7 days a week,
365 days a year, via toll-free telephone numbers--1-800-PRODIGY and
1-888-PRODIGY--that it promotes widely. Prodigy's outbound telemarketing
programs focus on the reacquisition of recently disconnected members and highly
qualified prospects. Prodigy outsources its telemarketing services. Prodigy
maintains an online, member-assisted referral program in which existing
subscribers receive cash payments for signing up new members.

CUSTOMER SERVICE

    Prodigy designs its customer service programs to increase member
satisfaction and retention, while controlling costs by combining outsourcing
with in-house services. Prodigy believes that its customer service programs,
coupled with a new-release strategy that is sensitive to the concerns of
existing members and responsive to market trends, have positioned Prodigy to
provide customer support that is cost-effective, and that it can expand to
accommodate future growth. SBC is responsible for providing customer service to
its DSL subscribers. Prodigy provides the following customer services to its
dial-up subscribers:

    TELEPHONE SUPPORT:  Prodigy outsources its telephone support for initial
questions from users to various vendors. Telephone technical support is
toll-free and available 24 hours per day, 365 days per year. Customers are
assisted with Prodigy software installation, enrollment questions, account
management concerns, service access problems, and disconnect requests. Prodigy
can direct customer calls between vendors on short notice, which Prodigy
believes creates a competitive environment between vendors, resulting in
enhanced quality, performance and pricing. Geographic distribution of all
centers allows for uninterrupted service in the event of regional disasters.
Administrative and billing support is available weekdays, from 9:00 a.m. to
9:00 p.m., Eastern Time.

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<PAGE>
    IN-HOUSE CUSTOMER SUPPORT AND SYSTEMS:  Prodigy maintains an online member
services area that provides a variety of support options to all members,
including real-time chat, instant messaging, news groups, message boards and
email. Prodigy has integrated comprehensive help, tutorials, advisories,
frequently asked questions and tips online. Prodigy also has an online "members
helping members" program, in which selected subscribers receive nominal monthly
compensation in exchange for providing personalized responses to members posting
inquiries on news groups, message boards and chat. Prodigy's customer service
organization monitors customer service vendor performance with quantitative
metrics such as average wait time, first call resolution rate and abandon rate,
and qualitative controls such as call-monitoring. Prodigy also has technically
trained customer service representatives to call subscribers with unresolved
problems.

    Prodigy maintains detailed customer records, and documents each customer
support request in a problem-tracking system. This system allows recurring
problems to be identified and escalated for resolution. Prodigy maintains a
Web-based database that is accessible by all vendor and employee customer
service representatives on a real-time basis. This database helps ensure
accurate and consistent delivery of customer service regardless of where the
contact is handled.

    BILLING:  Prodigy relies on several third-party providers for billing
services. Prodigy outsources the majority of subscriber access billing to CSG
Systems. CSG System's billing system is highly customized and flexible, supports
prompt pricing changes and provides credit card and paper invoice billing,
transaction processing and check handling services. Although Prodigy bills a
substantial majority of its current access subscribers through pre-authorized
credit card charges, a small percentage of customers elect to receive charges on
a Prodigy-branded bill page rendered by their local exchange carrier (LEC).
Currently, Prodigy offers phone billing for subscriber access charges in select
areas only through billing service agreements with SBC affiliates Southwestern
Bell, Pacific Bell, Nevada Bell and Ameritech.

TECHNOLOGY

    Prodigy has been a technology pioneer in the online industry since its
formation in 1984, and introduced many concepts that would later be adopted for
the Web. Continuing this pioneering heritage in the Internet industry, the
Prodigy service utilizes a standards-based, proprietary service provider
platform and mail-server developed by Prodigy.

    SERVICE PROVIDER PLATFORM:  The service provider platform is a suite of
functions that creates the infrastructure of a large-scale Internet service
provider. Capabilities include customer profile management, access control,
authentication, billing and customer care interfaces, and other functions
necessary to offer large-scale Internet services. The service provider platform
is scalable to millions of subscribers. It is compatible with industry standard
products such as Microsoft and Netscape, Apache Web servers and Oracle
databases. The service provider platform also interfaces effectively with
Prodigy's mail server. The platform is built to open standards to enable the use
of applications from other suppliers.

    PORTAL:  Prodigy's highly scalable Web platform allows the company to
deliver a personalized Internet experience, which is based on member preference
and geographical data. It is also compatible with various content feeds.
Personalization is based on member preference and geographical data. Prodigy was
one of the first ISPs to offer a DSL homepage.

    INSTANT MESSAGE/CHAT:  Prodigy has partnered with and invested in Odigo, a
New York based instant messaging firm to provide real time messaging between
members of Prodigy and among the 3.5 million users of Odigo's service worldwide.
Prodigy additionally offers access to Internet Relay Chat, an Internet-
standards based application, that allows members to communicate through chat
rooms with other Internet users worldwide.

    COMMUNITY PLATFORM:  Prodigy offers various tools and systems that enable
and promote communities on the Prodigy Internet service, including a bulletin
board platform and an email list platform. The email

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list platform is capable of supporting custom domains and delegated
administration, making it possible for Prodigy to leverage it not only for
communities but also for its small business Web-hosting accounts.

    ALERTS:  Prodigy provides a real-time notification system that is capable of
alerting Prodigy members to various events of interest such as arrival of
certain emails, stock and Usenet alerts. The system is highly scalable and
extensible to various content and alert feeds.

    WEB-HOSTING PLATFORM:  Prodigy's Web-hosting platform is a highly scalable
and functional system for hosting small business Web sites. The system is
compatible with e-commerce applications and various Web publishing tools. The
system also provides small business users with custom email domains and
mailboxes, as well as 56 kilobits dial-up capabilities.

    MAIL SERVER:  Prodigy Internet uses a scalable, reliable Internet mail
server. The mail server draws on the fault-tolerance and scalability provided by
the underlying Oracle database to offer flexibility, ease of operation and
scalability. Prodigy's mail server supports standard Internet protocols. The
mail system also provides:

    - TOOLS FOR ADMINISTRATORS: Welcome messages; bulk mailers, quota controls
      by realm, domain, household, small business or individual account; tools
      to manage spam-mail; and operational scripts and tools;

    - TOOLS FOR USERS: User-configured filters for prioritization and spam-mail
      removal. Messages can contain any number of attachments through technology
      that allows the user to send and receive graphics, audio and video files
      via the Internet, up to a size limitation of 10 megabytes per mailbox. The
      mail system delivers messages without promotional tag lines;

    - FEATURES FOR BUSINESS CUSTOMERS: Support for multiple domains, which
      enables Prodigy Internet to operate multiple Internet services under
      different brands on the same system base and an off-site administrator to
      control enterprise mailboxes;

    - CONFIGURATION AND PROVISIONING INTERFACES: The system supports a standard
      administrative interface that provides configuration and control of the
      mail system from external systems or via a hypertext markup language
      screen. Standard application programming interfaces the system to external
      databases for user authentication and mailbox provisioning; and

    - SCALING ABILITY: The system is designed to scale to millions of mailboxes
      with an architecture that supports hardware and data redundancy.

NETWORK AND RELATED INFRASTRUCTURE

    Subscribers access Prodigy's services by connecting to a network with their
PCs using local, toll-free or long-distance telephone service. The network
connects subscribers' PCs to the Internet and to Prodigy's hosting servers. The
hosting servers store some of the data accessed during subscriber sessions.
Network connections are made through communications hardware such as telephone
lines, routers, switches and modems. These direct data and enable communication
among a variety of computer operating systems. The network used for the Prodigy
Internet service is built to Internet standards.

    NETWORK ARCHITECTURE

    The network infrastructure used by Prodigy consists of three primary tiers:
local phone access sites; a middle tier, which connects local phone access sites
to regional hubs; and a backbone tier, which connects the regional hubs to the
Internet or Prodigy's data-hosting center. The network includes over 2,300 local
access sites nationwide and has the capability to provide dial-up access, with a
local telephone call, to approximately 90% of the households in the United
States. Prodigy also offers access via an 800-telephone number for $.10 per
minute without an additional enrollment charge. Local phone access sites
currently

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<PAGE>
provide 56 kilobits access to Prodigy Internet subscribers having modems of that
speed. All of the local phone access that provide 56 kilobits access are v.90
supported. Prodigy is investigating the use of v.92 standards with its network
providers.

    DATA-HOSTING CENTER

    Prodigy's data-hosting center, located in Yorktown Heights, New York, houses
approximately 400 high-capacity servers to store content and other data. The
data center contains a mainframe complex that supports business support systems
such as subscriber session accounting and reporting and high-capacity servers
for customer service support systems and business accounting. Prodigy's data
center hosts a variety of applications that are scalable to millions of users.
The use of standard interfaces allows integration of products offered by a broad
spectrum of vendors including IBM, Microsoft and Netscape. Supported operating
system platforms include UNIX/AIX, Linux, Windows-Registered Trademark- 2000,
Windows-Registered Trademark- NT and OS/390, and installed database products
include Oracle DB2, SQL and MySQL.

    Prodigy has equipped its data-hosting center with triple redundant power
systems, and housed it in a climate and humidity controlled environment. Prodigy
has installed both battery and diesel power backup systems to preclude outages.
All production host systems have backup processors or are designed to be
fault-tolerant, and all critical data is backed up to tape daily. Prodigy
physically secures facilities and data by incrementally restrictive card key
locks. Built-in operating system security features provide logical data
security. The facility uses firewall technology to protect critical systems.
Prodigy has installed servers that are open directly to the Internet on a
separate network. In addition, the facility uses anti-hacking measures.

    RELIABILITY AND AVAILABILITY

    Reliability and availability measurements are key objectives of Prodigy's
network and hosting configurations. Prodigy accumulates and analyzes statistics
on each access line, 24x7. Lines exhibiting quality problems are removed from
the Prodigy phone directory and referred for repair. When possible, Prodigy
provides alternate lines from other network providers. Prodigy provides its
customers with a "real-time" status Web site to view line availability
measurements. In addition, Prodigy has integrated Visual Networks IP Insight
product into the Prodigy Internet software, allowing Prodigy to gather data on
the actual connection experiences of subscribers who have agreed to have their
connection experience measured. Prodigy's NOC (Network Operations Center)
reports problem sites to the network providers for action, 24x7.

    At Prodigy's data-hosting center, Prodigy operates a 24x7, 365-day control
center. Where feasible, Prodigy has redundant computer systems/servers and
subsystems as well as redundant environmental systems to provide diversity. The
data-hosting center connects to the backbone via diversely routed, multi-vendor
OCx lines.

    NETWORK PROVIDERS

    Prodigy outsources its consumer dial-up network functions to McLeodUSA,
Navinet, SBC and AT&T, among others. In addition, Prodigy uses these vendors and
others to act as global service providers, where applicable, and backbone
providers which allow Prodigy customers located in Texas, California, Nevada,
Missouri, Kansas, Arkansas, Oklahoma, Illinois, Wisconsin, Michigan,
Connecticut, Ohio and Indiana to make an interLATA connection to the Internet.

    McLeodUSA is Prodigy's primary provider of network services. McLeodUSA
provides dial-up network access in all locations in which Prodigy provided
dial-up service as of June 30, 1997. Prodigy may require additional sites to be
added if it meets designated coverage and usage parameters. McLeodUSA may also
provide access to the network to other customers. McLeodUSA is required to
provide a backbone

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<PAGE>
network based on technology, and is required to support transmission via Serial
Line Internet Protocol, Point-to-Point Protocol and TCP/IP.

    McLeodUSA is required to meet specified service levels. McLeodUSA's failure
to meet the specified service level objectives will result in financial
penalties. If McLeodUSA fails to meet specified service levels for an extended
period, Prodigy may terminate the agreement. In addition, if there is a
system-wide failure, Prodigy has the right to terminate the agreement or assume
responsibility for operating the network at McLeodUSA's expense. McLeodUSA
charges Prodigy a fee per hour of usage by Prodigy's subscribers.

    Prodigy's agreement with McLeodUSA, as amended, will expire as of
December 31, 2002, and is subject to automatic renewal for successive one-year
terms unless terminated by either party on 12 months' notice. Until termination
of the agreement, Prodigy has agreed that McLeodUSA will be Prodigy's primary
provider of network services. During this period, Prodigy must give McLeodUSA
advance notice of, and the opportunity to discuss with Prodigy, any forms of
service access, other than network access, that Prodigy wishes to pursue in the
United States.

COMPETITION

    The industry in which Prodigy competes is intensely competitive and includes
many significant participants, including:

    - Internet service providers, including fee-based and free service
      providers;

    - proprietary online service providers;

    - ultra high-speed service providers;

    - major international telecommunications companies;

    - wireless communications companies;

    - Internet-search services; and

    - various other telecommunications companies.

    There are several thousand Internet service providers in the United States,
most of which operate small, local businesses. Additional regional telephone
operating companies, long-distance carriers and cable companies may also enter
the market. Internet-search service companies and major telecommunications
companies have established various partnering arrangements, which could result
in increased competition for Prodigy. Moreover, Prodigy faces competition from
companies that provide broadband connections to households, including local and
long-distance telephone companies, cable television companies and electric
utility companies. Broadband technologies offer significantly faster Internet
access than conventional modems, and the above-listed companies could include
Internet access in their basic service packages, could offer access for a
nominal additional charge, or could prevent Prodigy from delivering Internet
access through the cable or wire connections that they own. Some competitors,
such as NetZero, offer free Internet access services.

    Among the larger providers of Internet service are EarthLink, Microsoft
Network, AT&T WorldNet, MCI Internet, IBM Internet Connection, PSINet, and
Concentric Network Corporation. Microsoft's ownership of the dominant PC
operating system and the Microsoft Internet Explorer browser may give Microsoft
Network certain competitive advantages, including distribution and marketing
synergies. Prodigy also competes with AOL/Time Warner, which offers the AOL/Time
Warner and CompuServe proprietary online services over closed networks and
Internet access.

    Prodigy believes that the principal competitive factors in the Internet
service provider industry are speed and reliability of access, superior email
and attachment capability, ease of use, brand name

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<PAGE>
recognition, network coverage, customer service and price. Prodigy believes that
it competes effectively on the basis of these factors.

GOVERNMENT REGULATION

    Internet access and online services are not subject to direct regulation in
the United States. Changes in the laws and regulations relating to the
telecommunications and media industry, however, could impact Prodigy's business.
For example, the Federal Communications Commission could begin to regulate the
Internet and online services industry, which could result in increased costs for
Prodigy.

    The Federal Child Online Protection Act, enacted in October 1998, creates
criminal penalties for content on the Internet that may be deemed harmful to
minors. Prodigy has not changed any of its plans or policies as a result of this
statute, and does not believe its current plans or policies violate this
statute. In February 1999, a federal judge enjoined this statute. The Department
of Justice appealed the decision and on June 22, 2000, the Third Circuit Court
of Appeals upheld the trial court's decision to enjoin the statute. The
Department of Justice filed its petition for certiorari with the United States
Supreme Court on February 13, 2001 and opposition responses are due on
April 16, 2001.

    The Federal Children's Online Privacy Act, also enacted in October 1998,
will regulate the collection of personal information from children by commercial
Web site operators. Prodigy believes its plans and policies will enable it to
comply with the statute. There also are laws that make it illegal to traffic in
obscene or child pornographic materials, including by a computer.

    In addition, the applicability to Prodigy of existing laws governing issues
such as intellectual property ownership, defamation, access to the Internet for
the disabled and personal privacy is uncertain. Courts have indicated that
online service providers and Internet service providers could be held
responsible for the publication of defamatory material or for failure to prevent
the distribution of material that infringes copyrights. The Digital Millennium
Copyright Act, however, limits Prodigy's liability for certain types of
copyright infringement in the United States so long as Prodigy has no actual
knowledge of infringement. This act contains various compliance requirements and
Prodigy believes it has satisfied those requirements. The applicability to
Prodigy of international laws and regulations governing the Internet, however,
is uncertain.

    Prodigy does not edit or otherwise monitor the content accessed by
subscribers to Prodigy. However, Prodigy blocks access to news groups that carry
child pornography.

    In March 1997, Prodigy entered into a consent order with the Federal Trade
Commission, which became effective in March 1998, regarding use of the word
"free" and similar words in advertising, disclosure of the financial terms and
conditions of services, including method of cancellation, practices with respect
to electronic funds transfers and related matters. The consent order has a
duration of 20 years, and imposes various record-keeping requirements. Prodigy
believes that it is in compliance with the consent order, and that its
continuing compliance with the order will not have a negative effect on Prodigy.
AOL/Time Warner is subject to a similar consent order that governs its marketing
of services under both the AOL/Time Warner and CompuServe brands.

    In connection with the acquisition of BizOnThe.Net from U.S. Republic,
Prodigy became subject to an agreement between U.S. Republic and the Federal
Trade Commission that became final through a court order in November 1999. The
agreement requires full disclosure of "free" trial offers and cancellation
obligations, the verification of direct-to-phone-bill orders, clear
communication of the submission process, and probable placement of customer Web
sites on search engines, and various record-keeping requirements. Prodigy
believes that it is in compliance with the agreement, and that its continuing
compliance will not negatively affect Prodigy's business.

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<PAGE>
PROPRIETARY RIGHTS

    Prodigy owns a variety of trademarks, including
"Prodigy-Registered Trademark-", the Prodigy globe/orb logo, the Prodigy
Internet logo, "Prodigy Internet", "Are You a Prodigy?", "Prodigy MailLink-TM-"
and others, many of which are the subject of existing or pending registrations
in the United States and various foreign countries. Prodigy also owns other
intellectual property rights, including proprietary software used in its
business. Prodigy protects its proprietary technology through copyright and
trade secrets laws, employee and third party confidentiality agreements, and
other methods.

    Prodigy and IBM have licensed each other's entire patent portfolios existing
as of June 17, 1996 and all additional patents issued with respect to patent
applications filed prior to June 1, 1999. Until June 17, 2001, Prodigy is
required to grant IBM most-favored-nation status with respect to Prodigy's
software that it makes generally available to the public, meaning IBM can obtain
the software on terms no less favorable than any other company.

EMPLOYEES

    At February 28, 2001, Prodigy had 455 full-time employees, of whom 87 were
in sales and marketing; 198 were in technology and product development; 68 were
in customer service; and 102 were in management, finance and administration. As
necessary, Prodigy supplements its regular employees with temporary and contract
personnel, which totaled 97 persons at February 28, 2001.

    None of Prodigy's employees is represented by a labor union. Prodigy
believes that its employee relations are good.

SBC TRANSACTION

    ESTABLISHMENT OF STRATEGIC RELATIONSHIP WITH SBC.  In May 2000, Prodigy and
SBC established a strategic relationship in which:

    - SBC acquired an initial indirect interest in Prodigy of approximately 43%;

    - Prodigy became the exclusive retail Internet service marketed by SBC to
      consumers and small businesses in the United States;

    - SBC committed to obtain 1,200,000 additional Internet subscribers for
      Prodigy over a three-year period;

    - Prodigy agreed to pay SBC a fee for each subscriber obtained for it by
      SBC; and

    - SBC became Prodigy's exclusive provider of various telecommunications
      services.

    As a result of the SBC transaction:

    - Prodigy became a holding company;

    - Prodigy's sole assets consist of its interest in the operating partnership
      described below and rights under stock-related agreements and plans; and

    - Prodigy became an affiliate of SBC and became subject to the restrictions
      imposed on affiliates of Bell operating companies under the federal
      Communications Act.

    FORMATION AND OWNERSHIP OF OPERATING PARTNERSHIP.  In connection with the
establishment of the strategic relationship between Prodigy and SBC:

    - Prodigy contributed substantially all of its assets and liabilities and
      transferred its employees to a new limited partnership, called the
      operating partnership, that was formed to own and operate Prodigy's
      business;

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<PAGE>
    - SBC contributed to the operating partnership routers, servers and
      associated hardware selected by Prodigy and used in connection with SBC's
      consumer and small business Internet operations;

    - SBC also contributed to the operating partnership intangible assets
      consisting primarily of royalty-free licenses to use SBC's trademarks in
      connection with the marketing and operation of the Prodigy Internet
      service;

    - Prodigy received an initial interest in the operating partnership of
      approximately 57%; and

    - SBC received an initial interest in the operating partnership of
      approximately 43%.

    SBC has the right to exchange its units in the operating partnership for
shares of Class A common stock. SBC is permitted to transfer its units to any
person as long as the transferee agrees to comply with the operating
partnership's limited partnership agreement. In order to give SBC the
flexibility to combine its voting interest in Prodigy and its economic interest
in the operating partnership, SBC has the right to approve a merger of the
operating partnership into Prodigy by a vote of at least 75% of Class B common
stock without a vote of the holders of Class A common stock.

    Upon the issuance of units in the operating partnership and Class B common
stock to SBC, the number of units owned by Prodigy equaled the number of shares
of then outstanding Class A common stock. The partnership agreement requires
that each time Prodigy issues shares of Class A common stock the operating
partnership must issue an equal number of units to Prodigy in exchange for the
net proceeds received by Prodigy from the issuance of Class A common stock. As a
result, Prodigy can increase its percentage ownership of the operating
partnership by issuing additional Class A common stock, although unanimous
approval of Prodigy's executive steering committee, including the members
appointed by SBC, is required for Prodigy to issue additional Class A common
stock. The number of units owned by Prodigy is intended to equal the number of
shares of outstanding Class A common stock at all times. As of March 1, 2001,
Prodigy owned 70,245,820 units in the operating partnership (57.5%) and SBC
owned 51,843,631 units in the operating partnership (42.5%).

    CORPORATE GOVERNANCE.  As part of its strategic relationship with SBC,
Prodigy amended its certificate of incorporation and by-laws to implement the
following corporate governance arrangements:

    - SBC has the right to appoint three Prodigy directors;

    - Prodigy's other directors are elected by all stockholders, voting together
      as one class;

    - Prodigy's board established an executive steering committee, which must
      approve all major corporate actions prior to being submitted to the board
      for consideration; and

    - SBC has the right to appoint two members of the executive steering
      committee and Carso Global Telecom and Telmex have the right to appoint
      the other two members of the executive steering committee.

    Pursuant to a voting agreement, SBC has agreed to vote in favor of the
election of three nominees to the Prodigy board of directors designated by Carso
Global Telecom and Telmex.

    EXECUTIVE STEERING COMMITTEE.  The executive steering committee consists of
four members, two of whom are selected by the directors elected by SBC and two
of whom are selected by the Class A directors designated by Telmex and Carso
Global Telecom. The purpose of the executive steering committee is to evaluate
all major corporate actions of Prodigy, the operating partnership and any other
subsidiary of Prodigy, such as mergers, acquisitions and capital expenditures or
borrowings in excess of $20,000,000. Major corporate actions require the
unanimous approval of the executive steering committee prior to being submitted
of the board of directors of Prodigy for its approval.

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<PAGE>
    STRATEGIC AND MARKETING AGREEMENT WITH SBC.  In order to implement their
strategic relationship, Prodigy and SBC entered into a strategic and marketing
agreement. In January 2001, Prodigy and SBC amended and restated the strategic
marketing agreement as follows:

    - SBC and its affiliates agreed to act as sales representatives to market
      the Prodigy Internet service to residential dial-up subscribers in the
      United States and agreed not to market the service of any other Internet
      service provider to residential dial-up subscribers until December 31,
      2009, subject to the exceptions described below, although SBC and its
      affiliates may market their own Internet products and services to
      residential dial-up subscribers;

    - SBC and its affiliates agreed to purchase the Prodigy Internet service for
      resale to DSL and business dial-up subscribers and agreed not to market
      the service of any other Internet service provider to DSL and business
      dial-up subscribers until December 31, 2009, subject to the exceptions
      described below;

    - for residential dial-up subscribers, the Prodigy Internet service will be
      primarily branded by Prodigy, and Prodigy will provide customer service
      and bill such subscribers; and

    - for business dial-up and DSL subscribers, the Prodigy Internet service
      will be co-branded by Prodigy and SBC, and SBC and its affiliates will
      provide customer service and bill such subscribers.

    SBC's obligations are subject to the exceptions that SBC and its affiliates
may:

    - take action to preserve and retain legacy subscribers;

    - co-brand with a competitive retail Internet service provider products or
      services offered by SBC or its affiliates;

    - enter into agreements with competitive retail Internet service providers
      to provide DSL services in conjunction with the products or services
      offered by SBC or its affiliates;

    - list competitive retail Internet service providers on their web sites or
      in their products as long as they are not more prominent or otherwise
      treated more favorably than the Prodigy Internet service;

    - provide any individual products and services constituting retail Internet
      service provider services to a competitor whose products and services are
      branded under the competitor's marks in bundles so long as such bundles do
      not constitute a retail Internet service provider service;

    - sell and supply advertising and e-commerce through any medium; and

    - market any device not manufactured by or exclusively for SBC or its
      affiliates which includes a competitive retail Internet service so long as
      such marketing efforts are not predominately concentrated on the use of
      the retail Internet service or product.

    Prodigy agreed to pay SBC a fee of $35 for each of the first 50,000
residential dial-up subscribers procured by SBC in any calendar year; a fee of
$40 for each of the next 50,000 subscribers procured in any calendar year; and a
fee of $50 for each subscriber in excess of 100,000 procured in any calendar
year. All fees are to be paid over a three-year period with the next installment
due on October 15, 2001 and subject to interest at the rate of 12% per annum.

    SBC, and in certain instances its affiliates, agreed to:

    - procure for Prodigy a minimum of 3,750,000 DSL subscribers and 375,000
      dial-up subscribers over the nine-year period beginning on January 1, 2001
      and to pay Prodigy a penalty for a shortfall in either class of
      subscribers in any one year period--the penalty for each subscriber below
      the committed level is equal to six times the wholesale price for such
      service, although an excess of subscribers in one class in a given year
      may be used to offset the penalty caused by a shortfall of subscribers in
      another year;

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<PAGE>
    - pay Prodigy for the resold Prodigy Internet service a wholesale monthly
      price of $5.00 for each DSL subscriber until December 31, 2003 and $4.00
      for each DSL subscriber thereafter until December 31, 2009, except that if
      the number of DSL subscribers procured by SBC during the three-year period
      ending on December 31, 2003 is less than 3,500,000, then the wholesale
      monthly price for each DSL subscriber shall remain at $5.00, unless SBC
      and its affiliates shall have procured in excess of 3,000,000 DSL
      subscribers in which case the wholesale monthly price shall be $4.50;

    - pay Prodigy for the resold Prodigy Internet service a wholesale monthly
      price of $9.00 for each dial-up business subscriber; for the first 100,000
      dial-up business subscribers and the applicable DSL wholesale price for
      all dial-up business subscribers in excess of 100,000;

    - pay Prodigy a fee of $75 for each DSL subscriber Prodigy procures for SBC
      and its affiliates and $10 for each long distance customer Prodigy
      procures for SBC and its affiliates;

    - include Prodigy's name and logo in any advertising where the SBC product
      or service includes the Prodigy Internet service;

    - forgive approximately $23,000,000 in fees for DSL and business dial-up
      subscribers incurred by Prodigy during the period from May 31, 2000 to
      December 31, 2000;

    - forgive $5,000,000 of charges owed by FlashNet Communications, Inc., which
      was acquired by Prodigy on May 31, 2000;

    - transfer all of the subscribers of Oklahoma Internet Online to Prodigy
      without charge;

    - appoint Prodigy as a sales agent for Sterling Commerce's web site on
      mutually agreeable terms; and

    - appoint Prodigy as the preferred provider of email services to SBC and its
      affiliates.

    Prodigy agreed to:

    - appoint SBC and its affiliates as Prodigy's preferred provider of DSL
      network services wherever such services are offered by SBC and its
      affiliates;

    - appoint SBC as Prodigy's exclusive network provider so long as SBC offers
      its network services to Prodigy at the most favorable rates that it offers
      such services to other similar purchasers and so long as SBC's terms are
      competitive with those offered by other providers;

    - grant SBC the exclusive right to market its long-distance phone service,
      local phone service, wireless phone services, paging services and related
      calling services to Prodigy's subscribers, so long as SBC's terms are
      competitive with those offered by other providers;

    - grant SBC the exclusive right to provide telecommunications, advertising,
      telecommunications e-commerce and Internet telephony applications in
      conjunction with the Prodigy Internet service to Prodigy's subscribers, so
      long as SBC's terms are competitive with those offered by other providers;
      and

    - appoint SBC as the exclusive provider of electronic yellow and white pages
      and city guides to Prodigy's subscribers, so long as SBC's terms are
      competitive with those offered by other providers.

    SBC's exclusive rights described in the four preceding bullet points are
subject to Prodigy's pre-existing agreements with other providers. When these
pre-existing agreements terminate, SBC's exclusive rights described above will
apply.

    These arrangements may be terminated before December 31, 2009 by SBC if the
Prodigy Internet service fails to meet specified standards relating to
nonsubscriber revenue or performance or if any designated competitor acquires
15% or more of Prodigy, or by either party if the other party breaches the
agreement. For one year after December 31, 2009 or one year after termination if
the agreement is terminated by Prodigy on account of SBC's breach or by SBC for
one of the reasons described in the

                                       17
<PAGE>
preceding sentence, SBC and its affiliates will not market on a stand-alone
basis any other retail Internet service provider in the United States.

ITEM 2. PROPERTIES

    Prodigy's corporate headquarters occupy 112,000 square feet of office space
in Austin, Texas. An SBC affiliate has signed a seven-year lease for this space
expiring in March 2008. The current annual base rent is $3,200,000. $9.00 per
square foot of estimated operating expenses is built into the base rent. Taxes,
or building costs, which exceed this base are shared pro-rata with the property.
Prodigy subleases this space from the SBC affiliate on the same economic terms.

    Prodigy also leases approximately 20,000 square feet of office space in
Stafford, Texas, under a lease expiring on September 14, 2003. The current
annual base rent is $308,000. Approximately 3,900 square feet of this space has
been subleased with the remainder of the space available for sublease. Current
obligation on this space is $686,985.

    Prodigy leases 97,000 square feet of office space in White Plains, New York,
where its corporate headquarters were located until November 2000. The lease
expires December 31, 2004. The current annual base rent is $2,330,000, and
Prodigy is required to pay an allocated portion of taxes and operating expenses.
Prodigy has established a letter of credit in the initial amount of $3,930,000
to secure the rent payments. Prodigy is attempting to sublease its White Plains
facility.

    Prodigy also leases 80,000 square feet in Yorktown Heights, New York. The
lease expires February 28, 2007, with two 5-year renewal options in Prodigy's
favor. The current annual base rent is $800,000, and Prodigy is required to pay
associated taxes and operating expenses. Prodigy intends to continue to use this
facility for its data center operations.

    Prodigy leases 77,000 square feet in Fort Worth, Texas, where the corporate
headquarters of FlashNet were located prior to Prodigy's acquisition of FlashNet
in May 2000. On June 23, 2000, Prodigy announced the closure of this facility
and is seeking to sublease 46,000 square feet this space. A lease termination
agreement is in place for the remaining 31,000 square feet, effective April 30,
2001.

    Prodigy believes that its existing facilities are adequate for its current
needs, and that suitable additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

    On December 13, 2000, British Telecommunications filed a lawsuit against
Prodigy in the United States District Court for the Southern District of New
York, Northern Division, claiming that Prodigy has infringed its alleged patent
of "Hyper-link text" technology. Prodigy filed its Answer and Counterclaim and
expects a hearing in order to construct the patent claims sometime in
August--September 2001. No trial date has been set and, due to the early stage
of this litigation, Prodigy makes no predictions as to the outcome of this case.

    On June 8, 1998, Brent Johnson filed a lawsuit against Prodigy in the United
States District Court for the Northern District of Oklahoma alleging that
Prodigy has infringed on two 1997 patents for software that Prodigy licensed
from another company called Diversified Data Resources ("DDR"). Eventually
Johnson joined his company, I.D.G., as co-plaintiff. Prodigy no longer uses the
software in question and the licensor, DDR, has defaulted on its indemnification
obligations. The case was stayed pending resolution of similar litigation
between Johnson and DDR in the Northern District of California. DDR suffered an
adverse judgment of $480,000 and has filed a notice of appeal. Dispositive
motions are currently before the Court in the Prodigy case and a trial date has
been set for October 15, 2001. Because of the changing case law applicable to
this patent claim, Prodigy makes no predictions as to the outcome of this
litigation.

                                       18
<PAGE>
    In September 1998, Prodigy received a letter from the Office of the Attorney
General of New York, notifying Prodigy that the Attorneys General of New York
and 19 other states were investigating the "advertising and certain other
practices" of Prodigy and other unnamed Internet service providers. The letter
stated that the inquiry was a follow-up to the settlement between AOL/Time
Warner and many states in May 1998, concerning the following issues:

    - disclosures for free offers;

    - representations concerning pricing;

    - disclosures concerning premium areas;

    - disclosures for communications charges;

    - advertising to minors;

    - cancellation procedures; and

    - unauthorized charges to credit cards or bank accounts, and changes to the
      service agreement.

    The letter requested that Prodigy voluntarily supply various documents and
other information relating to the marketing and provision of its services.
Prodigy has submitted all requested materials. Since July 1999, Prodigy has
allowed the State of New York to share the documents and information submitted
in response to this inquiry with a number of additional states. No legal action
has been initiated against Prodigy as a result of the investigation.

    On January 10, 2000, Christa Roberts filed a class action lawsuit in the
Superior Court of the State of California, County of Los Angeles, against
Prodigy, AOL/Time Warner, Circuit City Stores, Fry's Electronic, Microsoft and
other unnamed parties. On February 7, 2000, the plaintiff filed an amended
complaint naming Young H. Kim as the named plaintiff in place of Christa
Roberts. The lawsuit alleges that Prodigy and the defendants offered incentives
to consumers and entered into retail sales contracts with consumers which
violated California law, and engaged in false advertising. The plaintiff is
seeking restitution from the defendants of all sums related to this conduct. The
trial court dismissed the lawsuit for failure to state a cause of action and the
Plaintiff appealed. Prodigy's response brief is due in the Court of Appeals on
or before March 30, 2001. Given the early stage of the appeal, no prediction as
to its outcome can be made.

    On February 24, 2000, Prodigy was served with a summons and complaint by
Carroll Wesley Chance in a class action lawsuit brought against Best Buy,
Prodigy and Young America in the State Court of Richmond County, State of
Georgia. The case was brought on behalf of the class of similarly situated
consumers who allegedly purchased a computer at Best Buy, enrolled in the
Prodigy Internet service under the incentive program, and did not receive a
incentive check. The complaint alleges breach of contract, unjust enrichment,
conversion and negligence. The plaintiffs seek damages not to exceed $74,900 per
member of the class, including actual damages, incentives, interest, punitive
damages, court costs and litigation expenses. The case tentatively settled on
March 1, 2001 for payment of fees and the offer of one free month of service to
class members who renewed or re-activated their accounts for a specified period
of time. Prodigy is currently in the process of notifying class members of the
settlement. The Settlement will become final if no Class Member objects or if no
such objections are sustained in a hearing scheduled for April 12, 2001.

    On March 31, 2000, Giovanni R. Viana filed a class action lawsuit against
Prodigy in the 11th Judicial Circuit Court for Dade County, Florida. This class
action lawsuit arises out of the Best Buy mail-in incentive program. The
plaintiff alleges Prodigy violated Florida's Unfair Trade Practices Act when it
represented it would provide incentives and failed to do so. In addition, the
complaint contains a breach of contract claim for failure to pay the incentives.
The plaintiff seeks damages under the breach of contract

                                       19
<PAGE>
claim not to exceed $75,000 per member of the class, as well as actual damages
plus attorneys' fees and litigation costs. Given the early stage of this
litigation, no prediction as to its outcome can be made.

    On June 20, 2000, Saul Kaufman filed a purported class action lawsuit
against Prodigy in the Circuit Court for Cook County, Illinois, alleging he was
"locked out" of his service during the migration from Web America, a company
acquired by Prodigy in March 2000, to Prodigy. Kaufman is not allowed to conduct
"fact" discovery until the Judge decides whether to certify this case as a class
action. Prodigy expects a decision on class certification during the Summer of
2001 and makes no predictions as to the outcome of this litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

                                       20
<PAGE>
PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET INFORMATION AND HOLDERS OF CLASS A COMMON STOCK

    Prodigy's Class A common stock has traded on the Nasdaq National Market
under the symbol "PRGY" since May 31, 2000 and its common stock previously
traded on the Nasdaq National Market under the symbol "PRGY" since February 11,
1999. In connection with the closing of the SBC transaction on May 31, 2000, all
outstanding shares of common stock were automatically converted into Class A
common stock.

    The table below sets forth, for the periods indicated, the high and low sale
prices of Prodigy common stock as reported on the Nasdaq National Market. Prices
prior to May 31, 2000 are for Prodigy's common stock and prices since May 31,
2000 are for Prodigy's Class A common stock.

<TABLE>
<CAPTION>
                                                              PRODIGY COMMON STOCK
                                                              ---------------------
                                                                HIGH         LOW
                                                              ---------   ---------
<S>                                                           <C>         <C>
Quarter ended March 31, 1999 (commencing February 11,         $ 50.625    $     20
  1999).....................................................
Quarter ended June 30, 1999.................................     41.25     21.0625
Quarter ended September 30, 1999............................    28.625       14.00
Quarter ended December 31, 1999.............................   35.4375       16.00

Quarter ended March 31, 2000................................    26.125       14.00
Quarter ended June 30, 2000.................................   15.4375       10.00
Quarter ended September 30, 2000............................     10.50      4.9375
Quarter ended December 31, 2000.............................      6.25       1.125
</TABLE>

    As of March 15, 2001, there were 70,245,820 shares of common stock issued
and outstanding and held of record by 738 record holders. This number does not
include stockholders who hold the stock in "street name" through brokers or
nominees.

DIVIDENDS

    Prodigy has never declared or paid cash dividends on its common stock.
Prodigy currently intends to retain earnings, if any, to support its growth
strategy, and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Prodigy board of directors after taking into account various factors, including
Prodigy's financial condition, operating results, current and anticipated cash
needs, and plans for expansion.

CLASS B COMMON STOCK

    Upon the establishment of its strategic relationship with SBC, Prodigy
issued to SBC one share of Class B common stock in consideration of $100.
Class B common stock is convertible at any time, on a one-for-one basis, into
the same number of shares of Class A common stock. When transferred to any
person or entity not affiliated with SBC, Class B common stock automatically
converts into Class A common stock. There is no established trading market for
the Class B common stock. SBC was also granted customary demand and piggyback
registration rights with respect to the Class A common stock issuable upon
conversion of the Class B common stock or units in the operating partnership
held by SBC or its transferees.

                                       21
<PAGE>
RIGHTS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK

    Holders of Class A common stock generally have rights identical to SBC, the
holder of Class B common stock, except that:

    - each holder of Class A common stock is entitled to one vote per share;

    - SBC, as the holder of the Class B common stock, is entitled to one vote
      for each share of Class B common stock held by it and one vote for each
      unit in the operating partnership not held by Prodigy; and

    - SBC, as the owner of Prodigy Class B common stock, has the right to elect
      three directors of Prodigy.

RECENT SALES OF UNREGISTERED SECURITIES

    Upon the establishment of its strategic relationship with SBC, Prodigy
issued to SBC one share of Class B common stock in consideration of $100 on
May 31, 2000. This share was issued in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933 relating to
sales by an issuer not involving a public offering. No underwriters or placement
agents were involved in this issuance.

    In January 2001, in partial consideration of its acquisition of the
WebAmerica Internet access customers and the BizOnThe.Net Web-hosting business
of U.S. Republic Communications, Prodigy agreed to release from escrow 727,272
shares of its Class A common stock to U.S. Republic in lieu of any additional
obligations by Prodigy relating to Prodigy's acquisition of BizOnThe.Net and
WebAmerica Internet access customers. These shares were issued in reliance upon
the exemption set forth in Section 4(2) of the Securities Act of 1933 relating
to sales by an issuer not involving a public offering. No underwriters or
placement agents were involved in this issuance.

ITEM 6. SELECTED FINANCIAL DATA

    The following data contains selected consolidated financial information and
other data for Prodigy. The selected consolidated financial data for Prodigy for
each of the years 1996-2000 has been derived from Prodigy's annual consolidated
financial statements, including the consolidated balance sheets at December 31,
1999 and 2000, and the related consolidated statements of operations and of cash
flows for the three years ended December 31, 2000, appearing elsewhere in this
document.

    Please read this information in conjunction with Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Prodigy's consolidated financial statements and accompanying notes included
elsewhere in this document.

                                       22
<PAGE>
  SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF PRODIGY

<TABLE>
<CAPTION>
                                                                      YEAR ENDED DECEMBER 31,
                                                     ---------------------------------------------------------
                                                       1996        1997        1998        1999        2000
                                                     ---------   ---------   ---------   ---------   ---------
                                                      (IN MILLIONS, EXCEPT NUMBER OF BILLABLE SUBSCRIBERS AND
                                                                      PER SHARE INFORMATION)
<S>                                                  <C>         <C>         <C>         <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
  Prodigy Internet.................................   $   .1      $  29.5     $ 80.7      $154.2      $ 288.5
  Amortization of subscriber incentives............       --           --         --       (15.6)       (53.4)
                                                      ------      -------     ------      ------      -------
    Prodigy Internet, net of amortization..........       .1         29.5       80.7       138.6        235.1
  Prodigy Classic..................................     90.6         98.8       48.2        15.6           --
  Management fees..................................       --           --         --         6.8        113.0
  Other............................................      8.2          5.9        7.2        12.4         28.3
                                                      ------      -------     ------      ------      -------
Total revenues.....................................     98.9        134.2      136.1       173.4        376.4

Operating costs & expenses:
  Costs of revenue.................................     66.3         92.0       93.3       102.2        207.8
  Marketing........................................     20.7         59.6       41.7        58.9         94.9
  Product development..............................      4.8         11.4       10.9        12.3         14.3
  General & administrative.........................     49.8         56.3       44.6        61.7        131.9
  Depreciation & amortization......................     12.3         21.4       16.1        21.8        179.1
  Amortization of subscriber acquisition costs.....       --           --         --         4.8         11.6
  Acquired incomplete technology...................     20.9           --         --          --           --
  Restructuring and other costs....................      3.1          9.9         --          --         19.5
  Write-down of assets held for sale...............       --          2.4         --          --           --
  Loss on sale of cellular assets..................       --           .8         --          --           --
  Write-down of goodwill and other intangibles.....       --           --         --          --         33.0
                                                      ------      -------     ------      ------      -------
Total operating costs & expenses...................    177.9        253.8      206.6       261.7        692.1
                                                      ------      -------     ------      ------      -------
Operating loss.....................................    (79.0)      (119.6)     (70.5)      (88.3)      (315.7)

Loss on equity investment in joint venture.........      (.5)       (12.1)        --          --           --
Gain on sale of assets/equity investments..........       --           --        5.2         3.3           --
Recovery of (write-down) equity investments........     (9.1)          .3         --          --           --
Interest income (expense), net.....................     (2.2)        (1.4)        .2         2.3        (12.1)
Gain on settlement of note receivable..............       --           --         --          .5           --
Gain on settlement of note payable.................       --           --         --         1.7           --
Minority interest in net loss......................       --           --         --          --        118.2
                                                      ------      -------     ------      ------      -------

Net loss...........................................   $(90.8)     $(132.8)    $(65.1)     $(80.5)     $(209.6)
                                                      ======      =======     ======      ======      =======
  Net loss per Common share basic & diluted:.......   $(8.76)     $ (7.66)    $(1.60)     $(1.34)     $ (3.10)
                                                      ======      =======     ======      ======      =======

Weighted average number of Common and Common
  equivalent shares outstanding basic & diluted....     10.4         17.3       40.7        60.0         67.7
                                                      ======      =======     ======      ======      =======
</TABLE>

                                       23
<PAGE>
        SELECTED HISTORICAL CONDENSED CONSOLIDATED FINANCIAL INFORMATION
                                  (CONTINUED)

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                         ------------------------------------------------------------------
                                            1996         1997         1998          1999           2000
                                         ----------   ----------   ----------   ------------   ------------
                                         (IN MILLIONS, EXCEPT NUMBER OF BILLABLE SUBSCRIBERS AND PER SHARE
                                                                    INFORMATION)
<S>                                      <C>          <C>          <C>          <C>            <C>
OTHER DATA:
Prodigy Internet billable subscribers
  at period end........................      7,000      221,000      505,000      1,138,000      1,608,000
Prodigy Classic billable subscribers at
  period end...........................    780,000      392,000      166,000             --             --
Internet subscribers managed...........         --           --           --        364,000      1,192,000
                                          --------     --------     --------     ----------     ----------
Total managed subscribers at period
  end..................................    787,000      613,000      671,000      1,502,000      2,800,000
                                          ========     ========     ========     ==========     ==========

EBITDA (1).............................   $  (76.2)    $ (110.0)    $  (49.2)    $    (40.5)    $    (38.6)

OTHER CASH FLOW DATA:
Net cash used in operating
  activities...........................   $  (35.3)    $ (114.0)    $  (68.0)    $    (40.1)    $    (21.4)
Net cash provided by (used in)
  investing activities.................      (47.9)       (15.3)         2.6         (212.6)         (21.7)
Net cash provided by financing
  activities...........................      104.1        120.4         65.2          276.0           30.6
</TABLE>

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                      ----------------------------------------------------
                                                        1996       1997       1998       1999       2000
                                                      --------   --------   --------   --------   --------
                                                                         (IN MILLIONS)
<S>                                                   <C>        <C>        <C>        <C>        <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)...........................   $(54.8)    $(48.5)    $(33.6)   $(128.1)    $(85.0)
Total assets........................................    126.6       93.5       78.3      346.0      802.7
Long-term debt (including related party notes)......     56.0       10.0         --        1.0      143.5
Contingent convertible notes (included in
  stockholder's equity (deficit))...................     30.5       30.5       30.5         --         --
Stockholder's equity (deficit)......................    (11.5)      17.7       29.8      165.1      307.1
</TABLE>

------------------------

(1) EBITDA represents operating loss plus depreciation and amortization,
    amortization of subscriber acquisition cost, amortization of contract
    subscriber incentive programs, gains on settlement of notes payable and
    asset disposals, and write-off of goodwill and other intangibles. EBITDA
    should not be construed as an alternative to operating income (as determined
    in accordance with U.S. GAAP), as a measure of the Company's operating
    performance, or as an alternative to cash flows from operating activities
    (as determined in accordance with U.S. GAAP), or as a measure of the
    Prodigy's liquidity.

                                       24
<PAGE>
SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)

    The following table sets forth unaudited consolidated quarterly statement of
operations data for each of the four quarters during the years ended
December 31, 1999 and 2000. In the opinion of management, this information has
been prepared substantially on the same basis as the audited financial
statements appearing elsewhere in this report on Form 10-K, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited consolidated
quarterly results of operations. The quarterly data should be read in
conjunction with the audited consolidated financial statements of Prodigy and
the notes thereto appearing elsewhere in this report on Form 10-K. The results
of operations for any quarter are not necessarily indicative of the results of
operations for any future period.

                       PRODIGY COMMUNICATIONS CORPORATION
                       PRESENTATION OF QUARTERLY FIGURES
<TABLE>
<CAPTION>
                                                              1999
                                      ----------------------------------------------------
QUARTER ENDED                          MARCH 31     JUNE 30     SEPTEMBER 30   DECEMBER 31
-------------                         ----------   ----------   ------------   -----------
                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                   <C>          <C>          <C>            <C>
Total revenues......................  $   35,926   $   37,090    $   46,362    $   54,030
Operating costs and expenses:
  Cost of revenue...................      21,846       22,105        27,743        30,505
  Marketing.........................      12,412       11,100        13,446        18,224
  Product development...............       3,450        3,405         2,761         2,725
  General and administrative........      12,653       12,861        16,827        19,311
  Write-off of goodwill and other
  intangibles.......................          --           --            --            --
  Depreciation and amortization.....       4,073        4,208         4,196         9,315
  Amortization of subscriber
    acquisition cost................          --           --         6,067         2,423
  Restructuring costs...............          --           --            --            --
                                      ----------   ----------    ----------    ----------
Total operating costs and
  expenses..........................      54,434       53,679        71,040        82,503
                                      ----------   ----------    ----------    ----------
Operating loss......................     (18,508)     (16,589)      (24,678)      (28,473)

Interest income/(expense), net......       1,064        1,842         1,127        (1,771)
Gain on sale of equity investment...          --        3,319            --           500
Gain of settlement of note
  payable...........................       1,714           --            --            --
Minority interest in net loss.......          --           --            --            --
Other...............................          --           44           (59)          (20)
                                      ----------   ----------    ----------    ----------
Net loss............................  $  (15,730)  $  (11,384)   $  (23,610)   $  (29,764)
                                      ==========   ==========    ==========    ==========
Basic and diluted net loss per
  share.............................  $    (0.29)  $    (0.19)   $    (0.39)   $    (0.46)
                                      ==========   ==========    ==========    ==========
Weighted avg number of shares
  outstanding.......................  53,455,241   61,007,546    61,145,041    64,094,423
                                      ----------   ----------    ----------    ----------

<CAPTION>
                                                              2000
                                      ----------------------------------------------------
QUARTER ENDED                          MARCH 31     JUNE 30     SEPTEMBER 30   DECEMBER 31
-------------                         ----------   ----------   ------------   -----------
                                        (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S>                                   <C>          <C>          <C>            <C>
Total revenues......................  $   51,964   $   73,356    $  121,073    $  129,962
Operating costs and expenses:
  Cost of revenue...................      29,415       37,564        68,861        71,988
  Marketing.........................      18,769       16,418        31,393        28,329
  Product development...............       3,282        3,643         3,789         3,570
  General and administrative........      21,609       27,426        40,727        42,160
  Write-off of goodwill and other
  intangibles.......................          --           --            --        33,020
  Depreciation and amortization.....       8,885       29,252        70,305        70,627
  Amortization of subscriber
    acquisition cost................       2,330        2,889         3,410         2,992
  Restructuring costs...............          --        9,555         8,968           929
                                      ----------   ----------    ----------    ----------
Total operating costs and
  expenses..........................      84,290      126,747       227,453       253,615
                                      ----------   ----------    ----------    ----------
Operating loss......................     (32,326)     (53,391)     (106,380)     (123,653)
Interest income/(expense), net......      (2,613)      (2,709)       (3,117)       (3,641)
Gain on sale of equity investment...          --           --            --            --
Gain of settlement of note
  payable...........................          --           --            --            --
Minority interest in net loss.......          --       17,111        46,643        54,418
Other...............................          25           40             8           (38)
                                      ----------   ----------    ----------    ----------
Net loss............................  $  (34,914)  $  (38,949)   $  (62,846)   $  (72,914)
                                      ==========   ==========    ==========    ==========
Basic and diluted net loss per
  share.............................  $    (0.54)  $    (0.59)   $    (0.90)   $    (1.04)
                                      ==========   ==========    ==========    ==========
Weighted avg number of shares
  outstanding.......................  64,564,764   66,388,743    69,865,920    70,006,258
                                      ----------   ----------    ----------    ----------
</TABLE>

                                       25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
  OF OPERATIONS

    The following discussion should be read in conjunction with the risk
factors, selected financial information, and the audited consolidated financial
statements.

    Prodigy is a leading national Internet service provider and has been an
online pioneer since its inception in 1984. Prodigy launched Prodigy Classic as
the world's first consumer-focused online service in 1988. Prodigy Classic
featured custom content, email and chat rooms, and was based on technologies
owned by Prodigy. In October 1996, Prodigy launched Prodigy Internet, a service
allowing consumers with any computer operating system to access the Internet.
Prodigy Classic was discontinued in October 1999, as Prodigy completed the
transition to Prodigy Internet. Since the autumn of 1997, Prodigy has focused on
expanding the Prodigy subscriber base and introducing additional Internet-based
services. Prodigy has also used outside companies for network coverage, customer
support and content. In May 2000, Prodigy and SBC consummated their marketing
and strategic relationship. Due to these initiatives, Prodigy has substantially
reduced its fixed operating costs and number of employees. Prodigy believes it
can accommodate sustained subscriber growth cost-effectively without significant
capital expenditures.

    The results of operations of Internet service providers, including those of
Prodigy, are significantly affected by subscriber cancellations. Subscriber
acquisition expenses and the administrative expenses of enrolling and assisting
new subscribers are substantial, and in the past, Prodigy typically offered free
service for one or two months to new subscribers. In selected distribution
channels, Prodigy has replaced free trial programs with prepaid term plans and
"money back guarantee" plans in order to attract enrollees who are less likely
to terminate service.

    Prodigy historically has experienced better retention for subscribers under
prepaid term plans than subscribers under month-to-month plans. Under prepaid
term plans, subscribers choose to prepay for longer terms at reduced monthly
rates. Additionally, under subscriber contract acquisition programs, Prodigy
makes payments to computer retailers and OEMs in return for, obtaining a signed
contractual commitment from the customer to a term subscription of one, two or
three years, and committed marketing of Prodigy Internet by the retailer in
connection with the retailer's other product advertisements. Prodigy's recent
experience has been that subscribers obtained through subscriber contract
acquisition programs have lower rates of cancellation than those obtained
through other channels.

    Prodigy historically has experienced seasonality in its business, with
higher expenses during the last and first fiscal quarters, corresponding to the
Christmas and post-Christmas selling season.

    On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business
of U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business. At
the closing, Prodigy repaid a $9 million loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy Class A common stock to U.S. Republic
including 727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. In January 2001, in partial
consideration of its acquisition of the BizOnThe.Net Web-hosting business of
U.S. Republic Communications, Prodigy agreed to release from escrow 727,272
shares of its Class A common stock to U.S. Republic in lieu of any additional
obligations by Prodigy relating to Prodigy's acquisition of BizOnThe.Net.

    The acquisition of BizOnThe.Net has been accounted for under the purchase
method of accounting and, accordingly, the cost to acquire BizOnThe.Net was
allocated to the assets acquired and liabilities assumed based on their
respective fair values with the excess allocated to goodwill. Based on the value
of the 2,840,993 shares of Class A common stock issued in connection with the
BizOnThe.Net acquisition and the $9 million cash used to repay the loan, the
total purchase price was approximately $58 million. The excess of the purchase
price over the fair value of tangible and intangible assets acquired and
liabilities assumed of $49.7 million has been allocated to goodwill and will be
amortized on a straight-line basis over

                                       26
<PAGE>
3 years. During December 2000, Prodigy wrote off $29.2 million of goodwill,
$2.1 million of tradename and $1.1 million of other intangibles associated with
BizOnThe.Net.

    On November 5, 1999, Prodigy agreed to acquire FlashNet
Communications, Inc. in a stock-for-stock merger. This merger was completed on
May 31, 2000. Under the terms of the merger agreement, Prodigy issued .35 shares
of Prodigy Class A common stock for each share of FlashNet common stock
outstanding on the closing date of the transaction, or 5,023,654 shares. In
addition, Prodigy assumed all vested FlashNet stock options and warrants
outstanding as of the date of the merger. Based on the value of 5,023,654 shares
of Prodigy Class A common stock issued and 778,187 options/warrants assumed in
connection with the FlashNet acquisition, the total purchase price was
$134.3 million including transaction costs of $1.9 million. On August 21, 2000,
Prodigy announced the closing of FlashNet Marketing, Inc. ("FMI"). FMI sold
FlashNet Internet service through a multi-level marketing arrangement with
independent sales representatives. Prodigy accrued $500,000 in expenses in 2000
to close FMI.

    The acquisition of FlashNet has been accounted for under the purchase method
of accounting. Accordingly, the cost to acquire FlashNet has been allocated to
the assets acquired and liabilities assumed based on their respective fair
values, with the excess allocated to goodwill. The goodwill and other
intangibles acquired are being amortized on a straight-line basis over a
three-year period.

    On May 31, 2000, SBC acquired an approximate 43% indirect interest in
Prodigy. In order to implement the transaction with SBC: (i) Prodigy contributed
substantially all its assets and liabilities and transferred its employees to
the operating partnership; (ii) SBC contributed to the operating partnership
routers, servers and associated hardware used in connection with its consumer
and small business Internet operations that were selected by Prodigy and
intangible assets consisting primarily of brand assets and subscriber
relationships; (iii) Prodigy received an initial interest in the operating
partnership of approximately 57%; (iv) SBC received an initial interest in the
operating partnership of approximately 43% and (v) SBC may convert its interest
in the operating partnership into a direct equity interest in Prodigy at any
time, or may require the operating partnership to be merged into Prodigy at any
time.

    At the closing of the transaction Prodigy also converted all outstanding
shares of common stock into Prodigy Class A common stock. Additionally, Prodigy
issued to an SBC subsidiary one share of Prodigy Class B common stock for
consideration of $100.

    Prodigy has recognized the contribution of the assets by SBC to the
operating partnership at fair value in exchange for the partnership units issued
of $560.8 million including transaction costs of approximately $3.5 million.
These intangible assets will be amortized over 3 years. The contribution of the
intangible assets at fair value has resulted in a substantial amount of
amortization, which will reduce Prodigy's future earnings or increase its future
losses. As a result of the partnership units issued, Prodigy consolidates the
operating partnership and recognizes the SBC minority interest in the operating
partnership. See "SBC Transaction".

RESULTS OF OPERATIONS

    Prodigy's total revenues are comprised of:

    - Internet and online service revenues, consisting of subscription revenues
      from subscribers to Prodigy Internet and Prodigy Classic;

    - management fees emanating from provision of certain management and
      consulting services to Telmex's Internet subsidiary Prodigy Internet
      Telmex and fees from SBC for providing Internet and online services to
      SBC's legacy dial-up and DSL subscribers, and

    - other revenues, consisting of small business Web-hosting fees from
      Prodigy's ProdigyBiz division and advertising and transaction fees.

                                       27
<PAGE>
    Prodigy defines billable subscribers as subscribers who remain enrolled
beyond completion of the applicable trial period or who enroll in a money-back
guarantee program. Prodigy defines "Internet subscribers managed" to include
billable Prodigy Internet subscribers, SBC legacy subscribers and billable
Prodigy Internet Telmex subscribers.

YEAR ENDED DECEMBER 31, 2000, COMPARED TO YEAR ENDED DECEMBER 31, 1999

SUBSCRIBERS

    The number of Prodigy Internet billable subscribers increased 470,000, or
41%, from 1,138,000 billable subscribers at December 31, 1999, to 1,608,000 at
December 31, 2000. This growth was largely attributable to the Strategic
Marketing Agreement Prodigy initiated with SBC, which became effective May 31,
2000. Of the total increase in new subscribers of 470,000, approximately
304,000, or 65%, emanated from the SBC channel. Total Internet subscribers
managed increased by 1,298,000, or 86%, from 1,502,000 at December 31, 1999, to
2,800,000 at December 31, 2000. Managed subscribers of Prodigy Internet Telmex
and SBC Communications Inc. accounted for 572,000 and 620,000 of the number of
Internet subscribers managed at December 31, 2000, respectively.

INTERNET REVENUES

    Subscription revenues from Prodigy Internet increased $96.5 million, or 70%,
from $138.6 million in 1999, to $235.1 million in 2000, due to the increase in
billable subscribers discussed above as well as the composition of these
subscribers. In June 2000, Prodigy began acquiring significant numbers of DSL
subscribers, primarily from the SBC channel, which service carries a
significantly higher price point ($39.95 per month, versus Prodigy's flagship
dial-up Internet service unlimited usage plan of $19.95 per month.) Subscription
revenues from Prodigy Classic decreased $15.6 million, or 100%, due to the
discontinuation of the Prodigy Classic service in October 1999.

    During 1999, Prodigy also entered into agreements with major retailers of
personal computers for the purpose of stimulating Prodigy Internet enrollments.
Under these agreements, Prodigy made payments to the retailers in exchange for
the retailers enrolling a customer onto Prodigy Internet, obtaining a signed
contractual commitment from the customer to a term subscription of one, two or
three years, and committed marketing of Prodigy Internet by the retailers in
connection with the retailers' other product advertisements. In accordance with
the terms of the agreements, the retailers provide certain incentives to the
customers upon enrollment. These payments amounted to $100, $250, or $400,
respectively, for a term subscription of one, two or three years at Prodigy's
standard monthly rates.

    In July 2000, the Emerging Issue Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives", which requires that promotional
incentives granted consumers in return for the sale of a product or service must
be classified in the Statement of Operations as a reduction of revenues related
to that product or service. Accordingly, in 1999 and 2000, amortization of
subscriber acquisition costs emanating from these contract subscriber incentive
programs of $15.6 million and $53.4 million, respectively, are reported on the
Statement of Operations as reductions of gross Prodigy Internet revenues earned
during the period. Previously, Prodigy had accounted for the amortization of
these costs as subscriber acquisition cost amortization.

MANAGEMENT FEES

    Management fee revenues from Prodigy Internet de Telmex and, commencing
June 2000, from legacy subscribers of SBC's Internet dial-up and DSL services,
increased by $106.2 million from $6.8 million in 1999 to $113.0 million in 2000.
Approximately 89% of this increase was attributable to dial-up and DSL customers
of SBC that became managed by Prodigy under the terms the strategic marketing
agreement with SBC which became effective on May 31, 2000.

                                       28
<PAGE>
OTHER REVENUES

    Other revenues increased by $15.9 million, or 128%, from $12.4 million in
1999 to $28.3 million in 2000. The increase in other revenues consisted of
$7.1 million from Prodigy's Web-hosting business, including revenues from
BizOnThe.Net, which was acquired in October 1999; $2.5 million from seven months
operations of FlashNet Communications in 2000, and a $6.2 million increase in
advertising display revenues primarily due to Prodigy's successful program of
re-establishing control over advertising content displayed on Prodigy's
homepage.

COST OF REVENUES

    Cost of revenues includes network and content expenses. Network expense
includes costs associated with Prodigy's hosting operations center in Yorktown
Heights, New York, the FlashNet division hosting operations center in Fort
Worth, Texas, as well as the costs of outsourced network provider services.
Content expenses consist of the costs of developing, or obtaining from third
parties, content for inclusion in Prodigy's service offerings. Cost of revenues
increased $105.6 million, or 103%, from $102.2 million in 1999, to
$207.8 million in 2000, primarily related to increased network charges incurred
by Prodigy in 2000 resulting from the increased hours of network usage incurred
by the increased number of Prodigy subscribers and, in the case of the
management of SBC legacy customers, the SBC network costs incurred by Prodigy
from this source.

    Prodigy Internet network usage increased 37% in 2000, compared to 1999,
primarily due to the subscribers obtained from the contract subscriber
acquisition programs that ran during the second half of 1999 and, to a lesser
extent, to the completion of the shift of the subscriber base from timed usage
plans which result in higher hourly usage. Prodigy Internet network costs
increased $6.5 million, or approximately 9%, from $75.9 million to
$82.4 million over the same period. During 2000 Prodigy amended its network
agreement with McLeodUSA to eliminate the fixed monthly charge, or "cap"
previously in effect in favor of a monthly network charge based upon a fixed
hourly rate times the number of hours of usage in the month. The increase in
network charges was offset, in part, by a decrease of $0.9 million, or 40%, in
content expense primarily attributable to the discontinuation of the Prodigy
Classic service.

SALES AND MARKETING

    Sales and marketing expense includes advertising, salaries of sales and
marketing personnel, and other general sales and marketing costs. Sales and
marketing expense increased $36.0 million, or 61%, from $58.9 million in 1999,
to $94.9 million in 2000. As a result of the significant increase in contract
subscribers during the period, Prodigy experienced a corresponding increase in
accounts receivable and the related provision for doubtful accounts associated
with the penalty fees charged on terminated subscriber contracts. Prodigy also
incurred significant acquisition expense in the form of bounties of between $40
and $75 payable to SBC for qualified new enrollments to Prodigy dial-up and DSL
service, respectively.

PRODUCT DEVELOPMENT

    Product development expense includes research and development costs, and
other product development costs. Product development expense increased
$2.0 million, or 16%, from $12.3 million in 1999 to $14.3 million in 2000.
Product development activities in 2000 centered upon development of Prodigy DSL
and a wireless Internet offering.

GENERAL AND ADMINISTRATIVE

    General and administrative expense increased $70.2 million, or 114%, from
$61.7 million in 1999, to $131.9 million in 2000. The increase was primarily
attributable to substantially higher customer service charges incurred in
connection with the SBC legacy subscribers and the new Prodigy subscribers
emanating from this channel during the seven months ending December 31, 2000. In
addition, a full year of

                                       29
<PAGE>
ProdigyBiz general and administrative costs are reflected in the year 2000
results and seven months activity emanating from FlashNet Communications Inc.
resulting in increases of $6.5 million and $7.2 million, respectively. In
addition, during 2000 Prodigy incurred $10.9 million of integration costs in
connection with implementing its strategic marketing agreements with SBC
primarily from a billing and customer service standpoint. Other components of
the increase in 2000 were retention bonuses of $6.5 million for those Prodigy
employees who opted not to accept relocation to the new Austin, Texas
headquarters location provided they remained in their positions through
December 31, 2000, relocation expense of $1.5 million, compensation expense
associated with option acceleration for separating employees who received twelve
months' accelerated vesting of their stock options, credit card interchange fees
of $1.8 million, 800 number charges of $0.5 million, and legal expense of
$2.1 million.

DEPRECIATION AND AMORTIZATION

    Depreciation and amortization expense increased $157.3 million, or 722%,
from $21.8 million in 1999, to $179.1 million in 2000. This increase was
comprised of $27.9 million of goodwill and other intangibles' amortization
related to the May 2000 FlashNet acquisition, $12.6 million attributable to a
full year of goodwill, tradename, and other intangibles' amortization incurred
in connection with the BizOnThe.Net acquisition versus three months in the prior
year, and $109.1 million of other intangibles' amortization as a result of the
SBC transaction in May 2000. In addition, depreciation expense increased by $0.9
and $0.7 million in each of Prodigy Internet and ProdigyBiz respectively during
2000, while FlashNet Communications incurred depreciation and amortization
charges of $6.2 million during the seven-month period ended December 31, 2000.

AMORTIZATION OF SUBSCRIBER ACQUISITION COSTS

    In May 1999, Prodigy entered into an agreement with Cable & Wireless
USA, Inc. ("Cable & Wireless") to purchase the dial-up access Internet
subscriber base of that entity. At the closing on July 20, 1999, Prodigy paid
Cable & Wireless $41.6 million in cash. Upon settlement of the transaction
during the first quarter of 2000, Prodigy received a purchase price reduction of
approximately $10 million from the original payment due to fewer subscribers
transitioning to the Prodigy Internet service than originally projected. Prodigy
has accounted for the purchase price paid for the acquired Cable & Wireless
subscribers that migrated to Prodigy Internet, and the subscribers it obtained
from Web America as subscriber acquisition costs, and amortized these costs over
36 months. During 2000, Prodigy incurred amortization of subscriber acquisition
costs of $11.6 million related to the acquired Cable & Wireless and Web America
subscribers.

    In addition, commencing in the fourth quarter 2000, EITF 00-14 became
effective with the result that amortization of deferred subscriber acquisition
costs attributable to "incentives" issued to subscribers in return for a one,
two, or three-year contractual commitment to Prodigy Internet, are required to
be reflected on the Statement of Operations as a reduction of revenues received
from the subscriber contracts. Previously, Prodigy had accounted for the
amortization of these costs as amortization of subscriber acquisition costs.

INTEREST AND OTHER INCOME

    Interest income decreased $3.6 million, from $5.1 million in 1999, to
$1.5 million in 2000. The 1999 level of interest income was primarily due to the
investment of the cash proceeds of Prodigy's initial public offering in
February 1999 in short-term money market instruments. Interest expense increased
$10.6 million, or 366% from $2.9 million in 1999 to $13.5 million in 2000. The
increase in 2000 reflects a full year of the outstanding note payable to Banco
Inbursa, S.A., an affiliate of Carso Global Telecom, in the current year versus
approximately four months in 1999.

                                       30
<PAGE>
    During the year ended December 31, 1999, Prodigy recognized a gain of
$3.3 million upon the sale of an equity investment. Also in 1999, Prodigy
recognized a gain of $1.7 million when it paid $.75 million in full settlement
of a promissory note in the principal amount of $2.0 million plus all accrued
interest.

INCOME TAXES

    Prodigy has evaluated the positive and negative evidence bearing on the
realizability of its deferred tax assets, which are comprised principally of net
operating loss carry-forwards. Under the applicable accounting standards,
Prodigy has considered its history of losses, and concluded that it is more
likely than not that Prodigy will not realize these favorable tax attributes.
Accordingly, the related deferred tax assets have been fully reserved.

OPERATING LOSS

    As a result of the foregoing factors, Prodigy's operating loss increased
$227.6 million, or 258%, from $88.2 million in 1999, to $315.8 million in 2000;
and its net loss increased $129.1 million, or 160%, from $80.5 million in 1999,
to $209.6 million in 2000.

YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998

SUBSCRIBERS

    The number of Prodigy Internet billable subscribers increased 633,000, or
125%, from 505,000 billable subscribers at December 31, 1998, to 1,138,000 at
December 31, 1999. Prodigy Classic subscribers decreased from 166,000 at
December 31, 1998, to 70,000 on October 1, 1999, the date Prodigy Classic was
discontinued, and zero thereafter. Total Internet subscribers managed increased
by 997,000, or 197%, from 505,000 at December 31, 1998, to 1,502,000 at
December 31, 1999. Managed subscribers of Prodigy Internet de Telmex accounted
for approximately 364,000 of the number of Internet subscribers managed at
December 31, 1999.

INTERNET REVENUES

    Subscription revenues from Prodigy Internet increased $57.9 million, or 72%,
from $80.7 million in 1998, to $138.6 million in 1999, due to the increase in
billable subscribers discussed above. Subscription revenues from Prodigy Classic
decreased $32.6 million, or 68%, from $48.2 million in 1998, to $15.6 million in
1999, due to the discontinuation of service as of October 1999. Timed usage
revenues decreased $2.7 million, or 64%, from $4.2 million in 1998, to
$1.5 million in 1999. The decrease in timed usage revenues was primarily
attributable to the decrease in Prodigy Classic subscribers during 1999.

    In accordance with EITF 00-14, all prior periods have been restated to
reflect amortization of deferred subscriber acquisition costs attributable to
"incentives" issued to subscribers in return for a one, two, or three-year
contractual commitment to Prodigy Internet, as a reduction of revenue in the
Statement of Operations. Previously, Prodigy had accounted for the amortization
of these costs as Amortization of subscriber acquisition costs.

OTHER REVENUES

    Other revenues increased by $12.0 million, or 166%, from $7.2 million in
1998, to $19.2 million in 1999. The increase in other revenues consisted of
$6.8 million in management fees relating to Prodigy's January 1999 agreement
with Telmex to manage the Prodigy Internet de Telmex Internet subscribers;
$3.0 million from Prodigy's Web-hosting business, including revenues from
BizOnThe.Net, which was acquired in October 1999; $5.4 million attributable to
transition services revenue related to Prodigy's July 1999 acquisition of
Internet subscribers of Cable & Wireless, and a $1.0 million increase in
advertising display revenues primarily due to Prodigy's successful program of
re-establishing control over advertising

                                       31
<PAGE>
content displayed on Prodigy Internet's homepage. These increases were offset,
in part, by a decrease of $4.4 million from Prodigy's African Internet
operations that were sold in October 1998.

COST OF REVENUES

    Cost of revenues includes network and content expenses. Network expense
includes costs associated with Prodigy's hosting operations center in Yorktown
Heights, New York, as well as the costs of outsourced network provider services.
Content expenses consist of the costs of developing, or obtaining from third
parties, content for inclusion in Prodigy's service offerings. Cost of revenues
increased $8.8 million, or 9%, from $93.4 million in 1998, to $102.2 million in
1999, primarily related to increased network charges incurred by Prodigy in
1999.

    Network usage increased 65% in 1999, compared to 1999, primarily due to the
shift of the subscriber base from timed usage plans that result in higher hourly
usage. However, network expense increased only 11%, or $10.3 million, due to a
monthly "cap" (based on average hourly usage by subscribers) contained in the
network agreement between Prodigy and McLeodUSA. The increase in network charges
was offset, in part, by a decrease of $1.5 million, or 40%, in content expense
attributable to the discontinuation of the Prodigy Classic service.

SALES AND MARKETING

    Sales and marketing expense includes advertising, salaries of sales and
marketing personnel, and other general sales and marketing costs. Sales and
marketing expense increased $17.2 million, or 41%, from $41.7 million in 1998,
to $58.9 million in 1999. The increase in marketing costs was primarily
attributable to an increase of $5.6 million in production, media and other costs
associated with Prodigy's "There is a Choice" and "Are you a Prodigy?"
advertising campaigns that appeared during 1999. In early 1998, Prodigy
postponed certain of its marketing programs in response to network performance
issues encountered during the transition period accompanying the initial rollout
of the McLeodUSA network. Additionally, Prodigy spent $4.4 million in
establishing Prodigy's Business Solutions division and marketing its product
offerings, and $1.4 million in marketing Prodigy's Hispanic Internet offering.
Sales and marketing expense also reflects increased bad debt provisions of
$2.8 million related to amounts due from subscribers for contractual early
termination penalties. As a result of the significant increase in contract
subscribers during the period, Prodigy experienced a corresponding increase in
accounts receivable and the related provision for doubtful accounts associated
with the penalty fees charged on terminated subscriber contracts.

PRODUCT DEVELOPMENT

    Product development expense includes research and development costs, and
other product development costs. Product development expense increased
$1.4 million, or 13%, from $10.9 million in 1998, to $12.3 million in 1999.
Product development activities in 1999 centered on implementing the billing,
provisioning and customer service infrastructure to support Prodigy's small
business Web-hosting business; improving the system infrastructure supporting
the Prodigy Internet de Telmex subscriber base, including Year 2000 remediation
efforts; developing a new homepage for Prodigy Internet, and developing future
Prodigy Internet product offerings and service enhancements.

GENERAL AND ADMINISTRATIVE

    General and administrative expense increased $17.1 million, or 38%, from
$44.6 million in 1998, to $61.7 million in 1999. The increase was primarily
attributable to substantially higher customer service charges incurred in
connection with the 125% increase of billable Prodigy Internet subscribers
achieved in the year, especially the heavy volume of enrollments emanating from
the contract subscriber acquisition program during the second half of 1999. This
increase primarily reflected a $10.2 million increase in customer service
charges, a $2.7 million increase in 800 number charges, and a $2.1 million
increase in

                                       32
<PAGE>
billing and credit card interchange fees. General and administrative expense
also increased in 1999, due to increased charges for accounting and legal fees,
recruiting, office temporary workers, and compensation expense resulting from
the issuance of stock options priced below market.

DEPRECIATION AND AMORTIZATION

    Depreciation and amortization expense increased $5.7 million, or 35%, from
$16.1 million in 1998, to $21.8 million in 1999. The increase was primarily due
to $4.0 million of goodwill, tradename, and other intangibles' amortization
incurred in connection with the BizOnThe.Net acquisition. In addition, the 1999
period reflects depreciation attributable to a new accounting system, as well as
subscriber management software implemented during 1999.

AMORTIZATION OF SUBSCRIBER ACQUISITION COSTS

    In May 1999, Prodigy entered into an agreement with Cable & Wireless to
purchase the dial-up access Internet subscriber base of that entity. At the
closing on July 20, 1999, Prodigy paid Cable & Wireless $40.9 million in cash.
Upon settlement of the transaction during the first quarter of 2000, Prodigy
received a purchase price reduction of $10.1 million from the original payment
due to fewer subscribers transitioning to the Prodigy Internet service than
originally projected. Prodigy has accounted for the purchase price paid for the
acquired Cable & Wireless subscribers that migrated to Prodigy Internet, as
subscriber acquisition costs, and amortizes these costs over 36 months. During
1999, Prodigy incurred amortization of subscriber acquisition costs of
$4.8 million related to the acquired Cable & Wireless subscribers.

INTEREST AND OTHER INCOME

    Interest income increased $3.6 million, from $1.5 million in 1998, to
$5.1 million in 1999. The increase is primarily due to the investment of the
cash proceeds of Prodigy's initial public offering in February 1999, in
short-term money market instruments. These increases were offset by interest
expense of $2.9 million incurred to service notes payable during 1999.

    During the year ended December 31, 1999, Prodigy recognized a gain of
$3.3 million upon the sale of an equity investment. In addition, Prodigy
recognized a gain of $1.7 million when it paid $.75 million in full settlement
of a promissory note in the principal amount of $2.0 million plus all accrued
interest.

INCOME TAXES

    Prodigy has evaluated the positive and negative evidence bearing on the
realizability of its deferred tax assets, which are comprised principally of net
operating loss carry-forwards. Under the applicable accounting standards,
Prodigy has considered its history of losses, and concluded that it is more
likely than not that Prodigy will not realize these favorable tax attributes.
Accordingly, the related deferred tax assets have been fully reserved.

OPERATING LOSS

    As a result of the foregoing factors, Prodigy's operating loss increased
$17.8 million, or 25%, from $70.5 million in 1998, to $88.2 million in 1999; and
its net loss increased $15.4 million, or 24%, from $65.1 million in 1998, to
$80.5 million in 1999.

FISCAL YEAR 2000 RESTRUCTURING

    In June 2000, Prodigy announced that it would move its headquarters from
White Plains, New York to Austin, Texas to better leverage Prodigy's alliance
with SBC. As a result of this relocation, Prodigy has recorded a restructuring
charge of $21.6 million related primarily to early termination payments and
other

                                       33
<PAGE>
contractual obligations for certain non-cancelable property leases and minimum
purchase commitments as well as costs associated with employee terminations.

    Real estate lease termination costs of approximately $5.2 million have been
accrued related to Prodigy's White Plains, Dallas and Houston facilities, and
have been reduced for sublease income that management believes is probable.
Other related exit costs of $12.1 million primarily consist of minimum purchase
commitments related to certain network and communication equipment agreements
which will be terminated.

    Accrued business restructuring costs for employee separations of
$4.2 million related to approximately 254 employees, of which 97 employees have
departed as of December 31, 2000, who were predominately located at the White
Plains, Dallas and Houston locations. These costs include severance and other
benefits.

    All actions required under this plan are expected to be taken by
September 30, 2001.

    Components of the 2000 business restructuring costs and amounts recorded
against the reserve as of December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                                                 ACCRUED
                                                                 2000            COSTS AT
                                                   2000        PAYMENTS/       DECEMBER 31,
                                                  CHARGES        OTHER             2000
                                                -----------   -----------      ------------
<S>                                             <C>           <C>              <C>
Lease obligations.............................  $ 5,253,000   $   400,000(a)   $ 5,653,000
Employee severance............................    4,174,000    (1,228,000)       2,946,000
Other contractual commitments.................   12,125,000            --       12,125,000
                                                -----------   -----------      -----------
                                                $21,552,000   $  (828,000)     $20,724,000
                                                ===========   ===========      ===========
</TABLE>

------------------------

(a) Approximately $400,000 of previously accrued liabilities related to these
    lease obligations was reclassified to the accrued restructuring costs from
    other liabilities.

FISCAL YEAR 1997 RESTRUCTURING

    During 1997, in an effort to decrease cash outflows and more efficiently
manage its business, Prodigy decided to, among other things, outsource its
internet network. In connection with the sale of its network Prodigy recorded
accrued costs of $14.6 million related primarily to early termination payments
and other contractual obligations for certain non-cancelable network related
agreements. In December 2000, Prodigy reversed the remaining unused reserve of
$2.1 million.

LIQUIDITY AND CAPITAL RESOURCES

    Since formation, Prodigy has relied on private sales of equity securities
(totaling $294.1 million through December 31, 2000), borrowings and its initial
public offering in February 1999, with net proceeds of $157.2 million to fund
its operations. Prodigy has incurred significant losses since inception, and at
December 31, 2000, had an accumulated deficit of $582.9 million and a working
capital deficit of $85.1 million comprised of current liabilities of
$122.7 million offset by current assets of $37.6 million.

    For the years ended December 31, 1998, 1999 and 2000, Prodigy incurred
negative cash flow from operations of $68 million, $40 million, and
$21 million, respectively. The decrease in cash used in operating activities
from 1998 to 1999 resulted from timing of accounts payable settlements and
increased amortization expense, which offset the increased net losses. The
reduction in cash used in operating activities from 1999 to 2000 was due to
reduction in accounts receivable and restructuring costs.

    Net cash used in investing activities increased by $215.2 million in 1999,
to $212.6 million compared to $2.6 million received from investing activities in
1998. The 1999 increase was due to cash payments related

                                       34
<PAGE>
to the acquisition of BizOnThe.Net, the acquisition of subscribers from Cable &
Wireless USA, subscriber contract acquisition programs, and increased capital
expenditures. Net cash used in investing activities decreased in 2000 to
$21.7 million primarily as a result of the discontinuation of the majority of
the contract subscriber programs.

    In May 1999, Prodigy entered into an agreement with Cable & Wireless, to
purchase the dial-up Internet access subscriber base of that entity for a
purchase price of approximately $31.7 million in cash, as determined by the
number of qualified Cable & Wireless subscribers who transitioned to Prodigy
Internet.

    From July 1999 through December 1999, Prodigy paid approximately
$154.6 million in consideration for subscribers obtained through its subscriber
contract acquisition programs. During 2000 Prodigy paid an additional
$19.5 million related to these programs. Prodigy has $5.4 million accrued
related to these programs as of December 31, 2000. Prodigy has capitalized these
costs and will amortize these costs over the terms of the underlying subscriber
contracts (one, two or three years).

    Prodigy's capital expenditures for the year ended December 31, 2000, were
$4.9 million, compared to capital expenditures of $9.9 million in 1999. Prodigy
anticipates that its capital expenditures will be approximately $13.5 million in
2001.

    In August 1999, Prodigy obtained a $150 million revolving line of credit
from Banco Inbursa, a Carso Global affiliate, to fund its subscriber contract
acquisition programs during the third and fourth quarters of 1999. The terms of
this line of credit allow Prodigy to borrow, repay and re-borrow amounts in
minimum increments of $1 million. Advances are due 30 days after borrowing, but
Prodigy is permitted to roll-over advances into new advances at its election.
Advances are uncollateralized, and during the third and fourth quarters of 1999,
bore interest of 9% and 12%, respectively. At December 31, 2000, the amount
borrowed under the line of credit was $137 million. In January 2001, Banco
Inbursa extended its revolving line of credit to June 15, 2002 subject to
monthly interest rate adjustments governed by market conditions.

    On January 1, 2001, SBC extended a $110 million revolving line of credit.
Concurrently, SBC forgave $5 million of obligations owed on a telecommunications
contract negotiated by FlashNet Communications and DSL bounty payments owed by
Prodigy to SBC were eliminated, with the result that a net receivable to Prodigy
of $17.0 million was paid by SBC in February 2001.

    In January 2001, Prodigy borrowed $25 million under the SBC line of credit.
At the same time, $15 million was repaid Banco Inbursa for principal and accrued
interest under its line of credit. As of February 28, 2001, the amount borrowed
under the SBC line of credit was $25 million. In March 2001, Prodigy repaid
$10 million to SBC and $7 million to Banco Inbursa with respect to the lines of
credit.

    At December 31, 2000, Prodigy had available cash and cash equivalents of
$23 million ($27.6 million at February 28, 2001).

    Prodigy's future financing requirements will depend on a number of factors,
including Prodigy's operating performance and increases in operating expenses
associated with growth in Prodigy's business. Prodigy believes that its
operations in 2001 can be supported by the combination of the SBC and Banco
Inbursa lines of credit and funds generated internally.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective in the first quarter of 2001. The Company adopted
SFAS No. 133 on January 1, 2001, and the adoption of this pronouncement did not
have a material impact on the Company's financial position and results of
operations.

                                       35
<PAGE>
    In November 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 100, "Restructuring and Impairment Charges." SAB No. 100 express the views
of the SEC staff regarding the accounting for and disclosure of certain expenses
commonly reported in connection with exit activities and business combinations.
This includes the accrual of exit and employee termination costs and the
recognition of impairment charges. SAB No. 100 did not have a material impact on
Prodigy's financial position or results of operations.

    In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The adoption of SAB 101 did not have a material effect on Prodigy's financial
position or results of operations.

    In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No.25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on Prodigy's financial
position or results of operations.

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

    This report on Form 10-K contains "forward-looking statements" relating to
among other matters, future economic performance, plans and projections of
revenue and other financial items, that are based on the beliefs of assumptions
made by and information currently available to Prodigy. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by these
statements. The words "expect", "estimate", "anticipate", "believe", "intend",
"plan" and similar expressions and variations thereof are intended to identify
forward-looking statements. Important factors are described below, including
risks and uncertainties, that could cause actual results to differ materially
from those expressed in or implied by such forward-looking statements.

    PRODIGY HAS YET TO GENERATE POSITIVE CASH FLOWS AND HAS INCURRED SIGNIFICANT
LOSSES, AND MAY INCUR LOSSES IN THE FUTURE. IF PRODIGY DOES NOT ACHIEVE AND
SUSTAIN PROFITABILITY, PRODIGY'S FINANCIAL CONDITION AND STOCK PRICE COULD
DECLINE.

    Prodigy cannot assure that it will achieve or sustain profitability. Since
inception, Prodigy has incurred significant losses. The following table shows
Prodigy's revenues and net losses during the three years ended December 31,
1998, 1999 and 2000:

<TABLE>
<CAPTION>
                                                              (IN MILLIONS)
                                                         YEAR ENDED DECEMBER 31,
                                                      ------------------------------
                                                        1998       1999       2000
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
Revenues............................................   $136.1     $173.4     $376.4
Net Losses..........................................   $ 65.1     $ 80.5     $209.6
</TABLE>

    At December 31, 2000, Prodigy had:

    - an accumulated deficit of $582.9 million;

    - a working capital deficit of $85.1 million;

                                       36
<PAGE>
    - current liabilities of $122.7 million; and

    - current assets of $37.6 million.

    As a result of these losses, Prodigy has never generated positive cash flow
from operations, and has relied on private and public sales of equity securities
and borrowings to fund its operations. The following table shows Prodigy's
negative cash flow from operations during the last three years:

<TABLE>
<CAPTION>
      YEAR ENDED DECEMBER 31,
           (IN MILLIONS)
------------------------------------
 1998          1999           2000
------       --------       --------
<S>          <C>            <C>
$68.0         $40.1          $21.4
</TABLE>

    PRODIGY MAY NOT BE ABLE TO FUND ITS OPERATIONS WITH THE CASH GENERATED FROM
ITS BUSINESS AND ITS EXISTING CREDIT FACILITIES. THE EARLY TERMINATION OF ITS
EXISTING CREDIT FACILITIES COULD FORCE PRODIGY TO SEEK ADDITIONAL EQUITY OR DEBT
FINANCING ON TERMS UNFAVORABLE TO PRODIGY. ADDITIONAL FINANCING THAT MAY BE
SOUGHT BY PRODIGY MAY RESULT IN DILUTION TO EXISTING STOCKHOLDERS AND ADDITIONAL
OPERATING RESTRICTIONS.

    Prodigy has experienced substantial negative cash flow during 2000. Prodigy
had $27.6 million of cash available at February 28, 2001. In December 2000,
Prodigy entered into a credit agreement with SBC pursuant to which SBC has
agreed to make revolving loans to Prodigy, from time to time, through
December 21, 2003, in the maximum aggregate principal amount of $110 million.
The credit agreement will terminate on December 31, 2003. As of March 15, 2001,
$15 million was outstanding under this credit agreement. In January 2001,
Prodigy extended a $150 million revolving line of credit from Banco Inbursa, an
affiliate of Carso Global Telecom, to June 15, 2002. As of March 15, 2001,
$115 million was outstanding under this line of credit. The termination of
either line of credit agreement would force Prodigy to seek additional equity or
debt financing before it currently anticipates needing to do so. The terms under
which Prodigy obtains additional equity or debt financing could be unfavorable
to Prodigy and could adversely affect Prodigy's business. Any additional equity
financing may cause investors to experience dilution. Any additional debt
financing may result in restrictions on Prodigy's operations.

    PRODIGY OPERATES IN A HIGHLY COMPETITIVE MARKET AND FACES SIGNIFICANT
COMPETITION FROM A VARIETY OF CURRENT AND POTENTIAL SOURCES, INCLUDING EARTHLINK
AND AOL/TIME WARNER, AS WELL AS COMPANIES THAT PROVIDE BROADBAND SERVICES.
PRODIGY MAY ALSO FACE ADDITIONAL COMPETITIVE PRESSURES FROM STRATEGIC ALLIANCES
OR CONSOLIDATIONS AMONG OTHER INTERNET SERVICE PROVIDERS. MANY OF PRODIGY'S
CURRENT AND FUTURE COMPETITORS HAVE GREATER FINANCIAL, MARKETING AND TECHNICAL
RESOURCES. THUS, PRODIGY MAY FAIL TO COMPETE EFFECTIVELY IN ITS MARKET.

    Prodigy's industry is intensely competitive, and some of Prodigy's current
and future competitors have substantially greater financial, marketing and
technical resources than Prodigy. Increased competition could also adversely
affect Prodigy's ability to develop new service offerings and interfere with
Prodigy's efforts to maintain or grow its subscriber base. There can be no
assurance Prodigy will compete effectively. Increasing competition could
adversely affect Prodigy's future revenues and liquidity.

    Prodigy's industry includes many significant participants, including:

    - Internet service providers;

    - proprietary online service providers;

    - major international telecommunications companies;

    - internet-search services; and

    - various other telecommunications companies.

                                       37
<PAGE>
    Prodigy also faces competition from companies that provide broadband service
to residential customers, including:

    - local and long-distance telephone companies;

    - cable television companies; and

    - electric utility companies.

    Among the larger Internet service providers that Prodigy competes with are
EarthLink, Microsoft Network, AT&T WorldNet, MCI Internet, IBM Internet
Connection, PSINet, and Concentric Network. Microsoft's ownership of the
dominant PC operating system and the Microsoft Internet Explorer browser may
give Microsoft Network competitive advantages, including distribution and
marketing synergies. Prodigy also competes with AOL Time Warner, which offers
the AOL/Time Warner and CompuServe proprietary online services over closed
networks and Internet access.

    Broadband technologies offer significantly faster Internet access than
conventional modems. Broadband companies could include Internet access in their
basic service packages, offer access for a nominal additional charge, or prevent
Prodigy from delivering Internet access through the cable or wire connections
that these companies own.

    The federal Telecommunications Act of 1996 contains provisions that remove
or establish procedures for removing restrictions on regional Bell operating
companies, and others that may permit them to engage directly in the Internet
access business. The act also makes it possible for national long-distance
carriers, such as AT&T, to offer local telephone service, which would permit
these carriers to offer direct local Internet access. The act and strategic
alliances or consolidation among Internet service providers may result in
additional competitive pressures.

    PRODIGY MAY BE SUBJECT TO INCREASING PRICING PRESSURES DUE TO INCREASING
COMPETITION, THE INTRODUCTION OF FREE SERVICE AND UNLIMITED USAGE PLANS, AND THE
ELIMINATION OF MOST HOURLY ACCESS CHARGES IN THE INDUSTRY, WHICH COULD RESULT IN
LOWER REVENUES.

    Because of Prodigy's historically low operating margins, any decrease in
revenues or increase in marketing expenses would diminish the likelihood of
Prodigy becoming profitable. The introduction of free service and unlimited
usage plans, and the elimination of most hourly access charges by Internet
service providers, as well as increasing competition in Prodigy's industry, have
placed further pressure on Prodigy's revenues and profit margins.

    SUBSCRIBER CANCELLATIONS ARE COMMON IN PRODIGY'S INDUSTRY, AND THE COST OF
ACQUIRING AND RETAINING NEW SUBSCRIBERS IS HIGH. A HIGH RATE OF CUSTOMER
TURNOVER MAY THUS ADVERSELY AFFECT PRODIGY'S FUTURE REVENUES AND EXPENSES.

    The failure to attract and retain subscribers to Prodigy's services, or an
increase in or a failure to slow the rate of subscriber cancellations, would
adversely affect Prodigy's future revenues. Prodigy's industry is characterized
by a high rate of customer turnover. Customer acquisition expenses and the
administrative expenses of enrolling and assisting new subscribers are
substantial.

    MCLEODUSA'S FAILURE TO PROVIDE NETWORK SERVICES AS REQUIRED COULD DAMAGE
PRODIGY'S BUSINESS.

    The failure by McLeodUSA for any reason to provide network services as
required, or any significant disruption in these services, whether for
technical, operational or financial reasons, could adversely affect Prodigy's
service quality, reputation and customer base.

    TELECOMMUNICATIONS NETWORKS ARE SUBJECT TO SECURITY PROBLEMS SUCH AS
BREAK-INS AND VIRUSES, AND OTHER NETWORK FAILURES. THE OCCURRENCE OF A NETWORK
PROBLEM COULD RESULT IN BREACH OF CONFIDENTIALITY LAWSUITS, THE LOSS OF
SUBSCRIBERS AND SUBSTANTIAL COSTS.

                                       38
<PAGE>
    Security problems represent an ongoing threat to the telecommunications
networks used in Prodigy's business. McLeodUSA's network and Prodigy's
data-hosting center are potentially vulnerable to computer viruses, break-ins
and similar disruptions that could lead to service interruptions. Break-ins
could jeopardize the confidentiality of information stored or transmitted by
Prodigy's customers. The security measures employed by McLeodUSA and Prodigy
cannot assure complete protection from security problems. The occurrence of
these problems may result in claims against Prodigy, and could adversely affect
it or its ability to attract and retain customers.

    Prodigy's operations are also dependent on the protection of McLeodUSA's
network and its data-hosting center against damage from fire, power loss,
telecommunications failures and similar events. Technical problems and network
failures can occur from time to time in the ordinary course of operating a
telecommunications network. Prodigy's host configuration for Prodigy Internet is
unique, and for cost reasons, has not been replicated off-site. The occurrence
of a natural disaster or other unanticipated problems in McLeodUSA's network or
Prodigy's data-hosting center, or the failure of telecommunications providers to
provide required data communications capacity due to a natural disaster or for
any other reason, could cause interruptions in Prodigy's services. These service
interruptions could adversely affect Prodigy's business.

    PRODIGY RELIES ON THIRD PARTY PROVIDERS, INCLUDING LOCAL PHONE COMPANIES,
FOR ESSENTIAL BUSINESS SERVICES. THE INABILITY OR UNWILLINGNESS OF THESE
COMPANIES TO CONTINUE TO PROVIDE TELECOMMUNICATIONS, CUSTOMER SERVICE, BILLING
AND OTHER SERVICES TO PRODIGY, OR TO PROVIDE THESE SERVICES AT REASONABLE
PRICES, COULD NEGATIVELY AFFECT PRODIGY'S BUSINESS.

    In addition to its network arrangements with McLeodUSA, Prodigy has
outsourced aspects of its content, customer service and billing functions to
several providers. Outsourcing makes Prodigy reliant on third party providers
for critical functions. The failure of these providers to provide services as
required, or any significant disruption of or deterioration in services, could
require Prodigy to obtain alternative suppliers at a higher cost and result in
customer cancellations.

    Prodigy also relies on local telephone and other companies to provide data
communications capacity via local telecommunications lines and leased
long-distance lines. Prodigy's suppliers and telecommunications carriers could
enter into exclusive arrangements with its competitors, or stop selling or
leasing their products or services to Prodigy at commercially reasonable prices
or at all.

    PRODIGY MUST CONTINUE TO INCREASE ITS SUBSCRIBER BASE. ENROLLMENTS FROM PC
BUNDLING ARE DECLINING AND THE GROWTH IN CONSUMER PURCHASES OF COMPUTERS IS
SLOWING. IF FUTURE ENROLLMENTS FROM PC BUNDLING ARE NOT FULLY REPLACED BY
ENROLLMENTS FROM OTHER ACQUISITION PROGRAMS, PRODIGY'S FINANCIAL CONDITION MAY
DECLINE.

    Prodigy's financial condition may decline if it does not continue to
increase its subscriber base. Historically, a majority of Prodigy Internet
enrollments have arisen from bundling arrangements with PC manufacturers. In
1998, 44% of total enrollments to Prodigy Internet were obtained through PC
bundling, including 32% from Prodigy's PC bundling relationship with Packard
Bell/NEC. In 1999, the percentage of total enrollments to Prodigy Internet
obtained through PC bundling declined to 15%, but the percentage obtained
through contract acquisition programs, in which Prodigy makes payments of up to
$400 to major PC retailers who enroll subscribers to term subscriptions of at
least one year, increased from zero in 1998, to 34%. Prodigy's contract
acquisition program with Best Buy accounted for approximately 33% of total
enrollments during 1999. Prodigy's contract acquisition program with Best Buy
has been terminated. Prodigy has other, less significant, contract acquisition
programs with other retailers, and entered into an additional contract
acquisition program in February 2000. During 2000, SBC contributed 74,722 net
dial-up customers and 229,702 net DSL customers on behalf of Prodigy. However,
Prodigy cannot predict whether future contract acquisition programs will
generate as many enrollments as in the past. Prodigy is not currently engaged in
contract acquisition programs with retailers as of February 28, 2001.

                                       39
<PAGE>
    IF PRODIGY IS UNABLE TO EXPAND ITS NETWORK AND OPERATIONS TO ACCOMMODATE AND
MIGRATE CUSTOMERS ACQUIRED THROUGH THE ACQUISITION OF FLASHNET COMMUNICATIONS OR
THE SBC TRANSACTION TO PRODIGY'S SERVICE, PRODIGY MAY LOSE SUBSCRIBERS AND THUS
MAY BE UNABLE TO ACHIEVE DESIRED RESULTS OF THE ACQUISITIONS AND STRATEGIC
RELATIONSHIPS AND MAY EXPERIENCE INCREASED OPERATING LOSSES.

    As a part of its business strategy, Prodigy has completed several
acquisitions to date, including the acquisition of FlashNet Communications in
May 2000, and may enter into additional business combinations, acquisitions and
strategic relationships. As a result of these transactions, Prodigy must rapidly
take on management of a significant number of new customers. This is requiring
Prodigy to expand its operations, especially its network and customer service
operations, in order to accommodate these new customers. Any failure of Prodigy
to successfully expand its operations and a resulting deterioration of service
could make it difficult for Prodigy to attract and retain customers, including
the customers resulting from the SBC transaction.

    Prodigy may not succeed in addressing these risks or any other problems
encountered in connection with these transactions potentially disrupting
Prodigy's business and causing increased losses.

    PRODIGY MAY NOT BE ABLE TO COMPLETE ANY ACQUISITIONS, WHICH COULD ADVERSELY
AFFECT ITS COMPETITIVE POSITION.

    Prodigy's failure to expand its business through acquisitions may materially
adversely affect its competitive position. Prodigy may be unable to identify,
finance and complete acquisitions on acceptable terms. The Internet services
industry is highly fragmented, consisting of several thousand Internet service
providers in the United States. The Internet services industry is already
experiencing consolidation, which is expected to continue over the next few
years.

    PRODIGY'S BUSINESS PLAN REQUIRES IT TO CONTINUE TO GROW ITS OWNED AND
MANAGED SUBSCRIBER BASE. IF PRODIGY IS UNABLE TO MANAGE GROWTH EFFECTIVELY AND
MAINTAIN CONSISTENT NETWORK PERFORMANCE, ITS BUSINESS COULD BE HARMED.

    Prodigy's ability to exploit the market for its products and services, and
increase its subscriber base, requires an effective planning and management
process. Prodigy's ability to plan and manage effectively will require Prodigy
to continue to implement and improve its operational, financial and management
information systems. Prodigy will also be required to attract and retain skilled
managers and other personnel, including its current executive officers.

    IF SBC MARKETING EFFORTS FAIL TO GENERATE ADDITIONAL DSL SUBSCRIBERS,
PRODIGY MAY EXPERIENCE ADDITIONAL OPERATING LOSSES.

    The number of Prodigy Internet owned and managed subscribers, excluding
Telmex, increased from 1.138 million at December 31, 1999 to 2.155 million at
February 28, 2001. A significant portion of the increase was due to SBC's DSL
subscribers managed by Prodigy as a result of the SBC transaction. Prodigy's
continued growth in the DSL marketplace will largely tie to marketing efforts of
SBC. If SBC's marketing efforts do not succeed or if SBC fails to provide
Prodigy with the minimum number of DSL subscribers as required in the strategic
and marketing agreement (3.75 million over the nine-year period), Prodigy may
experience additional operating losses.

    IF PRODIGY IS UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL IN AN INTENSELY
COMPETITIVE ENVIRONMENT, ITS OPERATIONS COULD BE ADVERSELY EFFECTED. THE SBC
TRANSACTION AND THE RELOCATION OF PRODIGY'S HEADQUARTERS TO AUSTIN, TEXAS, MAY
CAUSE PRODIGY TO LOSE KEY PERSONNEL.

    Competition for key personnel is intense, and there can be no assurance that
Prodigy will be successful in attracting and retaining necessary personnel to
maintain and support its business. Competition for key personnel is intense, and
there can be no assurance that Prodigy will be successful in attracting and
retaining necessary personnel to maintain and support its business. As a result
of the SBC transaction and the relocation of Prodigy's headquarters to Austin,
Texas, there was a high degree of turnover of Prodigy senior managers during
2000.

                                       40
<PAGE>
    SBC has considerable influence over the management of Prodigy. Several of
Prodigy's senior executives are employees of SBC and are compensated by SBC. If
SBC fails to retain such employees, Prodigy will lose valuable key personnel. As
a result of SBC's influence over the management of Prodigy, current and
prospective Prodigy employees may experience uncertainty about their future
roles with Prodigy. This uncertainty may cause Prodigy to fail to attract and
retain key management, sales, marketing and technical personnel. Any failure to
attract and retain key personnel could affect the condition of Prodigy's
business.

    SBC AND CARLOS SLIM HELU CONTROL PRODIGY. SBC AND CARLOS SLIM HELU CAN
DETERMINE THE OUTCOME OF ALL MATTERS SUBMITTED TO STOCKHOLDERS IRRESPECTIVE OF
THE VOTES OF OTHER STOCKHOLDERS.

    SBC and Carlos Slim Helu control Prodigy. Mr. Slim and members of his
immediate family beneficially own a majority of the voting equity securities of
Carso Global Telecom. Carso Global Telecom may be deemed to control Telmex
through the shares of Telmex that it owns directly and indirectly. Carlos Slim
Helu, Carso Global Telecom and Telmex collectively own 41,910,111 shares of
Class A common stock of Prodigy, representing approximately 34.7% of the
outstanding voting securities of Prodigy. SBC, through its ownership of Class B
common stock and units in Prodigy Communications Limited Partnership, has voting
power equivalent to the ownership of 50,448,283 shares of Class A common stock
of Prodigy, representing approximately 41.8% of the outstanding voting
securities of Prodigy. SBC, as the holder of Class B common stock, has the right
to elect three of the nine members of Prodigy's board of directors. The holders
of Class A common stock, including SBC, have the right to elect the remaining
members of Prodigy's board of directors. Pursuant to a voting agreement, SBC has
agreed to vote in favor of three nominees to the Prodigy board of directors
designated by Carso Global Telecom and Telmex.

    Furthermore, the following business relationships among Prodigy, Carlos Slim
Helu and SBC exist:

    - Carlos Slim Helu controls Carso Global Telecom, and is a director of SBC;

    - Carso Global Telecom controls Telmex, and SBC owns an equity interest of
      approximately 8.9% in Telmex;

    - Carso Global Telecom and SBC have formed other joint ventures in the past,
      and may do so in the future; and

    - Charles Foster, Chairman of Prodigy's board of directors, Paul Roth,
      President and CEO, Gregory Williams, Chief Operating Officer, and Allen
      Craft, Chief Financial Officer, are executive officers of Prodigy and are
      employed by SBC.

    As a result of the SBC transaction, all major corporate actions will require
the unanimous approval of the executive steering committee.

    THE EXISTENCE AND AUTHORITY OF THE EXECUTIVE STEERING COMMITTEE MAY DECREASE
THE WILLINGNESS OF SOME POTENTIAL DIRECTORS TO SERVE ON THE BOARD OF DIRECTORS.

    As part of the SBC transaction, Prodigy established an executive steering
committee, consisting of two directors selected by SBC and two directors
selected by Carso Global Telecom and Telmex. The current members of the
executive committee are Messrs. Foster, Chico Pardo, Pickering and Salameh. All
major corporate actions require the unanimous approval of the executive steering
committee prior to being submitted for the approval of the board of directors of
Prodigy. A potential director who does not anticipate being appointed to the
steering committee could perceive the authority of the steering committee as
diminishing the authority of the full board. This could make it more difficult
for Prodigy to attract and retain qualified directors.

                                       41
<PAGE>
    ALTHOUGH THE STRATEGIC AND MARKETING AGREEMENT WAS RECENTLY EXTENDED THROUGH
2009, SBC WILL RETAIN ITS INTEREST IN PRODIGY IF THE STRATEGIC AND MARKETING
AGREEMENT EXPIRES OR IS TERMINATED.

    As part of the SBC transaction, Prodigy and SBC entered into a strategic and
marketing agreement governing the marketing of the Prodigy Internet service and
related matters. Effective January 1, 2001, SBC and Prodigy modified the
original strategic and marketing agreement and extended it to a nine-year period
(until December 31, 2009). SBC may terminate the agreement if Prodigy fails to
meet specified performance standards or in other specified circumstances. If the
agreement expires or is terminated, SBC will retain its interest in Prodigy. As
a result, there is a possibility that Prodigy may not realize the benefits it
anticipated receiving when it issued an approximate 43% interest to SBC.

    PRODIGY'S BUSINESS IS SUBJECT TO SEASONALITY WHICH CAUSES PRODIGY'S
QUARTERLY RESULTS TO FLUCTUATE. IF PRODIGY'S QUARTERLY RESULTS FAIL TO MEET THE
EXPECTATIONS OF PUBLIC MARKET ANALYSTS AND INVESTORS, PRODIGY'S BUSINESS MAY BE
ADVERSELY AFFECTED.

    Although Prodigy's strategy of contracting with third parties to provide
services such as network access, billing and customer service enables it to tie
many variable costs to variable revenue sources, Prodigy bases its fixed
expenses, in part, on its expectations of future revenues. If revenues are below
expectations, Prodigy may be unable to reduce fixed costs proportionately, which
may adversely affect its operating results.

    Prodigy experiences quarterly fluctuations in its operating results due to
many factors including:

    - pricing changes;

    - changes in the level of consumer spending during business cycles;

    - timing of introduction of new and enhanced services by Prodigy; and

    - competitive factors.

    In addition, Prodigy historically has experienced seasonality in its
business, with higher expenses during the last and first fiscal quarters,
corresponding to the Christmas and post-Christmas selling season. Accordingly,
Prodigy believes that quarter-to-quarter comparisons of operating results may
not be meaningful or indicative of future results.

    THE FAILURE TO PROTECT PRODIGY'S PROPRIETARY TECHNOLOGY ADEQUATELY WOULD
ADVERSELY AFFECT PRODIGY'S COMPETITIVE POSITION.

    Failure to protect Prodigy's proprietary technology could adversely affect
its competitive position. Prodigy attempts to protect its proprietary technology
through copyright and trade secrets laws, patents, employee and third party
confidentiality agreements, and other methods. Prodigy grants customers a
license to use its services under agreements that contain terms and conditions
prohibiting unauthorized reproduction. Despite these precautions, unauthorized
third parties may be able to copy portions of Prodigy's services or reverse
engineer or obtain and use information Prodigy regards as proprietary.

    PRODIGY DEPENDS ON THE CONTINUED USE AND EXPANSION OF THE INTERNET.

    Prodigy's business and revenues depend on the continued use and expansion of
the Internet. A decrease in the demand for Internet services or a reduction in
the currently anticipated growth for Internet services could adversely affect
Prodigy's future revenues and liquidity. Only recently has the commercial sector
begun significant use of the Internet, and more recently still, have consumers
begun using the Internet. Use of the Internet has grown dramatically, but
Prodigy cannot assure the continued use and expansion of the Internet as a
medium of communications and commerce.

    PRODIGY'S ATTRACTION AND RETENTION OF CUSTOMERS DEPENDS ON ITS ABILITY TO
ANTICIPATE AND ADAPT TO RAPIDLY CHANGING TECHNOLOGY, AND ON THE COMPATIBILITY OF
ITS TECHNOLOGY WITH THE TECHNOLOGY OF OTHERS.

                                       42
<PAGE>
    Prodigy's industry is characterized by rapid technological change resulting
in dynamic customer demands and frequent new product and service introductions.
As a result of these technical improvements, markets can change rapidly.
Prodigy's future results will depend in part on its ability to make timely and
cost-effective enhancements and additions to its services. For example,
competitors have introduced, or announced plans to introduce, high-speed
Internet access utilizing broadband technology through cable lines, integrated
services digital network, or ISDN telephone service, and digital subscriber
line, or DSL telephone service. While Prodigy offers high-speed Internet access
through DSL, to the extent that Prodigy provides DSL services on its own,
Prodigy may not have sufficient resources to provide DSL access when introducing
new services that meet customer demands on a timely basis. Prodigy's new service
introductions may not achieve market acceptance.

    Prodigy's ability to compete successfully is also dependent upon the
continue compatibility of its services with the technologies of others. Although
Prodigy intends to support emerging standards in the market for Internet access,
its products may not conform to new standards in a timely fashion. Services or
technologies developed by others could render Prodigy's services or technology
non-competitive or obsolete.

    CHANGES IN GOVERNMENT REGULATION, WHICH ARE LIKELY IN THE RAPIDLY EVOLVING
INTERNET-RELATED INDUSTRIES, COULD ADVERSELY AFFECT PRODIGY'S BUSINESS.

    Internet access and online services are not subject to direct regulation in
the United States. Changes in the regulatory environment relating to the
telecommunications and media industry could adversely affect Prodigy's business,
financial condition, results of operations, or prospects. As the law in this
area develops, Prodigy's potential liability for information available through
its services could require Prodigy to implement measures to reduce its exposure
to this liability. Regulation of the Internet and online services industry could
result in increased telecommunications costs or competition for participants in
the Internet industry, including Prodigy. Prodigy cannot predict whether, or to
what extent, any new regulation will occur, or what effect any new regulation
would have on it. Due to the increasing use of the Internet, additional laws may
be adopted covering issues such as content, user privacy, pricing, libel,
intellectual property protection and infringement, and technology export and
other controls.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

MARKET RISK ON VARIABLE RATE FINANCIAL INSTRUMENTS

    Prodigy maintains a $150 million line of credit from Banco Inbursa, S.A. The
terms of this line of credit allow Prodigy to borrow, repay and re-borrow
amounts in minimum increments of $1 million and is available for draw-down until
June 15, 2002. Interest rates on this facility fluctuate based on market
conditions at the time of each draw-down. Increases in market interest rates
would cause interest expense to increase and earnings before income taxes to
decrease. The change in interest expense and earnings before income taxes would
be dependent upon the weighted average outstanding borrowings during the
reporting period following an increase in market interest rates. Based on the
Prodigy's outstanding borrowings under this facility as of December 31, 2000 at
an average interest rate of 12% per annum, a 100 basis point increase in market
interest rates would increase interest expense and decrease earnings before
income taxes by approximately $1.4 million. The fair market value of the
outstanding obligations under this facility approximate the facility's carrying
value due to the variable interest rates in place as of December 31, 2000.

    In addition to the above, on January 19, 2001, Prodigy entered into a
$110 million line of credit with SBC which expires on December 31, 2003 and
bears interest at LIBOR plus 400 basis points. Accordingly, increases in market
interest rates would cause interest expense, if any, on this facility to
increase and earnings before income taxes to decrease. The change in interest
expense and earnings before income taxes would be dependent upon the weighted
average outstanding borrowings during the reporting period

                                       43
<PAGE>
following an increase in market interest rates. Prodigy had no outstanding
amounts under this credit facility as of December 31, 2000.

    Prodigy did not hold derivative financial instruments as of December 31,
2000 and has never held these instruments in the past.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                           <C>
PRODIGY COMMUNICATIONS CORPORATION
  Report of Independent Accountants.........................   45
  Consolidated Balance Sheets at December 31, 1999 and
  2000......................................................   46
  Consolidated Statement of Operations for the years ended
  December 31, 1998, 1999 and 2000..........................   47
  Consolidated Statements of Cash Flows for the years ended
  December 31, 1998, 1999 and 2000..........................   48
  Consolidated Statements of Stockholder's Equity (Deficit)
  for the years ended December 31, 1998, 1999 and 2000......   49
  Notes to Consolidated Financial Statements................   50
</TABLE>

                                       44
<PAGE>
                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Prodigy Communications
Corporation:

    In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of
Prodigy Communications Corporation and its subsidiaries ("Prodigy") at
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of Prodigy's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, New York
March 29, 2001

                                       45
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

                          CONSOLIDATED BALANCE SHEETS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                1999        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
ASSETS:
Current assets:
  Cash and cash equivalents.................................  $  35,473   $  23,042
  Trade accounts receivable, net of allowances for doubtful
    accounts of $3,380 and $3,797 at December 31, 1999 and
    2000, respectively......................................     10,314       7,683
  Due from affiliates.......................................      1,801       2,642
  Prepaid expenses..........................................      2,793       3,180
  Other current assets......................................      1,437       1,076
                                                              ---------   ---------
    Total current assets....................................     51,818      37,623
Restricted cash.............................................      4,692       5,261
Property and equipment, net.................................     18,201      30,005
Goodwill and other intangibles, net.........................     87,321     596,350
Subscriber acquisition costs, net...........................    182,838     129,815
Other assets................................................      1,118       3,611
                                                              ---------   ---------
    Total assets............................................  $ 345,988   $ 802,665
                                                              =========   =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
  Notes payable to related party............................  $ 110,154   $      --
  Accounts payable..........................................     24,351      22,910
  Accrued compensation......................................      3,095       4,566
  Accrued restructuring and other costs.....................      3,849      20,724
  Other accrued expenses....................................     16,847      33,575
  Accrued subscriber acquisition costs......................      7,144       5,431
  Unearned revenue..........................................     14,062      28,580
  Capital lease obligation--short term......................        412       6,879
                                                              ---------   ---------
    Total current liabilities...............................    179,914     122,665
Capital lease obligation--long term.........................        983       6,535
Notes payable to related party..............................         --     137,000
                                                              ---------   ---------
    Total liabilities.......................................    180,897     266,200
Minority interest...........................................         --     229,373

Commitments and contingencies (Note 14)
Stockholders' equity:
  Preferred stock, $.01 par value; 10,000,000 shares
    authorized; none issued or outstanding..................         --          --
  Class A Common stock, $.01 par value; 150,000,000 shares
    authorized; 64,502,608 and 70,212,598 shares issued and
    outstanding at December 31, 1999 and 2000,
    respectively............................................        645         702
  Class B Common stock: $.01 par value; 1 share issued and
    outstanding at December 31, 2000........................         --          --
  Additional paid-in capital................................    539,054     889,288
  Accumulated deficit.......................................   (373,275)   (582,898)
  Note receivable from stockholder..........................     (1,333)         --
                                                              ---------   ---------
    Total stockholders' equity..............................    165,091     307,092
                                                              ---------   ---------
    Total liabilities and stockholders' equity..............  $ 345,988   $ 802,665
                                                              =========   =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       46
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1998       1999       2000
                                                              --------   --------   ---------
<S>                                                           <C>        <C>        <C>
Revenues:
  Prodigy Internet..........................................  $ 80,696   $154,211   $ 288,504
  Amortization of subscriber incentives.....................        --    (15,630)    (53,439)
                                                              --------   --------   ---------
  Prodigy Internet, net of amortization.....................    80,696    138,581     235,065

  Prodigy Classic...........................................    48,212     15,599          --
  Management fees...........................................        --      6,833     112,987
  Other.....................................................     7,232     12,395      28,303
                                                              --------   --------   ---------
    Total revenues..........................................   136,140    173,408     376,355
Operating costs and expenses:
  Costs of revenue..........................................    93,355    102,199     207,828
  Sales and marketing.......................................    41,678     58,854      94,909
  Product development.......................................    10,880     12,341      14,284
  General and administrative................................    44,640     61,652     131,922
  Depreciation and amortization.............................    16,072     21,792     179,069
  Amortization of subscriber acquisition costs..............        --      4,818      11,621
  Restructuring costs.......................................        --         --      19,452
  Write-off of goodwill and other intangibles...............        --         --      33,020
                                                              --------   --------   ---------
    Total operating costs and expenses......................   206,625    261,656     692,105
Operating loss..............................................   (70,485)   (88,248)   (315,750)
  Gain on sale of assets/equity investments.................     5,176      3,319          --
  Gain on settlement of note payable........................        --      1,714          --
  Gain on settlement of note receivable.....................        --        500          --
  Interest income...........................................     1,541      5,121       1,453
  Interest expense..........................................    (1,315)    (2,859)    (13,533)
  Minority interest in net loss.............................        --         --     118,172
  Other.....................................................        --        (35)         35
                                                              --------   --------   ---------
    Net loss................................................  $(65,083)  $(80,488)  $(209,623)
                                                              ========   ========   =========
Basic and diluted loss per share............................  $  (1.60)  $  (1.34)  $   (3.10)
                                                              ========   ========   =========
Weighted average number of common shares outstanding used in
  computing basic and diluted net loss per share............    40,746     59,958      67,719
                                                              ========   ========   =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       47
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              --------------------------------
                                                                1998       1999        2000
                                                              --------   ---------   ---------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
Net loss....................................................  $(65,083)  $ (80,488)  $(209,623)
Adjustments to reconcile net loss to net cash used in
  operating activities:
  Gain on sale of assets....................................    (5,176)     (3,319)         --
  Gain on settlement of note payable........................        --      (1,714)         --
  Gain on settlement of note receivable.....................        --        (500)         --
  Option grants at below fair value.........................       730       1,481       2,108
  Depreciation and amortization of property and equipment...     7,896       8,429      16,250
  Amortization of intangibles and write-off of goodwill.....     7,446      11,882     195,839
  Amortization of subscriber acquisition costs (including
  incentives)...............................................        --      20,448      65,060
  Minority interest in net loss.............................                          (118,171)
  Provision for doubtful accounts...........................       (49)     (3,200)     (8,072)
  Change in operating assets and liabilities, net of effects
  of acquisitions and
    disposals:
  Trade accounts receivable.................................       823      (4,711)     11,082
  Due from affiliate........................................        --      (1,801)       (841)
  Prepaid expenses..........................................      (312)     (1,078)        646
  Other assets..............................................     1,320      (1,083)      1,745
  Assets held for sale......................................     1,650          --          --
  Accounts payable and other accrued expenses...............   (20,359)     12,997      (1,102)
  Accrued compensation......................................       652          95         763
  Accrued restructuring, purchase and other special costs...    (3,170)       (856)     16,875
  Unearned revenue..........................................     5,648       3,271       6,060
                                                              --------   ---------   ---------
    Net cash used in operating activities...................   (67,984)    (40,147)    (21,381)
Cash flows from investing activities:
  Acquisition of property and equipment.....................    (2,567)     (9,907)     (4,877)
  Acquisition of subscribers................................        --    (196,142)     (9,573)
  Acquisition of businesses.................................        --      (9,829)     (1,678)
  SBC transaction costs.....................................        --          --      (3,533)
  Increase in investments...................................        --          --      (2,000)
  Proceeds from sale of assets/equity investments...........     5,176       3,319          --
                                                              --------   ---------   ---------
    Net cash provided by (used in) investing activities.....     2,609    (212,559)    (21,661)
Cash flows from financing activities:
  Proceeds from issuance of common stock....................    74,942     164,533       2,595
  Repayment of notes payable to related parties.............   (32,100)    (19,846)    (13,809)
  Proceeds from notes payable to related parties............    22,100     130,000      40,655
  Repayment of borrowings...................................   (30,000)       (750)         --
  Proceeds from borrowings..................................    30,000          --          --
  Payment of note receivable from stockholder...............     1,333       1,334       1,333
  (Increase)/decrease in restricted cash....................    (1,272)        728        (163)
  Other.....................................................       189          --          --
                                                              --------   ---------   ---------
  Net cash provided by financing activities.................    65,192     275,999      30,611
                                                              --------   ---------   ---------
Net increase (decrease) in cash and cash equivalents........      (183)     23,293     (12,431)
Cash and cash equivalents, beginning of period..............    12,363      12,180      35,473
                                                              --------   ---------   ---------
Cash and cash equivalents, end of period....................  $ 12,180   $  35,473   $  23,042
                                                              ========   =========   =========

Supplementary cash flow information:
  Cash paid for interest....................................  $  1,164   $   1,823   $  13,035
                                                              ========   =========   =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       48
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                              COMMON STOCK           COMMON STOCK
                                                             CONTINGENT          CLASS A               CLASS B          ADDITIONAL
                                                             CONVERTIBLE   -------------------   --------------------    PAID-IN
                                                                NOTES       SHARES     AMOUNT     SHARES      AMOUNT     CAPITAL
                                                             -----------   --------   --------   ---------   --------   ----------
<S>                                                          <C>           <C>        <C>        <C>         <C>        <C>
Balance at December 31, 1997...............................   $  30,500     33,804      $338           --    $    --     $218,736

Issuance of common stock for cash..........................                 11,254       112           --         --       74,926
Issuance of common stock on conversion of advances from
  stockholders.............................................          --         --        --           --         --           --
Options granted at below fair market value.................          --         --        --           --         --          730
Acquisition and retirement of treasury shares..............          --        (24)       --           --         --          (96)
Comprehensive loss:
  Net loss.................................................          --         --        --           --         --           --
  Translation adjustment...................................          --         --        --           --         --           --
Comprehensive loss.........................................          --         --        --           --         --           --
                                                              ---------    -------      ----     ---------   -------     --------
Balance at December 31, 1998...............................      30,500     45,034       450           --         --      294,296

Issuance of common stock...................................          --     12,373       124           --         --      164,409
Issuance of common stock on acquisition of BizOnThe.Net....          --      2,841        28           --         --       48,411
Convertible securities redemption..........................     (30,500)     4,255        43           --         --       30,457
Options granted below fair market value....................          --         --        --           --         --        1,481
Comprehensive loss:
  Net loss.................................................          --         --        --           --         --           --
Comprehensive loss.........................................          --         --        --           --         --           --
                                                              ---------    -------      ----     ---------   -------     --------
Balance at December 31, 1999...............................          --     64,503       645           --         --      539,054

Exercise of options/employee stock purchase plan...........          --        460         5           --         --        4,816
Issuance of common stock...................................          --         --        --           --         --           --
Issuance of common stock and vested options/warrants
  in connection with the acquisition of FlashNet...........          --      5,024        50           --         --      131,468
Issuance of common stock in SBC transaction................          --         --        --                      --           --
Sale of subsidiary to minority interest....................          --         --        --           --         --      209,775
Issuance of common stock in connection with subscriber
  acquisitions.............................................          --        226         2           --         --        4,175
Comprehensive loss:
  Net loss.................................................          --         --        --           --         --           --
Comprehensive loss.........................................          --         --        --           --         --           --
                                                              ---------    -------      ----     ---------   -------     --------
Balance at December 31, 2000...............................   $      --     70,213      $702                 $    --     $889,288
                                                              =========    =======      ====     =========   =======     ========

<CAPTION>
                                                                               ACCUMULATED
                                                                                  OTHER
                                                             ACCUMULATED      COMPREHENSIVE      NOTE RECEIVABLE
                                                               DEFICIT        (LOSS) PROFIT      FROM STOCKHOLDER     TOTAL
                                                             ------------   ------------------   ----------------   ---------
<S>                                                          <C>            <C>                  <C>                <C>
Balance at December 31, 1997...............................   $(227,704)          $(189)             $(4,000)       $  17,681
Issuance of common stock for cash..........................          --              --                   --           75,038
Issuance of common stock on conversion of advances from
  stockholders.............................................          --              --                1,333            1,333
Options granted at below fair market value.................          --              --                   --              730
Acquisition and retirement of treasury shares..............          --              --                   --              (96)
Comprehensive loss:
  Net loss.................................................     (65,083)             --                   --          (65,083)
  Translation adjustment...................................          --             189                   --              189

Comprehensive loss.........................................          --              --                   --
                                                              ---------           -----              -------        ---------
Balance at December 31, 1998...............................    (292,787)             --               (2,667)          29,792
Issuance of common stock...................................          --              --                1,334          165,867
Issuance of common stock on acquisition of BizOnThe.Net....          --              --                   --           48,439
Convertible securities redemption..........................          --              --                   --               --
Options granted below fair market value....................          --              --                   --            1,481
Comprehensive loss:
  Net loss.................................................     (80,488)             --                   --          (80,488)

Comprehensive loss.........................................          --              --                   --               --
                                                              ---------           -----              -------        ---------
Balance at December 31, 1999...............................    (373,275)             --               (1,333)         165,091
Exercise of options/employee stock purchase plan...........          --              --                   --            4,821
Issuance of common stock...................................          --              --                1,333            1,333
Issuance of common stock and vested options/warrants
  in connection with the acquisition of FlashNet...........          --              --                   --          131,518
Issuance of common stock in SBC transaction................          --              --                   --               --
Sale of subsidiary to minority interest....................          --              --                   --          209,775
Issuance of common stock in connection with subscriber
  acquisitions.............................................          --              --                   --            4,177
Comprehensive loss:
  Net loss.................................................    (209,623)             --                   --         (209,623)

Comprehensive loss.........................................          --              --                   --               --
                                                              ---------           -----              -------        ---------
Balance at December 31, 2000...............................   $(582,898)          $  --              $    --        $ 307,092
                                                              =========           =====              =======        =========

<CAPTION>

                                                             COMPREHENSIVE
                                                                  LOSS
                                                             --------------
<S>                                                          <C>
Balance at December 31, 1997...............................
Issuance of common stock for cash..........................
Issuance of common stock on conversion of advances from
  stockholders.............................................
Options granted at below fair market value.................
Acquisition and retirement of treasury shares..............
Comprehensive loss:
  Net loss.................................................    $ (65,083)
  Translation adjustment...................................          189
                                                               ---------
Comprehensive loss.........................................      (64,894)
                                                               =========
Balance at December 31, 1998...............................
Issuance of common stock...................................
Issuance of common stock on acquisition of BizOnThe.Net....
Convertible securities redemption..........................
Options granted below fair market value....................
Comprehensive loss:
  Net loss.................................................      (80,488)
                                                               ---------
Comprehensive loss.........................................      (80,488)
                                                               =========
Balance at December 31, 1999...............................
Exercise of options/employee stock purchase plan...........
Issuance of common stock...................................
Issuance of common stock and vested options/warrants
  in connection with the acquisition of FlashNet...........
Issuance of common stock in SBC transaction................
Sale of subsidiary to minority interest....................
Issuance of common stock in connection with subscriber
  acquisitions.............................................
Comprehensive loss:
  Net loss.................................................     (209,623)
                                                               ---------
Comprehensive loss.........................................    $(209,623)
                                                               =========
Balance at December 31, 2000...............................

</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       49
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

    Prodigy Communications Corporation ("Prodigy") is a leading nationwide
Internet Service Provider ("ISP"). Prodigy Internet delivers fast and reliable
Internet access and user-friendly Internet-based products, services and
information via a nationwide network covering more than 850 locations in all
50 states. Prodigy was formed in June 1996, under the name Prodigy, Inc., to
acquire Prodigy Services Company ("PSC") and to hold interests in International
Wireless Incorporated ("International Wireless"). In October 1996, Prodigy
launched Prodigy Internet, a service allowing consumers with any computer
operating system to access the Internet. Prodigy Classic, PSC's original online
service launched in 1988, was discontinued in October 1999, as Prodigy completed
the transition to Prodigy Internet. Since the autumn of 1997, Prodigy has
focused on expanding the Prodigy Internet subscriber base and introducing
Internet-based services.

    At December 31, 1999, Prodigy was controlled by Carso Global Telecom, S.A.
de C.V. ("Carso Global Telecom") through a 64.2% direct and indirect majority
voting equity interest in Prodigy's common stock. As a result of a strategic
relationship consummated with SBC Communications Inc. ("SBC") during 2000 (see
Note 2--Acquisition of FlashNet Communications, Transaction with SBC and
BizOnThe.Net Acquisition), Prodigy contributed substantially all of its assets
and liabilities and transferred its employees to an operating partnership,
Prodigy Communications Limited Partnership. Prodigy is the general partner of
the partnership and owns an approximate 57 percent interest and reports the
partnership on a consolidated basis net of SBC's minority interest. SBC owns an
approximate 43 percent interest in the partnership and owns a 43 percent
indirect interest in Prodigy's voting common stock. As of December 31, 2000,
Carso Global Telecom and Telemex own a 34 percent interest in Prodigy.

    Since formation, Prodigy has relied on private sales of equity securities
(totaling $294,100 through December 31, 2000), borrowings and its initial public
offering in February 1999 (with net proceeds of $157,200) to fund its
operations. Prodigy has incurred significant losses since inception and, at
December 31, 2000, had an accumulated deficit of $582,898 and a working capital
deficit of $85,042 comprised of current liabilities of $122,665 offset by
current assets of $37,623. For the years ended December 31, 1998, 1999 and 2000,
Prodigy incurred negative cash flows from operations of $67,984, $40,147 and
$21,381, respectively.

    At February 28, 2001, Prodigy had available cash and cash equivalents of
$27,633. Prodigy is currently experiencing negative cash flow each month and
expects to continue to experience negative cash flows through at least 2001. In
order to meet Prodigy's short-term cash needs, Prodigy continues to rely on its
$150,000 line of credit with Banco Inbursa, S.A., which is guaranteed by Telmex.
At December 31, 2000, the balance borrowed under this line of credit was
$137,000. (See Note 10--Notes Payable). Additionally, on December 29, 2000,
Prodigy and SBC entered into a credit agreement, pursuant to which, effective
January 19, 2001, SBC agreed to make revolving loans to Prodigy in the maximum
aggregate principal amount of $110,000. (See Note 17--Related Party
Transactions).

    In addition, to reduce the up-front cash requirements associated with its
DSL expansion, Prodigy had re-negotiated the payment terms of its subscriber
acquisition costs with SBC. Effective October 1, 2000, Amendment No. 1 to
Prodigy's Strategic and Marketing Agreement with SBC (see Note 2 "Acquisition of
FlashNet Communications, Transaction with SBC and BizOnThe.Net Acquisition")
(the "Amendment") permits Prodigy to pay subscriber acquisition costs over a
three-year period with the first installment due in October 2001. Previously,
such payments were due SBC at the time a qualified enrollment was recorded. In
addition, payment of subscriber acquisition costs owed to SBC prior to
October 1, 2000 may be deferred by Prodigy until February 5, 2001. Deferred
payments under the Amendment are subject to interest at the

                                       50
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

rate of 12% per annum. On January 1, 2001, Prodigy and SBC further amended and
restated the strategic and marketing agreement pursuant to which, among other
things, SBC waived approximately $23 million in subscriber acquisition costs
(See Note 17--Related Party Transactions).

    Prodigy's future financing requirements will depend on a number of factors,
including Prodigy's operating performance and increases in operating expenses
associated with growth in Prodigy's business. Prodigy believes that its
operations in 2001 can be supported by the combination of the SBC and Banco
Inbursa lines of credit and funds generated internally.

NOTE 2. AQUISITION OF FLASHNET COMMUNICATIONS, TRANSACTION WITH SBC AND
  BIZONTHE.NET ACQUISITION

    On November 5, 1999, Prodigy agreed to acquire FlashNet
Communications, Inc. ("FlashNet") in a stock-for-stock merger. This merger was
completed on May 31, 2000. Under the terms of the merger agreement, Prodigy
issued .35 shares of Prodigy Class A common stock for each share of FlashNet
common stock outstanding on the closing date of the transaction, or
5,023,654 shares. In addition, Prodigy assumed all vested FlashNet stock options
and warrants outstanding as of the date of the merger.

    Under accounting principles generally accepted in the United States, the
acquisition of FlashNet has been accounted for under the purchase method of
accounting. Accordingly, the cost to acquire FlashNet has been allocated to the
assets acquired and liabilities assumed based on their estimated fair values,
with the excess allocated to goodwill as follows:

<TABLE>
<S>                                                 <C>
Value of stock portion of purchase price..........  $119,764
Value of options and warrants assumed.............    12,573
Transaction costs.................................     1,931
                                                    --------
Purchase price....................................   134,268
Add: fair value of net liabilities assumed........     8,982
                                                    --------
Goodwill..........................................  $143,250
                                                    ========
</TABLE>

    Based on the value of the 5,023,654 shares of Prodigy Class A common stock
issued and 778,187 options/warrants assumed in connection with the FlashNet
acquisition, the total purchase price was $134,268 including transaction costs
of $1,931. The goodwill and other intangibles acquired, based on the excess of
the purchase price over the net book value of net assets acquired, was $143,250.
The goodwill and other intangibles are being amortized on a straight-line basis
over an estimated useful life of three years.

    On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business
of U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business. At
the closing, Prodigy repaid a $9 million loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy Class A common stock to U.S. Republic
including 727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. In January 2001, in partial
consideration of its acquisition of the BizOnThe.Net Web-hosting business of
U.S. Republic Communications, Prodigy agreed to release from escrow
727,272 shares of its Class A common stock from the escrow to U.S. Republic in
lieu of any additional obligations by Prodigy relating to Prodigy's acquisition
of BizOnThe.Net.

    The acquisition of BizOnThe.Net has been accounted for under the purchase
method of accounting and, accordingly, the cost to acquire BizOnThe.Net was
allocated to the assets acquired and liabilities assumed based on their
respective fair values with the excess allocated to goodwill. Based on the value
of

                                       51
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

the 2,840,993 shares of Class A common stock currently issued in connection with
the BizOnThe.Net acquisition and the $9,000 cash used to repay the loan, the
total purchase price was approximately $58,000. The excess of the purchase price
over the fair value of tangible and intangible assets acquired and liabilities
assumed of $49,688 has been allocated to goodwill and amortized on a
straight-line basis over 3 years. (See Note 8--Intangible Assets).

    The operations of BizOnThe.Net were combined with Prodigy's existing Web
hosting businesses and the combined operation is called ProdigyBiz.

    PRO-FORMA (UNAUDITED)

    The unaudited condensed pro-forma results of operations presented below
assumes the acquisitions of BizOnThe.Net and FlashNet occurred at the beginning
of each period presented. The pro-forma information is not necessarily
indicative of the combined results of operations of Prodigy, BizOnThe.Net and
FlashNet that would have resulted if the transaction had occurred on the dates
indicated. They are also not necessarily indicative of the future operating
results of the combined company.

<TABLE>
<CAPTION>
                                                     YEAR ENDED
                                                    DECEMBER 31,
                                                ---------------------
                                                  1999        2000
                                                ---------   ---------
<S>                                             <C>         <C>
Revenues......................................  $ 232,808   $ 393,988
Net loss......................................   (173,655)   (241,931)
Pro-forma net loss per common share...........      (2.59)      (3.47)
</TABLE>

    TRANSACTIONS WITH SBC

    In November 1999, Prodigy announced a transaction with SBC. As a result of
this transaction, which was completed on May 31, 2000, SBC acquired an
approximate 43% indirect interest in Prodigy. In order to implement the
transaction with SBC: (i) Prodigy contributed substantially all its assets and
liabilities and transferred its employees to Prodigy Communications Limited
Partnership (the "operating partnership"); (ii) SBC contributed to the operating
partnership routers, servers and associated hardware used in connection with its
consumer and small business Internet operations that were selected by Prodigy
and intangible assets consisting primarily of brand assets and subscriber
relationships; (iii) Prodigy received an initial interest in the operating
partnership of approximately 57%; (iv) SBC received an initial interest in the
operating partnership of approximately 43% and (v) SBC may convert its interest
in the operating partnership into a direct equity interest in Prodigy at any
time, or may require the operating partnership to be merged into Prodigy at any
time.

    At the closing of the transaction Prodigy also converted all outstanding
shares of common stock into Prodigy Class A common stock. Additionally, Prodigy
issued to an SBC subsidiary one share of Prodigy Class B common stock for
consideration of $100 (in whole dollars).

    In conjunction with the transaction, Prodigy and SBC entered into a
strategic and marketing agreement governing the sale and marketing of the
Prodigy Internet service and related matters. Under the agreement, Prodigy was
the exclusive retail Internet service marketed by SBC in the United States and
SBC purchased the Prodigy Internet service from Prodigy on wholesale terms and
provides Internet Service to SBC's approximately 767,000 existing Internet
subscribers. In addition, SBC committed to obtain for Prodigy an additional
1,200,000 Internet subscribers over a three-year period in exchange for a fee of
$40 to $75 (in whole dollars) for each subscriber obtained. SBC was obligated to
pay Prodigy a

                                       52
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

penalty for shortfalls in the number of subscribers delivered over the
three-year period, with the size of the penalty based on the number of
subscribers actually obtained. The agreement also includes provisions under
which SBC and Prodigy can purchase other services from each other, including
telecommunications and network services. (See Note 17--Related Party
Transactions).

    Prodigy has recognized the contribution of the assets by SBC to the
operating partnership in exchange for the partnership units issued at its
estimated fair value of $560,800. The contributed intangible assets are being
amortized over 3 years.

    Effective January 01, 2001, Prodigy and SBC amended and restated the
strategic marketing agreement. (See Note 17--Related Party Transactions).

NOTE 3. SIGNIFICANT ACCOUNTING POLICIES

    PRINCIPLES OF CONSOLIDATION

    The accompanying consolidated financial statements include the accounts of
Prodigy and its subsidiaries including Prodigy Communications Limited
Partnership and FlashNet. All significant intercompany accounts and transactions
have been eliminated.

    ESTIMATES AND ASSUMPTIONS

    The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.

    FOREIGN CURRENCY TRANSLATION

    The functional currencies of Prodigy's foreign subsidiaries, which were
disposed of in 1998, were the local currencies. Accordingly, assets and
liabilities of foreign subsidiaries were translated to U.S. dollars at
period-end exchange rates and revenues and expenses were translated using the
average rates during the period. The effects of foreign currency translation
adjustments have been accumulated and are included as a separate component of
stockholders' equity. Foreign currency transaction gains and losses, arising
from exchange rate fluctuations on transactions denominated in currencies other
than the functional currencies, were immaterial for all periods presented.

    REVENUE RECOGNITION

    Internet and on-line service revenues encompass subscription and usage fees
and are earned over the period services are provided. Other revenues, consisting
principally of subscriber management fees, Web hosting fees and marketing
services, are recognized as fees are earned or services are provided. In the
fourth quarter of 2000, Prodigy implemented the consensus position expressed by
the Emerging Issues Task Force ("EITF") in issue EITF 00-14, "Accounting for
Certain Sales Incentives". In accordance with EITF 00-14, revenues have been
presented net of the amortization of costs associated with incentives provided
to subscribers subject to contractual periods. These costs were previously
included in "Amortization of subscriber acquisition costs." The costs have been
reclassified in all periods presented to conform with the current year
presentation as required under EITF 00-14. (See Note 9--Subscriber Acquisition
Costs). Unearned revenue consists primarily of subscription fees billed in
advance.

                                       53
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    SUBSCRIBER ACQUISITION COSTS

    Costs of acquiring subscribers from third parties are capitalized and
amortized over the estimated life of the acquired subscriber (See
Note 9-Subscriber Acquisition Costs). General marketing costs, as well as all
other costs related to the acquisition of subscribers, are expensed as incurred.

    ADVERTISING COSTS

    Advertising costs are included in marketing expenses and are expensed as
incurred.

    RESEARCH AND DEVELOPMENT

    Research and development costs are expensed as incurred.

    CASH AND CASH EQUIVALENTS

    Prodigy considers all highly liquid investments with original maturities at
date of purchase of three months or less to be cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value because of the
short maturity of these instruments.

    RESTRICTED CASH

    Restricted cash represents collateral for outstanding letters of credit, the
escrow portion of proceeds related to Prodigy's sale of a subsidiary and
collateral for a surety bond filed with a state government.

    PROPERTY AND EQUIPMENT

    Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Expenditures
for major renewals and betterments that extend the useful lives of property and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are relieved and any resulting gain or loss
is recognized.

    INTERNAL USE SOFTWARE

    Prodigy capitalizes the cost of acquiring internal use software once the
application development stage has begun and ceases to capitalize costs once the
software is put into use. Training, maintenance and data conversion costs are
expensed as incurred.

    EQUIPMENT UNDER CAPITAL LEASES

    Prodigy leases certain computer equipment under capital lease agreements.
The assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. The
assets are being depreciated over their related lease terms. Depreciation of
assets under capital leases is included in depreciation expense.

    INTANGIBLE ASSETS

    Intangible assets consist principally of the brand assets and subscriber
relationships acquired from SBC and FlashNet, tradenames and goodwill.
Amortization of these assets is computed on a straight-line basis over estimated
useful lives. The brand assets, subscriber relationships and tradenames are
amortized

                                       54
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

over a period of 3 to 10 years. Goodwill, which represents the excess of the
purchase price over the estimated fair values of net assets acquired, is
amortized over a period of 3 to 10 years.

    LONG-LIVED ASSETS

    In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of ", Prodigy
periodically reviews the recoverability of the carrying value of its long-lived
assets including intangible assets and goodwill. Prodigy reviews long-lived
assets and the related intangible assets for impairment whenever events or
changes in circumstances indicate the carrying amounts of such assets may not be
recoverable. Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows of the operation to which the assets
relate, to the carrying amount, including associated intangible assets, of such
operation. If the operation is determined to be unable to recover the carrying
amount of its assets, then intangible assets are written down first, followed by
the other long-lived assets of the operation, to fair value. Fair value is
determined based on discounted cash flows or appraised values, depending upon
the nature of the assets.

    INCOME TAXES

    Deferred tax liabilities and assets are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities using current statutory rates. A valuation allowance is applied
against net deferred tax assets if, based on the weighted available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized.

    ACCOUNTING FOR STOCK-BASED COMPENSATION

    Prodigy adopted Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock-Based Compensation," in 1996. As permitted by
SFAS No. 123, Prodigy has elected to continue to apply the intrinsic value
methodology provisions of Accounting Principles Board Opinion No. 25 (APB 25),
"Accounting for Stock Issued to Employees," for the grants or awards of equity
instruments to employees.

    NET LOSS PER SHARE

    Prodigy computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 requires Prodigy to report both basic earnings per share, which
is based on the weighted average number of common shares outstanding, and
diluted earnings per share, which is based on the weighted average number of
common shares outstanding and all dilutive potential common shares outstanding.
As Prodigy incurred losses for all periods presented, there is no difference
between basic and diluted earnings per share.

    CONCENTRATIONS OF RISK

    Financial instruments which potentially subject Prodigy to concentrations of
credit risk consist principally of cash and trade receivables. Concentration of
credit risk with respect to cash is limited as Prodigy invests its cash in
deposits with several financial institutions. Concentration of credit risk with
respect to trade receivables is limited as the outstanding total represents a
large number of customers with individually small balances. The Company does not
require collateral or other security against trade receivable balances; however,
it does maintain reserves for potential credit losses and such losses have

                                       55
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

been within management's expectations. Prodigy derives approximately 38% of its
revenues from one customer.

    RECLASSIFICATIONS

    Certain amounts from prior periods have been reclassified to conform with
the current year presentation.

    RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133, as amended,
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities, and is effective in the first quarter of 2001. The Company adopted
SFAS No. 133 on January 1, 2001, and the adoption of this pronouncement did not
have a material impact on the Company's financial position and results of
operations.

    In November 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 100, "Restructuring and Impairment Charges." SAB No. 100 express the views
of the SEC staff regarding the accounting for and disclosure of certain expenses
commonly reported in connection with exit activities and business combinations.
This includes the accrual of exit and employee termination costs and the
recognition of impairment charges. SAB No. 100 did not have a material impact on
Prodigy's financial position or results of operations.

    In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The adoption of SAB 101 did not have a
material effect on Prodigy's financial position or results of operations.

    In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
non-compensatory plan, the accounting consequence of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 did not have a material impact on Prodigy's financial
position or results of operations.

NOTE 4. RESTRUCTURING CHARGES

    FISCAL YEAR 2000 RESTRUCTURING

    In June 2000, Prodigy announced that it would move its headquarters from
White Plains, New York, to Austin, Texas, to better leverage Prodigy's alliance
with SBC. As a result of this relocation, Prodigy has recorded a restructuring
charge of $21,552 related primarily to early termination payments and other
contractual obligations for certain non-cancelable property leases and minimum
purchase commitments as well as costs associated with employee terminations.

                                       56
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    Real estate lease termination costs of approximately $5,250 have been
accrued related to Prodigy's White Plains, Ft. Worth, Texas and Houston, Texas
facilities, and have been reduced for sublease income that management believes
is probable. Other related restructuring costs of $12,124 primarily consist of
minimum purchase commitments related to certain network and communication
equipment agreements, which will be terminated.

    Accrued business restructuring costs for employee separations of $4,174
related to approximately 254 employees, of which 97 employees have departed as
of December 31, 2000, who were predominately located at the White Plains, Ft.
Worth and Houston locations. These costs include severance and other benefits.

    All actions required under this plan are expected to be taken by
September 30, 2001.

    Components of the 2000 business restructuring costs and amounts recorded
against the reserve as of December 31, 2000, were as follows:

<TABLE>
<CAPTION>
                                                       2000          ACCRUED COSTS AT
                                           2000      PAYMENTS/         DECEMBER 31,
                                         CHARGES       OTHER               2000
                                         --------   -----------      ----------------
<S>                                      <C>        <C>              <C>
Lease obligations......................  $ 5,253    $       400 (a)       $ 5,653
Employee severance.....................    4,174         (1,228)            2,946
Other contractual commitments..........   12,125             --            12,125
                                         -------    -----------           -------
                                         $21,552    $      (828)          $20,724
                                         =======    ===========           =======
</TABLE>

------------------------

(a) Approximately $400 of previously accrued liabilities related to these lease
    obligations were reclassified to the accrued restructuring costs from other
    liabilities.

    FISCAL YEAR 1997 RESTRUCTURING

    During 1997, in an effort to decrease cash outflows and more efficiently
manage its business, Prodigy decided to, among other things, outsource its
internet network. In connection with the sale of its network Prodigy recorded
accrued costs of $14,561 related primarily to early termination payments and
other contractual obligations for certain non-cancelable lease and network
related agreements. In December 2000, Prodigy reversed the remaining unused
reserve of $2,100.

NOTE 5. SEGMENT INFORMATION

    Prodigy has two reportable segments based on its internal reporting which is
disaggregated by the services Prodigy offers: 1) consumer internet services from
the Prodigy Internet (including management fees associated with SBC subscribers)
and FlashNet divisions; and 2) other services consisting of small business Web
hosting from the ProdigyBiz division, advertising and transaction services and
the subscriber management agreement with Telmex under which Prodigy provides
certain management consulting services (i.e., customer service) to Telmex
subscribers in exchange for a fee. There are no inter-segment revenues between
the two identifiable reporting segments. All accounting policies are applied
consistently to the segments, where applicable.

                                       57
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    A summary of the segment financial information is as follows:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                        ------------------------------
                                                          1998       1999       2000
                                                        --------   --------   --------
<S>                                                     <C>        <C>        <C>
Revenues:
  Internet and online services (1)....................  $128,918   $154,181   $336,821
  All other services..................................     7,222     19,227     39,534
                                                        --------   --------   --------
Total revenues........................................  $136,140   $173,408   $376,355
                                                        ========   ========   ========
Loss (income) from operations:
  Internet and online services (2)....................  $ 76,896   $ 89,139   $282,870
  All other services (3)..............................    (6,411)      (891)     2,511
  Other (4)...........................................        --         --     30,369
                                                        --------   --------   --------
Total loss from operations............................  $ 70,485   $ 88,248   $315,750
                                                        ========   ========   ========
</TABLE>

------------------------

(1) For the years ended December 31, 1998, 1999 and 2000, includes revenues from
    Prodigy's billable DSL subscribers of $0, $0 and $33,952, respectively.

(2) For the years ended December 31, 1998, 1999 and 2000, Internet and online
    services includes goodwill and other intangible assets amortization of
    $7,488, $7,488 and $144,416, respectively.

(3) For the years ended December 31, 1998, 1999 and 2000, all other services
    includes goodwill and other intangible assets amortization of $0, $4,394 and
    $18,404, respectively.

(4) Other consists of integration-related costs associated with the SBC
    transaction and restructuring costs (Note 4--Restructuring Charges).

NOTE 6. DISPOSITIONS

    EXIT OF INTERNATIONAL OPERATIONS

    Effective January 1997, Prodigy sold all issued outstanding capital stock of
International Wireless, a subsidiary with operations principally focused on
cellular and internet communications in Africa, in exchange for (i) the
surrender of 1,392,857 shares of common stock of Prodigy, (ii) a Promissory Note
(the "Note") in the amount of $21,500 due in full on July 27, 1997, and
(iii) the termination of options to purchase 250,000 shares of common stock.

    In October 1997, Prodigy and the buyer modified the Note which resulted in a
loss on the sale of International Wireless of $848,000 recorded in 1997. In
October 1999 the Note was restructured for a cash settlement of $500 and an 8%
convertible note for $875 due in October 2006. The Note is convertible into
1 million shares of common stock of Wireless Communications Technology, which
purchased the cellular division of International Wireless. At December 31, 1999
and 2000 the note receivable was valued at zero.

    In March 1998, Prodigy terminated its Chinese joint ventures and operations.
On October 1, 1998, Africa Online, Inc. was sold for gross cash proceeds of
$2,815, of which $750 was placed in escrow to collateralize certain
indemnification obligations of Prodigy for a six-month period. The sale resulted
in a gain to Prodigy of approximately $2,900.

                                       58
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    SALE OF NETWORK

    Prodigy owned and operated its own network in the United States until
July 1, 1997. Effective July 1, 1997, Prodigy sold to Splitrock Services, Inc.,
(now known as McLeodUSA), an affiliate of Carso Global Telecom, certain of its
network assets. McLeodUSA agreed to: (i) assume equipment leases, maintenance
and license liabilities related to network assets, and (ii) enter into a Full
Service Agreement whereby McLeodUSA will provide certain network services to
Prodigy, including commitments to meet certain capacity and performance
requirements.

    In connection with the sale of the network assets, Prodigy sold property and
equipment with a net book value of approximately $9,500 and did not record any
gain or loss upon the sale of these assets. The net book value of the equipment
was reclassified as a "Deferred Network Asset" and is being amortized over the
four-year term of the McLeodUSA contract on a straight-line basis (See
Note 8--Intangible Assets).

    SALE OF EQUITY INVESTMENT

    During 1997, Prodigy sold a subsidiary which eventually became part of TCI
Music. As a result of the sale, Prodigy acquired shares of TCI Music. During
April of 1999, TCI Music announced its merger with Liberty Media. As a result,
the value of Prodigy's investment increased and was sold for $3,325, generating
a gain of $3,319, which was recognized in 1999.

NOTE 7. PROPERTY AND EQUIPMENT

    Property and equipment consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                       USEFUL LIFE     1999       2000
                                                       -----------   --------   --------
<S>                                                    <C>           <C>        <C>
Computer equipment...............................      3-5 years     $33,109    $43,993
Capitalized software.............................      3-5 years       5,862      9,380
Leasehold improvements...........................      5-7 years       4,836      6,072
Furniture and equipment..........................      5-8 years       1,696      3,208
Property under capital lease.....................      39 months       1,538     21,578
                                                                     -------    -------
                                                                      47,041     84,231
Less accumulated depreciation and amortization...                     28,840     54,226
                                                                     -------    -------
Net property and equipment.......................                    $18,201    $30,005
                                                                     =======    =======
</TABLE>

    Depreciation and amortization of fixed assets was approximately $7,896,
$8,429 and $16,250 for the years ended December 31, 1998, 1999 and 2000,
respectively.

                                       59
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

NOTE 8. INTANGIBLE ASSETS

    The cost and accumulated amortization of intangible assets was as follows at
December 31:

<TABLE>
<CAPTION>
                                                             1999       2000
                                                           --------   --------
<S>                                                        <C>        <C>
Tradename:
  Cost...................................................  $39,217    $ 35,617
  Less: accumulated amortization.........................   12,887      16,166
                                                           -------    --------
                                                           $26,330    $ 19,451
                                                           =======    ========
Other Intangibles:
  Cost...................................................  $ 1,900    $563,651
  Less: accumulated amortization.........................      152     109,598
                                                           -------    --------
                                                           $ 1,748    $454,053
                                                           =======    ========
Goodwill:
  Cost...................................................  $65,127    $156,026
  Less: accumulated amortization.........................    9,447      34,368
                                                           -------    --------
                                                           $55,680    $121,658
                                                           =======    ========
Deferred network costs:
  Cost...................................................  $ 9,502    $  9,502
  Less: accumulated amortization.........................    5,939       8,314
                                                           -------    --------
                                                           $ 3,563    $  1,188
                                                           =======    ========
</TABLE>

    In October 2000, Prodigy ceased the outbound telemarketing efforts of
ProdigyBiz. As a result, Prodigy wrote off $29,174 of goodwill, $2,113 of
tradename and $1,115 of other intangibles associated with ProdigyBiz as these
assets were considered impaired.

NOTE 9. SUBSCRIBER ACQUISITION COSTS

    In July 1999, Prodigy purchased Cable & Wireless' dial-up access Internet
subscriber base. At the closing, Prodigy paid Cable & Wireless approximately
$41,600 in cash. In March 2000, Prodigy received a refund of approximately
$10,000, related to a purchase price adjustment due to fewer subscribers
transitioning to Prodigy than originally projected, reducing the cost of the
subscribers purchased to approximately $31,700. In March 2000, Prodigy purchased
Web America's dial-up access Internet subscriber base for $4,177 in Prodigy
Class A common stock. Prodigy has capitalized the costs associated with these
subscriber acquisitions and is amortizing the costs over 36 months, representing
the estimated weighted average term of the subscribers acquired. During the
twelve months ended December 31, 1999 and 2000, Prodigy recognized amortization
expenses from these transaction of $4,818 and $11,621, respectively.

    Commencing in June 1999, Prodigy entered into agreements with major
retailers of personal computers (the "Retailers") to make specified payments to
the Retailers in exchange for the Retailers enrolling customers onto Prodigy
Internet and obtaining a signed contractual commitment from these customers to
term subscriptions to Prodigy of one, two, or three years at a monthly charge of
$19.95 or $21.95 (in whole dollars). In accordance with the terms of the
agreements, the Retailers provide certain incentives to the customers upon
enrollment. Prodigy has capitalized the payments to the Retailers and is
amortizing them

                                       60
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

over the life of the related subscriber contracts. In accordance with EITF
00-14, the amortization expense associated with these payments has been recorded
as a reduction to the Internet revenue received from the customers. For each of
the years ended December 31, 1999 and 2000, Prodigy had paid gross subscriber
acquisition costs related to these agreements of $154,530 and $19,457,
respectively, and had recognized related amortization expense of $15,630 and
$53,439, respectively. In addition, at December 31, 1999 and 2000, Prodigy had
recorded accrued subscriber contract costs representing payments due to the
Retailers of $7,144 and $5,431 respectively.

    Capitalized subscriber acquisition costs at December 31, 1999 and 2000 are
as follows:

<TABLE>
<CAPTION>
                                                            1999       2000
                                                          --------   --------
<S>                                                       <C>        <C>
Cable & Wireless
  Cost..................................................  $ 41,612   $ 31,728
  Less: accumulated amortization........................     4,818     15,324
                                                          --------   --------
                                                            36,794     16,404
Web America
  Cost..................................................        --      4,177
  Less: accumulated amortization........................                1,115
                                                          --------   --------
                                                                --      3,062
Retail Subscriber Contract Acquisition
  Cost..................................................   161,674    179,418
  Less: accumulated amortization........................    15,630     69,069
                                                          --------   --------
                                                           146,044    110,349
                                                          --------   --------
Total capitalized subscriber acquisition costs..........  $182,838   $129,815
                                                          ========   ========
</TABLE>

NOTE 10. NOTES PAYABLE

    Notes payable consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                            1999       2000
                                                          --------   --------
<S>                                                       <C>        <C>
Notes payable to related party..........................  $110,154   $137,000
                                                          ========   ========
</TABLE>

    In August 1999, Prodigy obtained a $150,000 line of credit from Banco
Inbursa. The terms of this line of credit allow Prodigy to borrow, repay and
re-borrow amounts in minimum increments of $1,000. During 1999 and 2000,
advances were due 30 days after borrowing, but Prodigy was permitted to
roll-over advances into new advances at its election. Advances are
uncollateralized. The interest rate on this facility fluctuates based on market
conditions at the time of each draw-down.

    During 1999, these borrowings reached a maximum of $130,000 at interest
rates ranging between 9% and 12%. At December 31, 1999, the line had been paid
down to $110,154. In January 2000, Prodigy repaid $13,800 of these notes and in
November and December 2000, Prodigy borrowed an additional $18,655 and $22,000,
respectively resulting in an outstanding balance of $137,000 at December 31,
2000.

    On January 17, 2001 Banco Inbursa approved the extension of the line credit
in the maximum aggregate principal amount of $150,000 until June 15, 2002. As a
result of this extension, the outstanding balance under this line has been
reclassified to long-term notes payable at December 31, 2000.

                                       61
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    On January 19, 2001, Prodigy entered into a $110 million line of credit with
SBC. The line of credit expires December 31, 2003 and bears interest at LIBOR
plus 400 basis points.

    In March 1996, Prodigy borrowed $2,000 from a network company (the
"Corporate Lender") pursuant to an 8.25% convertible note. Principal and
interest were due on March 31, 1997. The note had not been formally extended. In
January 1999, Prodigy paid the Corporate Lender $750 in full settlement of its
8.25% convertible note in the principal amount of $2,000 and all accrued
interest. As a result Prodigy recognized a gain of $1,714 in 1999.

NOTE 11. INCOME TAXES

    Prodigy had no income tax expense for the years ended December 31, 1998,
1999 and 2000 as a result of net losses. As of December 31, 1999 and 2000,
Prodigy's deferred tax assets were as follows:

<TABLE>
<CAPTION>
                                                                1999        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
Domestic net operating loss carryforwards...................  $ 114,840   $ 141,279
Intangible assets...........................................      6,133      32,804
Restructuring and other nonrecurring reserves...............      1,844       7,440
Other.......................................................      5,026       7,278
Valuation allowance.........................................   (127,843)   (188,801)
                                                              ---------   ---------
Net deferred tax asset......................................  $      --   $      --
                                                              =========   =========
</TABLE>

    At December 31, 2000, Prodigy had net operating loss carryforwards for
federal income tax purposes of approximately $344,582 which may be used to
offset future taxable income and begin to expire in 2010. The utilization of the
federal income tax loss carryforwards is subject to limitation as a result of a
change of ownership.

    Management of Prodigy has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets, which are comprised
principally of net operating loss carryforwards. Under the applicable accounting
standards, management has considered Prodigy's history of losses and concluded
that it is more likely than not that Prodigy will not realize these deferred tax
assets.

NOTE 12. STOCKHOLDERS' EQUITY

    REVERSE STOCK SPLIT

    On January 25, 1999, the Board of Directors effected a one-for-four reverse
common stock split. The share information in the accompanying consolidated
financial statements has been retroactively restated to reflect the effect of
the reverse stock split.

    REDUCTION IN AUTHORIZED SHARES

    On January 25, 1999, Prodigy effected a reduction in the number of
authorized shares from 280 million to 150 million.

                                       62
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    INITIAL PUBLIC OFFERING

    On February 11, 1999, Prodigy completed an initial public offering under the
Securities Act of 1933. This resulted in the sale of 11.2 million shares of
common stock for gross proceeds of approximately $168,000 and net proceeds of
approximately $157,200.

    IBM AND SEARS CONVERSION OF CONTINGENT NOTES

    Contingent Convertible Notes ("Contingent Notes") valued at $30,500, were
issued to International Business Machines Corporation ("IBM") and Sears Roebuck
and Co. ("Sears") in 1996 in connection with the acquisition of PSC and had an
interest rate of 8% annually commencing on December 17, 1997.

    In November 1997, IBM and Sears (i) agreed that the consideration receivable
upon conversion of the Contingent Notes would be based on the valuation of
Prodigy in excess of $250,000 (with the aggregate consideration payable to IBM
and Sears still limited to $200,000 plus interest from June 17, 1996) and
(ii) were granted Contingent Stock Purchase Warrants (the "Contingent Warrants")
to purchase shares of Common Stock of Prodigy at 130% of the fair market value
thereof at the time of conversion of the Contingent Notes. The aggregate number
of shares of Common Stock issuable to IBM and Sears upon conversion of the
Contingent Notes and exercise of the Contingent Warrants could not exceed 15% of
the number of shares outstanding upon completion of the initial public offering.
As a condition to these arrangements, Carso Global Telecom prepaid (on behalf of
and as an advance to Prodigy) the balance due on Prodigy's former White Plains
lease ($5,831) and established a $4,000 letter of credit, declining quarterly
over three years, to collateralize certain payment obligations of Prodigy under
PSC contracts for which IBM and Sears remain liable.

    Upon the completion of Prodigy's initial public offering both IBM and Sears
acquired a 7.5% interest in Prodigy's outstanding common stock in accordance
with the terms of the Contingent Convertible Notes. IBM and Sears each received
approximately 2,127,500 shares for a combined total of approximately 4,255,000.
Additionally, IBM and Sears each received warrants which allow them to purchase
2,409,145 additional shares each at $19.50 per share. Those warrants are
exercisable for three years from the conversion date.

    STOCK WARRANTS

    At December 31, 1997, Prodigy had warrants outstanding with various
shareholders, including Carso Global Telecom, to purchase 3,859,347 shares of
Prodigy's common stock at an average price of $4.20 per share. During 1998,
3,750,000 warrants were exercised at $4.00 per share. At December 31, 1998,
Prodigy had warrants outstanding with various shareholders to purchase 122,402
shares of Prodigy's common stock at an average price of $11.09 per share. All
the outstanding warrants were exercisable as of December 31, 1998. At
December 31, 1999 and December 31, 2000, Prodigy had warrants outstanding with
various shareholders to purchase 117,402 shares of Prodigy's common stock at an
average price of $11.05 per share. During 1999, 5,000 warrants were exercised at
a price of $12.00 per share. No warrants were exercised during 2000.

NOTE 13. STOCK OPTION AND PURCHASE PLANS

    In 1996, the Board of Directors and the stockholders approved a Stock Option
Plan (the "1996 Plan"). Under the 1996 Plan, options to purchase up to 2,375,000
shares of common stock may be granted to employees, directors, consultants and
advisors of Prodigy. Options granted may be either "incentive stock

                                       63
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

options" or "nonqualified options." All options issued under the 1996 Plan are
exercisable over periods determined by the Board of Directors, not to exceed
10 years from the date of grant. Options generally vest over periods ranging
from 3-5 years. In September 1997, the Board of Directors and the stockholders
approved an increase of 750,000 to the number of shares of common stock
available for future grants. These options have the same terms and conditions as
the shares initially authorized under the 1996 Plan.

    1999 OUTSIDE DIRECTOR STOCK OPTION PLAN

    In January 1999, Prodigy's Board of Directors and stockholders adopted
Prodigy's 1999 outside director stock option plan. The director plan permits the
issuance of up to 250,000 shares of common stock on the exercise of options
granted under the director plan. All options granted under the director plan are
non-statutory stock options. Pursuant to the director plan, each director of
Prodigy who was not then employed by Prodigy received on the closing of
Prodigy's initial public offering an option to purchase 30,000 shares of common
stock at an exercise price equal to the price per share at which shares were
sold in the initial public offering. Thereafter, each new non-employee director
will receive, on his or her initial election to the board of directors, an
option to purchase 30,000 shares of common stock at an exercise price equal to
the fair market value of the common stock on the date of grant. All options
granted under the director plan vest in four equal annual installments, based on
continued service as a director, and expire three months after termination of
service as a director.

    1999 STOCK OPTION PLAN

    In 2000, the Board of Directors and shareholders adopted the 1999 Stock
Option Plan (the "1999 Plan"). Under the 1999 Plan, options to purchase up to
5,600,000 shares of common stock, subject to adjustment in the event of stock
splits, may be granted to employees, directors, consultants and advisors of
Prodigy. Options granted may be either incentive stock options or nonqualified
options. All options issued under the 1999 Plan are exercisable over periods
determined by the Board of Directors, not to exceed 10 years from the date of
grant. As of December 31, 2000, 2,440,093 options had been granted under this
plan.

    Prodigy's stock option plans are administered by the Board of Directors.

    REPRICING OF STOCK OPTIONS

    In June 1997, the Board approved a plan to reprice employee stock options
under the 1996 Plan to restore the long-term employee retention and performance
incentives of the stock options outstanding. In accordance with the repricing
plan, all stock options held by then current, active full-time employees, with
exercise prices above $12.00 per share, were canceled and replaced by the same
number of options exercisable at $12.00 per share, the fair value of Prodigy's
common stock as determined by the Board on the date of the repricing.

    In May 1998, the Board approved a plan to reprice employee stock options
under the 1996 Plan to restore the long-term employee retention and performance
incentives of the stock options outstanding. In accordance with the repricing
plan, all stock options held by then current, active full-time employees, with
exercise prices above $4.00 per share, were canceled and replaced by the same
number of options exercisable at $4.00 per share. Prodigy records compensation
expense for these repriced options over the vesting periods based upon a fair
value of $7.00 per share. During 1998, 1999 and 2000 approximately $730, $1,481
and $2,108 of compensation expense was recorded.

                                       64
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    The exercise and vesting periods of the outstanding options were not altered
by the repricings.

EXCHANGE AND ACCELERATION OF STOCK OPTIONS

    Upon completion of the SBC transaction on May 31, 2000, options to purchase
an aggregate of 154,791 shares of Class A common stock accelerated and became
fully vested.

    In connection with the FlashNet acquisition on May 31, 2000, Prodigy
exchanged options to purchase approximately 159,000 shares of FlashNet common
stock for options to purchase approximately 56,650 Prodigy Class A common stock
at an exchange ratio of .35 shares of FlashNet common stock for each share of
Prodigy Class A common stock. The Prodigy options were fully vested at the time
of issuance.

    In connection with the employee terminations associated with Prodigy's 2000
restructuring, options to purchase approximately 300,000 Prodigy Class A common
stock were accelerated and became fully vested on December 31, 2000.

    Based on the terms of the original stock option agreements and the fair
market value of the Prodigy Class A common stock on the date of the
modifications, in accordance with APB 25 and FIN 44, there was no compensation
expense recorded in connection with the above accelerations.

    Stock option plan activity for the years ended December 31, 1998, 1999 and
2000 follows (in thousands):

<TABLE>
<CAPTION>
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Outstanding at January 1....................................    2,299      2,370      1,907
Options granted.............................................    1,441      1,093      3,573
Options exercised...........................................       (3)    (1,092)      (311)
Options canceled/forfeited..................................   (1,367)      (464)    (1,690)
                                                               ------     ------     ------
Outstanding at December 31..................................    2,370      1,907      3,479
                                                               ======     ======     ======
Exercisable at December 31..................................      691        413      1,090
                                                               ======     ======     ======
Available for grant at December 31..........................      752        373      4,091
                                                               ======     ======     ======
</TABLE>

    Weighted average option exercise price information for the years ended
December 31, 1998, 1999 and 2000 follows:

<TABLE>
<CAPTION>
                                                                1998       1999       2000
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Outstanding at January 1....................................   $10.72     $ 5.83     $11.17
Options granted.............................................     5.84      16.63      15.20
Options exercised...........................................    11.46       6.24       5.38
Options canceled............................................    10.64       8.06      16.49
Outstanding at December 31..................................     5.83      11.17      13.26
Exercisable at December 31..................................   $ 6.87     $ 5.83     $12.73
</TABLE>

                                       65
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    The following table summarizes information about stock options outstanding
at December 31, 2000:

<TABLE>
<CAPTION>
                          OPTIONS OUTSTANDING                                    OPTIONS EXERCISABLE
------------------------------------------------------------------------   -------------------------------
                        NUMBER       WEIGHTED AVERAGE       WEIGHTED           NUMBER
RANGE OF EXERCISE    OUTSTANDING        REMAINING       AVERAGE EXERCISE    EXERCISABLE        AVERAGE
     PRICES         (IN THOUSANDS)   CONTRACTUAL LIFE        PRICE         (IN THOUSANDS)   EXERCISE PRICE
-----------------   --------------   ----------------   ----------------   --------------   --------------
<S>                 <C>              <C>                <C>                <C>              <C>
  $1.56-2.31              124           9.9 Years            $ 1.97               --            $   --
  2.44-3.19                56           9.9 Years              2.85               --                --
  3.88-5.69               463           8.1 Years              4.09              252              4.00
  6.72-10.00              442           8.2 Years              8.24              207              8.42
 10.08-15.00              720           8.8 Years             11.44              162             12.73
 15.31-22.75            1,615           9.1 Years             18.90              446             19.07
 23.00-25.63               58           8.5 Years             24.47               24             23.81
                        -----                                                  -----
  $1.56-25.63           3,478           8.9 Years            $13.26            1,091            $12.73
                        -----                                                  -----
</TABLE>

    Had compensation cost for Prodigy been determined based upon the fair value
at the grant date for awards under the plan consistent with the methodology
prescribed under SFAS No. 123, Prodigy's net losses for the years ended
December 31, 1998, 1999 and 2000 would have been approximately $65,872, $83,977
and $221,069 respectively, and basic and diluted net loss per share would have
been approximately $1.62, $1.40, and $3.26 respectively. The weighted average
fair value of the options granted during the years ended December 31, 1998,
1999, and 2000 was estimated at $4.15, $8.18 and $8.41 per share, respectively,
on the date of grant using the Black-Scholes option-pricing model and the
following assumptions:

<TABLE>
<CAPTION>
                                                         1998        1999         2000
                                                       --------   ----------   ----------
<S>                                                    <C>        <C>          <C>
Dividend yield.......................................        0             0            0
Volatility...........................................       60%           60%          90%
Risk free rate.......................................      5.4%         5.34%        6.39%
Expected option life.................................  3 years    3.35 years   2.77 years
</TABLE>

    1999 EMPLOYEE STOCK PURCHASE PLAN

    In January 1999, Prodigy's Board of Directors and stockholders adopted the
1999 Employee Stock Purchase Plan (the "purchase plan"). The purchase plan
authorizes the issuance of up to 500,000 shares of Prodigy's common stock to
eligible employees of Prodigy and its subsidiaries. Under the purchase plan,
eligible employees may purchase shares of Prodigy's common stock, subject to
certain limitations, at a price equal to the lower of 85% of the fair market
value of the shares on the first date of the offering period and 85% of the fair
market value of the shares on the purchase date. The purchase plan permits
shares to be purchased at the end of the purchase periods occurring during each
offering period. Unless otherwise provided by the Board prior to commencement,
an offering period will begin on each May 16 and November 16, and continue for a
period of 24 months. A purchase period will begin on each May 16 and
November 16, and will continue for a period of six months, ending on the
following November 15 or May 15, respectively. The first offering period and the
first purchase period commenced on Prodigy's initial public offering. The last
day of each purchase period is the date on which shares are actually purchased.
Purchases are limited to 10% of an employee's eligible compensation up to a
maximum of $25 per year. During 1999 and 2000 Prodigy issued 83,880 and 149,188
new shares to its employees at an average price of $12.75 and $6.31
respectively, per share under the purchase plan.

                                       66
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

NOTE 14. COMMITMENTS AND CONTINGENCIES

    At December 31, 2000, the Company's minimum rental commitments under
non-cancelable operating leases with initial or remaining terms of more than one
year were as follows:

<TABLE>
<S>                                                           <C>
Year Ended December 31,
2001........................................................  $ 6,326
2002........................................................    7,309
2003........................................................    7,264
2004........................................................    7,082
2005 and thereafter.........................................   14,304
                                                              -------
                                                              $42,285
                                                              =======
</TABLE>

    The Company's rent expense in the years ended December 31, 1998, 1999 and
2000 was approximately $2,302, $2,970 and $4,741 respectively.

    The Company entered into a new sublease agreement to be effective as of
April 1, 2001 with respect to its new corporate headquarters in Austin.

    During 2000, the Company entered into capital leases for certain computer
equipment. Minimum future lease payments under the capital leases as of
December 31, 2000, are:

<TABLE>
<S>                                                           <C>
2001........................................................  $ 8,111
2002........................................................    6,919
2003........................................................    1,949
                                                              -------

Total minimum lease payments................................   16,979
Less--amounts representing interest.........................    2,116
                                                              -------
Present value of minimum lease payments.....................  $14,863
                                                              =======
</TABLE>

    In December 1993, PSC entered into a non-cancelable agreement with a
telephone company to provide certain services at the Company's White Plains, New
York, and Yorktown, New York, facilities. The agreement has a term ("service
period") of ten years. The agreement calls for line charges totaling $510 per
year. The Company has the right to terminate the agreement for certain services
at any time, at a cost of 80% of the line charges over the remaining services
period.

    The Company is party to a contract for a subscription management system
through June 2001. This contract requires minimum annual payment of processing
fees of $1,116. For the years ended 1998, 1999 and 2000 the Company paid $3,039
and $3,723 and $3,937 respectively.

    Under the Company's four-year agreement with McLeodUSA, the Company is
obligated to minimum annual payments of $51,000 in 2000, and $54,000 in 2001,
and maximum monthly charges based on the number of the Company's subscribers for
the month. The agreement provides for early termination charges of $7,000 in the
first year, declining thereafter on an annual basis. The agreement is
automatically renewed for successive 12-month periods unless terminated by
either party upon 12 months' notice.

    In February 1998, the Company contracted with a vendor to provide various
data communications services. The contract has a term of 36 months, and requires
minimum annual payments to the vendor of $7,300. If the minimum annual payment
is not reached, the Company is subject to an underutilization charge equal to
50% of the difference between the minimum annual payment and the actual usage.
The

                                       67
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

Company can terminate the agreement upon written notice to the vendor and the
payment of a penalty equal to 50% of the minimum annual payment due for the
remaining term.

    In October 1999, the company entered into an agreement with a telephone
company to provide certain network services for the Yorktown Heights, New York
data center. These services commenced during the first quarter of 2000. This
agreement has an initial term of seven years, and requires minimum payments of
$1,225 per year. The agreement has termination and cancellation charges which
would be defined by New York's FCC Tariffs in effect at the time of
cancellation.

    CONTINGENCIES

    On December 13, 2000, British Telecommunications filed a lawsuit against
Prodigy in the United States District Court for the Southern District of New
York, Northern Division, claiming that Prodigy has infringed its alleged patent
of "Hyper-link text" technology. Prodigy filed its Answer and Counterclaim and
expects a hearing in order to construct the patent claims sometime in
August--September 2001. No trial date has been set and, due to the early stage
of this litigation, Prodigy makes no predictions as to the outcome of this case.

    On June 8, 1998, Brent Johnson filed a lawsuit against Prodigy in the United
States District Court for the Northern District of Oklahoma alleging that
Prodigy has infringed on two 1997 patents for software that Prodigy licensed
from another company called Diversified Data Resources ("DDR"). Eventually
Johnson joined his company, I.D.G., as co-plaintiff. Prodigy no longer uses the
software in question and the licensor, DDR, has defaulted on its indemnification
obligations. The case was stayed pending resolution of similar litigation
between Johnson and DDR in the Northern District of California. DDR suffered an
adverse judgment of $480,000 and has filed a notice of appeal. Dispositive
motions are currently before the Court in the Prodigy case and a trial date has
been set for October 15, 2001. Because of the changing case law applicable to
this patent claim, Prodigy makes no predictions as to the outcome of this
litigation.

    On January 10, 2000, Christa Roberts filed a class action lawsuit in the
Superior Court of the State of California, County of Los Angeles, against
Prodigy, AOL/Time Warner, Circuit City Stores, Fry's Electronic, Microsoft and
other unnamed parties. On February 7, 2000, the plaintiff filed an amended
complaint naming Young H. Kim as the named plaintiff in place of Christa
Roberts. The lawsuit alleges that Prodigy and the defendants offered incentives
to consumers and entered into retail sales contracts with consumers which
violated California law, and engaged in false advertising. The plaintiff is
seeking restitution from the defendants of all sums related to this conduct. The
trial court dismissed the lawsuit for failure to state a cause of action and the
Plaintiff appealed. Prodigy's response brief is due in the Court of Appeals on
or before March 30, 2001. Given the early stage of the appeal, no prediction as
to its outcome can be made.

    On February 24, 2000, Prodigy was served with a summons and complaint by
Carroll Wesley Chance in a class action lawsuit brought against Best Buy,
Prodigy and Young America in the State Court of Richmond County, State of
Georgia. The case was brought on behalf of the class of similarly situated
consumers who allegedly purchased a computer at Best Buy, enrolled in the
Prodigy Internet service under the incentive program, and did not receive a
incentive check. The complaint alleges breach of contract, unjust enrichment,
conversion and negligence. The plaintiffs seek damages not to exceed $74,900 per
member of the class, including actual damages, incentives, interest, punitive
damages, court costs and litigation expenses. The case tentatively settled on
March 1, 2001 for payment of fees and the offer of one free month of service to
class members who renewed or re-activated their accounts for a specified period
of time. Prodigy is currently in the process of notifying class members of the
settlement. The Settlement

                                       68
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

will become final if no Class Member objects or if no such objections are
sustained in a hearing scheduled for April 12, 2001.

    On March 31, 2000, Giovanni R. Viana filed a class action lawsuit against
Prodigy in the 11th Judicial Circuit Court for Dade County, Florida. This class
action lawsuit arises out of the Best Buy mail-in incentive program. The
plaintiff alleges Prodigy violated Florida's Unfair Trade Practices Act when it
represented it would provide incentives and failed to do so. In addition, the
complaint contains a breach of contract claim for failure to pay the incentives.
The plaintiff seeks damages under the breach of contract claim not to exceed
$75,000 per member of the class, as well as actual damages plus attorneys' fees
and litigation costs. Given the early stage of this litigation, no prediction as
to its outcome can be made.

    On June 20, 2000, Saul Kaufman filed a purported class action lawsuit
against Prodigy in the Circuit Court for Cook County, Illinois, alleging he was
"locked out" of his service during the migration from Web America, a company
acquired by Prodigy in March 2000, to Prodigy. Kaufman is not allowed to conduct
"fact" discovery until the Judge decides whether to certify this case as a class
action. Prodigy expects a decision on class certification during the Summer of
2001 and makes no predictions as to the outcome of this litigation.

    The company is a defendant in various other lawsuits arising in the ordinary
course of business. It is the opinion of management that any liability to the
Company which may arise as a result of these matters will not have a material
adverse effect on the Company's financial condition or results of operations.

NOTE 15. DEFINED CONTRIBUTION PLAN

    On June 17, 1996, as part of the Company's acquisition of PSC, the company
took on responsibility for the administration and sponsorship of the Prodigy
Services Corporation Capital Accumulation Plan (the "Plan").

    The Plan is a defined contribution plan covering all employees of the
Company. Employees can participate in the Plan from their first day of
employment.

    Each year, active participants may contribute up to 12% of their pre-tax
base salaries, up to the maximum amount allowed by the Plan. The Company
contributes a matching contribution equal to 100 percent of an employee's
pre-tax contributions, limited to a maximum of 3% of a participant's
compensation. The Plan also has an after-tax savings feature that permits
employees to contribute from 1% to 10% of their base salaries subject to
Internal Revenue Code limitations.

    The Company's contributions were $469, $698 and $816 in 1998, 1999 and 2000
respectively.

NOTE 16. VALUATION AND QUALIFYING ACCOUNTS

    The following table sets forth activity in the Company's allowance for
doubtful accounts:

<TABLE>
<CAPTION>
                                 BALANCE AT BEGINNING                                        BALANCE AT END OF
                                      OF PERIOD         CHARGES TO OPERATIONS   DEDUCTIONS        PERIOD
                                 --------------------   ---------------------   ----------   -----------------
<S>                              <C>                    <C>                     <C>          <C>
Year Ended:
  December 31, 1998............         $  685                 $   49             $  367           $  367
  December 31, 1999............            367                  3,200                187            3,380
  December 31, 2000............          3,380                  8,072              7,655            3,797
</TABLE>

                                       69
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

    The following table sets forth activity in the Company's deferred income tax
valuation allowance:

<TABLE>
<CAPTION>
                                 BALANCE AT BEGINNING                                        BALANCE AT END OF
                                      OF PERIOD         CHARGES TO OPERATIONS   DEDUCTIONS        PERIOD
                                 --------------------   ---------------------   ----------   -----------------
<S>                              <C>                    <C>                     <C>          <C>
Year Ended:
  December 31, 1998............        $ 68,940                $27,250          $     --          $ 96,190
  December 31, 1999............          96,190                 31,653                --           127,843
  December 31, 2000............         127,843                 60,958                --           188,801
</TABLE>

NOTE 17. RELATED PARTY TRANSACTIONS

    TELMEX AGREEMENT

    On January 25, 1999, Prodigy and Telmex, a subsidiary of Carso Global
Telecom, executed an agreement under which: (i) Prodigy will assist Telmex in
the negotiation of agreements with service providers for Telmex's IDP service in
Mexico pertaining to network/Internet access, Web hosting, customer service,
content hosting, billing, marketing, sales and data collection services;
(ii) Prodigy will advise Telmex on customer service, administrative functions
and technical operations, including marketing, Internet connection and other
network services, content, customer support, pricing and service composition,
billing and collection, inbound telemarketing and other aspects of the ISP
business; (iii) the parties will discuss the potential migration of certain IDP
infrastructure functions, including email, subscriber management and
authentication systems, for Telmex's IDP subscriber to the Prodigy
infrastructure platform, and the advisability of offering a co-branded
IDP/Prodigy service in Mexico; and (iv) the parties will pursue additional
opportunities, such as providing services to one another and the joint
acquisitions of subscribers. In exchange for Prodigy's services, Telmex will pay
Prodigy a management fee, on a monthly basis, equal to 15% of the net subscriber
revenue (defined as the invoiced sales price less discounts, excise taxes and
credits for returns) on the first 200,000 IDP subscribers and 10% of the net
subscriber revenue (as defined above) on additional IDP subscribers. The
agreement has a term of five years and may be terminated by Telmex if Prodigy
undergoes a change of control. Prodigy earned subscriber management fees from
Telmex of $6,833 and $13,221 during 1999 and 2000, of which $1,801 and $1,114
was receivable at December 31, 1999 and 2000 respectively.

    MCLEODUSA AGREEMENT

    Carso Global Telecom owns a minority interest in McLeodUSA. As part of the
sale of its network operations, Prodigy also entered into a Sublease Agreement
pursuant to which McLeodUSA subleases a portion of Prodigy's leased space in
Yorktown Heights, New York, effective July 1, 1997 through February 28, 2001.

    Pursuant to the Full Service Agreement with McLeodUSA, effective July 1,
1997, McLeodUSA provides to Prodigy network services consisting primarily of
end-to-end connection services from subscriber dial-up lines to Prodigy's data
center. McLeodUSA charges Prodigy at a fixed rate per subscriber, subject to a
monthly maximum usage limit, after which an incremental hourly rate is charged,
and certain minimum charges (see Note 14--Commitments and Contingencies).
Prodigy incurred network charges to McLeodUSA of approximately $64,100, $76,600
and $78,700 for the years ended December 31, 1998, 1999 and 2000, respectively.

    Additionally, Prodigy's accounts payable to McLeodUSA for the years ended
December 31, 1999 and 2000 was approximately $8,800 and $3,700 respectively.

    Under a transition services agreement, Prodigy agreed to pay for certain of
McLeodUSA's operating expenses and to provide temporary network-related services
to McLeodUSA, including accounting, human

                                       70
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

resources and purchasing functions. McLeodUSA agreed to reimburse Prodigy for
expenses incurred and the cost of providing these support services (excluding
termination penalties under existing network contracts). The total of the
reimbursed expenses and service costs in 1997 was $27,532. The reimbursed
amounts have been offset against the corresponding expenses and costs in the
statements of operations. The transition services agreement terminated on
December 31, 1997, although Prodigy continued to provide certain incidental
services and make payments on behalf of McLeodUSA through June 30, 1998.

    Under the Full Service Agreement, McLeodUSA is required to meet specified
service level objectives. McLeodUSA's failure to meet the service level
objectives results in financial penalties. If McLeodUSA fails to meet the
service level objectives for an extended period of time, Prodigy may terminate
the Full Service Agreement. In addition, if there is a system-wide failure, or
McLeodUSA breaches specified financial covenants, Prodigy has the right to
terminate the Full Service Agreement or assume responsibility for operating the
network at McLeodUSA's expense.

    COMPUSA, INC.

    During 2000, Prodigy entered into an agreement with CompUSA, Inc.
("CompUSA") for the purpose of stimulating Prodigy Internet enrollments. Under
the arrangement, Prodigy made payments to CompUSA in exchange for the retailers
enrolling a customer onto Prodigy Internet, obtaining a signed contractual
commitment from the customer to a term subscription of one, two or three years,
and committed marketing of Prodigy Internet by CompUSA in connection with the
retailers' other product advertisements. These payments amounted to $100, $250
or $400, respectively, for a term subscription of one, two or three years at
Prodigy's standard monthly rates. Payments pursuant to these arrangements
amounted to $24,300 through December 31, 2000. Prodigy has capitalized the
payments to CompUSA and is amortizing them over the life of the related
subscriber contracts. In accordance with EITF 00-14, the amortization expense
associated with these payments has been recorded as a reduction to the Internet
revenue received from the customers.

    SBC

    In conjunction with the SBC transaction, Prodigy and SBC entered into a
strategic and marketing agreement governing the sale and marketing of the
Prodigy Internet service and related matters. Under the agreement, Prodigy was
the exclusive retail Internet service marketed by SBC in the United States and
SBC purchased the Prodigy Internet service from Prodigy on wholesale terms and
provides it to SBC's approximately 767,000 existing Internet subscribers. In
addition, SBC committed to obtain for Prodigy an additional 1,200,000 Internet
subscribers over a three-year period in exchange for a fee of $40 to $75 (in
whole dollars) for each subscriber obtained. SBC was obligated to pay Prodigy a
penalty for shortfalls in the number of subscribers delivered over the
three-year period, with the size of the penalty based on the number of
subscribers actually obtained. The agreement also includes provisions under
which SBC and Prodigy can purchase other services from each other, including
telecommunications and network services.

    Under the prior marketing agreement with SBC, Prodigy recognized revenues of
$143,190 and expenses of $146,421 for the year ended December 31, 2000. As of
December 31, 2000, Prodigy had receivables from SBC of $49,117 and accounts
payable of $47,589. These amounts have been recorded as a net receivable of
$1,528 in due from affiliates.

    Effective January 1, 2001, Prodigy and SBC announced revised marketing
agreements which extend the original marketing relationship from 3 to 9 years
(through 2009). Under the new agreements, SBC will act as the retailer of DSL
services with Prodigy providing services to SBC on a wholesale basis in exchange
for a fee ($5/month/subscriber for years 2001-2003, $4/month/subscriber
thereafter). Notwithstanding the foregoing, the wholesale fee shall remain $5.00
until SBC acquires 3.5 million DSL subscribers; however,

                                       71
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

effective upon the later of (i) January 1, 2004, or (ii) the month in which SBC
acquires 3.0 million DSL subscribers, the wholesale fee shall be $4.50. SBC also
becomes the retailer of dial-up Internet access provided to business subscribers
with SBC paying a fee for services provided on a wholesale basis
($9/month/subscriber 2001-2003, $4/month/subscriber thereafter). Notwithstanding
the foregoing, the $9/month will apply to the first 100,000 business dial-up
customers in each month, thereafter, the then applicable DSL subscriber fee will
be applicable to such business dial-up subscribers. Prodigy will remain the
retailer for dial-up Internet access service provided to residential subscribers
and SBC will continue to act as Prodigy's sales agent for such services. SBC has
guaranteed that Prodigy will receive 3.75 million DSL subscribers and 375,000
dial-up subscribers over the term of the agreements. Because SBC will pay for
line costs, networking, customer acquisition, customer care, billing and
collection for DSL subscribers, Prodigy's cash needs will be dramatically
reduced. In addition, SBC waived approximately $23 million in bounty fees under
the prior sales and marketing agreement and agreed to extend a $110 million line
of credit to Prodigy.

                                       72
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE

    On March 9, 2001, Prodigy notified PricewaterhouseCoopers LLP that their
engagement as Prodigy's independent accountant will be terminated following the
issuance of their report on Prodigy's financial statements for the year ended
December 31, 2000 and engaged Ernst & Young LLP to act as Prodigy's independent
accountant to audit its financial statements for the year ending December 31,
2001 and thereafter. This change in certifying accountants was approved by the
audit committee of the board of directors.

    The reports of PricewaterhouseCoopers LLP on the financial statements of
Prodigy for the years ended December 31, 1998 and 1999 did not contain an
adverse opinion or a disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.

    During Prodigy's fiscal years ended December 31, 1998, 1999 and 2000 and
through March 29, 2001, there were no disagreements between Prodigy and
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their reports on the
financial statements for such years.

    During Prodigy's three most recent fiscal years and through March 29, 2001,
it has not consulted with Ernst & Young LLP regarding any of the matters
specified in Item 304(a)(2) of Regulation S-K.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this Item regarding Prodigy's directors and
executive officers is expected to be included in its Proxy Statement to be filed
pursuant to Schedule 14A in connection with Prodigy's 2001 Annual Meeting of
Stockholders under the sections captioned "Election of Directors" and "Current
Executive Officers" and is incorporated herein by reference thereto.

ITEM 11. EXECUTIVE COMPENSATION

    The information required by this Item regarding the compensation of
Prodigy's directors and executive officers is expected to be included in its
Proxy Statement to be filed pursuant to Schedule 14A in connection with
Prodigy's 2001 Annual Meeting of Stockholders under the sections captioned
"Director Compensation" and "Executive Compensation" and is incorporated herein
by reference thereto.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this Item regarding the security ownership of
certain beneficial owners and management is expected to be included in Prodigy's
Proxy Statement to be filed pursuant to Schedule 14A in connection with
Prodigy's 2001 Annual Meeting of Stockholders under the section captioned
"Principal Stockholders" and is incorporated herein by reference thereto.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

    The information required by this Item regarding certain relationships and
related transactions is expected to be included in Prodigy's Proxy Statement to
be filed pursuant to Schedule 14A in connection with Prodigy's 2001 Annual
Meeting of Stockholders under the sections captioned "Transactions With Related
Parties" and is incorporated herein by reference thereto.

                                       73
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a) See Item 8 of this report on Form 10-K.

    (b) Reports on Form 8-K.

    No reports on Form 8-K were filed during the fourth quarter of 2000.

    (a) 3. and (c) -- Exhibits

<TABLE>
<S>          <C>
 2.1(1)+     Asset Purchase Agreement, dated as of May 26, 1999, by and
               among Cable & Wireless USA, Inc., Cable & Wireless USA
               Internet, L.L.C. and the Registrant.
 2.2(2)      Asset Purchase Agreement, dated as of September 7, 1999, by
               and among the Registrant, U.S. Republic
               Communications, Inc., VarTec Telecom, Inc., VarTec Telecom
               Holding Company, T. Gary Remy and Tom D. Johnson.
 2.3(3)*     Agreement and Plan of Merger, dated as of November 5, 1999,
               and as amended as of March 15, 2000, among the Registrant,
               PUCKnut Corporation, and FlashNet Communications, Inc.
 3.1(4)      Amended and Restated Certificate of Incorporation of the
               Registrant, effective as of May 31, 2000.
 3.2(4)      Amended and Restated By-laws of the Registrant, effective as
               of May 31, 2000.
 3.3(5)      Amended and Restated Limited Partnership Agreement for
               Prodigy Communications Limited Partnership, dated as of
               May 31, 2000, by and among the Registrant, SBC Internet
               Communications, Inc. and Prodigy Transition Corporation.
 3.4(6)      Amendments to By-Laws, dated June 23, 2000.
 3.5         Amendment to By-Laws, dated February 28, 2001.
 4.1         Specimen certificate for shares of Class A Common Stock.
 4.2(7)      Warrant to purchase Common Stock, issued by FlashNet
               Communications, Inc. to Ascend Communications on
               December 10, 1997.
10.1(8)      Form of 8% Contingent Convertible Promissory Note issued by
               Prodigy Services Corporation to IBM and Sears.
10.2(8)      Form of Contingent Common Stock Purchase Warrant issued by
               Prodigy Services Corporation to IBM and Sears.
10.3(8)**    1996 Stock Option Plan of the Registrant, as amended.
10.4(8)**    1999 Employee Stock Purchase Plan of the Registrant.
10.5(3)**    1999 Stock Option Plan of the Registrant.
10.6(8)**    1999 Outside Director Stock Option Plan of the Registrant.
10.7(8)+     Software License and Services Agreement, dated April 16,
               1997, between Prodigy Services Corporation and ORACLE
               Worldwide Tech Support.
10.8(3)+     Amended and Restated Splitrock Full Service Agreement, dated
               February 16, 2000, between Splitrock Services, Inc. and
               Prodigy Services Corporation.
10.9(8)      Agreement of Sublease, dated June 24, 1997, between
               Splitrock Services, Inc. and Prodigy Services Corporation.
10.10(8)**   Employment Agreement, dated September 1, 1998, between the
               Registrant and Samer F. Salameh.
10.11(8)**   Employment Agreement, dated September 14, 1998, between the
               Registrant and Andrea S. Hirsch.
10.12(8)**   Employment Agreement, dated December 14, 1998, between the
               Registrant and David C. Trachtenberg.
10.13**      Employment Agreement, dated June 1, 2000, between the
               Registrant and Samer F. Salamch.
10.14**      Employment Agreement, dated June 1, 2000, between the
               Registrant and Andrea S. Hirsch.
</TABLE>

                                       74
<PAGE>
<TABLE>
<S>          <C>
10.15**      Employment Agreement, dated June 1, 2000, between the
               Registrant and David C. Trachtenberg.
10.16**      Employment Agreement, dated November 16, 2000, between the
               Registrant and Dan Iannotti.
10.17**      Employment Agreement, dated November 16, 2000, between the
               Registrant and Richard S. Walker.
10.18**      Employment Agreement, dated November 16, 2000, between the
               Registrant and William Kirkner.
10.19(8)     Lease, dated August 14, 1997, between Prodigy Services
               Corporation and Westchester One LLC, as amended.
10.20        Lease, dated as July 2000 between Investors Life Insurance
               Company and SBC Services, Inc.
10.21        Sublease, dated as of April 1, 2001, between Prodigy
               Communications Limited Partnership and SBC Services, Inc.
10.22(8)+    Promotion and Distribution Agreement, effective October 6,
               1996, between Microsoft Corporation and Prodigy Services
               Corporation, as amended.
10.23(8)     Lease Agreement, dated June 6, 1998, between Prodigy
               Services Company and Crow-Kelly#1, as amended.
10.24(9)+    Microsoft Windows 98 "Get Connected" Co-Marketing Agreement,
               dated July 2, 1998, between Prodigy Services Corporation
               and Microsoft Corporation.
10.25(3)     Amendment No. 1 to Microsoft Windows 98 "Get Connected"
               Co-Marketing Agreement, dated October 1, 1998, by and
               between Microsoft Corporation and Prodigy Services
               Corporation.
10.26(3)+    Renewal and Amendment to that certain Microsoft Windows 98
               "Get Connected" Co-Marketing Agreement, dated June 1,
               1999, by and between Microsoft Corporation and Prodigy
               Services Corporation.
10.27(3)     Amendment No. 3 to that certain Microsoft Windows 98 "Get
               Connected" Co-Marketing Agreement, dated January 19, 2000,
               by and between Microsoft Corporation and Prodigy Services
               Corporation.
10.28(8)+    Software Development and Processing Services Agreement,
               dated January 1, 1992, between Prodigy Services Company
               and CSG Systems, Inc., as amended.
10.29(8)     Form of Prodigy Service Member Agreement.
10.30(8)     Agreement, dated January 25, 1999, among the Registrant,
               Telefonos de Mexico, S.A. de C.V., and others.
10.31(9)     Microsoft Internet Explorer Logo License Agreement, dated
               July 2, 1998, by and between Prodigy Services Corporation
               and Microsoft Corporation.
10.32(9)     Microsoft Internet Explorer License and Distribution
               Agreement, dated July 2, 1998, by and between Prodigy
               Services Corporation and Microsoft Corporation.
10.33(4)     Investment, Issuance, Contribution and Assumption Agreement,
               dated as of November 19, 1999, and as amended as of
               April 19, 2000, by and among SBC Communications Inc., SBC
               Internet Communications, Inc., the Registrant, Prodigy
               Transition Corporation, and Prodigy Communications Limited
               Partnership.
10.34(10)    Voting Agreement, dated as of November 19, 1999, by and
               among SBC Communications Inc., Carso Global Telecom, S.A.
               de C.V. and Telefonos de Mexico, S.A. de C.V.
10.35(5)     Registration Rights Agreement, dated as of May 31, 2000, by
               and among the Registrant, SBC Communications Inc. and SBC
               Internet Communications, Inc.
10.36(4)     Strategic and Marketing Agreement, dated as of November 19,
               1999, by and among SBC Communications Inc., SBC Internet
               Communications, Inc., the Registrant and Prodigy
               Communications Limited Partnership.
</TABLE>

                                       75
<PAGE>
<TABLE>
<S>          <C>
10.37(11)    Amendment No. 1 to the Strategic and Marketing Agreement
               dated as of October 1, 2000, by and among the Registrant,
               SBC Communications, Inc., SBC Internet
               Communications, Inc., and Prodigy Communications Limited
               Partnership.
10.38(12)    Narrowband Internet Service Sales Agency Agreement, dated as
               of January 1, 2001, by and among the Registrant, SBC
               Communications Inc., SBC Internet Communications, Inc. and
               Prodigy Communications Limited Partnership.
10.39(12)    Internet Service Resale Agreement, dated as of January 1,
               2001, by and among the Registrant, SBC
               Communications Inc., SBC Internet Communications, Inc. and
               Prodigy Communications Limited Partnership.
10.40(12)    Supplemental Agreement, dated as of January 1, 2001, by and
               among the Registrant, SBC Communications Inc., SBC
               Internet Communications, Inc. and Prodigy Communications
               Limited Partnership.
10.41(12)    Credit Agreement dated as of December 29, 2000, by and among
               the Registrant and SBC Communications Inc.
10.42(12)    Letter from Banco Inbursa, S.A. to Registrant dated January
               17, 2001.
10.43(13)    Letter from PricewaterhouseCoopers LLP to the Commission
               dated March 15, 2001.
21           Subsidiaries of the Registrant.
23.1         Consent of PricewaterhouseCoopers LLP.
</TABLE>

------------------------

(1) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed on August 3, 1999.

(2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed on October 21, 1999.

(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K,
    filed on March 30, 2000.

(4) Incorporated by reference to the Registrant's Definitive Proxy Statement on
    Schedule 14A, filed on May 5, 2000.

(5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed on June 14, 2000.

(6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed on August 14, 2000.

(7) Incorporated by reference to FlashNet Communications, Inc.'s Registration
    Statement on Form S-1, as amended (File No. 333-69277).

(8) Incorporated by reference to the Registrant's Registration Statement on
    Form S-1, as amended (File No. 333-64233).

(9) Incorporated by reference to the Registrant's Annual Report on Form 10-K405,
    filed on March 31, 1999.

(10) Incorporated by reference to the Schedule 13D/A, filed on March 9, 2000, by
    Carlos Slim Helu, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim
    Domit, Maria Soumaya Slim Domit, Vanessa Paula Slim Domit, Johanna Monique
    Slim Domit, Carso Global Telecom, S.A. de C.V. and Telefonos de Mexico, S.A.
    de C.V.

(11) Incorporated by reference to the Registrant's Quarterly Report on Form
    10-Q, filed on November 14, 2000.

(12) Incorporated by reference to Registrant's Current Report on Form 8-K, filed
    on January 19, 2001.

(13) Incorporated by reference to the Registrant's Current Report on Form 8-K,
    filed on March 16, 2001.

+  Confidential treatment granted as to certain portions.

                                       76
<PAGE>
*   The exhibits and schedules to this agreement were omitted from the agreement
    by the Registrant. The Registrant agrees to furnish any exhibit or schedule
    to this agreement supplementary to the Securities and Exchange Commission
    upon written request.

**  Management contract or compensation plan or arrangement filed in response to
    Item 14(c) of Form 10-K.

(b) Financial Statement Schedules

   None

                                       77
<PAGE>
    All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, or are not applicable; and therefore, have been omitted.

                                   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, in the city of Austin,
State of Texas, on the 29th day of March, 2001.

<TABLE>
<S>                                                    <C>  <C>
                                                       PRODIGY COMMUNICATIONS CORPORATION

                                                       By:            /s/ DANIEL V. IANNOTTI
                                                            -----------------------------------------
                                                                        Daniel V. Iannotti
                                                              SENIOR VICE PRESIDENT, GENERAL COUNSEL
Date: March 29, 2001                                                      AND SECRETARY
</TABLE>

                                       78
<PAGE>
    Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of Prodigy and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                        NAME                                      TITLE                    DATE
                        ----                                      -----                    ----
<C>                                                    <S>                          <C>
                    /s/ PAUL ROTH                      Chief Executive Officer and
     -------------------------------------------         President (Principal         March 29, 2001
                      Paul Roth                          Executive Officer)

                                                       Executive Vice President of
                   /s/ ALLEN CRAFT                       Finance, Chief Financial
     -------------------------------------------         Officer and Treasurer        March 29, 2001
                     Allen Craft                         (Principal Financial and
                                                         Accounting Officer)

                /s/ CHARLES E. FOSTER
     -------------------------------------------       Chairman of the Board          March 29, 2001
                  Charles E. Foster

               /s/ ROBERT B. PICKERING
     -------------------------------------------       Director                       March 29, 2001
                 Robert B. Pickering

                 /s/ LOUIS R. BRILL
     -------------------------------------------       Director                       March 29, 2001
                   Louis R. Brill

                /s/ ROBERT S. MCCLANE
     -------------------------------------------       Director                       March 29, 2001
                  Robert S. McClane

                 /s/ JAMES R. ADAMS
     -------------------------------------------       Director                       March 29, 2001
                   James R. Adams

                 /s/ JOE C. MCKINNEY
     -------------------------------------------       Director                       March 29, 2001
                   Joe C. McKinney

     -------------------------------------------       Director
                  Jaime Chico Pardo

     -------------------------------------------       Director
                  Samer F. Salameh

     -------------------------------------------       Director
                Randall L. Stephenson
</TABLE>

                                       79
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<S>          <C>
2.1(1)+      Asset Purchase Agreement, dated as of May 26, 1999, by and
               among Cable & Wireless USA, Inc., Cable & Wireless USA
               Internet, L.L.C. and the Registrant.
2.2(2)       Asset Purchase Agreement, dated as of September 7, 1999, by
               and among the Registrant, U.S. Republic
               Communications, Inc., VarTec Telecom, Inc., VarTec Telecom
               Holding Company, T. Gary Remy and Tom D. Johnson.
2.3(3)*      Agreement and Plan of Merger, dated as of November 5, 1999,
               and as amended as of March 15, 2000, among the Registrant,
               PUCKnut Corporation, and FlashNet Communications, Inc.
3.1(4)       Amended and Restated Certificate of Incorporation of the
               Registrant, effective as of May 31, 2000.
3.2(4)       Amended and Restated By-laws of the Registrant, effective as
               of May 31, 2000.
3.3(5)       Amended and Restated Limited Partnership Agreement for
               Prodigy Communications Limited Partnership, dated as of
               May 31, 2000, by and among the Registrant, SBC Internet
               Communications, Inc. and Prodigy Transition Corporation.
3.4(6)       Amendments to By-Laws, dated June 23, 2000.
3.5          Amendment to By-Laws, dated February 28, 2001.
4.1          Specimen certificate for shares of Class A Common Stock.
4.2(7)       Warrant to purchase Common Stock, issued by FlashNet
               Communications, Inc. to Ascend Communications on
               December 10, 1997.
10.1(8)      Form of 8% Contingent Convertible Promissory Note issued by
               Prodigy Services Corporation to IBM and Sears.
10.2(8)      Form of Contingent Common Stock Purchase Warrant issued by
               Prodigy Services Corporation to IBM and Sears.
10.3(8)**    1996 Stock Option Plan of the Registrant, as amended.
10.4(8)**    1999 Employee Stock Purchase Plan of the Registrant.
10.5(3)**    1999 Stock Option Plan of the Registrant.
10.6(8)**    1999 Outside Director Stock Option Plan of the Registrant.
10.7(8)+     Software License and Services Agreement, dated April 16,
               1997, between Prodigy Services Corporation and ORACLE
               Worldwide Tech Support.
10.8(3)+     Amended and Restated Splitrock Full Service Agreement, dated
               February 16, 2000, between Splitrock Services, Inc. and
               Prodigy Services Corporation.
10.9(8)      Agreement of Sublease, dated June 24, 1997, between
               Splitrock Services, Inc. and Prodigy Services Corporation.
10.10(8)**   Employment Agreement, dated September 1, 1998, between the
               Registrant and Samer F. Salameh.
10.11(8)**   Employment Agreement, dated September 14, 1998, between the
               Registrant and Andrea S. Hirsch.
10.12(8)**   Employment Agreement, dated December 14, 1998, between the
               Registrant and David C. Trachtenberg.
10.13**      Employment Agreement, dated June 1, 2000, between the
               Registrant and Samer F. Salameh.
10.14**      Employment Agreement, dated June 1, 2000, between the
               Registrant and Andrea S. Hirsch.
10.15**      Employment Agreement, dated June 1, 2000, between the
               Registrant and David C. Trachtenberg.
10.16**      Employment Agreement, dated November 16, 2000, between the
               Registrant and Dan Iannotti.
10.17**      Employment Agreement, dated November 16, 2000, between the
               Registrant and Richard S. Walker.
10.18**      Employment Agreement, dated November 16, 2000, between the
               Registrant and William Kirkner.
</TABLE>

<PAGE>
<TABLE>
<S>          <C>
10.19(8)     Lease, dated August 14, 1997, between Prodigy Services
               Corporation and Westchester One LLC, as amended.
10.20        Lease, dated as July 2000 between Investors Life Insurance
               Company and SBC Services, Inc.
10.21        Sublease, dated as of April 1, 2001, between Prodigy
               Communications Limited Partnership and SBC Services, Inc.
10.22(8)+    Promotion and Distribution Agreement, effective October 6,
               1996, between Microsoft Corporation and Prodigy Services
               Corporation, as amended.
10.23(8)     Lease Agreement, dated June 6, 1998, between Prodigy
               Services Company and Crow-Kelly#1, as amended.
10.24(9)+    Microsoft Windows 98 "Get Connected" Co-Marketing Agreement,
               dated July 2, 1998, between Prodigy Services Corporation
               and Microsoft Corporation.
10.25(3)     Amendment No. 1 to Microsoft Windows 98 "Get Connected"
               Co-Marketing Agreement, dated October 1, 1998, by and
               between Microsoft Corporation and Prodigy Services
               Corporation.
10.26(3)+    Renewal and Amendment to that certain Microsoft Windows 98
               "Get Connected" Co-Marketing Agreement, dated June 1,
               1999, by and between Microsoft Corporation and Prodigy
               Services Corporation.
10.27(3)     Amendment No. 3 to that certain Microsoft Windows 98 "Get
               Connected" Co-Marketing Agreement, dated January 19, 2000,
               by and between Microsoft Corporation and Prodigy Services
               Corporation.
10.28(8)+    Software Development and Processing Services Agreement,
               dated January 1, 1992, between Prodigy Services Company
               and CSG Systems, Inc., as amended.
10.29(8)     Form of Prodigy Service Member Agreement.
10.30(8)     Agreement, dated January 25, 1999, among the Registrant,
               Telefonos de Mexico, S.A. de C.V., and others.
10.31(9)     Microsoft Internet Explorer Logo License Agreement, dated
               July 2, 1998, by and between Prodigy Services Corporation
               and Microsoft Corporation.
10.32(9)     Microsoft Internet Explorer License and Distribution
               Agreement, dated July 2, 1998, by and between Prodigy
               Services Corporation and Microsoft Corporation.
10.33(4)     Investment, Issuance, Contribution and Assumption Agreement,
               dated as of November 19, 1999, and as amended as of
               April 19, 2000, by and among SBC Communications Inc., SBC
               Internet Communications, Inc., the Registrant, Prodigy
               Transition Corporation, and Prodigy Communications Limited
               Partnership.
10.34(10)    Voting Agreement, dated as of November 19, 1999, by and
               among SBC Communications Inc., Carso Global Telecom, S.A.
               de C.V., and Telefonos de Mexico, S.A. de C.V.
10.35(5)     Registration Rights Agreement, dated as of May 31, 2000, by
               and among the Registrant, SBC Communications Inc. and SBC
               Internet Communications, Inc..
10.36(4)     Strategic and Marketing Agreement, dated as of November 19,
               1999, by and among SBC Communications Inc., SBC Internet
               Communications, Inc., the Registrant and Prodigy
               Communications Limited Partnership.
10.37(11)    Amendment No. 1 to the Strategic and Marketing Agreement
               dated as of October 1, 2000, by and among the Registrant,
               SBC Communications Inc., SBC Internet
               Communications, Inc. and Prodigy Communications Limited
               Partnership.
10.38(12)    Narrowband Internet Service Sales Agency Agreement, dated as
               of January 1, 2001, by and among the Registrant, SBC
               Communications, Inc. SBC Internet Communications, Inc. and
               Prodigy Communications Limited Partnership.
10.39(12)    Internet Service Resale Agreement, dated as of January 1,
               2001, by and among the Registrant, SBC
               Communications Inc., SBC Internet Communications, Inc. and
               Prodigy Communications Limited Partnership.
10.40(12)    Supplemental Agreement, dated as of January 1, 2001, by and
               among the Registrant, SBC Communications Inc., SBC
               Internet Communications, Inc. and Prodigy Communications
               Limited Partnership.
</TABLE>

<PAGE>
<TABLE>
<S>          <C>
10.41(12)    Credit Agreement dated as of December 29, 2000, by and among
               the Registrant and SBC Communications Inc.
10.42(12)    Letter from Banco Inbursa, S.A. to Registrant dated January
               17, 2001.
10.43(13)    Letter from PricewaterhouseCoopers LLP to the Commission
               dated March 15, 2001.
21           Subsidiaries of the Registrant.
23.1         Consent of PricewaterhouseCoopers LLP.
</TABLE>

------------------------

  (1) Incorporated by reference to the Registrant's Current Report on Form 8-K,
      filed on August 3, 1999.

  (2) Incorporated by reference to the Registrant's Current Report on Form 8-K,
      filed on October 21, 1999.

  (3) Incorporated by reference to the Registrant's Annual Report on Form 10-K,
      filed on March 30, 2000.

  (4) Incorporated by reference to the Registrant's Definitive Proxy Statement
      on Schedule 14A, filed on May 5, 2000.

  (5) Incorporated by reference to the Registrant's Current Report on Form 8-K,
      filed on June 14, 2000.

  (6) Incorporated by reference to the Registrant's Current Report on Form 8-K,
      filed on August 14, 2000.

  (7) Incorporated by reference to FlashNet Communications, Inc.'s Registration
      Statement on Form S-1, as amended (File No. 333-69277).

  (8) Incorporated by reference to the Registrant's Registration Statement on
      Form S-1, as amended (File No. 333-64233).

  (9) Incorporated by reference to the Registrant's Annual Report on
      Form 10-K405, filed on March 31, 1999.

(10) Incorporated by reference to the Schedule 13D/A, filed on March 9, 2000, by
     Carlos Slim Helu, Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim
     Domit, Maria Soumaya Slim Domit, Vanessa Paula Slim Domit, Johanna Monique
     Slim Domit, Carso Global Telecom, S.A. de C.V., and Telefonos de Mexico,
     S.A. de C.V.

(11) Incorporated by reference to Registrant's Quarterly Report Form 10-Q, filed
     November 14, 2000.

(12) Incorporated by reference to Registrant's Current Report on Form 8-K, filed
     on January 19, 2001.

(13) Incorporated by reference to the Registrant's Current Report on Form 8-K,
     filed on March 16, 2001.

+  Confidential treatment granted as to certain portions.

*   The exhibits and schedules to this agreement were omitted from the agreement
    by the Registrant. The Registrant agrees to furnish any exhibit or schedule
    to this agreement supplementary to the Securities and Exchange Commission
    upon written request.

**  Management contract or compensation plan or arrangement filed in response to
    Item 14(c) of Form 10-K.