<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

[X]  Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

              For the quarterly period ended: September 30, 2000

                                      OR

[_]   Transition report pursuant  to section 13 or 15(d) of the Securities
      Exchange Act of 1934

              For the transition period from ______ to _________

                      Commission File Number:  000-25333

                      PRODIGY COMMUNICATIONS CORPORATION
            (Exact name of registrant as specified in its charter)

           DELAWARE                                  04-3323363
 (State or other jurisdiction of                (I.R.S. Employer
 incorporation or organization)                 Identification No.)


                               44 SOUTH BROADWAY
                         WHITE PLAINS, NEW YORK  10601
             (Address of principal executive offices and zip code)

Registrant's telephone number, including area code:  (914) 448-8000

Former name, former address, and former
year, if changed since last report:       Not applicable

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 the number of shares outstanding of each of the Issuer's classes of
Common Stock, as of the latest practicable date.

The number of shares of the registrant's Class A common stock, $.01 par value
per share, outstanding on October 31, 2000 was 69,896,188. On October 31, 2000
there was 1 share of Class B common stock outstanding, $.01 par value per share.

<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
                                   FORM 10-Q
                       QUARTER ENDED September 30, 2000


                                     INDEX

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                        <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

            Condensed Consolidated Balance Sheets                             3

            Condensed Consolidated Income Statements                          4

            Condensed Consolidated Statements of Cash Flows                   5

            Condensed Consolidated Statements of Stockholders Equity          6

            Notes to Condensed Consolidated Financial Statements              7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                           12

         Certain Factors That May Affect Future Operating Results            20

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          28


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                                   28

Item 2.  Changes in Securities and Use of Proceeds                           29

Item 4.  Submission of Matters to a Vote of Security Holders                 29

Item 5.  Other Information                                                   29

Item 6.  Exhibits                                                            29

Signatures


</TABLE>
                                ---------------

     This report on Form 10-Q 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
growth, are forward-looking statements. Important factors that could cause
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 2.

     Prodigy, the Prodigy globe 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 and Prodigy MailLink are
trademarks of Prodigy. All other brand or product names may be trademarks or
registered trademarks of their respective owners.

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                      PRODIGY COMMUNICATIONS CORPORATION
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
               (in thousands except share and per share amounts)

<TABLE>
<CAPTION>

                                                                     September 30,   December 31,
                                                                         2000           1999
----------------------------------------------------------------------------------------------
<S>                                                                 <C>             <C>
Assets

Current assets:
  Cash and cash equivalents                                          $   4,900      $  35,473
  Accounts receivable, net of allowance for doubtful                     8,379         10,314
    accounts of $4,537 and $3,380 on September 30,
    2000 and December 31, 1999, respectively
  Due from affiliate                                                     1,100          1,801
  Prepaid expenses                                                       5,565          2,793
  Other current assets                                                   1,133          1,437
----------------------------------------------------------------------------------------------
Total current assets                                                    21,077         51,818

Restricted cash                                                          3,815          4,692
Property and equipment, net                                             34,358         18,201
Tradename, net                                                          22,754         26,330
Goodwill, net                                                          166,266         55,680
Deferred network costs                                                   1,782          3,563
Subscriber acquisition costs, net                                      145,664        182,838
Other intangibles, net                                                 499,767          1,748
Other assets                                                             2,211          1,118
----------------------------------------------------------------------------------------------
Total assets                                                         $ 897,694      $ 345,988
                                                                     =========      =========

Liabilities and Stockholders' Equity

Current liabilities:
  Notes payable                                                      $  96,345      $ 110,154
  Accounts payable                                                      11,304         24,351
  Due to affiliate                                                       2,743              -
  Other accrued expenses                                                41,550         16,847
  Accrued subscriber contract expenses                                  13,251          7,144
  Accrued compensation                                                   4,043          3,095
  Unearned revenue                                                      29,951         14,062
  Accrued restructuring costs                                           22,340          3,849
  Capital lease obligation - short term                                  5,378            412
----------------------------------------------------------------------------------------------
Total current liabilities                                              226,905        179,914
----------------------------------------------------------------------------------------------
Capital lease obligation - long term                                     7,942            983
                                                                     ---------      ---------
Total liabilities                                                      234,847        180,897
                                                                     ---------      ---------

Minority interest in operating partnership                             283,791              -
Stockholders' equity:
  Preferred stock; $.01 par value; 10,000,000                                -              -
    shares authorized; none issued or outstanding
  Common stock; Class A $.01 par value;                                    699            645
    150,000,000 shares authorized; 69,891,981
    and 64,502,608 shares issued and outstanding
    at September 30, 2000 and December 31, 1999, respectively
    Class B, $.01 par value; 1 share authorized
    and outstanding at September 30, 2000.
  Pending issuance of common stock                                           2              -
  Additional paid-in capital-common stock                              888,339        539,054
  Accumulated deficit                                                 (509,984)      (373,275)
----------------------------------------------------------------------------------------------
                                                                       379,056        166,424
  Less note receivable from stockholder                                      -         (1,333)
----------------------------------------------------------------------------------------------
Total stockholders' equity                                             379,056        165,091
----------------------------------------------------------------------------------------------

Total liabilities and stockholders' equity                           $ 897,694      $ 345,988
                                                                     =========      =========
</TABLE>
    The accompanying notes are an integral part of the unaudited condensed
                      consolidated financial statements.

                                       3
<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
             CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
               (in thousands except share and per share amounts)

<TABLE>
<CAPTION>
                                                    For the                 For the              For the              For the
                                                  Three Months           Three Months          Nine Months          Nine Months
                                                     Ended                   Ended                Ended                Ended
                                                 September 30,           September 30,        September 30,         September 30,
                                                     2000                    1999                 2000                  1999
--------------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                     <C>                  <C>                   <C>
Revenues:
 Internet and online service revenues:
  Prodigy Internet                               $    79,147             $    40,080          $   197,187         $    98,053
  Prodigy Classic                                          -                   3,842                    -              15,569
 Subscriber management fees                           47,776                   1,889               70,193               4,061
 Other                                                 7,687                   3,088               18,815               4,232
------------------------------------------------------------------------------------------------------------------------------
  Total revenues                                     134,610                  48,899              286,195             121,915

Operating costs and expenses:
 Cost of revenue                                      68,861                  27,743              135,840              71,694
 Sales and marketing                                  31,393                  17,118               66,580              40,630
 Product development                                   3,789                   2,761               10,714               9,616
 General and administrative                           40,727                  16,827               89,762              42,341
 Depreciation and amortization                        70,305                   4,196              108,442              12,477
 Amortization of subscriber acquisition costs         16,947                   4,932               48,431               4,932
 Restructuring costs                                   8,968                       -               18,523                   -
------------------------------------------------------------------------------------------------------------------------------
  Total operating costs and expenses                 240,990                  73,577              478,292             181,690
                                                 -----------             -----------          -----------         -----------
Operating loss                                      (106,380)                (24,678)            (192,097)            (59,775)

 Interest (income)/expense, net                        3,117                  (1,127)               8,439              (4,033)
 Gain on settlement of note payable                        -                       -                    -              (1,714)
 Gain on asset/equity investments sale                     -                       -                  (73)             (3,319)
 Minority interest in net loss                       (46,643)                      -              (63,754)                  -
 Other                                                    (8)                     59                    -                  15
                                                 -----------             -----------          -----------         -----------
Net loss                                         $   (62,846)            $   (23,610)         $  (136,709)        $   (50,724)
                                                 ===========             ===========          ===========         ===========

Basic and diluted net loss per share                  $(0.90)                 $(0.39)              $(2.04)             $(0.87)
                                                 ===========             ===========          ===========         ===========
Weighted average number of shares outstanding
 used in computing basic and diluted net loss
 per share                                        69,865,920              61,145,041           66,950,488          58,564,189
                                                 ===========             ===========          ===========         ===========

</TABLE>
    The accompanying notes are an integral part of the unaudited condensed
                      consolidated financial statements.

                                       4
<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                (in thousands)

<TABLE>
<CAPTION>
                                                            For the        For the
                                                          Nine Months    Nine Months
                                                             Ended          Ended
                                                         September 30,    September 30,
                                                             2000            1999
--------------------------------------------------------------------------------------
<S>                                                     <C>             <C>
Cash flows from operating activities:
 Net loss                                                  $(136,709)    $ (50,724)

 Adjustments to reconcile net loss to net cash
  used in operating activities:
  Gain on sale of assets                                           -        (3,319)
  Gain on settlement of note payable                               -        (1,714)
  Option grants at below fair value                            1,441           963
  Depreciation                                                11,188         5,899
  Amortization of goodwill                                    29,110         1,163
  Amortization of tradename                                    3,576         2,671
  Amortization of other intangibles                           62,787             -
  Amortization of deferred network asset                       1,781         1,782
  Amortization of subscriber acquisition costs                48,431         4,932
  Provision for doubtful accounts                             (5,317)       (3,851)
  Minority interest in net loss                              (63,753)            -
Changes in operating assets and liabilities,
  net of effects of acquisitions
  (Increase)/decrease in accounts receivable                   9,431         4,492
  (Increase)/decrease in due from affiliate                      701        (1,201)
  (Increase)/decrease in prepaid expenses                     (1,051)       (1,388)
  (Increase)/decrease in other assets                          2,151           562
  Increase/(decrease) in accounts payable and other
   accrued expenses                                           (3,540)       11,716
  Increase/(decrease) in due to affiliate                      2,743             -
  Increase/(decrease) in accrued compensation                    240           805
  Increase/(decrease) in unearned revenue                      7,431         5,237
  Increase/(decrease) in restructuring costs                  18,491          (854)
----------------------------------------------------------------------------------
Net cash used in operating activities                        (10,868)      (22,829)
----------------------------------------------------------------------------------
Cash flows from investing activities:
 Acquisition of property and equipment                        (2,695)       (9,451)
 Purchase price adjustment, Cable & Wireless USA, Inc.
   subscriber base acquisition                                 9,883             -
 Subscriber acquisition costs                                (10,856)     (119,004)
 SBC transaction costs                                        (3,486)            -
 FlashNet acquisition costs                                   (1,578)            -
 BizOnThe.Net acquisition costs                                  (90)            -
 Proceeds from sale of assets                                      -         3,319
 Investments in equity securities                             (2,000)            -
 Increase in restricted cash                                   1,283       (51,704)
----------------------------------------------------------------------------------
Net cash used in investing activities                         (9,539)     (176,840)
----------------------------------------------------------------------------------
Cash flows from financing activities:
 Sale of common stock, net of fees and reimbursements          2,310       161,285
 Repayment of borrowings                                           -          (750)
 Repayments of notes payable to related parties              (13,809)       36,000
 Repayments of note receivable from stockholder                1,333         1,334
----------------------------------------------------------------------------------
Net cash used in/(provided by)financing activities           (10,166)      197,869
----------------------------------------------------------------------------------

Net increase/(decrease) in cash                              (30,573)       (1,800)
                                                           ---------     ---------
Cash, beginning                                               35,473        12,180
                                                           ---------     ---------
Cash, ending                                               $   4,900     $  10,380
                                                           =========     =========
</TABLE>
    The accompanying notes are an integral part of the unaudited condensed
                      consolidated financial statements.

                                        5
<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
           CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
                       (in thousands except share amounts)


For the period ended September 30, 2000
<TABLE>
<CAPTION>


                                       Common Stock     Common Stock  Pending                            Note
                     Preferred Stock     Class A          Class B    Issuance   Additional            Receivable        Accumulated
                     ---------------     -------          -------    of Common   Paid-In  Accumulated    From          Comprehensive
                      Shares Amount  Shares   Amount  Shares  Amount   Stock     Capital    Deficit  Shareholder  Total     Loss
                      ------ ------  ------   ------  ------  ------ ----------  -------   -------   -----------  ----- ------------
<S>                    <C>  <C>   <C>         <C>      <C>    <C>     <C>      <C>        <C>         <C>      <C>       <C>

Balance at
 December 31, 1999      0   $0    64,502,608  $645     0       $0              $539,054  $(373,275)  $(1,333)  $ 165,091  $(373,275)

 Exercise of options                 365,719  $  4                             $  3,867                        $   3,871

 Sale of common stock                                                                                 $1,333   $   1,333

 Issuance of common
  stock and vested
  options/warrants
  assumed in
  connection with the
  acquisition of
  Flashnet
  Communications, Inc.             5,023,654  $ 50                             $131,468                        $ 131,518

  Issuance of common
  stock for SBC
  transaction                                          1       $0                                              $       0

  Sale of subsidiary
   to minority interest                                                        $209,775                        $ 209,775

  Pending issuance of
   common stock                                                       $2       $  4,175                        $   4,177

  Comprehensive loss:
    Net loss                                                                             $(136,709)            $(136,709) $(136,709)
                                                                                                                           --------
    Comprehensive loss                                                                                                    $(136,709)
                        -----------------------------------------------------------------------------------------------------------
Balance at
September 30, 2000      0   $0    69,891,981  $699     1       $0     $2       $888,339  $(509,984)        -   $ 379,056  $(509,984)
                        ===========================================================================================================

</TABLE>


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


                                        6
<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
       (in thousands except share, per share and subscriber information)

Note 1.  Basis of Presentation

  The accompanying unaudited condensed consolidated financial statements, which
include the accounts of Prodigy Communications Corporation ("Prodigy") and its
subsidiaries, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain amounts
in prior years' consolidated financial statements have been reclassified to
conform to the current year presentation. Operating results for the nine month
period ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the full year ending December 31, 2000. For further
information, refer to the consolidated financial statements and notes thereto,
included in Prodigy's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.

  Prodigy has incurred significant losses since inception and, at September 30,
2000, had an accumulated deficit of $509,984 and a working capital deficit of
$205,828 comprised of current liabilities of $226,905 and current assets of
$21,077. For the nine months ended September 30, 1999 and September 30, 2000,
Prodigy incurred losses from operations of $59,775 and $192,097, respectively,
and negative cash flows from operations of $22,829 and $10,868, respectively.

  At October 31, 2000, Prodigy had available cash and cash equivalents of
$3,398. Prodigy is currently experiencing substantial 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 credit
facility is guaranteed by Telmex. At September 30, 2000, the balance borrowed
under this line of credit was $96,345. In November 2000, Prodigy borrowed an
additional $18,655 under this credit facility. This note matures on November 22,
2000.

  In addition, to reduce the up-front cash requirements associated with its DSL
expansion, Prodigy has re-negotiated the payment terms of its subscriber
acquisition costs with SBC Communications Inc. Effective October 1, 2000,
Amendment No. 1 to Prodigy's Strategic and Marketing Agreement with SBC (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 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 rate of 12% per annum. The
Amendment will substantially reduce Prodigy's cash burn rate in the intervening
quarters.

  To the extent Prodigy is unable to fund its current obligations as they become
due from its operating cash flows, Carso Global Telecom, through its subsidiary
Telmex, has committed to provide financing, either through capital and/or debt
financing, of up to $200,000 through February 2001. This commitment is inclusive
of the aforementioned $150,000 line of credit from Banco Inbursa, S.A.

  Although Prodigy's efforts to obtain bank financing secured by long-term
customer contracts have proven unsuccessful, Prodigy continues to pursue long-
term financing with the support of its principal shareholders SBC, Telmex and
Carso Global Telecom.

  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. Based upon its current operating
plan, Prodigy believes that it will require significant external financing in
order to continue to expand its consumer business. Prodigy is considering a
number of alternatives to raise additional financing, including public or
private equity or debt financing, bank loans, strategic partner and joint
venture arrangements, vendor financing, leasing arrangements or a combination of
these sources. There can be no assurance that Prodigy will be able to obtain
sufficient financing on acceptable terms, the absence of which funding would
have a material adverse effect on Prodigy.

                                       7
<PAGE>

Note 2. Acquisition of BizOnThe.Net, Flashnet Communications and Transaction
   with SBC Communications

Acquisition of BizOnThe.Net and FlashNet Communications

  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 $9,000 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. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two-year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.

  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. The total purchase
price is subject to change when earn-out adjustments are finalized over the next
two years. Changes in the purchase price based on these adjustments will be
recorded as corresponding increases or decreases in goodwill at the time the
related items are resolved and are not expected to exceed $10,000. Based on the
value of 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 will be
amortized on a straight-line basis over 3 years.

  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 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 preliminarily
allocated to the assets acquired and liabilities assumed based on their
estimated fair values, with the excess to be allocated to goodwill as follows:


  Value of stock portion of purchase price       $119,764
  Value of options and warrants assumed            12,573
  Transaction costs                                 1,968
                                                 --------
  Purchase price                                  134,305

  Add: fair value of net liabilities assumed       32,309
  Less: fair value of net assets acquired         (27,009)
                                                 --------
  Goodwill/Intangibles                           $139,605
                                                 ========


  Prodigy has arranged for an independent valuation and other studies
required to determine the fair value of the assets acquired and liabilities
assumed. The valuations and other studies required to determine the fair value
of the FlashNet assets acquired and liabilities assumed have not been completed
and, accordingly, the balances reflected in the unaudited consolidated balance
sheet as of September 30, 2000 are preliminary and subject to further revision
and

                                       8
<PAGE>

adjustments. 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 is $134,305 including transaction
costs of $1,968. The goodwill and other intangibles acquired, based on the
excess of the purchase price over the net book value of net assets to be
acquired, is currently estimated to be $139,605. The goodwill and other
intangibles are expected to be amortized on a straight line basis over an
estimated three-year period.


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.


                                           Nine Months Ended
                                             September 30,
                                         ---------------------
                                           2000         1999
                                         --------    ---------
Revenues                                 $303,828     $171,232
Net loss                                $(169,205)   $(121,072)
Pro-forma net loss per common share        ($2.40)      ($1.78)


Transaction with SBC Communications

  In November 1999, Prodigy announced a transaction with SBC Communications
Inc. ("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 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) which is convertible into 51,843,631
shares of Prodigy Class A common stock.

  In conjunction with the transaction, Prodigy will be the exclusive retail
Internet service marketed by SBC in the United States and SBC will purchase the
Prodigy Internet service from Prodigy on wholesale terms and provide 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 will 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.

                                       9
<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
       (in thousands except share, per share, and subscriber information)



  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 $557,300. As a result of the partnership units issued, Prodigy will
consolidate the operating partnership and will recognize the SBC minority
interest in the operating partnership. The contribution of the intangible assets
at fair value will result in a substantial amount of amortization which will
reduce Prodigy's future earnings or increase its future losses.

  The Company has arranged for an independent valuation and other studies
required to determine the fair value of the intangible assets contributed to the
partnership by SBC. The valuations and other studies required to determine the
fair value of the assets contributed have not been completed and, accordingly,
the balances reflected in the unaudited consolidated balance sheets as of
June 30, 2000 are preliminary and subject to further revision and adjustments.
The total value of the transaction is approximately $560,800 including
transaction costs of $3,500. These intangible assets will be amortized over
3 years.

Note 3. Subscriber Acquisition Costs

  In July 1999 Prodigy purchased Cable & Wireless USA, Inc.'s dial-up access
Internet subscriber base for $31,700 in cash. In March 2000, Prodigy purchased
Web America's dial-up access Internet subscriber base for $4,177 in Prodigy
Class A common stock. These shares are due and pending issuance under agreement
with Web America. Prodigy has capitalized these costs and is amortizing the
costs over 36 months representing the estimated weighted average term of the
subscribers acquired. During the three and nine months ended September 30, 2000,
Prodigy recognized amortization expenses from these transaction of $3,411 and
$8,629, 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 Internet of one, two, or three years at a monthly
charge of $19.95 or $21.95 (in whole dollars). Prodigy has capitalized these
payments and is amortizing them over the life of the subscriber contract. During
the three and nine months ended September 30, 2000, Prodigy paid gross
subscriber acquisition costs related to these transactions of $4,970 and
$10,856, respectively, and had recognized related amortization expense of
$13,536 and $39,802, respectively. In addition, at September 30, 2000, Prodigy
had recorded accrued subscriber contract expenses to the Retailers of $13,251.


Note 4.  Restructuring Reserves

  In June 2000, Prodigy announced that it would move its headquarters from White
Plains, New York to Austin, Texas in order to facilitate synergies with SBC
Communications Inc. As a result of this restructuring plan, Prodigy has recorded
contractual and severance-related obligations of $18,523. Management intends to
terminate approximately 140 employees as a result of this plan. All required
payments under this plan are expected to be paid by September 30, 2001.


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 intersegment revenues
between the two identifiable reporting segments. All other accounting policies

                                      10
<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
       (in thousands except share, per share, and subscriber information)


are applied consistently to the segments, where applicable.

  A summary of the segment financial information is as follows:

<TABLE>
<CAPTION>
                                       Three months ended        Nine months ended
                                          September 30,            September 30,
                                        2000         1999       2000          1999
                                     ---------    ---------   ---------    ---------
<S>                                  <C>        <C>         <C>          <C>
Revenues:
Internet and online services(1)...   $ 122,731    $  43,922   $ 257,163    $ 113,622
All other services(2).............      11,879        4,977      29,032        8,293
                                     ---------    ---------   ---------    ---------
 Total revenues(6)................   $ 134,610    $  48,899   $ 286,195    $ 121,915
                                     =========    =========   =========    =========

Loss (income) from operations:

Internet and online services(3)...   $  95,359    $  24,386   $ 164,283    $  60,219
All other services(2)(4)..........      (1,612)         292         (43)        (444)
Other(5)..........................      12,633         --        27,857         --
                                     ---------    ---------   ---------    ---------
 Total loss from operations(7)....   $ 106,380    $  24,678   $ 192,097    $  59,775
                                     =========    =========   =========    =========
</TABLE>

1.   For the three months and nine months ended September 30, 2000, includes
     revenues from Prodigy's billable DSL subscribers of $11.8 million and $12.6
     million, respectively.

2.   Includes revenue and operating losses associated with the Prodigybiz small
     business Web hosting division, advertising and transaction fees and Telmex
     and SBC legacy subscriber management fees.

3.   For the three and nine months ended September 30, 2000 and 1999, Internet
     and online services includes goodwill and other intangible assets
     amortization of $60,242, $83,448, $1,872 and $5,616,respectively.

4.   For the three and nine months ended September 30, 2000 and 1999, all other
     services includes goodwill and other intangible assets amortization of
     $4,599, $13,805, $0 and $0, respectively.

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

6.   For the three and nine months ended September 30, 2000, Prodigy recognized
     revenues from related parties of $44.2 million and $60.0 million,
     respectively.

7.   For the three and nine months ended September 30, 2000, Prodigy recognized
     expenses from related parties of $38.3 million and $50.9 million,
     respectively.

                                      11
<PAGE>

Note 6.  Recently Issued Accounting Pronouncements

  In June 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101B, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101B deferred the required
implementation of SAB 101 until the fiscal quarter ended December 31, 2000.
Prodigy does not expect that SAB 101 will have a material impact on Prodigy's
financial position or results of operations.

  In May 2000, the Emerging Issues Task Force (EITF) issued EITF 00-14,
"Accounting for Certain Sales Incentives," which requires companies to classify
certain promotional expenses as a reduction of revenue. In July 2000, the EITF
deferred implementation of this issue to the fourth quarter of 2000, but
will require that comparative financial statements for prior periods be
reclassified to comply with the classification guidelines of this issue.
Management anticipates that the adoption of this issue may result in certain
reclassifications within the Income Statement; however, it is not expected to
have a material effect on Prodigy's results from operations or financial
position.

  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
noncompensatory 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. Prodigy does
not expect the application of FIN 44 to have a material impact on Prodigy's
financial position or results of operations.


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

  The following discussion should be read in conjunction with the
Consolidated Unaudited Financial Statements and Notes thereto contained herein
under Item 1.

Overview

  Prodigy Communications Corporation ("Prodigy") is a leading national Internet
service provider ("ISP") offering both dial-up and digital subscriber line
("DSL") Internet access. In May 2000, as a result of its transaction with SBC
Communications Inc., Prodigy became a leading provider of retail DSL broadband
Internet access to consumers and small businesses in the United States.

  The results of operations of ISPs, 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
subscriber contract acquisition programs 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 in return for, among other things, the
retailers enrolling a customer onto Prodigy Internet, obtaining a signed
contractual commitment from the customer to a term subscription of one, two or

                                      12
<PAGE>

three years, and committed marketing of Prodigy Internet by the retailer in
connection with the retailers' other product advertisements. Prodigy's
experience has been that subscribers obtained through subscriber contract
acquisition programs have lower rates of cancellation than those obtained
through other channels. Prodigy continues to pursue vendor partners for
subscriber acquisition programs but has diversified its distribution channels
through transactions such as the partnership with SBC.

 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, and to higher network usage. As a
result of the seasonality of its business, as well as other factors, Prodigy
experiences quarterly fluctuations in its operating results.

  In October 1999, Prodigy acquired the BizOnThe.Net Web hosting business of
U.S. Republic Communications, Inc. and combined this business with Prodigy's own
Web hosting division to form Prodigybiz.

  On May 31, 2000, Prodigy acquired FlashNet Communications, Inc. ("FlashNet")
in a stock-for-stock merger. The consolidated financial statements at September
30, 2000 and information presented below reflects the operating results and
balance sheet for the period June 1, 2000 through September 30, 2000.

  On May 31, 2000, Prodigy completed its transaction with SBC Communications
Inc. ("SBC"). The consolidated financial statements at September 30, 2000 and
information presented below reflects the results of this transaction for
the period June 1, 2000 through September 30, 2000.


Results of Operations

Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999

  Prodigy's total revenues have three components: 1) Internet and online service
revenues, from the Prodigy and FlashNet divisions, consisting of subscription
revenues from dial-up and DSL subscribers to Prodigy Internet and, for the
period ended September 30, 1999, dial-up subscriber revenues from Prodigy
Classic which was discontinued in October 1999; 2) fees from management
agreements with SBC Communications Inc. and Telmex under which Prodigy provides
certain management and consulting services to each entity's subscribers in
exchange for a fee; and 3) other services, consisting of small business Web
hosting fees from the Prodigybiz division, and advertising and transaction fees.

  Prodigy defines "billable" subscribers as subscribers who remain enrolled
beyond completion of the applicable trial period or who enrolled in a money-back
guarantee program. Prodigy defines "Internet subscribers managed" as billable
subscribers of billable Prodigy Internet de Telmex and "legacy" SBC subscribers,
but excluding Prodigy Classic subscribers.

Internet and online service revenues

  Subscription revenues for Prodigy Internet increased $39.0 million, or 97%,
from $40.1 million for the three months ended September 30, 1999 to $79.1
million for the three months ended September 30, 2000. The number of Prodigy
Internet billable subscribers increased 523,656, or 55%, from 955,784 at
September 30, 1999 to 1,479,440 at September 30, 2000. The year-to-year increase
in the number of total billable subscribers and related revenue included (i)
193,981 subscribers acquired from organic growth of the Prodigy Internet
subscriber base, or $19.4 million for the quarter, (ii) 132,861 billable Prodigy
DSL subscribers, or $11.8 million for the quarter, and (iii) 196,814 billable
subscribers due to the FlashNet acquisition, or $7.8 million for the quarter.
Revenue from Prodigy Classic was $3.8 million for the three months ended
September 30, 1999. Prodigy discontinued Prodigy Classic on October 1, 1999.

Subscriber management fees

  Total Internet subscribers managed, excluding subscribers to Prodigy Internet
and Prodigy Classic, increased by 953,374, or 363%, from 262,723 at
September 30, 1999 to 1,216,097 at September 30, 2000. Fees from Internet
subscribers managed increased $45.9 million, from $1.9 million in the three
months ended September 30, 1999 to $47.8 million in the three months ended
September 30, 2000. At September 30, 2000, the increase in Internet subscribers
managed included 474,859 billable dial-up and 204,991 DSL subscribers of SBC
from which Prodigy recognized management fees in the quarter of $26.5 million
and $17.7 million, respectively. At September 30, 1999 and September 30, 2000,
Prodigy Internet de Telmex subscribers managed amounted to 262,723 and 527,265,
respectively, from which Prodigy recognized management fees of $1.9 million and
$3.3 million for the respective quarters then ended.

                                      13
<PAGE>

Other revenues

  Other revenues increased $4.6 million, or 148%, from $3.1 million for the
three months ended September 30, 1999 to $7.7 million for the three months ended
September 30, 2000. The increase in the current year quarter is attributable to
an increase of $2.1 million, or 347%, in advertising sales and shopping
transactions revenue as well as to a $2.4 million increase in revenues from Web
hosting, the latter increase resulting from Prodigy's acquisition of
BizOnThe.Net in October 1999. The remainder of the period-to-period increase is
attributable to the recognition of $0.9 million of non-advertising revenues from
Prodigy's agreements with such partners as Metris and Looksmart, and
$1.0 million attributable to Flashnet. These increases were offset, in part, by
non-recurring prior period revenue of $2.3 million recognized in connection with
the Cable & Wireless subscriber acquisition transition agreement.

Cost of revenues

  Cost of revenues includes network and content expenses and associated
personnel salaries and benefits. 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 $41.1 million, or 148%, from
$27.8 million in the three months ended September 30, 1999 to $68.9 million in
the three months ended September 30, 2000 and is attributable, in part, to the
55% increase in Prodigy Internet subscribers from September 30, 1999 to
September 30, 2000. This, in turn, resulted in a 37% increase in network usage
in the three months ended September 30, 2000 versus the prior year period. For
the three months ended September 30, 2000, cost of revenues includes
$33.0 million of communications charges of Prodigy owned and managed SBC
Internet subscribers while these subscribers resided on the SBC network, and
$5.3 million of communications charges for subscribers residing on the FlashNet
network.

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 $14.3 million, or 84%, from $17.1 million in the
three months ended September 30, 1999 to $31.4 million in the three months ended
September 30, 2000. The current period primarily reflects increased sales
commissions and bounties, including $13.3 million of bounties relating to SBC-
generated dial-up and DSL Internet access enrollments which commenced in June
2000, and $0.5 million for commissions, primarily for the Web-hosting
salesforce. A further $1.8 million represents sales and marketing expenses of
the FlashNet division.

Product development

  Product development expense includes research and development costs and
other product development costs. Product development expense increased from
$2.8 million in the three months ended September 30, 1999 to $3.8 million in the
three months ended September 30, 2000. The current period increase is primarily
attributable to the need for consultants to augment permanent staff as well as
Prodigybiz activities.

General and administrative

  General and administrative expense increased $23.9 million, or 142%, from
$16.8 million in the three months ended September 30, 1999 to $40.7 million in
the three months ended September 30, 2000. The increase versus the prior year
period was primarily attributable to the inclusion of $1.3 million, $2.9 million
and $16.8 million of expenses pertaining to Prodigybiz, FlashNet, and the
limited partnership formed with SBC, respectively. Costs of $3.7 million were
charged to expense in the current
                                      14
<PAGE>

quarter for integrating the Flashnet and SBC enrollment, billing and customer
service functions with those of Prodigy Communications. Additional
compensation-related expenses of $4.0 million were incurred relating to moving
Prodigy's headquarters to Austin, Texas. These increases were offset, in part,
by a year-to-year decrease in customer service costs, excluding SBC-related
customer service costs, of $2.0 million which, in turn, was attributable to
Prodigy's emphasis on contract subscriber acquisition programs in the prior year
period.


Depreciation and amortization

  Depreciation and amortization expense increased $66.1 million from
$4.2 million in the three months ended September 30, 1999 to $70.3 million in
the three months ended September 30, 2000. The current period increase primarily
reflects amortization attributable to goodwill and other intangibles arising
from the FlashNet and BizOnThe.Net acquisitions and the SBC transaction.
BizOnThe.Net was completed on October 5, 1999 and has an amortization period of
three years. Flashnet and SBC were completed on May 31, 2000 and each has an
amortization period of three years.

Amortization of subscriber acquisition costs

  Commencing in June 1999, Prodigy entered into agreements with national
retailers of personal computers for the purpose of stimulating Prodigy Internet
enrollments by paying retailers in exchange for the retailer enrolling a
customer onto Prodigy Internet and obtaining a signed contractual commitment
from the customer for a term subscription. These payments amount to $100, $250,
or $400, respectively, for a term subscription of one, two or three years at a
monthly charge of $19.95 or $21.95.

  In July 1999 Prodigy acquired the dial-up Internet subscriber base of Cable &
Wireless USA, Inc. for $31.7 million in cash and, in March 2000, the dial-up
Internet subscriber base of Web America for $4.2 million in Prodigy Class A
common stock.

  Prodigy has capitalized these subscriber acquisition costs and amortizes these
costs over the term of the underlying subscriber contract for the retail program
or 36 months which represents the estimated weighted average term of the
subscribers acquired from Cable & Wireless USA, Inc. and Web America.

  Amortization of subscriber acquisition costs of $16.9 million was incurred by
Prodigy during the three months ended September 30, 2000 which encompassed
$3.4 million for amortization of the purchase price of subscribers acquired from
Cable and Wireless and Web America, and $13.5 million for amortization of
payments made to certain retailers in exchange for obtaining contract
subscribers to Prodigy Internet.

Restructuring reserves

  During the three months ended September 30, 2000 Prodigy accrued $9.0 million
relating to Prodigy's recently announced management changes and the relocation
of its headquarters operations to Austin, Texas.

Interest and other income

  Interest income/expense, net decreased from net income of $1.1 million in the
three months ended September 30, 1999 to net expense of $3.1 million in the
three months ended September 30, 2000. Prodigy's initial public offering
occurred during the first quarter of 1999 with the proceeds of the offering
being invested in short-term money market instruments. As a result of Prodigy's
contract subscriber programs and acquisitions during the second half of 1999,
Prodigy arranged a $150 million line of credit with Banco Inbursa, S.A. in
August 1999 and commenced borrowing against this line of credit. Throughout the
third quarter of 2000, the balance outstanding under this credit facility
averaged $96.3 million.

                                      15
<PAGE>

  As a result of the foregoing factors, Prodigy's operating loss increased from
$24.7 million in the three months ended September 30, 1999 to $106.4 million in
the three months ended September 30, 2000 and its net loss increased from $23.6
million in the three months ended September 30, 1999 to $62.8 million in the
three months ended September 30, 2000.

Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999

Internet and online service revenues

  Subscription revenues for Prodigy Internet increased $99.1 million, or 101%,
from $98.1 million for the nine months ended September 30, 1999 to $197.2
million for the nine months ended September 30, 2000. The number of Prodigy
Internet billable subscribers increased 523,656, or 55%, from 955,784 at
September 30, 1999 to 1,479,440 at September 30, 2000. The year-to-year increase
in the number of total billable subscribers and related revenue included (i)
193,981 subscribers acquired from organic growth of the Prodigy Internet
subscriber base, or $75.8 million for the nine months ended September 30, 2000,
(ii) 132,861 billable Prodigy DSL subscribers, or $12.6 million for the nine
months ended September 30, 2000, and (iii) 196,814 billable subscribers due to
the FlashNet acquisition, or $10.7 million for the nine months ended September
30, 2000. Revenue from Prodigy Classic was $15.6 million for the nine months
ended September 30, 1999. Prodigy discontinued Prodigy Classic on October 1,
1999.

Subscriber management fees

  Total Internet subscribers managed, excluding subscribers to Prodigy Internet
and Prodigy Classics, increased by 953,374, or 363%, from 262,723 at
September 30, 1999 to 1,216,097 at September 30, 2000. Fees from Internet
subscribers managed increased $66.1 million, from $4.1 million in the nine
months ended September 30, 1999 to $70.2 million in the nine months ended
September 30, 2000. At September 30, 2000, the increase in Internet subscribers
managed included 474,859 billable dial-up and 204,991 DSL subscribers of SBC
from which Prodigy recognized management fees for the nine months ended
September 30, 2000 of $36.2 million and $23.8 million, respectively. At
September 30, 1999 and September 30, 2000, Prodigy Internet de Telmex
subscribers managed amounted to 262,723 and 527,265, respectively, from which
Prodigy recognized management fees of $4.1 million and $9.8 million for the
respective quarters then ended.

Other revenues

  Other revenues increased $14.6 million, or 348%, from $4.2 million for the
nine months ended September 30, 1999 to $18.8 million for the nine months ended
September 30, 2000. The increase in the current year period is attributable to
the increase of approximately $5.3 million in advertising sales and shopping
transactions, as well as to a $7.2 million increase in Web hosting revenues, the
latter improvement attributable to Prodigy's acquisition of BizOnThe.Net small
business Web hosting company in October 1999. The balance of the period-to-
period increase is primarily attributable to the recognition of $1.4 million of
non-advertising revenue from Prodigy's agreement with such partners as Metris
Companies and Looksmart as well as $1.5 million attributable to FlashNet. These
increases were offset, in part, by prior period non-recurring Cable & Wireless
USA, Inc. transition agreement revenues of $1.6 million.

Cost of revenues

  Cost of revenues increased $64.1 million, or 89%, from $71.7 million in the
nine months ended September 30, 1999 to $135.8 million in the nine months ended
September 30, 2000 and is primarily attributable to the 55% increase in Prodigy
Internet subscribers from September 30, 1999 to September 30, 2000. Network
usage hours in the nine months ended September 30, 2000 rose 101.8 million
hours, or 60%, from 170.0 million hours for the nine months ended September 30,
1999 to 271.8 million hours for the nine months ended September 30, 2000. The
year-to-year increase in usage resulted in additional charges of $10.6 million.
For the nine months ended September 30, 2000, cost of revenues also includes
$42.1 million of communications charges of Prodigy owned and managed subscribers
while these resided on the SBC network, and $6.8 million of communications
charges for subscribers residing on the FlashNet network.

                                      16
<PAGE>

Sales and marketing

  Sales and marketing expense increased $26.0 million, or 64%, from
$40.6 million in the nine months ended September 30, 1999 to $66.6 million in
the nine months ended September 30, 2000. The current period primarily reflects
increased marketing operations, SBC bounties and salesforce commissions of
$16.5 million, FlashNet of $2.2 million and Prodigybiz of $5.2 milllion. In
addition, there was a $1.2 million increase in spending for direct mail
campaigns and $1.0 for telemarketing programs.


Product development

  Product development expense increased $1.1 million, or 11%, from $9.6 million
for the nine months ended September 30, 1999 to $10.7 million for the nine
months ended September 30, 2000. This increase was attributable to increased
costs resulting from use of consultants to augment permanent headcount, as well
as activities surrounding Prodigybiz.


General and administrative

  General and administrative expense increased $47.5 million, or 112% from
$42.3 million in the nine months ended September 30, 1999 to $89.8 million in
the nine months ended September 30, 2000. The current period reflects increases
of $4.0 million, $4.5 million and $20.8 million attributable to Prodigybiz,
FlashNet, and the limited partnership formed with SBC, respectively. Costs of
$9.3 million were charged to expense year-to-date for integrating the Flashnet
and SBC enrollment, billing and customer service functions with those of
Prodigy. Additional compensation-related expenses of $5.5 million were incurred
relating to moving Prodigy's headquarters to Austin, Texas. Billing and credit
card processing fees increased $0.8 million and $1.8 million, respectively, due
to the 55% increase in PI subscribers between September 30, 1999 and
September 30, 2000.

Depreciation and amortization

  Depreciation and amortization expense increased $96.0 million, or 774%, from
$12.4 million in the nine months ended September 30, 1999 to $108.4 million in
the nine months ended September 30, 2000. The current period increase primarily
reflects amortization attributable to goodwill and other intangibles arising
from the FlashNet and BizOnThe.Net acquisitions, and to the SBC transaction.
The BizOnThe.Net acquisition was completed on October 5, 1999 and the goodwill
attributable to this acquisition has an amortization period of three years. The
Flashnet acquisition and the SBC transaction were completed on May 31, 2000, and
each has an amortization period of three years.

Amortization of subscriber acquisition costs

  Commencing in June 1999, Prodigy entered into agreements with national
retailers of personal computers for the purpose of stimulating Prodigy Internet
enrollments by agreeing to make a payment to the retailer in exchange for the
retailer enrolling a customer onto Prodigy Internet and obtaining a signed
contractual commitment from the customer to a term subscription. These payments
amount to $100, $250, or $400, respectively, for a term subscription of one, two
or three years at a monthly charge of $19.95 or $21.95.

  In July 1999 Prodigy acquired the dial-up Internet subscriber base of Cable &
Wireless USA, Inc. for $31.7 million in cash and, in March 2000, the dial-up
Internet subscriber base of Web America for $4.2 million in Prodigy Class A
common stock.

  Prodigy has capitalized these subscriber acquisition costs and
amortizes these costs over the term of the underlying subscriber contract for
the retail program or 36 months which represents the estimated weighted average
term of the subscribers acquired from Cable & Wireless USA, Inc. and Web
America.

  Amortization of subscriber acquisition costs of $48.4 million was incurred
by Prodigy during the nine months ended September 30, 2000 which encompassed
$8.6 million for amortization of the purchase price of subscribers acquired from

                                      17
<PAGE>

Cable and Wireless and Web America, and $39.8 million for amortization of
payments made to certain retailers in exchange for obtaining contract
subscribers to Prodigy Internet.

Restructuring reserves

  During the nine months ended September 30, 2000 Prodigy accrued $18.5 million
relating to Prodigy's recently announced management restructuring and the
relocation of its headquarters operations to Austin, Texas.

Interest and other income

  Interest income/expense, net decreased from net income of $4.0 million in the
nine months ended September 30, 1999 to net expense of $8.4 million in the nine
months ended September 30, 2000. Prodigy's initial public offering occurred
during the first quarter 1999 with the proceeds of the offering being invested
in short-term money market instruments. As a result of Prodigy's contract
subscriber programs and other acquisitions during the second half of 1999,
Prodigy arranged a $150 million line of credit with Banco Inbursa, S.A. in
August 1999 and commenced borrowing against this line of credit. Throughout the
nine months ended September 30, 2000, the balance outstanding under this credit
facility averaged $96.3 million.

  As a result of the foregoing factors, Prodigy's operating loss increased from
$59.8 million in the nine months ended September 30, 1999 to $192.1 million in
the nine months ended September 30, 2000 and its net loss increased from
$50.7 million in the nine months ended September 30, 1999 to $136.7 million in
the nine months ended September 30, 2000.


Liquidity and Capital Resources

Since formation, Prodigy has relied on private sales of equity securities
(totaling $294.1 million through September 30, 2000), borrowings and an 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
September 30, 2000, had an accumulated deficit of $510.0 million and a working
capital deficit of $205.8 million comprised of current liabilities of
$226.9 million and current assets of $21.1 million. For the nine months ended
September 30, 1999 and September 30, 2000, Prodigy incurred a loss from
operations of $59.8 million and $192.1 million, respectively, and negative cash
flows from operations of $22.8 million and $10.9 million, respectively.

At October 31, 2000, Prodigy had available cash and cash equivalents of $3,398.
Prodigy is currently experiencing substantial 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 credit facility is
guaranteed by Telmex. At September 30, 2000, the balance borrowed under this
line of credit was $96,345. In November 2000, Prodigy borrowed an additional
$18,655 under this credit facility. This note matures on November 22, 2000.

In addition, to reduce the up-front cash requirements associated with its DSL
expansion, Prodigy has re-negotiated the payment terms of its subscriber
acquisition costs with SBC Communications Inc. Effective October 1, 2000,
Amendment No. 1 to Prodigy's Strategic and Marketing Agreement with SBC (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 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 rate of 12% per annum. The
Amendment will substantially reduce Prodigy's cash burn rate in the intervening
quarters.

To the extent Prodigy is unable to fund its current obligations as they become
due from its operating cash flows, Carso Global Telecom, through its subsidiary
Telmex, has committed to provide financing, either through capital and/or debt
financing, of up to $200,000 through February 2001. This commitment is inclusive
of the aforementioned $150,000 line of credit from Banco Inbursa, S.A.

Although Prodigy's efforts to obtain bank financing secured by long-term
customer contracts have proved to be unsuccessful, we continue to pursue long-
term financing with the support of our principal shareholders SBC, Telmex and
Carso Global Telecom.

Prodigy's future financing requirements will depend on a number of factors,
including our operating performance and increases in operating expenses
associated with growth in our business. Based upon our current operating plan,
we believe that it will require significant external financing in order to
continue to expand our consumer business. Prodigy is considering a

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<PAGE>

number of alternatives to raise additional financing, including public or
private equity or debt financing, bank loans, strategic partner and joint
venture arrangements, vendor financing, leasing arrangements or a combination of
these sources. There can be no assurance that we will be able to obtain
sufficient financing on acceptable terms, the absence of which funding would
have a material adverse effect on Prodigy.

  Net cash from investing activities decreased to $9.5 million in the nine
months ended September 30, 2000 from $176.8 million used in the nine months
ended September 30, 1999 primarily due to reduced spending on subscriber
acquisition programs in the current period.

  During the nine months ended September 30, 2000, Prodigy paid approximately
$10.9 million in consideration for subscribers obtained through its subscriber
contract acquisition programs. Prodigy has $13.3 million of accrued subscriber
contract expense related to these programs as of September 30, 2000. Prodigy has
capitalized these costs and will amortize these costs over the terms of the
underlying subscriber contracts (one, two or three years). At September 30,
2000, Prodigy had capitalized related subscriber contract acquisition costs of
$193.2 million and had recognized amortization expense of $39.8 million for the
nine months ended September 30, 2000.

  Prodigy's capital expenditures for the nine months ended September 30, 2000
were $2.7 million, primarily for the purchase of data processing equipment,
compared to capital expenditures of $9.5 million in the nine months ended
September 30, 1999. Prodigy has made greater use of lease financing of capital
purchases in the current period.

  In August 1999, Prodigy obtained a $150 million revolving line of credit from
Banco Inbursa, S.A. to fund its subscriber contract acquisition programs during
the third and fourth quarter of 1999. The terms of this line of credit allow
Prodigy to borrow, repay and reborrow amounts in minimum increments of
$1 million. Advances are due 30 days after borrowing, but Prodigy is permitted
to rollover advances into new advances at its election. Advances are
uncollateralized and bear interest of 12% per annum. At September 30, 2000, the
balance borrowed under this line of credit was $96.3 million. In November 2000,
Prodigy borrowed an additional $18.7 million under this credit facility. This
note matures on November 22, 2000.


Recently Issued Accounting Pronouncements

  In June 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101B, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101B deferred the required
implementation of SAB 101 until the fiscal quarter ended December 31, 2000.
Prodigy does not expect that SAB 101 will have a material impact on Prodigy's
financial position or results of operations.

  In May 2000, the Emerging Issues Task Force (EITF) issued EITF 00-14,
"Accounting for Certain Sales Incentives," which requires companies to classify
certain promotional expenses as a reduction of revenue. In July 2000, the EITF
deferred implementation of this issue to the fourth quarter of 2000, but
will require that comparative financial statements for prior periods be
reclassified to comply with the classification guidelines of this issue.
Management anticipates that the adoption of this accounting treatment may result
in certain reclassifications within the Statement of Operations, however it is
not expected to have a material effect on Prodigy's results from operations or
financial position.

  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

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<PAGE>

Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory 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. Prodigy does
not expect the application of FIN 44 to 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-Q contains "forward-looking statements" relating to,
without limitation, 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. The words
"expect", "estimate", "anticipate", "believe", "intend", "plan" and similar
expressions and variations thereof are intended to identify forward-looking
statements. The cautionary statements set forth in this "Certain Factors That
May Affect Future Operating Results" section and elsewhere in this report on
Form 10-Q and in the Company's latest annual report on Form 10-K/A,
respectively, identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those expressed in or implied by such forward-
looking statements.

Prodigy 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 is currently experiencing substantial negative cash flow each month,
expects to continue to experience negative cash flow through at least 2001, and
is in the process of seeking additional funding to finance its operations, the
absence of which funding would have a material adverse effect on Prodigy.
Prodigy had $4.9 million of cash available at September 30, 2000. Any additional
equity financing may cause investors to experience dilution. Any additional debt
financing may result in restrictions on Prodigy's operations.

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,
1997, 1998 and 1999 and the nine months ended September 30, 2000.


                             Year Ended December 31,
                                                               Nine Months Ended
                      1997           1998          1999       September 30, 2000
                 -------------- -------------- -------------- ------------------

   Revenues....  $134.2 million $136.1 million $189.0 million  $286.2 million
   Net Losses..  $132.8 million $ 65.1 million $ 80.5 million  $136.7 million

At September 30, 2000, Prodigy had:

 .  an accumulated deficit of $510.0 million;

 .  a working capital deficit of $205.8 million;

 .  current liabilities of $226.9 million; and

 .  current assets of $21.1 million.

As a result of these losses, Prodigy has never generated annual positive cash
flow from operations and has relied on private and public sales of equity

                                      20
<PAGE>

securities and borrowings to fund its operations. The following table shows
Prodigy's negative cash flows from operations during the last three years and
for the nine months ended September 30, 2000.


                Year Ended December 31,
     ------------------------------------------  Nine Months Ended
          1997          1998          1999       September 30, 2000
     -------------- ------------- ------------- ------------------
     $114.0 million $68.0 million $40.1 million    $10.9 million

Prior to its acquisition by Prodigy on June 17, 1996, Prodigy's predecessor
incurred significant net losses and sustained negative cash flow from
operations that required continued funding by the predecessor's former owners,
IBM and Sears. The funding totaled $1.3 billion as of June 16, 1996.

Prodigy operates in a highly competitive market and faces significant
competition from a variety of current and potential sources, including
EarthLink and America Online, 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. 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.

Prodigy also faces competition from companies that provide broadband service
to households, 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, which has merged with MindSpring, Microsoft Network, AT&T WorldNet,

MCI Internet, IBM Internet Connection, PSINet, GTE Internetworking 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 America Online, which offers the America Online 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

                                      21
<PAGE>

access business. This 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 federal
Telecommunications 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.

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.

Prodigy relies on third party network providers to carry Prodigy's subscriber
traffic. Prodigy's primary network provider is Splitrock, and Splitrock's
failure to provide network services as required could damage Prodigy's business.

Splitrock was formed in 1997 and has a limited operating history, and Prodigy
currently is Splitrock's principal customer. The failure by Splitrock 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.

Security problems represent an ongoing threat to the telecommunications
networks used in Prodigy's business. Splitrock'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 Splitrock 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 Splitrock'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 Splitrock'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.

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<PAGE>

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 Splitrock, 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. The federal Telecommunications Act of 1996 is expected to lead
to increased competition in the provision of local and other telephone service.
However, Prodigy cannot predict the timing or extent of any developments or
their effect on pricing or supply. Prodigy's suppliers and telecommunications
carriers also sell or lease products and services to its competitors and
possibly current or future competitors. 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.

Carso Global Telecom, Telmex, SBC and Prodigy's directors have engaged in
transactions that were not necessarily arms' length. Prodigy cannot assure that
its directors will act solely in the interests of Prodigy and its shareholders.

Circumstances may arise in which the interests of Carso Global Telecom, Telmex
or SBC, as shareholders, could conflict with the interests of the other
shareholders of Prodigy. Carlos Slim Helu and members of his family beneficially
own a majority of the voting equities of Carso Global Telecom. Carso Global
Telecom may be deemed to control Telmex through the shares of Telmex it owns
directly and indirectly. Mr. Slim is also chairman of the board of Carso Global
Telecom and Telmex. Prior to the closing of the SBC transaction on May 31, 2000,
Mr. Slim and members of his immediate family could be deemed to control Prodigy
through the shares of Prodigy they owned indirectly. Carso Global Telecom and
its affiliates have engaged in numerous transactions with Prodigy in the past
that were not necessarily a result of arms'-length negotiations. For example, an
affiliate of Carso Global Telecom provides Prodigy with a $150 million revolving
line of credit. Prodigy has outsourced its network to Splitrock, a company in
which Carso Global Telecom owns stock. Prodigy entered into an arrangement with
CompUSA, a company that is controlled by Mr. Helu, to make specified payments to
CompUSA in exchange for CompUSA enrolling customers onto Prodigy Internet and
obtaining a signed contractual commitment from these customers to term
subscriptions of one, two or three years at Prodigy's standard monthly rates.
Carso Global Telecom and its affiliates may engage in additional related-party
transactions with Prodigy in the future.

Mr. Salameh, Jaime Chico Pardo and Arturo Elias, directors of Prodigy, are
affiliated with Carso Global Telecom or Telmex. Charles Roesslein, the chief
executive officer and director of Prodigy, and Charles Foster and Robert
Pickering, directors of Prodigy, are employed by SBC Communications Inc. Mr.
Salameh is married to Mr. Slim's niece, and Mr. Elias is married to Mr. Slim's
daughter.

The law requires Prodigy's directors to make all decisions in accordance with
their fiduciary duties and in the best interests of Prodigy and its
shareholders. The aforementioned directors of Prodigy owe similar duties to the
other companies for which they serve as directors or officers of with which they
are otherwise affiliated. Due to the nature of the potential conflicts of
interest presented on an ongoing basis by these arrangements, Prodigy cannot
assure that the directors involved have acted or will act in a manner that takes
into account solely the interest of Prodigy and its shareholders.

Prodigy cannot fund its operations with the cash generated from its business

                                      23
<PAGE>

and is seeking third-party financing to fund its operations. Additional
financing may result in dilution to existing stockholders and additional
operating restrictions.

Enrollments from PC bundling are declining. 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 terminated on November 30,
1999, except in 32 stores where the program terminated on November 4, 2000.
Prodigy has other, less significant, contract acquisition programs with other
retailers and entered into an additional contract acquisition program in
February 2000. However, Prodigy cannot predict whether future contract
acquisition programs will generate as many enrollments as in the past.

As a part of its business strategy, Prodigy has completed several acquisitions
to date and may enter into additional business combinations, acquisitions and
strategic relationships. These transactions are typically accompanied by risks
similar to those posed by the SBC transaction.

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

Prodigy's expansion strategy and future success depends on its ability to
anticipate and adapt to new services and markets.

Prodigy's business strategy includes the introduction of new services and
entry into new markets. Prodigy may be unsuccessful in offering new services
and entering new markets as planned. Prodigy's new services may not achieve
market acceptance. In particular, Prodigy is:

 .  expanding its Web hosting activities and other Internet-based services;

 .  expanding beyond its existing consumer market to include small and
   medium-sized businesses; and

 .  targeting Internet services to Spanish-speaking and Hispanic customers in
   the United States.

Prodigy historically has focused on the consumer market and has only limited
experience in developing and marketing services in these markets.

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, the market price of
Prodigy's stock will decline.

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.

                                      24
<PAGE>

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;

 . the 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; and

 . lower timed usage revenues, meaning revenues from hourly usage charges,
  typically occurring during Prodigy's second and third fiscal quarters
  resulting from reduced usage of its services during the summer months.

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, 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's business plan requires it to continue to grow its subscriber base.
If Prodigy is unable to manage growth effectively and maintain consistent
network performance, its business could be harmed.

Prodigy anticipates that the network assets and resources acquired upon the
consummation of the SBC transaction and the FlashNet merger will alleviate the
network performance deterioration which has accompanied the increase in
Prodigy's subscriber base.

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.
These challenges are exacerbated during periods of rapid growth. For example,
as Prodigy increased the number of billable Prodigy Internet subscribers by 87%
from June 30, 1999 to December 31, 1999, network performance deteriorated and
customer service costs increased. The network performance deterioration did not
materially affect Prodigy's results of operations or significantly alter the
services offered by Prodigy.

If Prodigy is unable to attract and retain key personnel in an intensely
competitive environment, its operations could be adversely effected.

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. Although Prodigy has entered into non-
competition agreements with some executive officers, the agreements may not be
enforceable. Prodigy does not maintain insurance on the lives of any of its
officers or directors.

                                      25
<PAGE>

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 more than 5,000 Internet service
providers in the United States, and is expected to undergo substantial
consolidation over the next few years.

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.

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, 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
continued 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 noncompetitive 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 control.

If Prodigy is unable to expand its network and operations to accommodate SBC's
customers, Prodigy may lose subscribers and thus not realize the expected
benefits of the SBC transaction.

                                      26
<PAGE>

As a result of the closing of the SBC transaction, Prodigy has rapidly taken on
management of a significant number of new customers. Prodigy must therefore
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 closing of SBC transaction.


SBC has considerable influence over the management of Prodigy. As a result of
this change in ownership and management structure, current and prospective
Prodigy employees may experience uncertainty about their future roles with
Prodigy. This uncertainty may adversely affect Prodigy's ability 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.

All major corporate actions 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.

Prodigy has established an executive steering committee, consisting of two
directors selected by SBC and two directors selected by Carso Global Telecom and
Telmex. All major corporate actions will 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.

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. The agreement has an initial term of three years and
automatically renews for additional three-year terms unless terminated by
Prodigy or SBC. In addition, 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 has issued an approximate 43%
interest to SBC and will not realize the benefits it anticipates receiving in
exchange for the interest.

The complex process of integrating Prodigy and FlashNet may disrupt the
business activities of Prodigy and affect employee morale, thus affecting
Prodigy's ability to retain key employees.

Integrating the operations and personnel of Prodigy and FlashNet will be a
complex process, and Prodigy is uncertain that the integration will be completed
rapidly or will achieve the anticipated benefits of the merger. The successful
integration of Prodigy and FlashNet will require, among other things,
integration of their finance, human resources and sales and marketing groups and
coordination of development efforts. The diversion of the attention of Prodigy's
management and any difficulties encountered in the process of combining the
companies could cause the disruption of the business activities of Prodigy.
Further, the process of combining Prodigy and FlashNet could negatively affect
employee morale and the ability of Prodigy to retain some of its key employees
after the merger.

                                      27
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

  Not Applicable.


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

  On June 27, 2000, Prodigy was served with a summons and complaint by Saul
Kaufman on behalf of himself and others similarly situated. The complaint,
seeking class certification, was filed in the Circuit Court of Cook County,
Illinois, County Department, Chancery Division. It alleges breach of contract
and unfair and deceptive practices in connection with the transfer of Web
America members to Prodigy Internet, during which transfer Prodigy allegedly did
not provide service for a number of days, but allegedly charged for those days'
service. Given the early stage of this litigation, no prediction as to its
outcome can be made.

  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 rebate program. The plaintiff
alleges Prodigy violated Florida's Unfair Trade Practices Act when it
represented it would provide rebates and failed to do so. In addition, the
complaint contains a breach of contract claim for failure to pay the rebates.
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 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 purchased a computer at Best Buy, enrolled in the Prodigy Internet
service under the rebate program and did not receive a rebate 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, rebates, interest, punitive damages, court
costs and litigation expenses. The court recently dismissed the unjust
enrichment, conversion and negligence causes of action leaving only the breach
of contract claim before the court. Prodigy is presently engaged in serious
settlement discussions with plaintiff's counsel.

  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, America Online, 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 other defendants offered
rebates 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.
Prodigy filed a Demurrer to plaintiffs' Complaint as did defendants AOL and
CompuServe. On August 3, 2000, the court granted defendants' Demurrers without
leave to amend, effectively dismissing plaintiffs' lawsuit. Plaintiffs' have 60
days following service of the Notice of Entry of Judgment to file their appeal.
Prodigy expects plaintiffs to appeal.

  On October 2, 1999, Irwin Sales filed a lawsuit against Prodigy in the United
States District Court of the Southern District of New York. The lawsuit alleges
that Prodigy breached an independent contractor agreement with the plaintiff and
engaged in fraud arising out of it. The plaintiff seeks $25 million in damages
for the contract claim and $50 million in damages for the fraud claim. On
January 5, 2000 Prodigy served its answer. On February 1, 2000, the plaintiff
filed an amended complaint, and, on February 25, 2000, Prodigy filed a motion to
dismiss the plaintiffs fraud claim. Prodigy believes it has meritorious defenses

                                      28
<PAGE>

to the claims and intends to vigorously contest them. The case is presently set
to go to trial on November 27, 2000.


Item 2.  Changes in Securities and Use of Proceeds

     None.

Item 4.  Submission of Matters to a Vote of Security Holders

     None.


Item 5.    Other Information

  On October 1, 2000, Prodigy and SBC amended the Strategic and Marketing
Agreement which was originally executed on May 31, 2000 as part of the
consummation of the transaction with SBC as described in Prodigy's Current
Reports on Form 8-K filed on December 2, 1999 and June 14, 2000 and in Prodigy's
proxy statement dated May 5, 2000. As amended, the Strategic and Marketing
Agreement permits Prodigy to pay its 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 SBC prior to October
1, 2000 may be deferred by Prodigy until February 5, 2001. Deferred payments
under this Agreement are subject to interest at the rate of 12% per annum. This
Agreement will substantially reduce Prodigy's cash burn rate in the upcoming
quarters.

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits.

  The exhibits listed on the Exhibit Index are filed herewith.

(b)  Reports on Form 8-K

     None


                                       29

<PAGE>


                                   SIGNATURES


Pursuant to the requirements 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.



                             PRODIGY COMMUNICATIONS CORPORATION


Date:  November 14, 2000     /s/ Allen Craft
                           -------------------------------
                           Allen Craft
                           Vice President and Chief Financial
                           Officer (Principal Financial and
                           Accounting Officer)


                                       30




<PAGE>
                                  EXHIBIT INDEX

   10.1       Amendment No. 1 to the Strategic and Marketing Agreement dated as
              of October 1, 2000, by and among the Registrant, SBC
              Communications Inc., SBC Communications Inc. and Prodigy
              Communications Limited Partnership.

   27         Financial Data Schedule.
--------

                                      31