<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: March 31, 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 Common Stock, $.01 par value per share,
outstanding on April 30, 2000 was 64,692,700.
                                  ----------


<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
                                   FORM 10-Q
                         QUARTER ENDED MARCH 31, 2000


                                     INDEX

                                                                       Page

PART I.  FINANCIAL INFORMATION                                           3

Item 1.  Financial Statements                                            3

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                      10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk     26


PART II.  OTHER INFORMATION                                             26

Item 1.  Legal Proceedings                                              26

Item 2.  Changes in Securities and Use of Proceeds                      26

Item 6.  Exhibits                                                       27

Signatures

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

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."

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 amounts)
<TABLE>
<CAPTION>
                                                      March 31,     December 31,
                                                        2000            1999
--------------------------------------------------------------------------------
<S>                                                 <C>             <C>
Assets

Current assets:
  Cash and cash equivalents                         $  21,134       $  35,473
  Accounts receivable, net of allowance for doubtful    4,817          10,314
    accounts of $4,696 and $3,380 on March 31,
    2000 and December 31, 1999, respectively
  Due from affiliate                                    2,055           1,801
  Prepaid expenses                                      3,130           2,793
  Other current assets                                    275           1,437
--------------------------------------------------------------------------------
Total current assets                                   31,411          51,818

Restricted cash                                         4,063           4,692
Property and equipment, net                            19,225          18,201
Tradename, net                                         25,140          26,330
Goodwill, net                                          51,170          55,680
Deferred network costs                                  2,969           3,563
Subscriber acquisition costs, net                     158,159         182,838
Other intangibles, net                                  1,589           1,748
Other assets                                            4,033           1,118
--------------------------------------------------------------------------------
Total assets                                        $ 297,759       $ 345,988
                                                    =========       =========

Liabilities and Stockholders' Equity

Current liabilities:
  Notes payable                                     $  96,345       $ 110,154
  Accounts payable                                     14,446          24,351
  Other accrued expenses                               21,592          16,847
  Accrued subscriber contract expenses                  7,972           7,144
  Accrued compensation                                  1,619           3,095
  Unearned revenue                                     16,029          14,062
  Accrued purchase and restructuring costs              3,817           3,849
  Capital lease obligation - short term                 1,163             412
--------------------------------------------------------------------------------
Total current liabilities                             162,983         179,914
--------------------------------------------------------------------------------
Capital Lease obligation - long term                    2,375             983
                                                    ---------       ---------
Total liabilities                                     165,358         180,897
                                                    ---------       ---------

Stockholders' equity:
  Preferred stock; $.01, par value; 10,000,000
    shares authorized; none issued or outstanding           -               -
  Common stock; $.01 par value; 150,000,000
    shares authorized; 64,644,561 and
    64,502,608 shares issued and outstanding at
    March 31, 2000 and December 31, 1999,
    respectively                                          646             645
  Additional paid-in capital-common stock             540,944         539,054
  Accumulated deficit                                (408,189)       (373,275)
--------------------------------------------------------------------------------
                                                      133,401         166,424
  Less note receivable from stockholder                (1,000)         (1,333)
--------------------------------------------------------------------------------
Total stockholders' equity                            132,401         165,091
--------------------------------------------------------------------------------

Total liabilities and stockholders' equity          $ 297,759       $ 345,988
                                                    =========       =========

</TABLE>

The accompanying footnotes 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
                                                    Three Months    Three Months
                                                       Ended           Ended
                                                     March 31,        March 31,
                                                       2000             1999
----------------------------------------------------------------------------------
<S>                                                 <C>             <C>
Revenues:
  Internet and online service revenues:
    Prodigy Internet                                $    56,929     $    27,908
    Prodigy Classic                                           -           6,680
                                                    ------------    ------------
                                                         56,929          34,588

  Other (including $2,605 and $761 of affiliate
         revenue for the three months
         ended March 31, 2000 and
         March 31, 1999, respectively)                    8,021           1,338
----------------------------------------------------------------------------------
    Total revenues                                       64,950          35,926

Operating costs and expenses:
  Cost of revenue                                        29,415          21,846
  Marketing                                              18,769          12,412
  Product development                                     3,282           3,450
  General and administrative                             21,609          12,653
  Depreciation and amortization                           8,885           4,073
  Amortization of subscriber acquisition costs           15,316             -
--------------------------------------------------------------------------------
    Total operating costs and expenses                   97,276          54,434
                                                    ------------    ------------
Operating loss                                          (32,326)        (18,508)

  Interest (income)/expense, net                          2,613          (1,064)
  Gain on settlement of note payable                          -          (1,714)
  Gain on asset sale                                        (25)              -
                                                    ----------------------------
Net loss                                            $   (34,914)    $   (15,730)
                                                    ============================

Basic and diluted net loss per share                $     (0.54)    $     (0.29)
                                                    ============    ============
Weighted average number of shares outstanding
  used in computing basic and diluted net loss
  per share                                          64,564,764      53,455,241
                                                    ============    ============

</TABLE>


The accompanying footnotes 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
                                                                  Three Months      Three Months
                                                                      Ended             Ended
                                                                     March 31,        March 31,
                                                                       2000              1999
--------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>
Cash flows from operating activities:
  Net loss                                                          $(34,914)         $(15,730)

  Adjustments to reconcile net loss to net cash used in operating
    activities:

    Option grants at less than fair value                                917               321
    Depreciation                                                       2,420             1,880
    Amortization of goodwill                                           4,522               388
    Amortization of tradename                                          1,190               890
    Amortization of deferred network asset                               594               594
    Amortization of subscriber acquisition costs                      15,316                 -
    Amortization of other intangibles                                    159                 -
  Change in operating assets and liabilities,
    net of effects of acquisitions and disposals
    Accounts receivable                                                5,497               282
    Due from affiliate                                                  (254)             (761)
    Prepaid expenses                                                    (337)             (133)
    Other assets                                                         247               512
    Accounts payable                                                  (9,905)            2,227
    Other accrued expenses                                             4,745             1,109
    Accrued compensation                                              (1,476)             (844)
    Unearned revenue                                                   1,967             1,676
    Accrued purchase and restructuring costs                             (32)             (249)
-----------------------------------------------------------------------------------------------
Net cash used in operating activities                                 (9,344)           (7,838)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Acquisition of property and equipment                               (1,301)           (3,175)
  Purchase price reduction for Cable & Wireless
    subscriber acquisition                                             9,793                 -
  Purchase price increase for BizOnThe.Net acquisition                   (12)                -
  Subscriber acquisition                                                 398                 -
  Short-term investments                                                   -           (31,829)
  Other investments                                                   (2,000)                -
----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                    6,878           (35,004)
----------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Sale of common stock, net of fees                                      974           159,458
  Borrowings/(repayments) of notes payable to related
    parties                                                          (13,809)                -
  Repayment of note payable to unrelated party                             -            (2,000)
  Repayments of note receivable from stockholder                         333               334
  Decrease in restricted cash                                            629               696
----------------------------------------------------------------------------------------------
Net cash provided by financing activities                            (11,873)          158,488
----------------------------------------------------------------------------------------------

Net increase (decrease) in cash                                      (14,339)          115,646
                                                                    --------          --------
Cash and cash equivalents, beginning                                  35,473            12,180
                                                                    --------          --------
Cash and cash equivalents, ending                                   $ 21,134          $127,826
                                                                    ========          ========
Noncash financing activity:
    Conversion of contingent convertible notes to common stock             -            30,500
</TABLE>


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

                                       5
<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
     CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
               (in thousands except share and per share amounts)


For the period ended March 31, 2000
<TABLE>
<CAPTION>
                                                                        Contingent                        Additional
                                                       Preferred Stock  Convertible     Common Stock       Paid in
                                                       Shares   Amount  Securities   Shares      Amount    Capital
                                                       ---------------  -----------  ------------------   ----------
<S>                                                    <C>      <C>     <C>          <C>         <C>     <C>
Balance, December 31, 1999                                0       $0            $0   64,502,608  $645      $539,054

Sale of common stock
  Exercise of options                                     -        -                    141,953     1         1,890
  Sale of stock                                           -        -

Net Loss:
                                                       -------------------------------------------------------------
Balance, March 31, 2000                                   0       $0            $0   64,644,561  $646      $540,944
                                                       ======   ======      ======  ===========  =====    ==========
</TABLE>
<TABLE>
<CAPTION>
                                                                                    Note
                                                                                  Receivable
                                                                     Accumulated     From
                                                                       Deficit    Shareholder     Total
                                                                     -----------  -----------     -----
<S>                                                                  <C>          <C>          <C>
Balance, December 31, 1999                                           $(373,275)    $(1,333)      $165,091

Sale of common stock
  Exercise of options                                                                               1,891
  Sale of stock                                                                        333            333

Net loss                                                               (34,914)                   (34,914)
                                                       ---------------------------------------------------
Balance, March 31, 2000                                              $(408,189)    $(1,000)      $132,401
                                                                    ===========  ==========    ===========
</TABLE>

The accompanying footnotes 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 and per share information)

Note 1.  Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements,
which include the accounts of Prodigy Communications Corporation ("Prodigy")
and its wholly owned 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 three month period ended March 31, 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 for the fiscal year
ended December 31, 1999.

     At March 31, 2000, Prodigy had available cash and cash equivalents of
$21.1 million. Prodigy is currently experiencing substantial negative cash flow
each month and expects to continue to experience negative cash flows through
2000. Telmex has unconditionally committed to provide financing, either through
capital and/or debt financing, of up to $200 million to fund Prodigy's
operations through February 2001. The terms of this financing will be determined
at the time such financing, if any, is provided.

Note 2.  Common Stock Offering

     On February 17, 1999, Prodigy completed an initial public offering under
the Securities Act of 1933. Prodigy sold 11,200,000 shares of Common Stock
and raised net proceeds of approximately $157,200.

     Upon the completion of Prodigy's offering both IBM and Sears acquired
an interest in Prodigy's outstanding common stock in accordance with the
terms of the Contingent Convertible Notes. IBM and Sears each received
approximately 2,127,500 shares for a combined total of approximately 4,255,000.

     Additionally, IBM and Sears each received warrants which allow them to
purchase 2,409,145 additional shares each at $19.50 per share. Those warrants
are exercisable for three years from the conversion date.

Note 3. Subscriber Acquisition Costs

     In May 1999, Prodigy entered into an agreement with Cable & Wireless USA,
Inc. to purchase the dial-up access Internet subscriber base of that entity. At
the closing on July 20, 1999, Prodigy paid Cable & Wireless USA, Inc. $40,900 in
cash. In March 2000, Prodigy received an approximately $10,000 purchase price
adjustment from Cable & Wireless, USA, Inc. due to fewer subscribers
transitioning to Prodigy Internet than originally projected, reducing the cost
of the subscribers purchased under this agreement to approximately $31,000.
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 months ended March 31, 2000, Prodigy recognized amortization
expenses from this transaction of $2,329.

     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 months ended March 31, 2000, Prodigy had recorded gross subscriber
acquisition costs related to these transactions of $2,919 and had recognized
related amortization expense of $12,987. In addition, at March 31, 2000, Prodigy
had recorded accrued subscriber contract expenses to the Retailers of $7,972.

     Prodigy reviews subscriber terminations quarterly. Any unamortized
subscriber acquisition costs related to such terminations are written off
immediately.

Note 4.  Restructuring Reserves

     During the quarter ended March 31, 2000 Prodigy paid $32 of expenditures
related to the 1997 restructuring reserve. These expenditures related to
contractual obligations and severance payments identified under the original
plans. The remaining reserve consists primarily of contractual obligations that
management expects will be paid in full by December 31, 2001.

Note 5.  Settlement of Debt

     In January 1999, Prodigy paid a network company $750 in full settlement
of its 8 1/4% convertible note in the principal amount of $2,000, and all
accrued interest and recognized a gain of $1,714.

                                       7


<PAGE>


                      PRODIGY COMMUNICATIONS CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

             (in thousands except share and per share information)

Note 6.  Net Loss Per Share

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

Note 7. Segment Information

     Prodigy has two reportable segments based on its internal reporting which
is disaggregated by the services Prodigy offers: consumer Internet services and
small business Web hosting services, the latter of which principally includes
the BizOnThe.Net Web hosting business acquired from U.S. Republic
Communications, Inc. in October 1999. Based on the level of operations during
the period, the revenues and operating losses of the Web hosting
services are reflected below in an "all other" category together with other
non-segment business transactions. There are no intersegment revenues between
the two reportable segments. All other accounting policies are applied
consistently to the segments, where applicable.

     A summary of the segment financial information is as follows:

                                                    Three months ended
                                                        March 31,
                                                     2000       1999
                                                    -------    -------
                                                      (in thousands)
Revenues:
Internet and online services.....................   $56,929    $34,588
All other services(1)............................     8,021      1,338
                                                    -------    -------
     Total revenues..............................   $64,950    $35,926
                                                    =======    =======

Loss (income) from operations

Internet and online services(2)..................   $29,616    $18,537
All other services(1)(3).........................       968        (29)
Other(4).........................................     1,742         -
                                                    -------    -------
     Total loss from operations..................   $32,326    $18,508
                                                    =======    =======

1. Includes revenue and operating losses associated with the Prodigybiz small
   business Web hosting division, the Prodigy Internet de Telmex management
   agreement, and advertising and transaction fees.

2. For the three months ended March 31, 2000 and 1999, Internet and online
   services includes goodwill and other intangible assets amortization of
   $17,200 and $1,900, respectively.

3. For the three months ended March 31, 2000 and 1999, all other services
   includes goodwill and other intangible assets amortization of $4,600 and $0,
   respectively.

4. Other consists of integration-related costs associated with the pending
   acquisition of FlashNet Communications, Inc. and the pending transaction with
   SBC Communications discussed in Note 9.


Note 8.  Recently Issued Accounting Pronouncements

     In March 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101A, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101A defers the required
implementation of SAB 101 until the fiscal quarter ended June 30, 2000. Prodigy
has concluded that SAB 101 does not have a material impact on Prodigy's
financial position or results of operations.

     In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No.25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
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.

                                       8
<PAGE>


                      PRODIGY COMMUNICATIONS CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

             (in thousands except share and per share information)

Note 9. Subsequent Events

 Pending Acquisition of FlashNet Communications

  On November 5, 1999, Prodigy announced a definitive agreement to acquire
FlashNet Communications, Inc. in a stock-for-stock merger. Under the terms of
the merger agreement, Prodigy will issue 0.35 shares of Prodigy common stock
for each share of FlashNet common stock outstanding on the closing date of the
transaction. Based on the number of shares of FlashNet currently outstanding,
Prodigy will issue approximately 5,000,000 shares to complete the acquisition.
The acquisition is expected to be completed in the second quarter of 2000,
subject to FlashNet shareholder approval. The acquisition will be accounted for
under the purchase method of accounting.

 Pending Transaction with SBC Communications

  During November 1999, Prodigy announced a proposed transaction with SBC
Communications Inc. ("SBC"). In the proposed transaction, SBC will acquire an
approximate 43% indirect interest in Prodigy. 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 690,000 existing Internet subscribers. SBC
has 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.

  In order to implement the transaction with SBC: (i) Prodigy will contribute
substantially all its assets and liabilities and transfer its employees to the
operating partnership; (ii) SBC will contribute to the operating partnership
routers, servers and associated hardware used in connection with its consumer
and small business Internet operations that are selected by Prodigy and
intangible assets consisting primarily of brand assets and subscriber
relationships; (iii) Prodigy will receive an initial interest in the operating
partnership of approximately 57%; (iv) SBC will receive 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.

  Prodigy will recognize the contribution of the assets by SBC to the operating
partnership at fair value in exchange for the partnership units issued. 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.

  On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200,000
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement includes a preliminary summary
of principal terms and conditions, estimated expenses and the structuring fee
due Citibank at closing. The letter agreement does not constitute a firm
financing commitment from Citibank, and Prodigy cannot assure that the Citibank
financing will be completed. The Citibank financing is subject to the issuance
by SBC of a performance guarantee and satisfaction of the following conditions:

  .  satisfactory completion of Citibank's due diligence review of Prodigy;

  .  in Citibank's determination, the absence of any material adverse change
     in the financial markets or in the financial condition or operations of
     Prodigy;

  .  negotiation and execution of mutually satisfactory documentation for the
     financing;

  .  the receipt of specified ratings from ratings agencies; and

  .  the receipt of internal Citibank credit approval and any other approvals
     and legal opinions as Citibank may deem necessary or advisable.

  In connection with the Citibank financing, Prodigy and SBC have agreed in
principle that SBC will provide a contingent performance guarantee in exchange
for which Prodigy will grant SBC a contingent warrant to purchase 537,924
shares of Prodigy common stock for $1.00 per share. The performance guarantee
to be provided by SBC requires that, in the event Prodigy becomes unable to
continue to perform its service obligations under the subscriber contracts, SBC
shall either perform Prodigy's service obligations directly or replace Prodigy
with a substitute Internet service provider.

                                       9

<PAGE>

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"). In October 1996, Prodigy launched Prodigy
Internet, an open standards-based Internet access service. Since the autumn of
1997, Prodigy has focused on expanding the Prodigy Internet subscriber base and
introducing additional value-added services. Prodigy has also made strategic
decisions to outsource its network, most of its content, and use multiple
vendors for outsourced customer service functions. As a result of these
initivates, Prodigy has substantially reduced its fixed operating costs and
headcount.

     In conjunction with the lauch of Prodigy Internet in October 1996, Prodigy
began offering a plan allowing subscribers unlimited usage of Prodigy Internet
for a flat monthly fee without hourly usage charges. In December 1996, Prodigy
introduced a similar plan for Prodigy Classic. Since the introduction of
Prodigy's unlimited usage plans, the portion of revenues generated from hourly
usage charges has decreased substantially.

     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
three years, and committed marketing of Prodigy Internet by the retailer in
connection with the retailers' other product advertisements. Prodigy's recent
experience has been that subscribers obtained through subscriber contract
acquisition programs have lower rates of cancellation than those obtained
through other channels. As a result of these lower rates of cancellation,
Prodigy has made the strategic decision to focus its marketing efforts towards
these subscriber acquisition programs.

     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
(revenues from hourly usage charges) during its second and third fiscal quarters
resulting from reduced usage of its services during the summer months. The
seasonal reductions in timed usage revenues historically experienced by Prodigy
have been mitigated by the movement from timed usage plans to unlimited usage
plans as well as growth in base, although Prodigy expects to continue to have
higher expenses during its first and fourth quarters due 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.

Results of Operations

Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999

     Prodigy's total revenues have two components: Internet and online service
revenues consisting of subscription revenues from subscribers to Prodigy
Internet and Prodigy Classic, and other revenues, consisting of small business
Web hosting fees from Prodigy's Prodigybiz division, fees from a management
contract with Telmex under which Prodigy provides certain management and
consulting services to Telmex's Internet subsidiary Prodigy Internet de Telmex,
and advertising and transaction fees. Subscription revenues include revenues
from hourly usage charges ("timed usage revenues"). Prodigy Classic was
discontinued in October 1999.

                                      10
<PAGE>

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

Internet revenues

     Subscription revenues for Prodigy Internet increased $29.0 million, or
104%, from $27.9 million for the three months ended March 31, 1999 to $56.9
million for the three months ended March 31, 2000. The number of Prodigy
Internet billable subscribers increased 529,000, or 90%, from 586,000 at March
31, 1999 to 1,115,000 at March 31, 2000. Revenue from Prodigy Classic was $6.7
million for the three months ended March 31, 1999. Prodigy discontinued Prodigy
Classic on October 1, 1999. Total Internet subscribers managed increased by
795,000 or 109%, from 731,000 at March 31, 1999 to 1,526,000 at March 31, 2000.
Billable subscribers of Prodigy Internet de Telmex accounted for approximately
411,000 and 145,000 of the number of Internet subscribers managed at March 31,
2000 and March 31, 1999, respectively.

Other revenues

     Other revenues increased $6.7 million, or 499%, from $1.3 million for the
three months ended March 31, 1999 to $8.0 million for the three months ended
March 31, 2000 as a result of Web hosting revenues from Prodigy Biz and the
management agreement with Telmex under which Prodigy receives a percentage
of the monthly net revenues from Telmex's Internet subscribers. For the three
months ended March 31, 1999 and March 31, 2000, Prodigy recognized Prodigy
Internet de Telmex management fees of $0.8 million and $2.6 million,
respectively. Prodigy recognized revenues of $2.6 million from its Prodigybiz
division in the first quarter of 2000.

     As a result of the foregoing factors, total revenues increased by $29.0
million, or 81%, from $35.9 million in the three months ended March 31, 1999
to $65.0 million in the three months ended March 31, 2000.

Cost of revenues

    Cost of revenues includes network and content expenses. 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 $7.6
million, or 35%, from $21.8 million in the three months ended March 31, 1999 to
$29.4 million in the three months ended March 31, 2000 and is primarily
attributable to the 90% increase in Prodigy Internet subscribers from March 31,
1999 to March 31, 2000, which, in turn, resulted in a 62% increase in network
usage in the three months ended March 31, 2000 versus the prior year period.

Sales and Marketing

     Sales and marketing expense includes advertising, salaries of sales and
marketing personnel and other general sales and marketing costs. Marketing
expense increased $6.4 million, or 51%, from $12.4 million in the three months
ended March 31, 1999 to $18.8 million in the three months ended March 31, 2000.
The current period reflects an increase of $3.6 million versus the prior year
period for broadcast media costs incurred in connection with Prodigy's "Are
you a Prodigy?" advertising campaign as well as increases of $1.0 million for
direct mail campaigns and $0.5 million for bounties.

Product development

     Product development expense includes research and development costs and
other product development costs. Product development expense decreased from $3.5
million in the three months ended March 31, 1999 to $3.3 million in the
three months ended March 31, 2000. The current period decrease is primarily
attributable to the completion of Prodigy's Year 2000 remediation efforts.

General and administrative

     General and administrative expense increased from $12.7 million in the
three months ended March 31, 1999 to $21.6 million in the three months ended
March 31, 2000. The increase versus the prior year period was primarily
attributable to the inclusion of $2.2 million of Prodigy Biz' general and
administrative expenses in the quarter as well as increased customer service
costs of $0.9 million, increased billing and credit card processing fees of $0.3
million and $0.7 million, respectively, and increased provisions for bad debt of
$1.4 million. The increase in customer service, and billing and credit card
processing fees was attributable to the 90% increase in subscribers between
March 31, 1999 and March 31, 2000. The increased provision for bad debt was
attributable to estimated defaults on subscriber contracts acquired from
Prodigy's contract subscriber acquisition programs. In addition, integration
costs of $1.7 million were charged to expense in the current quarter in
anticipation of the completion of the FlashNet Communications acquisition and
the SBC transaction during the second quarter of 2000.


                                      11
<PAGE>

Depreciation and amortization

     Depreciation and amortization expense increased $4.8 million, or 118%, from
$4.1 million in the three months ended March 31, 1999 to $8.9 million in the
three months ended March 31, 2000. The current period increase primarily
reflects amortization attributable to goodwill and other intangibles arising
from the BizOnThe.Net acquisition in October 1999.

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 to Prodigy
Internet. 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 the Company acquired the Internet dial-up business of
Cable & Wireless USA, Inc.

     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 for the Cable & Wireless subscribers.

     Amortization of subscriber acquisition costs of $15.3 million was incurred
by Prodigy during the three months ended March 31, 2000 which encompassed
$2.3 million for amortization of the purchase price of subscribers acquired from
Cable and Wireless and $13.0 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 March 31, 2000 the Company incurred
$32 million of expenditures related to the 1997 restructuring reserve.
These expenditures relate to contractual obligations and severance
payments identified under the original plans. The remaining reserve consists
primarily of contractual obligations that management expects will be paid in
full by December 31, 2001.

Interest and other income

     Interest income/expense, net decreased from net income of $1.1 million in
the three months ended March 31, 1999 to net expense of $2.6 million in the
three months ended March 31, 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 other acquisitions during the second half of
1999, Prodigy arranged a $130.0 million line of credit with Carso Global Telecom
in August 1999 and commenced borrowing against this line of credit. Throughout
the first quarter of 2000, the balance outstanding under this credit facility
averaged $96.3 million. Borrowings under this facility carry an interest rate of
12 percent per annum.

     As a result of the foregoing factors, Prodigy's operating loss
increased from $18.5 million in the three months ended March 31, 1999 to
$32.3 million in the three months ended March 31, 2000 and its net loss
increased from $15.7 million in the three months ended March 31, 1999 to
$34.9 million in the three months ended March 31, 2000.

Liquidity and Capital Resources

    Since formation, Prodigy has relied on private sales of equity
securities (totaling $294.1 million through March 31, 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 March 31, 2000, had an accumulated deficit of $408.2
million and a working capital deficit of $131.6 million comprised of current
liabilities of $163.0 million and current assets of $31.4 million. For the three
months ended March 31, 1999 and March 31, 2000 Prodigy incurred negative cash
flow from operations of $7.8 million and $9.3 million, respectively.

    The increase in cash used in operating activities from 1999 to 2000 resulted
from timing of payable settlements and increased amortization expense which
offset the increased net losses.

                                      12
<PAGE>

     Net cash from investing activities increased to $6.9 million provided from
investing activities in 2000 from $35.0 million used in 1999 primarily due to
current period cash proceeds of approximately $10.0 million pertaining to the
purchase price reduction from the Cable and Wireless subscriber acquisition
versus, in the prior period, the investment of a portion of the proceeds from
Prodigy's initial public offering in short term money market instruments.

     In February 1999, Prodigy sold 11,200,000 shares of Common Stock in its
initial public offering, including 2,000,000 shares of Common Stock sold to
Telmex, for aggregate net proceeds of $157.2 million.

     In May 1999, Prodigy entered into an agreement with Cable and Wireless
USA, Inc. to purchase the dial-up Internet access subscriber base of that entity
for a purchase price based on the number of Cable & Wireless customers who
transitioned to Prodigy Internet. At the closing, on July 20, 1999, the Company
paid Cable & Wireless USA, Inc. $40.9 million in cash. In March 2000, Prodigy
received an approximately $10.0 million purchase price adjustment from Cable &
Wireless, USA Inc. due to fewer subscribers transitioning to Prodigy Internet
than originally projected reducing the total purchase price paid to
approximately $31.0 million.

     During the three months ended March 31, 2000, Prodigy paid approximately
$2.1 million in consideration for subscribers obtained through its subscriber
contract acquisition programs. Prodigy has $8.0 million accrued related to these
programs as of March 31, 2000. Prodigy has capitalized these costs and will
amortize these costs over the terms of the underlying subscriber contracts (one,
two or three years). At March 31, 2000, Prodigy had capitalized related
subscriber contract acquisition costs of $170.2 million and had recognized
amortization expense of $13.0 million for the three months ended March 31, 2000.

     Prodigy's capital expenditures for the quarter ended March 31, 2000 were
$1.3 million, primarily for the purchase of data processing equipment, compared
to capital expenditures of $3.2 million in the quarter ended March 31, 1999.
Prodigy anticipates that its capital expenditures will be approximately $25
million in 2000.

     In August 1999, Prodigy obtained a $130 million revolving line of credit
from Carso Global Telecom 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, during the third and fourth quarters of 1999 bore interest
of 9% and 12%, respectively. During 1999, Prodigy borrowed the maximum amount
permitted under this line of credit. At March 31, 2000, the line of credit had
been paid down to $96.3 million. This note matures on June 7, 2000.

     At March 31, 2000, Prodigy had available cash and cash equivalents of
$21.1 million. Prodigy is currently experiencing substantial negative cash flow
each month and expects to continue to experience negative cash flows through
2000. Telmex has unconditionally committed to provide financing, either through
capital and/or debt financing, of up to $200 million to fund Prodigy's
operations through February 2001. The terms of this financing will be determined
at the time such financing, if any, is provided.

     On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the
Prodigy Internet service. The letter agreement includes a preliminary summary
of principal terms and conditions, estimated expenses and the structuring fee
due Citibank at closing. The letter agreement does not constitute a firm
financing commitment from Citibank, and Prodigy cannot assure that the Citibank
financing will be completed. The Citibank financing is subject to the issuance
by SBC of a performance guarantee and satisfaction of the following conditions:

  .  satisfactory completion of Citibank's due diligence review of Prodigy;

  .  in Citibank's determination, the absence of any material adverse change
     in the financial markets or in the financial condition of operations of
     Prodigy;

  .  negotiation and execution of mutually satisfactory documentation for the
     financing;

  .  the receipt of specified ratings from ratings agencies; and

  .  the receipt of internal Citibank credit approval and any other approvals
     and legal opinions as Citibank may deem necessary or advisable.


                                      13
<PAGE>


     In connection with the Citibank financing, Prodigy and SBC have agreed in
principle that SBC will provide a contingent performance guarantee in exchange
for which Prodigy will grant SBC a contingent warrant to purchase 537,924
shares of Prodigy common stock for $1.00 per share. The performance guarantee
to be provided by SBC requires that, in the event Prodigy becomes unable to
continue to perform its service obligations under the subscriber contracts, SBC
will either perform Prodigy's service obligations directly or replace Prodigy
with a substitute Internet service provider. Management believes that the
Citibank financing or, if not completed, the Telmex financing will be sufficient
to enable Prodigy to meet its planned expenditures through at least February
2001. Prodigy cannot assure that the Citibank financing will be completed. If
the Citibank financing or other comparable third party financing is completed,
Prodigy does not expect to obtain financing through the Telmex commitment.

     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.

Recently Issued Accounting Pronouncements

     In March 2000, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101A, an amendment to SAB 101, "Revenue
Recognition in Financial Statements." SAB 101A defers the required
implementation of SAB 101 until the fiscal quarter ended June 30, 2000. Prodigy
has concluded that SAB 101 will not have a material impact on Prodigy's
financial position or results of operations.

     In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
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.



                                       14
<PAGE>

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, 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 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 three months ended March 31, 2000.
<TABLE>
<CAPTION>
                                   Year Ended December 31,
                         -------------------------------------------- Three Months Ended
                              1997           1998           1999        March 31, 2000
                         -------------- -------------- -------------- ------------------
<S>                      <C>            <C>            <C>            <C>
   Revenues........      $134.2 million $136.1 million $189.0 million    $65.0 million
   Net Losses......      $132.8 million $ 65.1 million $ 80.5 million    $34.9 million
</TABLE>

At March 31, 2000, Prodigy had:

 .  an accumulated deficit of $408.2 million;

 .  a working capital deficit of $131.6 million;

 .  current liabilities of $163.0 million; and

 .  current assets of $31.4 million.

As a result of these losses, Prodigy has never generated positive cash flow
from operations and has relied on private and public sales of equity securities
and borrowings to fund its operations. The following table shows Prodigy's
negative cash flows from operations during the last three years and for the
three months ended March 31, 2000.


                       Year Ended December 31,
              ------------------------------------------ Three Months Ended
                   1997          1998          1999        March 31, 2000
              -------------- ------------- ------------- ------------------
              $114.0 million $68.0 million $40.1 million    $9.3 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.

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

Prodigy's industry includes many significant participants, including:

 .  Internet service providers;

 .  proprietary online service providers;

 .  major international telecommunications companies;

 .  Internet-search services; and

 .  various other telecommunications companies.

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,

                                      15
<PAGE>
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
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

                                      16
<PAGE>
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.

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.

Carlos Slim Helu currently controls Prodigy. Mr. Slim can determine the
outcome of all matters submitted to shareholders irrespective of the votes of
other shareholders.

Carlos Slim Helu can control the management and affairs of Prodigy. Mr Slim
and members of his immediate family beneficially own a majority of the voting
equity securities of Carso Global Telecom. Carso Global Telecom may be deemed
to control Telmex through the shares of Telmex that it owns directly and
indirectly. Mr. Slim is also chairman of the board of Carso Global Telecom and
Telmex. Thus, Mr. Slim and members of his immediate family may be deemed to
control Prodigy and can currently determine the outcome of all matters
submitted to a vote of Prodigy shareholders, including the election of all
members of Prodigy's board of directors. The voting control of Mr. Slim could
be used as a means or have the effect of delaying or preventing a change in
control or acquisition of Prodigy.

Carso Global Telecom, Telmex 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 or
Telmex, as shareholders, could conflict with the interests of the other
shareholders of Prodigy. Carso Global Telecom and its affiliates have engaged
in numerous transactions with Prodigy in the past that were not necessarily a

                                      17
<PAGE>

result of arms'-length negotiations. For example, an affiliate of Carso Global
Telecom provides Prodigy with a $130,000,000 revolving line of credit, and
Telmex has committed to provide financing of up to $200,000,000 to fund
Prodigy's operations through February 2001. Prodigy has outsourced its network
operations to Splitrock, a company that is 30% owned by Carso Global Telecom.
Prodigy has also entered into an arrangement with CompUSA, a company that is
controlled by Carlos Slim 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 to
Prodigy Internet 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, and there can be no assurance these
transactions will be on arms'-length terms. Samer F. Salameh, Prodigy's chairman
of the board and chief executive officer, who formerly served on Splitrock's
board of directors, holds stock options to purchase shares of Splitrock common
stock. Mr. Salameh also serves as an advisor to the chief executive officer of
Telmex. In addition to Mr. Salameh, Alfredo Sanchez, Arturo Elias and James M.
Nakfoor, directors of Prodigy, are affiliated with Carso Global Telecom or
Telmex, and Allen Craft, an executive officer and director of Prodigy, is
employed by SBC. 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. Messrs. Salameh, Elias, Nakfoor and Sanchez, directors of
Prodigy, owe similar duties to the other companies for which they serve as
directors or officers or with which they are otherwise affiliated. Due to the
nature of the potential conflicts of interest presented on an ongoing basis by
these arrangements, and potential future arrangements, Prodigy cannot assure
that the directors involved have acted or will act in a manner that takes into
account solely the interests of Prodigy and its shareholders.

Prodigy cannot fund its operations with the cash generated from its business
and is seeking third-party financing to fund its operations. Additional
financing may result in dilution to existing stockholders and additional
operating restrictions.

Prodigy is currently experiencing substantial negative cash flow each month
and expects to continue to experience negative cash flow through 2000. Prodigy
had $21.1 of cash available at March 31, 2000. Telmex has committed to provide
financing of up to $200,000,000 to fund Prodigy's operations through February
2001. In addition, Prodigy is in the process of seeking third party financing
of $200,000,000 secured by the future service fees payable by contract
subscribers to the Prodigy Internet service. Any additional equity financing
may cause investors to experience dilution. Any additional debt financing may
result in restrictions on Prodigy's operations.

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 is still in effect. 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.

The number of Prodigy Internet subscribers decreased from 1,138,000 at
December 31, 1999 to 1,115,000 at March 31, 2000, primarily due to the
termination of Prodigy's contract acquisition program with Best Buy on November
30, 1999.

                                      18
<PAGE>

If Prodigy does not manage the integration of acquired companies successfully,
it may be unable to achieve desired results of the acquisitions and may
experience increased operating losses.

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 effect its operating results.

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

 . pricing changes;

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

 . 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.

                                      19
<PAGE>

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 to be 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. The failure to close either the SBC transaction or
the FlashNet merger in a timely fashion or at all or the failure to integrate
the network assets and resources acquired through the SBC transaction and the
FlashNet merger could adversely affect Prodigy's network performance, service
quality, reputation and customer 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.

Prodigy may not be able to complete proposed acquisitions, which could
adversely affect Prodigy's competitive position.

Prodigy's failure to expand its business through acquisitions may materially
adversely affect its competitive position. Prodigy may be unable to identify,
finance and complete acquisitions on acceptable terms. The Internet services
industry is highly fragmented, consisting of 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


                                      20
<PAGE>

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 controls.

RISKS ASSOCIATED WITH THE PENDING SBC TRANSACTION.

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.

As a result of the SBC transaction, Prodigy will rapidly take on management
of a significant number of new customers. This will require Prodigy to expand
its operations, especially its network and customer service operations, in
order to accommodate these new customers. Any failure of Prodigy to
successfully expand its operations and a resulting deterioration of service
could make it difficult for Prodigy to attract and retain customers, including
the customers resulting from the SBC transaction.

                                      21
<PAGE>

If the SBC transaction's benefits do not meet the expectations of financial or
industry analysts or if Prodigy is unable to retain the customers resulting
from the SBC transaction, the market price of Prodigy Class A common stock may
decline.

The market price of Prodigy Class A common stock may decline as a result of
the SBC transaction if:

 . Prodigy does not achieve the perceived benefits of the SBC transaction as
  rapidly as, or to the extent, anticipated by financial or industry
  analysts;

 . the effect of the SBC transaction on Prodigy's financial results is not
  consistent with the expectations of financial or industry analysts; or

 . Prodigy is unable to retain the customers resulting from the SBC
  transaction.

Upon the closing of the SBC transaction, each share of Prodigy common stock
will be automatically converted into one share of Prodigy Class A common stock.
Prodigy Class A common stock will continue to be traded on the Nasdaq National
Market under the same trading symbol as Prodigy common stock.

Prodigy's officers and directors hold options that will accelerate as a result
of the SBC transaction. These benefits are in addition to the benefits to be
derived generally by Prodigy's shareholders and may have influenced them to
support or approve the SBC transaction. There can be no assurance Prodigy's
officers and directors would have supported the merger absent this option
acceleration.

Prodigy's officers and directors hold options to purchase 154,791 shares
representing an aggregate potential gain of $878,522 based on the closing
market price of Prodigy's common stock on March 31, 2000 that will accelerate
and become fully vested and exercisable upon completion of the SBC transaction.

There are business relationships among Prodigy, Prodigy's principal
stockholders and SBC that may have influenced the willingness of Prodigy's
board of directors to approve the SBC transaction.

The following business relationships among Prodigy, Prodigy's principal
stockholders and SBC exist:

 . Carlos Slim Helu controls Prodigy and Carso Global Telecom and is a
  director of SBC;

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

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

 . Samer F. Salameh, Alfredo Sanchez, Arturo Elias and James M. Nakfoor,
  directors of Prodigy, have affiliations with Carso Global Telecom or
  Telmex; and

 . Allen Craft, an executive officer and director of Prodigy, is employed by
  SBC.

The Prodigy board of directors was aware of and took into account these
business relationships when it approved the SBC transaction. It is possible
that these relationships may have influenced the members of the Prodigy board
to approve the SBC transaction when they may not have otherwise.

It is possible that these interests may have influenced the members of the
Prodigy board to vote to approve the SBC transaction when they may not have
otherwise. Prodigy stockholders should consider whether these interests may
have influenced these directors and officers to support or recommend the SBC
transaction.

On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $200 million
secured by the future service fees payable by contract subscribers to the

                                      22
<PAGE>

Prodigy Internet service. The letter agreement does not constitute a firm
financing commitment from Citibank. The Citibank financing is subject to the
issuance by SBC of a performance guarantee and satisfaction of other
conditions, and Prodigy cannot assure that the financing will be completed.
Prodigy and SBC have agreed in principle that SBC will provide a performance
guarantee that, in the event Prodigy becomes unable to continue to perform its
service obligations under the subscriber contracts, SBC will either perform
Prodigy's service obligations directly or replace Prodigy with a substitute
Internet service provider. In exchange for this guarantee, Prodigy and SBC have
agreed in principle that SBC will receive a contingent warrant to purchase
537,924 shares of Prodigy common stock for $1.00 per share, expiring 3.5 years
after the closing date of the Citibank financing and exercisable only if:

 . SBC's performance guarantee is triggered;

 . Prodigy's chief executive officer is not then an SBC appointee; and

 . SBC, Carso Global Telecom and Telmex then collectively own, on a fully-
  diluted basis, securities representing less than 50% of the voting power
  of Prodigy's then outstanding securities.

The SBC transaction may cause Prodigy to lose key personnel if they experience
uncertainty about their future roles following the transaction.

SBC will have 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 following the SBC transaction. 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.

After the SBC transaction is implemented, all major corporate actions will
require the unanimous approval of the executive steering committee. The
existence and authority of the executive steering committee may decrease the
willingness of some potential directors to serve on the board of directors.

As part of the SBC transaction, Prodigy will establish 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 will enter 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 will issue an approximate 43%
interest to SBC and not realize the benefits it anticipates receiving in
exchange for the interest.

                                      23
<PAGE>

RISKS ASSOCIATED WITH THE PENDING FLASHNET TRANSACTION.

Prodigy's stock price is volatile and the value of the Prodigy common stock
issued in the merger will depend on its market price at the time of the merger,
and no adjustment will be made as a result of changes in the market price of
Prodigy's common stock.

The market price of Prodigy common stock, like that of the shares of many
other high technology and Internet companies, has been and may continue to be
volatile. For example, from February 11, 1999 to May 4, 2000, Prodigy common
stock traded as high as $50.625 per share and as low as $8.25 per share.

At the closing of the merger, holders of FlashNet common stock will exchange
each of their shares for 0.35 share of Prodigy common stock. This exchange
ratio will not be adjusted for changes in the market price of Prodigy common
stock or of FlashNet common stock. In addition, neither Prodigy nor FlashNet
may terminate or renegotiate the merger agreement, and FlashNet may not
resolicit the vote of its shareholders solely because of changes in the market
price of Prodigy common stock or of FlashNet common stock. Any reduction in
Prodigy common stock price will result in you receiving less value in the
merger at closing. You will not know the exact value of Prodigy common stock to
be issued to you in the merger at the time of the special meeting of FlashNet
shareholders.

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. Since
FlashNet is located in Texas, it will be more difficult to retain employees of
FlashNet if after the merger, some of the activities and management of FlashNet
move from Texas to New York. 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.

If the merger's benefits do not meet the expectations of financial or industry
analysts, the market price of Prodigy common stock may decline.

The market price of Prodigy common stock may decline as a result of the
merger if:

 .  Prodigy does not achieve the perceived benefits of the merger as rapidly
   as, or to the extent, anticipated by financial or industry analysts; or

 .  the effect of the merger on Prodigy's financial results is not
   consistent with the expectations of financial or industry analysts.

Failure to complete the merger may impede alternative mergers or alternative
business combinations and may further result in FlashNet paying substantial
termination fees to Prodigy. This failure may also dilute the value of
FlashNet's stock, decrease its market price and cause FlashNet to nevertheless
incur legal and accounting fees.

If the merger is not completed for any reason, FlashNet may be subject to a
number of material risks, including:

 .  Prodigy may require FlashNet to pay a termination fee of $5,000,000
   and/or reimburse Prodigy for expenses of up to $500,000;

 .  FlashNet shareholders may experience dilutive effects to their stock
   ownership because Prodigy may exercise an option to acquire up to 19.9%
   of the outstanding shares of FlashNet common stock;

 .  the market price of FlashNet common stock may decline to the extent that
   the current market price of FlashNet common stock reflects a market
   assumption that the merger will be completed; and

                                      24
<PAGE>

 .  costs related to the merger, such as legal and accounting fees, must be
   paid even if the merger is not completed.

If the merger is terminated and the FlashNet board of directors seeks another
merger or business combination, you cannot be certain that FlashNet will be
able to find a partner willing to pay an equivalent or more attractive price
than the price Prodigy will pay in the merger. In addition, Prodigy's option to
acquire up to 19.9% of the outstanding shares of FlashNet common stock, which
may become exercisable upon termination of the merger agreement, may impede an
alternative merger or business combination.

FlashNet's officers and directors may have been influenced to approve the
merger because of their ownership of options to purchase FlashNet stock, their
ownership as a group of a substantial interest in FlashNet, their possible
receipt of significant severance packages or employment agreements and
Prodigy's agreement to indemnify them against future liability. Also, two
FlashNet directors may have been influenced by their ownership interest in
Prodigy to support and approve the merger. There can be no assurance that
FlashNet's officers and directors would have supported the merger absent these
interests.

The directors and officers of FlashNet participate in arrangements and have
continuing indemnification against liabilities that provide them with interests
in the merger that are different from, or in addition to, yours, including the
following:

 .  as of the date of this prospectus, the executive officers and directors
   of FlashNet owned stock options to purchase an aggregate of 432,946
   shares of FlashNet common stock, all of which are vested;

 .  directors and officers and their affiliates, who together own
   approximately 28% of the outstanding shares of FlashNet common stock as
   of December 31, 1999, have agreed to vote in favor of the merger;

 .  several officers of FlashNet are entitled to benefits, including
   substantial severance packages, under their employment agreements with
   FlashNet if their employment is terminated upon FlashNet's change of
   control, such as the merger;

 .  upon completion of the merger, Prodigy and FlashNet may enter into
   employment agreements with some executive officers of FlashNet;

 .  Prodigy has agreed to cause the surviving corporation in the merger to
   indemnify present and former FlashNet officers and directors against
   liability arising out of their service as an officer or director.
   Prodigy will cause the surviving corporation to maintain officers' and
   directors' liability insurance to cover against this liability for the
   next six years; and

 .  Mr. Thurburn, a FlashNet director, owns 1,000 shares of Prodigy common
   stock. In addition, subsequent to the November 5, 1999 meeting at which
   the merger was approved by the FlashNet board of directors, Global
   Undervalued Securities Fund, L.P., which is controlled by Mr.
   Kleinheinz, a FlashNet director, acquired Prodigy common stock. Global
   Undervalued Securities Fund owned 87,800 shares of Prodigy common stock
   on December 20, 1999 and 266,700 shares of Prodigy common stock on April
   18, 2000.

It is possible that these interests may have influenced members of the
FlashNet board to vote to approve and support the merger agreement and the
merger when they would not have if they did not have these interests. No
committee of independent directors was appointed to consider the approval and
recommendation of the merger. FlashNet cannot determine whether an independent
board committee would have approved the merger.

                                      25
<PAGE>

The merger may cause FlashNet to lose key personnel which could materially
affect FlashNet's business and require FlashNet to incur substantial costs to
recruit replacements for lost personnel.

As a result of FlashNet's change in ownership, current and prospective
FlashNet employees may experience uncertainty about their future roles with
Prodigy. This uncertainty may adversely affect FlashNet's ability to attract
and retain key management, sales, marketing and technical personnel. Any
failure to attract and retain key personnel could have a material adverse
effect on the business of FlashNet and Prodigy.

Customers of Prodigy and FlashNet may terminate service as a result of
concerns over future service offerings and integration support of current
services following the merger.

The announcement and closing of the merger could cause customers and
potential customers of Prodigy and FlashNet to cancel service. In particular,
customers could be concerned about future service offerings and integration
support of current services. Subscriber cancellations could have a material
adverse effect on the future revenues and competitive portion of Prodigy and
FlashNet.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Not Applicable.


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

  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. Given the early stage of this litigation, no
prediction as to its outcome can be made.

  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. Prodigy has received a copy of the summons and complaint but has not
been properly served in the lawsuit. 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. Given the early stage of this litigation, no
prediction as to its outcome can be made.

  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 $25,000,000 in
damages for the contract claim and $50,000,000 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 to the claims and intends to vigorously contest them.

Item 2.  Changes in Securities and Use of Proceeds

USE OF PROCEEDS

     None.

                                      26
<PAGE>

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

     The Company did not file any reports on Form 8-K during the three months
     ended March 31, 2000.

                                      27
<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:  May 15, 2000        /s/ Allen Craft
                           -------------------------------
                           Allen Craft
                           Executive Vice President of Finance,
                           Chief Financial Officer and Treasurer
                           (Principal Financial and Accounting
                           Officer)

                                      28

<PAGE>

Exhibit
Number             Title
------             -----
27                 Financial Data Schedule