<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: June 30, 2000
                                      OR

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

              For the transition period from ______ to _________

                      Commission File Number:  000-25333

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

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


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                         Yes    X                   No

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

The number of shares of the registrant's Class A common stock, $.01 par value
per share, outstanding on July 31, 2000 was 69,855,421. On July 31, 2000 there
was 1 share of Class B common stock outstanding, $.01 par value per share.


<PAGE>

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


                                     INDEX

                                                                       Page

PART I.  FINANCIAL INFORMATION                                           3

Item 1.  Financial Statements                                            3

            Consolidated Balance Sheets                                  3

            Consolidated Income Statements                               4

            Consolidated Statements of Cash Flows                        5

            Consolidated Statements of Stockholders Equity               6

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

         Certain Factors That May Affect Future Operating Results       15

Item 3.  Quantitative and Qualitative Disclosures About Market Risk     23


PART II.  OTHER INFORMATION                                             23

Item 1.  Legal Proceedings                                              23

Item 2.  Changes in Securities and Use of Proceeds                      23

Item 4.  Submission of Matters to a Vote of Security Holders            23

Item 6.  Exhibits                                                       24

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" under Item 2.

Prodigy, the Prodigy globe logo and Prodigy Internet are registered
trademarks, and Are You A Prodigy?, the Are You A Prodigy? logo, It's a tool
for living, Prodigy Classic, the Prodigy Internet logo and Prodigy MailLink are
trademarks of Prodigy. All other brand or product names may be trademarks or
registered trademarks of their respective owners.


                                       2


<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                       PRODIGY COMMUNICATIONS CORPORATION
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                     (in thousands except share amounts)
<TABLE>
<CAPTION>
                                                             June 30,      December 31,
                                                               2000            1999
---------------------------------------------------------------------------------------
<S>                                                        <C>             <C>
Assets

Current assets:
  Cash and cash equivalents                                $  20,728       $  35,473
  Accounts receivable, net of allowance for doubtful           9,315          10,314
    accounts of $4,021 and $3,380 on June 30,
    2000 and December 31, 1999, respectively
  Due from affiliate                                           1,813           1,801
  Prepaid expenses                                             4,576           2,793
  Other current assets                                         1,063           1,437
---------------------------------------------------------------------------------------
Total current assets                                          37,495          51,818

Restricted cash                                                5,053           4,692
Property and equipment, net                                   38,427          18,201
Tradename, net                                                23,945          26,330
Goodwill, net                                                179,921          55,680
Deferred network costs                                         2,376           3,563
Subscriber acquisition costs, net                            147,485         182,838
Other intangibles, net                                       546,570           1,748
Other assets                                                   2,361           1,118
---------------------------------------------------------------------------------------
Total assets                                               $ 983,633       $ 345,988
                                                           =========       =========

Liabilities and Stockholders' Equity

Current liabilities:
  Notes payable                                            $  96,345       $ 110,154
  Accounts payable                                            21,693          24,351
  Other accrued expenses                                      30,076          16,847
  Accrued subscriber contract expenses                         7,272           7,144
  Accrued compensation                                         3,348           3,095
  Unearned revenue                                            31,581          14,062
  Accrued restructuring costs                                 13,371           3,849
  Capital lease obligation - short term                        6,000             412
---------------------------------------------------------------------------------------
Total current liabilities                                    209,686         179,914
---------------------------------------------------------------------------------------
Capital lease obligation - long term                           7,016             983
                                                           ---------       ---------
Total liabilities                                            216,702         180,897
                                                           ---------       ---------

Minority interest in operating partnership                   331,507               -
Stockholders' equity:
  Preferred stock; $.01 par value; 10,000,000
    shares authorized; none issued or outstanding                  -               -
  Common stock; Class A $.01 par value;
    150,000,000 shares authorized; 69,841,574
    and 64,502,608 shares issued and outstanding
    at June 30, 2000 and December 31, 1999, respectively
    Class B, $.01 par value; 1 share authorized
    and outstanding at June 30, 2000,                           698             645
  Additional paid-in capital-common stock                   882,531         539,054
  Accumulated deficit                                      (447,138)       (373,275)
--------------------------------------------------------------------------------------
                                                            436,091         166,424
  Less note receivable from stockholder                        (667)         (1,333)
--------------------------------------------------------------------------------------
Total stockholders' equity                                  435,424         165,091
--------------------------------------------------------------------------------------

Total liabilities and stockholders' equity                $ 983,633       $ 345,988
                                                          =========       =========

</TABLE>

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

                                       3
<PAGE>


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


<TABLE>
<CAPTION>
                                                      For the         For the        For the         For the
                                                    Three Months    Three Months    Six Months      Six Months
                                                       Ended           Ended          Ended           Ended
                                                     June 30,         June 30,       June 30,        June 30,
                                                       2000             1999          2000             1999
-----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>            <C>             <C>
Revenues:
  Internet and online service revenues:
    Prodigy Internet                                $    61,110     $    30,065    $   118,039     $    57,973
    Prodigy Classic                                           -           5,047              -          11,727
  Subscriber management fees                             19,813           1,411         22,417           2,172
  Other                                                   5,712             567         11,129           1,144
-----------------------------------------------------------------------------------------------------------------
    Total revenues                                       86,635          37,090        151,585          73,016

Operating costs and expenses:
  Cost of revenue                                        37,564          22,105         66,979          43,951
  Sales and marketing                                    16,418          11,100         35,187          23,512
  Product development                                     3,643           3,405          6,925           6,855
  General and administrative                             27,426          12,861         49,035          25,514
  Depreciation and amortization                          29,252           4,208         38,137           8,281
  Amortization of subscriber acquisition costs           16,168               -         31,484               -
  Restructuring costs                                     9,555               -          9,555               -
--------------------------------------------------------------------------------  -----------------------------
    Total operating costs and expenses                  140,026          53,679        237,302         108,113
                                                    ------------    ------------   ------------    ------------
Operating loss                                          (53,391)        (16,589)       (85,717)        (35,097)

  Interest (income)/expense, net                          2,709          (1,859)         5,322          (2,906)
  Gain on settlement of note payable                          -               -             -           (1,714)
  Gain on asset/equity investments sale                     (40)         (3,319)           (65)         (3,319)
  Other                                                       -             (27)            -              (44)
  Minority Interest in net loss                         (17,111)              -        (17,111)              -
                                                    ----------------------------   ----------------------------
Net loss                                            $   (38,949)    $   (11,384)   $   (73,863)    $   (27,114)
                                                    ============================   ============================

Basic and diluted net loss per share                $     (0.59)    $     (0.19)   $     (1.13)    $     (0.47)
                                                    ============    ============   ============    ============
Weighted average number of shares outstanding
  used in computing basic and diluted net loss
  per share                                          66,388,743      61,007,546     65,476,754      57,252,375
                                                    ============    ============   ============    ============
</TABLE>
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                     For the           For the
                                                                   Six Months         Six Months
                                                                      Ended             Ended
                                                                     June 30,          June 30,
                                                                       2000              1999
--------------------------------------------------------------------------------------------------
<S>                                                               <C>               <C>
Cash flows from operating activities:
  Net loss                                                          $(73,863)         $(27,114)

  Adjustments to reconcile net loss to net cash used in operating
    activities:
    Gain on sale of assets                                                              (3,319)
    Option grants at below fair value                                  1,120               642
    Depreciation                                                       5,724             3,895
    Amortization of goodwill                                          12,900               775
    Amortization of tradename                                          2,385             1,781
    Amortization of other intangibles                                 15,938
    Amortization of deferred network asset                             1,187             1,188
    Amortization of subscriber acquisition costs                      31,484
    Provision for doubtful accounts                                   (2,936)
    Minority interest in net loss                                    (17,111)
    (Increase)/decrease in accounts receivable                         6,114               (71)
    (Increase)/decrease in due from affiliate                            (12)             (322)
    (Increase)/decrease in prepaid expenses                              (62)             (356)
    (Increase)/decrease in other assets                                2,071                74
    Increase/(decrease) in accounts payable and other
      accrued expenses                                                (4,644)            1,310
    Increase/(decrease) in accrued compensation                         (455)               (6)
    Increase/(decrease) in unearned revenue                            9,061             3,099
    Increase/(decrease) in restructuring costs                         9,522              (390)
-----------------------------------------------------------------------------------------------
Net cash used in operating activities                                 (1,577)          (18,814)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Acquisition of property and equipment                               (1,604)           (7,387)
  Purchase price adjustment, Cable and Wireless subscriber
     acquisition                                                       9,883
  Subscriber acquisition costs                                        (5,886)
  SBC transaction costs                                               (1,803)
  FlashNet acquisition costs                                            (642)
  BizOnThe.Net acquisition costs                                         (90)
  Proceeds from sale of assets                                             -             3,319
  Investments in equity securities                                    (2,000)
  Short-term investments                                                   -           (44,252)
----------------------------------------------------------------------------------------------
Net cash used in investing activities                                 (2,142)          (48,320)
----------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Sale of common stock, net of fees and reimbursements                 2,072           160,634
  Repayments of notes payable to related parties                     (13,809)           (2,000)
  Repayments of note receivable from stockholder                         666             1,000
  Increase in restricted cash                                             45               650
----------------------------------------------------------------------------------------------
Net cash used in financing activities                                (11,026)          160,284
----------------------------------------------------------------------------------------------

Net increase/(decrease) in cash                                      (14,745)           93,150
                                                                    --------          --------
Cash, beginning                                                       35,473            12,180
                                                                    --------          --------
Cash, ending                                                        $ 20,728          $105,330
                                                                    ========          ========
</TABLE>

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

                                      5
<PAGE>

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


For the period ended June 30, 2000
<TABLE>
<CAPTION>
                                         Common Stock    Common Stock                               Note
                      Preferred Stock     Class A          Class B      Additional                Receivable            Accumulated
                      ---------------     -------          -------       Paid In    Accumulated     From               Comprehensive
                      Shares  Amount    Shares  Amount  Shares  Amount   Capital      Deficit    Shareholder  Total       Loss
                      ------  ------    ------  ------  ------  ------  ----------  -----------  ----------- -------   -------------
<S>                   <C>     <C>     <C>       <C>     <C>     <C>     <C>         <C>          <C>         <C>       <C>
Balance at
 December 31, 1999       0      $0    64,502,608  $645     0       $0   $539,054    ($373,275)     ($1,333)  $165,091   ($287,316)

 Exercise of options                     315,312  $  3                  $  3,307                             $  3,310

 Sale of common stock                                                                               $  666   $    666

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

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

  Sale of subsidiary
   to minority interest                                                 $208,702                             $208,702

  Comprehensive loss:
    Net loss                                                                         ($73,863)               ($73,863)  ($ 73,863)
                                                                                                                        ---------
    Comprehensive loss                                                                                                  ($352,179)
                                                                                                                        =========
                       ------------------------------------------------------------------------------------------------
Balance at June 30,      0      $0    69,841,574  $698     1       $0   $882,531    ($447,138)       ($667)  $435,424
2000
                       ===============================================================================================
</TABLE>

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


                                       6

<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
             (in thousands except share 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 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 six month
period ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2000. For further
information, refer to the consolidated financial statements and notes thereto,
included in Prodigy's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.

     At June 30, 2000, Prodigy had available cash and cash equivalents of
$20,728. 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 $200,000 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. Management believes that this
additional funding will be sufficient to enable the company to meet its planned
expenditures through at least December 31, 2000.

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

Acquisition of BizOnThe.Net and FlashNet Communications

     On October 5, 1999, Prodigy acquired the BizOnThe.Net Web hosting business
of U.S. Republic Communications, Inc. an indirect majority owned subsidiary of
VarTec including the subscribers of the BizOnThe.Net Web hosting business.
At the closing, Prodigy repaid a $9,000 loan from VarTec to U.S. Republic and
issued 2,840,993 shares of Prodigy Class A common stock to U.S. Republic
including 727,272 shares held in an escrow account to secure the indemnification
obligations of U.S. Republic and its shareholders. Some or all of the escrowed
shares will be released to U.S. Republic at various times over the two year
period following the closing. In addition to the shares and amounts paid at
closing, in 2001 Prodigy may be required to issue up to 727,272 additional
shares, contingent on the attainment by the acquired business of set earn-out
targets.

     The acquisition of BizOnThe.Net has been accounted for under the purchase
method of accounting and accordingly the cost to acquire BizOnThe.Net was
allocated to the assets acquired and liabilities assumed based on their
respective fair values with the excess allocated to goodwill. The total purchase
price is subject to change when earn-out adjustments are finalized over the next
two years. Changes in the purchase price based on these adjustments will be
recorded as corresponding increases or decreases in goodwill at the time the
related items are resolved and are not expected to exceed $10,000. Based on the
value of the 2,840,993 shares of Class A common stock currently issued in
connection with the BizOnThe.Net acquisition and the $9,000 cash used to repay
the loan, the total purchase price was approximately $58,000. The excess of the
purchase price over the fair value of tangible and intangible assets acquired
and liabilities assumed of $49,598 has been allocated to goodwill and will be
amortized on a straight-line basis over 3 years.

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

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

<TABLE>
<S>                                                 <C>
     Value of stock portion of purchase price       $119,764
     Value of options and warrants assumed            12,573
     Transaction costs                                 1,921
                                                    --------
     Purchase price                                  134,258

     Add: fair value of net liabilities assumed       29,802
     Less: fair value of net assets acquired         (27,009)
                                                    --------
     Goodwill/Intangibles                           $137,051
                                                    ========
</TABLE>
     Prodigy has arranged for an independent valuation and other studies
required to determine the fair value of the assets acquired and liabilities
assumed. The valuations and other studies required to determine the fair value
of the FlashNet assets acquired and liabilities assumed have not been completed
and, accordingly, the balances reflected in the unaudited consolidated balance
sheets as of June 30, 2000 are preliminary and subject to further revision and
adjustments. Based on the value of the 5,023,654 shares of Prodigy Class A
common stock issued and 778,187 options/warrants assumed in connection with the
FlashNet acquisition, the total purchase price is $134,258 including transaction
costs of $1,921. The goodwill and other intangibles acquired, based on the
excess of the purchase price over the net book value of net assets to be
acquired, is currently estimated to be $137,051. The goodwill and other
intangibles are expected to be amortized on a straight line basis over an
estimated three year period.

Pro-Forma (Unaudited)

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

<TABLE>
<CAPTION>
                                         Six Months Ended
                                             June 30,
                                       -------------------
                                          2000      1999
                                       --------   --------
<S>                                   <C>        <C>
Revenues                               $ 169,218   $ 92,246
Net loss                               $(106,129)  $(71,461)
Pro-forma net loss per common share    $   (1.52)  $  (1.10)
</TABLE>


                                       7


<PAGE>

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

Transaction with SBC Communications

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

     At the closing of the transaction Prodigy also converted all outstanding
shares of common stock into Prodigy Class A common stock. Additionally, Prodigy
issued to an SBC subsidiary one share of Prodigy Class B common stock for
consideration of $100 (in whole dollars) which is convertible to 51,843,631 of
Prodigy Class A common stock. In conjunction with the transaction, Prodigy will
be the exclusive retail Internet service marketed by SBC in the United States
and SBC will purchase the Prodigy Internet service from Prodigy on wholesale
terms and provide it to SBC's approximately 767,000 existing Internet
subscribers. In addition, SBC committed to obtain for Prodigy an additional
1,200,000 Internet subscribers over a three year period in exchange for a fee of
$40 to $75 (in whole dollars) for each subscriber obtained. SBC will pay Prodigy
a penalty for shortfalls in the number of subscribers delivered over the three
year period, with the size of the penalty based on the number of subscribers
actually obtained. The agreement also includes provisions under which SBC and
Prodigy can purchase other services from each other, including
telecommunications and network services.

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

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

Note 3. Subscriber Acquisition Costs

     In July 1999 Prodigy purchased Cable & Wireless USA, Inc.'s dial-up access
Internet subsciber base for $31,700. Prodigy has capitalized these costs and is
amortizing the costs over 36 months representing the estimated weighted average
term of the subscribers acquired. During the three and six months ended June 30,
2000, Prodigy recognized amortization expenses from this transaction of $2,889
and $5,218, respectively.

     Commencing in June 1999, Prodigy entered into agreements with major
retailers of personal computers (the "Retailers") to make specified payments to
the Retailers in exchange for the Retailers enrolling customers onto Prodigy
Internet and obtaining a signed contractual commitment from these customers to
term subscriptions to Prodigy Internet of one, two, or three years at a monthly
charge of $19.95 or $21.95 (in whole dollars). Prodigy has capitalized these
payments and is amortizing them over the life of the subscriber contract. During
the three and six months ended June 30, 2000, Prodigy had recorded gross
subscriber acquisition costs related to these transactions of $398 and $5,886,
respectively, and had recognized related amortization expense of $13,279 and
$26,266, respectively. In addition, at June 30, 2000, Prodigy had recorded
accrued subscriber contract expenses to the Retailers of $7,272.

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

Note 4.  Restructuring Reserves

     In June 2000, Prodigy announced that it will move its headquarters from
White Plains, New York to Austin, Texas in order to facilitate synergies with
SBC Communications, Inc. As a result of this decision, Prodigy recorded
contractual obligations associated with restructuring of approximately $9,600.
Prodigy expects to record additional restructuring costs for employee severance
in the quarter ended September 30, 2000 as Prodigy's plans are finalized.

                                      8
<PAGE>

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

Note 5. Segment Information

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

     A summary of the segment financial information is as follows:

                                         Three months ended   Six months ended
                                              June 30,            June 30,
                                          2000       1999     2000       1999
                                         -------    -------  -------    -------
Revenues:
Internet and online services............ $76,901    $35,112  $133,830   $69,700
All other services(1)...................   9,734      1,978    17,755     3,316
                                         -------    -------  --------   -------
     Total revenues..................... $86,635    $37,090  $151,585   $73,016
                                         =======    =======  ========   =======

Loss (income) from operations:

Internet and online services(2)......... $40,788    $17,126  $ 71,001   $35,958
All other services(1)(3)................    (879)      (537)     (508)     (861)
Other(4)................................  13,482          0    15,224         0
                                         -------    -------  --------   -------
     Total loss from operations......... $53,391    $16,589  $ 85,717   $35,097
                                         =======    =======  ========   =======

1. Includes revenue and operating losses associated with the ProdigyBiz small
   business Web hosting division, advertising and transaction fees and Telmex
   management fees.

2. For the three and six months ended June 30, 2000 and 1999, Internet and
   online services includes goodwill and other intangible assets amortization of
   $21,334 and $23,206, and $1,872 and $3,744, respectively.

3. For the three and six months ended June 30, 2000 and 1999, all other services
   includes goodwill and other intangible assets amortization of $4,614 and
   $9,206, and $0 and $0, respectively.

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

Note 6.  Recently Issued Accounting Pronouncements

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

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

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

Note 7. Pending Transactions

  On March 16, 2000 Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $150,000
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 Class A 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
initiatives, Prodigy has substantially reduced its fixed operating costs and
headcount.

     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. Prodigy continues to pursue vendor partners for
subscriber acquisition programs but has diversified its distribution channels
through transactions such as the partnership with SBC.

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

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

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

Results of Operations

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

     Prodigy's total revenues have three components: 1) Internet and online
service revenues, from the Prodigy and FlashNet divisions, consisting of
subscription revenues from subscribers to Prodigy Internet and Prodigy Classic;
2) fees from management agreements with SBC Communications, Inc. and Telmex
under which Prodigy provides certain management and consulting services to each
entity's subscribers in exchange for a fee; 3) and other services, consisting of
small business web hosting fees from the ProdigyBiz division, and advertising
and transaction fees. On-line Service 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 and SBC subscribers but excluding Prodigy Classic subscribers.

Internet and online service revenues

     Subscription revenues for Prodigy Internet increased $31.0 million, or
103%, from $30.1 million for the three months ended June 30, 1999 to $61.1
million for the three months ended June 30, 2000 of which $3.0 million is
attributable to Flashnet. The number of Prodigy Internet billable subscribers
increased 699,000, or 114%, from 613,000 at June 30, 1999 to 1,312,000 at June
30, 2000. The latter figure includes 214,000 billable subscribers of FlashNet,
which was acquired by Prodigy on May 31, 2000. Revenue from Prodigy Classic was
$5.0 million for the three months ended June 30, 1999. Prodigy discontinued
Prodigy Classic on October 1, 1999.

Subscriber management fees

     Total Internet subscribers managed, excluding subscribers to Prodigy
Internet and Prodigy Classic, increased by 1,058,000, or 578%, from 183,000 at
June 30, 1999 to 1,241,000 at June 30, 2000. The latter figure includes 767,000
billable subscribers of SBC, whose transaction with Prodigy was completed on May
31, 2000. Billable subscribers of Prodigy Internet de Telmex accounted for
approximately 183,000 and 465,000 of the number of Internet subscribers managed
at June 30, 1999 and June 30, 2000, respectively. Fees from Internet subscribers
managed increased $18.4 million, from $1.4 million in the three months ended
June 30, 1999 to $19.8 million in the three months ended June 30, 2000.

Other revenues

     Other revenues increased $5.1 million, or 907%, from $0.6 million for the
three months ended June 30, 1999 to $5.7 million for the three months ended
June 30, 2000. The increase in the current year quarter is attributable to an
increase of $1.8 million, or 416%, in advertising sales and shopping
transactions revenue as well as to a $2.3 million increase in revenues from Web
hosting, the latter increase resulting from Prodigy's acquisition of
BizOnThe.Net in October 1999. The remainder of the period-to-period increase is
attributable to the recognition of $0.5 million of non-advertising revenues from
Prodigy's agreements with such partners as Metris and Looksmart, and
$0.5 million is attributable to Flashnet.

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
$15.5 million, or 70%, from $22.1 million in the three months ended June 30,
1999 to $37.6 million in the three months ended June 30, 2000 and is
attributable, in part, to the 114% increase in Prodigy Internet subscribers from
June 30, 1999 to June 30, 2000. This, in turn, resulted in a 60% increase in
network usage in the three months ended June 30, 2000 versus the prior year
period. In addition, for the month of June 2000 - the period subsequent to the
acquisition of FlashNet and Prodigy's transaction with SBC- cost of revenues
includes $9.9 million of communications charges of Prodigy owned and managed
SBC Internet subscribers while these subscribers resided on the SBC network, and
$1.5 million of communications charges for subscribers residing on the FlashNet
network.

Sales and marketing

     Sales and marketing expense includes advertising, salaries of sales and
marketing personnel and other general sales and marketing costs. Sales and
marketing expense increased $5.3 million, or 48%, from $11.1 million in the
three months ended June 30, 1999 to $16.4 million in the three months ended
June 30, 2000. The current period primarily reflects increased sales commissions
and bounties, including $3.2 million of bounties relating to SBC-generated dial
and DSL access enrollments which commenced in June 2000, as well as $1.6 million
for commissions, primarily for the Web-hosting salesforce, and outbound
telemarketing expenses. A further $0.4 million represent sales and marketing
expenses of the newly acquired FlashNet division for the month of June 2000.

Product development

     Product development expense includes research and development costs and
other product development costs. Product development expense increased from
$3.4 million in the three months ended June 30, 1999 to $3.6 million in the
three months ended June 30, 2000. The current period increase is primarily
attributable to ProdigyBiz which was not part of the prior year results.

General and administrative

     General and administrative expense increased from $12.9 million in the
three months ended June 30, 1999 to $27.4 million in the three months ended
June 30, 2000. The increase versus the prior year period was primarily
attributable to the inclusion of $1.5 million, $1.6 million and, $4.2 million of
Prodigybiz and FlashNet division general and administrative expenses, and the
limited partnership formed with SBC, respectively. Costs of $3.9 million were
charged to expense in the current quarter for integrating the Flashnet and SBC
enrollment, billing and customer service functions with those of Prodigy
Communications. Additional compensation related expenses of $2.5 million were
incurred relating to moving Prodigy's headquarters to Austin, Texas. Credit card
processing fees increased $0.7 million attributable to the 114% increase in PI
subscribers between June 30, 1999 and June 30, 2000. The increased provision for
bad debts of $1.5 million was due to estimated defaults on subscriber contracts
from Prodigy's contract subscriber acquisition programs.

                                      11
<PAGE>

Depreciation and amortization

     Depreciation and amortization expense increased $25.0 million, or 595%,
from $4.2 million in the three months ended June 30, 1999 to $29.3 million in
the three months ended June 30, 2000. The current period increase primarily
reflects amortization attributable to goodwill and other intangibles arising
from the FlashNet and BizOnThe.Net acquisitions and the SBC transaction.
BizOnThe.Net was completed on October 5, 1999 and has an amortization period of
three years. Flashnet and SBC were completed on May 31, 2000 and each has an
amortization period of three years.

Amortization of subscriber acquisition costs

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

     In July 1999 the Company acquired the Internet dial-up business of Cable &
Wireless USA, Inc. for $31.7 million.

     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 $16.2 million was incurred
by Prodigy during the three months ended June 30, 2000 which encompassed
$2.9 million for amortization of the purchase price of subscribers acquired from
Cable and Wireless and $13.3 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 June 30, 2000 Prodigy accrued $9.6 million
relating to Prodigy's recently announced management restructuring and the
relocation of its headquarters operations to Austin, Texas.

Interest and other income

     Interest income/expense, net decreased from net income of $1.9 million in
the three months ended June 30, 1999 to net expense of $2.7 million in the three
months ended June 30, 2000. Prodigy's initial public offering occurred during
the first quarter of 1999 with the proceeds of the offering being invested in
short-term money market instruments. As a result of Prodigy's contract
subscriber programs and acquisitions during the second half of 1999, Prodigy
arranged a $130 million line of credit with Banco Inbursa, SA in August 1999
and commenced borrowing against this line of credit. Throughout the second
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 $16.6 million in the three months ended June 30, 1999 to $53.4 million in
the three months ended June 30, 2000 and its net loss increased from $11.4
million in the three months ended June 30, 1999 to $38.9 million in the three
months ended June 30, 2000.

Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999

Internet and online service revenues

     Subscription revenues for Prodigy Internet increased $60.1 million, or
104%, from $58.0 million for the six months ended June 30, 1999 to
$118.0 million for the six months ended June 30, 2000 of which $3.0 million is
attributable to Flashnet. The number of Prodigy Internet billable subscribers
increased 699,000, or 114%, from 613,000 at June 30, 1999 to 1,312,000 at
June 30, 2000. The latter figure includes 214,000 billable subscribers of
FlashNet which was acquired by Prodigy on May 31, 2000. Revenue from Prodigy
Classic was $11.7 million for the six months ended June 30, 1999. Prodigy
discontinued Prodigy Classic on October 1, 1999.

                                      12
<PAGE>

Subscriber management fees

     Total Internet subscribers managed, excluding Prodigy Internet and Prodigy
Classic subscribers, increased by 1,058,000, or 578%, from 183,000 at June 30,
1999 to 1,241,000 at June 30, 2000. The latter figure includes 767,000 billable
subscribers of SBC whose transaction with Prodigy was completed on May 31, 2000.
Billable subscribers of Prodigy de Telmex accounted for approximately 183,000
and 465,000 of the number of Internet subscribers managed at June 30, 1999 and
June 30, 2000, respectively. Fees from Internet subscribers managed increased
$20.2 million, from $2.2 million in the six months ended June 30, 1999 to
$22.4 million in the six months ended June 30, 2000.

Other revenues

     Other revenues increased $10.0 million, or 873%, from $1.1 million for the
six months ended June 30, 1999 to $11.1 million for the six months ended
June 30, 2000. The increase in the current year period is attributable to the
increase of approximately $3.2 million in advertising sales and shopping
transactions, as well as to a $4.8 million increase in Web hosting revenues, the
latter improvement resulting from Prodigy's acquisition of BizOnThe.Net small
business Web hosting company in October 1999. The balance of the period-to-
period increase is primarily attributable to the recognition of $0.5 million of
non-advertising revenue from Prodigy's agreement with such partners as Metris
Companies and Looksmart as well as a $0.7 million adjustment pertaining to
Prodigy's acquisition of the Internet subscribers of Cable and Wireless and $0.5
million due to the acquisition of Flashnet at May 31, 2000.

Cost of revenues

     Cost of revenues increased $23.0 million, or 52%, from $44.0 million in the
six months ended June 30, 1999 to $67.0 million in the six months ended June 30,
2000 and is primarily attributable to the 114% increase in Prodigy Internet
subscribers from June 30, 1999 to June 30, 2000. Network usage hours in the six
months ended June 30, 2000 rose 66.5 million hours, or 58%, from 114.2 million
hours for the six months ended June 30, 1999 to 180.7 million hours for the six
months ended June 30, 2000. In addition, for the month of June 2000 -- the
period subsequent to the acquisition of FlashNet and Prodigy's transaction
with SBC -- cost of revenues includes $9.9 million of communications charges of
Prodigy owned and managed subscribers while these resided on the SBC network,
and $1.5 million of communications charges for subscribers residing on the
FlashNet network.

Sales and marketing

     Sales and marketing expense increased $11.7 million, or 50% from
$23.5 million in the six months ended June 30, 1999 to $35.2 million in the
six months ended June 30, 2000. The current period primarily reflects increased
sales commissions and bounties, including $3.2 million of bounties related to
SBC-generated dial and DSL access enrollments which commenced in June 2000, as
well as $2.0 million for sales commissions primarily for the web hosting
salesforce. In addition, there was $1.7 million in increased spending for direct
mail campaigns and a $2.0 million increase in broadcast media primarily for the
"Are You a Prodigy?" advertising campaign run in the first quarter 2000.

Product development

     Product development expense remained constant at $6.9 million for the six
month periods ending June 30, 1999 and 2000, respectively. The successful
completion of Prodigy's year 2000 remediation efforts led to a reduction of
expense in the current period which was offset by product development expense
attributable to ProdigyBiz, as well as Prodigy's DSL and wireless projects.

General and administrative

     General and administrative expense increased $23.5 million, or 92% from
$25.5 million in the six months ended June 30, 1999 to $49.0 million in the six
months ended June 30, 2000. The current year increase reflects $2.7 million,
$1.6 million and $4.2 million of Prodigybiz and FlashNet division general and
administrative expenses and the limited partnership formed with SBC,
respectively. Costs of $5.7 million were charged to expense year-to-date for
integrating the Flashnet and SBC enrollment, billing and customer service
functions with those of Prodigy. Additional compensation related expenses of
$2.5 million were incurred relating to moving Prodigy's headquarters to Austin,
Texas. Billing and credit card processing fees increased $.6 million and $1.4
million, respectively, due to the 114% increase in PI subscribers between June
30, 1999 and June 30, 2000. The increased provision for bad debts of $2.9
million was due to estimated defaults on subscriber contracts from Prodigy's
contract subscriber acquisition programs. In addition, legal expenses increased
$1.1 million due to the settlement of certain legal proceedings.

Depreciation and amortization

     Depreciation and amortization expense increased $29.9 million, or 361%,
from $8.3 million in the six months ended June 30, 1999 to $38.1 million in the
six months ended June 30, 2000. The current period increase primarily reflects
amortization attributable to goodwill and other intangibles arising from the
FlashNet and BizOnThe.Net acquisitions and the SBC transaction. BizOnThe.Net was
completed on October 5, 1999 and has an amortization period of three years.
Flashnet and SBC were completed on May 31, 2000, and each of which has an
amortization period of three years.

Amortization of subscriber acquisition costs

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

     In July 1999 Prodigy acquired the Internet dial-up business of Cable &
Wireless USA, Inc. for $31.7 million.

     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 $31.5 million was incurred
by Prodigy during the six months ended June 30, 2000 which encompassed
$5.2 million for amortization of the purchase price of subscribers acquired from
Cable and Wireless and $26.3 million for amortization of payments made to
certain retailers in exchange for obtaining contract subscribers to Prodigy
Internet.

Restructuring reserves

     During the six months ended June 30, 2000 Prodigy accrued $9.6 million
relating to Prodigy's recently announced management restructuring and the
relocation of its headquarters operations to Austin, Texas.

Interest and other income

     Interest income/expense, net decreased from net income of $2.9 million in
the six months ended June 30, 1999 to net expense of $5.3 million in the six
months ended June 30, 2000. Prodigy's initial public offering occurred during
the first quarter 1999 with the proceeds of the offering being invested in
short-term money market instruments. As a result of Prodigy's contract
subscriber programs and other acquisitions during the second half of 1999,
Prodigy arranged a $130 million line of credit with Banco Inbursa, SA in August
1999 and commenced borrowing against this line of credit. Throughout the first
half 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 $35.1 million in the six months ended June 30, 1999 to $85.7 million in the
six months ended June 30, 2000 and its net loss increased from $27.1 million in
the six months ended June 30, 1999 to $73.9 million in the six months ended
June 30, 2000.

                                      13
<PAGE>

Liquidity and Capital Resources

    Since formation, Prodigy has relied on private sales of equity securities
(totaling $294.1 million through June 30, 2000), borrowings and an initial
public offering in February 1999 (with net proceeds of $157.2 million) to fund
its operations. Prodigy has incurred significant losses since inception and, at
June 30, 2000, had an accumulated deficit of $447.1 million and a working
capital deficit of $172.2 million comprised of current liabilities of
$209.7 million and current assets of $37.5 million. For the six months ended
June 30, 1999 and June 30, 2000 Prodigy incurred negative cash flows from
operations of $18.8 million and $1.6 million, respectively.

    The decrease in cash used in operating activities from 1999 to 2000 resulted
from increased amortization expense which offset the increased net losses.

    Net cash from investing activities decreased to $2.1 million used in
investing activities in the six months ended June 30, 2000 from $48.3 million
used in 1999 primarily due to current year cash proceeds of $9.9 million
pertaining to the purchase price reduction from the Cable and Wireless
subscriber acquisition, and the investment of a portion of the proceeds from
Prodigy's initial public offering in short term money market instruments in
1999.

     During the six months ended June 30, 2000, Prodigy paid approximately
$5.9 million in consideration for subscribers obtained through its subscriber
contract acquisition programs. Prodigy has $7.3 million accrued related to these
programs as of June 30, 2000. Prodigy has capitalized these costs and will
amortize these costs over the terms of the underlying subscriber contracts (one,
two or three years). At June 30, 2000, Prodigy had capitalized related
subscriber contract acquisition costs of $178.5 million and had recognized
amortization expense of $26.3 million for the six months ended June 30, 2000.

     Prodigy's capital expenditures for the six months ended June 30, 2000 were
$1.6 million, primarily for the purchase of data processing equipment, compared
to capital expenditures of $7.4 million in the six months ended June 30, 1999.

     In August 1999, Prodigy obtained a $130 million revolving line of credit
from Banco Inbursa SA to fund its subscriber contract acquisition programs
during the third and fourth quarter of 1999. The terms of this line of credit
allow Prodigy to borrow, repay and reborrow amounts in minimum increments of
$1 million. Advances are due 30 days after borrowing, but Prodigy is permitted
to rollover advances into new advances at its election. Advances are
uncollateralized and bear interest of 12%. During 1999, Prodigy borrowed the
maximum amount permitted under this line of credit. At June 30, 2000, the line
of credit had been paid down to $96.3 million. This note matures on August 30,
2000.

     At June 30, 2000, Prodigy had available cash and cash equivalents of
$20.7 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. Management believes that this
additional funding will be sufficient to enable the company to meet its planned
expenditures through at least December 31, 2000.

    On March 16, 2000, Prodigy and Citibank signed a letter agreement which
contemplates that Citibank will structure and arrange financing of $150 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.

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

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

     In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
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/A,
respectively, identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those expressed in or implied by such forward-
looking statements.

Prodigy has incurred significant losses and may incur losses in the future. If
Prodigy does not achieve and sustain profitability, Prodigy's financial
condition and stock price could decline.

Prodigy 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 six months ended June 30, 2000.
<TABLE>
<CAPTION>
                                   Year Ended December 31,
                         --------------------------------------------  Six Months Ended
                              1997           1998           1999        June 30, 2000
                         -------------- -------------- -------------- ------------------
<S>                      <C>            <C>            <C>            <C>
   Revenues........      $134.2 million $136.1 million $189.0 million    $151.6 million
   Net Losses......      $132.8 million $ 65.1 million $ 80.5 million    $ 73.9 million
</TABLE>

At June 30, 2000, Prodigy had:

 .  an accumulated deficit of $447.1 million;

 .  a working capital deficit of $172.2 million;

 .  current liabilities of $209.7 million; and

 .  current assets of $37.5 million.

As a result of these losses, Prodigy has never generated annual positive cash
flow from operations and has relied on private and public sales of equity
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 six months ended June 30, 2000.


                       Year Ended December 31,
              ------------------------------------------  Six Months Ended
                   1997          1998          1999        June 30, 2000
              -------------- ------------- ------------- ------------------
              $114.0 million $68.0 million $40.1 million    $1.6 million

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

Prodigy operates in a highly competitive market and faces significant
competition from a variety of current and potential sources, including
EarthLink and America Online, as well as companies that provide broadband
services. Prodigy may also face additional competitive pressures from strategic
alliances or consolidations among other Internet service providers. Many of
Prodigy's current and future competitors have greater financial, marketing and
technical resources. Thus, Prodigy may fail to compete effectively in its
market. Increasing competition could adversely affect Prodigy's future revenues
and liquidity.

Prodigy's industry includes many significant participants, including:

 .  Internet service providers;

 .  proprietary online service providers;

 .  major international telecommunications companies;

 .  Internet-search services; and

 .  various other telecommunications companies.

Prodigy also faces competition from companies that provide broadband service
to households, including:

 . local and long-distance telephone companies;

 . cable television companies; and

 . electric utility companies.

Among the larger Internet service providers that Prodigy competes with are
EarthLink, which has merged with MindSpring, Microsoft Network, AT&T WorldNet,

                                      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.

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

Circumstances may arise in which the interests of Carso Global Telecom,
Telmex or SBC, as shareholders, could conflict with the interests of the other
shareholders of Prodigy. Carlos Slim Helu and members of his family beneficially
own a majority of the voting equities of Carso Global Telecom. Carso Global
Telecom may be deemed to control Telmex through the shares of Telmex it owns
directly and indirectly. Mr. Slim is also chairman of the board of Carso Global
Telecom and Telmex. Prior to the closing of the SBC transaction on May 31, 2000,
Mr. Slim and members of his immediate family could be deemed to control Prodigy
through the shares of Prodigy they owned indirectly. Carso Global Telecom and
its affiliates have engaged in numerous transactions with Prodigy in the past
that were not necessarily a

                                      17
<PAGE>

result of arms'-length negotiations. For example, an affiliate of Carso Global
Telecom provides Prodigy with a $130 million revolving line of credit, and
Telmex has committed to provide financing of up to $200 million to fund
Prodigy's operations through February 2001. Prodigy has outsourced its network
to Splitrock, a company in which Carso Global Telecom owns stock. Prodigy
entered into an arrangement with CompUSA, a company that is controlled by Mr.
Helu, to make specified payments to CompUSA in exchange for CompUSA
enrolling customers onto Prodigy Internet and obtaining a signed contractual
commitment from these customers to term subscriptions of one, two or three years
at Prodigy's standard monthly rates. Carso Global Telecom and its affiliates may
engage in additional related-party transactions with Prodigy in the future.

Samer Salameh, Prodigy's chairman of the board 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, Jaime Chico Pardo and
Arturo Elias, directors of Prodigy, are affiliated with Carso Global Telecom or
Telmex. Charles Roesslein, the chief executive officer and director of Prodigy,
and Dave Gallemore and James Kahan, directors of Prodigy, are 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. The aforementioned directors of Prodigy owe similar duties to the
other companies for which they serve as directors or officers of with which they
are otherwise affiliated. Due to the nature of the potential conflicts of
interest presented on an ongoing basis by these arrangements, Prodigy cannot
assure that the directors involved have acted or will act in a manner that takes
into account solely the interest of Prodigy and its shareholders.

Prodigy cannot fund its operations with the cash generated from its business
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
$20.7 million of cash available at June 30, 2000. Telmex has committed to
provide financing of up to $200 million to fund Prodigy's operations through
February 2001. In addition, Prodigy is in the process of seeking third party
financing of $150 million 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 increased from 1,115,000 at
March 31, 2000 to 1,312,000 at June 30, 2000, primarily due to the FlashNet
acquisition and the SBC transaction, both of which were completed in the second
quarter.

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

Prodigy's ability to exploit the market for its products and services and
increase its subscriber base requires an effective planning and management
process. Prodigy's ability to plan and manage effectively will require Prodigy
to continue to implement and improve its operational, financial and management
information systems. Prodigy will also be required to attract and retain
skilled managers and other personnel, including its current executive officers.
These challenges are exacerbated during periods of rapid growth. For example,
as Prodigy increased the number of billable Prodigy Internet subscribers by 87%
from June 30, 1999 to December 31, 1999, network performance deteriorated and
customer service costs increased. The network performance deterioration did not
materially affect Prodigy's results of operations or significantly alter the
services offered by Prodigy.

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

Competition for key personnel is intense, and there can be no assurance that
Prodigy will be successful in attracting and retaining necessary personnel to
maintain and support its business. Although Prodigy has entered into non-
competition agreements with some executive officers, the agreements may not be
enforceable. Prodigy does not maintain insurance on the lives of any of its
officers or directors.

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 control.

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

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

                                      21
<PAGE>

SBC has considerable influence over the management of Prodigy. As a result of
this change in ownership and management structure, current and prospective
Prodigy employees may experience uncertainty about their future roles with
Prodigy. This uncertainty may adversely affect Prodigy's ability to attract and
retain key management, sales, marketing and technical personnel. Any failure to
attract and retain key personnel could affect the condition of Prodigy's
business.

All major corporate actions require the unanimous approval of the executive
steering committee. The existence and authority of the executive steering
committee may decrease the willingness of some potential directors to serve on
the board of directors.

Prodigy has established an executive steering committee, consisting of two
directors selected by SBC and two directors selected by Carso Global Telecom and
Telmex. All major corporate actions will require the unanimous approval of the
executive steering committee prior to being submitted for the approval of the
board of directors of Prodigy. A potential director who does not anticipate
being appointed to the steering committee could perceive the authority of the
steering committee as diminishing the authority of the full board. This could
make it more difficult for Prodigy to attract and retain qualified directors.

SBC will retain its interest in Prodigy if the strategic and marketing
agreement expires or is terminated.

As part of the SBC transaction, Prodigy and SBC entered into a strategic and
marketing agreement governing the marketing of the Prodigy Internet service and
related matters. The agreement has an initial term of three years and
automatically renews for additional three-year terms unless terminated by
Prodigy or SBC. In addition, SBC may terminate the agreement if Prodigy fails to
meet specified performance standards or in other specified circumstances. If the
agreement expires or is terminated, SBC will retain its interest in Prodigy. As
a result, there is a possibility that Prodigy has issued an approximate 43%
interest to SBC and will not realize the benefits it anticipates receiving in
exchange for the interest.

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

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

                                      22
<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Not Applicable.


PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

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

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

  On February 24, 2000, Prodigy was served with a summons and complaint by
Carroll Wesley Chance in a class action lawsuit brought against Best Buy,
Prodigy and Young America in the State Court of Richmond County, State of
Georgia. The case was brought on behalf of the class of similarly situated
consumers who purchased a computer at Best Buy, enrolled in the Prodigy
Internet service under the rebate program and did not receive a rebate check.
The complaint alleges breach of contract, unjust enrichment, conversion and
negligence. The plaintiffs seek damages not to exceed $74,900 per member of the
class, including actual damages, rebates, interest, punitive damages, court
costs and litigation expenses. 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 million in damages
for the contract claim and $50 million in damages for the fraud claim. On
January 5, 2000 Prodigy served its answer. On February 1, 2000, the plaintiff
filed an amended complaint, and, on February 25, 2000, Prodigy filed a motion to
dismiss the plaintiffs fraud claim. Prodigy believes it has meritorious defenses
to the claims and intends to vigorously contest them.

Item 2.  Changes in Securities and Use of Proceeds

     None.

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

  At Prodigy's 2000 Annual Meeting of Stockholders held on May 24, 2000, the
following proposals were adopted by the stockholders of Prodigy by the votes
specified below:

<TABLE>
<CAPTION>
                                                                                           Against or                  Broker
    Proposal                                                                     For       Withheld       Abstain     Non-votes
--------------------------------------------------------------------------      ------     ----------     -------     ---------
<S>                                                                           <C>         <C>           <C>         <C>
1.  To elect the following six (6) nominees as directors of Prodigy:           45,373,492     180,710           -             -
    Samer F. Salameh, Alfredo Sanchez, Allen Craft, James R. Adams,
    Arturo Elias and James M. Nakfoor

2.  To adopt the 1999 stock option plan.                                       44,686,755     801,139      66,308             -

3.  To approve Prodigy's proposed transaction with SBC Communications, Inc.    45,395,520     135,185      23,497    12,097,081
    described in the proxy statement dated May 5, 2000.

4.  To ratify the selection of PricewaterhouseCooper LLP as independent        45,421,011     108,813      24,378             -
    auditors of Prodigy for the fiscal year ending December 31, 2000.
</TABLE>

                                      23
<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

     (1)  On June 14, 2000, Prodigy filed a Current Report on Form 8-K,
          reporting under Item 5 that on May 31, 2000 Prodigy and SBC
          Communications Inc. completed the transactions described in Prodigy's
          Current Report on Form 8-K filed on December 2, 1999, as more
          completely described in Prodigy's proxy statement dated May 5, 2000.

     (2)  On June 15, 2000, Prodigy filed a Current Report on Form 8-K,
          reporting under Item 2 that on May 31, 2000 Prodigy acquired FlashNet
          Communications, Inc., a nationwide provider of Internet access and
          related services pursuant to an Agreement and Plan of Merger dated
          November 5, 1999, as amended, by and among Prodigy, FlashNet
          Communications, Inc. and a wholly owned subsidiary of Prodigy. At the
          closing, Prodigy issued 0.35 of a share of Prodigy Class A common
          stock for each share of FlashNet common stock outstanding immediately
          prior to the close of the transaction. Based on the number of shares
          of FlashNet immediately prior to the closing, Prodigy issued 5,023,654
          shares to complete the merger. In addition, Prodigy assumed all
          FlashNet options with an exercise price less than the closing price of
          FlashNet common stock on May 31, 2000 and all FlashNet warrants
          outstanding at the effective date of the merger.

                                      24
<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:  August 14, 2000     /s/ Allen Craft
                           -------------------------------
                           Allen Craft
                           Vice President and Chief Financial
                           Officer (Principal Financial and
                           Accounting Officer)


                                      25

<PAGE>

                                 EXHIBIT INDEX

 3.1(1)     Restated Certificate of Incorporation of the Registrant, effective
            as of May 31, 2000.

 3.2(1)     Amended and Restated By-Laws of the Registrant, effective as of May
            31, 2000.

 3.3        Amendment to By-Laws of the Registrant.

 3.4(2)     Amended and Restated Limited Partnership Agreement for Prodigy
            Communications Limited Partnership dated as of May 31, 2000 by and
            among the Registrant, SBC Internet Communications, Inc. and Prodigy
            Transition Corporation.

 10.1(2)    Registration Rights Agreement, dated May 31, 2000, by and among the
            Registrant, SBC Communications Inc. and SBC Internet Communications,
            Inc.

 27         Financial Data Schedule.
--------
(1)  Incorporated by reference to the Registrant's Definitive Proxy Statement
     on Schedule 14A filed on May 5, 2000.
(2)  Incorporated by reference to the Registrant's Current Report on Form 8-K
     filed on June 14, 2000.