<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

(MARK ONE)

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

                 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001
                                       OR

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

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                       COMMISSION FILE NUMBER: 000-25333

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

                       PRODIGY COMMUNICATIONS CORPORATION

             (Exact name of registrant as specified in its charter)

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

                         6500 RIVER PLACE BLVD., BLDG III
                                AUSTIN, TEXAS 78730
               (Address of principal executive offices and zip code)
</TABLE>

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

   Former name, former address, and former FiscalYear, 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 outstanding on
May 7, 2001 was 70,245,820.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION
                                   FORM 10-Q
                          QUARTER ENDED MARCH 31, 2001
                                     INDEX

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

Item 1.                 Financial Statements........................................      3

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

Item 3.                 Quantitative and Qualitative Disclosures About Market
                          Risk......................................................     27

PART II.                OTHER INFORMATION

Item 1.                 Legal Proceedings...........................................     29

Item 2.                 Changes in Securities and Use of Proceeds...................     31

Item 3.                 Default Upon Senior Securities..............................     31

Item 4.                 Submission of Matters to a Vote of Security Holders.........     31

Item 5.                 Other Information...........................................     31

Item 6.                 Exhibits and Reports on Form 8-K............................     31

Signatures..........................................................................     32
</TABLE>

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

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

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                       PRODIGY COMMUNICATIONS CORPORATION

               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

               (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              MARCH 31,   DECEMBER 31,
                                                                2001          2000
                                                              ---------   ------------
<S>                                                           <C>         <C>
ASSETS:
Current assets:
  Cash and cash equivalents.................................  $  24,575     $  23,042
  Trade accounts receivable, net of allowance for doubtful
    accounts of $2,479 and $3,797 on March 31, 2001 and
    December 31, 2000, respectively.........................      7,619         7,683
  Due from affiliates.......................................      1,013         2,642
  Prepaid expenses..........................................      2,514         3,180
  Other current assets......................................        668         1,076
                                                              ---------     ---------
Total current assets........................................     36,389        37,623

Restricted cash.............................................      4,538         5,261
Property and equipment, net.................................     26,256        30,005
Goodwill and other intangibles, net.........................    532,012       596,350
Subscriber acquisition costs, net...........................    112,706       129,815
Other assets................................................      3,580         3,611
                                                              ---------     ---------
Total assets................................................  $ 715,481     $ 802,665
                                                              =========     =========

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
  Accounts payable..........................................  $  12,294     $  22,910
  Accrued compensation......................................      4,763         4,566
  Accrued restructuring and other costs.....................     16,499        20,724
  Other accrued expenses....................................     32,185        33,575
  Accrued subscriber acquisition costs......................      3,148         5,431
  Unearned revenue..........................................     27,106        28,580
  Capital lease obligation--short term                            6,605         6,879
                                                              ---------     ---------
Total current liabilities...................................    102,600       122,665

  Capital lease obligation--long term.......................      5,473         6,535
  Notes payable to related parties..........................    131,263       137,000
                                                              ---------     ---------
Total liabilities...........................................    239,336       266,200

Minority Interest...........................................    203,602       229,373

Stockholders' equity:
  Preferred stock; $.01, par value; 10,000,000 shares
    authorized; none issued or outstanding..................         --            --
  Class A Common stock; $.01 par value; 150,000,000 shares
    authorized; 70,245,820 and 70,212,598 shares issued and
    outstanding at March 31, 2001 and December 31, 2000,
    respectively............................................        702           702
  Class B Common stock; $.01 par value; 1 share issued and
    outstanding at March 31, 2001 and December 31, 2000,
    respectively                                                     --            --
  Additional paid-in-capital--Common stock..................    889,464       889,288
  Accumulated deficit.......................................   (617,623)     (582,898)
                                                              ---------     ---------
Total stockholders' equity..................................    272,543       307,092
                                                              ---------     ---------
Total liabilities and stockholders' equity..................  $ 715,481     $ 802,665
                                                              =========     =========
</TABLE>

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

                                       3
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

               (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                FOR THE        FOR THE
                                                              THREE MONTHS   THREE MONTHS
                                                                 ENDED          ENDED
                                                               MARCH 31,      MARCH 31,
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
Revenues:
  Internet and online service revenues......................  $    76,479    $    56,929
  Amortization of subscriber incentives.....................      (12,814)       (12,987)
                                                              -----------    -----------
    Internet and online service revenue, net of
      amortization..........................................       63,665         43,942
  Subscriber management fees................................       22,137          2,605
  Other.....................................................        6,515          5,416
                                                              -----------    -----------
      Total revenues........................................       92,317         51,963

Operating costs and expenses:
  Cost of revenue...........................................       40,787         29,415
  Sales and marketing.......................................       12,205         18,769
  Product development.......................................        4,361          3,282
  General and administrative................................       37,302         21,609
  Depreciation and amortization.............................       51,414          8,885
  Amortization of subscriber acquisition costs..............        2,992          2,329
                                                              -----------    -----------
      Total operating costs and expenses....................      149,061         84,289
                                                              -----------    -----------
Operating loss..............................................      (56,744)       (32,326)

Other
  Interest expense, net.....................................        3,752          2,613
  Minority interest in net loss.............................      (25,771)            --
  Gain on sale of assets....................................           --            (25)
                                                              -----------    -----------
Net loss....................................................  $   (34,725)   $   (34,914)
                                                              ===========    ===========
Basic and diluted net loss per share........................  $     (0.49)   $     (0.54)
                                                              ===========    ===========
Weighted average number of shares outstanding used in
  computing basic and diluted net loss per share............   70,234,375     64,564,764
                                                              ===========    ===========
</TABLE>

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

                                       4
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                FOR THE        FOR THE
                                                              THREE MONTHS   THREE MONTHS
                                                                 ENDED          ENDED
                                                               MARCH 31,      MARCH 31,
                                                                  2001           2000
                                                              ------------   ------------
<S>                                                           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................    $(34,725)      $(34,914)
  Adjustments to reconcile net loss to net cash used in
    operating activities:
    Option grants at less than fair value...................          31            917
    Depreciation of property and equipment..................       4,525          2,420
    Amortization of goodwill and other intangibles..........      46,891          6,465
    Amortization of subscriber incentive and acquisition
    costs...................................................      15,806         15,316
    Minority interest in net loss...........................     (25,771)            --
    Provision for doubtful accounts.........................      (2,928)        (1,375)
  Change in operating assets and liabilities, net of effects
  of
    Acquisitions and disposals:
    Trade accounts receivable...............................       2,992          6,872
    Due from affiliates.....................................      19,076           (254)
    Prepaid expenses........................................         666           (337)
    Other assets............................................         439            247
    Accounts payable and other accrued expenses.............     (12,006)        (5,160)
    Accrued compensation....................................         197         (1,476)
    Unearned revenue........................................      (1,474)         1,967
    Accrued restructuring and other costs...................      (4,225)           (32)
                                                                --------       --------

Net cash provided by (used in) operating activities.........       9,494         (9,344)
                                                                --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Acquisition of property and equipment.....................      (2,112)        (1,301)
  Purchase price reduction for Cable & Wireless subscriber
    acquisition.............................................          --          9,793
  Purchase price increase for BizOnThe.Net acquisition......          --            (12)
  Subscriber acquisition....................................        (980)           398
  Other investments.........................................          --         (2,000)
                                                                --------       --------

Net cash provided by (used in) investing activities.........      (3,092)         6,878
                                                                --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of common stock....................         145            974
  Proceeds from borrowing of notes payable to related
  parties...................................................      25,000             --
  Payments of notes payable to related parties..............     (30,737)       (13,809)
  Payments of note receivable from stockholder..............          --            333
  Increase in restricted cash...............................         723            629
                                                                --------       --------

Net cash used in financing activities.......................      (4,869)       (11,873)
                                                                --------       --------

Net increase (decrease) in cash.............................       1,533        (14,339)
                                                                --------       --------

Cash and cash equivalents, beginning........................      23,042         35,473
                                                                --------       --------

Cash and cash equivalents, ending...........................    $ 24,575       $ 21,134
                                                                ========       ========

Noncash operating activity:
    Forgiveness of due to affiliate.........................    $ 17,447       $      0
</TABLE>

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

                                       5
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION
     CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
                      (IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                             CLASS A                CLASS B
                                                 PREFERRED STOCK          COMMON STOCK            COMMON STOCK
                                               --------------------   ---------------------   --------------------   ADDITIONAL
                                                                                                                      PAID IN
                                                SHARES     AMOUNT       SHARES      AMOUNT     SHARES     AMOUNT      CAPITAL
                                               --------   ---------   ----------   --------   --------   ---------   ----------
<S>                                            <C>        <C>         <C>          <C>        <C>        <C>         <C>
BALANCE, DECEMBER 31, 1999                          --    $     --    64,502,608     $645          --    $     --     $539,054

Issuance of common stock.....................       --          --     5,709,990       57           1          --      140,459

Sale of subsidiary to minority interest -....       --          --            --       --          --          --      209,775

Net loss.....................................       --          --            --       --          --          --           --
                                               --------   ---------   ----------     ----     --------   ---------    --------

BALANCE, DECEMBER 31, 2000                          --    $     --    70,212,598     $702           1    $     --     $889,288

Issuance of common stock.....................       --          --        33,222       --          --          --          176

Net loss.....................................       --          --            --       --          --          --           --
                                               --------   ---------   ----------     ----     --------   ---------    --------

BALANCE, MARCH 31, 2001                             --    $     --    70,245,820     $702           1    $     --     $889,464
                                               ========   =========   ==========     ====     ========   =========    ========

<CAPTION>

                                                             NOTE RECEIVABLE
                                               ACCUMULATED        FROM
                                                 DEFICIT       STOCKHOLDER       TOTAL
                                               -----------   ---------------   ---------
<S>                                            <C>           <C>               <C>
BALANCE, DECEMBER 31, 1999                      $(373,275)       $(1,333)      $ 165,091
Issuance of common stock.....................          --          1,333         141,849
Sale of subsidiary to minority interest -....          --             --         209,775
Net loss.....................................    (209,623)            --        (209,623)
                                                ---------        -------       ---------
BALANCE, DECEMBER 31, 2000                      $(582,898)       $    --       $ 307,092
Issuance of common stock.....................          --             --             176
Net loss.....................................     (34,725)            --         (34,725)
                                                ---------        -------       ---------
BALANCE, MARCH 31, 2001                         $(617,623)       $    --       $ 272,543
                                                =========        =======       =========
</TABLE>

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

                                       6
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

NOTE 1. BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements,
which include the accounts of Prodigy Communications Corporation ("Prodigy") and
its subsidiaries, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting only of normal recurring accruals,
considered necessary for a fair presentation, have been included in the
accompanying unaudited financial statements. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain amounts
in prior years' consolidated financial statements have been reclassified to
conform to the current year presentation. Operating results for the three-month
period ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the full year ending December 31, 2001. For further
information, refer to the consolidated financial statements and notes thereto,
included in Prodigy's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.

    At March 31, 2001, Prodigy had available cash and cash equivalents of
$24.6 million. Prodigy experienced positive cash flow in the first quarter 2001,
due to a reduction in a receivable from an affiliate related to a payment
received in accordance with the revision of the SBC marketing agreement, but
expects to continue to experience negative cash flows throughout 2001. Prodigy
continues to rely on its $150 million line of credit with Banco Inbursa, S.A..
As of March 31, 2001, the amount borrowed under this line of credit was
$116.2 million. Additionally, on December 29, 2000, Prodigy and SBC
Communications, Inc. ("SBC") entered into a credit agreement, pursuant to which,
effective January 19, 2001, SBC agreed to make revolving loans to Prodigy in the
maximum principal amount of $110 million. As of March 31, 2001, the amount
borrowed under this credit agreement was $15 million.

    Effective October 1, 2000, Amendment No.1 to Prodigy's Strategic and
Marketing Agreement with SBC permits Prodigy to pay subscriber acquisition costs
over a three-year period with the first installment due in October 2001.
Previously, such payments were due to SBC at the time a qualified enrollment was
recorded. Effective January 1, 2001, in addition, to reduce the up-front cash
requirements associated with its DSL expansion, Prodigy had re-negotiated the
payment terms of its subscriber acquisition costs with SBC. Prodigy and SBC
further amended and restated the strategic and marketing agreement pursuant to
which, among other things, SBC waived approximately $23 million in subscriber
bounties.

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

NOTE 2. RESTRUCTURING CHARGES

    In June 2000, Prodigy announced that it would move its headquarters from
White Plains, New York, to Austin, Texas, to better leverage Prodigy's alliance
with SBC. As a result of this relocation, Prodigy recorded a restructuring
charge of $21,552 related primarily to early termination payments and other
contractual obligations for certain non-cancelable property leases and minimum
purchase commitments as well as costs associated with employee terminations. The
accrued restructuring charge as of March 31, 2001 was $16,499.

                                       7
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

NOTE 2. RESTRUCTURING CHARGES (CONTINUED)
    The restructuring charge included $5,250 relating to real estate lease
termination costs of Prodigy's White Plains, New York, and Fort Worth and
Houston, Texas facilities, and has been reduced for sublease income that
management believes is probable. Other related restructuring costs of $12,124
primarily consist of minimum purchase commitments related to certain network and
communication equipment agreements attributable to FlashNet, which will be
terminated.

    The restructuring charge included $4,174 relating to employee separations of
approximately 254 employees, of which 198 employees have departed as of
March 31, 2001. These employees were predominately located at the White Plains,
New York and Fort Worth and Houston, Texas locations. These costs include
severance and other benefits.

    As of March 31, 2001, the Company has incurred employee separation costs of
$4.2 million. All actions required under this plan are expected to be taken by
September 30, 2001.

NOTE 3. NET LOSS PER SHARE

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

NOTE 4. SEGMENT INFORMATION

    Prodigy has two reportable segments based on its internal reporting which is
disaggregated by the services Prodigy offers: consumer Internet services and Web
hosting and management services, the latter of which principally includes the
SBC and Prodigy Internet de Telmex management agreement services and the
BizOnThe.Net Web hosting business acquired from U.S. Republic
Communications, Inc. in October 1999. Based on the level of operations during
the period, the revenues and operating losses of the Web hosting and management
services are reflected below in an "all other" category together with other
non-segment business transactions. There are no intersegment revenues between
the two reportable segments. Assets are not identified and allocated by
operating segments, nor does management evaluate the segments based upon these
criteria. All other accounting policies are applied consistently to the
segments, where applicable.

                                       8
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

NOTE 4. SEGMENT INFORMATION (CONTINUED)
    A summary of the segment financial information is as follows (in thousands):

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                           -------------------
                                                             2001       2000
                                                           --------   --------
<S>                                                        <C>        <C>
Revenues:
Internet and online services.............................  $ 63,665   $43,942
All other services(1)....................................    28,652     8,021
                                                           --------   -------
  Total revenues.........................................  $ 92,317   $51,963
                                                           ========   =======

Loss (income) from operations:
Internet and online services(2)..........................  $ 81,033   $29,616
All other services(1)(3).................................   (26,687)      968
Other(4).................................................     2,398     1,742
                                                           --------   -------
  Total loss from operations.............................  $ 56,744   $32,326
                                                           ========   =======
</TABLE>

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

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

(2) For the three months ended March 31, 2001 and 2000, Internet and online
    services includes goodwill and other intangible assets amortization of
    $46,889 and $1,873, respectively.

(3) For the three months ended March 31, 2001 and 2000, all other services
    includes goodwill and other intangible assets amortization of $0 and $4,592,
    respectively.

(4) Other consists of integration costs associated with the SBC Transaction.

NOTE 5. COMMITMENTS AND CONTINGENCIES

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

    On June 8, 1998, Brent Johnson filed a lawsuit against Prodigy in the United
States District Court for the Northern District of Oklahoma alleging that
Prodigy has infringed on two 1997 patents for software that Prodigy licensed
from another company called Diversified Data Resources ("DDR"). Eventually
Johnson joined his company, I.D.G., as co-plaintiff. Prodigy no longer uses the
software in question and the licensor, DDR, has defaulted on its indemnification
obligations. The case was stayed pending resolution of similar litigation
between Johnson and DDR in the Northern District of California. DDR suffered an
adverse judgment of $480,000 and filed a notice of appeal. DDR has since settled
with Johnson

                                       9
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and the appeal was dismissed. Dispositive motions are currently before the Court
in the Prodigy case and a trial date has been set for October 15, 2001. Because
of the changing case law applicable to this patent claim and the unpredictable
nature of litigation, Prodigy makes no predictions as to the outcome of this
litigation.

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

    - disclosures for free offers;

    - representations concerning pricing;

    - disclosures concerning premium areas;

    - disclosures for communications charges;

    - advertising to minors;

    - cancellation procedures; and

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

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

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

    On February 24, 2000, Prodigy was served with a summons and complaint by
Carroll Wesley Chance in a class action lawsuit brought against Best Buy,
Prodigy and Young America in the State Court of Richmond County, State of
Georgia. The case was brought on behalf of the class of similarly situated
consumers who allegedly purchased a computer at Best Buy, enrolled in the
Prodigy Internet service under the incentive program, and did not receive a
incentive check. The complaint alleged breach of contract, unjust enrichment,
conversion and negligence. The plaintiffs sought damages not to exceed $74,900
per

                                       10
<PAGE>
                       PRODIGY COMMUNICATIONS CORPORATION

  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

             (IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)

NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
member of the class, including actual damages, incentives, interest, punitive
damages, court costs and litigation expenses. The case settled on March 1, 2001
for payment of fees and the offer of one free month of service to class members
who renewed or re-activated their accounts for a specified period of time.
Prodigy notified potential class members of the settlement, and the Court has
approved and finalized the Settlement.

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

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

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

DESCRIPTION OF SBC TRANSACTION

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

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

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

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

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

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

    As a result of the SBC transaction:

    - Prodigy became a holding company;

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

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

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

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

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

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

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

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

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

    Upon the issuance of units in the operating partnership and Class B common
stock to SBC, the number of units owned by Prodigy equaled the number of shares
of then outstanding Class A common stock. The partnership agreement requires
that each time Prodigy issues shares of Class A common stock the operating
partnership must issue an equal number of units to Prodigy in exchange for the
net proceeds received by Prodigy from the issuance of Class A common stock. As a
result, Prodigy can increase its percentage ownership of the operating
partnership by issuing additional Class A common stock, although

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unanimous approval of Prodigy's executive steering committee, including the
members appointed by SBC, is required for Prodigy to issue additional Class A
common stock. The number of units owned by Prodigy is intended to equal the
number of shares of outstanding Class A common stock at all times. As of
March 1, 2001, Prodigy owned 70,245,820 units in the operating partnership
(57.5%) and SBC owned 51,843,631 units in the operating partnership (42.5%).

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

    - SBC has the right to appoint three Prodigy directors;

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

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

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

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

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

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

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

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

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

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

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

    - take action to preserve and retain legacy subscribers;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Prodigy agreed to:

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

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

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

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

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

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

    These arrangements may be terminated before December 31, 2009 by SBC if the
Prodigy Internet service fails to meet specified standards relating to
nonsubscriber revenue or performance or if any designated competitor acquires
15% or more of Prodigy, or by either party if the other party breaches the
agreement. For one year after December 31, 2009 or one year after termination if
the agreement is terminated by Prodigy on account of SBC's breach or by SBC for
one of the reasons described in the preceding sentence, SBC and its affiliates
will not market on a stand-alone basis any other retail Internet service
provider in the United States.

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

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

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

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

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

    On 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).

    Prodigy has recognized the contribution of the assets by SBC to the
operating partnership in exchange for the partnership units issued, at fair
value, of $560.8 million including transaction costs of approximately
$3.5 million. Through, December 31, 2000 these intangible assets were amortized
using a three year life. As a result of the revision of the SBC marketing
agreement, which resulted in a timing difference of cash flows, as of
January 1, 2001, the estimated life of the contributed intangible assets was
changed from three to four years. The contribution of the intangible assets at
fair value has resulted in a substantial amount of amortization, which will
reduce Prodigy's future earnings or increase its future losses. As a result of
the partnership units issued, Prodigy consolidates the operating partnership and
recognizes the SBC minority interest in the operating partnership.

    Results of Operations

    Prodigy's total revenues are comprised of:

    - Internet and online service revenues, consisting of subscription revenues
      from subscribers to Prodigy Internet and fees from SBC for providing
      Internet and online services to SBC's business dial-up and DSL
      subscribers;

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

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

    Prodigy defines "Internet subscribers owned and managed" to include billable
Prodigy Internet subscribers, SBC dial-up, SBC legacy dial-up, SBC DSL and SBC
business dial-up subscribers and billable Prodigy Internet de Telmex
subscribers. Prodigy does not count members in a trial period or who enroll in a
money-back guarantee program.

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    Three Months Ended March 31, 2001 Compared to Three Months Ended March 31,
2000

SUBSCRIBERS

    The number of Prodigy Internet subscribers owned and managed increased
1,561,000, or 102%, from 1,526,000 to 3,087,000. This growth was largely
attributable to the strategic and marketing agreement Prodigy initiated with
SBC, which became effective May 31, 2000. The increase in new subscribers owned
and managed was comprised of 1.2 million from the SBC channel, 232,000 from the
Prodigy Internet de Telmex channel and the remainder from the Prodigy Internet
dial channel.

REVENUES

    Total revenue increased $40.3 million or, 78%, from $52.0 million to
$92.3 million. The increase in total revenue was comprised of a $19.6 million
increase in Internet revenues, a $19.5 million increase in management fees and a
$1.1 million increase in other revenues.

    INTERNET AND ONLINE SERVICES REVENUE.  Revenues from Internet and online
services increased $19.6 million, or 34%, from $56.9 million to $76.5 million
due to the increase in subscribers discussed above.

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

    In July 2000, the Emerging Issue Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives", which requires that promotional
incentives granted consumers in return for the sale of a product or service must
be classified in the Statement of Operations as a reduction of revenues related
to that product or service. Accordingly, in the three months ended March 31,
2001 and 2000, amortization of subscriber acquisition costs emanating from these
contract subscriber incentive programs of $12.8 million and $13.0 million,
respectively, are reported on the Statement of Operations as reductions of gross
Prodigy Internet revenues earned during the period. Previously, Prodigy had
accounted for the amortization of these costs as subscriber acquisition cost
amortization.

    SUBSCRIBER MANAGEMENT FEES.  Management fee revenues from Prodigy Internet
de Telmex and, commencing June 2000, from legacy subscribers of SBC's Internet
dial-up and business dial-up services, increased by $19.5 million from
$2.6 million to $22.1 million. Approximately 93% of this increase was
attributable to SBC customers that became managed by Prodigy under the terms the
strategic and marketing agreement with SBC which became effective on May 31,
2000, as amended in January 2001.

    OTHER.  Other revenues increased by $1.1 million, or 20%, from $5.4 million
to $6.5 million. The increase in other revenues consisted of $1.9 million from
billing adjustments related to the migration of FlashNet Communications
customers to Prodigy's system, offset by a decrease in Web hosting revenues
related to ProdigyBiz.

OPERATING COSTS AND EXPENSES

    COST OF REVENUES.  Cost of revenues includes network and content expenses.
Network expense includes costs associated with Prodigy's hosting operations
center in Yorktown Heights, New York, the FlashNet division hosting operations
center in Fort Worth, Texas, as well as the costs of outsourced

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network provider services. Content expenses consist of the costs of developing,
or obtaining from third parties, content for inclusion in Prodigy's service
offerings. Cost of revenues increased $11.4 million, or 39%, from
$29.4 million, to $40.8 million in 2001, primarily related to increased network
charges incurred by Prodigy resulting from the increased hours of network usage
incurred by the increased number of Prodigy subscribers and, in the case of the
management of SBC legacy customers, the SBC network costs incurred by Prodigy
from this source.

    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 decreased $6.6 million, or 35%, from
$18.8 million, to $12.2 million. This decrease was attributable to a decreased
level of advertising during the most recent period.

    PRODUCT DEVELOPMENT.  Product development expense includes research and
development costs, and other product development costs. Product development
expense increased $1.1 million, or 33%, from $3.3 million to $4.4 million.
Product development activities in 2001 centered upon development of a new client
kit and an enhancement of existing web pages.

    GENERAL AND ADMINISTRATIVE.  General and administrative expense increased
$15.7 million, or 73%, from $21.6 million, to $37.3 million. The increase is
attributable to an increase in DSL customer care expense resulting from the
outsourcing of this service and SBC integration costs incurred during the most
recent period.

    DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased $42.5 million, or 479%, from $8.9 million to $51.4 million. This
increase was comprised of $33.1 million of other intangibles amortization
related to the May 2000 SBC transaction, $11.9 million of goodwill and other
intangibles' amortization related to the May 2000 FlashNet acquisition, and
$2.1 million increase in depreciation relating to additions of property,
equipment and leasehold improvements associated with the May 2000 FlashNet
acquisition and the fourth quarter 2000 relocation of the corporate headquarters
to Austin, Texas, offset by a $4.6 million decrease in intangibles amortization
relating to the fourth quarter 2000 write-off of BizOnThe.Net.

    AMORTIZATION OF SUBSCRIBER ACQUISITION COSTS.  In May 1999, Prodigy entered
into an agreement with Cable & Wireless USA, Inc. ("Cable & Wireless") to
purchase the dial-up access Internet subscriber base of that entity. At the
closing on July 20, 1999, Prodigy paid Cable & Wireless $41.6 million in cash.
Upon settlement of the transaction during the first quarter of 2000, Prodigy
received a purchase price reduction of approximately $10 million from the
original payment due to fewer subscribers transitioning to the Prodigy Internet
service than originally projected. Prodigy has accounted for the purchase price
paid for the acquired Cable & Wireless subscribers that migrated to Prodigy
Internet, and the subscribers it obtained from Web America as subscriber
acquisition costs, and amortized these costs over three years. During the three
months ending March 31, 2001, Prodigy incurred amortization of subscriber
acquisition costs of $3.0 million related to the acquired Cable & Wireless and
Web America subscribers compared to $2.3 million for the three months ending
March 31, 2000.

OTHER

    INTEREST AND OTHER INCOME.  Interest expense increased $1.1 million, from
$2.6 million, to $3.7 million. The increase was attributable to a higher average
level of debt outstanding during the current period.

    MINORITY INTEREST IN NET LOSS.  Minority interest in net loss increased from
$0 to $25.8 million. This increase was attributable to the SBC transaction,
whereby SBC acquired an indirect interest in Prodigy of approximately 43%.

    INCOME TAXES.  Prodigy has evaluated the positive and negative evidence
bearing on the realizability of its deferred tax assets, which are comprised
principally of net operating loss carry-forwards. Under the

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applicable accounting standards, Prodigy has considered its history of losses,
and concluded that it is more likely than not that Prodigy will not realize
these favorable tax attributes. Accordingly, the related deferred tax assets
have been fully reserved.

    Fiscal Year 2000 Restructuring

    In June 2000, Prodigy announced that it would move its headquarters from
White Plains, New York, to Austin, Texas, to better leverage Prodigy's alliance
with SBC. As a result of this relocation, Prodigy recorded a restructuring
charge of $21.6 million related primarily to early termination payments and
other contractual obligations for certain non-cancelable property leases and
minimum purchase commitments as well as costs associated with employee
terminations. The accrued restructuring charge as of March 31, 2001 was
$16.5 million.

    The restructuring charge included $5.3 million relating to real estate lease
termination costs of Prodigy's White Plains, New York, and Fort Worth and
Houston, Texas facilities, and have been reduced for sublease income that
management believes is probable. Other related restructuring costs of
$12.1 million primarily consist of minimum purchase commitments related to
certain network and communication equipment agreements attributable to FlashNet,
which will be terminated.

    The restructuring charge included $4.2 million relating to employee
separations of approximately 254 employees, of which 198 employees have departed
as of March 31, 2001. These employees were predominately located at the White
Plains, New York and Fort Worth and Houston, Texas locations. These costs
include severance and other benefits.

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

LIQUIDITY AND CAPITAL RESOURCES

    Since formation, Prodigy has relied on private sales of equity securities
(totaling $294.1 million through March 31, 2001), borrowings and its initial
public offering in February 1999, with net proceeds of $157.2 million to fund
its operations. Prodigy has incurred significant losses since inception, and at
March 31, 2001, had an accumulated deficit of $617.6 million and a working
capital deficit of $66.2 million comprised of current liabilities of
$102.6 million offset by current assets of $36.4 million.

    For the three months ended March 31, 2001, Prodigy provided cash from
operations of $9.5 million compared to negative cash flow from operations of
$9.3 million for the three months ended March 31, 2000. The change in cash used
in operating activities from 2000 to 2001 was due to reduction in a receivable
from an affiliate, related to a payment received in accordance with a revision
in the SBC marketing agreement.

    Net cash used in investing activities increased by $10 million in 2001, to
$3.1 million compared to $6.9 million cash provided by investing activities in
2000. The 2001 increase was due primarily to the prior period's purchase price
adjustment relating to the acquisition of subscribers from Cable & Wireless USA,
as well as to subscriber contract acquisition programs, and increased capital
expenditures.

    From July 1999 through December 1999, Prodigy paid approximately
$154.6 million in consideration for subscribers obtained through its subscriber
contract acquisition programs. During 2000, Prodigy paid an additional
$19.5 million related to these programs. Prodigy has $3.1 million accrued
related to these programs as of March 31, 2001. Prodigy has capitalized these
costs and will amortize these costs over the terms of the underlying subscriber
contracts (one, two or three years).

    Prodigy's capital expenditures for the three months ended March 31, 2001,
were $2.1 million, compared to capital expenditures of $1.3 million for the
three months ended March 31, 2000. Prodigy anticipates that its capital
expenditures will be approximately $13.5 million in 2001.

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    In August 1999, Prodigy obtained a $150 million revolving line of credit
from Banco Inbursa, a Carso Global affiliate, to fund its subscriber contract
acquisition programs during the third and fourth quarters of 1999. The terms of
this line of credit allow Prodigy to borrow, repay and re-borrow amounts in
minimum increments of $1 million. Advances are due 30 days after borrowing, but
Prodigy is permitted to rollover advances into new advances at its election.
Advances are uncollateralized, and during the third and fourth quarters of 1999,
bore interest of 9% and 12%, respectively. At March 31, 2001, the amount
borrowed under the line of credit was $116 million. In January 2001, Banco
Inbursa extended its revolving line of credit to June 15, 2002 subject to
monthly interest rate adjustments governed by market conditions.

    On December 29, 2000, SBC extended a $110 million revolving line of credit.
Concurrently, SBC forgave $5 million of obligations owed on a telecommunications
contract negotiated by FlashNet Communications and DSL bounty payments owed by
Prodigy to SBC were eliminated, with the result that a net receivable to Prodigy
of $17 million was paid by SBC in February 2001.

    In January 2001, Prodigy borrowed $25 million under the SBC line of credit.
At the same time, $15 million was repaid Banco Inbursa for principal and accrued
interest under its line of credit. As of March 31, 2001, the amount borrowed
under the SBC line of credit was $15 million. In March 2001, Prodigy repaid
$10 million to SBC and $7 million to Banco Inbursa with respect to the lines of
credit.

    At March 31, 2001, Prodigy had available cash and cash equivalents of
$24.6 million.

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

                                       20
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

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

    PRODIGY ACHIEVED POSITIVE CASH FLOWS FOR THE FIRST TIME SINCE ITS INCEPTION
IN THE QUARTER ENDED MARCH 31, 2001. THE GENERATION OF POSITIVE CASH FLOWS WAS
DUE PRIMARILY TO REPAYMENT OF A RECEIVABLE DUE FROM AN AFFILIATE RECEIVED IN
FEBRUARY 2001. HAD PRODIGY NOT RECEIVED THAT REPAYMENT, PRODIGY WOULD HAVE HAD
NEGATIVE CASH FLOWS FROM OPERATIONS. 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 years ended December 31, 1998, 1999
and 2000 and for the three months ended March 31, 2000 and 2001, in millions:

<TABLE>
<CAPTION>
                                                                            THREE MONTHS
                                                  YEAR ENDED                    ENDED
                                                 DECEMBER 31,                 MARCH 31,
                                        ------------------------------   -------------------
                                          1998       1999       2000       2000       2001
                                        --------   --------   --------   --------   --------
<S>                                     <C>        <C>        <C>        <C>        <C>
Revenues..............................   $136.1     $173.4     $376.4     $52.0      $92.3
Net Losses............................   $ 65.1     $ 80.5     $209.6     $34.9      $34.7
</TABLE>

    At March 31, 2001, Prodigy had:

    - an accumulated deficit of $617.6 million;

    - a working capital deficit of $66.2 million;

    - current liabilities of $102.6 million; and

    - current assets of $36.4 million.

    As a result of these losses, Prodigy had not generated positive cash flow
from operations until the quarter ended March 31, 2001. The positive cash flow
generated was due principally to a repayment of a receivable from an affiliate
received in February 2001.

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

    Prodigy experienced substantial negative cash flow during 2000 and would
have had negative cash flows during the three months ending March 31, 2001 but
for the repayment of a receivable due from an affiliate received in
February 2001. Prodigy had $24.6 million of cash available at March 31, 2001. In
December 2000, Prodigy entered into a credit agreement with SBC pursuant to
which SBC has agreed to make revolving loans to Prodigy, from time to time,
through December 21, 2003, in the maximum aggregate principal amount of
$110 million. The credit agreement will terminate on December 31, 2003. As of
March 31, 2001, $15 million was outstanding under this credit agreement. In
January 2001, Prodigy extended a $150 million revolving line of credit from
Banco Inbursa, an affiliate of Carso Global Telecom, to June 15, 2002. As of
March 31, 2001, $116 million was outstanding under this line of credit. The

                                       21
<PAGE>
termination of either line of credit agreement would force Prodigy to seek
additional equity or debt financing before it currently anticipates needing to
do so. The terms under which Prodigy obtains additional equity or debt financing
could be unfavorable to Prodigy and could adversely affect Prodigy's business.
Any additional equity financing may cause investors to experience dilution. Any
additional debt financing may result in restrictions on Prodigy's operations.

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

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

    Prodigy's industry includes many significant participants, including:

    - Internet service providers;

    - proprietary online service providers;

    - major international telecommunications companies;

    - Internet-search services; and

    - various other telecommunications companies.

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

    - local and long-distance telephone companies;

    - cable television companies; and

    - electric utility companies.

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

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

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

                                       22
<PAGE>
    PRODIGY MAY BE SUBJECT TO INCREASING PRICING PRESSURES DUE TO INCREASING
COMPETITION, THE INTRODUCTION OF FREE SERVICE AND UNLIMITED USAGE PLANS, AND THE
ELIMINATION OF MOST HOURLY ACCESS CHARGES IN THE INDUSTRY, WHICH COULD RESULT IN
LOWER REVENUES.

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

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

    The failure to attract and retain subscribers to Prodigy's services, or an
increase in or a failure to slow the rate of subscriber cancellations, would
adversely affect Prodigy's future revenues. Moreover, a significant percentage
of Prodigy's subscriber base is currently under contract, the majority of which
will expire over the next two years. In the absence of incentives to retain
these subscribers, Prodigy could experience significantly higher rates of
customer turnover in the future. Prodigy's industry is characterized by a high
rate of customer turnover. Customer acquisition expenses and the administrative
expenses of enrolling and assisting new subscribers are substantial.

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

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

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

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

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

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

                                       23
<PAGE>
    In addition to its network arrangements with McLeodUSA, Prodigy has
outsourced aspects of its content, customer service and billing functions to
several providers. Outsourcing makes Prodigy reliant on third party providers
for critical functions. The failure of these providers to provide services as
required, or any significant disruption of or deterioration in services, could
require Prodigy to obtain alternative suppliers at a higher cost and result in
customer cancellations.

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

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

    Prodigy's financial condition may decline if it does not continue to
increase its subscriber base. Historically, a majority of Prodigy Internet
enrollments have arisen from bundling arrangements with PC manufacturers. In
1998, 44% of total enrollments to Prodigy Internet were obtained through PC
bundling, including 32% from Prodigy's PC bundling relationship with Packard
Bell/NEC. In 1999, the percentage of total enrollments to Prodigy Internet
obtained through PC bundling declined to 15%, but the percentage obtained
through contract acquisition programs, in which Prodigy makes payments of up to
$400 to major PC retailers who enroll subscribers to term subscriptions of at
least one year, increased from zero in 1998, to 34%. Prodigy's contract
acquisition program with Best Buy accounted for approximately 33% of total
enrollments during 1999. Prodigy's contract acquisition program with Best Buy
has been terminated. Prodigy has other, less significant, contract acquisition
programs with other retailers, and entered into an additional contract
acquisition program in February 2000. During 2000, SBC contributed 75,000 net
dial-up customers and 230,000 net DSL customers on behalf of Prodigy. However,
Prodigy cannot predict whether future contract acquisition programs will
generate as many enrollments as in the past. Prodigy is not currently engaged in
contract acquisition programs with retailers as of March 31, 2001.

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

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

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

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

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

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

                                       24
<PAGE>
    Prodigy's ability to exploit the market for its products and services, and
increase its subscriber base, requires an effective planning and management
process. Prodigy's ability to plan and manage effectively will require Prodigy
to continue to implement and improve its operational, financial and management
information systems. Prodigy will also be required to attract and retain skilled
managers and other personnel, including its current executive officers.

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

    The number of Prodigy Internet owned and managed subscribers, excluding
Telmex, increased from 1.1 million at March 31, 2000 to 2.4 million at
March 31, 2001. A significant portion of the increase was due to SBC's DSL
subscribers managed by Prodigy as a result of the SBC transaction. Prodigy's
continued growth in the DSL marketplace will largely tie to marketing efforts of
SBC. If SBC's marketing efforts do not succeed or if SBC fails to provide
Prodigy with the minimum number of DSL subscribers as required in the Strategic
and Marketing Agreement (3.75 million over the nine-year period), Prodigy may
experience additional operating losses.

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

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

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

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

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

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

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

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

                                       25
<PAGE>
    - Carso Global Telecom and SBC have formed other joint ventures in the past,
      and may do so in the future; and

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

    AS A RESULT OF THE SBC TRANSACTION, ALL MAJOR CORPORATE ACTIONS WILL REQUIRE
THE UNANIMOUS APPROVAL OF THE EXECUTIVE STEERING COMMITTEE. THE EXISTENCE AND
AUTHORITY OF THE EXECUTIVE STEERING COMMITTEE MAY DECREASE THE WILLINGNESS OF
SOME POTENTIAL DIRECTORS TO SERVE ON THE BOARD OF DIRECTORS.

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

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

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

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

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

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

    - pricing changes;

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

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

    - competitive factors.

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

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

                                       26
<PAGE>
    Failure to protect Prodigy's proprietary technology could adversely affect
its competitive position. Prodigy attempts to protect its proprietary technology
through copyright and trade secrets laws, patents, employee and third party
confidentiality agreements, and other methods. Prodigy grants customers a
license to use its services under agreements that contain terms and conditions
prohibiting unauthorized reproduction. Despite these precautions, unauthorized
third parties may be able to copy portions of Prodigy's services or reverse
engineer or obtain and use information Prodigy regards as proprietary.

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

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

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

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

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

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

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

                                       27
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK ON VARIABLE RATE FINANCIAL INSTRUMENTS

    Prodigy maintains a $150 million line of credit from Banco Inbursa, S.A. The
terms of this line of credit allow Prodigy to borrow, repay and re-borrow
amounts in minimum increments of $1 million and is available for drawdown until
June 15, 2002. Interest rates on this facility fluctuate based on market
conditions at the time of each drawdown. Increases in market interest rates
would cause interest expense to increase and earnings before income taxes to
decrease. The change in interest expense and earnings before income taxes would
be dependent upon the weighted average outstanding borrowings during the
reporting period following an increase in market interest rates. Based on the
Prodigy's outstanding borrowings under this facility as of March 31, 2001 at an
average interest rate of 12% per annum, a 100 basis point increase in market
interest rates would increase interest expense and decrease earnings before
income taxes by approximately $1.2 million. The fair market value of the
outstanding obligations under this facility approximate the facility's carrying
value due to the variable interest rates in place as of March 31, 2001.

    In addition to the above, on January 19, 2001, Prodigy entered into a
$110 million line of credit with SBC that expires on December 31, 2003 and bears
interest at LIBOR plus 400 basis points. Accordingly, increases in market
interest rates would cause interest expense, if any, on this facility to
increase and earnings before income taxes to decrease. The change in interest
expense and earnings before income taxes would be dependent upon the weighted
average outstanding borrowings during the reporting period following an increase
in market interest rates. Based on the Prodigy's outstanding borrowings under
this facility as of March 31, 2001 at an average interest rate of 12% per annum,
a 100 basis point increase in market interest rates would increase interest
expense and decrease earnings before income taxes by approximately $200,000. The
fair market value of the outstanding obligations under this facility approximate
the facility's carrying value due to the variable interest rates in place as of
March 31, 2001.

    Prodigy did not hold derivative financial instruments as of March 31, 2001
and has never held these instruments in the past.

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<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

    - disclosures for free offers;

    - representations concerning pricing;

    - disclosures concerning premium areas;

    - disclosures for communications charges;

    - advertising to minors;

    - cancellation procedures; and

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

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

    On January 10, 2000, Christa Roberts filed a class action lawsuit in the
Superior Court of the State of California, County of Los Angeles, against
Prodigy, AOL Time Warner, Circuit City Stores, Fry's Electronic, Microsoft and
other unnamed parties. On February 7, 2000, the plaintiff filed an amended
complaint naming Young H. Kim as the named plaintiff in place of Christa
Roberts. The lawsuit alleges that Prodigy and the defendants engaged in false
advertising, and offered incentives to consumers and entered into retail sales
contracts with consumers which violated California law. The plaintiff is seeking
restitution from the defendants of all sums related to this conduct. The trial
court dismissed the lawsuit for failure to state a cause of action and the
Plaintiff appealed. Prodigy's response brief was filed in the Court

                                       29
<PAGE>
of Appeals on March 30, 2001. Given the early stage of the appeal, no prediction
as to its outcome can be made.

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

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

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

                                       30
<PAGE>
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

    None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

    None.

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

    None.

ITEM 5. OTHER INFORMATION

    None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

    None.

(b) Reports on Form 8-K

(1) On January 19, 2001, Prodigy filed a Current Report on Form 8-K, reporting
    under Item 5 that:

    - on December 29, 2000, Prodigy and SBC Communications Inc. entered into a
      credit agreement, pursuant to which SBC agreed to make revolving loans to
      Prodigy in the maximum aggregate principal amount of $110,000,000,

    - on January 1, 2001, Prodigy and SBC amended and restated the Strategic and
      Marketing Agreement which was entered into on November 19, 1999 as part of
      Prodigy's transaction with SBC, as described in Prodigy's Current Report
      on Form 8-K filed on December 2, 1999, Prodigy's Definitive Proxy
      Statement on Schedule 14A filed on May 5, 2000 and Prodigy's Current
      Report on Form 8-K filed on June 14, 2000, and which was amended on
      October 20, 2000, as described in Prodigy's Quarterly Report on Form 10-Q
      filed on November 14, 2000, and

    - on January 17, 2001 Banco Inbursa, S.A. approved the extension of a line
      of credit in the maximum aggregate principal amount of $150,000,000 to
      Prodigy until June 15, 2002.

    Prodigy reported under Item 9 that it was making available the scripts to be
used by members of Prodigy's management who would be participating in a
conference call on January 19, 2001.

(2) On March 16, 2001, Prodigy filed a Current Report on Form 8-K, reporting
    under Item 4 that on March 9, 2001, Prodigy notified PricewaterhouseCoopers
    LLP that its engagement as the Registrant's independent public accountants
    would be terminated following the issuance of its report on the Registrant's
    financial statements for the year ended December 31, 2000 and engaged
    Ernst & Young LLP to act as the Registrant's independent public accountants
    to audit the Registrant's financial statements for the year ending
    December 31, 2001.

(3) On April 17, 2001, Prodigy filed a Current Report on Form 8-K/A amending the
    Form 8-K filed on March 16, 2001, reporting under Item 4 that on March 29,
    2001, PricewaterhouseCoopers LLP issued its report on the Registrant's
    financial statements for the year ended December 31, 2000, and, on April 2,
    2001, the Registrant filed its Annual Report on Form 10-K for the year ended
    December 31, 2000 containing Pricewaterhouse Coopers LLP's report on the
    financial statements. Accordingly, the termination of Pricewaterhouse
    Coopers LLP as the Registrant's independent public accountants became
    effective.

                                       31
<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.

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

Date: May 14, 2001                                                    /s/ ALLEN CRAFT
                                                      ------------------------------------------------
                                                                        Allen Craft
                                                         EXECUTIVE VICE PRESIDENT OF FINANCE, CHIEF
                                                         FINANCIAL OFFICER AND TREASURER (PRINCIPAL
                                                             FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>

                                       32