<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

(Mark One)

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

                For the quarterly period ended: June 30, 1999
                                      OR

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

              For the transition period from ______ to _________

                      Commission File Number:  000-25333

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

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


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

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

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

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

                         Yes    X                   No

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

Title of each class
-------------------
Common stock $.01 par value
Shares outstanding on July 31, 1999 61,110,541
                                    __________

<PAGE>

                      PRODIGY COMMUNICATIONS CORPORATION
                                   FORM 10-Q
                          QUARTER ENDED JUNE 30, 1999


                                     INDEX

                                                                       Page

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements                                            3

Item 2.  Management's Discussion and Analysis of Financial Condition     8
         and Results of Operations

Item 3.  Quantitative and Qualitative Disclosures About Market Risk     11


PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                              12

Item 2.  Changes in Securities and Use of Proceeds                      12

Item 4.  Submission of Matters to a Vote of Security Holders            13

Item 6.  Exhibits                                                       14

Signatures

                               ________________

     This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed below under the caption "Certain Factors That May Affect
Future Operating Results," among others, could cause actual results to differ
materially from those indicated by forward-looking statements made herein and
presented elsewhere by management from time to time. Such forward-looking
statements represent management's current expectations and are inherently
uncertain. Investors are warned that actual results may differ from management's
expectations.


     Prodigy(R), Prodigy Internet(TM), and Prodigy Classic(TM) are trademarks of
the Company. All other trademarks referred to herein are the property of their
respective owners.

                                       2
<PAGE>

PART I.

Item 1.  Financial Statements

                       PRODIGY COMMUNICATIONS CORPORATION
               CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                     (in thousands except share amounts)
<TABLE>
<CAPTION>
                                                     June 30,       December 31,
                                                       1999              1998
--------------------------------------------------------------------------------
<S>                                                 <C>             <C>
Assets

Current assets:
  Cash and cash equivalents                         $ 105,330         $12,180
  Short term investments                               44,252             -
  Accounts receivable net of allowance for doubtful
    accounts of 394 and 367 on June 30, 1999
    and December 31, 1998, respectively                 1,037             966
  Due from affiliate                                      322             -
  Prepaid expenses                                      2,047           1,691
  Other current assets                                    181             106
--------------------------------------------------------------------------------
Total current assets                                  153,169          14,943

Restricted cash                                         4,770           5,420
Notes receivable, net of deferred gain of                 -               -
    $16,148 at June 30, 1999 and December 31, 1998
Property and equipment, net                            16,490          12,998
Tradename, net                                         24,798          26,579
Goodwill, net                                          10,812          11,587
Deferred network costs                                  4,751           5,939
Other assets                                              717             866
--------------------------------------------------------------------------------
Total assets                                        $ 215,507         $78,332
                                                     ========         =======

Liabilities and Stockholders' Equity

Current liabilities:
  Notes payable                                     $       -         $ 2,000
  Accounts payable                                      5,750           6,184
  Accrued compensation                                  2,994           3,000
  Other accrued expenses                               24,195          22,451
  Unearned revenue                                     13,299          10,200
  Accrued purchase and restructuring costs              4,315           4,705
--------------------------------------------------------------------------------
Total liabilities                                      50,553          48,540
--------------------------------------------------------------------------------

Stockholders' equity:
  Preferred stock; $.01, par value; 10,000,000
    shares authorized; none issued or outstanding           -               -
  Contingent convertible notes                              -          30,500
  Common stock; $.01 par value; 150,000,000 and
    280,000,000 shares authorized; 61,079,031 and
    45,034,297 shares issued and outstanding at
    June 30, 1999 and December 31, 1998                   611             450
  Additional paid-in capital-common stock             485,911         294,296
  Accumulated deficit                                (319,901)       (292,787)
--------------------------------------------------------------------------------
                                                      166,621          32,459
  Less note receivable from stockholder                (1,667)         (2,667)
--------------------------------------------------------------------------------
Total stockholders' equity                            164,954          29,792
--------------------------------------------------------------------------------

Total liabilities and stockholders' equity          $ 215,507         $78,332
                                                     ========         =======

</TABLE>

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

                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                      For the         For the         For the         For the
                                                    Three Months    Three Months     Six Months      Six Months
                                                       Ended           Ended           Ended           Ended
                                                      June 30,        June 30,        June 30,        June 30,
                                                       1999             1998           1999             1998
----------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>             <C>             <C>
Revenues:
  Internet and online service revenues:
    Prodigy Internet                                $    30,065     $    19,153     $    57,973     $    34,198
    Prodigy Classic                                       5,047          12,751          11,727          28,937
                                                    ------------    ------------    ------------    ------------
                                                         35,112          31,904          69,700          63,135

  Other (including $1,411 and $2,172 of affiliate
         revenue for the three and six
         months ended June 30, 1999,
         respectively                                     1,978           2,019           3,316           4,175
----------------------------------------------------------------------------------------------------------------
    Total revenues                                       37,090          33,923          73,016          67,310

Operating costs and expenses:
  Cost of revenue                                        23,954          24,942          47,481          51,496
  Marketing                                              11,243           8,451          23,762          15,452
  Product development                                     3,801           2,899           7,661           6,289
  General and administrative                             14,681          13,052          29,209          26,318
--------------------------------------------------------------------------------    ----------------------------
    Total operating costs and expenses                   53,679          49,344         108,113          99,555
                                                    ------------    ------------    ------------    ------------
Operating loss                                          (16,589)        (15,421)        (35,097)        (32,245)

  Interest (income)/expense, net                         (1,842)            113          (2,906)            328
  Gain on sale of equity investment                      (3,319)              -          (3,319)              -
  Gain on settlement of note payable                          -               -          (1,714)              -
  Gain on asset sale                                          -               -               -            (400)
  Other                                                     (44)              -             (44)              -
                                                    ----------------------------    ----------------------------
Net loss                                            $   (11,384)    $   (15,534)    $   (27,114)    $   (32,173)
                                                    ============================    ============================

Basic and diluted loss per share                    $     (0.19)    $     (0.43)    $     (0.47)    $     (0.92)
                                                    ============    ============    ============    ============
Weighted average number of shares outstanding
  used in computing basic and diluted net loss
  per share                                          61,007,546      36,466,399      57,252,375      35,142,502
                                                    ============    ============    ============    ============

</TABLE>


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

                                       4

<PAGE>

                       PRODIGY COMMUNICATIONS CORPORATION
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     For the           For the
                                                                    Six  Months       Six Months
                                                                      Ended             Ended
                                                                     June 30,          June 30,
                                                                      1999              1998
--------------------------------------------------------------------------------------------------
<S>                                                                <C>
Cash flows from operating activities:
  Net loss                                                         $    (27,114)   $  (32,173)

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

    Gain on sale of equity investments                                   (3,319)            -
    Option grants at below fair value                                       642           280
    Depreciation                                                          3,895         4,250
    Amortization of goodwill                                                775           773
    Amortization of tradename                                             1,781         1,602
    Amortization of deferred network asset                                1,188         1,166
  Change in operating assets and liabilities,
    net of effects of acquisitions and disposals

    Accounts receivable                                                     (71)        1,048
    Due from affiliate                                                     (322)            -
    Other receivables                                                         -           (78)
    Prepaid expenses                                                       (356)          331
    Assets held for sale                                                      -          (432)
    Other assets                                                             74         1,020
    Accounts payable                                                       (434)       (9,738)
    Other accrued expenses                                                1,744        (4,736)
    Accrued compensation                                                     (6)         (261)
    Unearned revenue                                                      3,099         4,870
    Accrued purchase and restructuring costs                               (390)       (2,324)
----------------------------------------------------------------------------------------------
Net cash used in operating activities                                   (18,814)      (34,402)
----------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Acquisition of property and equipment                                  (7,387)         (445)
Proceeds from sale of equity investments                                  3,319             -
  Short term investments                                                (44,252)            -
---------------------------------------------------------------------------------------------
Net cash used in investing activities                                   (48,320)         (445)
---------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Sale of common stock, net of fees                                     160,634        15,010
  Borrowings/(repayments) of notes payable to related
    parties                                                              (2,000)       16,400
  Repayments of note receivable from stockholder                          1,000           666
  Increase (decrease) in restricted cash                                    650            (1)
  Other                                                                       -            16
---------------------------------------------------------------------------------------------
Net cash provided by financing activities                               160,284        32,091
---------------------------------------------------------------------------------------------

Net increase in cash                                                     93,150        (2,756)
                                                                   ------------    ----------
Cash, beginning                                                          12,180        12,363
                                                                   ------------    ----------
Cash, ending                                                       $    105,330    $    9,607
                                                                   ============    ==========
Noncash financing activity:
    Conversion of contingent convertible notes to common stock           30,500          -
</TABLE>


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

                                       5


<PAGE>

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


For the period ended June 30, 1999

<TABLE>
<CAPTION>
                                                                        Contingent                        Additional
                                                       Preferred Stock  Convertible     Common Stock       Paid in
                                                       Shares   Amount  Securities   Shares      Amount    Capital
                                                       ---------------  -----------  ------------------   ----------
<S>                                                    <C>      <C>     <C>          <C>         <C>     <C>
Balance, December 31, 1998                                0       $0      $30,500    45,034,297 $ 450     $ 294,296

Sale of common stock
  Exercise of options                                     -        -                    589,468     6         4,781
  Sale of stock                                           -        -                 11,200,000   112       156,377

Conversion of notes into common stock                                     (30,500)    4,255,266    43        30,457

Comprehensive Loss:
Net loss

Comprehensive loss
                                                       --------------------------------------------------------------
Balance, June 30, 1999                                    0       $0        $0       61,079,031  $611       $485,911
                                                       ======   ======    ======    ===========  =====     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                    Note
                                                                                  Receivable
                                                                     Accumulated     From
                                                                       Deficit    Shareholder     Total
                                                                     -----------  -----------     -----
<S>                                                                  <C>          <C>          <C>
Balance, December 31, 1998                                           $(292,787)    $(2,667)       $29,792

Sale of common stock                                                                                4,787
  Exercise of options                                                                1,000        157,489
  Sale of stock

Conversion of notes into common stock                                                                   -

Comprehensive Loss:
Net loss                                                                (27,114)                  (27,114)
                                                                                                -----------
Comprehensive loss                                                                                (27,114)
                                                       ---------------------------------------  -----------
Balance, June 30, 1999                                             $ (319,901)     $ (1,667)     $164,954
                                                                    ===========   ==========    ===========
</TABLE>

The accompanying footnotes are an integral part of the 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 (the "Company")
and its wholly owned subsidiaries, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation, have been
included in the accompanying unaudited financial statements. All significant
intercompany transactions and balances have been eliminated in consolidation.
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to the current year presentation. Operating results for
the three and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 1999. For further information, refer to the consolidated financial
statements and notes thereto, included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.

     During the second quarter of 1999, the Company entered into an agreement
with a computer retailer (the "Retailer") to make specified payments to the
Retailer in exchange for the Retailer enrolling customers onto Prodigy Internet
and obtaining a signed contractual commitment from these customers to term
subscriptions to Prodigy Internet of one, two, or three years at a monthly
charge of $19.95. The Company has capitalized these payments and plans to
amortize them over the life of the subscriber contract. The Company expects this
policy to have a material impact on the year end financial statements.

Note 2.  Common Stock Offering

     On February 11, 1999, the Company completed an initial public offering
under the Securities Act of 1933. The Company sold 11,200,000 shares of Common
Stock and raised aggregate proceeds of approximately $156,400.

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

      Additionally, IBM and Sears each received warrants which allow them to
purchase additional shares up to 15% of common shares outstanding as of the IPO
date at 130% of the fair market value at the date of conversion of the
Contingent Convertible Notes. Those warrants are exercisable for three years
from the conversion date. IBM and Sears each received warrants to purchase
approximately 2,409,000 shares or approximately 4,818,000 in total.

Note 3.  Restructuring Reserves

     During the first and second quarter of 1999, the Company paid $249 and
$141, respectively, of expenditures related to the 1997 restructuring reserve.
These expenditures relate to contractual obligations and severance payments
identified under the original plans. The remaining reserve consists primarily of
contractual obligations that management expects to be paid in full by December
31, 2001.

Note 4.  Settlement of Debt

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

Note 5.  Gain on Sale of Assets

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

Note 6.  Net Loss Per Share

     The Company 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 the Company 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 the Company incurred losses for all periods presented,
the inclusion of options in the calculation of weighted average common shares is
anti-dilutive; and therefore there is no difference between basic and diluted
earnings per share.

Note 7.  Recent Pronouncements

     During the first quarter of 1999 the Company adopted the American Institute
of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". All internal software is recorded by the Company in accordance
with the above mentioned pronouncement and is depreciated over three years
beginning on the date the software is put in use. The Company has capitalized
$1,287 and $1,623 of costs related to internal use of software during the three
months ended March 31, 1999 and June 30, 1999 respectively.

     In January 1999, the Company adopted SOP 98-5 "Reporting on the Costs of
Start-up Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs. It requires the costs of start-up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs historically, the adoption of this standard did not have a
significant impact on the Company's results of operations, financial position or
cash flows.

Note 8. Subsequent Events

     In connection with the agreement with the Retailer, the Company is required
to establish a $50,000 letter of credit with a financial institution. This
line of credit was established in the third quarter and was fully
collateralized by a corresponding amount of cash that has been classified as
restricted cash.


                                       7
<PAGE>

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

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

Overview

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

     The results of operations of ISP's, including those of the Company, 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 the Company typically offered free
service for one or two months to new subscribers. In selected distribution
channels, the Company is replacing free trial programs with money-back
guarantees in order to attract enrollees who are less likely to terminate
service. The failure to attract and retain subscribers to the Company's
services, or an increase in the rate of subscriber cancellations, would have a
material adverse effect on the Company. The Company 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. The Company recognizes revenue related to
prepaid online service fees over the period services are provided on a straight-
line basis. The Company ceased offering prepaid term plans in 1995 but
reinstated such term plans in January 1997.

     The Company historically has experienced seasonality in its business, with
higher expenses during the last and first fiscal quarters, corresponding to the
Christmas and post-Christmas selling season, and lower timed usage revenues
(revenues from hourly usage charges) during its second and third fiscal quarters
resulting from reduced usage of its services during the summer months. The
Company believes that the seasonal reductions in timed usage revenues
historically experienced by the Company will be mitigated by the movement from
timed usage plans to unlimited usage plans as well as growth in the Company's
subscriber base, although the company expects to continue to have higher
expenses during its first and fourth quarters. As a result of the seasonality of
its business, as well as other factors, the Company experiences quarterly
fluctuations in it its operating results.

Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998

     The Company's total revenues have two components: Internet and online
service revenues, consisting of subscription revenues from subscribers to
Prodigy Internet and Prodigy Classic, and other revenues, consisting of
advertising and transaction fees, Web hosting fees from the Company's Business
Services division, and fees from a management contract with Telmex under which
Prodigy provides certain management and consulting services to Telmex's Internet
subsidiary Prodigy Internet de Telmex. Subscription revenues include revenues
from hourly usage charges ("timed usage revenues"). The Company defines
"billable" subscribers as subscribers who remain enrolled beyond completion of
the applicable trial period or who enroll in a money-back guarantee program.
The Company defines "Internet subscribers managed" to include billable Prodigy
Internet subscribers and billable Prodigy Internet de Telmex subsribers but
exclude Prodigy Classic subsribers.

Internet revenues

     Subscription revenues for Prodigy Internet increased $10.9 million, or 57%,
from $19.2 million for the three months ended June 30, 1998 to $30.1 million for
the three months ended June 30, 1999. The number of Prodigy Internet billable
subscribers increased 227,000, or 59%, from 386,000 at June 30, 1998 to 613,000
at June 30, 1999, representing 100% and 77% of Internet subscribers managed
at June 30, 1998 and June 30, 1999, respectively. Prodigy Internet subscribers
accounted for 77% and 93%, respectively, of total network usage during the three
months ended June 30, 1998 and June 30, 1999. Subscription revenues from Prodigy
Classic decreased $7.7 million, or 60%, from $12.7 million in the three months
ended June 30, 1998 to $5.0 million in the three months ended June 30, 1999 as
the number of Prodigy Classic billable subscribers decreased from 251,000 at
June 30, 1998 to 99,000 at June 30, 1999. The Company has announced its
intention to discontinue Prodigy Classic in the fourth quarter of 1999. Total
Internet subscribers managed increased by 410,000 or 106%, from 386,000 at
June 30, 1998 to 796,000 at June 30, 1999. Timed usage revenues decreased $.6
million, or 62%, from $1 million in the three months ended June 30, 1998 to $.4
million in the three months ended June 30, 1999. The decrease in timed usage
revenues associated with Prodigy Classic was offset by an increase in average
revenue per billable subscriber primarily due to the higher-priced plans for
unlimited usage associated with Prodigy Internet.

Other revenues

     Other revenues approximated $2 million in each of the three months ended
June 30, 1998 and 1999. Other revenues decreased in the current period as a
result of the Company's sale and divestiture of its operations in Africa and
China in 1998. This decrease was offset by the commencement in February 1999 of
the management agreement with Telmex under which the Company receives a
percentage of the monthly net revenues from Telmex's Internet subscribers.

     As a result of the foregoing factors, total revenues increased by $3.2
million from $33.9 million in the three months ended June 30, 1998 to $37.1
million in the three months ended June 30, 1999.

Cost of revenues

    Cost of revenues includes network and content expenses. Content expenses
consist of the costs of developing, or obtaining from third parties, content for
inclusion in the Company's service offerings. Cost of revenues decreased from
$24.9 million in the three months ended June 30, 1998 to $24.0 million in the
three months ended June 30, 1999. This decrease was attributable to the
elimination of costs associated with the Company's African Internet operations
which were sold in October 1998. In addition, the Company benefited from its
network outsourcing arrangement with Splitrock by reaching the contractual "cap"
of its monthly network charges in April 1998 and, effective January 1999, by
securing a more favorable rate for a certain category of subscriber. As a
result, network usage costs increased only $.3 million, or 2%, versus the year
earlier period despite an increase of 48% in network usage hours over the same
period resulting from the shift of the subscriber base from timed usage to
unlimited usage plans.

Marketing

     Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. Marketing expense
increased $2.7 million, or 33%, from $8.5 million in the three months ended
June 30, 1998 to $11.2 million in the three months ended June 30, 1999. The
Company increased broadcast and print media advertising in connection with the
launch of the Prodigy Hispanic Internet offering and the continuation of the
"You've Got a Choice" advertising campaign.

    In June 1999, the Company launched a major initiative to stimulate Prodigy
Internet enrollments by agreeing to make a payment to a computer retailer in
exchange for the Retailer enrolling a customer onto Prodigy Internet and
obtaining a signed contractual commitment from the customer to a term
subscription to Prodigy Internet. These payments amount to $100, $250, or $400,
respectively, for a term subscription of one, two or three, years at a monthly
charge of $19.95. The Company has accounted for these payments as deferred costs
and plans to amortize these costs to selling expense over the one, two or
three year term of the underlying subscription contract.

Product development

     Product development expense includes research and development costs and
other product development costs. Product development expense increased from $2.9
million in the three months ended June 30, 1998 to $3.8 million in the three
months ended June 30, 1999. In the 1998 period, product development activities
centered on integration and stabilization of the Splitrock network and
transition to the co-branded Prodigy/Excite content platform for Prodigy
Internet. In the three months ended June 30, 1999, product development
activities centered on the development of the Prodigy Hispanic product,
implementing the billing, provisioning and customer service infrastructure to
support the Company's Business Solutions Group, improving the system
infrastructure supporting the PI de Telmex subscriber base, including Year 2000
remediation efforts, developing a new home page for the Prodigy Service, and in
developing future Prodigy Internet product offerings and service enhancements.

General and administrative

     General and administrative expense increased from $13.1 million in the
three months ended June 30, 1998 to $14.7 million in the three months ended
June 30, 1999. The increase was primarily attributable to increased subscriber
management and billing charges, increased credit card processing fees, and
higher incentive compensation expense, including $.3 million of compensation
expense incurred in connection with employee stock options with exercise prices
deemed to be below fair market value.

Restructuring Reserves

     During the three months ended June 30, 1999, the Company incurred
$.2 million of expenditures related to the 1997 restructuring reserve.
These expenditures relate to contractual obligations and severance
payments identified under the original plans. The remaining reserve consists
primarily of contractual obligations that management expects will be paid in
full by December 31, 2001.

Interest and other income

     Interest income/expense, net improved from a net expense of $.3 million in
the three months ended June 30, 1998 to income of $2.9 million in the six
months ended June 30, 1999. This improvement was due to higher cash levels
following the Company's initial public offering in February 1999. In addition,
during the three months ended June 30, 1999, the Company recognized a gain of
$3.3 million upon sale of an equity investment received as consideration from
the sale of a subsidiary in 1997.

     As a result of the foregoing factors, the Company's operating loss
increased from $15.4 million in the three months ended June 30, 1998 to $16.6
million in the three months ended June 30, 1999 and its net loss decreased from
$15.5 million in the three months ended June 30, 1998 to $11.4 million in the
three months ended June 30, 1999.

Liquidity and Capital Resources

     Since formation, the Company has relied on private sales of equity
securities (totaling $294.7 million through December 31, 1998), borrowings and
an initial public offering in February 1999 (with net proceeds of $156.4
million) to fund its operations. The Company has incurred significant losses
since inception and, at December 31, 1998, had an accumulated deficit of $292.8
million, a working capital deficit of $33.6 million, current liabilities of
$48.5 million, current assets of $14.9 million and negative cash flow from
operations of $67.9 million. For the six months ended June 30, 1998 and
June 30, 1999, the Company incurred negative cash flow from operations of $34.4
million and $18.8 million, respectively.

     In February 1999, the Company sold 11,200,000 shares of Common Stock in its
IPO, including 2,000,000 shares of Common Stock sold to Telmex, for aggregate
net proceeds of $156.4 million.

     In May 1999, the Company entered into an agreement with Cable and Wireless
USA, Inc. to purchase the dial-up Internet access subscriber base of that entity
for a purchase price of approximately $50 million to $75 million in cash subject
to certain post-closing adjustments based on the number of Cable & Wireless
customers who transition to prodigy internet. At the closing, on July 20, 1999,
the Company paid Cable & Wireless USA, Inc. $40.9 million in cash.

     In June 1999, the Company entered into an agreement with a major
electronics retailer (the "Retailer") to make payments to the Retailer in
exchange for the Retailer enrolling a customer onto Prodigy Internet and
obtaining a signed contractual commitment from the customer to a term
subscription to Prodigy Internet of one, two, or three years at a monthly charge
of $19.95. These payments, amounting to $100,$250, or $400, respectively, for a
term subscription of one, two, or three years, will require the Company to seek
significant external financing.

     In August 1998, Carso Global Telecom agreed to provide the Company with a
$35.6 million committed revolving line of credit entitling the Company to
borrow, repay and reborrow amounts in minimum increments of $1.0 million prior
to maturity on December 31, 1999. Advances are due 90 days after borrowing, but
the Company is permitted to roll over advances into new advances at its
election. Advances are uncollateralized and bear interest at the LIBOR rate
plus between one and five percentage points (as negotiated on a case-by-case
basis). As of June 30, 1999, no amounts were outstanding under the revolving
line of credit. Carso Global Telecom is the Company's principal stockholder.

     As a result of the Company's outsourcing arrangements, the Company has
significantly reduced the level of capital expenditures needed in its
operations. The Company's July 1997 network agreement with Splitrock eliminated
the need for the Company to maintain and upgrade its own network. The Company's
portal content agreement with Excite eliminated the need, beginning in April
1998, for internal development of content and Prodigy Internet customization and
other programming projects. The Company's capital expenditures for the year
ended December 31, 1998 were $2.6 million, primarily for the purchase of data
processing equipment. For the three months ended June 30, 1999, the Company's
capital expenditures were $3.2 million, principally for the purchase and
implementation of a new subscriber management system with enhanced customer
care, data mining and marketing program management capabilities, the purchase
and implementation of a new accounting and financial reporting system and the
purchase of new equipment for Prodigy Internet.

     At June 30, 1999, the Company had available cash and cash equivalents of
$105.3 million. In addition, the Company invested $44.3 million in short term
financial instruments. In July 1999, the Company made a payment of 40.9 million
to Cable & Wireless USA, Inc. prusuant to its agreement to purchase the Cable
and Wireless USA, Inc. dial up subsciber base. Also in July 1999, the Company
established a $50 million Letter of Credit with a financial institution to
secure its financial obligations under terms of its contract with a major
computer retailer. This $50 million will be classified as restricted cash in the
third quarter. The Company estimates the total cost of the agreement with the
retailer, and similar agreements with certain personal computer manufacturers,
will cost approximately $125 million through September 1999. The Company is in
the process of arranging financing to fund the cost of these agreements. In
addition, the Company is currently experiencing substantial negative cash flow
each month and expects to continue to experience negative flows into the year
2000. The Company's future financing requirements will depend on a number of
factors, including the Company's operating performance and increases in
operating expenses associated with growth in the Company's business. Based upon
its current operating plan, the Company believes that it will require significnt
external financing, including a possible increse in the credit facility with
Carso Global Telecom, in order to meet existing contractual obligations and
expand its consumer business.

Year 2000 Readiness

     The Year 2000 issue is the result of computer programs being written using
two digits (rather than four) to define the applicable year. Computer programs
that have time-sensitive software may recognize a date using ''00'' as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
normal business activities. The Company maintains various internal computer
systems and equipment and contracts with third-party vendors for the provision
of computerized customer billing, network operation, Prodigy Internet service
content and certain other information technology and other services.

     The Company is currently incurring costs to resolve the potential impact of
the year 2000 on the processing of date-sensitive information by the Company's
internal computer systems and equipment and the computer systems and equipment
of the third-party vendors on which the Company's business relies. During 1998,
the Company established a Year 2000 project office staffed by Company personnel
and assisted by a consulting firm.

     The Company has completed an inventory of substantially all of its internal
systems and programs related to both the delivery of the Prodigy Internet
service and the daily operations of the business. The Company estimates that it
will spend approximately $9.5 million through the end of 1999 to remediate
potential Year 2000 problems with its internal systems and to purchase and
implement a new member management system with enhanced customer care, data
mining and marketing program management capabilities that will replace a system
that is not Year 2000 compliant. Prodigy Classic is not Year 2000 compliant and
the Company intends to discontinue Prodigy Classic in the fourth quarter of
1999. See ''--Certain Factors That May Affect Future Operating Results."

    The Company is developing contingency plans in the event that any critical
service component or business process fails due to a Year 2000 problem. In
addition, the Company has successfully completed "end-to-end" testing of its
network provider and its consumer billing system. The majority of the
remediation efforts have been completed as to mission critical systems with
schedules in place to complete remaining remediation related testing during the
fourth quarter of 1999.

    There can be no assurance that the Company will be able to address, in a
timely fashion, all potential Year 2000 problems, or that the systems of the
third-party vendors upon which the Company's business relies (and the
maintenance and operation of which are not within the control of the Company)
will be Year 2000 compliant or will become Year 2000 compliant in a timely
manner. Any Year 2000 problems could impact the provision of products or
services to the Company's customers and could subject the Company to the risk of
litigation, lost revenues and loss of current or future customers.

Six Months Ended June 30, 1998 Compared To Six Months Ended June 30, 1999

Internet revenues

    Subscription revenues for Prodigy Internet increased $23.8 million, or 70%,
from $34.2 million for the six months ended June 30, 1998 to $58.0 million for
the six months ended June 30, 1999. The number of Prodigy Internet subscribers
increased 227,000, or 59%, from 386,000 at June 30, 1998 to 613,000 at June 30,
1999, representing 100% and 77% of Internet subscribers managed by Prodigy at
June 30, 1998 and June 30, 1999, respectively. Prodigy Internet subscribers
accounted for 74% and 92%, respectively, of total network usage during the
six months ended June 30, 1998 and June 30, 1999. Subscription revenues from
Prodigy Classic decreased $17.2 million, or 59%, from $28.9 million in the six
months ended June 30, 1998 to $11.7 million in the six months ended June 30,
1999 as the number of Prodigy Classic billable subscribers decreased from
251,000 at June 30, 1998 to 99,000 at June 30, 1999. The Company has announced
its intention to discontinue Prodigy Classic in the fourth quarter of 1999.
Internet subscribers managed by the Company increased by 410,000 or 106% from
386,000 at June 30, 1998 to 796,000 at June 30, 1999. Timed usage revenues
decreased $1.5 million, or 58%, from $2.6 million in the six months ended June
30, 1998 to $1.1 million in the six months ended June 30, 1999. The decrease in
timed usage revenues associated with Prodigy Classic was offset by an increase
in average revenue per billable subscriber primarily due to the higher-priced
plans for unlimited usage associated with Prodigy Internet.

Other revenues

    Other revenues decreased $.9 million, or 21%, from $4.2 million for the six
months ended June 30, 1998 to $3.3 million for the six months ended June 30,
1998. These results reflect the loss of revenues from the Company's sale and
divestiture of its operations in Africa and China in 1998. This decrease was
offset, in part, by the commencement in February 1999 of the management
agreement with Telmex under which the Company receives a percentage of the
monthly net reveneues from subscribers to the Telmex Internet service.

    As a result of the foregoing factors, total revenues increased by 8% from
$67.3 million in the six months ended June 30, 1998 to $73.0 million in the six
months ended June 30, 1999.

Cost of revenues

    Cost of revenues includes network and content expenses. Content expenses
consist of the costs of developing, or obtaining from third parties, content for
inclusion in the Company's service offerings. Cost of revenues decreased $4.0
million, or 8%, from $51.5 million in the six months ended June 30, 1998 to
$47.5 million in the six months ended June 30, 1999. This decrease was primarily
attributable to the Company's content outsourcing agreement with Excite, which
substantially eliminated content expense associated with Prodigy Internet
beginning April 1998 and to sale of the Company's African Internet operations in
October 1998. In addition, the Company benefited from its network outsourcing
arrangement with Splitrock by reaching the contractual "cap" of its monthly
network charges in April 1998 and, effective January 1999, by securing a more
favorable rate for a certain category of subscriber. As a result, network usage
costs increased only $.4 million, or 1%, versus the year earlier period despite
an increase of 57% in network usage hours over the same period due to the shift
of the subscriber base from timed usage to unlimited usage plans.

Marketing

     Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. Marketing expense
increased $8.3 million, or 54%, from $15.5 million in the six months ended June
30, 1998 to $23.8 million in the six months ended June 30, 1999. During the
current period, the Company increased broadcast and print media advertising in
connection with the launch of the Prodigy Hispanic Internet offering and the
continuation of the "There Is A Choice" advertising campaign.

    In June 1999, the Company launched a major initiative to stimulate
Prodigy Internet enrollments by agreeing to make a payment to a computer
retailer (the "Retailer") in exchange for the Retailer enrolling a customer onto
Prodigy Internet and obtaining a signed contractual commitment from the customer
to a term subscription to Prodigy Internet of one, two, or three years at a
monthly charge of $19.95. These payments amount to $100, $250, or $400,
respectively, for a one-year, two-year, or three year subscription to Prodigy
Internet. The Company has accounted for these payments as deferred subscriber
acquisition costs and plans to amortize these costs to selling expense over the
one, two or three year term of the underlying subscription contract.

Product development

     Product development expense includes research and development costs and
other product development costs. Product development expense increased $1.4
million, or 22%, from $6.3 million in the six months ended June 30, 1998 to
$7.7 million in the six months ended June 30, 1999. In the 1998 period, product
development activities centered on integration and stabilization of the
Splitrock network and transition to the co-branded Prodigy/Excite content
platform for Prodigy Internet. In the six months ended June 30, 1999, product
development activities centered on the development of the Prodigy Hispanic
product, implementing the billing, provisioning and customer service
infrastructure to support the Company's Business Solutions Group, improving the
systems infrastructure supporting the PI de Telmex subscriber base, including
Year 2000 remediation efforts, developing a new home page for the Prodigy
Service, and in developing future Prodigy Internet product offerings and service
enhancements.

General and administrative

    General and administrative expense increased $2.9 million, or 11%, from
$26.3 million in the six months ended June 30, 1998 to $29.2 million in the six
months ended June 30, 1999. The increase was primarily attributable to increased
subscriber management and billing charges, increased credit card processing
fees, and higher incentive compensation expense, including $.6 million of
compensation expense incurred in connection with employee stock options with
exercise prices deemed to be deemed fair market value.

Restructuring Reserves

    During the six months ended June 30, 1999, the Company incurred $.4 million
of expenditures related to the 1997 restructuring reserve. These expenditures
relate to contractual obligations and severance payments identified under the
original plans. The remaining reserve consists primarily of contractual
obligations that Management expects to be paid in full by December 31, 2001.

Interest and Other Income

    Interest income/expense, net improved from a net expense of $.3 million in
the six months ended June 30, 1998 to income of $2.9 million in the six months
ended June 30, 1999. This improvement was due to higher cash levels following
the Company's initial public offering in February 1999. During the six months
ended June 30, 1999, the Company recognized a gain of $3.3 million upon sale of
an equity investment received as consideration from the sale of a subsidiary in
1997. In addition, the Company paid a network $750 in full settlement of its 8
1/4% convertible note in the principal amount of $2,000, and all accrued
interest.

    As a result of the foregoing factors, the Company's operating loss increased
from $32.2 million in the six months ended June 30, 1998 to $35.1 million in the
six months ended June 30, 1999 and its net loss decreased from $32.2 million in
the six months ended June 30, 1998 to $27.1 million in the six months ended June
30, 1999.

Liquidity and Capital Resources

    Since formation, the Company has relied on private sales of equity
securities (totaling $294.7 million through December 31, 1998), borrowings and
an initial public offering in February 1999 (with net proceeds of $156.4
million) to fund its operations. The Company has incurred significant losses
since inception and, at December 31, 1998, had an accumulated deficit of $292.8
million, a working capital deficit of $ 33.6 million, current liabilities of
$48.5 million, current assets of $14.9 million and negative cash flow from
operations of $67.9 million. For the six months ended June 30, 1998 and June 30,
1999, the Company incurred negative cash flow from operations of $34.4 million
and $18.8 million, respectively.

    In February 1999, the Company sold 11,200,000 shares of Common Stock in its
IPO, including 2,000,000 shares of Common Stock sold to Telmex, for aggregate
net proceeds of $156.4 million.

    In May 1999, the Company entered into an agreement with Cable and Wireless
to purchase the dial-up Internet access subscriber base of that entity for a
purchase price approximately $50 million to $75 million in cash, subject to
post-closing adjustments based on the number of Cable & Wireless USA, Inc.
customers who transition to Prodigy Internet.

    In June 1999, the Company entered into an agreement with a major electronics
retailer to subsize purchase of PC equipment by their customers in exchange for
a contractual commitment to subscribe Prodigy Internet. The subsidies, amounting
to $100, $250 or $400, respectively, for a one-year, two-year, or three-year
service contract with Prodigy Internet will require significant external sources
of financing. The Company is currently in the process of arranging this
financing.

    In August 1998, Carso Global Telecom agreed to provide the Company with a
$35.6 million committed revolving line of credit entitling the Company to
borrow, repay and reborrow amounts in minimum increments of $1.0 million prior
to maturity on December 31, 1999. Advances are due 90 days after borrowing, but
the Company is permitted to roll over advances into new advances at its
election. Advances are uncollateralized and bear interest at the LIBOR rate plus
between one and five percentage points (as negotiated on a case-by-case basis).
As of June 30, 1999, no amounts were outstanding under the revolving line of
credit. Carso Global Telecom is the Company's principal stockholder.

    As a result of the Company's outsourcing arrangements, the Company has
significantly reduced the level of capital expenditures needed in its
operations. The Company's July 1997 network agreement with Splitrock eliminated
the need for the Company to maintain and upgrade its own network. The Company's
portal content agreement with Excite eliminated the need, beginning in April
1998, for internal development of content and Prodigy Internet customization and
other programming projects. The Company's capital expenditures for the year
ended December 31, 1998 were $2.6 million, primarily for the purchase of data
processing equipment. For the six months ended June 30, 1999, the Company's
capital expenditures were $7.4 million, principally for the purchase and
implementation of a new subscriber management system with enhanced customer
care, date mining nd marketing program management capabilities, the purchase and
implementation of new accounting and financial reporting system and the purchase
of new equipment for Prodigy Internet.

    At June 30, 1999, the Company had available cash and cash equivalents of
$105.3 million. In addition, the Company invested $44.3 million in short-term
financial instruments.

    In July 1999, the Company made a payment of $40.9 million to Cable &
Wireless USA, Inc. pursuant to its agreement to purchase the Cable and Wireless
USA, Inc. dial up subscriber base. Also in July 1999, the Company established a
fully collateralized $50 million Letter of Credit with a financial institution
to secure its financial obligations under terms of its contract with a major
computer retailer. This $50 million will be classified as restricted cash in the
third quarter. The Company estimates the total cost of the agreement with the
retailer, and similar agreements with certain personal computer manufacturers,
will cost approximately $125 million through September 1999. The Company is in
the process of arranging financing to fund the cost of these agreements. In
addition, the Company is currently experiencing substantial negative cash flow
each month and expects to continue to experience negative cash flows into the
year 2000. The Company's future financing requirements will depend on a number
of factors, including the Company's operating performance and increases in
operating expenses associated with growth in the Company's business. Based upon
its current operating plan, the Company believes that it will require
significant external financing, including a possible increase in the credit
facility with Carso Global Telecom, in order to meet existing contractual
obligations and expand its consumer business.






                                       8

<PAGE>


Recent Pronouncements

     During the first quarter of 1999 the company adopted the American Institute
of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 98-1
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". All internal software is recorded by the Company in accordance
with the above mentioned pronouncement and is depreciated over three years
beginning on the date the software is put in use.

     In January 1999, the Company adopted SOP 98-5 "Reporting on the Costs of
Start-up Activities." SOP 98-5 provides guidance on the financial reporting of
start-up costs and organization costs.  It requires the costs of start-up
activities and organization costs to be expensed as incurred.  As the Company
has expensed these costs historically, the adoption of this standard did not
have a significant impact on the Company's results of operations, financial
position or cash flows.

Certain Factors That May Affect Future Operating Results

     The cautionary statements set forth below and elsewhere in this Report, as
well as in the Company's latest Annual Report on Form 10-K, identify important
risks and uncertainties that could materially adversely affect our business,
financial condition, results of operations or prospects.

     Since our inception, we have incurred significant losses. There can be no
assurance that we will achieve or sustain profitability.

     As a result of our operating losses, negative cash flow and contractual
obligations to a major computer retailer and certain personal computer
manufacturer as a result of the Company's initiative to expand its consumer
business, we expect to require significant external financing by October 1,
1999. We can give no assurance that such financing will be available to us on
favorable terms and in a timely manner, or at all. If we are not able to obtain
financing as required, we may be required to curtial or elimate certain planned
expenditures, and we may be unable to meet certain payment obligations. This
would have a material adverse effect on us.

     Our industry is intensely competitive and includes many significant
participants, including:  ISPs, proprietary online service providers, major
international telecommunications companies, Internet-search services and various
other telecommunications companies.   We also face competition from companies
that provide broadband connections to households, including:  local and long-
distance telephone companies, cable television companies, and electric utility
companies. Many of our current and future competitors have substantially greater
financial, marketing and technical resources than us. There can be no assurance
we will compete effectively. The Telecommunications Act and strategic alliances
or consolidation among ISPs may result in additional competitive pressures.

     Subscriber cancellations may materially adversely affect the results of
operations of ISPs, including Prodigy. Customer acquisition expenses and the
administrative expenses of enrolling and assisting new subscribers are
substantial. The failure to attract and retain subscribers to our services, or
an increase in, or a failure to slow, the rate of subscriber cancellations,
would have a material adverse effect on us.

     The Internet services industry is highly fragmented, consisting of more
than 5,000 ISPs in the United States, and is expected to undergo substantial
consolidation over the next few years. Any failure to expand our business
through acquisitions may materially adversely affect our competitive position.
Any acquisitions that we make may involve risks, including the successful
integration and management of acquired operations and personnel. The integration
of acquired businesses may also divert management's attention from other
business matters. This could materially adversely affect our business.

     Our subscriber traffic is carried on a network owned and operated by
Splitrock. The failure by Splitrock for any reason to provide network services
as required, or any significant

                                       9
<PAGE>

disruption in such services, whether for technical, operational, financial or
other reasons, would have a material adverse effect on us.

     The security measures employed by Splitrock and us cannot assure complete
protection from security problems. The occurrence of these problems may result
in claims against us and could adversely affect us or our ability to attract and
retain customers. In addition, the occurrence of a natural disaster or other
unanticipated technical or other problems in Splitrock's network or our data
hosting center, or the failure of telecommunications providers to provide
required data communications capacity for any reason, could cause interruptions
in our services.

     In addition to our network arrangements with Splitrock, we have outsourced
our content to Excite and aspects of our customer service and billing functions
to several providers. We also rely on local telephone and other companies to
provide data communications capacity via local telecommunications lines and
leased long-distance lines. The failure of these providers to provide services
as required, or any significant disruption of or deterioration in services,
would have a material adverse effect on us.

     A majority of our Prodigy Internet enrollments arise from bundling
arrangements with PC manufacturers and our relationship with Microsoft. The loss
of relationships with Packard Bell/NEC or Microsoft or any significant reduction
in enrollments from these sales channels would have a material adverse effect on
us.

     We intend to discontinue Prodigy Classic in the fourth quarter of 1999.
Prodigy Classic has been a significant source of revenue and subscribers to
Prodigy Internet. The termination of Prodigy Classic could adversely affect our
results of operations.

     Our industry is characterized by rapid technological change resulting in
dynamic customer demands and frequent new product and service introductions. As
a result, markets can change rapidly. Our future results will depend in part on
our ability to make timely and cost-effective enhancements and additions to our
services that achieve market acceptance.

     Our ability to compete successfully is dependent upon the continued
compatibility of our services with the technologies of others. Although we
intend to support emerging standards in the market for Internet access, we can
give no assurance that our products will conform to new standards in a timely
fashion.

     Our business strategy includes the introduction of new services and entry
into new markets. We can give no assurance that we will be successful in
offering new services and entering new markets as planned or that any new
services will achieve market acceptance.

     Our future financing requirements will depend on many factors, including
our operating performance and increases in operating expenses associated with
growth in our business. Adequate additional financing may not be available on
acceptable terms when needed.

     We experience quarterly fluctuations in our operating results due to many
factors, including:  the seasonality of our business, changes in the level of
consumer spending during

                                       10
<PAGE>

business cycles, the timing of introduction of new and enhanced services by us,
pricing changes, competitive factors and other factors discussed herein. We
historically have experienced seasonality in our business. Accordingly, we
believe that quarter-to-quarter comparisons of operating results may not be
meaningful or indicative of future results.

  Our ability to exploit the market for our products and services and increase
our subscriber base requires an effective planning and management process. Our
ability to plan and manage effectively will require us to continue to implement
and improve our operational, financial and management information systems. We
will also be required to attract and retain skilled personnel. Competition for
key personnel is intense, and there can be no assurance that we will be
successful in attracting and retaining necessary personnel.

     Changes in the regulatory environment relating to the telecommunications
and media industry could adversely affect us.

     See also "-- Year 2000 Readiness."

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     Not Applicable.

                                       11
<PAGE>

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

On April 7, 1999, Prodigy was served with a Summons and Complaint by two former
executives of the Company, Edward A. Bennett and William J. Lansing, in the
Supreme Court of the State of New York, County of New York, alleging breach of
separate contacts between the Company and each of the Plaintiffs. Plaintiffs
assert that their options to acquire 206,254 and 71,875 shares of Common Stock
of Prodigy at $12.00 per share, respectively, are fully vested and have not
expired, and when they tried to exercise their options, Prodigy refused to
acknowledge their exercise on the grounds that the options had expired.
Plaintiffs are claiming damages in an amount to be determined at trail.

In May 1999, Prodigy filed a Motion to Dismiss this litigation in the Supreme
Court of the State of New York. Oral arguments took place on July 21, 1999. No
decision has been rendered as of the date hereof.

The Company denies the validity of the claim and intends to defend itself
vigorously.

Item 2.  Changes in Securities and Use of Proceeds

USE OF PROCEEDS

     The effective date of the Company's first registration statement, filed on
Form S-1 under the Securities Act of 1933 (No. 333-64233), relating to the
Company's initial public offering of its Common Stock and simultaneous sale
shares to a stockholder of the Company and registering 11,200,000 shares, was
February 10, 1999.

     The following table sets forth the underwriting discounts and commissions
and other expenses incurred by the Company from February 10, 1999 through June
30, 1999 in connection with the issuance and distribution of such securities.
All amounts shown are estimates.

<TABLE>
<S>                                       <C>
Underwriting discounts and commissions     $  9,315,000
Nasdaq National Market listing fee              142,000
Blue Sky fees and expenses                       64,000

</TABLE>

                                       12
<PAGE>

<TABLE>
<S>                                       <C>
Transfer Agent and Registrar fees                11,000
Accounting fees and expenses                    647,000
Legal fees and expenses                         565,000
Printing and mailing expenses                   379,000
Miscellaneous                                   522,000
                                           ------------
  Total                                    $ 11,645,000  ($2,330,000,
                                                         excluding
                                                         underwriting
                                                         discounts
                                                         and commissions)
                                                         ================
Net Proceeds                               $156,355,000
                                           ============
</TABLE>

     None of such expenses involved direct or indirect payments to directors or
officers of the Company or their associates, 10% stockholders of the Company, or
affiliates of the Company.

          From February 10, 1999 to June 30, 1999, the Company used
approximately $ 7.0 million of the proceeds from the initial public offering for
advertising campaigns, implementation of new customer service software, and for
general corporate purposes. The remaining proceeds from the IPO were invested in
a money market fund and other, short-term financial instruments.

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

          None.

                                       13
<PAGE>

Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits.

     The exhibits listed on the Exhibit Index are filed herewith.

(b)  Reports on Form 8-K

     (i)  On June 3, 1999, the Company filed a Form 8-K reporting, under Item 5,
that on May 26, 1999, the Company entered into a definitive agreement to acquire
Cable & Wireless USA, Inc.'s consumer, business and Campus dial-up subscribers.

     (ii) On August 11, 1999, the Company filed a Form 8-K reporting, under Item
2, that on July 20, 1999 the Company acquired certain of the consumer, business
and campus dial-up subscribers of Cable & Wireless USA, Inc. pursuant to an
Asset Purchase Agreement, dated as May 26, 1999, by and among Cable & Wireless
USA, Inc., Cable & Wireless USA Internet, L.L.C. and the Company. At the
closing, the Company paid Cable & Wireless USA, Inc., $40.9 million in cash,
which amount is subject to certain post-closing adjustments based on the number
of Cable & Wireless customers who transition to Prodigy's service. Prodigy
utilized cash proceeds raised in its initial public offering to pay for the
acquired assets.


                                       14
<PAGE>

                                   SIGNATURES


  Pursuant to the requirements of the securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



  PRODIGY COMMUNICATIONS
  CORPORATION


Date:  August 16, 1999     /s/ David R. Henkel
                           -------------------------------
                           David R. Henkel
                           Executive Vice President, Finance,
                           and Chief Financial Officer
                           (Principal Financial and Accounting
                           Officer)

                                       15