<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE QUARTER ENDED September 30, 1999

                        COMMISSION FILE NUMBER 000-21043

                         PACIFIC GATEWAY EXCHANGE, INC.
                         ------------------------------
             (Exact Name of Registrant as Specified in its Charter)


Delaware                                    94-3134065

(State of Other Jurisdiction                (IRS Employer
of Incorporation or Organization)           Identification Number)


500 Airport Blvd, Suite 340, Burlingame, California, 94010

(Address of Principal Executive Offices)             (Zip Code)

Registrant's Telephone Number, Including Area Code (650) 375 6700
                                                   --------------

                                      None
                                      ----
                        (Former Name, Former Address and
                Former Fiscal Year if Changed Since Last Report)

     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
                                        ---      ---

At November 5, 1999, the number of the registrant's Common Shares of $.0001 par
value outstanding was 19,488,217.
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.

                               TABLE OF CONTENTS
                               -----------------



<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
<S>                                                                                     <C>
Part I - FINANCIAL INFORMATION

Item 1:  Financial Statements

         Consolidated condensed balance sheets
         As of September 30, 1999 (Unaudited) and December 31, 1998                     1

         Unaudited consolidated condensed statements of operations
         for the three and nine months ended September 30, 1999 and 1998                2

         Unaudited consolidated condensed statements of cash flows
         for the nine months ended September 30, 1999 and 1998                          3

         Notes to unaudited consolidated condensed financial statements                 4

Item 2:  Management's discussion and analysis
         of financial condition and results
         of operations                                                                  9


Part II - OTHER INFORMATION

Item 1:  Legal Proceedings                                                              18

Item 2:  Changes in Securities and Use of Proceeds                                      18

Item 3:  Defaults upon Senior Securities                                                18

Item 4:  Submission of matters to a vote of security holders                            18

Item 5:  Other information                                                              19

Item 6:  Exhibits and reports on Form 8-K                                               19
</TABLE>
<PAGE>

Item 1.  Financial Statements

                        PACIFIC GATEWAY EXCHANGE, INC.
                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                (in thousands)
<TABLE>
<CAPTION>

                                                                      September 30,    December 31,
                                                                         1999              1998
                                                                    ---------------   ---------------
                              ASSETS                                  (Unaudited)
Current Assets:
<S>                                                                 <C>               <C>
Cash and cash equivalents                                                 $ 15,039          $ 30,041
Accounts receivable, net of allowance for doubtful accounts
     of $6,970 in 1999 and $4,312 in 1998                                  144,585            87,725
Prepaid expenses                                                             1,771             1,244
Income taxes receivable                                                          -             1,358
Deferred income tax                                                          2,283             2,207
Other current assets                                                         2,595             1,408
                                                                    ---------------   ---------------
     Total current assets                                                  166,273           123,983
Property and equipment:
Fiber optic cables                                                          42,761            34,663
Long distance communications equipment                                      70,599            48,710
Computers and office equipment                                              17,678             9,352
Leasehold improvements                                                       4,596             2,004
Construction in progress                                                    18,281            13,587
Cable construction in progress                                              23,270            12,066
                                                                    ---------------   ---------------
                                                                           177,185           120,382
Less: accumulated depreciation                                              27,142            17,335
                                                                    ---------------   ---------------
     Total property and equipment, net                                     150,043           103,047
Goodwill                                                                     8,247               523
Deposits and other assets                                                   15,738             8,084
                                                                    ---------------   ---------------
     Total assets                                                        $ 340,301         $ 235,637
                                                                    ===============   ===============


                                LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                                         $ 168,984         $ 118,303
Accrued liabilities                                                          6,906             4,193
Income taxes payable                                                         5,835                 -
Other liabilities                                                              882             1,740
                                                                    ---------------   ---------------
     Total current liabilities                                             182,607           124,236
Line of credit                                                              26,800             8,700
Other non-current liabilities                                               13,928             2,062
                                                                    ---------------   ---------------
     Total liabilities                                                     223,335           134,998
                                                                    ---------------   ---------------

Stockholders' Equity:
Common stock                                                                     2                 2
Additional paid in capital                                                  74,422            65,431
Deferred compensation-restricted stock                                      (6,861)           (4,618)
Foreign currency translation                                                  (636)               34
Retained earnings                                                           50,439            40,190
Common stock held in treasury, at cost                                        (400)             (400)
                                                                    ---------------   ---------------
     Total stockholders' equity                                            116,966           100,639
                                                                    ---------------   ---------------
     Total liabilities and stockholders' equity                          $ 340,301         $ 235,637
                                                                    ===============   ===============
</TABLE>

     See accompanying Notes to Consolidated Condensed Financial Statements

                                       1
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                  (in thousands, except net income per share)
<TABLE>
<CAPTION>

                                                                 Three Months                       Nine Months
                                                             Ended September 30,                Ended September 30,
                                                             -------------------                -------------------
                                                             1999            1998                1999          1998
                                                             ----            ----                ----          ----
                                                                 (Unaudited)                        (Unaudited)

 <S>                                                        <C>             <C>
 Revenues                                                   $ 170,061       $ 124,853           $ 450,176     $ 339,877
 Cost of services and capacity sold                           144,773         104,644             387,641       286,836
                                                            ---------       ---------           ---------     ---------
      Gross profit                                             25,288          20,209              62,535        53,041
 Selling, general, and administrative expenses                 16,766          11,612              38,385        26,464
 Depreciation and amortization                                  3,703           2,209              10,089         6,318
                                                            ---------       ---------           ---------     ---------
      Total operating expenses                                 20,469          13,821              48,474        32,782
                                                            ---------       ---------           ---------     ---------
      Operating income                                          4,819           6,388              14,061        20,259
 Interest income, net                                            (158)           (532)               (623)       (1,701)
 Other income, net                                               (299)         (1,712)             (1,045)       (1,118)
                                                            ---------       ---------           ---------     ---------
      Income before income taxes                                5,276           8,632              15,729        23,078
 Provision for income taxes                                     1,820           2,980               5,480         8,165
                                                            ---------       ---------           ---------     ---------
      Net income                                            $   3,456       $   5,652           $  10,249     $  14,913
                                                            =========       =========           =========     =========

      Net income per share - basic                             $ 0.18          $ 0.30           $    0.53     $    0.78
                                                            =========       =========           =========     =========

      Net income per share - diluted                           $ 0.18          $ 0.29           $    0.52     $    0.75
                                                            =========       =========           =========     =========
      Weighted-average number of common shares
        outstanding - basic                                    19,348          19,065              19,213        19,056
                                                            =========       =========           =========     =========

      Weighted-average number of common shares
        outstanding - diluted                                  19,670          19,752              19,825        19,924
                                                            =========       =========           =========     =========
</TABLE>



    See accompanying Notes to Consolidated Condensed Financial Statements.

                                       2
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                       Nine Months
                                                                  Ended September 30,
                                                                 -----------------------
                                                                  1999            1998
                                                                 -------         -------
                                                                       (Unaudited)
Operating Activities:
<S>                                                               <C>             <C>
Net income                                                        $ 10,249        $ 14,913
Adjustments to net income:
     Depreciation and amortization                                  10,089           6,318
     Stock compensation expense                                        725             456
     Bad debt provision                                              2,716             620
     Equity in earnings of affiliated companies, net                (1,322)         (1,311)
     Distributions received from equity investees                      966               -
     Changes in operating assets and liabilities:
        Accounts receivable                                        (58,319)        (24,526)
        Prepaid expenses                                              (451)           (929)
        Income taxes receivable                                      1,358               -
        Deferred income tax                                            (76)              -
        Other current assets                                        (1,187)              -
        Deposits and other assets                                   (2,612)           (387)
        Accounts payable                                            49,410          28,607
        Accrued liabilities                                          2,713             936
        Income taxes payable (recoverable)                           5,835          (3,745)
        Other liabilities                                            4,838             723
                                                                  --------        --------
     Net cash provided by operating activities                      24,932          21,675
                                                                  --------        --------

Investing Activities:
     Purchase of property and equipment                            (50,573)        (30,924)
     Investments in subsidiaries and affiliates                     (8,734)         (3,314)
                                                                  --------        --------
     Net cash used in investing activities                         (59,307)        (34,238)
                                                                  --------        --------

Financing Activities:
     Borrowings on revolving line of credit                         18,100               -
     Exercise of stock options                                       1,273             491
     Other                                                               -             (57)
                                                                  --------        --------
     Net cash provided by financing activities                      19,373             434
                                                                  --------        --------

Net decrease in cash and cash equivalents                          (15,002)        (12,129)
Cash and cash equivalents at beginning of the period                30,041          43,850
                                                                  --------        --------
Cash and cash equivalents at end of the period                    $ 15,039        $ 31,721
                                                                  ========        ========


Supplemental data:
Common stock issued to investee                                    $ 4,750         $ 1,800
Costs incurred for cable acquisition                               $ 6,170         $     -
Interest paid                                                      $   993         $     -

</TABLE>
    See accompanying Notes to Consolidated Condensed Financial Statements.

                                       3
<PAGE>

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                  (UNAUDITED)


(1)  GENERAL
------------

     The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.  In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) that are necessary to present fairly the financial
position, results of operations, and cash flows for the interim periods.  These
financial statements should be read in conjunction with the annual report on
Form 10-K of Pacific Gateway Exchange, Inc. (the "Company" or "Pacific Gateway")
for the year ended December 31, 1998.  The results for the three and nine months
ended September 30, 1999, are not necessarily indicative of the results that may
be expected for future periods.

     Certain prior-year amounts have been reclassified to conform to the 1999
financial statement presentation.


(2)  SIGNIFICANT ACCOUNTING STANDARDS
-------------------------------------

     Effective June 30, 1999, the Financial Accounting Standards Board,
sometimes called "FASB", issued FASB Interpretation No. 43, "Real Estate Sales",
sometimes called "FIN 43", which affirms that sales of "integral equipment" be
accounted for in accordance with real estate accounting rules as previously set
forth in FASB No. 66. The Company believes that the application of FIN 43 is
likely to result in the classification of undersea and land-based fiber optic
cables and related equipment as "integral equipment" as defined in FIN 43. This
change in the accounting for indefeasible rights to use, sometimes called
"IRUs", fiber optic capacity would not change the timing or amount of the cash
proceeds or the network assets that the Company expects to receive under the
commitments that the Company has made to sell or lease bandwidth capacity. It
would, however, require the Company to recognize the revenue from some of its
agreements as operating leases over the life of the agreement as opposed to the
industry practice. Prior to the adoption of FIN 43, revenues were recognized
during the period in which the Company provided access to the capacity. As a
result, this change in accounting treatment would reduce the revenues and income
that the Company would recognize in the earlier years of the agreements; the
Company would recognize revenues over the life of the agreements, regardless of
when it receives cash or delivers capacity.

     The FASB has recently issued Statement of Financial Accounting Standards
No.137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133 ("SFAS 133")" ("SFAS 137"),
which amended SFAS 133, to be effective for periods beginning after June 15,
2000.  Management does not expect the adoption of SFAS 133 to have a material
impact on the Company's financial position or results of operations.


(3)  CABLE EXCHANGES AND SALES
------------------------------

     In April 1999, the Company agreed to exchange, in a non-monetary
transaction, capacity on its Trans-Atlantic cable network for certain U.S.
domestic fiber optic cables owned by Williams Communications Group, Inc.  The
Company took delivery of a portion of the capacity to be received (the
"Delivered Capacity") in the third quarter.  The value applied to the capacity
was $6.9 million.  In accordance with Accounting Principles Board Opinion No. 29
"Non Monetary Transactions" ("APB No. 29"), no gain has been recognized on this
transaction.

     In the second quarter, the Company entered into third party agreements to
provide 20 year IRUs to 10.7% of the Delivered Capacity. The Company recorded
these transactions as sales type leases and recognized $6.4 million in revenue
related to these transactions during the three- and nine-month periods ended
September 30, 1999. As discussed in Note 2, "Significant Accounting Standards",
it is likely that future sales or leases of bandwidth capacity will be accounted
for in accordance with FIN 43.

                                       4
<PAGE>

(4)  EARNINGS PER SHARE
-----------------------

<TABLE>
<CAPTION>
                                                                                            Per
                                                                                           Share
(in thousands, except per share amounts)                 Income           Shares           Amount
                                                      ------------     ------------     ------------
<S>                                                     <C>              <C>              <C>
Three Months Ended September 30, 1999
Basic EPS                                                  $ 3,456           19,348           $ 0.18
Effect of dilutive stock options and restricted stock            -              322                -
                                                      ------------     ------------     ------------
Diluted EPS                                                $ 3,456           19,670           $ 0.18
                                                      ============     ============     ============

Three Months Ended September 30, 1998
Basic EPS                                                  $ 5,652           19,065           $ 0.30
Effect of dilutive stock options and restricted stock            -              687            (0.01)
                                                      ------------     ------------     ------------
Diluted EPS                                                $ 5,652           19,752           $ 0.29
                                                      ============     ============     ============

Nine Months Ended September 30, 1999
Basic EPS                                                  $10,249           19,213           $ 0.53
Effect of dilutive stock options and restricted stock            -              612            (0.01)
                                                      ------------     ------------     ------------
Diluted EPS                                                $10,249           19,825           $ 0.52
                                                      ============     ============     ============

Nine Months Ended September 30, 1998
Basic EPS                                                  $14,913           19,056           $ 0.78
Effect of dilutive stock options and restricted stock            -              868            (0.03)
                                                      ------------     ------------     ------------
Diluted EPS                                                $14,913           19,924           $ 0.75
                                                      ============     ============     ============
</TABLE>


(5)  COMPREHENSIVE INCOME
-------------------------

     Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources.  Comprehensive income includes foreign currency
translation adjustments, which are excluded from net income.  In accordance with
the adoption of SFAS No. 130, total comprehensive income was $4.3 million and
$9.6 million for the three and nine months ended September 30, 1999,
respectively.  Comprehensive income included foreign currency translation gains
and losses.

                                       5
<PAGE>

(6)  ACQUISITIONS AND INVESTMENTS
---------------------------------

     In September 1999, the Company acquired Onyx Internet, Ltd. for $2.4
million in cash.  Onyx Internet serves approximately three thousand small to
medium sized business and residential customers throughout England and Scotland.
The Company acquired Onyx to expand its presence in the European Internet market
and extend its Internet product offerings.  Under purchase accounting, the
excess of the aggregate purchase price over the net assets acquired resulted in
total intangible assets and goodwill of $2.1 million, which will be amortized
over periods ranging from two to 10 years.

     In June 1999, the Company acquired the retail customers and assets of Robo
Tel, Inc. for $6.6 million, consisting of $1.85 million in cash and $4.75
million in the Company's common stock.  The customer base of over 28,000 is
mainly Chinese and Vietnamese residential and small business customers based in
the United States.  There were $1.3 million of accounts receivable and $0.6
million of accounts payable; under purchase accounting, the excess of the
aggregate purchase price over the net assets acquired resulted in total goodwill
of $5.9 million, which will be amortized over 10 years.


(7)  SEGMENT INFORMATION
------------------------

     The Company previously reported the business segments of wholesale,
offshore, and retail.  As a result of capital investment activities into
diversified business segments, management of the Company now views the results
of operations for wholesale, offshore, and retail as one segment, referred to as
"Telecommunications".  The Company has also introduced new reporting segments in
line with its businesses diversification. These are bandwidth services and
Internet services. Bandwidth services represents the Company's interests in high
capacity fiber optic networks. Internet services represents the Company's
acquisition of Onyx Internet during the third quarter and its increased focus on
the provision of services to the Internet industry.

     Telecommunication services includes U.S. and offshore wholesale and retail
services.  U.S. wholesale provides international telecommunications services to:
(1) U.S.-based carriers that originate international traffic, but do not have
operating agreements with foreign carriers; (2) existing international carriers
who terminate their overflow telecommunications traffic on its system; and (3)
customers with smaller traffic volumes.  Revenues from the Company's offshore
wholesale operations is generated from country-specific, usage-sensitive rates
charged to the Company's carrier customers and from traffic terminated in its
international switching facilities.  The Company operates switching facilities
in the United Kingdom, Russia, Australia, Japan, and New Zealand.  The Company
provides retail international long distance services to the Filipino, Japanese,
Chinese, Vietnamese, Russian, Korean, and Romanian communities in the United
States.

     The Company has begun to sell excess bandwidth capacity on its global
network. As discussed in Note 2, "Significant Accounting Standards", it is
likely that future sales or leases of bandwidth capacity will be accounted for
in accordance with FIN 43. The Company also exchanged bandwidth capacity for
additional network facilities, which it will record as fixed assets.

     Lastly, the Company began generating Internet service revenues, including
connectivity revenues, in the third quarter of 1999.

     Corporate and other includes cash, equity investments, and other
miscellaneous current and non-current assets.  These assets are not allocated to
the three operating segments.

                                       6
<PAGE>

(7)  SEGMENT INFORMATION (Continued)
------------------------------------

     The results of operations for the Company's operating segments for the
three and nine months ended September 30, 1999, and 1998, were:

<TABLE>
<CAPTION>
                                  Telecommunication            Bandwidth            Internet           Corp./
(in thousands)                         Services                 Services            Services            Other             Total
                                --------------------        --------------      --------------    ---------------   --------------
<S>                               <C>                         <C>                 <C>               <C>               <C>
Three Months Ended September
 30, 1999
Total sales                                 $183,662               $ 6,354             $   150      $          -          $190,166
Inter-company                                (20,105)                    -                   -                 -           (20,105)
                                --------------------        --------------      --------------    ---------------   --------------
Revenues                                    $163,557               $ 6,354             $   150      $          -          $170,061
Depreciation                                $  3,644          $          -             $    59      $          -          $  3,703
                                --------------------        --------------      --------------    ---------------   --------------
Operating income                            $  4,164               $ 5,151             $(4,496)     $          -          $  4,819
                                ====================        ==============      ==============    ===============   ==============

Three Months Ended September
 30, 1998
Total sales                                 $137,592          $          -        $          -      $          -          $137,592
Inter-company                                (12,739)                    -                   -                 -           (12,739)
                                --------------------        --------------      --------------    ---------------   --------------
Revenues                                    $124,853          $          -        $          -      $          -          $124,853
Depreciation                                $  2,209          $          -        $          -      $          -          $  2,209
                                --------------------        --------------      --------------    ---------------   --------------
Operating income                            $  6,388          $          -        $          -      $          -          $  6,388
                                ====================        ==============      ==============    ===============   ==============

Nine Months Ended September 30,
 1999
Total sales                                 $507,496               $ 6,354             $   150      $          -          $514,000
Inter-company                                (63,824)                    -                   -                 -           (63,824)
                                --------------------        --------------      --------------    ---------------   --------------
Revenues                                    $443,672               $ 6,354             $   150      $          -          $450,176
Depreciation                                $ 10,030          $          -             $    59      $          -          $ 10,089
                                --------------------        --------------      --------------    ---------------   --------------
Operating income                            $ 13,406               $ 5,151             $(4,496)     $          -          $ 14,061
                                ====================        ==============      ==============    ===============   ==============

Nine Months Ended September 30,
 1998
Total sales                                 $377,682          $          -        $          -      $          -          $377,682
Inter-company                                (37,805)                    -                   -                 -           (37,805)
                                --------------------        --------------      --------------    ---------------   --------------
Revenues                                    $339,877          $          -        $          -      $          -          $339,877
Depreciation                                $  6,318          $          -        $          -      $          -          $  6,318
                                --------------------        --------------      --------------    ---------------   --------------
Operating income                            $ 20,259          $          -        $          -      $          -          $ 20,259
                                ====================        ==============      ==============    ===============   ==============

Total assets at
September 30, 1999                          $284,472               $23,270             $ 6,906           $25,653          $340,301
                                ====================        ==============      ==============    ===============   ==============

Total assets at
December 31, 1998                           $192,179          $          -        $          -           $43,458          $235,637
                                ====================        ==============      ==============    ===============   ==============
</TABLE>

                                       7
<PAGE>

(8)  CONTINGENCIES
------------------

     The Company is party to various legal proceedings in the ordinary course of
business.  Although the ultimate resolution of these proceedings cannot be
ascertained, management does not expect that they will have a material adverse
impact on the Company's financial position or results of operations.


(9)  SUBSEQUENT EVENTS
----------------------

     In November 1999, the Company signed a commitment letter with Banc of
America Securities LLC and Deutsche Bank Securities Inc. to amend and restate
its existing facility to provide for a $100 million credit facility. The
commitment letter contemplates that the Company will use up to $50 million of
the proceeds from any securities offering having gross proceeds of $150 million
or more to repay the new credit facility and requires a $50 million permanent
reduction in the facility on or before April 1, 2000. Thereafter, the new credit
facility would provide a $50 million facility for the Company. The Company would
use the funds primarily to invest in undersea cables as well as for other
capital expenditures, to meet its working capital needs, and for general
corporate purposes.

     In November 1999, the Company announced that it expects to take a
restructuring charge of $3 million against fourth quarter earnings.  The
expenses are to integrate the operations of its recent acquisitions, consolidate
and streamline telecommunications and data operations, and exit certain
retail telecommunications programs and product lines. The Company has recently
entered into five acquisition agreements totaling $25.6 million, which require
system, operational, and back office integration.

     In November 1999, the Company obtained a commitment for $15 million in
vendor financing from Cisco Systems Capital Corporation to be used to finance
the purchase of Cisco Internet routers and related hardware and software.

                                       8
<PAGE>

Item 2:  Management Discussion and Analysis of Financial Condition and Results
         of Operations

     This Quarterly Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking
statements are statements other than historical information or statements of
current condition.  Some forward-looking statements may be identified by use of
terms such as "believes," "anticipates," "plans," "intends," "expects,"
"estimates," or other similar expressions.  These forward-looking statements
relate to the plans, objectives, and expectations of Pacific Gateway Exchange,
Inc. ("Pacific Gateway" or the "Company") regarding its future operations or
financial performance or related to the Company's expectations regarding the
telecommunications industry.  In light of the inherent risks and uncertainties
of any forward-looking statement, the inclusion of forward-looking statements in
this report should not be regarded as a representation by the Company or any
other person that the forward-looking statements will come true.

     The revenues and results of operations of the Company and future
developments in the telecommunications industry are subject to risks and
uncertainties and could differ materially from those projected in the forward-
looking statements as a result of numerous factors, including the following:

1.   changes in the ratios between the amount of telephone traffic that the
     Company delivers and the amount that it receives and changes in expected
     future revenue from delayed proportional return traffic from foreign
     partners under the Company's operating agreements;
2.   foreign currency fluctuations;
3.   the termination of operating agreements with other carriers or the
     inability to enter into additional operating agreements;
4.   inaccuracies in the Company's forecasts of traffic;
5.   changes in or developments under domestic or foreign laws, regulations,
     licensing requirements, or telecommunications standards;
6.   foreign political or economic instability;
7.   changes in the availability of transmission facilities such as domestic,
     international, and undersea fiber optic cable facilities or in the
     feasibility, timing, or expense of building or leasing such facilities;
8.   loss of the services of key officers, such as: Howard A. Neckowitz,
     Chairman of the Board, President and Chief Executive Officer, Gail E.
     Granton, Chief Operating Officer, Global Marketing and Offshore
     Development, Thomas J. Murphy, Chief Operating Officer, Network Development
     and IP Services; or Sandra D. Grey, Chief Financial Officer and Vice
     President, Finance;
9.   loss of a customer that provides significant revenues to the Company;
10.  highly competitive market conditions in the industry and rapid
     technological change;
11.  future management decisions regarding acquisitions, capital expenditures,
     or financing;
12.  concentration of credit risk;
13.  natural disasters and catastrophic events;
14.  network outages, failures, or computer viruses;
15.  opportunities for and problems relating from the acquisition of other
     companies or facilities;
16.  availability of financing on acceptable terms and conditions in the credit
     market;
17.  difficulties that may be encountered in the development of bandwidth
     services, including construction delays, regulatory obstacles, contract
     disputes, additional capital contributions, and the availability of
     opportunities for additional bandwidth purchases;
18.  uncertainties in the growth of the Company's retail operations and the
     development of new business lines, such as the Company's bandwidth and
     Internet operations, including uncertainties about the difficulty of hiring
     appropriate personnel and competitive conditions;
19.  Internet growth at slower rates than expected;
20.  any failure of our computer systems or the computer systems of third
     parties that are material to our operations (such as computer systems of
     service providers, suppliers, and brokers) to process information after
     December 31, 1999; or
21.  consolidation of the Company's competitors within the telecommunications,
     bandwidth, or Internet industries.

                                       9
<PAGE>

     The foregoing review of important factors, including those discussed in
detail below, should not be construed as exhaustive.  The Company undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.

Overview

     Pacific Gateway Exchange was founded in August 1991 to capitalize on the
significant growth opportunities in the international telecommunications
services market. Since then, the Company has undertaken four strategic
initiatives in response to regulatory and technological developments: (1) as
foreign countries deregulated their telecommunications markets, the Company
started offshore wholesale operations; (2) in response to technological
innovation and consumer demand, the Company entered the market for retail
services; (3) to meet the growing global demand for high bandwidth fiber optic
capacity, the Company acquired significant interests in strategic state-of-the-
art undersea and land-based cable systems, which it uses for its own operations
or sells, leases, or exchanges in opportunistic transactions; and (4) to
participate in the growth of the Internet, the Company recently began its own
Internet operations providing connectivity services and it plans to provide co-
location and other Internet services to the global Internet community.

     The Company expects its growth strategy to have a number of effects on its
future results of operations.  In particular, the Company expects to: (1)
receive substantial cash proceeds from it sales or leases of bandwidth capacity;
(2) generate losses from its Internet services business as a result of
substantial start-up costs; and (3) incur increased interest expense
attributable to indebtedness.

     The Company adopted Statement of Financial Accounting Standard No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") effective January 1, 1998.  SFAS No. 131 requires disclosure of each of
the Company's operating segments, which is defined as a segment whose operating
results are distinguishable and regularly reviewed by the Company's decision
makers.  Prior to 1999, the Company' business consisted entirely of
telecommunications operations.  The Company managed its telecommunication
operations based on segments of wholesale, offshore, and retail activities.  As
a result of the diversification of its business, the Company now manages its
business based upon segments of  telecommunications, bandwidth, and Internet
services.  The operating results of these segments are regularly reviewed by and
are integral to Company management and its decision-making process.  Financial
information on the Company's new operating segments is included in Note (7)
entitled "Segment Data" in the Notes to the Unaudited Consolidated Condensed
Financial Statements.

     As described above, the Company derives its revenues from three operating
segments: telecommunications, bandwidth, and Internet services.  The Company's
telecommunications revenues are based upon the number of minutes billable and
recorded upon completion of a call.  The Company generally prices its services
at a lower cost than the major carriers operating in its global markets.  The
Company derives telecommunication revenues from carrying a mix of wholesale and
retail long distance traffic in the U.S. and offshore.  The Company expects to
continue to generate telecommunication revenues from internal growth through
sales and marketing efforts focused on customers with significant international
long-distance usage, including other telecommunications carriers, ethnic, and
other retail customers and resellers.  As it has done in the past, the Company
plans to seek strategic acquisitions that expand its customer base and increase
its market share.

     Prices in the long distance industry have declined in recent years and, as
competition continues to increase, the Company believes that prices are likely
to continue to decrease.  In addition, as deregulation accelerates and
competition increases in offshore markets, the Company's revenues per minute
could be adversely impacted.  The Company believes that such decreases
in prices will be offset by increased telecommunications usage.

                                       10
<PAGE>

     Cost of telecommunications revenue is comprised primarily of costs incurred
from other domestic and foreign telecommunications carriers to originate,
transport, and terminate calls.  The majority of the Company's cost of
telecommunication revenue is variable, based upon the number of minutes of use,
with transmission and termination costs being its most significant expense.  As
the Company increases the portion of traffic transmitted over its owned or
leased facilities, the cost of telecommunication revenue will be increasingly
comprised of fixed costs.  The Company seeks to lower its cost of
telecommunication revenue by:

     .   optimizing the routing of calls over the lowest cost route;
     .   increasing volumes on its owned lines;
     .   negotiating lower variable usage based costs with domestic and foreign
         service providers and negotiating additional and lower cost foreign
         carrier agreements with the foreign incumbent carriers and others; and
     .   continuing to expand its network to extend its global reach.

     The Company generally realizes a higher average price per minute and gross
margin on its international calls as compared to its domestic long distance
services and a higher average price per minute and gross margin on its retail
services as compared to its wholesale services. Although wholesale services
generate a lower gross margin than retail services, they are an important part
of the Company's business because the high traffic volume of its wholesale
customers improves the utilization of the network and allows for greater
flexibility in negotiating rates from suppliers. The Company's overall average
price per minute and gross margin may fluctuate based on its relative volume of
international versus domestic long distance services, wholesale services versus
retail services, and the proportion of traffic carried on its owned network
versus resale of other carrier services.

     The Company has begun selling or leasing bandwidth capacity on its global
network. As of September 30, 1999, the Company had entered into agreements to
sell or lease bandwidth capacity (including maintenance services) valued by the
parties at $141.1 million. Of the $141.1 million, $30.0 million relates to
operating and maintenance revenues to be received over the terms of the
contracts (which are generally 20 years), $57.5 million consists of other cash
proceeds that the Company expects to receive over time and the balance consists
of network assets valued by the parties at $53.6 million to be delivered over
time in exchange for bandwidth capacity. Of these amounts, the Company expects
to receive cash proceeds, including operating and maintenance revenues, of $7.8
million in 1999 and $15.4 million in 2000. The proceeds from these sales or
leases will be used to fund the expansion of the Company's network and to meet
working capital requirements and other cash needs. The exchanged assets will
provide the Company with a more extensive network to support its other
operations.

     Effective June 30, 1999, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 43, "Real Estate Sales, sometimes called "FIN
43", which affirms that sales of "integral equipment" be accounted for in
accordance with real estate accounting rules as previously set forth in FASB
Statement No. 66.  The Company believes that the application of FIN 43 is likely
to result in the classification of undersea and land-based fiber optic cables
and related equipment as "integral equipment" as defined by FIN 43.  This change
in the accounting for indefeasible rights to use ("IRUs") of fiber optic
capacity would not change the timing or amount of cash proceeds or network
assets that the Company expects to receive under the commitments that it has
made to sell or lease bandwidth capacity.  It would, however, require the
Company to recognize the revenue from some agreements as operating leases over
the

                                       11
<PAGE>

lives of the agreements as opposed to the industry practice prior to the
adoption of FIN 43, under which the Company recognized revenue during the period
in which it provided access to the capacity. As a result, this change in
accounting treatment would reduce the revenue and income that the Company would
recognize in the earlier years of the agreements and spread it out over the life
of the agreements, regardless of when the cash or network assets were received
or access to the capacity was provided. Consummation of the new credit facility
is subject to the negotiation of documentation, completion of due diligence
review, and other contingencies. There is no assurance that the new credit
facility will be consummated.

     By way of example, if the Company enters into an agreement for a 20-year
IRU for capacity that provides for cash payments of $100.0 million, under prior
industry practice, the Company would have recorded revenues of $100.0 million
when it delivered the capacity.  By contrast, if the Company is required to use
real estate accounting rules in accordance with FIN 43, although it would still
receive the cash payments of $100.0 million at the same time, it would be
required to recognize revenues of $5.0 million per year over the 20-year term of
the agreement.

     The Company began generating Internet service revenue, including
connectivity service revenue, in the third quarter of 1999.

     The Company's selling, general, and administrative expenses are comprised
primarily of salaries, commissions, occupancy costs, sales and marketing
expenses, advertising expenses, administrative costs, and sales allowances.
These expenses have been increasing consistently with the expansion of the
Company's operations.  Management expects this trend to continue and believes
that the Company will incur additional selling, general and administrative
expenses to support the expansion of its operations into Internet and bandwidth
services.

     The Company expects its increased capital investment activity in the future
to affect its operating results in the near term due to increased depreciation
charges and interest expense in connection with borrowings to fund such
expenditures.  These costs will be incurred in advance of the realization of the
expected improvements in operating results from such investments.

     Although the Company's functional currency is the United States dollar, a
significant portion of its revenues are derived from sales and operations
outside the United States.  In the future, the Company expects to continue to
derive a portion of its revenues and incur operating costs from its operations
outside the United States and therefore changes in exchange rates may have an
effect on its results of operations.  The Company historically has not engaged
in hedging transactions and does not currently contemplate engaging in hedging
transactions to mitigate foreign exchange risks.

Results of Operations

     The following table sets forth statements of operations data as a
percentage of revenues for the periods indicated.

<TABLE>
<CAPTION>
                                               Three Months                     Nine Months
                                            Ended September 30,             Ended September 30,
                                         -------------------------       --------------------------
                                            1999           1998             1999            1998
                                         ----------     ----------       ----------     -----------
<S>                                        <C>            <C>              <C>            <C>
Revenues                                      100.0%         100.0%           100.0%          100.0%
 Cost of services and capacity sold            85.1%          83.8%            86.1%           84.4%
                                         ----------     ----------       ----------     -----------
    Gross margin                               14.9%          16.2%            13.9%           15.6%
Selling, general, and administrative
 expenses                                       9.9%           9.3%             8.5%            7.7%
Depreciation and amortization                   2.2%           1.8%             2.2%            1.9%
                                         ----------     ----------       ----------     -----------
    Total operating expenses                   12.1%          11.1%            10.7%            9.6%
                                         ----------     ----------       ----------     -----------
    Operating income                            2.8%           5.1%             3.2%            6.0%
Interest income, net                           -0.1%          -0.4%            -0.2%           -0.5%
Other income, net                              -0.2%          -1.4%            -0.1%           -0.3%
                                         ----------     ----------       ----------     -----------
    Income before income taxes                  3.1%           6.9%             3.5%            6.8%
Provision for income taxes                      1.1%           2.4%             1.2%            2.4%
                                         ----------     ----------       ----------     -----------
    Net income                                  2.0%           4.5%             2.3%            4.4%
                                         ==========     ==========       ==========     ===========
</TABLE>

                                       12
<PAGE>

Three Months Ended September 30, 1999, Compared to the Three Months Ended
September 30, 1998

Revenues:   Total revenues for the three-month period ended September 30, 1999,
increased 36% to $170.1 million from $124.9 million.  The increase was a result
of revenue growth in the Company's telecommunications services and the
introduction of the Company's bandwidth and Internet services.
Telecommunications revenues increased 31.0% to $163.6 million in the three
months ended September 30, 1999, from $124.9 million in the same period in 1998.
The increase resulted from an increase in the number of minutes to 694 million
during the three months  ended September 30, 1999, from 444 million during the
same period in 1998.  The increase in the number of minutes resulted from an
increase in the number of the Company's wholesale-carrier customers to
approximately 210 at September 30, 1999, from 157 at September 30, 1998, and the
increase in demand associated with decreasing prices as the average price per
minute charged to customers decreased to $0.24 in the three months ended
September 30, 1999, compared to $0.28 for the same period in 1998.  Also
contributing to the increase in the number of minutes was an increase in the
number of retail customers primarily attributable to the Company's acquisition
of retail customer bases.  Bandwidth revenue for the three months ended
September 30, 1999, was $6.4 million, representing sales of bandwidth capacity
delivered to customers.  Refer to the discussion above on the likely accounting
treatment of revenue recognition of future sales and leases of bandwidth
capacity.  Internet revenue for the current three months was $0.2 million,
representing the commencement of our Internet services in September 1999.  There
were no bandwidth or Internet  revenues for the three months  ended September
30, 1998.

Gross profit:   Gross profit increased 25% to $25.3 million in the three months
ended September 30, 1999, from $20.2 million in the same period in 1998.  Gross
margin decreased to 14.9% for the three months ended September 30, 1999, from
16.2% in the same period in 1998.  Telecommunication gross profit decreased to
$19.6 million in the three months ended September 30, 1999, from $20.2 in the
same period in 1998.  Increased competition continues to drive wholesale
telecommunication prices downward resulting in decreased wholesale
telecommunication gross margins.  This decrease was partially offset by gross
profit generated from Company's retail operations that are higher than its
wholesale gross margins due to retail prices that are higher than wholesale
prices.  Bandwidth gross profit was $5.6 million for the three months ended
September 30, 1999, due to the delivery of bandwidth capacity on the Company's
network under sale or lease agreements.  Internet service gross profit was $0.1
million for the three months ended September 30, 1999.

Selling, general, and administrative expenses ("SG&A"):   SG&A expenses
increased 45% to $16.8 million in the three months ended September 30, 1999,
from $11.6 million in the same period in 1998.  As a percentage of revenues,
SG&A expenses were 9.9% in the three months ended September 30, 1999, up from
9.3% in the same period in 1998.  This increase was due primarily to increased
personnel and sales commission expenses.  The increase in personnel expenses was
directly related to the increase in the number of employees in the Company's
wholly-owned subsidiaries to 370 at September 30, 1999, from 142 at September
30, 1998.  During the period, the Company hired additional retail back-office
and telemarketing personnel supporting its increasing revenue base and personnel
supporting the commencement of its Internet services' business.  The Company
plans to continue expanding these functions to increase future revenues and cash
flows.  During the three-month period ended September 30, 1999, the Company also
has incurred approximately $4.4 million in start-up and related costs for its
Internet operations.  In the near term, the Company expects to incur additional
start-up costs to provide Internet services.  The increase in sales commission
expenses was due to increased revenues.

Depreciation and amortization:   Depreciation and amortization increased 68% to
$3.7 million in the three -months ended September 30, 1999, from $2.2 million in
the same period in 1998.  Depreciation as a percentage of revenues was 2.2% for
the three months  ended September 30, 1999, and 1.8% for the same period in
1998.  The increase was primarily due to depreciation of additional U.S.
wholesale and offshore fiber optic cables and communications equipment acquired
since September 30, 1998.  Depreciation will continue to increase as the Japan-
U.S. and TAT-14 cable systems, the related backhaul facilities, and the
Company's Internet service equipment are placed in-service.

                                       13
<PAGE>

Interest:   Interest income decreased to $0.2 million for the three months ended
September 30, 1999, from $0.5 million in the same period in 1998 due to
decreased average cash balances.  The Company had $15.6 million in average cash
balances during the three months ended September 30, 1999, compared to $31.4
million in the same period in 1998.  In addition, the Company has capitalized
the interest costs that relate to network and facility construction per SFAS No.
34, "Capitalization of Interest Cost."  The Company will depreciate the
capitalized interest over the related asset's life.

Income tax:   Income taxes decreased 39% to $1.8 million in the three months
ended September 30, 1999, from $3.0 million in the three-month period ended
September 30, 1998, primarily due to decreased operating income.  The effective
tax rate was 35% in the quarters ended September 30, 1999 and 1998.

Nine Months Ended September 30, 1999, Compared to the Nine Months Ended
September 30, 1998

Revenues:   Total revenues for the nine months ended September 30, 1999,
increased 32.5% to $450.2 million from $339.9 million in the same period in
1998.  The increase was a result of revenue growth in the Company's
telecommunications services and the introduction of its bandwidth and Internet
services.  Telecommunications revenues increased 30.5% to $443.7 million from
$339.9 million in the same period in 1998.  The increase resulted from an
increase in the number of minutes to 1.8 billion during the nine months ended
September 30, 1999, from 1.2 billion during the same period in 1998.  The
increase in the number of minutes resulted from an increase in the number of the
Company's wholesale-carrier customers to approximately 210 at September 30,
1999, from 157 at September 30, 1998.  The increase in the number of minutes
also resulted from the elasticity associated with declining prices ,as the
average price per minute charged to customers decreased to $0.25 in the nine-
month period ended September 30, 1999, compared to $0.29 for the same period in
1998.  Also contributing to the increase in the number of minutes was an
increase in the number of retail customers primarily attributable to the
Company's acquisitions of retail customer bases.  Bandwidth revenue for the nine
months ended September 30, 1999, was $6.4 million, representing sales of
bandwidth capacity delivered to customers.  Refer to the discussion above on the
likely accounting treatment of revenue recognition of future sales and leases of
bandwidth capacity.  Internet revenue for the current nine-month period was $0.2
million, representing the commencement of our Internet services in September
1999.  There were no bandwidth or Internet revenues for the nine months ended
September 30, 1998.

Gross profit:   Gross profit increased 18% to $62.5 million in the nine months
ended September 30, 1999, from $53.0 million in the same period in 1998.  Gross
margin decreased to 13.9% in the nine months  ended September 30, 1999, from 16%
in the same period in 1998.  Telecommunication gross profit increased 7% to
$56.8 million in the nine months ended September 30, 1999, from $53.0 in the
same period in 1998.  Increased competition continues to drive wholesale
telecommunication prices downward resulting in decreased wholesale
telecommunication gross margins.  This decrease was partially offset by gross
profit generated from Company's retail operations that are higher than its
wholesale gross margins due to retail prices that are higher than wholesale
prices.  Bandwidth gross profit was $5.6 million for the nine months  ended
September 30, 1999, due to the delivery of bandwidth capacity on the Company's
network.  Internet gross profit was $0.1 million for the nine months ended
September 30, 1999.

Selling, general, and administrative expenses:   SG&A expenses increased 45.0%
to $38.4 million in the nine months ended September 30, 1999, from $26.5 million
in the same period in 1998.  As a percentage of revenues, SG&A expenses were
8.5% in the nine months ended September 30, 1999, an increase from 7.7% in the
same period in 1998.  This increase was due primarily to increased personnel and
sales commission expenses.  The increase in personnel expenses was directly
related to the increase in the number of employees in the Company's wholly-owned
subsidiaries to 370 at September 30, 1999, from 142 at September 30, 1998.
During the period, the Company hired retail back-office and telemarketing
personnel supporting its increasing revenue base and additional personnel to
support the commencement of its Internet services' business.  The Company plans
to continue expanding these functions to increase future revenues and cash
flows.  During the nine months ended September 30, 1999, the Company also has
incurred approximately $6.4 million in start-up and related costs for its
Internet initiatives.  In the near term, the

                                       14
<PAGE>

Company expects to incur additional start-up costs to provide Internet services.
The increase in sales commission expenses was due to increased revenues.

Depreciation and amortization:   Depreciation and amortization increased 59.7%
to $10.1 million in the nine months ended September 30, 1999, from $6.3 million
in the same period in 1998.  Depreciation as a percentage of revenues was 2.2%
for the nine months ended September 30, 1999, and 1.9% for the same period in
1998.  The increase was primarily due to depreciation of additional U.S.
wholesale and offshore fiber optic cables and communications equipment acquired
since September 30, 1998.  Depreciation will continue to increase as the Japan-
U.S. and TAT-14 cable systems, the related backhaul facilities, and the
Company's Internet service equipment are placed in service.

Interest:   Interest income decreased to $0.6 million in the nine months ended
September 30, 1999, from $1.7 million in the same period in 1998 due to
decreased average cash balances.  The Company had $21.6 million in average cash
balances during the nine months ended September 30, 1999, compared to $34.5
million in the same period in 1998.  In addition, the Company has capitalized
the interest costs that relate to network and facility construction per SFAS No.
34, "Capitalization of Interest Cost."  The Company will depreciate the
capitalized interest over the related asset's life.

Income tax:   Income taxes decreased 33% to $5.5 million in the nine months
ended September 30, 1999, from $8.2 million in the same period in 1998,
primarily due to decreased operating income.  The effective tax rate decreased
to 34.8% for the nine months  ended September 30, 1999, from 35.4% for the same
period in 1998.

Liquidity and Capital Resources

     The Company uses its existing cash balances, cash provided by operating
activities, existing lines of credit, and debt commitments to finance its
operations.

     Net cash provided by operating activities increased to $24.9 million for
the nine-month period ended September 30, 1999, from $21.7 million for the same
period in 1998.  This increase in cash provided by operating activities was
primarily due to higher revenues, partially offset by costs associated with the
commencement of the Company's Internet operations

     Net cash used in investing activities was $59.3 million for the nine-month
period ended September 30, 1999, from $34.2 million for the same period in 1998.
Capital expenditures for the nine-month period ended September 30, 1999, were
$50.6 million, compared to $30.9 million in the same period in 1998.  The
capital expenditures in 1999 were for undersea fiber optic cable and offshore
transmission equipment, while capital expenditures in 1998 were primarily for
transmission equipment.  Capital expenditures for the nine -months ended
September 30, 1998, totaled $31 million and were primarily for domestic
switches.  In addition, in the third quarter of 1999, the Company purchased a
retail customer base for $4.5 million in cash and acquired Onyx Internet Ltd., a
United Kingdom Internet service provider and Web designer, for $2.4 million in
cash.  In the second quarter of 1999, the Company acquired Robo Tel, Inc., an
international long-distance company, for $1.85 million in cash and $4.75 million
in Pacific Gateway's common stock.  In the first quarter of 1998, the Company
acquired 16.66% of a Mexican multimedia company for $3.3 million in cash and
$1.8 million in Pacific Gateway's common stock.

     Net cash provided by financing activities was $19.4 million for the nine-
month period ended September 30, 1999, and $0.4 million for the same period in
1998.  In 1999, the Company borrowed an additional $18.1 million under its
existing credit facility (discussed below).  The remainder of these cash inflows
was from the exercise of stock options.

                                       15
<PAGE>

     In December 1998, the Company obtained its existing credit facility with
Bank of America, NT&SA, and NationsBanc Montgomery LLC, which was a one-year $30
million facility.  In September 1999, the Company increased its existing credit
facility to $50 million, subject to a borrowing base.  At September 30, 1999,
the Company had $26.8 million in borrowings under its existing credit facility.
The existing credit facility expires on December 16, 1999.  The Company has
signed a commitment letter with Deutsche Bank Securities Inc and Banc of America
Securities LLC for a new credit facility that would provide for a $100 million
facility expiring 364 days after closing.  The commitment letter contemplates
that the Company would use up to $50 million of the net proceeds from any
securities offering in which the Company receives gross proceeds of $150 million
or more to repay the new credit facility and requires a $50 million permanent
reduction in the facility on or before April 1, 2000.  Thereafter, the new
credit facility would provide a $50 million facility for the Company.
Consummation of the new credit facility is subject to the negotiation of
documentation, completion of due diligence review, and other contingencies.
There is no assurance that the new credit facility will be consummated.

     At September 30, 1999, the Company had outstanding commitments, due before
December 31, 2000, of approximately $145.3 million, principally for the
acquisition of additional ownership in digital undersea fiber optic cables and
network equipment.  This includes the commitment to purchase undersea fiber
optic cable in the US-Japan cable network for $70 million and in the TAT-14
cable system for $67 million.  As part of its global network expansion, the
Company plans to invest substantial amounts in backhaul facilities in Europe,
Japan, and the U.S.

     The Company has entered into a commitment letter for $15 million in vendor
financing with Cisco Systems Capital Corporation, to be used to finance the
purchase of Cisco Internet routers and related hardware and software.  It is
also pursuing additional vendor financing arrangements.

     As of September 30, 1999, the Company had entered into agreements to sell
or lease bandwidth capacity (including maintenance services) valued by the
parties at $141.1 million, of which $30.0 million relates to operating and
maintenance revenues to be received over the terms of the contracts, which is
generally 20 years.  Of the $141.1 million, the Company expects to receive cash
proceeds over time of $87.5 million, of which the Company expects to receive
$7.8 million in 1999 and $15.4 million in 2000, and network assets valued by the
parties at $53.6 million in exchange for its bandwidth capacity delivered over
time.

     Additional financing arrangements are necessary for the Company to satisfy
its capital requirements and the failure to obtain such arrangements could have
a material adverse effect on the Company.  To fund its planned capital
requirements, the Company is exploring financing alternatives, including public
or private sales of securities, and vendor financing arrangements.  The timing
and terms of any financing activities will be subject to market conditions.

     The Company believes that its existing cash balances, cash provided by
operating activities, anticipated borrowings under the new credit facility, and
other funding sources that it is pursuing will be sufficient to meet its
outstanding capital commitments, current capital expenditures, and working
capital needs through at least December 2000.

                                       16
<PAGE>

Year 2000 Readiness

     The "Year 2000" issue is the risk that the Company's internal computer
systems, network elements, software applications, and other business systems may
not properly reflect or recognize the year 2000.  Because many computers and
computer applications define dates by the last two digits of the year, "00" may
not be properly identified as the year 2000.  The Year 2000 issue is
unprecedented and involves many uncertainties.  There is a risk that material
third parties will fail to complete their Year 2000 remediation and testing or
that the Year 2000 issue will cause broad-based or systematic problems, which
could have an adverse effect on the Company's results of operations, liquidity,
or financial condition.

     The Company identified its Year 2000 risks to be: internal information
systems; non-financial systems; and external noncompliance by vendors and
customers.

     Internal information systems.  The Company's internal information systems
were initially designed to be Year 2000 ready.  These systems, including the
Company's billing system, have been tested in a simulated Year 2000 environment
and were determined to be Year 2000 ready.  The costs associated with testing
Year 2000 readiness were not material.

     Non-financial systems.  The Company has assessed the Year 2000 impact on
its other non-financial internal systems, primarily its telecommunications
switching equipment in the United States in Dallas, Los Angeles, and New York
and offshore in the United Kingdom, Russia, Japan, Australia, and New Zealand
and has conducted tests on such systems.  The Company has installed software and
hardware upgrades for all switching equipment as indicated by the test results.
The costs associated with testing and upgrading equipment were not material to
the Company's business, financial condition, or results of operations.  The
Company also has identified and evaluated other operational systems and
applications, which the Company believes are not mission critical, such as
building operations and individual personal computers used by Company personnel.

     Vendors and customer systems.  The Company has evaluated its significant
vendors and customers' Year 2000 readiness with respect to information systems
used by those entities that could impact business with the Company.  The Company
is satisfied that its most significant vendors and customers, including the most
significant carrier with whom the Company exchanges traffic, are highly likely
to be Year 2000 ready.  There is no assurance, however, that such third parties
will achieve full Year 2000 readiness.  In the event that any of the Company's
significant vendors and customers do not successfully achieve Year 2000
readiness and the Company is unable to replace them with new or alternative
vendors and customers, the Company's business or operations could be adversely
affected.

     As part of the Company's Year 2000 risk program, the Company is evaluating
scenarios that may occur as a result of the millennium change.  Through its
normal course of business, the Company has arrangements with secondary vendors
and foreign partners on all of its routes.  The Company believes that these
arrangements will mitigate the effects of any significant Year 2000 disruptions.

     The Company terminates traffic in countries where it has no assurance of
Year 2000 readiness.  A Year 2000 issue in such a country could shut down its
local or national telephone systems, making it impossible for the Company to
originate or terminate traffic in that country.  If the Company experiences
significant disruptions as a result of Year 2000 errors or if a country with
which we exchange traffic has a Year 2000 disruption, then the Company's
operations, revenues, cash flows, and other important aspects of its business
and financial condition are likely to be adversely affected.

                                       17
<PAGE>

                         PART II.   OTHER INFORMATION


Item 1.  Legal proceedings

         The Company is party to various legal proceedings in the ordinary
         course of business. Although the ultimate resolution of these
         proceedings cannot be ascertained, management does not expect that they
         will have a material adverse impact on the Company's financial position
         or results of operations.


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

         The Company's annual meeting of stockholders was held on July 29, 1999.

         The following table sets forth information regarding the number of
         votes for, against, withheld, or abstaining and broker non-votes, with
         respect to each matter presented at the meeting.

         1.  Both nominees for Class I director were elected as follows:

             NOMINEES                     FOR                    WITHHOLD

             Gail E. Granton           15,110,295                361,998
             James J. Junewicz         15,110,295                361,998

         2.  The amendment to the Company's Long-Term Incentive Plan to increase
             the number of shares available for award under the Plan from 4.0
             million (4,000,000) to 4.5 million (4,500,000) shares was approved
             as follows:
                                                                  BROKER
                FOR           AGAINST           ABSTAIN          NON-VOTE
             13,053,051      2,392,447           26,795             0

         3.  The selection of PricewaterhouseCoopers L.L.P. as the Company's
             independent auditors for the fiscal year ending December 31, 1999,
             was approved as follows:

                                                                  BROKER
                FOR           AGAINST           ABSTAIN          NON-VOTE
             15,447,366        5,135             19,792             0

                                       18
<PAGE>

Item 5.  Other Information

         None


Item 6.  Exhibits and Reports on Form 8-K

         (a) The Exhibit filed as part of this report is listed below:

         27  Financial Data Schedule

         (b) No reports on Form 8-K have been filed during the quarter ended
             September 30, 1999.

                                       19
<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.


                              PACIFIC GATEWAY EXCHANGE, INC.



Dated: November 15, 1999

                              By: /s/ Howard A. Neckowitz
                                 ------------------------
                                 Howard A. Neckowitz
                                 President and CEO
                                 (Authorized Signatory)


                              By: /s/ Sandra Grey
                                 ----------------
                                 Sandra Grey
                                 Chief Financial Officer
                                 (Principal Financial and Accounting Officer)

                                       20