<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 March 31, 1997

                      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)


533 Airport Blvd, Suite 505, Burlingame, California, 94010

(Address of Principal Executive Offices)           (Zip Code)

Registrant's telephone number, including area code (415) 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 
                                   ---     ---

As of April 30, 1997, the number of the registrant's Common Shares of $.0001 par
value outstanding was 18,938,000.

<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        
          March 31, 1997 and December 31, 1996                              3
                                                             
          Consolidated condensed statements of operations    
          for the three-month periods ended                  
          March 31, 1997 and 1996                                           4
                                                             
          Consolidated condensed statements of cash flows    
          for the three-month periods ended                  
          March 31, 1997 and 1996                                           5
                                                             
          Notes to consolidated condensed financial statements              6
 
Item 2:   Management's discussion and analysis
          of financial condition and results
          of operations                                                     7
 
 
Part II - OTHER INFORMATION
 
Item 6: Exhibits and Reports on Form 8-K                                   11
</TABLE>

                                       2
<PAGE>

Item 1.  Financial Statements

                        PACIFIC GATEWAY EXCHANGE,  INC.
                     CONSOLIDATED CONDENSED BALANCE SHEETS
                                (in thousands)
                                    

<TABLE>
<CAPTION>
 
                                                                           March 31,             December 31,
                                                                              1997                    1996
                                                                           -----------            ------------
                                                                           (Unaudited)
<S>                                                                        <C>                     <C>
                                                     ASSETS
CURRENT ASSETS:                                                       
Cash and cash equivalents                                                     $ 34,530                $  45,563
Accounts receivable, net of allowance for doubtful accounts                          
   of $2,429 in 1997 and $1,679 in 1996                                         29,370                   25,145
Accounts receivable, related party                                               2,564                    3,066
Prepaids                                                                           801                      729
Deferred income tax                                                              1,338                    1,184
                                                                           -----------            -------------
        Total current assets                                                    68,603                   75,687
Property and equipment, net                                                     36,169                   27,636
Deposits and other assets                                                          648                      493
                                                                           -----------            -------------
        Total assets                                                         $ 105,420                $ 103,816
                                                                           ===========            =============
                                     LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable                                                             $  36,016                $  36,472
Accrued liabilities                                                                785                    1,304
Income taxes payable                                                             1,761                    2,493
Other liabilities                                                                  338                      367
                                                                                                              
Current portion of capitalized lease obligations                                   216                        -
                                                                           -----------            -------------
        Total current liabilities                                               39,116                   40,636
Long-term portion of capitalized lease obligations                                 353                        -
Deferred income tax                                                                835                      708
                                                                           -----------            -------------
        Total liabilities                                                       40,304                   41,344
                                                                           -----------            -------------

STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, authorized
   1,000,000 shares, no shares issued                                                -                        -
Common stock, $.0001 par value, authorized 25,000,000 shares,                       
   issued 19,081,560 shares, outstanding 18,938,000 shares                           
   in 1997 and issued 19,040,050 shares, outstanding 18,896,490                      
   shares in 1996                                                                    2                        2
Additional paid in capital                                                      55,296                   55,113
Retained earnings                                                               10,218                    7,757
Less cost of common stock held in treasury,                                          
   143,560 shares in 1996                                                          400                      400
                                                                           -----------            -------------
        Total stockholders' equity                                              65,116                   62,472
                                                                           -----------            -------------
        Total liabilities and stockholders' equity                         $   105,420                $ 103,816
                                                                           ===========            -------------

</TABLE>


See Accompanying Notes to Consolidated Condensed Financial Statements

                                       3
<PAGE>
 
                        PACIFIC GATEWAY EXCHANGE,  INC.
                CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                  (in thousands, except net income per share)

<TABLE>
<CAPTION>
                                                                             Three Months
                                                                            Ended March 31,
                                                                         ----------------------
                                                                          1997           1996
                                                                         -------        -------
                                                                               (Unaudited)       
<S>                                                                      <C>            <C>
                                                                                        
Revenues                                                                 $47,524        $27,480
Revenues - related party                                                   3,927          4,760
                                                                         -------        -------
Total revenues                                                            51,451         32,240
Cost of long distance services                                            43,141         29,130
                                                                         -------        -------
     Gross margin                                                          8,310          3,110
Selling, general and administrative expenses                               3,825          1,956
Depreciation                                                                 853            385
                                                                         -------        -------
     Total operating expenses                                              4,678          2,341
                                                                         -------        -------
     Operating income                                                      3,632            769
Interest expense/(income)                                                   (488)           152
                                                                         -------        -------
  Income before income taxes                                               4,120            617
Provision for income taxes                                                 1,658            250
                                                                         -------        -------
     Net income                                                          $ 2,462        $   367
                                                                         -------        -------
     Net income per share                                                $  0.13        $  0.03
                                                                         =======        =======
Weighted average number of common shares                                                
outstanding                                                               19,537         14,300
                                                                         -------        -------
</TABLE>

    See Accompanying Notes to Consolidated Condensed Financial Statements.

                                       4
<PAGE>
 
                        PACIFIC GATEWAY EXCHANGE, INC.
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                (in thousands)
<TABLE>
<CAPTION>
                                                                                  Three Months
                                                                                 Ended March 31,
                                                                             ----------------------
                                                                               1997           1996
                                                                             --------       ------- 
                                                                                   (Unaudited)
<S>                                                                          <C>            <C>
OPERATING ACTIVITIES:
Net Income                                                                   $  2,462       $   367
Adjustments to net income:                                                                  
  Depreciation                                                                    853           385
  Bad debts provision                                                             750           135
  Changes in operating assets and liabilities:                                              
     Accounts receivable                                                       (4,975)       (6,323)
     Accounts receivable, related party                                           502           473
     Notes and advances receivable                                                  -           176
     Prepaid Expenses                                                             (72)            -
     Deferred tax asset                                                          (154)          (30)
     Deposits and other assets                                                   (155)         (163)
     Accounts payable                                                            (457)        8,419
     Accrued liabilities                                                         (519)          (53)
     Other liabilities                                                            (29)          115
     Deferred tax liability                                                       127             -
     Income taxes payable                                                        (732)         (481)
                                                                             --------       ------- 
                                                                                            
  Net cash provided by (used in) operating activities                          (2,399)        3,020
                                                                             --------       ------- 
                                                                                            
INVESTING ACTIVITIES:                                                                       
Purchase of property and equipment                                             (8,771)       (4,121)
                                                                             --------       -------
Net cash used in investing activities                                          (8,771)       (4,121)
                                                                             --------       ------- 
                                                                                            
FINANCING ACTIVITIES:                                                                       
Borrowings on revolving lines of credit, related party                              -         3,000
Repayments on capital lease obligation                                            (46)            -
Options exercised                                                                 183             -
                                                                             --------       -------
Net cash provided by financing activities                                         137         3,000
                                                                             --------       ------- 
                                                                                            
Net increase (decrease) in cash and cash equivalents                          (11,033)        1,899
Cash and cash equivalents at beginning of the period                           45,563         1,792
                                                                             --------       -------
Cash and cash equivalents at end of the period                               $ 34,530       $ 3,691
                                                                             ========       =======

</TABLE>

     See Accompanying Notes to Consolidated Condensed Financial Statements

                                       5
<PAGE>
 
             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS


(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) which 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, 1996. The results for the three month periods ended March,
1997 and 1996, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.

(2)  ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC
-------------------------------------------------------

The Company has entered into operating agreements with 32 telecommunications
carriers in 25 different countries under which international long distance
traffic is both delivered and received.  Under these agreements, the foreign
carriers are contractually obligated to adhere to the policy of the Federal
Communications Commission (the "FCC"), whereby traffic from the foreign country
is routed to international carriers, such as the Company, in the same proportion
as traffic carried into the country.  Mutually exchanged traffic between the
Company and foreign carriers is settled through a formal settlement policy that
generally extends over a six-month period at an agreed upon rate.  The Company
records the amount due to the foreign partner as an expense in the period the
traffic is delivered.  Of the 32 agreements the Company had at March 31, 1997,
12 agreements provided that the company generally must wait up to six months
before it actually receives the proportional return traffic.  For these
agreements, the Company recognizes a loss in the period in which it sells to a
customer because the amount due to the foreign partner generally exceeds the
amount the Company charges its customers.  As a result, a significant increase
in traffic with one or more of the carriers with which the Company must wait up
to six months to receive return traffic may cause the Company to report a net
loss in the accounting period in which such increase occurred.  Historically,
when the return traffic is received in the future period, the Company generally
realized a gross margin on the return traffic that, when combined with the prior
period loss on the outbound traffic, has resulted in a gross profit on the total
transaction.  Although the Company can reasonably estimate the revenue it will
receive under the FCC's proportional share policy, there is no guarantee that
there will be traffic delivered back to the United States or what impact changes
in either future settlement rates or changes in foreign exchange rates will have
on net payments made and revenue received.

(3) LEASE COMMITMENTS
---------------------

The Company leases certain computer equipment under an agreement which is
classified as a capital lease.  The lease has a term of three years with a
minimum purchase price at the end of the lease.  Leased capital assets included
in property plant and equipment at March 31, 1997 are as follows (in thousands):

                                March 31, 1997
                                --------------

Computer equipment                   $610


Future minimum payments by year and in the aggregate consist of the following at
March 31, 1997 (in thousands):

                                 Capital Leases
                                 --------------
<TABLE>
<S>                                        <C>
1997                                    $  161
1998                                       216
1999                                       216
2000                                         8
                                         -----
 Total minimum lease payments              601
 Less amounts representing interest        (32)
                                        ------
 Present value of net minimum payments     569
 Less current portion                      216
                                        ------
                                        $  353
                                        ======
</TABLE>

                                       6
<PAGE>
 

(4)  NEW ACCOUNTING PRONOUNCEMENTS
----------------------------------

In December, 1996, the FASB issued SFAS No. 128, "Earnings per Share," which is
effective for both the interim periods and annual periods ending after December
15, 1997. SFAS 128 establishes standards for computing and presenting earnings
per share (EPS). This statement replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The Company does not expect the impact on the financial
statements to be material.

                                       7
<PAGE>
 
ITEM 2.   MANAGEMENT'S 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, including statements
regarding expected future revenue from delayed proportional return traffic from
foreign partners pursuant to certain operating agreements.  Forward-looking
statements are statements other than historical information or statements of
current condition.  Some forward looking statements may be identified by use of
such terms as "believes," "anticipates," "intends," or "expects."  These
forward-looking statements relate to the plans objectives and expectations of
the Company for future operations. In light of the risks and uncertainties
inherent in all future projections, 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 objectives or plans of the Company will be achieved. The
Company's revenues and results of operations are difficult to forecast and could
differ materially from those projected in the forward-looking statements as a
result of numerous factors including the following: (i) changes in international
settlement rates; (ii) changes in the ratios between outgoing and incoming
traffic; (iii) foreign currency fluctuations; (iv) termination of certain
operating agreements or inability to enter into additional operating agreements;
(v) inaccuracies in the Company's forecast of traffic growth; (vi) changes in or
developments under domestic or foreign laws, regulations, licensing requirements
or telecommunication standards; (vii) foreign political or economic instability;
(viii) changes in the availability of transmission facilities; (ix) loss of the
services of key officers, such as Howard A. Neckowitz, Chairman of the Board,
President and Chief Executive Officer or Gail E. Granton, Executive Vice
President, International Business Development and Secretary; (x) loss of a
customer which provides significant revenues to the Company; (xi) highly
competitive market conditions in the industry; or (xii) concentration of credit
risk. The foregoing review of the important factors should not be considered 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.

The following table sets forth income statement data as a percentage of revenues
for the period indicated.

<TABLE>
<CAPTION>
 
 
                                                                             Three months
                                                                            Ended March 31,
                                                                     --------------------------
                                                                       1997              1996      
                                                                     --------           -------
<S>                                                                  <C>                 <C>            
Total revenues                                                        100.0%             100.0%       
Cost of long distance services                                         83.8%              90.4%       
                                                                     --------           -------
           Gross margin                                                16.2%               9.6%       
Selling, general and administrative expenses                            7.4%               6.1%       
Depreciation                                                            1.7%               1.2%       
                                                                     --------           -------
           Total operating expenses                                     9.1%               7.3%       
                                                                     --------           -------
           Operating income                                             7.1%               2.4%       
Interest expense                                                       <0.9%>              0.5%       
                                                                     --------           -------
           Income before income taxes                                   8.0%               1.9%       
 Provision for income taxes                                             3.2%               0.8%       
                                                                     --------           -------
                     Net income                                         4.8%               1.1%       
                                                                     ========           =======
 
 
</TABLE>

                                       8
<PAGE>
 
 Three months ended March 31, 1997 Compared to three months ended March 31, 1996
                                                                                
Revenues:   Total revenues for the quarter ended March 31, 1997 increased 60% to
$51.5 million from $32.2 million for the quarter ended March 31, 1996.  The
increase was primarily the result of both increased sales to existing customers,
due to an increase in the number of operating agreements to 32 at March 31, 1997
from 25 at March 31, 1996 and a increase in the number of wholesale carrier
customers to 78 at March 31, 1997 from 57 at March 31, 1996.  As a result, total
minutes of use have increased 66% over the same quarter last year while the
average price per minute charged to customers has declined to 28 cents compared
to 30 cents last year. The change in the terminating country mix with different
rates per minute, the reduction in the rates received for the traffic
terminating in and transiting the United States and the increase in the
incidental United States domestic terminating traffic, are factors influencing
the average customer price per minute. During the quarter (as in all previous
quarters) Pacific Gateway sent more minutes out than it received under its
operating agreements.  Because the same rate is charged by the foreign carrier
to terminate calls in their country as Pacific Gateway charges to terminate
calls in the United States, declining rates have an adverse effect on revenue
and estimated return traffic revenue backlog, but, as a result of sending more
calls out than the Company receives, declining rates improve the gross margin
received on the entire transaction of a minute delivered with such foreign
carriers.

Gross Margin:   Gross margin increased 167% to $8.3 million for the quarter
ended March 31, 1997 from $3.1 million for the quarter ended March 31, 1996.  As
a percentage of revenue, gross margin increased from 9.6% in the quarter ended
March 31, 1996 to 16.2% in the current quarter.  This increase resulted from
savings derived from a reduction in the transit or resale rates on the routes in
which the Company does not have a direct operating agreement, a reduction in the
foreign access charges on the routes in which the Company has  a direct
operating agreement and a reduction in the domestic termination rates in the
United States.  These savings were offset by the effects of an increase in the
estimated return traffic revenue backlog which adversely effects the current
gross margin.  The cost of long distance service increased to $43.1 million for
the quarter ended March 31, 1997 from $29.1 million for the quarter ended March
31, 1996.  This increase in costs represents growth in outbound traffic on new
and existing routes in advance of receiving proportional return traffic,
resulting in an increase in the estimated delayed proportional return traffic
backlog amount at March 31, 1997.
                                                                                
Selling General and Administrative Expenses: As a percentage of revenues,
selling, general and administrative expenses increased from 6.1% in the first
quarter of 1996 to 7.4% in the first quarter of 1997 and the actual expenses
increased 96% to $3.8 million from $2.0 million.  This increase was due
primarily to increased personnel and sales commission expenses.  The increase in
personnel expenses was directly related to the increase in employees to 53 at
March 31, 1997 from 30 at March 31, 1996.  The increase in sales commission
expenses was primarily due to increased revenues.
                                                                                
Depreciation:   Depreciation increased 122% to $0.9 million in 1997 from $0.4
million in 1996.  As a percentage of revenues, depreciation was 1.7% of revenue
for the quarter ended March 31, 1997 and 1.2% for the quarter ended March 31,
1996.  The increase in the dollar amount was primarily due to depreciation of
additional transmission facilities acquired during 1996 and in the first quarter
of 1997.
                                                                                
Interest:   The Company had interest income of $488 thousand for the quarter
ended March 31, 1997 compared to interest expense of $152 thousand for the
quarter ended March 31, 1996.  This was due to the successful completion of the
initial public offering in July 1996 resulting in the Company having $34.5
million in cash or cash equivalents and no line of credit outstanding at March
31, 1997 compared to $3.7 million of cash and $8.4 million owing under the lines
of credit available to the Company at March 31, 1996.
                                                                                
Income Tax:   Income taxes increased to $1.7 million from $0.3 million,
primarily due to increased operating income.  The effective tax rate was 40% for
the quarter ended March 31, 1997 and 40.5% for the quarter ended March 31, 1996.

                                       9
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
        
The Company has financed its rapid growth, including its capital expenditures,
through funds provided by operations and the funds from the public offering
completed in the third quarter of 1996. Due to the timing differences in the
international settlements, the Company's accounts receivable turnover varies
from its accounts payable turnover.  The length of these turnovers is a function
of different timing requirements in the Company's agreements with foreign
partners.  For example, the length of the Company's accounts payable turnover is
partially due to its accounts payable with foreign partners which generally have
180 day terms as a result of the six month lag in the international settlement
process.
                                                                                
Net cash used in operating activities was $2.4 million for the quarter ended
March 31, 1997 and the net cash provided by operating activities for the quarter
ended March 31, 1996 was $3.0 million.  The decrease in the first quarter of
1997 was primarily a result of an increase in accounts receivable exceeded by an
increase in net income while the increase in the first quarter of 1996 was
primarily a result of an increase in net income and accounts payable which
exceeded the increase in accounts receivable.
                                                                                
Net cash used in investing activities was $8.8 million for the quarter ended
March 31, 1997 compared with $4.1 million for the quarter ended December 31,
1996. The expenditures in 1997 and 1996 were primarily for the acquisition of
partial ownership interests in international fiber optic cable transmission
systems and related equipment.
                                                                                
Net cash provided by financing activities was $0.1 million for the quarter ended
March 31, 1997 and $3.0 million for the quarter ended March 31, 1996. During the
first quarter of 1997 the Company utilized a supplier's attractive financing
terms for purchasing equipment and received payment for options that were
exercised.
                                                                                
The deficit in working capital excluding cash at March 31, 1997 is $5.0 million
compared to a deficit of $10.7 million at March 31, 1996. This is due to the
significant delay that occurs in both paying and receiving the actual cash for
the minutes sent and received from overseas. This is offset by the estimated
return traffic revenue backlog of $13.9 million at March 31, 1997 and $8.4
million at March 31, 1996.
                                                                                
At March 31, 1997, the Company had outstanding commitments of $18.3 million for
the acquisition of additional ownership in digital undersea fiber optic cables
and related network equipment. The Company believes that net proceeds from the
public offering in the third quarter of 1996, together with cash provided by
operating activities and other sources of liquidity, will be sufficient to meet
its outstanding capital commitments, current capital expenditures and working
capital needs through the end of 1997.  However, the Company may raise
additional funds through an equity offering or other financing arrangements to
fund growth potential to the extent management identifies opportunities that are
beneficial for the Company.
                                                                                
OTHER OPERATING DATA
                                                                                
The information set forth below illustrates management's estimate of the amount
of revenue derived from the proportional delayed return traffic which certain
carriers are contractually obligated to provide to the Company within six months
of the Company delivering certain outbound calls.  See Note 2 to the Notes to
the Financial Statements.  The estimated delayed return traffic revenue is based
on the anticipated ratios between the outgoing and incoming traffic and
anticipated settlement rates.  The information concerning estimated delayed
return traffic revenue backlog contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities
Exchange Act of 1934.  The actual results and actual amounts of delayed return
traffic revenue could differ materially from the estimated amounts reflected
herein as a result of numerous factors, including, but not limited to, changes
in international settlement rates, changes in ratios between outgoing and
incoming traffic, foreign currency fluctuations, termination of certain
operating agreements and changes in US tax law.

                                       10
<PAGE>
 
<TABLE>
<CAPTION>
 
 
                                                                                       Three Months             
                                                                                     Ended March 31,            
                                                                          --------------------------------    
                                                                               1997                   1996         
                                                                          ---------              ---------
<S>                                                                         <C>                    <C>
Revenues received in current period
from delayed return traffic(1)                                               4,882                  1,260
 
Estimated delayed return traffic revenue                                    13,948                  8,400 (5)
backlog at end of period(2)

Estimated delayed return traffic revenue
backlog at end of preceding period(3)                                       13,719                  6,142

Increase in estimated revenues
from delayed return traffic(4)                                                 229                  2,258
 
</TABLE>

(1)  Represents revenue recorded in the current period from certain of the
     Company's operating agreements which require the Company to wait up to six
     months to receive the return traffic.   See Note 2 of  the Financial
     Statements.

(2)  For the quarter ended March 31, 1996 the amount reflects the revenue
     actually received by the Company from delayed return traffic for the six
     months ended September 30, 1996.  The amount as of March 31, 1997 reflects
     management's estimate of the revenue to be received by the Company from
     delayed return traffic during the six months ending September 30, 1997,
     Such estimate being based on the anticipated ratios between outgoing and
     incoming traffic, anticipated settlement rates and forecast foreign
     exchange rates.

(3)  To reflect the increase (decrease) in delayed return traffic revenue for
     each respective period, the information presented reflects, for the purpose
     of computing such increase/(decrease), the amount of the estimated return
     traffic revenue for the preceding period.  For example, the amount set
     forth for the quarter ended March 31, 1997 is the amount of return traffic
     revenue backlog for the period ending December 31, 1996.

(4)  The increase in the amount of estimated delayed return traffic revenue
     earned during the quarter ended March 31, 1997 and 1996, is (1) for the
     period ending March 31, 1997, the difference between the amount of
     estimated delayed return traffic revenue backlog at March 31, 1997 and
     December 31, 1996 and (2) for the period ending March 31, 1996,  the
     difference between the amount of estimated delayed return traffic revenue
     backlog at March 31, 1996 and December 31, 1995. The amount of the increase
     reflects Management's estimate of such revenue earned in the particular six
     month period, although not reported on the company's financial statements
     until up to six months later, under the operating agreements which require
     the company to wait up to six months before such revenue is actually
     received pursuant to the contractual obligation of foreign carriers to
     deliver such return traffic. Historically the company has realized an after
     tax net margin of approximately 50% on the amount of such revenues when
     these are received.

(5)  At the end of each quarter, the Company determines the actual amount of
     delayed return traffic revenue received for each preceding six month period
     and uses this actual amount as the "estimated" return traffic backlog for
     the period ending six months earlier.  As a result, in each current quarter
     and the immediately preceding quarter, the amounts represent estimates.
     However, in the preceding comparison period, the delayed return backlog
     represents the amount that the Company actually received in the ensuing six
     months.

                                       11

<PAGE>
 
                          PART II.   OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K


No reports on Form 8-K have been filed during the quarter ended March 31, 1997.
The Exhibits filed as part of this report are listed below.


Exhibit No.    Document Description
-----------    --------------------

3.             Amended and Restated Bylaws
4.             Amended and Restated Bylaws
11.            Computation of Per Share Earnings
21.            Subsidiaries
27.            Financial Data Schedule

                                       12
<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: May 15, 1997

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


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

                                       13