<PAGE>

                                                                    EXHIBIT 10.1








                         PACIFIC GATEWAY EXCHANGE, INC.
                         1997 LONG-TERM INCENTIVE PLAN
                         -----------------------------



                                   AS AMENDED
<PAGE>

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


SECTION 1.........................................................   1
        GENERAL...................................................   1
                1.1.  Purpose.....................................   1
                1.2.  Participation...............................   1

SECTION 2.........................................................   2
        OPTIONS...................................................   2
                2.1.  Definition..................................   2
                2.2.  Eligibility.................................   2
                2.3.  Price.......................................   2
                2.4.  Exercise....................................   3
                2.5.  Post-Exercise Limitations...................   3
                2.6.  Expiration Date.............................   4
                2.7.  Reload Provision............................   4

SECTION 3.........................................................   5
        STOCK APPRECIATION RIGHTS.................................   5
                3.1.  Definition..................................   5
                3.2.  Eligibility.................................   5
                3.3.  Exercise....................................   5
                3.4.  Settlement of Award.........................   5
                3.5.  Post-Exercise Limitations...................   6
                3.6.  Expiration Date.............................   6

SECTION 4.........................................................   6
        STOCK AWARDS..............................................   6
                4.1.  Definition..................................   6
                4.2.  Eligibility.................................   7
                4.3.  Terms and Conditions of Awards..............   7

SECTION 5.........................................................   7
        STOCK PURCHASE PROGRAM....................................   7
                5.1.  Purchase of Stock...........................   8
                5.2.  Matching Shares.............................   8
                5.3.  Restrictions on Shares......................   8

SECTION 6.........................................................   8
        PERFORMANCE UNITS.........................................   8
                6.1.  Definition..................................   8
                6.2.  Eligibility.................................   8

                                      (i)
<PAGE>

                6.3.  Terms and Conditions of Awards..............   8
                6.4.  Settlement..................................   9
                6.5.  Termination during Performance Period.......   9

SECTION 7.........................................................   9
        OPERATION AND ADMINISTRATION..............................  10
                7.1.  Effective Date..............................  10
                7.2.  Shares Subject to Plan......................  10
                7.3.  Individual Limits on Awards.................  10
                7.4.  Adjustments to Shares.......................  10
                7.5.  Limit on Distribution.......................  12
                7.6.  Liability for Cash Payments.................  13
                7.7.  Performance-Based Compensation..............  13
                7.8.  Withholding.................................  13
                7.9.  Transferability.............................  14
                7.10. Notices.....................................  14
                7.11. Form and Time of Elections..................  14
                7.12. Agreement With Company......................  14
                7.13. Limitation of Implied Rights................  14
                7.14. Evidence....................................  15
                7.15. Action by Company or Related Company........  15
                7.16. Gender and Number...........................  15

SECTION 8.........................................................  15
        COMMITTEE.................................................  15
                8.1.  Administration..............................  15
                8.2.  Selection of Committee......................  15
                8.3.  Powers of Committee.........................  15
                8.4.  Delegation by Committee.....................  16
                8.5.  Information to be Furnished to Committee....  16
                8.6.  Liability and Indemnification of Committee..  16

SECTION 9
        CHANGE IN CONTROL.........................................  17

SECTION 10........................................................  18
        AMENDMENT AND TERMINATION.................................  18

APPENDIX A
        AWARDS TO NONEMPLOYEE DIRECTORS...........................  19


                                      (ii)
<PAGE>

                        PACIFIC GATEWAY EXCHANGE, INC.
                         1997 LONG-TERM INCENTIVE PLAN
                         -----------------------------

                                  AS AMENDED
                                  ----------



                                   SECTION 1
                                   ---------

                                    GENERAL
                                    -------

      1.1  Purpose.  The Pacific Gateway Exchange, Inc. 1997 Long-Term Incentive
           -------
Plan (the "Plan") has been established by Pacific Gateway Exchange, Inc. (the
"Company") to:

     (a)  attract and retain employees and other persons providing services to
          the Company and the Related Companies (as defined below);

     (b)  motivate Participants, by means of appropriate incentives, to achieve
          long-range goals;

     (c)  provide incentive compensation opportunities that are competitive with
          those of other major corporations; and

     (d) further identify Participants' interests with those of the Company's
         other stockholders through compensation that is based on the Company's
         common stock;

and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return.  The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.

      1.2  Participation.  Subject to the terms and conditions of the Plan, the
           -------------
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible
<PAGE>

Individuals, those persons who will be granted one or more awards under Sections
2, 3, 4, 5 or 6 of the Plan (an "Award"), and thereby become "Participants" in
the Plan. In the discretion of the Committee, and subject to the terms of the
Plan, a Participant may be granted any Award permitted under the provisions of
the Plan, and more than one Award may be granted to a Participant. Except as
otherwise agreed by the Company and the Participant, or except as otherwise
provided in the Plan, an Award under the Plan shall not affect any previous
Award under the Plan or an award under any other plan maintained by the Company
or the Related Companies. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Related Company, any
director and any other person providing material services to the Company or a
Related Company.


                                   SECTION 2
                                   ---------

                                    OPTIONS
                                    -------

      2.1  Definitions.  The grant of an "Option" under this Section 2 entitles
           -----------
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section.  Options granted under this Section may be either Incentive Stock
Options or Non-Qualified Stock Options, as determined in the discretion of the
Committee.  An "Incentive Stock Option" is an Option that is intended to satisfy
the requirements applicable to an "incentive stock option" described in section
422 of the Internal Revenue Code of 1986, as amended (the "Code").  A "Non-
Qualified Stock Option" is an Option that is not intended to be an Incentive
Stock Option.

      2.2  Eligibility.  The Committee shall designate the Participants to whom
           -----------
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option.  To the extent that the aggregate
fair market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year (under
all plans of the Company and all Related Companies) exceeds $100,000, such
options shall be treated as Non-Qualified Stock Options, to the extent required
by section 422 of the Code.

      2.3  Price.  The determination and payment of the purchase price of a
           -----
share of Stock under each Option granted under this Section shall be subject to
the following:

      (a)  The purchase price shall be established by the Committee at the time
           the Option is granted; provided, however, that in no event shall such
           price be less than the par value of a share of Stock on such date;
           further, provided, in no event shall the purchase price of a share of
           Stock under an Incentive Stock Option be less than the Fair Market
           Value (defined below) of a share of stock at the time the Option is
           granted.

                                       2
<PAGE>

     (b)  Subject to the following provisions of this subsection, the full
          purchase price of each share of Stock purchased upon the exercise of
          any Option shall be paid at the time of such exercise and, as soon as
          practicable thereafter, a certificate representing the shares so
          purchased shall be delivered to the person entitled thereto.

     (c)  The purchase price shall be payable in cash or in shares of Stock
          (valued at Fair Market Value as of the day of exercise) that have been
          held by the Participant at least six months, or in any combination
          thereof, as determined by the Committee.

     (d)  A Participant may elect to pay the purchase price upon the exercise of
          an Option through a cashless exercise arrangement to the extent
          provided by the Committee.

     (e)  The "Fair Market Value" of a share of Stock of the Company as of any
          date shall be the closing price per share of Stock (or the mean of the
          closing bid and asked prices of a share, if the Stock is so reported)
          on the National Association of Securities Dealers Automated Quotation
          System ("NASDAQ"), the NASDAQ National Market System or other national
          or regional securities exchange or market system on which the Stock is
          primarily traded, or, if there shall have been no such sale so
          reported on that date, on the last preceding date on which such a sale
          was so reported.

     (f)  Except for adjustments pursuant to paragraph 7.4(b) (relating to the
          adjustment of shares), the purchase price for a share of Stock under
          any outstanding Option granted under the Plan may not be decreased
          after the date of grant nor may an outstanding Option granted under
          the Plan be surrendered to the Company as consideration for the grant
          of a new Option with a lower exercise price.

     2.4  Exercise.  Except as otherwise expressly provided in the Plan, an
          --------
Option granted under this Section shall be exercisable in accordance with the
following terms of this subsection:

     (a)  The terms and conditions relating to exercise of an Option shall be
          established by the Committee, and may include, without limitation,
          conditions relating to completion of a specified period of service
          (subject to paragraph (b) below), achievement of performance standards
          prior to exercise of the Option or achievement of Stock ownership
          objectives by the Participant.  The Committee, in its sole discretion,
          may accelerate the vesting of any Option under circumstances
          designated by it at the time the Option is granted or thereafter.

     (b)  No Option may be exercised by a Participant after the Expiration Date
          (as defined in subsection 2.6) applicable to that Option.

     (c)  The exercise of an Option will result in the surrender of the
          corresponding rights under a tandem Stock Appreciation Right (as
          described in Section 3), if any.

                                       3
<PAGE>

     2.5  Post-Exercise Limitations.  The Committee, in its discretion, may
          -------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, Stock ownership by the Participant
and such other factors as the Committee determines to be appropriate.

     2.6  Expiration Date.  The "Expiration Date" with respect to an Option
          ---------------
means the date established as the Expiration Date by the Committee at the time
of the grant; provided, however, that the Expiration Date with respect to any
Option shall not be later than the earliest to occur of:

     (a)  the ten-year anniversary of the date on which the Option is granted;

     (b)  if the Participant's Date of Termination occurs by reason of death or
          Disability, the one-year anniversary of such Date of Termination;

     (c)  if the Participant's Date of Termination occurs by reason of
          Retirement, the three-year anniversary of such Date of Termination; or

     (d)  if the Participant's Date of Termination occurs for reasons other than
          Retirement, death or Disability, the three-month anniversary of such
          Date of Termination.

For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the period
in which the reason for the cessation of services is a leave of absence approved
by the Company or the Related Company which was the recipient of the
Participant's services.  Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in any substantial gainful activity, which condition, in
the opinion of a physician selected by the Committee, is expected to have a
duration of not less than 120 days. "Retirement" of a Participant shall mean the
occurrence of a Participant's Date of Termination after providing at least five
years of service to the Company or the Related Companies and attaining age 65.

      2.7  Reload Provision.  In the event the Participant exercises an Option
           ----------------
and pays all or a portion of the purchase price in Stock in the manner permitted
by subsection 2.3, or satisfies withholding obligations in Stock if permitted
under subsection 7.8, such Participant (either pursuant to the terms of the
Option Award, or pursuant to the exercise of Committee discretion at the time
the Option is exercised) may be issued a new Option to purchase additional
shares of Stock equal to the number of shares of Stock surrendered to the
Company in such payment.  Such new Option shall have an exercise price equal to
the Fair Market Value per share on the date such new

                                       4
<PAGE>

Option is granted, shall first be exercisable six months from the date of grant
of the new Option and shall have an Expiration Date on the same date as the
Expiration Date of the original Option so exercised by payment of the purchase
price or withholding in shares of Stock.


                                   SECTION 3
                                   ---------

                           STOCK APPRECIATION RIGHTS
                           -------------------------

     3.1  Definition.  Subject to the terms of this Section, a "Stock
          ----------
Appreciation Right" granted under the Plan entitles the Participant to receive,
in cash or Stock (as determined in accordance with subsection 3.4), value equal
to all or a portion of the excess of: (a) the Fair Market Value of a specified
number of shares of Stock at the time of exercise over (b) a specified price
designated at the time the Stock Appreciation Right is granted or, if granted in
tandem with an Option, the exercise price with respect to shares under the
tandem Option.

     3.2  Eligibility.  Subject to the provisions of the Plan, the Committee
          -----------
shall designate the Participants to whom Stock Appreciation Rights are to be
granted under the Plan, shall determine the exercise price or a method by which
the price shall be established with respect to each such Stock Appreciation
Right and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based.  A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option.  If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Committee,
the Stock Appreciation Right may, but need not, be granted in tandem with the
Option.

     3.3  Exercise.  The exercise of Stock Appreciation Rights shall be subject
          --------
to the following:

     (a)  If a Stock Appreciation Right is not in tandem with an Option, then
          the Stock Appreciation Right shall be exercisable in accordance with
          the terms established by the Committee in connection with such rights;
          and may include, without limitation, conditions relating to completion
          of a specified period of service, achievement of performance standards
          prior to exercise of the Stock Appreciation Rights or achievement of
          objectives relating to Stock ownership by the Participant.  The
          Committee, in its sole discretion, may accelerate the vesting of any
          Stock Appreciation Right under circumstances designated by it at the
          time the Stock Appreciation Right is granted or thereafter.  No Stock
          Appreciation Right subject to this paragraph may be exercised by a
          Participant after the Expiration Date (as defined in subsection 3.6)
          applicable to that Stock Appreciation Right.

     (b)  If a Stock Appreciation Right is in tandem with an Option, then the
          Stock Appreciation Right shall be exercisable at the time the tandem
          Option is exercisable.

                                       5
<PAGE>

          The exercise of a Stock Appreciation Right will result in the
          surrender of the corresponding rights under the tandem Option.

     3.4  Settlement of Award.  Upon the exercise of a Stock Appreciation
          -------------------
Right, the value to be distributed to the Participant, in accordance with
subsection 3.1, shall be distributed in shares of Stock (valued at their Fair
Market Value at the time of exercise), in cash or in a combination thereof, in
the discretion of the Committee.

     3.5  Post-Exercise Limitations.  The Committee, in its discretion, may
          -------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
a Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.

     3.6  Expiration Date.  If a Stock Appreciation Right is in tandem with an
          ---------------
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option.  If a Stock Appreciation Right is not in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the date established as the Expiration Date by the Committee;
provided, however, that subject to the following provisions of this subsection,
the Expiration Date with respect to any Stock Appreciation Right shall not be
later than the earliest to occur of:

     (a)  the ten-year anniversary of the date on which the Stock Appreciation
          Right is granted;

     (b)  if the Participant's Date of Termination occurs by reason of death or
          Disability, the one-year anniversary of such Date of Termination; or

     (c)  if the Participant's Date of Termination occurs by reason of
          Retirement, the three-year anniversary of such Date of Termination; or

     (d)  if the Participant's Date of Termination occurs by reason other than
          Retirement, death or Disability, the three-month anniversary of such
          Date of Termination.


                                   SECTION 4
                                   ---------

                                 STOCK AWARDS
                                 ------------

     4.1  Definition.  Subject to the terms of this Section, a Stock Award
          ----------
under the Plan is a grant of shares of Stock to a Participant, the earning,
vesting or distribution of which is subject to one or more conditions
established by the Committee.  Such conditions may relate to events (such as
performance or continued employment) occurring before or after the date the
Stock Award is granted, or the date the Stock is

                                       6
<PAGE>

earned by, vested in or delivered to the Participant. If the vesting of Stock
Awards is subject to conditions occurring after the date of grant, the period
beginning on the date of grant of a Stock Award and ending on the vesting or
forfeiture of such Stock (as applicable) is referred to as the "Restricted
Period". Stock Awards may provide for delivery of the shares of Stock at the
time of grant or may provide for a deferred delivery date. A Stock Award may,
but need not, be made in conjunction with a cash-based incentive compensation
program maintained by the Company and may, but need not, be in lieu of cash
otherwise awardable under such program.

     4.2  Eligibility.  The Committee shall designate the Participants to whom
          -----------
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.

     4.3  Terms and Conditions of Awards.  Stock Awards granted to Participants
          ------------------------------
under the Plan shall be subject to the following terms and conditions:

     (a)  Beginning on the date of grant (or, if later, the date of
          distribution) of shares of Stock comprising a Stock Award, and
          including any applicable Restricted Period, the Participant as owner
          of such shares shall have the right to vote such shares.

     (b)  Payment of dividends with respect to Stock Awards shall be subject to
          the following:

          (i)   On and after date that a Participant has a fully earned and
                vested right to the shares comprising a Stock Award, and the
                shares have been distributed to the Participant, the Participant
                shall have all dividend rights (and other rights) of a
                stockholder with respect to such shares.

          (ii)  Prior to the date that a Participant has a fully earned and
                vested right to the shares comprising a Stock Award, the
                Committee, in its sole discretion, may award Dividend Rights
                with respect to such shares.

          (iii) On and after the date that a Participant has a fully earned and
                vested right to the shares comprising a Stock Award, but before
                the shares have been distributed to the Participant, the
                Participant shall be entitled to Dividend Rights with respect to
                such shares, at the time and in the form determined by the
                Committee.

          (iv)  A "Dividend Right" with respect to shares comprising a Stock
                Award shall entitle the Participant, as of each dividend payment
                date, to an amount equal to the dividends payable with respect
                to a share of Stock multiplied by the number of such shares.
                Dividend Rights shall be settled in cash or in shares of Stock,
                as determined by the Committee, shall be payable at the time and
                in the form determined by the Committee and shall be subject to
                such other terms and conditions as the Committee may determine.

                                       7
<PAGE>

                                   SECTION 5
                                   ---------

                            STOCK PURCHASE PROGRAM
                            ----------------------

      5.1  Purchase of Stock.  The Committee may, from time to time, establish
           -----------------
one or more programs under which Participants will be permitted to purchase
shares of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs. The purchase price for shares of
Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in an
award of matching shares (as provided in subsection 5.2), the purchase price may
not be less than 50% of the Fair Market Value of the Stock at the time of
purchase (or, in the Committee's discretion, the average stock value over a
period determined by the Committee), and further provided that the purchase
price may not be less than par value.

      5.2  Matching Shares.  Except as otherwise provided in subsection 5.1, any
           ---------------
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.

      5.3  Restrictions on Shares.  The Committee may impose such restrictions
           ----------------------
with respect to shares purchased under subsection 5.1, or matching shares
awarded pursuant to subsection 5.2, as the Committee determines to be
appropriate.  Such restrictions may include, without limitation, restrictions of
the type that may be imposed with respect to Stock Awards under Section 4.


                                   SECTION 6
                                   ---------

                               PERFORMANCE UNITS
                               -----------------

      6.1  Definition.  Subject to the terms of this Section, the Award of
           ----------
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award.  The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met.  For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.

      6.2  Eligibility.  The Committee shall designate the Participants to whom
           -----------
Performance Units are to be granted and the number of units subject to each such
Award.

      6.3  Terms and Conditions of Awards.  For each Participant, the Committee
           ------------------------------
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the

                                       8
<PAGE>

performance measures used for determining whether the Performance Units are
earned; the Performance Period during which the performance measures will apply;
the relationship between the level of achievement of the performance measures
and the degree to which Performance Units are earned; whether, during or after
the Performance Period, any revision to the performance measures or Performance
Period should be made to reflect significant events or changes that occur during
the Performance Period; and the number of earned Performance Units that will be
paid in cash and the number of earned Performance Units to be paid in shares of
Stock.

     6.4  Settlement.  Settlement of Performance Units shall be subject to the
          ----------
following:

     (a)  The Committee will compare the actual performance to the performance
          measures established for the Performance Period and determine the
          number of units as to which settlement is to be made, and the value of
          such units.

     (b)  Settlement of units earned shall be wholly in cash, wholly in Stock or
          in a combination of the two and distributed in a lump sum or
          installments, as determined by the Committee.

          (i)   For Performance Units stated in units representing shares of
                Stock when granted, either one share of Stock will be
                distributed for each unit earned or cash will be distributed for
                each unit earned equal to either (A) the Fair Market Value of a
                share of Stock at the end of the Performance Period or (B) the
                average Stock value over a period determined by the Committee.

          (ii)  For Performance Units stated in cash when granted, the value of
                each unit earned will be distributed in its initial cash value
                or shares of Stock will be distributed based on the cash value
                of the units earned divided by (A) the Fair Market Value of a
                share of Stock at the end of the Performance Period or (B) the
                average Stock value over a period determined by the Committee.

     (c)  Shares of Stock distributed in settlement of the units shall be
          subject to such vesting requirements and other conditions, if any, as
          the Committee shall determine.  Such vesting restrictions may include,
          without limitation, restrictions of the type that may be imposed with
          respect to Stock Awards under Section 4.

     6.5  Termination during Performance Period.  If a Participant's Date of
          -------------------------------------
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion of the Performance Units as to
which he would otherwise be eligible and may accelerate the

                                       9
<PAGE>

determination of the value and settlement of such Performance Units or make such
other adjustments as the Committee, in its sole discretion, deems desirable.


                                   SECTION 7
                                   ---------

                         OPERATION AND ADMINISTRATION
                         ----------------------------

     7.1  Effective Date.  The Plan shall be effective as of the date it is
          --------------
adopted by the Board of Directors of the Company (the "Board"); provided,
however, that Awards granted under the Plan prior to its approval by
stockholders will be contingent on approval of the Plan by the Company's
stockholders.  The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any shares of Stock awarded under
it are outstanding and not fully vested; provided, however, that no new Awards
shall be made under the Plan on or after the tenth anniversary of the date on
which the Plan is adopted by the Board.

     7.2  Shares Subject to Plan.  The shares of Stock with respect to which
          ----------------------
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions.  Subject to the provisions of subsection 7.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 4,500,000 shares in the aggregate.  Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.

     7.3  Individual Limits on Awards.  Notwithstanding any other provision of
          ---------------------------
the Plan to the contrary, no Participant shall receive any Award of an Option or
Stock Appreciation Right under the Plan that is intended to constitute
"performance-based compensation" (as that term is used in section 162(m) of the
Code) to the extent that the sum of:

     (a)  the number of shares of Stock subject to such Award;

     (b)  the number of shares of Stock subject to all other prior Awards of
Options and Stock Appreciation Rights under the Plan during the one-year period
ending on the date of the Award; and

     (c)  the number of shares of Stock subject to all other prior stock options
and stock appreciation rights granted to the Participant under other plans or
arrangements of the Company and Related Companies during the one-year period
ending on the date of the Award;

would exceed the Participant's Individual Limit under the Plan.  The
determination made under the foregoing provisions of this subsection shall be
based on the shares subject to the awards at the

                                       10
<PAGE>

time of grant, regardless of when the awards become exercisable. Subject to the
provisions of subsection 7.4, a Participant's "Individual Limit" shall be
500,000 shares. Options and Stock Appreciation Rights that are not intended to
constitute "performance-based compensation" shall not be subject to the limit
otherwise imposed by this subsection 7.3.

     7.4  Adjustments to Shares.
          ---------------------

     (a)  If the Company shall effect any subdivision or consolidation of shares
of Stock or other capital readjustment, payment of stock dividend, stock split,
combination of shares or recapitalization or other increase or reduction of the
number of shares of Stock outstanding without receiving compensation therefor in
money, services or property, then the Committee shall adjust (i) the number of
shares of Stock available under the Plan; (ii) the number of shares available
under any individual or other limits; (iii) the number of shares of Stock
subject to outstanding Awards; and (iv) the per-share price under any
outstanding Award to the extent that the Participant is required to pay a
purchase price per share with respect to the Award.

     (b)  If the Company is reorganized, merged or consolidated or is party to a
plan of exchange with another corporation, pursuant to which reorganization,
merger, consolidation or plan of exchange, the stockholders of the Company
receive any shares of stock or other securities or property, or the Company
shall distribute securities of another corporation to its stockholders, there
shall be substituted for the shares subject to outstanding Awards an appropriate
number of shares of each class of stock or amount of other securities or
property which were distributed to the stockholders of the Company in respect of
such shares, subject to the following:

          (i)   If the Committee determines that the substitution described in
     accordance with the foregoing provisions of this paragraph would not be
     fully consistent with the purposes of the Plan or the purposes of the
     outstanding Awards under the Plan, the Committee may make such other
     adjustments to the Awards to the extent that the Committee determines such
     adjustments are consistent with the purposes of the Plan and of the
     affected Awards.

          (ii)  All or any of the Awards may be cancelled by the Committee on or
     immediately prior to the effective date of the applicable transaction, but
     only if the Committee gives reasonable advance notice of the cancellation
     to each affected Participant, and only if either: (A) the Participant is
     permitted to exercise the Award for a reasonable period prior to the
     effective date of the cancellation; or (B) the Participant receives payment
     or other benefits that the Committee determines to be reasonable
     compensation for the value of the cancelled Awards.

          (iii) Upon the occurrence of a reorganization of the Company or any
     other event described in this paragraph (b), any successor to the Company
     shall be substituted for the Company to the extent that the Company and the
     successor agree to such substitution.

                                       11
<PAGE>

     (c)  Upon (or, in the discretion of the Committee, immediately prior to)
the sale to (or exchange with) a third party unrelated to the Company of all or
substantially all of the assets of the Company, all Awards shall be cancelled.
If Awards are cancelled under this paragraph, then, with respect to any affected
Participant, either:

          (i)  the Participant shall be provided with reasonable advance notice
     of the cancellation, and the Participant shall be permitted to exercise the
     Award for a reasonable period prior to the effective date of the
     cancellation; or

         (ii)  the Participant shall receive payment or other benefits that the
     Committee determines to be reasonable compensation for the value of the
     cancelled Awards.

     The foregoing provisions of this paragraph shall also apply to the sale of
all or substantially all of the assets of the Company to a related party, if the
Committee determines such application is appropriate.

     (d)  In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act in a manner
that it determines to be consistent with the purposes of the Plan and of the
affected Awards and, where applicable or otherwise appropriate, in a manner that
it determines to be necessary to preserve the benefits and potential benefits of
the affected Awards for the Participants and the Company.

     (e)  The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting the Company's Stock or the rights
thereof, the dissolution or liquidation of the Company, any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.

     (f)  Except as expressly provided by the terms of this Plan, the issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property or for labor or services,
either upon direct sale, upon the exercise of rights or warrants to subscribe
therefor or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof, shall be made with respect to Awards then outstanding hereunder.

     (g)  Awards under the Plan are subject to adjustment under this subsection
only during the period in which they are considered to be outstanding under the
Plan.  For purposes of this subsection, an Award is considered "outstanding" on
any date if the Participant's ability to obtain all benefits with respect to the
Award is subject to limits imposed by the Plan (including any limits imposed by
the Agreement reflecting the Award).  The determination of whether an Award is
outstanding shall be made by the Committee.

                                       12
<PAGE>

     7.5  Limit on Distribution.  Distribution of shares of Stock or other
          ---------------------
amounts under the Plan shall be subject to the following:

     (a)  Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.

     (b)  In the case of a Participant who is subject to Section 16(a) and 16(b)
of the Securities Exchange Act of 1934, the Committee may, at any time, add such
conditions and limitations to any Award to such Participant, or any feature of
any such Award, as the Committee, in its sole discretion, deems necessary or
desirable to comply with Section 16(a) or 16(b) and the rules and regulations
thereunder or to obtain any exemption therefrom.

     (c)  To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares may be
effected on a non-certificated basis, to the extent not prohibited by applicable
law or the rules of any stock exchange.

     7.6  Liability for Cash Payments.  Subject to the provisions of this
          ---------------------------
Section, each Related Company shall be liable for payment of cash due under the
Plan with respect to any Participant to the extent that such benefits are
attributable to the service rendered for that Related Company by the
Participant.  Any disputes relating to liability of a Related Company for cash
payments shall be resolved by the Committee.

     7.7  Performance-Based Compensation.  To the extent that the Committee
          ------------------------------
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the time
an Award is granted, take such steps and impose such restrictions with respect
to such Award as it determines to be necessary to satisfy such requirements
including, without limitation:

     (a)  The establishment of performance goals that must be satisfied prior to
the payment or distribution of benefits under such Awards.

     (b)  The submission of such Awards and performance goals to the Company's
stockholders for approval and making the receipt of benefits under such Awards
contingent on receipt of such approval.

     (c)  Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms of the
Plan and Agreement reflecting the Awards have been satisfied.

                                       13
<PAGE>

To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the Plan
because the Awards constitute Options or Stock Appreciation Rights, the
Committee may, at the time the Award is granted, conform the Awards to
alternative methods of satisfying the requirements applicable to Performance-
Based Compensation.

     7.8  Withholding.  All Awards and other payments under the Plan are
          -----------
subject to withholding of all applicable taxes, which withholding obligations
may be satisfied, with the consent of the Committee, through the surrender of
shares of Stock which the Participant already owns or to which a Participant is
otherwise entitled under the Plan.

     7.9  Transferability.  Awards under the Plan are not transferable except
          ---------------
as designated by the Participant by will or by the laws of descent and
distribution.  To the extent that the Participant who receives an Award under
the Plan has the right to exercise such Award, the Award may be exercised during
the lifetime of the Participant only by the Participant.  Notwithstanding the
foregoing provisions of this subsection, the Committee may permit Awards under
the Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Committee may establish.  In no event
shall an Incentive Stock Option be transferable to the extent that such
transferability would violate the requirements applicable to such option under
Code section 422.

     7.10 Notices.  Any notice or document required to be filed with the
          -------
Committee under the Plan will be properly filed if delivered or mailed by
registered mail, postage prepaid, to the Committee, in care of the Company, at
its principal executive offices.  The Committee may, by advance written notice
to affected persons, revise such notice procedure from time to time.  Any notice
required under the Plan (other than a notice of election) may be waived by the
person entitled to notice.

     7.11 Form and Time of Elections.  Unless otherwise specified herein, each
          --------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.

     7.12 Agreement With Company.  At the time of an Award to a Participant
          ----------------------
under the Plan, the Committee may require a Participant to enter into an
agreement with the Company (the "Agreement") in a form specified by the
Committee, agreeing to the terms and conditions of the Plan and to such
additional terms and conditions, not inconsistent with the Plan, as the
Committee may, in its sole discretion, prescribe.

     7.13 Limitation of Implied Rights.
          ----------------------------

                                       14
<PAGE>

     (a)  Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation, any
specific funds, assets, or other property which the Company or any Related
Company, in its sole discretion, may set aside in anticipation of a liability
under the Plan.  A Participant shall have only a contractual right to the
amounts, if any, payable under the Plan, unsecured by any assets of the Company
and any Related Company.  Nothing contained in the Plan shall constitute a
guarantee by the Company or any Related Company that the assets of such
companies shall be sufficient to pay any benefits to any person.

     (b)  The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan.  Except as otherwise provided in the Plan, no Award
under the Plan shall confer upon the holder thereof any right as a stockholder
of the Company prior to the date on which he fulfills all service requirements
and other conditions for receipt of such rights and shares of Stock are
registered in his name.

     7.14 Evidence.  Evidence required of anyone under the Plan may be by
          --------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.

     7.15 Action by Company or Related Company.  Any action required or
          ------------------------------------
permitted to be taken by the Company or any Related Company shall be by
resolution of its board of directors, or by action of one or more members of the
board (including a committee of the board) who are duly authorized to act for
the board or (except to the extent prohibited by applicable law or the rules of
any stock exchange) by a duly authorized officer of the company.

     7.16 Gender and Number.  Where the context admits, words in any gender
          -----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.

                                   SECTION 8
                                   ---------

                                   COMMITTEE
                                   ---------

     8.1  Administration.  The authority to control and manage the operation
          --------------
and administration of the Plan shall be vested in a committee (the "Committee")
in accordance with this Section 8.

     8.2  Selection of Committee.  The Committee shall be selected by the
          ----------------------
Board, and shall consist of not fewer than two members of the Board or such
greater number as may be required for compliance with Rule 16b-3 issued under
the Securities Exchange Act of 1934.

                                       15
<PAGE>

     8.3  Powers of Committee.  The authority to manage and control the
          -------------------
operation and administration of the Plan shall be vested in the Committee,
subject to the following:

     (a)  Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select employees to receive Awards, to determine the
time or times of receipt, to determine the types of Awards and the number of
shares covered by the Awards, to establish the terms, conditions, performance
criteria, restrictions, and other provisions of such Awards, and to cancel or
suspend Awards.  In making such Award determinations, the Committee may take
into account the nature of services rendered by the respective employee, his
present and potential contribution to the Company's success and such other
factors as the Committee deems relevant.

     (b)  Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the Plan
will be structured to conform to the requirements applicable to Performance-
Based Compensation, and to take such action, establish such procedures, and
impose such restrictions at the time such Awards are granted as the Committee
determines to be necessary or appropriate to conform to such requirements.

     (c)  The Committee will have the authority and discretion to interpret the
Plan, to establish, amend and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant to
the Plan and to make all other determinations that may be necessary or advisable
for the administration of the Plan.

     (d)  Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.

     (e)  Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any Award.

     8.4  Delegation by Committee.  Except to the extent prohibited by
          -----------------------
applicable law or the rules of any stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers to
any person or persons selected by it.  Any such allocation or delegation may be
revoked by the Committee at any time.

     8.5  Information to be Furnished to Committee.  The Company and Related
          ----------------------------------------
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties.  The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect.  Participants and other
persons entitled to benefits under the Plan must furnish the Committee such
evidence, data or information as the Committee considers desirable to carry out
the terms of the Plan.

                                       16
<PAGE>

     8.6  Liability and Indemnification of Committee.  No member or authorized
          ------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a director or employee of the Company or
Related Company.  The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises.  This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.

                                   SECTION 9
                                   ---------

                               CHANGE IN CONTROL
                               -----------------

     Except as otherwise provided in the Plan or in the agreement reflecting
the applicable Award, ten days prior to the occurrence of a Change in Control
(i) all outstanding Options and Stock Appreciation Rights shall become
immediately exercisable, (ii) all shares of Restricted Stock and Performance
Stock shall become fully vested, (iii) all vesting restrictions imposed under
subsection 6.3 (relating to restrictions on shares purchased by Participants and
matching shares) shall cease to apply, and (iv) Performance Units may be paid
out in such manner and amounts as determined by the Committee; provided,
however, such vesting, lapse of restrictions and payments shall be contingent
upon the consummation of the Change in Control. For purposes of the Plan, a
"Change in Control" shall be deemed to occur on the earliest of the existence of
one of the following events:

     (a)  the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either the then
outstanding shares of common stock of the Company entitled to vote generally in
the election of directors, but excluding, for this purpose, any such acquisition
by the Company or any of its subsidiaries, or any employee benefit plan (or
related trust) of the Corporation, or any corporation with respect to which,
following such acquisition, more than 50% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the common stock and voting securities
of the Company immediately prior to such acquisition in substantially the same
proportion as their ownership, immediately prior to such acquisition, of the
then outstanding shares of common stock of the Company or the combined voting
power of the then outstanding voting securities of the Company entitled to vote
generally in the election of directors, as the case may be;

                                       17
<PAGE>

     (b) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened "election contest" relating to the election of the
directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or

     (c)  approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then outstanding
shares of common stock or the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the Company or
of the sale or other disposition of all or substantially all of the assets of
the Company.


                                  SECTION 10
                                  ----------

                           AMENDMENT AND TERMINATION
                           -------------------------

     The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may materially adversely affect the rights of any
Participant or beneficiary under any Award made under the Plan prior to the date
such amendment is adopted by the Board; and further provided that the provisions
of paragraph 2.3(f) (relating to Option repricing) cannot be amended unless the
amendment is approved by the Company's stockholders.

                                       18
<PAGE>

                                  APPENDIX A
                                  ----------

                        AWARDS TO NONEMPLOYEE DIRECTORS
                        -------------------------------


1.   Eligible Directors.  Each director of the Company who is not an employee of
     ------------------
the Company or Related Company and who does not own stock possessing more than
3% of the total combined voting power of all classes of stock of the Company (a
"Nonemployee Director") shall be eligible for awards under this Appendix A.

2.   Option Award.  Each individual who is a Nonemployee Director upon his or
     ------------
her initial election or appointment to the Board shall be awarded an Option to
purchase 20,000 shares of Stock upon such initial election or appointment (an
"Initial Option").  Thereafter, on each subsequent anniversary of such election
or appointment, if the Nonemployee Director is then a member of the Board, the
Nonemployee Director shall be awarded an Option to purchase 10,000 shares of
Stock (an "Annual Option").  Nonemployee Directors who were first appointed to
the Board prior to the effective date of this Plan and received an Initial
Option under the Pacific Gateway Exchange, Inc. 1995 Stock Option Plan (the
"1995 Plan") shall be eligible for Annual Options under this Plan on the
anniversary of the Initial Option awarded under the 1995 Plan, to the extent
that the Company determines that Annual Awards will no longer be made under the
1995 Plan.

3.   Exercise Price.  The exercise price per share with respect to an Option
     --------------
awarded under this Appendix A shall be the Fair Market Value of a share of Stock
on the date such Option is awarded.

4.   Vesting.  Each Option granted under this Appendix A shall become
     -------
exercisable: (i) with respect to 1/4 of the shares awarded, on the first
anniversary of the grant date (the "Initial Vesting Date");  and (ii) with
respect to an additional 1/16 of the shares awarded, on each subsequent 3-month
anniversary of the Initial Vesting Date until such time as this Option is fully
exercisable.

5.   Expiration. The Expiration Date with respect to any Option awarded under
     ----------
this Appendix A shall be the earliest to occur of:

     (a) the ten-year anniversary of the date on which the Option is granted;

     (b) if the Nonemployee Director's service on the Board terminates by reason
of death or Disability, the one-year anniversary of such termination of service;

     (c) if the Nonemployee Director's service on the Board terminates for any
reason other than death or Disability, the three-month anniversary of such
termination of service.

6.   Other Terms and Conditions.  Except as provided in this Appendix A, the
     --------------------------
Option shall be subject to all of the terms and conditions of the Plan.

                                       19