<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2000

                        COMMISSION FILE NUMBER 000-21043

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

            Delaware                                           94-3134065
  (State of Other Jurisdiction                                (IRS Employer
of Incorporation or Organization)                         Identification Number)

500 Airport Blvd, Suite 340, Burlingame, California,               94010
   (Address of Principal Executive Offices)                     (Zip Code)

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

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

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

                                  Yes  X    No
                                      ---      ---

At November 16, 2000, the number of the registrant's Common Shares of $.0001 par
value outstanding was 20,017,285.



<PAGE>   2
                         PACIFIC GATEWAY EXCHANGE, INC.

                                TABLE OF CONTENTS


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

Item 1:     Financial Statements

            Condensed consolidated balance sheets as of September 30, 2000, and
            December 31, 1999 ...................................................... 1

            Condensed consolidated statements of operations for the three-month
            and nine-month periods ended September 30, 2000 and 1999 ............... 2

            Condensed consolidated statements of cash flows for the nine-month
            periods ended September 30, 2000 and 1999 .............................. 3

            Notes to condensed consolidated financial statements ................... 4

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


Part II  -  OTHER INFORMATION

Item 1:     Legal Proceedings ..................................................... 18

Item 2:     Changes in Securities and Use of Proceeds ............................. 18

Item 3:     Defaults upon Senior Securities ....................................... 18

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

Item 5:     Other information ..................................................... 18

Item 6:     Exhibits and reports on Form 8-K ...................................... 18
</TABLE>

<PAGE>   3
                  PACIFIC GATEWAY EXCHANGE, INC.
               CONDENSED CONSOLIDATED BALANCE SHEETS
                          (in thousands)


<TABLE>
<CAPTION>
                                                              September 30,      December 31,
                                                                  2000               1999
                                                             -----------------   ------------
                                                             (Unaudited)
<S>                                                          <C>                 <C>
                              ASSETS
Current Assets:
Cash and cash equivalents                                     $   7,265           $  27,189
Accounts receivable, net of allowance for doubtful accounts
      of $14,412 in 2000 and $7,846 in 1999                     207,412             133,998
Prepaid expenses                                                    750               1,065
Income taxes receivable                                           9,182                  --
Deferred income tax                                                --                 3,701
Other current assets                                             12,465               6,455
                                                              ---------           ---------
      Total current assets                                      237,074             172,408
Property and equipment, net                                      86,975             169,187
Intangible assets, net                                            2,191              17,830
Deferred income tax                                                --                 2,227
Deposits and other assets                                         6,258              13,153
                                                              ---------           ---------
      Total assets                                            $ 332,498           $ 374,805
                                                              =========           =========


               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable                                              $ 257,298           $ 154,601
Line of credit                                                   43,854              54,100
Accrued liabilities                                               7,341              13,156
Income taxes payable                                               --                 4,279
Vendor and equipment financing                                   11,311                  --
Other current liabilities                                        16,074                 660
                                                              ---------           ---------
      Total current liabilities                                 335,878             226,796
Vendor and equipment financing                                     --                10,000
Deferred income tax                                                --                 5,850
Other liabilities                                                12,873              17,140
                                                              ---------           ---------
      Total liabilities                                         348,751             259,786
                                                              ---------           ---------

Stockholders' Equity:
Common stock and additional paid-in capital                      82,785              76,534
Deferred compensation-restricted stock                           (4,440)             (8,065)
Foreign currency translation                                      1,179              (1,285)
Retained earnings                                               (95,377)             48,235
Common stock held in treasury, at cost                             (400)               (400)
                                                              ---------           ---------
      Total stockholders' equity                                (16,253)            115,019
                                                              ---------           ---------
      Total liabilities and stockholders' equity              $ 332,498           $ 374,805
                                                              =========           =========
</TABLE>



      See accompanying Notes to Condensed Consolidated Financial Statements



                                       1
<PAGE>   4
                         PACIFIC GATEWAY EXCHANGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
               (in thousands, except net income (loss) per share)


<TABLE>
<CAPTION>
                                                     Three Months               Nine Months
                                                  Ended September 30,       Ended September 30,
                                                ----------------------    ----------------------
                                                   2000        1999         2000         1999
                                                ---------    ---------    ---------    ---------
<S>                                             <C>          <C>          <C>          <C>
Revenues                                        $  60,573    $ 170,061    $ 280,522    $ 450,176
Cost of services and capacity sold                 56,332      144,964      250,889      387,832
                                                ---------    ---------    ---------    ---------
     Gross profit                                   4,241       25,097       29,633       62,344
Selling, general, and administrative expenses      21,785       17,317       78,879       41,245
Depreciation and amortization                       3,961        3,785       14,946        9,910
Provision for Impairment of Assets                 45,226         --         78,776         --
                                                ---------    ---------    ---------    ---------
     Total operating expenses                      70,972       21,102      172,601       51,155
                                                ---------    ---------    ---------    ---------
     Operating income                             (66,731)       3,995     (142,968)      11,189
Business exit costs                                  --           --          8,957         --
Interest (income) expense net                       1,331         (158)       3,873         (625)
Other (income) loss, net                              248         (299)        (776)      (1,046)
                                                ---------    ---------    ---------    ---------
     Income (loss) before income taxes             68,310        4,452     (155,022)      12,860
Provision for income taxes                             27        1,558      (11,410)       4,501
                                                ---------    ---------    ---------    ---------
     Net income                                 $ (68,337)   $   2,894    $(143,612)   $   8,359
                                                =========    =========    =========    =========

     Net income per share - basic               $   (3.43)   $    0.15    $   (7.26)   $    0.44
                                                =========    =========    =========    =========

     Net income per share - diluted             $   (3.43)   $    0.15    $   (7.26)   $    0.42
                                                =========    =========    =========    =========
     Weighted-average number of common shares
       outstanding - basic                         19,914       19,348       19,781       19,213
                                                =========    =========    =========    =========

     Weighted-average number of common shares
       outstanding - diluted                       19,914       19,670       19,781       19,825
                                                =========    =========    =========    =========
</TABLE>


      See accompanying Notes to Condensed Consolidated Financial Statements



                                       2
<PAGE>   5
                         PACIFIC GATEWAY EXCHANGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                     Nine Months
                                                                 Ended September 30,
                                                                ----------------------
                                                                   2000        1999
                                                                ---------    ---------
<S>                                                             <C>          <C>
Operating Activities:
Net income (loss)                                               $(143,612)   $   8,359
Adjustments to net income:
     Depreciation and amortization                                 14,946        9,910
     Stock compensation expense                                       332          725
     Bad debt expense                                               8,109        2,716
     Provision for loss on impaired assets                         78,776         --
     Acquisition and investment losses                              8,957         --
     Equity in earnings of affiliated companies, net                 (587)      (1,322)
     Changes in operating assets and liabilities:
        Accounts receivable                                       (86,911)     (58,319)
        Prepaid expenses                                              315         (451)
        Income taxes receivable                                   (13,461)       1,358
        Deferred tax asset                                          5,928          (76)
        Other current assets                                       (6,010)      (1,187)
        Deposits and other assets                                   7,124       (2,612)
        Accounts payable                                          107,777       49,601
        Accrued liabilities                                        (5,815)       2,626
        Other current liabilities                                  15,414         --
        Income taxes payable                                         --          4,858
        Deferred tax liability                                     (5,850)        --
        Other liabilities                                          (4,267)       4,838
                                                                ---------    ---------
     Net cash provided (used) by operating activities             (18,835)      21,024
                                                                ---------    ---------

Investing Activities:
     Sale of property and equipment                                49,776         --
     Purchase of property and equipment                           (31,646)     (47,631)
     Investments in subsidiaries and affiliates                   (10,284)      (8,734)
                                                                ---------    ---------
     Net cash provided (used) by investing activities               7,846      (56,365)
                                                                ---------    ---------

Financing Activities:
     Borrowings (repayments) on revolving line of credit, net     (10,246)      18,100
     Vendor and equipment financing, net                            1,311         --
     Exercise of stock options                                       --          1,273
     Distributions received from equity investees                    --            966
                                                                ---------    ---------
     Net cash provided (used) by financing activities              (8,935)      20,339
                                                                ---------    ---------

Net decrease in cash and cash equivalents                         (19,924)     (15,002)
Cash and cash equivalents at beginning of the period               27,189       30,041
                                                                ---------    ---------
Cash and cash equivalents at end of the period                  $   7,265    $  15,039
                                                                =========    =========

Supplemental data:
Common stock issued for acquisitions                            $   9,336    $    --
Common stock issued to investee                                 $    --      $   4,750
Costs incurred for cable acquisitions                           $    --      $   6,170
Interest paid                                                   $   3,718    $     993
</TABLE>


      See accompanying Notes to Condensed Consolidated Financial Statements


                                       3
<PAGE>   6
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


(1) GENERAL

    The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and Securities Exchange Commission ("SEC") regulations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, the financial statements reflect all adjustments (of a
normal and recurring nature) that are necessary to present fairly the financial
position, results of operations, and cash flows for the interim periods. These
financial statements should be read in conjunction with the annual report on
Form 10-K of Pacific Gateway Exchange, Inc. (the "Company" or "Pacific Gateway")
for the year ended December 31, 1999. The results for the three and nine month
periods ended September 30, 2000, are not necessarily indicative of the results
that may be expected for future periods.

    During the three months ended September 30, 2000, the Company curtailed
substantially all of its wholesale voice operations outside the U.S. except for
the United Kingdom and Russia. Subsequent to September 30, 2000, the Company
terminated substantially all of its domestic wholesale voice operations. The
operations that are ongoing after the shutdowns described above accounted for
approximately $27.8 million, or 46%, of the total sales reported in the three
months ended September 30, 2000. The Company expects that its future revenues
will come primarily from its retail, Internet and bandwidth operations, although
there can be no assurance that the Company will be successful in these
endeavors. See Notes 5 and 11 for the impact of these events on the Company's
long-lived assets.

    As discussed in Note 7, and in other sections of this report, the Company
has faced and continues to face severe shortages of operating capital. In
addition, the Company is in default under its bank facility. The Company is
considering a wide array of options to address its liquidity situation. The
Company hopes that these measures, plus others that may be implemented in the
future, will position the Company to meet the challenges now posed by the
changing telecommunications marketplace and its liquidity situation. If it is
unsuccessful in improving its cash position, the Company may decide or be forced
to seek relief under bankruptcy laws. The payment default under the bank
facility increases the possibility of bankruptcy for the Company.

    As described in Note 11, the Company performed a review of its long-lived
assets as of September 30, 2000, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of
this review, the Company recorded an impairment loss of $45.2 million in the
quarter ended September 30, 2000, related to those assets.

    The Company is continuing in its attempts to restructure its operations.
These efforts include headcount reductions, service reductions, asset sales and
the termination of certain operations. There can be no assurance that such
restructuring efforts will be successful.

    Certain prior-year amounts have been reclassified to conform to the 2000
financial statement presentation.

(2) EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                                    PER
                                                          INCOME                   SHARE
  (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)                (LOSS)       SHARES      AMOUNT
                                                        ---------    ---------    --------
<S>                                                     <C>          <C>          <C>
            Three Months Ended September 30, 2000
Basic EPS                                               $ (68,337)      19,914    $  (3.43)
Effect of dilutive stock options and restricted stock        --           --            --
                                                        ---------      -------    --------
Diluted EPS                                             $ (68,337)      19,914    $  (3.43)
                                                        =========      =======    ========

            Three Months Ended September 30, 1999
Basic EPS                                               $   2,894       19,348    $   0.15
Effect of dilutive stock options and restricted stock        --            322          --
                                                        ---------      -------    --------
Diluted EPS                                             $   2,894       19,670    $   0.15
                                                        =========      =======    ========

            Nine Months Ended September 30, 2000
Basic EPS                                               $(143,612)      19,781    $  (7.26)
Effect of dilutive stock options and restricted stock        --             --          --
                                                        ---------      -------    --------
Diluted EPS                                             $(143,612)      19,781    $  (7.26)
                                                        =========      =======    ========

            Nine Months Ended September 30, 1999
Basic EPS                                               $   8,359       19,213    $   0.44
Effect of dilutive stock options and restricted stock        --            612       (0.02)
                                                        ---------      -------    --------
Diluted EPS                                             $   8,359       19,825    $   0.42
                                                        =========      =======    ========
</TABLE>


                                       4
<PAGE>   7
(3) COMPREHENSIVE INCOME

    Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources. Comprehensive income includes foreign currency
translation adjustments, which are excluded from net income. Total comprehensive
income (loss) was ($67.1) million and $3.7 million for the three months ended
September 30, 2000 and 1999, respectively; and ($143.4) million and $7.7 million
for the nine months ended September 30, 2000 and 1999, respectively.

(4) PROPERTY AND EQUIPMENT

    As of September 30, 2000, the Company classified substantially all of its
assets as held for sale. As described in Note 11, those assets have been written
down to their estimated fair value as of September 30, 2000, if appropriate.
Property and equipment still being actively used in the Company's operations as
of September 30, 2000, was comprised mainly of assets used in the Company's
voice retail, Internet, bandwidth, and U.S., United Kingdom and Russian
wholesale voice operations. Property and equipment no longer being actively used
in the Company's operations as of September 30, 2000, was comprised mainly of
assets which were used in the Company's Australian, Japan, German, and New
Zealand wholesale voice operations. As of November 20, 2000, property and
equipment related to the Company's U.S. wholesale voice operations were no
longer being actively used in operations. The Company's policy is to continue to
depreciate assets only as long as they are still being actively used in the
Company's operations. Property and equipment at December 31, 1999, was all being
actively used in the Company's business and was recorded at book value.

    Property and equipment at September 30, 2000, and December 31, 1999
consisted of:

<TABLE>
<CAPTION>
                                                                     CARRIED AT
                                                                     LESSER  OF
                                                                      BOOK OR
                                               DEPRECIABLE      ESTIMATED FAIR VALUE       BOOK VALUE
           (DOLLARS IN THOUSANDS)             LIVES (YEARS)      SEPTEMBER 30, 2000    DECEMBER 31, 1999
    ------------------------------------      -------------     --------------------   -----------------
<S>                                           <C>               <C>                    <C>
    Property and equipment being actively
     used:
    Fiber optic cables                                   20          $     304             $  37,531
    Long distance communications equipment              5-7              8,719                84,433
    Computers and office equipment                      4-7              3,559                16,725
    Leasehold improvements                    Term of lease              1,439                 8,332
    Construction in progress                              -                221                12,605
    Cable construction in progress                        -                 --                40,782
                                                                     ---------             ---------
                                                                        14,242               200,408
                                                                     ---------             ---------
    Less: accumulated depreciation                                       3,958                31,221
                                                                     ---------             ---------
      Total, net                                                        10,284               169,187
                                                                     ---------             ---------
    Property and equipment no longer being
       actively used as of November 20, 2000                            76,691                    --
                                                                     ---------             ---------
      Total, net                                                     $  86,975             $ 169,187
                                                                     =========             =========

</TABLE>

    As a result of its liquidity problems, the Company has severely curtailed
the expansion of its communications network. The Company has sold a significant
portion of its interest in two fiber optic cable networks. See Note 5.

(5) ACQUISITIONS, INVESTMENTS AND DIVESTITURES

    In July 1999, the Company acquired a retail customer base for $7.0 million
in cash. In March 2000, the Company paid an additional $1.6 million based on
earnings of the acquired business. Under purchase accounting, the excess of the
aggregate purchase price over the net assets acquired resulted in total
intangible assets and goodwill of $8.6 million.

    In November 1999, the Company acquired a retail customer base for $4.2
million in cash and 60,000 shares of the Company's common stock. In the three
months ended March 31, 2000, the Company made the final cash payments of $2.8
million and issued the 60,000 shares of its common stock valued at $0.9 million
on the issue date. Under purchase accounting, the excess of the aggregate
purchase price over the net assets acquired resulted in total goodwill of $5.1
million.

    Also in November 1999, the Company acquired a retail customer base for $3.4
million. The agreement stipulated that the Company pledge $5.4 million of its
common stock as collateral for a $2.7 million cash payment due in 2000. In March
2000, the Company did not meet its cash payment obligation for this acquisition
and instead issued 330,000 of its common shares with a value


                                       5
<PAGE>   8

of $5.4 million at issuance. The Company believes that the $5.4 million was
impaired by $2.7 million. As a result, the Company has recorded an expense of
$2.7 million in the three months ended March 31, 2000. The Company has recorded
the remaining aggregate purchase price of $3.4 million as goodwill.

    In December 1999, the Company agreed to purchase the international retail
division of NOSVA Limited Partnership for $40.2 million. The purchase price was
comprised of $21.0 million in cash and $19.2 million of the Company's common
stock. In January 2000, the Company paid $3.0 million in cash and issued 154,887
of its common shares with a value of $3.0 million at issuance. The aggregate
consideration of $6.0 million represented a non-refundable deposit. The Company
did not complete the acquisition; therefore, it expensed the $6.0 million
deposit in March, 2000. (See Note 10 regarding litigation relating to this
agreement.)

    In February 2000, the Company acquired a retail customer base for $0.2
million and the forgiveness of $0.3 million owed to the Company by the seller.

    During the quarter ended June 30, 2000 the $17.1 million of goodwill and
other intangible assets recorded in the above purchases of retail customers was
deemed impaired. See Note 11.

    In June 2000, the Company completed the sale of its interests in the
Japan-U.S. Cable Network to Metromedia Fiber Network, Inc. ("MFN"). This
transaction generated approximately $46 million in cash, $28 million of which
was used to pay down bank indebtedness. In addition approximately $40 million of
future payment obligations were assumed by the buyer in this transaction.

    In September, 2000 the Company completed the sale of its interest in the
TAT-14 fiber optic cable network to MFN. This sale generated $3.0 million in
cash, with MFN assuming $65 million of future payment obligations.

    Under both MFN transactions, the Company is obligated to purchase capacity
on the cable networks at the in-service dates and upon expansion for
approximately $74 million. The Company will not be required to purchase capacity
in the event of customer cancellation prior to the applicable in-service date.
The Company expects the Japan-U.S. Cable Network in-service date will be in
February 2001 and the expansion date will be in July 2001. It also expects that
the TAT-14 Cable Network in-service date will be in February 2001.

(6) SEGMENT INFORMATION

    During 1999, the Company expanded into the bandwidth and Internet businesses
and began reporting these operations as segments. Due to the financial
constraints under which the Company has recently operated, these new segments
did not grow as planned, and therefore have never represented more than 10% of
the Company's revenue, profit or loss, or assets. As a result, the Company will
no longer report on segments as this information is not required and would not
be meaningful. If any of the Company's segments exceed the thresholds for
reportability in the future, the Company will provide the required disclosures
for those segments.

(7) DEBT

    Line of Credit

    The Company negotiated with its bank lenders a second Amended and Restated
Credit Agreement, dated as of May 31, 2000, that waived all defaults occurring
up to that time. This Amended and Restated Agreement eliminated financial
covenants, raised the interest rate and required that approximately $28 million
of proceeds from the sale of capacity on the Japan-U.S. Cable Network to MFN be
paid to lenders to permanently reduce the commitment. In addition, this
agreement required that on a going forward basis 100% of net proceeds from
assets sales would be paid to the lenders, with the commitment being permanently
reduced in an amount equal to 50% of such net proceeds. The Company's bank
facility matured on November 20, 2000, at which time the existing $38.6 million
of loans thereunder became due and payable. There is no indication that the
banks will extend the maturity of this facility. No replacement facility exists
and the Company does not have the funds to make the payment to the lenders.
Accordingly, an event of default exists with respect to payment of this bank
facility. The Company has requested that the lenders refrain from foreclosing on
the lenders' collateral while it seeks to sell assets. There can be no assurance
that the lenders will agree to any such forbearance. If no forbearance is agreed
to, the lenders may seek to foreclose on assets of the Company.

    Equipment Financing

    In December 1999, the Company obtained $10.0 million in equipment financing
from GE Capital Corporation ("GECC"), to be



                                       6
<PAGE>   9

used to finance its expansion and to meet its working capital needs. The Company
used certain of its switching equipment located in Los Angeles as collateral for
the 3 year financing arrangement. At September 30, 2000, the balance was $8.6
million. Since June 30, 2000, the Company has made only one of its required
monthly payments and the Company therefore has a payment default with respect to
this financing agreement. GECC sent a notice stating it intended to sell its
collateral in a private sale after November 20, 2000. The Company has been
attempting to sell this equipment, and has requested that GECC permit such sale
efforts to continue, with the proceeds of any such sale to be used first to
satisfy the GECC obligation. There can be no assurance that any such sale will
realize an amount sufficient to pay the GECC obligation, or that GECC will
refrain from taking further action to foreclose on its collateral. As of the
date hereof, the total amount due under the GECC financing agreement is
approximately $8.3 million.

    Vendor Financing

    In December 1999, the Company obtained a $15.0 million vendor financing
facility from Cisco Systems Capital Corporation ("Cisco"). At September 30,
2000, the Company had $2.7 million outstanding under this facility. The
Company's default under its bank credit agreement also resulted in a cross
default under its Cisco financing arrangement, therefore, it may not utilize any
additional credit under this facility until it remedies its default status.

    Security Interest

    In April 2000, the Company agreed to pledge certain of its assets to MCI
WorldCom, Inc. ("MCI") due to its inability to meet its obligation for
telecommunication services. The Company pledged the security interest to avoid
termination of services from MCI, one of its most significant vendors. This
agreement is still in effect.

(8)  OTHER LIABILITIES

     The Company's other current liabilities consisted of:

                                                   SEPTEMBER      DECEMBER
             (DOLLARS IN THOUSANDS)                30, 2000       31, 1999
                                                   ---------      --------
             Bandwidth Commitment                  $  7,532       $    --
             Other                                    8,542           660
                                                   --------       -------
               Other current liabilities           $ 16,074       $   660
                                                   ========       =======

(9)  RELATED PARTY TRANSACTIONS

     The Company is provided services by a legal firm in which one of the
Company's directors is a partner. The Company made payments to this firm of $2.5
million and $1.3 million in the nine months ended September 30, 2000 and 1999,
respectively.

(10) CONTINGENCIES

     The Company is party to various legal proceedings in the ordinary course of
business.

     In addition, on April 7, 2000, a complaint entitled Jeffrey Winick, on
Behalf of Himself and All Others Similarly Situated v. Pacific Gateway Exchange,
Inc., et al., was filed in the United States District Court, Northern District
of California (Case No. C 00-1211). The complaint also names certain officers of
the Company. The complaint purports to be a securities class action on behalf of
persons who purchased publicly traded securities of the Company between May 13,
1999, and March 31, 2000. The complaint alleges that between May 13, 1999, and
March 31, 2000, material false and misleading statements were made about the
Company's financial results and condition in violation of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. The complaint seeks monetary damages, interest, and costs, as well
as other relief that may be proper. After the filing of this complaint, other
complaints were filed in the United States District Court for the Northern
District of California, making similar allegations. One of these complaints
purported to be on behalf of persons who purchased the publicly traded
securities of the Company between April 13, 1999 and March 31, 2000. It is
anticipated that all of these actions will be consolidated into a single action.
Until a lead plaintiff is identified for the consolidated action, no responsive
pleading is required.

     In addition, Stepak v. Neckowitz, et al., case no. 413473, and Meyer v.
Neckowitz, et al., case no. 413538, shareholder derivative complaints against
certain of the Company's officers and directors, were filed in state court in
California. They allege, among other things, breach of fiduciary duty in
connection with the conduct alleged in the aforesaid federal court class
actions.




                                       7
<PAGE>   10

    The Securities and Exchange Commission has informed the Company that it is
conducting an informal inquiry concerning the Company's restatement of its 1999
quarterly financial statements. The Company intends to cooperate with such
inquiry.

    In addition, the Company and its subsidiary International Exchange
Communications have been named in NOSVA Limited Partnership and NOS
Communications, Inc. v. Pacific Gateway Exchange, et al. (Case No. C-00-2526
(MJJ)), a federal lawsuit filed in the United States District Court for the
Northern District of California on July 12, 2000. The complaint purports to be
for securities fraud, fraud, and breach of contract arising out of the alleged
failure of the Company to register stock provided to NOSVA as part of an alleged
non-refundable deposit in connection with an aborted asset acquisition. The
plaintiffs contend, in part, that the stock provided by the Company as part of
the alleged breakup fee was never registered and was also overvalued due to
alleged securities fraud. The securities fraud allegations largely overlap with
those asserted in the Winick litigation. The amended complaint seeks $3 million
in compensatory damages, plus punitive damages, specific performance, attorneys'
fees and costs as well as other relief that may be proper. The plaintiffs have
also filed a motion for preliminary injunction to compel the Company to register
the stock. The Company and its related co-defendants have moved to compel
arbitration of all the claims and intend to contest the motion and the
allegations of the complaint vigorously. International Exchange Communications
is also a party to a companion arbitration matter brought by NOSVA asserting
breach of contract and fraud claims. The arbitration proceedings have not yet
commenced. International Exchange Communications intends to contest the
allegations of the arbitration complaint vigorously.

    The Company has received a Notice of Arbitration from Mitsubishi Electric
Information Network Corporation and Diamond Link (Bermuda) Ltd. relating to
capacity on the Japan-U.S. Cable Network. These claimants seek the transfer of
this capacity or the refund of payments of $6.7 million which they have already
made, plus interest and costs. The parties are in the process of selecting the
arbitrators for this arbitration. These claimants have also filed a complaint in
federal court in the Northern District of California (Case No. C003184-SC) with
respect to this matter, seeking a preliminary injunction. The company opposed
that motion, and plaintiffs subsequently withdrew it.

    In November 1999, SA Telecommunications, Inc. and certain of its
subsidiaries, as debtors and debtors-in-possession ("Debtors") under Chapter 11
of the United States Bankruptcy Code ("Bankruptcy Code"), commenced an adversary
proceeding against the Company to recover alleged preferential payments in the
aggregate amount of $124,677.17 under Section 547(b) of the Bankruptcy Code, SA
Telecommunications, Inc. et al. v. Pacific Gateway Exchange, in the District
Court for the District of Delaware, Adversary Proceeding No. 00-79. This action
was subsequently dismissed and refiled by the plaintiff in the Bankruptcy Court
for the District of Delaware. The Debtors' Chapter 11 case was then converted to
Chapter 7 liquidation in September 2000. The Company has not answered the
complaint but has substantial defenses to the alleged preference payments and
has informed the newly-appointed Chapter 7 trustee of these defenses.

    In addition, in June, 2000, Harris Corporation filed an action in the
Superior Court for the County of San Francisco, against Pacific Gateway Exchange
and Does 1 through 50, inclusive, seeking $3,282,404.10, plus punitive damages,
interest and attorneys fees, all arising out of Harris Corporation's supply of
certain equipment and other goods and services to the Company. The Company filed
a demurrer to the claim for punitive damages which subsequently was withdrawn.
The Company has filed a cross-complaint against Harris Corporation seeking
damages in an unspecified amount. The Court has scheduled a Status and Setting
Conference for November 17, 2000. The action has not yet been set for trial.

    In addition, certain of the Company's creditors have filed lawsuits seeking
payment.

    While management intends to vigorously defend these actions, there can be no
assurance that an adverse result or settlement with regards to these actions
would not have a material adverse impact on the Company's financial condition or
results of operations.

    The United Kingdom Customs & Excise representatives have reviewed the
Company's 1998 Value Added Tax ("VAT") returns, and have asserted that the
Company should have billed approximately $1.8 million VAT to customers, to whom
no VAT was billed. The Company is in the process of providing documentation for
not billing VAT to those customers. Because the Company has followed the same
billing practices for periods subsequent to 1998, it is probable that the
Company could owe additional VAT for 1999 and 2000. Should the Company be
unsuccessful in defending its position, it would then issue VAT only invoices to
its customers for the amounts HMS Customs & Excise determine should have been
billed. Since customers are allowed to claim a credit in their VAT returns for
VAT paid, the customers should be able to recover any payments to the Company.
If the Company is unsuccessful in its position, the Company could also be liable
for penalties and interest on the underpayments. In addition the funding of
these payments may cause serious problems if the Company has to make these
payments prior to billing and collecting from its customers. Finally, the
Company may have difficulty in collecting from customers who are no longer doing
business in the United Kingdom, or are out of business. Since no final
determination has been made as to which customers should have been billed VAT,
no provision has been made in the Company's financial statements for this
potential liability.




                                       8
<PAGE>   11

(11) PROVISION FOR IMPAIRMENT OF ASSETS AND ASSETS HELD FOR SALE

     As of September 30, 2000, the Company classified substantially all of its
assets as held for sale. The Company received an offer (not subsequently
consummated) for its retail operations, which was substantially less than the
book value of those operations. This offer resulted in the writedown of the
carrying value of those assets related to the retail operations to approximate
the amount of the offer as of June 20, 2000. The write down was $21.1 million,
and is reflected in the income statement as an operating loss. During the course
of management's review of the assets for sale, it was determined that part of
the reduction in value was caused by an overstatement of receivables by
approximately $5.7 million. The overstatement of receivables was determined to
have existed at the time of purchase of the retail businesses. If this
overstatement had been determined at that time, the reduction in receivables
would have been accounted for as goodwill. Accordingly, this amount was
reclassified as goodwill and is included in the above impairment calculation.
The Company's retail operations were written down a further $9.5 million in the
quarter ended September 30, 2000, as described below.

     The Company has curtailed its plans for network expansion. Therefore the
amounts in construction in progress were reviewed to determine if there was an
impairment of these assets. Management determined that $12.5 million of the
construction in progress should be written off, and this amount is included as
an operating charge in the nine months ended September 30, 2000.

     As the Company continues to explore the sale of assets and operations, the
Company receives offers which are, at times, substantially below the carrying
value of those assets. Depending on liquidity issues, management may decide it
is necessary to divest a substantial portion of its assets or operations at
prices significantly below the amount recorded in the Company's financial
statements. SFAS No. 121 requires that: (1) management review for impairment all
long-lived assets and certain identifiable intangibles to be held and used in
the Company's business whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable and (2) all long-lived
assets and certain identifiable intangibles to be disposed of, for which
management, having the authority to approve the action, has committed to a plan
to dispose of the assets, be reported at the lower of carrying amount or fair
value less costs to sell. Company management has conducted such a review and
recorded an impairment loss of $45.2 million in the quarter ended September 30,
2000. The loss has been recorded in the income statements under the caption
Provision for Impairment of Assets.

     Fair value was determined by: (1) reference to letters of intent and offers
that the Company has received for these assets that management believes
represent amounts at which the assets could be sold in a current transaction
between willing parties or (2) if no offer was received, reference to
management's analysis based on current market conditions. Management's estimate
of fair value will be analyzed on a quarterly basis and there can be no
assurances that future events will not have a material impact on these
estimates.

ITEM 2: MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

     The forward looking statements in this Quarterly Report are subject to
risks and uncertainties and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including the
following:

1.   actions and positions taken by the Company's lenders, including decisions
     with respect to foreclosure on assets;

2.   vendor responses to potential payment delays or defaults due to the severe
     cash shortages the Company has experienced;

3.   finding buyers for its possible selected asset sales, progress in
     negotiations, or delays in closing its asset sales and the amount of
     proceeds received from such sales;

                                       9
<PAGE>   12

4.   the possibility that the Company may not be able to adequately improve its
     liquidity situation and without an infusion of cash may decide it needs to
     file for bankruptcy;

5.   availability of financing on acceptable terms and conditions in the credit
     market;

6.   uncertainties in the development and growth of the Company's business
     lines, such as the Company's Internet operations, including competitive
     conditions;

7.   ramifications of the cessation of certain of the Company's operations;

8.   the termination of operating agreements with other carriers or the
     inability to enter into additional operating agreements;

9.   the uncertainties inherent in litigation;

10.  changes in the availability of transmission facilities such as domestic,
     international, and undersea fiber optic cable facilities or in the
     feasibility, timing, or expense of building or leasing such facilities;

11.  the availability of additional bandwidth for the Company's capacity
     obligations;

12.  inaccuracies in the Company's forecasts of traffic;

13.  loss of the services of key officers and key employees;

14.  loss of a customer that provides significant revenues to the Company;

15.  problems arising from recent acquisitions of other companies or facilities;

16.  changes in the ratios between the amount of telephone traffic that the
     Company delivers and the amount that it receives and changes in expected
     future revenue from delayed proportional return traffic from foreign
     partners under the Company's operating agreements;

17.  Internet growth at slower rates than expected;

18.  consolidation of the Company's competitors within the telecommunications or
     Internet industries;

19.  changes in the competitive or regulatory environment;

20.  higher than anticipated costs; or

21.  other risk factors included in the Company's Report on Form 10-K, on file
     with the Securities and Exchange Commission.

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

OVERVIEW

     Pacific Gateway Exchange was founded in August 1991 to capitalize on the
significant growth opportunities in the international telecommunications
services market. Since then, the Company has undertaken five strategic
initiatives in response to regulatory and technological developments: (1) as
foreign countries deregulated their telecommunications markets, the Company
started offshore wholesale operations; (2) in response to technological
innovation and consumer demand, the Company entered the market for retail
services; (3) to participate in the growth of the Internet, the Company began
its own Internet operations; (4) to take advantage of the Internet as a medium
of telephony, the Company began providing VoIP services to telecommunications
carriers, ISPs, and other value-added service providers; and (5) to meet the
growing global demand for high bandwidth fiber optic capacity, the Company
acquired interests in strategic state-of-the-art undersea and land-based cable
systems.



                                       10
<PAGE>   13
    During the three months ended September 30, 2000, the Company curtailed
substantially all of its wholesale voice operations outside the U.S. except for
the United Kingdom and Russia. Subsequent to September 30, 2000, the Company
terminated substantially all of its domestic wholesale voice operations. The
operations that remain after the shutdowns described above accounted for
approximately $27.8 million, or 46%, of the total sales reported in the three
months ended September 30, 2000. The Company expects that its future revenues
will come primarily from its retail, Internet and bandwidth operations, although
there can be no assurance that the Company will be successful in these
endeavors. See Notes 5 and 11 to the Notes to Condensed Consolidated Financial
Statements (unaudited) for the impact of these events on the Company's
long-lived assets.

    The Company is continuing to experience a severe liquidity shortage and its
financial position has deteriorated since the end of the second quarter of 2000.
The Company negotiated with its bank lenders a second Amended and Restated
Credit Agreement, dated as of May 31, 2000, that waived all defaults occurring
up to that time. However, the Company's bank facility matured on November 20,
2000, at which time the existing $38.6 million of loans thereunder became due
and payable. There is no indication that the banks will extend the maturity of
this facility. No replacement facility exists and the Company does not have the
funds to make the payment to the lenders. Accordingly, an event of default
exists with respect to payment of this bank facility. The Company has requested
that the lenders refrain from foreclosing on the lenders' collateral while it
seeks to sell assets. There can be no assurance that the lenders will agree to
any such forbearance. If no forbearance is agreed to, the lenders may seek to
foreclose on assets of the Company. The proceeds of any asset sales must be used
to repay this bank indebtedness. The Company also has a payment default with
respect to its equipment financing agreement with GE Capital Corporation
("GECC"). The Company's vendor financing agreement with Cisco Systems Capital
Corporation ("Cisco") is also in default. The Company is also significantly
overdue on payments to its vendors and litigation against the Company related to
such overdue payments has been increasing. Because of these events, the Company
may decide or be forced to seek relief under bankruptcy laws.

    The Company is continuing in its attempts to restructure its operations as
discussed below. These efforts include headcount reductions, service reductions,
asset sales and the termination of certain operations. There can be no assurance
that such restructuring efforts will be successful.

    In particular, the Company has taken the following steps:

    (1) The Company has been actively looking for buyers of its assets or for
the Company. In May, 2000, the Company agreed to sell its fiber optic cable
capacity on both the TAT-14 and the Japan-U.S. Cable Networks and two of its
related Japanese subsidiaries to Metromedia Fiber Network, Inc. ("MFN"). Under
the terms of the sale of the Japan-U.S. Cable Networks sale, the Company
received approximately $46 million in net cash proceeds from the sale and MFN
has assumed the liability for payment of the $40 million of cash payment
obligations that would have been due in 2000. Additionally, the Company will
retain the right to purchase cable capacity to meet its existing customer
capacity obligations and for its Internet operations. The Japan-U.S. transaction
closed in June 2000. The TAT-14 transaction, which closed in September, 2000,
provided another $3.0 million of cash, and a reduction in future cash payments
of $65 million of cash payments obligations. As a result of the asset sales, the
Company will no longer be engaged in broadband network design, but will continue
the design and provisioning processes required to activate its customer orders.
The Company did not enter into or close any other asset sale agreements in the
quarter ended September 30, 2000.

    (2) The Company has retained the Gordian Group to find buyers for the
Company or selected assets. Negotiations with certain buyers are ongoing but
there can be no assurance that any transactions will be consummated.

    (3) To conserve cash, the Company has discontinued certain operations and
continues to evaluate which of its operations should be continued.

    (4) The Company has aggressively reduced costs in many areas of the
Company's business. As a result of employee turnover and through targeted staff
reductions, the Company has reduced the number of its employees from 386 at
December 31, 1999, to 151 at November 15, 2000. The Company is also exploring
other cost saving measures, including reducing its use of consultants in
selected areas of the business. The Company is now relying on temporary
employees to fill certain positions in its accounting department. The Company
has retained the services of a management consulting firm to obtain necessary
expertise and replace departed employees in the restructuring of operations.

    (5) The Company also has reduced its planned expenditures by allowing its
agreement to acquire the retail division of NOSVA Limited Partnership to
terminate. As a result, the Company no longer is obligated to pay $18.0 million
in cash or to issue $16.2



                                       11
<PAGE>   14

million of its common stock at or subsequent to closing. See Note 10 to the
Notes to Condensed Consolidated Financial Statements (unaudited) regarding
litigation related to this transaction.

    The Company is considering a wide array of options to address its liquidity
situation. The Company hopes that these measures, plus others that may be
implemented in the future, will position the Company to meet the challenges now
posed by the changing telecommunications marketplace and its liquidity
situation. The Company expects its strategy may have a number of effects on its
future results of operations. In particular, the Company may: (1) incur interest
expense at higher, default interest rates and related penalties attributable to
its indebtedness, (2) incur increased administrative expenses as it pursues
strategic and financing alternatives to address liquidity and (3) receive
decreased cash inflows as a result of a significant reduction in revenues and
the cessation of certain operations. If it is unsuccessful in improving its cash
position, the Company may decide or be forced to seek relief under bankruptcy
laws. The payment default under the bank facility increases the possibility of
bankruptcy for the Company.

    The Company was late in filing its June 30, 2000, and September 30, 2000,
quarterly report on Form 10-Q. As a result, the Company is not eligible at this
time to register securities on Form S-3. For a period of one year, if the
Company needs to register securities, it would have to do so on Form S-1, which
has more comprehensive disclosure requirements than a Form S-3.

    On November 21, 2000, the Company received a notice from Nasdaq stating that
because the Company's common stock did not maintain a bid price of at least
$1.00 for the previous 30 consecutive trading days, the Company's common stock
will be delisted on February 22, 2001. unless the bid price for the Company's
common stock is at least $1.00 for 10 consecutive trading days on or before
February 20,2001. In addition, on November 22, 2000, the Company received a
notice from Nasdaq stating the Company's securities would be delisted if the
Company's quarterly report on Form 10-Q for the quarter ended September 30, 2000
was not filed by November 29, 2000, which it was not. The Company has requested
a hearing with Nasdaq on the delisting notice, which is scheduled for December
14, 2000. The delisting has been stayed pending the hearing. The Company is
appealing the delisting. However, there is no assurance that the Company will be
successful at the hearing. If Nasdaq delists the Company's stock, it could make
it more difficult for stockholders or potential stockholders to sell, buy or
obtain quotations as to the price of the Company's stock.

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

    Cost of telecommunications revenue is comprised primarily of costs incurred
from other domestic and foreign telecommunications carriers to originate,
transport, and terminate calls. The majority of the Company's cost of
telecommunication revenue is variable, based upon the number of minutes of use,
with transmission and termination costs being its most significant expense. The
Company seeks to lower its cost of telecommunication revenue by:

     -   optimizing the routing of calls over the lowest cost route;

     -   negotiating lower variable usage based costs with domestic and foreign
         service providers and negotiating additional and lower cost foreign
         carrier agreements with the foreign incumbent carriers and others.

    The Company generally realizes a higher average price per minute and gross
margin on its international calls as compared to its domestic long distance
services and a higher average price per minute and gross margin on its retail
services as compared to its wholesale services. The Company's overall average
price per minute and gross margin may fluctuate based on its relative volume of
international versus domestic long distance services, wholesale services versus
retail services, and the proportion of traffic carried on its owned network
versus resale of other carrier services.

    The Company's selling, general, and administrative expenses are comprised
primarily of salaries, commissions, occupancy costs, sales and marketing
expenses, advertising expenses, administrative costs, professional fees and
sales allowances. These expenses had been increasing consistently with the
expansion of the Company's operations into retail and Internet services. In
addition, the Company's current financial condition has resulted in increased
administrative expenses for professional services. The Company is also reducing
it workforce and expects that the resulting cost savings will partially offset
its other expenditures that are expected to increase. The reduced workforce has
resulted in additional consulting and temporary employee costs. In order to
induce employees to stay with the Company, the Company has made retention
payments.




                                       12
<PAGE>   15

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                THREE MONTHS                      NINE MONTHS
                                                             ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                           ------------------------          ---------------------
                                                             2000            1999              2000          1999
                                                           -------         --------          --------      -------
<S>                                                        <C>             <C>               <C>           <C>
       Total revenues                                       100.0 %         100.0 %           100.0 %      100.0 %
       Cost of services and capacity sold                    93.0 %          85.2 %            89.4 %       86.2 %
                                                            -----           -----             -----        -----
          Gross profit                                        7.0 %          14.8 %            10.6 %       13.8 %
       Selling, general, and administrative expenses         36.0 %          10.2 %            28.1 %        9.2 %
       Depreciation and amortization                          6.5 %           2.2 %             5.4 %        2.2 %
       Provision for impairment of assets                    74.7 %           0.0 %            28.1 %        0.0 %
                                                           ------           -----             -----        -----
          Total operating expenses                          117.2 %          12.4 %            61.6 %       11.4 %
                                                           ------           -----             -----        -----
          Operating income (loss)                          (110.2)%           2.4 %           (51.0)%        2.5 %
       Acquisition and investment losses                      0.0 %           0.0 %             3.2 %        0.0 %
       Interest (income) expense, net                         2.2 %           0.0 %             1.4 %       (0.1)%
       Other (income) loss, net                               0.4 %          (0.2)%            (0.3)%       (0.2)%
                                                           ------           -----             -----        -----
          Income (loss) before income taxes                (112.8)%           2.6 %           (55.3)%        2.8 %
       Provision for (benefit from) income taxes              0.0 %           0.9 %            (4.1)%        1.0 %
                                                           ------           -----             -----        -----
          Net income (loss)                                (112.8)%           1.7 %           (51.2)%        1.9 %
                                                           ======           =====             =====        =====
</TABLE>

THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES: Total revenues for the three month period ended September 30, 2000,
decreased 64.4% to $60.6 million from $170.1 million in the same period in 1999.
The decrease in revenue was primarily due to increased competition and the loss
of key customers because of the Company's liquidity shortage. The Company has
observed that certain vendors to whom the Company owes money have begun to send
more revenue to the Company to offset the amounts owed. If not for this, the
revenues for this quarter may have been lower. The Company's minutes of use
decreased to 392.5 million from 694 million, and the average price per minute
charged to customers decreased to $0.17 in the three months ended September 30,
2000, compared to $0.24 for the same period in 1999. The decrease was a result
of increased competition.

GROSS PROFIT: Gross profit decreased 83.1% to $4.2 million in the three months
ended September 30, 2000, from $25.1 million in the same period in 1999. Gross
margin decreased to 7.0% for the three months ended September 30, 2000, from
14.8% in the same period in 1999. Increased competition continues to drive
wholesale telecommunication prices downward resulting in decreased wholesale
telecommunication gross margins. This decrease was partially offset by higher
gross profit generated from the Company's retail operations.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A expenses increased
25.8% to $21.8 million in the three months ended September 30, 2000, from $17.3
million in the same period in 1999. As a percentage of revenues, SG&A expenses
were 36.0% in the three months ended September 30, 2000, up from 10.2% in the
same period in 1999. This increase was due primarily to increased personnel
expenses (including retention payments), legal and professional expenses,
including payments to consultants. At September 30, 2000, the Company employed
240 people, down from 370 at September 30, 1999. The Company has reduced its
number of employees to 151 at November 15, 2000.

BAD DEBT EXPENSE: Bad debt expense increased to $2.5 million in the three months
ended September 30, 2000, from $1.3 million in the same period in 1999.
Management believes that difficulties may be encountered in collecting certain
remaining accounts receivables due to the cessation of certain of the Company's
operations, although the effect of these difficulties cannot be quantified at
this time.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased 4.6% to
$4.0 million in the three months ended September 30, 2000, from $3.8 million in
the same period in 1999. Depreciation and amortization as a percentage of
revenues was 6.5% for the three months ended September 30, 2000, and 2.2% for
the same period in 1999. The increase in depreciation was




                                       13
<PAGE>   16

primarily due to additional U.S. wholesale and offshore fiber optic cables and
communications equipment acquired since March 31, 1999. The Company recorded
amortization expense of $0.6 million related to its intangible assets recorded
as a result of its retail acquisitions.

INTEREST: Interest expense was $1.3 million for the three months ended September
30, 2000, versus income of $0.2 million in the same period in 1999. The Company
has incurred debt for expansion and acquisitions, and no longer has cash
reserves to invest. In addition, the Company has capitalized the interest costs
that relate to network and facility construction per SFAS No. 34,
"Capitalization of Interest Cost." The Company will depreciate the capitalized
interest over the related asset's life.

INCOME TAX: Income taxes of $27 thousand were recorded in the three months ended
September 30, 2000, versus $1.6 million in the same period in 1999, due to
increased operating losses.

LOSS ON IMPAIRMENT OF ASSETS: As described in Note 11 to the Notes to Condensed
Consolidated Financial Statements (unaudited), the Company performed a review of
its long-lived assets as of September 30, 2000, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As a result of
this review, the Company recorded an impairment loss of $45.2 million in the
quarter ended September, 30, 2000, related to those assets.

NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30 ,1999

REVENUES: Total revenues for the nine month period ended September 30, 2000,
decreased 37.7% to $280.5 million from $450.2 million in the same period in
1999. The decrease in revenue was primarily due to the loss of key customers
because of the Company's liquidity shortage. The Company has observed that
certain vendors to whom the Company owes money sent more revenue to the Company
to offset the amounts owed. If not for this, the revenues for the nine months
ended September 30, 2000, may have been lower. The Company's minutes of use
decreased to 1.6 billion from 1.8 billion, and the average price per minute
charged to customers decreased to $0.18 in the nine months ended September 30,
2000, compared to $0.25 for the same period in 1999. The decrease was a result
of increased competition. Partially offsetting the decrease in the per minute
price was an increase in the Company's retail volume.

GROSS PROFIT: Gross profit decreased 52.5% to $29.6 million in the nine months
ended September 30, 2000, from $62.3 million in the same period in 1999. Gross
margin decreased to 10.6% for the nine months ended September 30, 2000, from
13.8% in the same period in 1999. Increased competition continues to drive
wholesale telecommunication prices downward resulting in decreased wholesale
telecommunication gross margins. This decrease was partially offset by higher
gross profit generated from the Company's retail operations.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ("SG&A"): SG&A expenses increased
91.2% to $78.9 million in the nine months ended September 30, 2000, from $41.2
million in the same period in 1999. As a percentage of revenues, SG&A expenses
were 28.1% in the nine months ended September 30, 2000, up from 9.2% in the same
period in 1999. This increase was due primarily to increased personnel expenses,
legal and professional expenses, and start-up and related costs for the
Company's Internet operations.

BAD DEBT EXPENSE: Bad debt expense increased to $8.1 million in the nine months
ended September 30, 2000, up from $2.7 million in the same period in 1999. The
increase is due primarily to a deterioration in the aging of the Company's
wholesale receivables and increased retail receivables as a result of the
acquisition of several retail businesses in the second half of 1999. In the nine
months ended September 30, 2000, the Company also experienced write-offs related
to the integration of receivables acquired as part of the Company's retail
acquisitions completed in 1999. Management believes that difficulties may be
encountered in collecting certain remaining accounts receivables due to the
cessation of certain of the Company's operations, although the effect of these
difficulties cannot be quantified at this time.



                                       14
<PAGE>   17
ACQUISITION AND INVESTMENT LOSSES: In the nine months ended September 30, 2000,
the Company expensed approximately $8.9 million related to its acquisitions and
investments. In March 2000, the Company expensed $6.0 million in non-refundable
deposits related to planned acquisition of NOSVA Limited Partnership, as the
Company will not complete the acquisition. See Note 10 to the Notes to Condensed
Consolidated Financial Statements (unaudited). Also in March 2000, the Company
issued 330,000 of its common shares to satisfy a $2.7 million cash payment
obligation for the purchase of a retail customer business. At issuance, the
shares were worth $5.4 million as stipulated in the asset purchase agreement.
The Company expensed the excess value of the shares of $2.7 million related to
this acquisition. In addition, the Company's equity investment in a Belgian
company required a letter of credit payment of $0.2 million, which it also
expensed during the period. The Belgian company is no longer in business and the
Company had previously fully written-down its equity investment as it incurred
losses.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased 50.8% to
$14.9 million in the nine months ended September 30, 2000, from $9.9 million in
the same period in 1999. Depreciation and amortization as a percentage of
revenues was 5.4% for the nine months ended September 30, 2000, and 2.2% for the
same period in 1999. The increase in depreciation was primarily due to
additional U.S. wholesale and offshore fiber optic cables and communications
equipment acquired since March 31, 1999. The Company recorded amortization
expense of $2.9 million related to its intangible assets recorded as a result of
its retail acquisitions.

INTEREST: Interest expense was $3.9 million for the nine months ended September
30, 2000, versus income of $0.6 million in the same period in 1999. The Company
has added new debt in 2000, and has not had the cash to invest during 2000. In
addition, the Company has capitalized the interest costs that relate to network
and facility construction per SFAS No. 34, "Capitalization of Interest Cost."
The Company will depreciate the capitalized interest over the related asset's
life.

INCOME TAX: Income taxes were a credit of $11.4 million in the nine months ended
September 30, 2000, versus a provision for income taxes of $4.5 million in the
same period in 1999. The credit resulted from the significant operating losses
of the Company, and the ability to carryback the current year losses to prior
years' income. The effective tax rate for the nine months ended September 30,
1999 was 34.8%.

LOSS ON IMPAIRMENT OF ASSETS: The Company may need to sell a substantial portion
of its assets to meet its cash requirements. The Company received an offer for
its retail operations (not subsequently consummated), which was substantially
less than the book value of those operations. This offer resulted in the
writedown of the carrying value of those assets related to the retail operations
to approximate the amount of the offer. At June 30, 2000, the write down
was $21.0 million, and was reflected in the income statement as an operating
loss. Based on offers received subsequent to the offer described above, the
carrying value of the retail assets were reduced by an additional $9.5 million
in the three months ended September 30, 2000.

    The Company has curtailed its plans for network expansion. Therefore the
amounts in construction in progress were reviewed to determine if there was an
impairment of these assets. Management determined that $12.5 million of the
construction in progress should be written off, and this amount is included as
an operating charge in the nine months ended September 30, 2000.

    As described in Note 11 to the Notes to Condensed Consolidated Financial
Statements (unaudited), the Company performed a review of its long-lived assets
as of September 30, 2000, in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." As a result of this review, the Company
recorded an impairment loss of $45.2 million in the quarter ended September, 30,
2000, related to those assets.

LIQUIDITY AND CAPITAL RESOURCES

    The Company uses its existing cash balances and cash provided by operating
activities to finance its operations.

    Net cash used by operating activities was $18.8 million for the nine month
period ended September 30, 2000, versus $21.0 million provided by operating
activities for the same period in 1999. This decrease in cash provided by
operating activities was due primarily to the large net loss for the period, the
Company's delayed payments to its vendors resulting in its increased accounts
payable balance at September 30, 2000, an increase in bad debt expense, and an
increase in depreciation and amortization, partially offset by an increase in
accounts receivable. The Company expects a further decrease in net cash provided
by operation activities as a result of a significant reduction in revenues and
the cessation of certain operations.




                                       15
<PAGE>   18

    Net cash provided by investing activities was $7.8 million for the nine
month period ended September 30, 2000, versus $56.4 million used in investing
activities for the same period in 1999. Capital expenditures for the nine-month
period ended September 30, 2000, were $31.6 million, compared to $47.6 million
in the same period in 1999. The capital expenditures in both 2000 and 1999 were
primarily for undersea fiber optic cable and offshore transmission equipment. In
addition, for the nine month period ended September 30, 2000 the Company
invested $10.3 million in the acquisition of several retail customer businesses
and a wholesale network acquired from another carrier and sold fixed assets for
$49.8 million.

    Net cash used by financing activities was $8.9 million for the nine month
period ended September 30, 2000, versus $20.3 million provided by financing
activities for the same period in 1999. During the nine-month period ended
September 30, 2000, the Company reduced its existing credit facility to $43.9
million, borrowed $2.7 million in cash from vendor financing and reduced its
outstanding equipment financing by $1.4 million.

    As discussed in the "Overview", the Company negotiated a second Amended and
Restated Credit Agreement, dated as of May 31, 2000, that waived all defaults
occurring up to that time. This Amended and Restated Agreement eliminated
financial covenants, raised the interest rate and required that approximately
$28 million of proceeds from the sale of capacity on the Japan-U.S. Cable
Network to MFN be paid to lenders to permanently reduce the commitment. In
addition, this agreement required that on a going forward basis 100% of net
proceeds from assets sales would be paid to the lenders, with the commitment
being permanently reduced in an amount equal to 50% of such net proceeds. The
Company's bank facility matured on November 20, 2000, at which time the existing
$38.6 million of loans thereunder became due and payable. There is no indication
that the banks will extend the maturity of this facility. No replacement
facility exists and the Company does not have the funds to make the payment to
the lenders. Accordingly, an event of default exists with respect to payment of
this bank facility. The Company has requested that the lenders refrain from
foreclosing on the lenders' collateral while it seeks to sell assets. There can
be no assurance that the lenders will agree to any such forbearance. If no
forbearance is agreed to, the lenders may seek to foreclose on assets of the
Company. The Company is actively negotiating with the banks to permit
reborrowings concurrent with asset sales. If the Company is unable to resolve
this situation, 100% of the net proceeds from asset sales will have to be used
to repay bank debt.

    In December 1999, the Company obtained $10.0 million in equipment financing
from GECC to be used to finance its expansion and to meet its working capital
needs. The Company used certain of its switching equipment located in Los
Angeles as collateral for the 3 year financing arrangement. At September 30,
2000, the balance was $8.6 million. Since June 30, 2000, the Company has made
only one of its required monthly payments and the Company therefore has a
payment default with respect to this financing agreement. GECC sent a notice
stating it intended to sell its collateral in a private sale after November 20,
2000. The Company has been attempting to sell this equipment, and has requested
that GECC permit such sale efforts to continue, with the proceeds of any such
sale to be used first to satisfy the GECC obligation. There can be no assurance
that any such sale will realize an amount sufficient to pay the GECC obligation,
or that GECC will refrain from taking further action to foreclose on its
collateral. As of the date hereof, the total amount due under the GECC financing
agreement is approximately $8.3 million. The Company's vendor financing
agreement with Cisco is also in default.

    During the nine months ended September 30, 2000, the Company sold its
capacity in two Cable Networks and, under the terms of the sale, the Company is
also purchasing capacity on the Japan-U.S. and TAT-14 Cable Networks at the
in-service dates and upon expansion for approximately $74 million. The Company
expects the Japan-U.S. Cable Network in-service date will be in February 2001
and the expansion date will be in July 2001. It also expects that the TAT-14
Cable Network in-service date will be in February 2001.

    As a result of its severe cash shortages, the Company has experienced
significant difficulty in making timely payments to its creditors including its
vendors/customers, which has caused numerous vendors to terminate service.
Certain of its vendors have filed lawsuits seeking repayment. In April 2000, the
Company agreed to pledge certain of its assets to MCI WorldCom, Inc. ("MCI") due
to its inability to meet its obligation for telecommunication services. The
Company pledged the security interest to avoid termination of services from MCI,
one of its most significant vendors. This agreement is still in effect.

    In 1999, the Company entered into agreements to lease and exchange bandwidth
capacity, including maintenance services. The Company committed to sell capacity
for $57.3 million to be received over three years and provide maintenance for
$30.0 million to be received over the terms of the contracts, which is generally
20 years. Certain vendors have sought to cancel their agreements which would
reduce the capacity sold to $19.9 million. (See Note 10 to the Notes to
Condensed Consolidated Financial Statements (unaudited)). Of the capacity
exchanged, the Company received domestic capacity in exchange for future
capacity on the TAT-14 Cable Network. Under the terms of the Cable Network sale
to MFN, the Company retained the right to purchase capacity to meet its
obligations under these agreements.



                                       16
<PAGE>   19

    The Company is now considering a wide array of alternatives to reduce its
costs, to repay indebtedness and generally to maximize value for its
shareholders. These alternatives include efforts to find a merger partner, to
sell particular assets, to negotiate new arrangements with existing creditors
and to find new sources of financing. Management believes that these measures,
if they can be promptly implemented, may enable the Company, on a much smaller
scale, to regain profitable operations. If the Company is unable to effect these
measures, the Company may be forced to seek relief under the bankruptcy laws and
such action is more likely in light of the payment default under the bank
facility. The Company's cash position continues to worsen and its deterioration
has accelerated since September 2000. As a result of the Company's liquidity
situation, its auditors included a going concern explanation in their opinion on
the Company's financial statements as of and for the year ended December 31,
1999. The timing and terms of any of the above transactions or financing
activities will be subject to market conditions and other factors beyond the
Company's control. There can be no assurance that such transactions, financing
arrangements or other alternatives will be consummated.



                                       17
<PAGE>   20


                           PART II. OTHER INFORMATION

Item 1.  Legal proceedings

    See Note 10 to the Notes to Condensed Consolidated Financial Statements
(unaudited) set forth in Part I, Item 1 of the Quarterly Report on Form 10-Q,
which is hereby incorporated by reference.

Item 2.  Changes in Securities and Use of Proceeds

    None

Item 3.  Defaults upon Senior Securities

    See Note 7 to the Notes to Condensed Consolidated Financial Statements
(unaudited) set forth in Part I, Item 1 of the Quarterly Report on Form 10-Q,
which is hereby incorporated by reference.

    None

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

    None

Item 5.  Other Information

    None

Item 6.  Exhibits and Reports on Form 8-K

    (a)  The Exhibits filed as part of this report are listed below:

         27 Financial Data Schedule

    (b)  The Company filed reports on Form 8-K during the quarter on July 6,
         July 13, and July 19 (changes in registrant's certifying accountant)
         and on September 11 (notifying of cancellation of delisting hearing by
         NASDAQ).



                                       18
<PAGE>   21



                                   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:  December 1, 2000

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


                                              By: /s/ David M. Davis
                                                 -------------------------------
                                                 David M. Davis
                                                 Acting CFO
                                                 (Principal Accounting Officer)




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