<PAGE>
 
 
 
                                 EXHIBIT 10.1
 
                            LONG TERM INCENTIVE PLAN
<PAGE>
 
                               TABLE OF CONTENTS
 
<TABLE>
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SECTION 1...................................................................   1
  GENERAL...................................................................   1
    1.1. Purpose............................................................   1
    1.2. Participation......................................................   1
SECTION 2...................................................................   1
  OPTIONS...................................................................   1
    2.1. Definition.........................................................   1
    2.2. Eligibility........................................................   1
    2.3. Price..............................................................   2
    2.4. Exercise...........................................................   2
    2.5. Post-Exercise Limitations..........................................   2
    2.6. Expiration Date....................................................   2
    2.7. Reload Provision...................................................   3
SECTION 3...................................................................   3
  STOCK APPRECIATION RIGHTS.................................................   3
    3.1. Definition.........................................................   3
    3.2. Eligibility........................................................   3
    3.3. Exercise...........................................................   3
    3.4. Settlement of Award................................................   4
    3.5. Post-Exercise Limitations..........................................   4
    3.6. Expiration Date....................................................   4
SECTION 4...................................................................   4
  STOCK AWARDS..............................................................   4
    4.1. Definition.........................................................   4
    4.2. Eligibility........................................................   4
    4.3. Terms and Conditions of Awards.....................................   5
SECTION 5...................................................................   5
  STOCK PURCHASE PROGRAM....................................................   5
    5.1. Purchase of Stock..................................................   5
    5.2. Matching Shares....................................................   5
    5.3. Restrictions on Shares.............................................   5
SECTION 6...................................................................   6
  PERFORMANCE UNITS.........................................................   6
    6.1. Definition.........................................................   6
    6.2. Eligibility........................................................   6
    6.3. Terms and Conditions of Awards.....................................   6
    6.4. Settlement.........................................................   6
    6.5. Termination during Performance Period..............................   6
SECTION 7...................................................................   7
  OPERATION AND ADMINISTRATION..............................................   7
    7.1. Effective Date.....................................................   7
    7.2. Shares Subject to Plan.............................................   7
    7.3. Individual Limits on Awards........................................   7
    7.4. Adjustments to Shares..............................................   7
    7.5. Limit on Distribution..............................................   9
    7.6. Liability for Cash Payments........................................   9
    7.7. Performance-Based Compensation.....................................   9
    7.8. Withholding........................................................   9
    7.9. Transferability....................................................   9
    7.10. Notices...........................................................  10
</TABLE>
 
                                      (i)
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<TABLE>
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    7.11. Form and Time of Elections........................................  10
    7.12. Agreement With Company............................................  10
    7.13. Limitation of Implied Rights......................................  10
    7.14. Evidence..........................................................  10
    7.15. Action by Company or Related Company..............................  10
    7.16. Gender and Number.................................................  10
SECTION 8...................................................................  11
  COMMITTEE.................................................................  11
    8.1. Administration.....................................................  11
    8.2. Selection of Committee.............................................  11
    8.3. Powers of Committee................................................  11
    8.4. Delegation by Committee............................................  11
    8.5. Information to be Furnished to Committee...........................  11
    8.6. Liability and Indemnification of Committee.........................  11
SECTION 9...................................................................  12
  CHANGE IN CONTROL.........................................................  12
SECTION 10..................................................................  13
  AMENDMENT AND TERMINATION.................................................  13
APPENDIX A
  AWARDS TO NONEMPLOYEE DIRECTORS...........................................  14
</TABLE>
 
                                      (ii)
<PAGE>
 
                        PACIFIC GATEWAY EXCHANGE, INC.
 
                         1997 LONG-TERM INCENTIVE PLAN
 
                                   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 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.
 
                                       1
<PAGE>
 
  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.
 
    (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
 
  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.
 
  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;
 
                                       2
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    (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 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
 
                                       3
<PAGE>
 
  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. 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 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
<PAGE>
 
  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.
 
                                   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.
 
                                       5
<PAGE>
 
                                   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 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 determination of
the value and settlement of such Performance Units or make such other
adjustments as the Committee, in its sole discretion, deems desirable.
 
                                       6
<PAGE>
 
                                   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 4,000,000 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 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 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.
 
  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:
 
                                       7
<PAGE>
 
      (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.
 
    (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
 
                                       8
<PAGE>
 
  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.
 
  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.
 
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
 
                                       9
<PAGE>
 
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.
 
    (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.
 
                                      10
<PAGE>
 
                                   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.
 
  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.
 
  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
 
                                      11
<PAGE>
 
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;
 
    (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
 
                                      12
<PAGE>
 
  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.
 
                                      13
<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 with respect to 25% of the shares awarded on the first anniversary
of the grant date, and with respect to an additional 25% of the shares awarded
on each subsequent anniversary of the grant date. All outstanding Options
awarded under this Appendix A shall become immediately exercisable upon a
Change in Control of the Company.
 
  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.
 
                                      14