PACIFIC GATEWAY EXCHANGE INC, 424B2, 1996-07-19

PACIFIC GATEWAY EXCHANGE INC
424B2, 1996-07-19
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 33-80191

5,267,000 SHARES

[PACIFIC GATEWAY EXCHANGE LOGO]

COMMON STOCK
------------------------
Of the 5,267,000 shares of Common Stock offered hereby (the "Shares"),
4,900,000 shares are being offered by Pacific Gateway Exchange, Inc. ("Pacific
Gateway" or the "Company") and 367,000 shares are being offered by certain
stockholders of the Company (the "Selling Stockholders"). See "Principal and
Selling Stockholders." Of the 4,900,000 shares being offered by the Company,
1,800,000 shares will be sold to KDD America, Inc. ("KDD"). See "Underwriting."
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. Prior to this offering (the "Offering"), there has been no public
market for the Common Stock of the Company. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price. The
Common Stock has been approved for quotation on the Nasdaq National Market under
the symbol "PGEX."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGES 6 TO
13 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED
BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- ------------------------------------------------------------------------------------------------
Per Share....................... $12.00 $0.84 $11.16 $11.16
- ------------------------------------------------------------------------------------------------
Total(3)........................ $41,604,000 $2,912,280 $34,596,000 $4,095,720
- ------------------------------------------------------------------------------------------------
Total Assuming Full Exercise of
Over-
Allotment Option(4)........... $51,084,600 $3,575,922 $35,042,958 $12,465,720
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting."

(2) Before deducting expenses estimated at $662,000, which are payable by the
Company.

(3) Does not include 1,800,000 Shares being sold to KDD at a price equal to the
initial public offering price per Share, net of underwriting discounts and
commissions for a total net amount of $20,088,000.

(4) Assuming exercise in full of the 30-day option granted by the Company and
certain stockholders of the Company to the Underwriters to purchase up to
an additional 40,050 and 750,000 shares, respectively, on the same terms,
solely to cover over-allotments. See "Underwriting" and "Principal and
Selling Stockholders."
------------------------
The Shares of Common Stock are offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters, and
subject to their right to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made in New York City on or about July 24,
1996.
------------------------
PAINEWEBBER INCORPORATED ALEX. BROWN & SONS
INCORPORATED
------------------------
THE DATE OF THIS PROSPECTUS IS JULY 19, 1996
<PAGE> 2

[PACIFIC GATEWAY EXCHANGE LOGO]

INTERNATIONAL NETWORK
CURRENT AND PENDING FACILITIES

[MAP]

WORLD MAP NAMING AND LOCATING UNDERSEA FIBER OPTIC CABLES
AND GATEWAY SWITCHES DESCRIBED BELOW

PACIFIC GATEWAY HAS OWNERSHIP POSITIONS IN 14 DIGITAL UNDERSEA FIBER OPTIC
CABLES AND OPERATES TWO INTERNATIONAL GATEWAY SWITCHING FACILITIES IN LOS
ANGELES AND NEW YORK. THE COMPANY HAS ALSO MADE PLANS TO INVEST OR LEASE AN
INTEREST IN APPROXIMATELY SEVEN ADDITIONAL UNDERSEA FIBER OPTIC CABLES, AS WELL
AS AN ADDITIONAL SWITCHING SITE IN DALLAS. THE COMPANY'S OWNED INTERNATIONAL
NETWORK, TOGETHER WITH LEASED CAPACITY AND SATELLITE CIRCUITS, ENABLE IT TO
TERMINATE TELECOMMUNICATIONS TRAFFIC TO ANY COUNTRY IN THE WORLD THAT HAS DIRECT
DIAL SERVICE WITH THE UNITED STATES.

LEGEND:

<TABLE>
<C> <S>
- ------- Company-owned undersea fiber optic transmission facilities.
- ------- Fiber optic transmission facilities currently in service,
under construction or in the planning stages in which the
Company has plans to purchase or lease an interest.
o Company-owned international gateway switching sites.
o Company-owned switching facilities planned for 1996
installation.
</TABLE>

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

------------------------

The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by its independent accountants
and quarterly reports containing unaudited financial information for each of the
first three quarters of each fiscal year.
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and Financial Statements and related Notes thereto appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus (i) gives effect to a 940 to 1 split of the Company's Common
Stock effected on October 20, 1995 and (ii) assumes no exercise of the
Underwriters' over-allotment option.

THE COMPANY

As of March 31, 1996, Pacific Gateway had operating agreements with 25
foreign carriers in 19 countries around the world, which countries collectively
represent approximately 43.3% of U.S.-originated international traffic. The
Company is currently negotiating operating agreements with more than 20
prospective foreign partners. The Company's foreign partners include both
telecommunications carriers that have been dominant in their home markets which
may be wholly or partially government-owned (often referred to as Post Telephone
and Telegraphs or "PTTs") and nondominant carriers that may have been recently
established as a result of the deregulation of foreign telecommunications
markets ("Competitive Carriers").

Industry sources estimate that the international telecommunications
services market was approximately $50.6 billion in aggregate carrier revenues in
1994, with approximately $12.4 billion of this traffic originating in the United
States, and that aggregate international telecommunications traffic grew at a
compound annual rate of 13% during the period from 1990 to 1994, with some
sectors in developing countries growing at faster rates. This historical growth
rate is approximately twice the growth rate of aggregate U.S. domestic long
distance traffic over the same period. The Company believes that the
international telecommunications market will continue to experience strong
growth for the foreseeable future.

The Company's senior management team founded Pacific Gateway in 1991 to
capitalize on the significant growth opportunities it believes are being created
by the following major trends in the international telecommunications services
market: (i) global deregulation and privatization; (ii) increased availability
of digital undersea fiber optic cable capacity; (iii) reductions in service
costs driven by technological advancements and increased competition; and (iv)
economic development and an increasing number of telephones and access lines in
service worldwide. Despite the growth and general deregulatory trends in the
global telecommunications market, however, the pace of change and emergence of
competition in many countries remains slow, with domestic and international
traffic still dominated by government-controlled monopoly carriers. The Company
believes that U.S.-based international carriers, such as Pacific Gateway, which
have already established, or are in negotiations to establish, operating
agreements with government-controlled monopoly carriers in many such countries
will be well-positioned to capture the benefits of increasing traffic flows as
the telecommunications infrastructure in these countries is expanded.

The Company's strategy to capitalize on the growing demand for
international telecommunications services consists of the following key
elements: (i) secure additional operating agreements with foreign carriers,
particularly in fast-growing markets in Asia, the Pacific Rim, Latin America and
Eastern Europe; (ii) expand and enhance its global network facilities; (iii)
pursue strategic alliances, joint ventures and acquisitions to increase both
overseas-originated and U.S.-originated traffic; (iv) broaden its offering of
higher margin value-added products and services; (v) leverage its existing
network facilities through targeted direct marketing of international services
to corporate customers located near the Company's switching facilities; and (vi)
maintain efficient, low-cost operations.

3
<PAGE> 4

International long distance traffic is traditionally exchanged pursuant to
bilateral operating agreements entered into between international long distance
carriers in two countries. The Company believes that it is currently the only
U.S.-based international carrier other than AT&T Communications, Inc., MCI
Telecommunications Corporation, Sprint Corporation and WorldCom, Inc. to have
secured a significant number of traditional switched voice bilateral operating
agreements with foreign carriers. Unless a U.S.-based international carrier is
able to offer a new business opportunity or a new source of traffic, generally
there is little incentive for a foreign carrier to take on the administrative
burdens of negotiating a new operating agreement with a U.S.-based carrier, to
incur additional capital investment, and to maintain the relationship on an
ongoing basis. The Company believes that the combination of the large traffic
volume, proven operating performance and personal relationships that
traditionally has been required both to establish operating agreements and to
secure positions in digital undersea fiber optic cable systems creates a
significant barrier to entry in the international telecommunications services
market.

The Company's target customer base includes the more than 200 U.S.-based
long distance carriers with annual revenues of between $50 million and $2
billion and the foreign carriers with which the Company has, or proposes to
have, operating agreements. As of March 31, 1996, Pacific Gateway provided its
services to approximately 57 U.S.-based long distance carriers and 25 foreign
carriers. The Company has been able to increase its revenues by providing
service to new U.S.-based customers, by providing its existing customers with
direct service to additional countries as it obtains new operating agreements
and by terminating increasing volumes of traffic from its foreign carrier
partners. The Company believes that the principal reasons its customers select
Pacific Gateway to carry their international traffic are (i) the Company's
reputation for operating a state-of-the-art network at rates that are comparable
to or lower than its competitors; (ii) that the Company's size enables its
experienced sales and operating personnel to tailor cost-effective
telecommunications services to meet customers' needs and to provide highly
responsive, flexible customer service; and (iii) that Pacific Gateway is the
only significant U.S. facilities-based international carrier that does not also
compete primarily for end-user customers in the domestic long distance market.

The Company was incorporated in Delaware on August 8, 1991. The Company's
principal executive offices are located at 533 Airport Boulevard, Suite 505,
Burlingame, California 94010. Its telephone number is (415) 375-6700.

THE OFFERING

Common Stock offered by the
Company........................... 4,900,000 shares

Common Stock offered by the Selling
Stockholders...................... 367,000 shares

Common Stock to be outstanding after
this Offering(1).................... 18,856,440 shares

Use of proceeds..................... The net proceeds of this Offering will
be used (i) to expand the Company's
international network facilities on
new and existing routes, (ii) to
repay the Company's existing
indebtedness to one of its
stockholders, and (iii) to invest in
potential joint ventures, strategic
alliances or acquisitions and for
working capital and other general
corporate purposes. See "Use of
Proceeds."

Nasdaq National Market symbol....... PGEX
- ---------------

(1) Gives effect to the purchase by the Company of 143,560 shares of Common
Stock from a former employee in April 1996 and excludes 1,200,000 shares
reserved for issuance under the Company's 1995 Stock Option Plan, of which
539,170 shares of Common Stock were issuable upon exercise of outstanding
options at March 31, 1996, and 400,000 shares of Common Stock were reserved
at March 31, 1996 for issuance under the Company's 1995 Stock Purchase Plan.
See "Capitalization" and "Management -- Stock Plans."

4
<PAGE> 5

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION(1) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------------------------ -------------------
1991 1992 1993 1994 1995 1995 1996
------------ ------ ------ ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND REVENUES PER MINUTE OF USE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Revenues........................... $ 124 $ 800 $5,048 $20,913 $ 76,416 $12,125 $32,240
Cost of long distance services..... 37 587 4,036 17,196 66,346 10,042 29,130
------- ------- ------- ------- ------- ------- -------
Gross profit..................... 87 213 1,012 3,717 10,070 2,083 3,110
Selling, general and administrative
expenses......................... 113 531 1,008 2,273 5,467 992 1,956
Depreciation....................... 1 17 104 410 1,124 189 385
------- ------- ------- ------- ------- ------- -------
Operating income (loss).......... (27) (335) (100) 1,034 3,479 902 769
Interest expense................... -- -- 12 193 538 111 152
------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes.......................... (27) (335) (112) 841 2,941 791 617
Provision for income taxes......... -- -- -- 205 1,155 311 250
------- ------- ------- ------- ------- ------- -------
Net income (loss)................ $ (27) $ (335) $ (112) $ 636 $ 1,786 $ 480 367
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share........ $ -- $(0.03) $(0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
======= ======= ======= ======= ======= ======= =======
Weighted average shares
outstanding...................... 10,070 11,128 14,300 14,300 14,300 14,300 14,300
OTHER OPERATING DATA:
EBITDA(2).......................... $ (26) $ (318) $ 4 $ 1,444 $ 4,603 $ 1,091 $ 1,154
Capital expenditures............... $ 80 $ 66 $1,542 $ 3,745 $ 7,233 $ 242 $ 4,121
Minutes of use..................... N/A N/A 13,580 61,690 252,925 38,667 108,888
Revenues per minute of use......... N/A N/A $ 0.37 $ 0.34 $ 0.30 $ 0.31 $ 0.30
Estimated return traffic revenue
backlog(3)....................... -- -- $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
AS
ACTUAL ADJUSTED(4)
------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................... $ 3,691 $ 49,293
Working capital (deficit)............................................................... (6,973) 41,629
Total assets............................................................................ 41,123 86,725
Revolving line of credit................................................................ 3,000 --
Revolving line of credit, related party................................................. 5,420 --
Stockholders' equity.................................................................... 3,257 57,279
</TABLE>

- ---------------

(1) The Company was incorporated in Delaware and commenced operations on August
8, 1991.

(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all the
Company's cash needs. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash flows from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.

(3) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimates of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

(4) Adjusted to reflect the sale of 3,100,000 shares of Common Stock offered by
the Company hereby at an initial public offering price of $12.00 per share
and 1,800,000 shares of Common Stock offered by the Company hereby to KDD at
a price equal to the initial public offering price per share, net of
underwriting discounts and commissions, and the application of the net
proceeds therefrom. See "Use of Proceeds."

5
<PAGE> 6

SALE OF SHARES TO KDD

As part of the Offering the Company will sell directly to KDD 1,800,000
Shares of Common Stock at a price equal to the initial public offering price per
Share, net of underwriting discounts and commissions. KDD is a subsidiary of
Kokusai Denshin Denwa, the leading international telecommunications carrier
based in Japan according to industry sources ("KDD Japan"). KDD will own
approximately 9.5% of the outstanding Common Stock following the purchase of the
1,800,000 Shares. KDD will enter into an agreement not to sell any of the Shares
to be purchased hereunder during the 180-day lock-up period commencing from the
date of this Prospectus and will restrict its sales during the 180-day period
thereafter to the volume limits that would be applicable if the Shares held by
KDD were restricted shares eligible for sale pursuant to Rule 144 under the
Securities Act. Any future sale of the Company's Common Stock by KDD could
adversely affect the market price of the Company's Common Stock. See "Shares
Eligible for Future Sale." Such agreement will also provide that KDD may not
increase its holdings of Common Stock of Pacific Gateway above 20% without the
prior written consent of Pacific Gateway. In connection with the sale of the
Shares to KDD, Pacific Gateway and KDD Japan will enter into a seven-year
cooperation agreement that contemplates joint projects in the communication
field, including joint product development in new services, such as video
teleconferencing, imaging and Internet services together with related technical
support and assistance; joint marketing arrangements to promote small and
medium-size business and retail and ethnic marketing programs; continuing
exchange of traffic; assistance by KDD Japan to the Company with respect to the
Company's business in Asia; and sharing of information by Pacific Gateway and
KDD Japan regarding the telecommunications market and industry in the United
States and Japan, respectively.

RISK FACTORS

The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the shares
of Common Stock offered hereby. This Prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements
regarding expected future revenue from delayed proportional return traffic from
foreign partners pursuant to certain operating agreements. Actual results could
differ materially from those projected in the forward-looking statements as a
result of numerous factors, including changes in international settlement rates,
changes in the ratios between outgoing and incoming traffic, foreign currency
fluctuations, termination of certain operating agreements, and other factors set
forth below and elsewhere in this Prospectus.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES

The Company commenced its operations in August 1991 and has a limited
operating history. The Company was not profitable until 1994 and had accumulated
losses of $473,445 through December 31, 1993. There can be no assurance that the
Company's future operations will continue to generate operating or net income.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

DEPENDENCE ON OPERATING AGREEMENTS WITH FOREIGN PARTNERS

Pacific Gateway's strategy is based on its ability to enter into operating
agreements with foreign carriers, which the Company refers to as foreign
partners, in each of the foreign countries it has targeted so it can terminate
traffic in, and receive return traffic from, that country. The Company believes
that it would not be able to serve its customers at competitive prices without
such operating agreements. The operating agreements are generally for an
unspecified term in accordance with industry practice, although many of the
Company's foreign partners have mutual investments with the Company in digital
undersea fiber optic cable to assure long-term telecommunications access between
their respective countries and the United States. While the Company has been
successful in negotiating and maintaining operating agreements, none of which
has been terminated to date, the trend toward deregulation of telephone
communications in many countries and a significant reduction in outgoing traffic
carried by Pacific Gateway, among other things, could cause foreign

6
<PAGE> 7

partners to terminate their operating agreements, or could cause such operating
agreements to have substantially less value to the Company. Such termination by
certain of the Company's foreign partners could have a material adverse effect
on the Company's business. Moreover, there can be no assurance that the Company
will be able to enter into additional operating agreements in the future. The
failure to enter into additional operating agreements could limit the Company's
ability to increase its revenues on a profitable basis. See
"Business -- Industry Background -- Operating Agreements" and
"Business -- Operating Agreements."

MANAGING RAPID GROWTH

The Company is experiencing a period of rapid growth which is expected to
continue to place a significant strain on the Company's management, operational
and financial resources. In order to manage its growth effectively, the Company
must continue to implement and improve its operational and financial systems and
controls, to purchase and utilize more digital undersea fiber optic cable and
other transmission facilities and to expand, train and manage its employee base.
Inaccuracies in the Company's forecasts of traffic could result in insufficient
or excessive transmission facilities and disproportionate fixed expenses. The
Company's overflow traffic is handled by other international carriers to which
the Company pays per minute usage fees. The Company is not able to assure that
the quality of these services is commensurate with the transmission quality
provided by the Company. If the Company is not able to manage its growth
effectively or maintain the quality of its service, the Company's business may
be adversely affected.

RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS

The Company generates substantially all its revenues by providing
international telecommunications services to its customers. The Company's
operations are subject to certain risks, such as changes in foreign government
regulations and telecommunications standards, licensing requirements, tariffs,
taxes and other trade barriers, as well as political and economic instability.
In addition, the Company's revenues and cost of long distance services are
sensitive to changes in international settlement rates, changes in the ratios
between outgoing and incoming traffic and foreign currency fluctuations.
International rates charged to customers are likely to decrease in the future
for a variety of reasons, including increased competition between existing
carriers, new entrants into niche markets and the consummation of joint ventures
among large international carriers that facilitate targeted pricing and cost
reductions. In addition, the Company's business could be adversely affected by a
reversal in the current trend toward deregulation of government-owned
telecommunications carriers. There can be no assurance that the Company will be
able to increase its traffic volume or reduce its operating costs sufficiently
to offset any resulting rate decreases.

DEPENDENCE ON AVAILABILITY OF TRANSMISSION FACILITIES

The future profitability of the Company will depend in part on its ability
to obtain transmission facilities on a cost-effective basis. Because digital
undersea fiber optic cables typically take several years to plan and construct,
carriers generally make investments based on a forecast of anticipated traffic.
The Company does not control the planning or construction of digital undersea
fiber optic transmission facilities and must seek access to such facilities
through partial ownership positions. If ownership positions are not available,
the Company must seek access to such facilities through lease arrangements on
negotiated terms that may vary with industry and market conditions. The Company
currently has partial ownership interests in 14 digital undersea fiber optic
cable systems, and leases capacity in one such cable system. In addition, unlike
AT&T Communications, Inc. ("AT&T"), MCI Telecommunications Corporation ("MCI"),
Sprint Corporation ("Sprint") and WorldCom, Inc., ("WorldCom"), the Company does
not have direct access from its gateway switches to the digital undersea fiber
optic cable heads, and is required to lease these facilities from these
competitors of the Company. The cost of leasing access from the gateway switches
to the digital undersea fiber optic cable heads is currently approximately 0.5%
of the Company's revenue. There can be no assurance of continued availability of
transmission facilities or access to digital undersea fiber optic cable heads on
economically viable terms. See "Business -- International Network."

7
<PAGE> 8

COMPETITION

The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The U.S.-based international telecommunications services
market is dominated by AT&T, MCI and Sprint. The Company also competes with
WorldCom and other carriers in certain markets. As the Company's network expands
to serve a broader range of customers, Pacific Gateway expects to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than the
Company. Moreover, the Company is likely to be subject to additional competition
as a result of the formation of global alliances among the largest
telecommunications carriers. Recent examples of such alliances include AT&T's
alliance with Unisource, known as "Uniworld," MCI's alliance with British
Telecom, known as "Concert," and Sprint's alliance with Deutsche Telekom and
France Telecom, known as "Global One." The Company also faces competition from
companies offering resold international telecommunications services. The Company
expects that competition from such resellers will increase in the future in
tandem with increasing deregulation of telecommunications markets worldwide.

The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems, such
as the proposed Iridium and GlobalStar systems, utilization of the Internet for
international voice and data communications and digital wireless communication
systems such as personal communications services ("PCS"). The Company is unable
to predict which of many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services. There can be no
assurance that the Company will be able to maintain its competitive position in
the future.

With the recent grants by the Federal Communications Commission (the "FCC")
of AT&T's petitions to be classified as a non-dominant carrier in the domestic
interstate and international markets, only certain domestic local exchange
carriers continue to be classified as dominant carriers. As a consequence of its
new classification, AT&T has obtained relaxed pricing restrictions and relief
from other regulatory constraints, including reduced tariff notice requirements,
which should make it easier for AT&T to compete with alternative carriers such
as the Company in the interstate, domestic interexchange market as well as the
international market. AT&T's reclassification as a non-dominant carrier for
international services could have an adverse effect on the Company because
certain regulations, such as the price cap regulation and extended tariff notice
periods, applicable to AT&T as a dominant carrier will no longer apply. These
reduced regulatory requirements could make it easier for AT&T to compete with
the Company. Nonetheless, the Commission placed certain conditions on AT&T's
reclassification to promote the development of vigorous competition in the
international services marketplace. Significantly, AT&T must (1) not raise its
international residential switched voice service rates for three years, (2)
assist competing U.S. carriers in obtaining nondiscriminatory accounting rates,
(3) assist the FCC's efforts to monitor the competitive impact of AT&T's global
alliances, and improve the maintenance, restoration, provisioning, and access to
international submarine cable facilities.

Because the Company's business is focused primarily in the international
market, AT&T's domestic non-dominant status should not have an adverse impact on
the Company's business. The FCC has also initiated a new proceeding to consider,
among other issues, whether regulation of domestic interexchange services should
be modified in light of AT&T's reclassification. In addition, the recently
enacted Telecommunications Act of 1996 (the "Telecommunications Act"), which
substantially revises the Communications Act of 1934 (the "Communications Act"),
permits and is designed to promote additional competition in the intrastate,
interstate and international telecommunications markets by both U.S.-based and
foreign companies, including the Regional Bell Operating Companies ("RBOCs").
RBOCs, among other existing or potential competitors of the Company, have
significantly more resources than the Company. See "Business -- Competition" and
"Business -- Government Regulation."

8
<PAGE> 9

DEPENDENCE ON KEY PERSONNEL

The Company is dependent on the efforts of Howard A. Neckowitz, Chairman of
the Board, President and Chief Executive Officer, Gail E. Granton, Chief
Financial Officer, Executive Vice President, International Business Development
and Secretary, Ronald D. Anderson, Vice President, Operations and Engineering,
and Robert F. Craver, Senior Vice President, International Relations, as well as
a group of employees with long-standing industry relationships and technical
knowledge of the Company's operations. The loss of the services of one or more
of these individuals could materially and adversely affect the business of the
Company and its future prospects. The Company has entered into employment
agreements with Messrs. Neckowitz, Anderson and Craver, and Ms. Granton. These
agreements generally provide, with certain limited exceptions, that the officer
cannot render services to another person or entity without the prior written
consent of the Board of Directors of the Company or engage in any activity which
conflicts or interferes in any material way with the performance of his or her
duties with the Company during the term of the agreement (which terms range from
two to four years) and during the separation period following the officer's
termination of employment prior to the end of the term of the agreement so long
as the officer is receiving a severance payment from the Company. Each agreement
provides that the officer may terminate the agreement during the separation
period following termination of employment, thus terminating the officer's
obligation not to compete as well as the Company's obligation to pay severance.
The Company does not maintain key person life insurance on any of its officers
or employees. The Company's future success will also depend on its ability to
attract and retain additional management, technical and sales personnel required
in connection with the growth and development of its business. See "Management."

CAPITAL EXPENDITURES; POTENTIAL NEED FOR ADDITIONAL FINANCING

The facilities-based telecommunications industry requires substantial
capital investment in switching and peripheral equipment and digital undersea
fiber optic cables. Growth in the number of minutes transmitted,
international locations and customers served by the Company will require
additional investment in equipment and facilities. While the Company believes
that the proceeds of this Offering, combined with other existing and anticipated
sources of liquidity, should be sufficient to fund its capital requirements for
the foreseeable future, certain events may occur that would require the Company
to obtain additional financing. Such events could include faster than expected
growth or lower than anticipated funds generated from operations. There can be
no assurance that the Company will be able to raise additional financing, or, if
raised, that the terms of such financing will be favorable to the Company.

GOVERNMENT REGULATION

The Company's business is subject to various federal laws, regulations,
regulatory actions and court decisions which may have negative effects on the
Company. The Company's interstate and international facilities-based and resale
services are subject to regulation by the FCC, and regulations promulgated by
the FCC are subject to change in the future. The Company may also be subject to
regulation in foreign countries in connection with certain of its business
activities. For example, the Company's use of transit agreements or
arrangements, if any, may be affected by laws or regulations in either the
transited or terminating foreign jurisdiction. There can be no assurance that
foreign countries will not adopt laws or regulatory requirements that could
adversely affect the Company. There can be no assurance that future regulatory,
judicial and legislative changes will not have a material adverse effect on the
Company or that regulators or third parties will not raise material issues with
regard to the Company's compliance with applicable regulations.

The FCC recently further streamlined its regulation of non-dominant
international carriers to provide that their tariffs and any revisions thereto
are effective upon one day's notice in lieu of the previous 14-day notice
period. The Company has filed international tariffs (for switched and private
line services) with the FCC. The Company has also filed a domestic tariff with
the FCC. With respect to international services, the Company has obtained
facilities-based Section 214 authorizations to operate its channels of
communication via satellites and undersea fiber optic cables. The FCC recently
reduced the filing requirements for facilities-based authorizations. Section 214
resale authority is also required to resell international services. The Company
has obtained all required authorizations from the FCC to use its various
transmission media for the

9
<PAGE> 10

provision of international switched services and international private line
services. In addition, the FCC is presently considering certain international
policy issues in several rulemaking proceedings and in response to specific
applications and petitions filed by other telecommunications carriers. The
resolution of these proceedings could have an adverse effect on the Company's
business.

The Company is also required to conduct its international business in
compliance with the FCC's international settlements policy (the "ISP"). The ISP
establishes the permissible boundaries for U.S.-based carriers and their foreign
counterparts to settle the cost of terminating each other's traffic over their
respective networks. There can be no assurance that the FCC will not change the
ISP or that any such change will not have a material adverse effect on the
Company's business.

FOREIGN OWNERSHIP

The Communications Act limits the ownership of an entity holding a common
carrier radio license by non-U.S. citizens, foreign corporations and foreign
governments. The Company does not currently hold any radio licenses. These
ownership restrictions currently do not apply to non-radio facilities, such as
fiber optic cable. There can be no assurance, however, that foreign ownership
restrictions will not be imposed on the operation of non-radio facilities used
for the provision of international services. The FCC recently adopted new rules
relating to the entry and participation of foreign-affiliated entities in the
U.S. telecommunications market. These rules also reduce international tariff
notice requirements for dominant, foreign-affiliated carriers from 45 days'
notice to 14 days' notice. Such reduced tariff notice requirements may make it
easier for dominant, foreign-affiliated carriers to compete with the Company.
The recently enacted Telecommunications Act partially amends existing
restrictions on the foreign ownership of radio licenses. In particular, the
Telecommunications Act allows corporations with non-U.S. citizen officers or
directors to hold radio licenses. Other non-U.S. ownership restrictions,
however, remain unchanged. See "Business -- Government Regulation -- Foreign
Ownership." The Company cannot predict the effect on the Company of the
Telecommunications Act or other new legislation or regulations which may become
applicable to the Company.

FEDERAL LEGISLATION

The Telecommunications Act, which substantially revises the Communications
Act, was recently enacted by Congress and signed into law by the President of
the United States. The legislation is designed to promote competition in all
telecommunications markets by, among other things, permitting the FCC to relax
regulations for local exchange carriers and other telecommunications carriers
where the public interest and competition warrant. To the extent such
flexibility is provided, the Company's ability to compete for certain services
may be adversely affected. The legislation also provides specific guidelines
under which the RBOCs can provide in-region long distance services. Under the
Telecommunications Act, RBOCs are authorized to provide out-of-region services,
which permit the RBOCs and other carriers to provide domestic and international
long distance services. The FCC has proposed rules to govern the entry of RBOCs
into the out-of-region interstate, interexchange market. Among other things, the
FCC has proposed to allow affiliates of RBOCs that provide out-of-region
interstate, interexchange service to be regulated as non-dominant carriers,
under certain circumstances. The Company's business could be adversely affected
by competition from the RBOCs, which typically have greater resources than the
Company, and from other carriers that have expanded opportunities to provide
domestic and international services.

The Telecommunications Act also imposes certain requirements on all
telecommunications carriers to facilitate the entry of new telecommunications
providers. All carriers must permit interconnection of their networks with other
carriers and may not deploy network features and functions that interfere with
interoperability. In addition, the Telecommunications Act requires all
telecommunications providers to contribute equitably to a Universal Service
Fund, although the FCC may exempt an interstate carrier or class of carriers if
their contribution would be minimal. There can be no assurance that the Company
would be exempt from contributing to a Universal Service Fund.

10
<PAGE> 11

judicially challenged. The Company is unable to predict the outcome of such
rulemakings or litigation or the substantive effect (financial or otherwise) of
the new legislation and the rulemakings on the Company.

There can be no assurance that current laws and FCC and other regulations
will not be amended or modified. Any such amendment or modification could have
an adverse effect on the Company's business.

RELATIONSHIP WITH MATRIX

Matrix Telecom, Inc. ("Matrix") is currently Pacific Gateway's largest
customer, accounting for approximately 44% and 22% of the Company's revenues in
1994 and 1995, respectively and approximately 15% during the three months ended
March 31, 1996. The loss of Matrix as a customer would have an immediate and
material adverse effect on the Company's business. Mr. Neckowitz, the Chairman
of the Board, President and Chief Executive Officer of the Company, is the
Chairman of the Board of Matrix, and Ronald L. Jensen, a member of the Board of
Directors of the Company, is a director of Matrix. The largest shareholders of
Matrix, Mr. Jensen, members of his family, Mr. Neckowitz and Ms. Granton, Chief
Financial Officer, Executive Vice President, International Business Development
and Secretary of the Company, are also the majority shareholders of Pacific
Gateway. Due to their ownership interests in Matrix and the close connection
between the business of the Company and the operations of Matrix, the interests
of Mr. Jensen, Mr. Neckowitz and Ms. Granton may conflict with the Company's
interest in certain circumstances. Pursuant to an agreement dated as of May 1,
1995, Matrix agreed to send substantially all its international
telecommunications traffic and its domestic telecommunications traffic in the
Northeast and California through the Company's network until November 1996,
subject to earlier termination if the Company does not match a bona fide
competitive pricing offer Matrix may receive from a third party. The term of the
agreement is automatically extended on a month-to-month basis unless either
party gives the other 30 days' notice of termination. There can be no assurance
whether or on what terms such agreement will be continued. See "Certain
Relationships and Related Transactions" and "Business -- Customers."

CONCENTRATION OF CREDIT RISK

Seven of the Company's customers accounted for approximately 49% of gross
accounts receivable as of March 31, 1996. The Company performs ongoing credit
evaluations of its customers but generally does not require collateral to
support accounts receivable from its customers. The Company's allowance for
doubtful accounts is based on current market conditions. Losses on uncollectible
accounts have consistently been insignificant and within management's
expectation.

ANTI-TAKEOVER PROVISIONS

The Company's Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock (the "Preferred Stock") and to determine the price,
rights, preferences and privileges of those shares without any further vote or
actions by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and serving other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or may
discourage a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. The Company has no present intention to
issue shares of Preferred Stock. In addition, the Company is subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporation Law
(the "Delaware Law"), which will prohibit the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Furthermore, certain provisions
of the Company's bylaws, including provisions that provide that the exact number
of directors shall be determined by a majority of the Board of Directors and
that the vacancies on the Board of Directors may be filled by a majority vote of
the directors then in office, though less than a quorum, may have the effect of
delaying or preventing changes in control or

11
<PAGE> 12

management of the Company, which could adversely affect the market price of the
Company's Common Stock. See "Management" and "Description of Capital Stock."

CONTROL OF COMPANY BY EXISTING STOCKHOLDERS

The Company currently has only one non-executive director. Upon the
consummation of this Offering, the existing stockholders of the Company in the
aggregate will own and control approximately 72.3% of the outstanding shares of
Common Stock. As a result of their ownership of shares of Common Stock, the
existing stockholders of the Company, acting together, will be able to control
the management and policies of the Company. Mr. Neckowitz, the Chairman of the
Board, President and Chief Executive Officer of the Company, has proxies to vote
a total of 8,900,860 shares of Common Stock held by certain members of the
Jensen family. These proxies, combined with the shares owned by Mr. Neckowitz,
give him the right to vote approximately 58.66% of the outstanding shares of
Common Stock of the Company after this Offering. See "Principal and Selling
Stockholders."

The Company has a revolving credit facility with Ronald L. Jensen, a
principal stockholder. The Company intends to use a portion of the proceeds of
this Offering to repay all existing indebtedness under this facility. At March
31, 1996, there was $5.4 million outstanding under the facility. See "Use of
Proceeds" and "Certain Relationships and Related Transactions -- Agreements with
Directors and Executive Officers."

SHARES ELIGIBLE FOR FUTURE SALE

Future sales of Common Stock in the public market following this Offering
by the current stockholders of the Company could adversely affect the market
price for the Common Stock. Upon expiration of the lock-up agreements with the
Underwriters 180 days after the date of this Prospectus (or earlier upon the
written consent of PaineWebber Incorporated, one of the Representatives of the
Underwriters), 5,568,000 shares of Common Stock outstanding prior to this
Offering may be sold in the public market, subject to limitations contained in
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act").
The volume limitations of Rule 144 will apply to the sale of these shares as
long as the shares are held by affiliates of the Company. Following this
Offering, sales of substantial amounts of shares of Common Stock in the public
market, or even the potential for such sales, could adversely affect the
prevailing market price of the Common Stock and impair the Company's ability to
raise capital through the sale of equity securities. See "Principal and Selling
Stockholders" and "Shares Eligible for Future Sale."

DILUTION

KDD and the other purchasers of Common Stock in this Offering will
experience immediate and substantial dilution in net tangible book value of
$8.15 per share and $8.99 per share, respectively. See
"Dilution."

ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

There is currently no public market for the Common Stock. There can be no
assurance that an active public market for the Common Stock will develop or
that, if a public market develops, the market price for the Common Stock will
equal or exceed the initial public offering price set forth on the cover page of
this Prospectus. For a discussion of the factors to be considered in determining
the initial public offering price, see "Underwriting."

Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of operations,
technological innovations, government regulations, proprietary rights or
significant litigation, may have a significant impact on the market price of the
Company's Common Stock.

12
<PAGE> 13

DIVIDEND POLICY

The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The Company intends to retain
earnings, if any, to develop and expand its business. See "Dividend Policy."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
to be sold by the Company in this Offering are estimated to be $54.0 million
($54.5 million if the Underwriters' over-allotment option is exercised in full),
after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. The Company will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Stockholders.

The Company intends to use (i) approximately $35 million of the net
proceeds to finance the expansion of its international network facilities on new
and existing routes, including investments in digital undersea fiber optic
cables, switches and related equipment, (ii) approximately $3.3 million to repay
existing indebtedness to Ronald L. Jensen, a principal stockholder of the
Company and (iii) the remaining proceeds to invest in potential joint ventures,
strategic alliances or acquisitions and for working capital and general
corporate purposes. Although the Company is currently evaluating several
potential investment opportunities, including joint ventures or strategic
alliances with foreign carriers in Pacific Rim, Europe and Latin America, and
the acquisition of one or more marketing organizations with a corporate customer
base, the Company is not currently negotiating any acquisition transaction.
Pending the use of the net proceeds for the purposes described above, the
Company will invest such proceeds in short-term, interest-bearing, investment
grade securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Company Strategy" and
"Certain Relationships and Related Transactions."

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not expect to do so in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant. In addition, the terms of the
Company's revolving credit facility with a commercial lender, which is
collateralized by its accounts receivable, prohibits the payment of cash
dividends without the lender's consent.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted to reflect the sale of 4,900,000 shares of Common
Stock offered by the Company hereby at an initial public offering price of
$12.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, and the application of the
net proceeds therefrom as described under "Use of Proceeds." This table should
be read in conjunction with the Financial Statements and related Notes thereto
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................................... $ 3,691 $49,293
======= =======
Revolving line of credit(1)............................................. $ 3,000 --
Revolving line of credit, related party(1).............................. 5,420 --
Stockholders' equity:
Preferred Stock, $.0001 par value, 1,000,000 shares authorized; no
shares issued and outstanding; and no shares issued and outstanding
as adjusted........................................................ -- --
Common Stock, $.0001 par value, 25,000,000 shares authorized;
14,100,000 shares issued and outstanding; and 19,000,000 shares
issued and outstanding as adjusted(2).............................. 1 2
Additional paid in capital............................................ 940 54,961
Retained earnings..................................................... 2,316 2,316
------- -------
Stockholders' equity............................................. 3,257 57,279
------- -------
Total capitalization.......................................... $11,677 $57,279
======= =======
</TABLE>

- ---------------

(1) Reflects the repayment of indebtedness to a commercial lender and to a
principal stockholder of the Company either from the proceeds of this
Offering or by the Company prior to the closing of this Offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Relationships
and Related Transactions."

(2) Excludes the purchase by the Company of 143,560 shares from a former
employee in April 1996 and 1,200,000 shares reserved for issuance under the
Company's 1995 Stock Option Plan, of which 539,170 shares of Common Stock
were issuable upon exercise of outstanding options at March 31, 1996, and
400,000 shares reserved at March 31, 1996 for issuance under the Company's
1995 Stock Purchase Plan. See "Management -- Stock Plans."

14
<PAGE> 15

DILUTION

The net tangible book value of the Company at March 31, 1996 was $3,257,000
or $0.23 per share of Common Stock. "Net tangible book value" per share
represents the amount of total tangible assets of the Company reduced by the
amount of its total liabilities and divided by the total number of shares of
Common Stock outstanding. Without taking into account any other change in such
pro forma net tangible book value after March 31, 1996, other than to give
effect to the sale by the Company of 3,100,000 shares offered hereby at an
initial public offering price of $12.00 per share and 1,800,000 shares of Common
Stock offered by the Company hereby to KDD at a price equal to the initial
public offering price per share, net of underwriting discounts and commissions,
and receipt of the net proceeds therefrom, the pro forma net tangible book value
of the Company at March 31, 1996 would have been approximately $57,279,000, or
$3.01 per share. This represents an immediate increase in such net tangible book
value of $2.78 per share to existing stockholders and an immediate dilution of
$8.15 per share to KDD and $8.99 per share to the other investors in the
Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share................. $12.00
Net tangible book value per share before
this Offering....................................... $0.23
Increase in net tangible book value per share
attributable to new investors....................... 2.78
-----
Pro forma net tangible book value per share after
this Offering......................................... 3.01
------
Dilution in net tangible book value per share to
new investors......................................... $ 8.99
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the differences between the existing stockholders, KDD and the other investors
in the Offering with respect to the number of shares of Common Stock purchased
from the Company, the total consideration paid to the Company and the average
price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 14,100,000 74.2% $ 941,734 1.6% $ 0.07
KDD........................... 1,800,000 9.5 20,088,000 34.5 $ 11.16
Other investors in the
Offering(1)................. 3,100,000 16.3 37,200,000 63.9 $ 12.00
---------- ----- ----------- -----
Total............... 19,000,000 100.0% $58,229,734 100.0%
========== ===== =========== =====
</TABLE>

- ---------------

(1) Sales by the Selling Stockholders in this Offering will reduce the number of
shares held by existing stockholders to 13,733,000 shares or approximately
72.3% of the total number of shares of Common Stock to be outstanding after
this Offering, and will increase the number of shares to be purchased by
investors in the Offering and KDD to 5,267,000 shares or approximately 27.7%
of the total number of shares of Common Stock to be outstanding after this
Offering. These amounts and percentages do not give effect to the purchase
by the Company of 143,560 shares from a former employee in April 1996.

The Average Price Per Share for KDD is less than the Average Price Per
Share for other investors in this Offering because no underwriting discounts and
commissions will be paid on account of shares of Common Stock sold to KDD. The
net proceeds per share to the Company, however, will be identical for all shares
sold in the Offering.

The above computations assume no exercise of the Underwriters'
over-allotment option and no exercise of any outstanding options. At March 31,
1996, there were outstanding options to purchase 539,170 shares of Common Stock
at a weighted average exercise price of $8.67 per share. To the extent
outstanding options are exercised, there will be further dilution to new
investors. See "Management -- Stock Plans," "Management -- Compensation of
Directors" and Note 7 of Notes to Financial Statements.

15
<PAGE> 16

SELECTED FINANCIAL DATA

The following selected financial data for the fiscal years ended December
31, 1992, 1993, 1994 and 1995 have been derived from financial statements of the
Company which have been audited by Coopers & Lybrand L.L.P., independent
accountants, and which for the years ended December 31, 1993, 1994 and 1995 are
included elsewhere in this Prospectus. The selected financial data for the
period from the Company's inception on August 8, 1991 through December 31, 1991
and the three-month periods ended March 31, 1995 and 1996 have been derived from
unaudited financial statements which, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the financial position and results of operations of the
Company for such unaudited period. The financial statements for the three-month
periods ended March 31, 1995 and 1996 are also included elsewhere in the
Prospectus. The results of operations for the three-month periods ended March
31, 1995 and 1996 are not necessarily indicative of results that may be expected
for the full year.

The data set forth below are qualified by reference to, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and related
Notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION(1) THREE MONTHS ENDED
THROUGH YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, -------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------------ ------- ------- ------- -------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE AND REVENUES PER MINUTE OF USE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 124 $ 800 $ 5,048 $20,913 $ 76,416 $12,125 $ 32,240
Cost of long distance services................ 37 587 4,036 17,196 66,346 10,042 29,130
-------- ------- ------- ------- -------- ------- --------
Gross profit................................ 87 213 1,012 3,717 10,070 2,083 3,110
Selling, general and administrative
expenses.................................... 113 531 1,008 2,273 5,467 992 1,956
Depreciation.................................. 1 17 104 410 1,124 189 385
-------- ------- ------- ------- -------- ------- --------
Operating income (loss)..................... (27) (335) (100) 1,034 3,479 902 769
Interest expense.............................. -- -- 12 193 538 111 152
-------- ------- ------- ------- -------- ------- --------
Income (loss) before income taxes........... (27) (335) (112) 841 2,941 791 617
Provision for income taxes.................... -- -- -- 205 1,155 311 250
-------- ------- ------- ------- -------- ------- --------
Net income (loss)........................... $ (27) $ (335) $ (112) $ 636 $ 1,786 $ 480 $ 367
======== ======= ======= ======= ======== ======= ========
Net income (loss) per share................... $ -- $ (0.03) $ (0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
======== ======= ======= ======= ======== ======= ========
Pro forma net income per share(2)............. $ 0.15 $ 0.04 $ 0.03
======== ======= ========
Weighted average shares outstanding........... 10,070 11,128 14,300 14,300 14,300 14,300 14,300
OTHER OPERATING DATA:
EBITDA(3)..................................... $ (26) $ (318) $ 4 $ 1,444 $ 4,603 $ 1,091 $ 1,154
Capital expenditures.......................... $ 80 $ 66 $ 1,542 $ 3,745 $ 7,233 $ 242 $ 4,121
Minutes of use................................ N/A N/A 13,580 61,690 252,925 38,667 108,888
Revenues per minute of use.................... N/A N/A $ 0.37 $ 0.34 $ 0.30 $ 0.31 $ 0.30
Estimated return traffic revenue backlog(4)... -- -- $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
-------------------------------------------------- MARCH 31,
1991 1992 1993 1994 1995 1996
---- ------ ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 1 $ 129 $ 63 $ 9 $ 1,792 $ 3,691
Working capital (deficit)............................. 195 37 (865) 242 (6,412) (6,973)
Total assets.......................................... 374 1,007 4,130 12,301 29,756 41,123
Revolving line of credit.............................. -- -- -- -- 3,000 3,000
Revolving line of credit, related party............... -- -- 718 4,488 2,420 5,420
Stockholders' equity.................................. 101 580 468 1,104 2,891 3,257
</TABLE>

- ---------------

(1) The Company was incorporated in Delaware and commenced operations on August
8, 1991.

(2) Assumes that a portion of the proceeds are used to repay the amounts
outstanding under the Company's two revolving lines of credit and that the
interest expense, net of taxes, is eliminated.

(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash flows
as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash from operating activities or other measures
of liquidity determined in accordance with generally accepted accounting
principles.

(4) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimate of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

16
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 including statements regarding expected future revenue from
delayed proportional return traffic from foreign partners pursuant to certain
operating agreements. The Company's revenues and results of operations are
difficult to forecast and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including, without
limitation, changes in international settlement rates, changes in the ratios
between outgoing and incoming traffic, foreign currency fluctuations,
termination of certain operating agreements, and other factors discussed under
"Risk Factors" above.

OVERVIEW

Pacific Gateway was founded in August 1991 to capitalize on the significant
growth opportunities in the international telecommunications services market.
The Company operates an international network consisting of international and
domestic switching facilities in Los Angeles and New York, partial ownership
interests in 14 digital undersea fiber optic cable systems in the Atlantic,
Pacific and Caribbean regions and operating agreements with foreign carriers
that provide for the exchange of telecommunications traffic. As of March 31,
1996, the Company had operating agreements with 25 foreign carriers in 19
countries around the world, which provide for the exchange of telecommunications
traffic with these carriers. The Company's revenues are derived primarily from
the sale of international telecommunications services to U.S.-based carriers on
a wholesale basis and from the traffic received by the Company under operating
agreements with its foreign partners. Substantially all the Company's remaining
revenues are derived from the sale of domestic switched services to Matrix. As
of March 31, 1996, the Company provided its services to approximately 57
U.S.-based long distance carriers.

The majority of the Company's costs are variable and consist of payments to
foreign partners for the termination of traffic, payments to other providers of
long distance services for transmission services to countries where the Company
does not have operating agreements, payments to domestic carriers for the
termination of overseas-originated traffic in the United States where the
Company does not have its own domestic network and payments to local exchange
companies for access charges for originating and terminating international and
domestic traffic where the Company has its own domestic network. The Company
generally enters new markets by establishing operating agreements with foreign
partners and by investing in or leasing digital undersea fiber optic cable in
order to cost-effectively carry and terminate traffic. The Company seeks to have
partial ownership positions in cable systems where it believes its customers'
demand will justify the investment in those fixed assets. Although the Company
is generally able to earn a higher gross margin on traffic routed through its
owned circuits relative to leased routes, Pacific Gateway will continue to buy
usage-sensitive transmission capacity on a per minute basis from other U.S.
facilities-based international carriers on routes where traffic volumes are
relatively low or inconsistent, as well as to manage overflow traffic on busy
routes.

Under its operating agreements, the Company typically agrees to send
U.S.-originated traffic to its foreign partners and its foreign partners agree
to send a proportionate amount of return traffic via the Company's network at
negotiated rates. These agreements contractually obligate the foreign partners
to adhere to the policy of the FCC, whereby traffic from the foreign country is
routed to U.S.-based international carriers, such as the Company, in the same
proportion as traffic carried into the foreign country. The Company and its
foreign partners typically settle the amounts owed to each other in cash on a
net basis, subsequent to the receipt of return traffic. The Company records the
amount due to the foreign partner as an expense in the period the Company's
traffic is delivered.

Of the Company's 25 operating agreements, 10 provide that the Company
generally must wait up to six months before it actually receives the
proportional return traffic. The delay period between the Company's delivery of
U.S.-originated traffic and the receipt of the proportional return traffic
enables the carriers to determine the appropriate traffic exchange ratio based
on the Company's relative market share on a particular

17
<PAGE> 18

route. As a result, the Company delivers outbound traffic and generally
recognizes a loss in the period in which it sells to its customers because
amounts due to foreign partners generally exceed revenues from customers on
outbound traffic. The Company then recognizes revenues with minimal associated
cost on the associated return traffic on a six month delayed basis. The rates
that the Company charges its customers are established at a level such that the
Company expects to recognize a gross profit on the combined transactions.

For the 10 agreements which provide for delayed return traffic, the Company
had previously deferred a portion of the costs associated with outbound traffic
until the receipt of the proportional return traffic. The Company has restated
its financial statements so that the costs associated with the outbound call are
recorded as an expense in the period the Company's traffic is delivered. The
impact of this restatement was to reduce income before income taxes, net income
and income per share by $5.7 million, $3.5 million, and $0.25 in 1995 and
$348,762, $211,282, and $0.02 in 1994, respectively.

The costs associated with operating agreements that provide for delayed
proportional return traffic have increased rapidly over time as the Company has
added new operating agreements and generally increased its volumes of outbound
traffic. Revenues from delayed proportional return traffic have grown on a six
month delayed basis consistent with the delayed settlement process described
above. Based on U.S.-originated traffic which the Company delivered during the
six months ended March 31, 1996, for which the Company recorded costs of $6.8
million in the fourth quarter of 1995 and $11.0 million in the first quarter of
1996, the Company estimates that the proportional return traffic it will receive
will result in revenues of approximately $8.4 million during the six months
ending September 30, 1996.

The Company's selling, general and administrative expenses consist
primarily of personnel costs and selling commissions related to its U.S.
wholesale business. Certain of the Company's data processing services are
provided by Matrix, the Company's largest customer, and are included in selling,
general and administrative expenses based on a charge which approximates the
cost of these services. See "Certain Relationships and Related Transactions."
The Company has developed and is currently in the process of testing its own
customized billing and management information system. See "Business -- Billing
and Management Information Systems."

18
<PAGE> 19

RESULTS OF OPERATIONS

The following table provides a breakdown of the Company's statement of
operations on an actual and percentage of revenues basis for the periods
indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------- -----------------------------------
1993 1994 1995 1995 1996
-------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $5,048 100.0% $20,913 100.0% $76,416 100.0% $12,125 100.0% $32,240 100.0%
Cost of long distance
services.................... 4,036 79.9 17,196 82.2 66,346 86.8 10,042 82.8 29,130 90.3
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit................ 1,012 20.1 3,717 17.8 10,070 13.2 2,083 17.2 3,110 9.7
Selling, general and
administrative expenses..... 1,008 20.0 2,273 10.9 5,467 7.2 992 8.2 1,956 6.1
Depreciation.................. 104 2.1 410 2.0 1,124 1.5 189 1.6 385 1.2
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Operating income (loss)..... (100) (2.0) 1,034 4.9 3,479 4.5 902 7.4 769 2.4
Interest expense.............. 12 0.2 193 0.9 538 0.7 111 0.9 152 0.5
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before income
taxes..................... (112) (2.2) 841 4.0 2,941 3.8 791 6.5 617 1.9
Provision for income taxes.... -- -- 205 1.0 1,155 1.5 311 2.6 250 0.8
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Net income (loss)........... $ (112) (2.2)% $ 636 3.0% $ 1,786 2.3% $ 480 3.9% $ 367 1.1%
====== ===== ======= ===== ======= ===== ======= ===== ======= =====
Other Operating Data:
Revenues from delayed return
traffic(1)................ $ 97 $ 412 $ 4,462 $ 194 $ 3,042
====== ======= ======= ======= =======
Estimated return traffic
revenue backlog(2)........ $ 158 $ 986 $ 6,142 $ 2,052 $ 8,400
====== ======= ======= ======= =======
</TABLE>

- ---------------

(1) Represents revenue from proportional return traffic under certain of the
Company's operating agreements which require the Company to wait up to six
months to receive the return traffic. The substantial majority of the direct
costs associated with such revenue is recognized up to six months in advance
of the receipt of the revenue.

(2) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and management's
estimate of revenue to be received from delayed proportional return traffic
during the three month period ending June 30, 1996. For the three months
ended March 31, 1996, this amount represents management's estimate of
revenue to be received from delayed proportional return traffic during the
six months ending September 30, 1996. Management's estimates of the revenue
to be received from delayed proportional return traffic are based on the
anticipated ratios between outgoing and incoming traffic and the anticipated
settlement rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995

Revenues: Total revenues in the three months ended March 31, 1996 increased
166% to $32.2 million from $12.1 million in the three months ended March 31,
1995. The increase was primarily the result of both increased sales to existing
customers, due to an increase in the number of operating agreements to 25 at
March 31, 1996 from 12 at March 31, 1995 and a 128% increase in the number of
wholesale carrier customers to 57 at March 31, 1996 from 25 at March 31, 1995.
The Company also received more return traffic from its foreign partners during
the three months ended March 31, 1996 with return traffic increasing to $3.0
million in the three months ended March 31, 1996 from $194,000 in the three
months ended March 31, 1995.

Gross Profit: Gross profit increased 48% to $3.1 million from $2.1 million
primarily due to increased revenues. As a percentage of revenues, gross profit
decreased from 17.2% in the prior period to 9.7% in the current period. This
percentage decrease was primarily the result of increased traffic on direct
routes where the Company must generally wait up to six months for the return
traffic. The amount of costs associated with operating agreements that provide
for delayed proportional return traffic increased to $11.0 million during the
three months ended March 31, 1996 from $1.6 million in the three months ended
March 31, 1995. This increase in costs represents growth in outbound traffic on
new and existing routes in advance of proportional return traffic, and is
expected to result in increased delayed proportional return traffic in the
following six months.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 100% to $2.0 million from $1.0 million. This
increase was due primarily to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
employees to

19
<PAGE> 20

30 at March 31, 1996 from 18 at March 31, 1995. The increase in sales commission
expenses was primarily due to increased revenues. As a percentage of revenues,
selling, general and administrative expenses decreased from 8.2% in the prior
period to 6.1% in the current period.

Depreciation: Depreciation increased 104% to $385,000 from $189,000. As a
percentage of revenues, depreciation decreased from 1.6% in the prior period to
1.2% in the current period. The increase in dollar amount was primarily due to
depreciation of additional transmission facilities acquired during the last
three quarters of 1995.

Interest Expense: Interest expense increased 37% to $152,000 from $111,000.
This increase was a result of increased borrowing under the Company's revolving
credit facilities. See "Certain Relationships and Related Transactions."

Income Taxes: Income taxes decreased to $250,000 from $311,000, primarily
due to decreased operating income. The effective tax rate was 39.3% in 1995 and
40.5% in 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Revenues: Total revenues in 1995 increased 266% to $76.4 million from $20.9
million in 1994. The increase was primarily the result of both increased sales
to existing customers, due to an increase in the number of operating agreements
to 21 at December 31, 1995 from 12 at December 31, 1994 and a 193% increase in
the number of wholesale carrier customers to 44 at December 31, 1995 from 15 at
December 31, 1994. In addition to an increase in the revenue from Matrix to
$17.2 million in 1995 from $9.2 million in 1994, the Company also received more
return traffic from its foreign partners during 1995 with return traffic revenue
increasing to $4.5 million in 1995 from $412,000 in 1994. See "Certain
Relationships and Related Transactions."

Gross Profit: Gross profit increased 173% to $10.1 million from $3.7
million primarily due to increased revenues. As a percentage of revenues, gross
profit decreased from 17.8% in 1994 to 13.2% in 1995. This percentage decrease
was primarily the result of increased traffic on direct routes where the Company
must generally wait up to six months for the return traffic. The amount of costs
associated with operating agreements that provide for delayed proportional
return traffic during the year increased to $17.7 million in 1995 from $1.2
million in 1994. This increase in costs represents growth in outbound traffic on
new and existing routes in advance of proportional return traffic, and is
expected to result in increased delayed proportional return traffic in the
following six months.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 139% to $5.5 million from $2.3 million. This
increase was due primarily to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
employees to 28 as of December 31, 1995 from 15 as of December 31, 1994. The
increase in sales commission expenses was primarily due to increased revenues.
Matrix provided certain data processing services to the Company for which the
Company incurred expenses of $166,000 and $35,000 in 1995 and 1994,
respectively. As a percentage of revenues, selling, general and administrative
expenses decreased from 10.9% in the prior period to 7.2% in the current period.

Depreciation: Depreciation increased 168% to $1.1 million from $410,115. As
a percentage of revenues, depreciation decreased to 1.5% in the current period
from 2.0% in the prior period. The increase in dollar amount was primarily due
to depreciation of additional transmission facilities and switching equipment
acquired in 1995.

Interest Expense: Interest expense increased 179% to $537,982 from
$192,979. This increase was a result of increased borrowings under the Company's
revolving credit facility with a principal stockholder of the Company, which
borrowings were used to finance the acquisition of long distance communications
equipment and ownership interests in digital undersea fiber optic cables. See
"Certain Relationships and Related Transactions."

20
<PAGE> 21

Income Taxes: Income taxes increased to $1.2 million from $205,000,
primarily due to increased operating income and a change in the effective tax
rate. The effective tax rate was 39.3% in 1995 and 24.4% in 1994. The lower 1994
rate reflects utilization of certain net operating loss carryforwards.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

Revenues: Total revenues in 1994 increased 318% to $20.9 million from $5.0
million in 1993. This increase was primarily the result of a larger number of
minutes sold to new U.S. wholesale carrier customers that were added in 1994.
The Company tripled its base of U.S. wholesale customers during 1994 to 15 at
December 31, 1994 from 5 at December 31, 1993. The revenue from Matrix accounted
for $6.0 million of the increase in 1994, as revenue from Matrix increased to
$9.2 million in 1994 from $3.2 million in 1993.

Gross Profit: Gross profit increased 270% to $3.7 million from $1.0 million
primarily due to increased revenues. As a percentage of revenues, gross profit
decreased from 20.1% in 1993 to 17.8% in 1994. This percentage decrease was
primarily the result of increased traffic on direct routes where the Company
must generally wait up to six months for its proportional share of return
traffic. The amount of costs associated with the operating agreements that
provide for delayed proportional return traffic during the year increased to
$1.2 million in 1994 from $144,000 in 1993. This increase in costs represents
growth in outbound traffic on new and existing routes in advance of proportional
return traffic, and resulted in increased delayed proportional return traffic in
the first six months of 1995.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses increased 130% to $2.3 million from $1.0 million. This
increase was primarily due to increased personnel and sales commission expenses.
The increase in personnel expenses was directly related to the increase in
personnel to 15 at December 31, 1994 from six at December 31, 1993. The increase
in sales commission expense was due to increased revenues. Beginning in 1994,
Matrix provided certain data processing services to the Company for which the
Company incurred expenses of $35,000 in 1994. As a percentage of revenues,
selling, general and administrative expenses decreased from 20.0% in 1993 to
10.9% in 1994.

Depreciation: Depreciation increased 293% to $410,115 from $104,241. As a
percentage of revenues, depreciation decreased to 2.0% in 1994 from 2.1% in
1993. The increase in the dollar amount was primarily due to depreciation of
additional transmission facilities and switching equipment acquired in 1994.

Interest Expense: Interest expense increased to $192,979 from $11,891. As a
percentage of revenues, interest expense increased from 0.2% in 1993 to 0.9% in
1994. This increase was a result of the interest on additional borrowings under
the Company's revolving credit facility which were used to finance additional
digital undersea fiber optic cable acquisitions during 1994.

Income Taxes: Income taxes were $205,000 in 1994. There was no income tax
expense in 1993 because the Company had an operating loss. The Company's
effective tax rate in 1994 was 24.4%, which reflected a combined federal and
state income tax rate of 39.5% less the utilization of net operating loss
carryforwards from prior years.

21
<PAGE> 22

QUARTERLY RESULTS OF OPERATIONS

The following tables set forth statement of operations data for each of the
Company's last nine fiscal quarters and the percentage of the Company's revenues
represented by each line item reflected therein. This information is unaudited
and has been prepared on the same basis as the audited financial statements
contained herein and, in management's opinion, reflects all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the periods presented. The operating results
for any quarter are not necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
QUARTER ENDED:
-------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ $ 3,305 $3,947 $ 4,688 $8,973 $12,125 $17,560 $21,392 $25,339 $32,240
------- ------ ------- ------ ------- ------- ------- ------- -------
Cost of long
distance
service........... 2,815 3,268 3,637 7,476 10,041 15,154 18,904 22,247 29,130
------- ------ ------- ------ ------- ------- ------- ------- -------
Gross profit...... 490 679 1,051 1,497 2,084 2,406 2,488 3,092 3,110
Selling, general and
administrative
expenses.......... 303 411 591 968 993 1,295 1,536 1,643 1,956
Depreciation........ 39 65 145 161 189 221 300 414 385
------- ------ ------- ------ ------- ------- ------- ------- -------
Operating
income.......... 148 203 315 368 902 890 652 1,035 769
Interest expense.... 14 29 54 96 111 117 153 157 152
------- ------ ------- ------ ------- ------- ------- ------- -------
Income
before
income
taxes..... 134 174 261 272 791 773 499 878 617
Provision for income
taxes............. 32 43 64 66 311 303 196 345 250
------- ------ ------- ------ ------- ------- ------- ------- -------
Net
income.... 102 $ 131 $ 197 $ 206 $ 480 $ 470 $ 303 $ 533 $ 367
======= ====== ======= ====== ======= ======= ======= ======= =======
Net income
per
share..... $ 0.01 $ 0.01 $ 0.01 $ 0.01 $ 0.03 $ 0.03 $ 0.02 $ 0.04 $ 0.03
======= ====== ======= ====== ======= ======= ======= ======= =======
Other Operating
Data:
Revenues from
delayed return
traffic(1)...... $ 59 $ 97 $ 107 $ 149 $ 194 $ 792 $ 1,260 $ 2,216 $ 3,042
======= ====== ======= ====== ======= ======= ======= ======= =======
Estimated return
traffic revenue
backlog(2)...... $ 204 $ 256 $ 343 $ 986 $ 2,052 $ 3,476 $ 5,258 $ 6,142 $ 8,400
======= ====== ======= ====== ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES FOR THE QUARTER ENDED:
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1994 1994 1994 1994 1995 1995 1995 1995 1996
--------- -------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of long
distance
services.......... 85.2 82.8 77.6 83.3 82.8 86.3 88.4 87.8 90.3
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit...... 14.8 17.2 22.4 16.7 17.2 13.7 11.6 12.2 9.7
Selling, general and
administrative
expenses.......... 9.1 10.4 12.6 10.8 8.2 7.4 7.2 6.5 6.1
Depreciation........ 1.2 1.6 3.1 1.8 1.6 1.3 1.4 1.6 1.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating
income.......... 4.5 5.2 6.7 4.1 7.4 5.0 3.0 4.1 2.4
Interest expense.... .4 0.7 1.2 1.1 0.9 0.7 0.7 0.6 0.5
----- ----- ----- ----- ----- ----- ----- ----- -----
Income
before
income
taxes..... 4.1 4.5 5.5 3.0 6.5 4.3 2.3 3.5 1.9
Provision for income
taxes............. 1.0 1.1 1.4 0.7 2.6 1.7 0.9 1.4 0.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Net
income.... 3.1% 3.4% 4.1% 2.3% 3.9% 2.6% 1.4% 2.1% 1.1%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>

- ---------------

(2) Represents revenue from delayed proportional return traffic actually
received during the six months following the end of the years ended December
31, 1993 and 1994 and the three months ended March 31, 1995. For the year
ended December 31, 1995, the amount represents the actual return revenue of
$3,042 during the three months ended March 31, 1996 and three months ended
March 31, 1996, the amounts represent management's estimate of revenue to be
received from delayed proportional return traffic during the three month
period ending June 30, 1996. For the three months ended March 31, 1996, this
amount represents management's estimate of revenue to be received from
delayed proportional return traffic during the six months ending September
30, 1996. Management's estimates of the revenue to be received from delayed
proportional return traffic are based on the anticipated ratios between
outgoing and incoming traffic and the anticipated settlement rates. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

22
<PAGE> 23

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its rapid growth, including its capital
expenditures, through funds provided by operations, a revolving credit facility
with a principal stockholder, a revolving credit facility with a commercial
lender and the sale of shares of common stock. The Company's net working capital
requirements have been insignificant as the Company has funded accounts
receivable growth through corresponding growth in its accounts payable. The
Company's accounts receivable turnover was 54 days in 1995 compared to an
accounts payable turnover of 71 days in 1995. The Company's longer accounts
payable turnover is partially due to its accounts payable with foreign partners
which generally have 180-day terms as a result of the six-month lag inherent in
the international telecommunications services settlement process.

Net cash provided by (used in) operating activities was $758,290, ($77,963)
and $7.4 million in 1993, 1994 and 1995, respectively and $863,043 and $3.0
million for the three months ended March 31, 1995 and 1996, respectively. In
1995, the net cash provided by operations was the result of an increase in net
income and accounts payable which exceeded the increases in accounts receivable
and deferred settlement costs. The net cash provided by operations in 1993 was
the result of an increase in accounts payable and accrued liabilities
representing the net settlements due to foreign partners, which increase was
greater than the increase in accounts receivable from customers.

Net cash used in investing activities was $1.5 million, $3.7 million and
$6.5 million in 1993, 1994 and 1995, respectively, and $241,603 and $4.1 million
for the three months ended March 31, 1995 and 1996, respectively. Substantially
all of these expenditures were for the acquisition of partial ownership
interests in international fiber optic cable transmission systems and related
equipment.

Net cash provided by financing activities was $717,919, $3.8 million and
$932,615 in 1993, 1994 and 1995, respectively, and $3.0 million for the three
month period ended March 31, 1996. In connection with the 1992 investment by a
principal stockholder, the Company received loan commitments aggregating
$750,000 from a principal stockholder. In 1994 this principal stockholder
replaced the loan commitments with a revolving credit facility (the "Note") to
the Company. Available funds under the Note were initially $5.0 million in 1994,
and were increased to $9.0 million in 1995 based on the Company having achieved
certain performance-based milestones. The Note is secured by a pledge of
substantially all the assets of the Company that are not pledged to the
commercial lender, and bears interest payable monthly at the prime rate plus 2%.
As of March 31, 1996, $5.4 million was outstanding under the Note. The Company
intends to repay the balance outstanding under the Note with a portion of the
net proceeds of this Offering. The entire $9.0 million of available credit under
the Note will expire on the closing of this Offering. See "Use of Proceeds" and
"Certain Relationships and Related Transactions." The Company has an additional
revolving credit facility with a commercial lender under which it may borrow the
lesser of $3.0 million or 70% of certain of the Company's accounts receivable.
Interest is payable monthly at the lender's prime rate plus 0.875%. The
revolving credit facility is collateralized by all the Company's accounts
receivable and contains covenants with respect to, among other things, the
profitability and current ratio of the Company and restrictions on the payment
of dividends. On December 28, 1995, the Company borrowed $3.0 million under the
facility and used the proceeds to repay $3.0 million of the amount outstanding
under the Note. The facility expires on September 30, 1996.

The Company believes that the net proceeds of this Offering, together with
cash provided by operating activities and other existing sources of liquidity,
will be sufficient to meet its expected capital expenditures and working capital
needs through the end of 1997. At March 31, 1996, the Company had outstanding
commitments of $860,000 for the acquisition of additional ownership interests in
digital undersea fiber optic cables. The Company anticipates making capital
expenditures of approximately $15 million during the remainder of 1996 and $20
million in 1997 to expand the Company's international network facilities on new
and existing routes, and expects to use a portion of the net proceeds of this
Offering for such purposes. See "Use of Proceeds."

23
<PAGE> 24

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued 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," which is
effective for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 on January 1, 1996 and does not expect the impact on its
financial statements, if any, to be material.

In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which is effective for fiscal years beginning after December 31,
1995. SFAS 123 encourages entities to adopt a fair value based method of
accounting for employee stock compensation plans; however, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting. Under the intrinsic value based
method, companies do not recognize compensation cost for many of their stock
compensation plans. Under the fair value based method, companies would recognize
compensation costs for those same plans. The Company elects to continue to use
the intrinsic value based method, and therefore does not expect the impact on
its financial statements, if any, to be material.

24
<PAGE> 25

BUSINESS
OVERVIEW

Pacific Gateway is a facilities-based international telecommunications
carrier which provides international telecommunications services primarily to
its target customer base of long distance service providers worldwide, including
five of the seven largest U.S.-based long distance carriers. As a
"facilities-based" carrier, the Company primarily owns or leases its
international network facilities rather than reselling time provided by another
facilities-based carrier. The Company operates an international network
consisting of international and domestic switching facilities in Los Angeles and
New York, partial ownership interest in 14 digital undersea fiber optic cable
systems in the Atlantic, Pacific and Caribbean regions and operating agreements
that provide for the exchange of traffic with foreign carriers. The Company
currently has the capacity to send or receive approximately 240 million
international minutes annually over its owned digital undersea fiber optic cable
facilities.

As of March 31, 1996, Pacific Gateway had operating agreements with 25
foreign carriers in 19 countries around the world, which countries collectively
represent approximately 43.3% of U.S.-originated international traffic. The
Company is currently negotiating operating agreements with more than 20
prospective foreign partners. The Company's foreign partners include both
telecommunications carriers that have been dominant in their home markets which
may be wholly or partially government-owned (often referred to as Post Telephone
and Telegraph or "PTTs") and nondominant carriers that may have been recently
established as a result of the deregulation of foreign telecommunications
markets ("Competitive Carriers").

INDUSTRY BACKGROUND

The international telecommunications market consists of all calls that
originate in one country and terminate in another. Industry sources estimate
that this market was approximately $50.6 billion in aggregate carrier revenues
in 1994. This market can be divided into two major segments: the U.S.-originated
international market (the "U.S.-Originated Market"), consisting of all
international calls which either originate or terminate in the United States,
and the overseas-originated international market (the "Overseas-Originated
Market"), consisting of calls between countries other than the United States.
Services offered by international long distance carriers fall into three primary
categories: international switched services, switch-based value-added services
and international private line services.

Bilateral operating agreements between international long distance carriers
in different countries are key components of the international long distance
telecommunications market. Under an operating agreement, each carrier agrees to
terminate traffic in its country and provide proportional return traffic to its
partner carrier. The implementation of a high quality international network,
including the acquisition and utilization of digital undersea fiber optic cable
and adherence to the technical recommendations of the International Telegraph
and Telephone Consultative Committee (the "CCITT") of the International
Telephone Union (the "ITU") for signalling, protocol and transmission, is an
important element in enabling a carrier to compete effectively in the
international long distance telecommunications market.

The international long distance telecommunications market has experienced
rapid growth in recent years. During the period from 1990 to 1994, according to
the FCC, the U.S.-Originated Market grew at an annual compound rate of 13% from
$7.6 billion to $12.4 billion, while the U.S. domestic long distance market grew
at a compound annual rate of 7%. The Company believes that the international
telecommunications market will continue to experience strong growth for the
foreseeable future as a result of the following trends:

- the opening of overseas telecommunications markets due to deregulation
and the privatization of government-owned monopoly carriers, permitting
the emergence of new carriers;

- the reduction of international outbound long distance rates, driven by
competition and technological advancements, which is making international
calling available to a much larger customer base and stimulating
increasing traffic volumes;

- the increased availability and quality of digital undersea fiber optic
cable in the place of satellite- and analog coaxial cable-based
transmission networks, which have enabled long distance carriers to
improve the quality of their services and reduce their cost structures;

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<PAGE> 26

- the dramatic increases in the availability of telephones and the number
of access lines in service around the world, stimulated by economic
growth, government mandates and technological advancements;

- the worldwide proliferation of new communications devices such as
cellular telephones, facsimile machines and other forms of data
communications equipment;

- the rapidly increasing globalization of commerce, trade and travel; and

- the rapidly increasing demand for bandwidth-intensive data transmission
services, including the Internet.

Many of the world's developing countries are committing significant
resources to build telecommunications infrastructures in order to increase the
number and quality of telephone lines in their countries. The ITU forecasts that
the number of telephone lines in developing countries will grow at a compound
annual growth rate of 17% per year through the year 2000, compared to 5% per
year in the same period for developed nations. The Company believes that
increasing investment in telecommunications infrastructure will stimulate
increasing demand for international telecommunications services.

The Wall Street Journal estimated in September 1995 that more than 19
telecommunications companies worldwide had announced intentions to raise a total
of more than $36 billion from investors by the end of 1996 in what are generally
referred to as privatizations. In conjunction with these privatizations, certain
countries have opened their telecommunications markets to competition in order
to increase the level of private investment and the rate of infrastructure
development. Deregulation of telecommunications services in the United States
began in 1984 with the AT&T divestiture. The Company believes that, since that
date, more than 40 new facilities-based Competitive Carriers have emerged in
international markets outside of the United States as this trend toward
deregulation has expanded internationally. The Company believes that this trend
creates numerous opportunities for U.S.-based carriers, such as Pacific Gateway,
to increase their access to developing telecommunications markets and to
increase their market share in both the U.S.-Originated Market and the
Overseas-Originated Market. The Company believes that many of the emerging
carriers in developing countries, as well as certain recently privatized PTTs,
are likely to seek alliances, partnerships or joint ventures with other
international carriers to expand their global networks. Recent examples of such
alliances include AT&T's alliance with Unisource, known as "Uniworld," MCI's
alliance with British Telecom, known as "Concert," and Sprint's alliance with
Deutsche Telekom and France Telecom, known as "Global One."

Despite the growth and general deregulatory trends in the global
telecommunications market, the pace of change and emergence of competition in
many countries remains slow, with domestic and international traffic still
dominated by government-controlled monopoly carriers. The Company believes that
U.S.-based international carriers, such as Pacific Gateway, which have already
established, or are in negotiations to establish, operating agreements with
government-controlled monopoly carriers in many such countries will be well-
positioned to capture the benefits of increasing traffic flows as the
telecommunications infrastructure in these countries is expanded.

Markets

U.S.-Originated Market. In 1994, the U.S.-Originated Market was $12.4
billion in aggregate revenues from international switched services traffic,
according to statistics published by the FCC. Based on 1994 FCC statistics, the
U.S.-Originated Market is dominated by AT&T with a 64% market share, followed by
MCI with a 24% market share, and Sprint with a 10% market share. The balance of
this market currently is divided among WorldCom, Pacific Gateway and a number of
specialized carriers. U.S.-based carriers that originate international traffic
but do not have operating agreements with foreign carriers must utilize the
services of a carrier which has the appropriate facilities and operating
agreements to terminate this traffic. In addition, international carriers with
operating agreements may use the services of other international carriers for
overflow traffic or on routes with smaller traffic volumes. Approximately $1.1
billion of the 1994 U.S.-Originated Market traffic, which aggregated $12.4
billion in revenues, was terminated under an operating agreement held by a
carrier other than the originating carrier. The Company's marketing efforts to
U.S.-based carriers are primarily directed at this segment of the
U.S.-Originated Market.

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<PAGE> 27

Overseas-Originated Market. Based on statistics compiled by industry
sources, the Company estimates that the Overseas-Originated Market was $37.4
billion in aggregate revenues generated by international carriers in 1994.
According to the ITU, the Overseas-Originated Market for international long
distance service grew from 12.1 billion minutes per year in 1984 to 53.6 billion
minutes per year in 1994, representing a 16% compound annual growth rate.
Although the Company's extensive international network enables it to compete in
the entire Overseas-Originated Market, Pacific Gateway is focusing its strategy
on developing a significant presence in a defined set of geographical routes
where it believes it has either competitive advantages through strong
relationships with foreign partners or the opportunity to gain market share and
increase its volume of higher-margin, value-added services.

Services

International Switched Services. International switched services represent
the largest component of international telecommunications traffic. These
services are provided through transmission facilities employing switches that
automatically route calls to available circuits. As shown in the diagram below,
a typical international telephone call which originates in a U.S. business or
residence first travels through the local carrier's switched network to the
caller's domestic long distance carrier. The domestic long distance carrier then
carries the call to an international gateway switch. An international carrier
picks up the call at its gateway switch and sends it through a digital undersea
fiber optic cable or satellite circuit to the corresponding international
gateway switch operated by an international carrier in the country of
destination. The long distance carrier in that country then routes the call to
its customer through the domestic telephone network. Foreign-originated traffic
is routed back to the United States in a similar manner.

[INTERNATIONAL SWITCHED SERVICES CHART]

Switch-Based Value-Added Services. Switch-based value-added services
include 800 service, international directory assistance with the option of call
completion, travel card services, enhanced facsimile services and
videoconferencing, among others. The provision of such value-added services
offers carriers attractive opportunities to increase operating margins and offer
a more competitive service to their customers.

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<PAGE> 28

International Private Line Services. International private line services
provide a dedicated point-to-point connection between two locations without
using a public switched network. A typical private line connection would be
between the New York and London branches of an international bank. Customers of
this service are typically multinational corporations or government agencies
which have substantial communications volume between two or more international
locations.

Operating Agreements

International long distance traffic is traditionally exchanged under
switched voice bilateral operating agreements between long distance carriers in
two countries. In order to terminate a U.S.-originated call in another country,
a U.S.-based international carrier must have an operating agreement with a
carrier in that country or must pay for transmission service from another
carrier that has such an agreement. Operating agreements provide for the
termination of traffic in, and return traffic to, the partners' respective
countries for mutual compensation through negotiated settlement rates. Operating
agreements typically provide that a foreign carrier will return the same
percentage of total U.S. terminating traffic as it receives from the U.S.-based
carrier and also provide for network coordination and accounting and settlement
procedures. The execution of an operating agreement between two carriers is
typically accompanied by an equal investment by both carriers in digital
undersea fiber optic cable between the two countries. While operating agreements
generally are for an unspecified term, the Company believes that the common
ownership of transmission facilities, which are expected to have 20-year useful
lives, establishes a solid foundation for long-term relationships among
international carriers.

Before the deregulation of telecommunications services in the United States
in 1984, AT&T was the only carrier that had operating agreements with foreign
carriers. Until recently, in many foreign countries there was only one operating
agreement in place between the government-controlled monopoly carrier and a
foreign-based international carrier. In the United States, however, after
deregulation of the long distance telecommunications services industry, MCI and
Sprint each negotiated its own operating agreements with foreign carriers. In
addition, WorldCom, as a result of the international relationships developed by
certain of its recently-acquired subsidiaries, also has numerous operating
agreements. See "-- Government Regulation."

Other than these four carriers and Pacific Gateway, the Company believes
that no new U.S. entrant in the international telecommunications market has been
able to secure a significant number of traditional switched voice bilateral
operating agreements with foreign carriers. Unless a U.S.-based international
carrier is able to offer a new business opportunity or a new source of traffic,
generally there is little incentive for a government-controlled monopoly carrier
to take on the administrative burdens of negotiating a new operating agreement
with a U.S.-based carrier, to incur additional capital investment, and to
maintain the relationship on an ongoing basis. The Company believes that the
combination of the large traffic volume, proven operating performance and
personal relationships that traditionally has been required both to establish
operating agreements and to secure positions in digital undersea fiber optic
cable systems, creates a significant barrier to entry in the international
telecommunications market.

COMPANY STRATEGY

The Company's objective is to strengthen its position as a facilities-based
international telecommunications services provider by increasing its customer
base in the United States and abroad and positioning itself for continued growth
in revenues and profitability. The Company's strategy for achieving this
objective consists of the following key elements:

Secure Additional Operating Agreements

Pacific Gateway actively seeks to enter into additional operating
agreements to expand the geographical scope of its international network and to
attract new domestic and foreign customers. Pacific Gateway is able to increase
the revenues generated by its existing customer base by providing direct service
for these customers to additional countries.

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<PAGE> 29

Pacific Gateway targets prospective partners for new operating agreements
by evaluating customer demand, the relative long-term economic attractiveness of
offering direct service to a particular country and the availability of fiber
optic or satellite transmission capacity to that country. Currently, the Company
is focusing its resources on establishing additional routes primarily to Asia,
the Pacific Rim, Eastern Europe and Latin America. The Company believes that
these markets, and, in the near future, the Middle East and Africa, offer
opportunities for the Company to attain significant market share, improve gross
margins, and gain other strategic advantages. In addition, the Company is
seeking increased access to more competitive high traffic routes, such as to
Western Europe, through strategic relationships with well-established
international carriers that offer opportunities to achieve significant revenue
growth at relatively low cost. Pacific Gateway believes that the experience,
relationships and knowledge of its management team have played, and will
continue to play, a key role in enabling the Company to negotiate additional
operating agreements in selected markets. The Company also believes that as
specific telecommunications markets become less regulated, its management team
will be able to use its experience and knowledge to augment existing operating
agreements, including by the deployment of telecommunications equipment in
foreign countries, resulting in a more efficient world-wide network.

Expand and Enhance Network Facilities

To support additional operating agreements and the growth of traffic on its
existing direct routes, the Company intends to continue to acquire partial
ownership positions in new and existing digital undersea fiber optic cables. The
Company is generally able to increase its gross profit margin and provide
greater assurance of the quality and reliability of transmission by routing
traffic over its owned international facilities. The Company also intends to
expand its switching and international gateway facilities in the United States
and to invest in network operations in certain foreign locations in order to
originate and terminate customer traffic more cost effectively and support the
development of a targeted commercial sales development program. The Company
expects to begin operating a new domestic switching facility in Dallas by the
end of the third quarter of 1996. The Company has committed to invest in seven
new digital undersea fiber optic cable projects which are currently in the
planning stages. The Company utilizes state-of-the-art equipment and
technologies that conform to relevant operating standards to ensure high
quality, cost-effective transmission service.

Increase Overseas-Originated Traffic Through International Alliances, Joint
Ventures and Acquisitions

The Company believes that alliances and direct investments with foreign
partners have the potential to increase the Company's opportunities to increase
traffic in the most rapidly growing segments of the international
telecommunications market. The Company is currently evaluating several potential
alliances, investment opportunities and acquisitions, including equity positions
and operating roles with both established and emerging international
telecommunications carriers with operations in Asia, the Pacific Rim, Eastern
Europe, Western Europe and Latin America. The Company currently is discussing
with potential U.S. and foreign partners the terms of possible business
relationships and other strategic alliances which could provide that the partner
would acquire a minority ownership interest in the Company. There can be no
assurance that any of these discussions will result in the formation of an
alliance or that any such alliance, if formed, would be successful. The Company
is pursuing these opportunities to stimulate traffic from foreign markets, to
leverage its foreign partners' knowledge of their local markets and to expand
into new emerging markets. In many of the regions targeted by the Company, the
provision of telecommunications services is being deregulated, providing
numerous opportunities either to provide wholesale services to other competitive
carriers operating in the region or to service the end-user market directly.
Additionally, many of the switch-based value-added services currently offered by
the Company in the United States (discussed below) can be provided abroad
through such alliances, creating opportunities to generate additional revenues
through available technology.

Expand Product Line

The Company intends to expand the range of products and services that it
offers to its customers to include international 800 service, prepaid services
such as debit and travel cards, international directory assistance with the
option of call completion service, enhanced facsimile service and virtual
private network

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<PAGE> 30

services. The Company believes that leveraging its existing network by offering
additional value-added services will increase the loyalty of its existing
customer base and help attract new customers. These services will enable Pacific
Gateway's carrier customers to provide a broader range of international services
to their end-user customers, which the Company expects will stimulate additional
higher margin international traffic over its network.

Expand Customer Segments

Pacific Gateway intends to leverage its existing network and low-cost
structure by marketing international long distance services directly to selected
corporate customers that are generally spending more than $10,000 per month on
international telecommunications services and are located within geographic
proximity to the Company's switching facilities. The Company also intends to
market its services to targeted businesses which have large volumes of
international telecommunications traffic to specific countries where the Company
believes that it can offer the combined advantages of competitive prices, high
transmission quality and service diversity. The Company expects that traffic
generated by corporate customers will result in higher gross margins than the
Company's wholesale traffic. To develop this aspect of its business more
rapidly, the Company may seek to acquire a marketing organization with an
existing corporate customer base located within geographic proximity to the
Company's switching facilities. The Company is not currently negotiating any
such acquisition.

Maintain Efficient Low-Cost Operations

The Company believes it is important to maintain efficient, low-cost
operations in order to be competitive in the international telecommunications
services market. Through continuous monitoring of its network, the Company
optimizes the routing of calls to decrease transmission costs and obtain the
highest possible transmission quality and reliability. The Company pursues a
disciplined, incremental approach to the costs of expansion. When Pacific
Gateway initially expands sales and services into a region, the Company usually
arranges to provide services for that area on a usage-sensitive (variable cost)
basis. As volume grows, the Company typically reprovisions its network by
acquiring fixed-cost facilities with greater capacity. In addition, the Company
closely controls selling, general and administrative costs at levels that it
believes are among the lowest in the industry. The Company intends to maintain a
small corporate staff and to continue investing in network technology and
information systems that will preserve and enhance its position as a low-cost
international telecommunications service provider.

SERVICES

The Company provides four categories of services: international switched
services, domestic switched services, switch-based value-added services and
international private line services. Substantially all the Company's current
revenues are generated by the sale of international switched services and
domestic switched services.

International Switched Services. The Company's international switched
services revenues are generated from outgoing and incoming international traffic
carried through its international network. Revenues from international switched
services are derived from country-specific, usage-sensitive rates charged to its
customers and return traffic from Pacific Gateway's foreign partners.

As of March 31, 1996, the Company had 25 operating agreements with foreign
carriers in 19 countries under which it carries traffic through its network of
switching facilities and digital undersea fiber optic cables, as well as through
leased satellite circuits. Through its network and its arrangements with U.S.
and foreign carriers, the Company is able to deliver traffic to or between all
countries in the world that have direct dial service with the United States.
International switched services represented approximately 85.6% and 88.1% of the
Company's revenues in 1994 and 1995, respectively, and 89.5% in the three months
ended March 31, 1996.

Domestic Switched Services. The Company provides both originating and
terminating switched long distance services within the United States. The
Company's originating network, which provides access and

30
<PAGE> 31

egress to local network providers, extends to geographical areas around its
switching facilities in Los Angeles (serving most major metropolitan areas in
California, Arizona, and Nevada) and New York (serving selected metropolitan
locations in New York, Washington, D.C., Massachusetts, Pennsylvania,
Connecticut, New Jersey and Virginia). As the Company expands its switching
network to include Dallas and other strategic locations, its originating network
will be expanded to the major metropolitan areas in those regions. The Company
provides domestic switched services as a cost-effective means to terminate its
return traffic in the U.S. and to offer services to U.S.-based long distance
resellers that do not own or lease switching facilities ("switchless
resellers"). Currently the Company provides domestic switched services only to
Matrix. Domestic switched services accounted for approximately 12.4% and 11.7%
of the Company's total revenues in 1994 and 1995, respectively, and 8.6% in the
three months ended March 31, 1996.

Switch-Based Value-Added Services. The Company regards the 25 foreign
carriers with which it has operating agreements both as existing customers
through their use of the Company's network to terminate traffic and as potential
customers for the Company's anticipated switch-based value-added service
offerings. The Company currently offers directory assistance, international 800
service and prepaid services such as debit and travel cards on a limited basis
to its U.S.-based wholesale carrier customers that do not provide such services
directly to their customers. Pacific Gateway intends to expand the range of its
value-added services to include international directory assistance with the
option of call completion services. In the aggregate, these services accounted
for less than 1% of the Company's revenues in each of 1994 and 1995 and
approximately 1.8% in the three months ended March 31, 1996.

International Private Line Services. Pacific Gateway provides dedicated
international point-to-point connections on a selective basis to customers
requiring special dedicated services for high-traffic voice and data routes
between two locations. International private line services represented less than
1% of the Company's revenues in each of 1994 and 1995 and in the three months
ended March 31, 1996.

INTERNATIONAL NETWORK

Since its inception in 1991, the Company has successfully implemented an
extensive international facilities-based network comprised of its international
gateway switches and related peripheral equipment and digital undersea fiber
optic cable systems, as well as leased cable and satellite capacity. The map on
the inside front cover of this Prospectus illustrates the Company's
international network, including cable projects that are currently in the
planning stages. The Company is able to provide service to any point in the
world using a combination of its owned digital undersea fiber optic network and
leased cable and satellite capacity. The Company's network employs
state-of-the-art digital switching and fiber optic technologies and is supported
by comprehensive monitoring and technical services. The Company believes that
this network is fundamental to its ability to compete successfully in the
international telecommunications market. The Company regards its extensive
international network as a significant competitive advantage which would be
expensive and time-consuming for a new entrant to replicate.

International Gateway and Domestic Switches

The Company operates international gateway switches in Los Angeles and New
York that were manufactured by Northern Telecom and conform to international
signalling and transmission standards provided for in CCITT recommendations.
Traffic to Asia and the Pacific Rim is generally routed via the Company's Los
Angeles gateway, and traffic to Europe and Latin America is routed via the
Company's New York gateway. In addition, the Company operates domestic switches
in Los Angeles and New York to support origination and termination of its
customer traffic and to provide domestic switched service to Matrix. The Company
expects to implement a domestic switch in Dallas by the end of the third quarter
of 1996 to serve the Mexico market, and, in the future, may implement other
international gateway and domestic switches in other strategic locations. The
Company expects to expand its originating network to Europe, the Pacific Rim,
Asia and Latin America through alliances or direct investments.

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Digital Undersea Fiber Optic Cable Systems

The Company currently has investments in 14 digital undersea fiber optic
cable systems with an ownership interest in each of generally less than 1%.
Digital undersea fiber optic cables are owned and operated by consortia of
international service providers which jointly commit to fund the construction
and operating costs of the cables in proportion to their equity positions in the
cables. Typically, participation in a consortium is limited to those carriers
which have the operating authority to provide direct international service and
have obtained operating agreements with the countries served by the cables.
Capacity is usually owned by two carriers in two countries with ownership to the
theoretical "midpoint" of the cable. Because digital undersea fiber optic cables
typically take several years to plan and construct, carriers generally make
investments based on a forecast of anticipated traffic.

The Company seeks to have ownership positions in digital undersea fiber
optic cable systems where it believes its customers' demand will justify the
investment in those fixed assets. Although the Company is generally able to earn
a higher gross margin on traffic routed through its owned fiber optic cable
routes relative to leased routes, Pacific Gateway will continue to buy
usage-sensitive transmission capacity on a per minute basis from other U.S.
facilities-based international carriers on routes where traffic volumes are
relatively low or inconsistent, as well as to manage overflow traffic on busy
routes.

The Company does not have direct access from its gateway switches to the
digital undersea fiber optic cable heads and currently leases these facilities
from certain of its competitors.

Satellite Facilities

The Company utilizes leased satellite facilities for traffic to and from
countries where digital undersea fiber optic cables are not available or
cost-effective. Leased satellite facilities are also used for redundancy when
digital undersea cable service is temporarily interrupted. The Company is
currently evaluating the construction of earth station facilities based on
increasing traffic that may result in such investments being cost-effective for
the Company.

Network Monitoring and Technical Support

The Company provides customer service and support, 24-hour network
monitoring, trouble reporting and response procedures, service implementation
coordination, billing assistance and problem resolution. The Company provides a
single point of contact for each customer and accepts end-to-end responsibility
for installation, maintenance and problem resolution.

Pacific Gateway generally utilizes redundant, highly automated
state-of-the-art telecommunications equipment in its network and has diverse
alternate routes available in cases of component or facility failure. Back-up
power systems and automatic traffic re-routing enable the Company to provide a
high level of reliability for its customers. Computerized automatic network
monitoring equipment allows fast and accurate analysis and resolution of network
problems.

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OPERATING AGREEMENTS

As of March 31, 1996, the Company had 25 operating agreements with foreign
carriers in 19 countries as reflected in the table below.

<TABLE>
<CAPTION>
CUMULATIVE % OF
NUMBER OF COUNTRY OR COUNTRIES OF U.S.-ORIGINATED
YEAR NEW AGREEMENTS FOREIGN CARRIER(S) MINUTES(1)
----- -------------- ------------------------------------ ---------------
<S> <C> <C> <C>
1991 1 Guam 0.2%
1992 2 Japan(2), Philippines 2.2%
1993 4 Australia, Canada, New Zealand, 24.5%
Russia
1994 5 Netherlands, Sweden, Switzerland 26.8%
1995 9 Chile, Dominican Republic, Japan, 34.6%
Spain, United Kingdom(2), Venezuela
1996 4(3) Germany, Israel, South Korea, 43.3%
Malaysia
</TABLE>

- ---------------

(1)Percentage of total U.S.-originated international minutes going to countries
in which the Company has entered into operating agreements, excluding private
lines, based on 1994 FCC statistics.

(2)Private line only.

(3)As of March 31, 1996.

These agreements enable the Company to terminate traffic in a foreign
country directly to its foreign carrier's network and entitle the Company to
receive a proportionate amount of return traffic from the foreign partner.
Although the Company's operating agreements generally are for an unspecified
term, the Company believes that the common ownership of transmission facilities,
which are expected to have 20-year useful lives, establishes a solid foundation
for long-term relationships among international carriers. Currently, Pacific
Gateway is engaged in various stages of negotiation with respect to operating
agreements with 20 carriers in approximately 15 countries in addition to those
reflected in the table above.

CUSTOMERS

As of March 31, 1996, the Company provided its services to approximately 57
U.S.-based long distance carriers, up sharply from 44 carriers as of December
31, 1995 and 15 carriers as of December 31, 1994. In the United States, the
Company has identified the more than 200 long distance carriers with annual
revenues of between $50 million and $2 billion as its target customer base. The
Company also regards the 25 foreign carriers with which it has operating
agreements as existing customers and as potential customers for the Company's
anticipated switch-based value-added services. In 1994, Matrix, Wiltel, Inc.
(now WorldCom) and Optus Communications Pty Limited accounted for 44%, 12% and
11% of the Company's revenues, respectively. In 1995 and the three months ended
March 31, 1996, only Matrix, with 22% and 15%, respectively, accounted for more
than 10% of the Company's revenues.

Matrix is a U.S.-based switchless long distance carrier which provides
domestic and, through Pacific Gateway, international long distance services to
its domestic retail customers. It targets principally the small business market,
utilizing telemarketing services, direct mail and direct sales. Pursuant to an
agreement dated as of May 1, 1995, Matrix has agreed to send substantially all
its international telecommunications traffic and its domestic telecommunications
traffic in the Northeast and California through Pacific Gateway's network until
November 1996, subject to earlier termination if the Company does not match a
bona fide competitive pricing offer Matrix may receive from a third party. The
term of the agreement is automatically extended on a month-to-month basis unless
either party gives the other 30 days' notice of termination. The Company expects
that the relative portion of its revenues derived through its relationship with
Matrix will continue to decline if the Company continues to be successful in
obtaining additional U.S. and foreign customers and increasing traffic from its
existing customers. See "Risk Factors -- Relationship with Matrix" and "Certain
Relationships and Related Transactions."

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<PAGE> 34

SALES AND MARKETING

The Company believes that the principal reasons its customers select
Pacific Gateway to carry their international traffic are (i) the Company's
reputation for operating a state-of-the-art network at rates that are comparable
to or lower than its competitors, (ii) that the Company's size enables its
experienced sales and operating personnel to tailor cost-effective
telecommunications services to meet customers' needs and to provide highly
responsive, flexible customer service and (iii) that Pacific Gateway is the only
significant U.S. facilities-based international carrier that does not also
compete primarily for end-user customers in the domestic long distance market.

Wholesale Carrier Services

The Company's wholesale carrier services are generally priced at or below
the market price of the other four leading U.S. international facilities-based
carriers. The Company does not, however, offer a standard discount relative to
AT&T or any other carrier's rates, and believes that its ability to obtain
traffic from its customers is not dependent upon its pricing alone.

Pacific Gateway has five sales professionals dedicated to marketing and
maintaining the Company's relationships with its U.S.-based carrier customers.
Marketing is typically conducted on a personalized basis. Participation at
industry conferences, referrals from other carriers and long-term relationships
are key factors in establishing the visibility, reputation and personal trust
necessary to obtain and maintain this business. The Company believes that it has
been able to compete effectively by offering more personalized service than its
competitors and the assurance of ongoing senior-level attention to each account.

The Company initiates and maintains its relationships with its foreign
partners in the Company's targeted markets through the combined efforts of its
senior management team. The Company believes that its success in entering into
operating agreements with its foreign partners is due largely to the
long-standing personal relationships which the Company's senior management team
have developed with the appropriate officials at PTTs and Competitive Carriers
as a result of their previous positions and experience with other large U.S-
based international carriers.

Commercial Services

Pacific Gateway is developing a commercial program targeted at selected
businesses with substantial international calling volume located in geographic
proximity to the Company's international gateway switches in New York and Los
Angeles. The primary service offerings will be switched services, as well as
international private line services. The Company believes it can reach this
customer base at low marginal cost through a focused sales force. To develop
this aspect of its business more rapidly, the Company may seek to acquire a
marketing organization with an existing corporate customer base located within
geographic proximity to the Company's switching facilities. The Company is not
currently negotiating any such acquisition.

BILLING AND MANAGEMENT INFORMATION SYSTEMS

Accurate operation of a management information system is vital to the
Company's operations, given the high volume of transactions and the need to bill
customers accurately. To date, the Company has not experienced any system
problem which has led to significant delays in billing customers or in disputes
with its customers over billing.

The Company maintains its own staff of programming and management
information reporting personnel, as well as contract programmers dedicated to
the maintenance of the Company's management information system. This system
includes reporting on revenues, cost of long distance services, margin analysis,
foreign settlement systems and network performance reporting. The Company
provides common data access for system users to support its customer service,
accounting and network monitoring functions.

The Company currently has a contract pursuant to which Matrix has agreed to
provide call processing, rating and bill rendering services to the Company
through June 1, 1996 and on a monthly basis thereafter, on terms that the
Company believes are competitive with similar services offered in the industry.
The Company

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<PAGE> 35

has purchased an IBM AS400 computer system sized to meet the Company's projected
growth through mid-1997, and has developed and is currently testing its own
customized billing and management information system software to meet the needs
of its customers and vendors and enhance the Company's ability to monitor its
operations. The Company intends to phase in its new management information
systems during the second quarter of 1996 and discontinue its Matrix contract
soon thereafter.

COMPETITION

The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems, such
as the proposed Iridium and GlobalStar systems, utilization of the Internet for
international voice and data communications, and digital wireless communication
systems such as PCS. The Company is unable to predict which of many possible
future product and service offerings will be important to maintain its
competitive position or what expenditures will be required to develop and
provide such products and services. See "Risk Factors -- Competition."

With the recent grant by the FCC of AT&T's petition to be classified as a
non-dominant carrier in the domestic interstate market, only certain domestic
local exchange carriers continue to be classified as dominant carriers. AT&T has
also been classified as a non-dominant carrier in the international market. As a
consequence of its new classifications, AT&T has obtained relaxed pricing
restrictions and relief from other regulatory constraints, including reduced
tariff notice requirements, which should make it easier for AT&T to compete with
alternative carriers such as the Company in the interstate, domestic
interexchange and international markets. With regard to AT&T's long pending
petition to be reclassified as a non-dominant international carrier, the FCC
concluded that AT&T does not possess market power in the U.S.-international
market for residential IMTS or multi-purpose earth station services. As a
consequence of its new non-dominant status, AT&T will be permitted to file
tariffs for its international services on one day's notice instead of 45 days,
without economic or cost support data, and will no longer be required to comply
with price cap regulation for its residential IMTS. In addition, AT&T will be
relieved from Section 214 licensing requirements imposed on dominant carriers,
such as obtaining FCC approval prior to terminating service to a particular
point. AT&T remains subject to the Section 214 requirements of non-dominant U.S.
international carriers, and the generally applicable common carrier
requirements, including to provide international services at reasonable and
nondiscriminatory rates, terms, and conditions. However, the removal of dominant
carrier regulation could make it easier for AT&T to compete with the Company. To
support the continuing development of competition in this market, the FCC
conditioned its reclassification of AT&T in the international marketplace on a
number of "voluntary" commitments by AT&T. Broadly, AT&T has committed to
improve the maintenance, restoration, provisioning, and access to international
cable facilities, assist the Commission's efforts to monitor the competitive
impact of AT&T's global alliances with foreign

35
<PAGE> 36

telecommunications entities, and help ensure that all U.S. carriers have access
to nondiscriminatory accounting rate arrangements. Significantly, AT&T has also
committed to maintaining its annual average rate per minute for international
residential calls at or below the 1995 level for approximately three years.

The FCC has also initiated a new proceeding to consider, among other
issues, whether regulation of domestic interexchange services should be modified
in light of AT&T's reclassification. In addition, the recently-enacted
Telecommunications Act substantially revises the Communications Act, and permits
and is designed to promote additional competition in the intrastate, interstate
and international telecommunications markets by both U.S.-based and foreign
companies, including the RBOCs. RBOCs, among other existing or potential
competitors of the Company, have significantly more resources than the Company.
See "-- Government Regulation."

GOVERNMENT REGULATION

Overview

The Company's services are subject to varying degrees of federal
regulation. The FCC exercises authority over all interstate and international
facilities-based and resale services offered by the Company. Services that
originate and terminate within the same state, also known as intrastate
services, are regulated by state regulatory commissions. The Company also may be
subject to regulation in foreign countries in connection with certain business
activities. For example, the Company's use of transit agreements or
arrangements, if any, may be affected by regulations in either the transited or
terminating foreign jurisdiction. There can be no assurance that foreign
countries will not adopt regulatory requirements that could adversely affect the
Company.

Federal Regulation

General Requirements. The Company must comply with the requirements of
common carriage under the Communications Act, including the offering of service
on a non-discriminatory basis at just and reasonable rates, and obtaining FCC
approval prior to any assignment of authorizations or any transfer of de jure or
de facto control of the Company.

The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
both domestic and international service. Under the Communications Act and the
FCC's rules, all international carriers, including the Company, are required to
obtain authority under Section 214 of the Communications Act prior to initiating
their international telecommunications services, and must file and maintain
tariffs containing the rates, terms, and conditions applicable to their
services. The FCC recently further streamlined its regulation of non-dominant
international carriers, to provide that these tariffs and any revisions thereto
are effective upon one day's notice in lieu of the previous 14-day notice
period. The Company has filed international tariffs (for switched and private
line services) with the FCC. Nevertheless, an otherwise non-dominant U.S.-based
carrier may be subject to dominant carrier regulation on a specific
international route if it is affiliated with a foreign carrier operating at the
foreign point. The Company has no affiliations that would subject it to dominant
carrier treatment on any route.

Domestic interstate common carriers such as the Company are not required to
obtain Section 214 or other authority from the FCC for the provision of domestic
interstate telecommunications services. Domestic interstate carriers must,
however, file and maintain tariffs with the FCC containing the specific rates,
terms and conditions applicable to their services. These tariffs are effective
upon one day's notice. The Company has filed a domestic tariff with the FCC. The
FCC's policy of permitting domestic carriers to file streamlined "range of
rates" tariffs was overturned by the U.S. Court of Appeals for the District of
Columbia Circuit on January 20, 1995. The Telecommunications Act, however,
provides that the FCC must forbear from applying most provisions of the
Communications Act or FCC regulations (including tariff filing requirements) to
a telecommunications carrier, a class of carriers or a telecommunications
service, if the FCC determines that enforcement of the Communications Act (or
FCC regulations) is not necessary to meet certain public interest standards and
that forbearance is consistent with the public interest. Carriers may petition
the FCC for

36
<PAGE> 37

forbearance. As of the date of this Prospectus, at least one carrier has
petitioned the FCC to forbear from applying tariff filing requirements to
non-dominant carriers. The Telecommunications Act's forbearance provision and
subsequent FCC actions may lessen certain of the regulatory requirements
applicable to the Company. In addition, in a separate proceeding, the FCC has
proposed to forbear from requiring non-dominant domestic carriers to file
tariffs pursuant to authority under the Telecommunications Act.

International Services. With respect to international services, the Company
must obtain facilities-based Section 214 authorization to operate its channels
of communication via satellites and undersea fiber optic cables, although the
FCC recently reduced the filing requirements for facilities-based
authorizations. Section 214 resale authority is required to resell international
services. The Company has obtained all required authorizations from the FCC to
use its various transmission media for the provision of international switched
services and international private line services.

While the FCC permits the resale of international switched services, the
resale of international private lines for the provision of services
interconnected to the public switched network, generally referred to as "private
line resale," is permitted only on those routes where the FCC has found that
equivalent resale opportunities are provided to U.S.-based carriers (for
example, on routes to countries such as Canada, the United Kingdom and Sweden).
The FCC is considering these and other international service issues in the
context of several policy rulemaking proceedings and in response to specific
petitions and applications filed by other international carriers. In one recent
proceeding, the FCC reduced regulatory requirements of international
telecommunications service providers such as the Company. In addition to
reducing the filing period for non-dominant carriers' international tariffed
rates from 14 days to one day, the FCC streamlined other international service
rules. In particular, the FCC now permits resellers to resell services of any
authorized facilities-based carrier except U.S. facilities-based affiliates that
are regulated as dominant carriers on routes the reseller seeks to serve. The
FCC's resolution of some of these issues in other proceedings either may
facilitate the Company's international business (by, for example, streamlining
the regulatory requirement to acquire additional international facilities
capacity), or adversely affect the Company's international business (by, for
example, permitting larger carriers to take advantage of accounting rate
discounts for high traffic volumes). The Company is unable to predict how the
FCC will resolve the pending international policy issues or how such resolution
will affect its international business.

The Company must also conduct its international business in compliance with
the FCC's international settlements policy ("ISP"). The ISP establishes the
permissible boundaries for U.S.-based carriers and their foreign correspondents
to settle the cost of terminating each other's traffic over their respective
networks. The precise terms of settlement are established in a correspondent
agreement, also referred to as an operating agreement. Among other terms, the
operating agreement establishes the types of service covered by the agreement,
the division of revenues between the carrier that bills for the call and the
carrier that terminates the call at the other end, the frequency of settlements
(i.e., monthly or quarterly), the currency in which payments will be made, the
formula for calculating traffic flows between countries, technical standards,
procedures for the settlement of disputes, the effective date of the agreement
and the term of the agreement.

The amount of payments (the "settlement rate") is determined by the
negotiated accounting rate specified in the operating agreement. Under the ISP,
unless prior approval is obtained, the settlement rate generally must be
one-half of the accounting rate. Carriers must obtain waivers of the FCC's rules
if they wish to use an accounting rate that differs from the prevailing rate or
vary the settlement rate from one-half of the accounting rate. As a result of
the FCC's pro-competition policies, the recent trend has been to reduce
accounting rates.

As a U.S.-based international carrier, the Company is also subject to the
FCC's "uniform settlements policy" designed to eliminate foreign carriers'
incentives and opportunities to discriminate in their operating agreements among
different U.S.-based carriers through "whipsawing." Whipsawing refers to the
practice of a foreign carrier to vary the accounting and/or settlement rate
offered to different U.S.-based carriers for the benefit of the foreign carrier,
which could secure various incentives by favoring one U.S.-based carrier over
another. Under the uniform settlements policy, U.S.-based carriers can only
enter into operating agreements that contain the same accounting rate offered to
all U.S.-based carriers. When a U.S.-based carrier negotiates

37
<PAGE> 38

an accounting rate with a foreign correspondent that is lower than the
accounting rate offered to another U.S.-based carrier for the same service, the
U.S.-based carrier with the lower rate must file a notification letter with the
FCC. If a U.S.-based carrier varies the terms and conditions of its operating
agreement in addition to lowering the accounting rate, then the U.S.-based
carrier must request a waiver of the FCC's rules. Both the notification and the
waiver requests are designed to ensure that all U.S.-based carriers have an
opportunity to compete for foreign correspondent return traffic.

Among other efforts to counter the practice of whipsawing and inequitable
treatment of similarly situated U.S.-based carriers, the FCC adopted the
principle of proportionate return to assure that competing U.S.-based carriers
have roughly equitable opportunities to receive the return traffic that reduces
the marginal cost of providing international service. Consistent with its
pro-competition policies, the FCC prohibits U.S.-based carriers from bargaining
for any special concessions from foreign partners.

Additionally, international telecommunications service providers are
required to file copies of their contracts with other carriers, including
operating agreements, with the FCC within 30 days of execution. The Company has
filed each of its operating agreements with the FCC. The FCC's rules also
require the Company to file periodically a variety of reports regarding its
international traffic flows and use of international facilities. The FCC is
engaged in a rulemaking proceeding in which it has proposed to reduce certain
reporting requirements of common carriers. The Company is unable to predict the
outcome of this proceeding or its effect on the Company.

Foreign Ownership. The Communications Act limits the ownership of an entity
holding a common carrier radio license by non-U.S. citizens, foreign
corporations and foreign governments. The Company does not currently hold any
radio licenses. These ownership restrictions currently do not apply to non-radio
facilities, such as fiber optic cable. There can be no assurance, however, that
foreign ownership restrictions will not be imposed on the operation of non-radio
facilities used for the provision of international services. The FCC recently
adopted new rules relating to the entry and participation of foreign-affiliated
entities in the U.S. telecommunications market. These rules also reduce
international tariff notice requirements for dominant, foreign-affiliated
carriers from 45 days' notice to 14 days' notice. Such reduced tariff notice
requirements may make it easier for dominant, foreign-affiliated carriers to
compete with the Company. The Telecommunications Act partially amends existing
restrictions on the foreign ownership of radio licenses by allowing corporations
with non-U.S. citizen officers or directors to hold radio licenses. Other
non-U.S. ownership restrictions, however, remain unchanged. The effect on the
Company of the Telecommunications Act or other new legislation or regulations
which may become applicable to the Company cannot be determined.

Federal Legislation. The recently-enacted Telecommunications Act, among
other things, is intended to establish competition with local exchange carriers
("LECs") as a national policy by preempting state and local laws that prohibit
competition in the local exchange market and by the establishment of certain
requirements, including interconnection requirements, the offering of local
network elements on an unbundled basis and other LEC requirements with respect
to resale, number portability, dialing parity, access to rights-of-way and
mutual compensation. The Telecommunications Act authorizes the FCC to provide
regulatory flexibility for LECs and other telecommunications companies for which
regulation is no longer necessary, The Telecommunications Act also provides
specific guidelines under which RBOCs can provide in-region long distance
services. Upon enactment, and, subject to obtaining necessary certifications
from state and federal authorities to provide intrastate or interstate services,
RBOCs are authorized to provide out-of-region long distance services which will
permit RBOCs to compete with the Company in the provision of domestic and
international long distance services. The FCC has proposed rules to govern the
entry of RBOCs into the out-of-region interstate, interexchange market. Among
other things, the FCC has proposed to allow affiliates of RBOCs that provide
out-of-region interstate, interexchange service to be regulated as non-dominant
carriers, under certain circumstances. The Telecommunications Act also contains
provisions that will permit the FCC to forbear from applying certain provisions
of the Telecommunications Act and common carrier regulations to non-dominant
carriers. Such FCC action could reduce some of the Company's regulatory
requirements, such as filing specific rates for its domestic interstate
services. The Telecommunications Act also imposes certain requirements on all
telecommunications carriers to facilitate the entry of new telecommunications
providers. All carriers must permit interconnection of their networks with other
carriers and may not deploy network

38
<PAGE> 39

features and functions that interfere with interoperability. In addition, the
Telecommunications Act requires all telecommunications providers to contribute
equitably to a Universal Service Fund, although the FCC may exempt an interstate
carrier or class of carriers if their contribution would be minimal.

Certain provisions of the Telecommunications Act could materially affect
the growth and operation of the telecommunications industry and the services
provided by the Company. There are numerous rulemakings to be undertaken by the
FCC which will interpret and implement the Telecommunications Act's provisions.
Further, certain of the Telecommunications Act's provisions have been, and
likely will continue to be, judicially challenged. The Company is unable to
predict the outcome of such rulemakings or litigation or the substantive effect
(financial or otherwise) of the new legislation and the rulemakings on the
Company.

EMPLOYEES

As of March 31, 1996, Pacific Gateway had 30 full-time employees, of which
seven were engaged in international relations, 12 in operations and engineering,
and 11 in sales, customer support and business development.

PROPERTIES

The principal offices of the Company are located in approximately 5,000
square feet of space in Burlingame, California. The Company leases this space
under an agreement which expires in November 1996. The Company also leases a
total of approximately 3,000 square feet in New York and Los Angeles as sites
for its switching facilities. The lease in New York expires in June 1997, at
which time the Company anticipates that it will relocate to New Jersey. The
Company anticipates that it will incur additional expenses of approximately
$250,000 over a six month period in relocating its New York switching
facilities. The lease in Los Angeles expires in April 1998. The Company believes
that its facilities are adequate to support its current needs and that suitable
additional facilities will be available, when needed, at commercially reasonable
terms.

LITIGATION

The Company is not currently subject to any material legal proceedings.

39
<PAGE> 40

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY MEMBERS OF MANAGEMENT

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Howard A. Neckowitz............. 42 President, Chief Executive Officer and
Chairman of the Board
Gail E. Granton................. 40 Chief Financial Officer, Executive Vice
President, International Business
Development, Secretary and Director
Ronald L. Jensen................ 65 Director
</TABLE>

Other key members of management of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ronald D. Anderson.............. 39 Senior Vice President, Operations and
Engineering
Paul G. Black................... 39 Vice President, International Development
Programs
Katherine A. Chapman............ 29 Director, Customer Programs
Robert F. Craver................ 53 Senior Vice President, International
Relations
William R. Haner................ 42 Vice President, International Sales
Karen D. Martin................. 44 Controller
Joyce M. Raymond................ 32 Vice President, Carrier Marketing
Fred A. Weismiller.............. 54 Executive Vice President, International
Marketing
Vernon R. Woelke................ 47 Vice President, Finance
</TABLE>

MR. HOWARD A. NECKOWITZ has served as President, Chief Executive Officer
and Chairman of the Board of the Company since its inception in August 1991. Mr.
Neckowitz previously served as a consultant to major U.S. and overseas
telecommunications companies with respect to valuation and due diligence
processes for the acquisition of ongoing foreign telecommunications operations
and the start-up of competitive carrier operations for international, long
distance, local and cellular operations in various countries. Prior to his
consulting experience, Mr. Neckowitz served from 1982 to 1986 as Director,
International Services, at GTE Sprint, where he founded and developed GTE
Sprint's international services operation. In this position he was responsible
for feasibility analyses supporting GTE Sprint's entrance into the international
switched service market. From 1977 to 1982, Mr. Neckowitz worked at AT&T in its
Overseas Department. Mr. Neckowitz serves as Chairman of the Board of Matrix and
as a director of Cam-Net Telecommunications, Inc., a provider of domestic
telecommunication services in Canada, both of which are customers of the
Company.

MS. GAIL E. GRANTON has served as Chief Financial Officer, Executive Vice
President, International Business Development, Secretary and a member of the
Board of Directors of the Company since its inception in August 1991. From 1986
to August 1991, Ms. Granton served as a consultant to major U.S. and overseas
telecommunications companies, focusing on the valuation and due diligence
process for the acquisition of ongoing foreign telecommunication operations and
the start-up of competitive carrier operations for international, long distance,
local and cellular operations in various countries. From 1982 to 1986, Ms.
Granton worked in the International Department of GTE Sprint, as a Manager,
International Business Development, reporting to Mr. Neckowitz.

MR. RONALD L. JENSEN has served as a member of the Board of Directors since
1992. He has been the sole owner of United Group Association ("UGA"), a health
insurance agency, since 1985 and has held various executive offices since such
date. Mr. Jensen is the Chairman of the Board and served as President from 1988
to 1994 of United Insurance Companies, Inc. ("UICI"), a publicly-traded
insurance holding company, and is a member of the board of directors of Matrix.
See "Certain Relationships and Related Transactions."

40
<PAGE> 41

MR. RONALD D. ANDERSON has served as Senior Vice President, Operations and
Engineering of the Company since December 1992. From 1986 to 1992, Mr. Anderson
served in a similar position with TRT International, Inc., an international
telecommunications carrier that has since been acquired by WorldCom. Mr.
Anderson has more than 15 years of experience in domestic and international
telecommunications engineering and operations, with significant experience in
international signaling and transmission for cable and satellite, PTT technical
interface and bilateral technical negotiations.

MR. PAUL G. BLACK joined the Company in October 1995 as Vice President,
International Development Programs. From 1993 through 1995, Mr. Black was
President of SERSA/GEOCOM, a provider of dedicated international communications
services. From 1990 to 1993, Mr. Black was Manager, Western Region for GTE
Spacenet (now known as GTE Telecom). From 1987 to 1990, Mr. Black organized and
launched a national sales and customer service organization for Transpoint
Communications which marketed voice and data transmission services to Fortune
500 companies and regional long distance companies.

MS. KATHERINE A. CHAPMAN has served as Director, Customer Programs for the
Company since April 1995. From 1989 to April 1995, Ms. Chapman served in various
positions with Cable & Wireless of North America. While at Cable & Wireless, Ms.
Chapman had various responsibilities including sales, marketing, and customer
support for commercial customers, managing and maintaining a wholesale customer
base, and developing the marketing strategy for dedicated access customers. Ms.
Chapman has seven years of experience in the telecommunications industry.

MR. ROBERT F. CRAVER has served as Senior Vice President, International
Relations of the Company since February 1994. Prior to joining the Company, Mr.
Craver worked at GTE Hawaiian Telephone Co., Inc. from 1987 to 1994. While at
GTE Hawaiian Telephone, Mr. Craver directed that company's international program
as Director of International Services. Mr. Craver has also held international
positions at Sprint and AT&T, for a total of more than 20 years of experience in
the international telecommunications industry. Mr. Craver has extensive
experience in international negotiations with foreign partners and has served as
an officer of the Pacific Telecommunications Council.

MR. WILLIAM R. HANER has served as Vice President, International Sales, of
the Company since January 1995. From 1993 to 1994, Mr. Haner served in a similar
position with IDB Communications Group, Inc., an international
telecommunications company which has since been acquired by WorldCom. From 1985
to 1993, Mr. Haner was a Director of Sales for TRT International, Inc., where he
was responsible for international data services and implementing enhanced
facsimile services. Mr. Haner has more than 14 years of sales experience with
long distance carriers and commercial customers.

MS. KAREN D. MARTIN has served as Controller of the Company since October
1995. From 1982 to 1995, Ms. Martin served as Tax Manager with Tab Products Co.,
an office products company. Ms. Martin is a member of the California Society of
CPAs and the American Institute of Certified Public Accountants.

MS. JOYCE M. RAYMOND joined the Company in December 1993 as Vice President,
Carrier Marketing, to develop a U.S. carrier marketing program for the Company.
Prior to joining the Company, Ms. Raymond was Director, Carrier Services, at
West Coast Communications, where she was responsible for carrier marketing from
1992 to 1993. Ms. Raymond was also Director, Carrier Services at Com System,
Inc., a domestic long distance telecommunications company, where she was
responsible for developing the carrier marketing program from 1984 to 1992. Ms.
Raymond has more than 11 years of experience in the telecommunications industry.

MR. FRED A. WEISMILLER joined the Company in November 1994 as Executive
Vice President, International Marketing. Mr. Weismiller's responsibilities
include developing the valued-added long distance services which can be sold to
U.S. carriers and to carriers in developing overseas markets. From 1991 to 1994,
Mr. Weismiller served as Managing Director and Executive Director, Sales and
Marketing at Telecom New Zealand. Mr. Weismiller has 25 years of experience in
international and domestic telecommunications management, including 20 years
with AT&T, where his final assignment was in Hong Kong as the Managing Director
of the AT&T Regional Technical Center from 1989 to 1990.

41
<PAGE> 42

MR. VERNON R. WOELKE has served as Vice President, Finance of the Company
since October 1995. Mr. Woelke also serves as the Chief Financial Officer of
UICI, a position he has held since 1986. He has also served as a director of
UICI since 1990 and as a Director and President or Executive Officer of various
of the insurance subsidiaries of UICI since 1986. Mr. Woelke will continue to
serve as Vice President, Finance of the Company as required on an interim basis
until June 30, 1996.

All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. Officers are
elected by and serve at the discretion of the Board of Directors. There are no
family relationships among the directors or officers of the Company.

EXECUTIVE COMPENSATION

The following summary compensation table sets forth information concerning
cash and non-cash compensation paid by the Company during the fiscal year ended
December 31, 1995 to the Company's Chief Executive Officer and each of the
Company's other executive officers whose total compensation for services in all
capacities to the Company exceeded $100,000 during such year.

SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1995

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND ---------------------- OPTIONS/SARS
PRINCIPAL POSITION SALARY BONUS #
------------------ -------- ------- -------------
<S> <C> <C> <C>
Howard A. Neckowitz................................... $240,000 $17,528 141,175
President and Chief Executive Officer
Gail E. Granton....................................... $144,167 $10,711 65,882
Chief Financial Officer, Executive Vice President,
International Business Development and Secretary
</TABLE>

The Company's Board of Directors and stockholders adopted the Company's
1995 Stock Option Plan (the "Option Plan") on September 30, 1995. As of March
31, 1996, options to purchase 539,170 shares of Common Stock had been granted by
the Company under the Option Plan. No compensation intended to serve as
incentive for performance to occur over a period longer than one fiscal year was
paid pursuant to a long-term incentive plan during the last fiscal year to any
of the persons named in the Summary Compensation Table. The Company does not
have any defined benefit or actuarial plan under which benefits are determined
primarily by final compensation or average final compensation and years of
service with any of the persons named in the Summary Compensation Table.

42
<PAGE> 43

STOCK OPTIONS GRANTED IN FISCAL 1995

The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended December
31, 1995 to the persons named in the Summary Compensation Table:

OPTION GRANTS IN FISCAL YEAR 1995

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
% OF TOTAL RATES OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED EXERCISE FOR OPTION TERM(3)
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION -------------------
OPTIONS GRANTED FISCAL 1995 SHARE(2) DATE 5% 10%
--------------- ------------ --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Howard A. Neckowitz............ 141,175(1) 27.7% $8.50 09/30/00 $331,536 $732,610
Gail E. Granton................ 65,882(1) 12.9 8.50 09/30/00 154,717 341,884
</TABLE>

- ---------------

(1) Options vest and become exercisable 25% on September 30, 1996 and 6.25% per
quarter thereafter, provided optionee is continuously employed by the
Company.

(2) All options were granted at an exercise price equal to the fair market value
of Pacific Gateway's Common Stock as determined by the Board of Directors of
the Company on the date of grant. Pacific Gateway's Common Stock was not
publicly traded at the time of the option grants to the officers.

(3) Potential realizable values are net of exercise price, but before taxes
associated with exercise. Amounts represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are provided
in accordance with rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of the future Common
Stock price. Actual gains, if any, on stock option exercises are dependent
on the future performance of the Common Stock, overall market conditions and
the option holders' continued employment through the vesting period. This
table does not take into account any appreciation in the price of the Common
Stock from the date of grant to date. If the fair market value of the Common
Stock at the date of grant is the assumed initial public offering price of
$14.00, the potential realizable value of these options (a) at a 5% assumed
annual rate of stock price appreciation would be $546,060, and $254,828,
respectively, and (b) at a 10% assumed annual rate of stock price
appreciation would be $1,206,651 and $563,103, respectively.

OPTION EXERCISES AND FISCAL 1995 YEAR-END VALUES

The following table provides the specified information concerning
unexercised options held as of December 31, 1995 by the persons named in the
Summary Compensation Table:

AGGREGATED OPTION EXERCISES
AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT 12/31/95 12/31/95(1)
------------------- -------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ---- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Howard A. Neckowitz.................................... -- 141,175 -- $352,937
Gail E. Granton........................................ -- 65,882 -- $164,705
</TABLE>

- ---------------

(1) Calculated by subtracting the exercise price from the estimated fair market
value of the underlying securities as of December 31, 1995 of $11.00 per
share.

No options were exercised by the individuals named in the table in fiscal
year 1995. No compensation intended to serve as incentive for performance to
occur over a period longer than one fiscal year was paid pursuant to a long-term
incentive plan during the last fiscal year to any of the persons named in the
Summary Compensation Table.

STOCK PLANS

1995 Stock Option Plan

The Company has reserved a total of 1,200,000 shares of Common Stock for
issuance under the Option Plan, 120,000 shares of which have been reserved for
issuance to Outside Directors (as defined herein). As of March 31, 1996, options
to purchase 539,170 shares had been granted under the Option Plan. Under the
Option Plan, options may be granted to employees (including officers),
consultants, advisors and directors of

43
<PAGE> 44

the Company, although only employees and directors and officers who are also
employees may receive "incentive stock options" intended to qualify for certain
tax treatment. The exercise price of nonqualified stock options must be no less
than the fair market value of the Common Stock on the date of grant. The
exercise price of incentive stock options must be no less than the fair market
value of the Common Stock on the date of grant and, in the case of incentive
stock options granted to employees owning 10% or more of the Company's
outstanding stock ("10% Holders"), the exercise price must be no less than 110%
of the fair market value of the Common Stock on the date of grant. Options
granted under the Option Plan generally vest over a four-year period but vest in
full upon a change of control of the Company. The Option Plan also provides for
the automatic granting of nonqualified stock options to directors of the Company
who hold less than 3% of the shares outstanding and who are not employees of the
Company ("Outside Directors"). Currently there are no Outside Directors of the
Company. Each Outside Director is eligible on the effective date of this
Offering, and each new Outside Director who is elected after the effective date
of this Offering will be granted an initial option to purchase 20,000 shares of
Common Stock on the effective date of this Offering or upon his or her initial
appointment or election to the Board of Directors, respectively. Subsequently,
each Outside Director will automatically be granted an option to purchase 10,000
shares of Common Stock on each successive anniversary date of either (i) in the
case of an Outside Director eligible on the effective date of this Offering, the
effective date of this Offering, or (ii) in the case of other Outside Directors,
the date of his or her initial election or appointment as an Outside Director.
The exercise price of the options granted to Outside Directors will be equal to
the fair market value of the Common Stock on the date of grant. Options granted
under the Option Plan generally vest over four years and must be exercised
within five years.

1995 Employee Stock Purchase Plan

A total of 400,000 shares of the Company's Common Stock have been reserved
for issuance under the Company's 1995 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have yet been issued. The Purchase Plan permits
eligible employees of the Company to purchase Common Stock at a discount, but
only through payroll deductions, during concurrent 24-month offering periods.
Each offering period will be divided into four consecutive six-month purchase
periods. The price at which Common Stock is purchased under the Purchase Plan is
set by the Board of Directors, but shall not be less than 85% of the fair market
value of the Common Stock on the first day of the offering period or the last
day of the purchase period, whichever is lower. The initial offering period will
commence on the effective date of this Offering.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements, dated October 1, 1995,
with each of Howard A. Neckowitz, President, Chief Executive Officer and
Chairman of the Board, Gail E. Granton, Chief Financial Officer, Executive Vice
President, International Business Development and Secretary, Ronald D. Anderson,
Senior Vice President, Operations and Engineering and Robert F. Craver, Senior
Vice President, International Relations. These agreements generally provide,
with certain limited exceptions, that the officer cannot render services to
another person or entity without the prior written consent of the Board of
Directors of the Company or engage in any activity which conflicts or interferes
in any material way with the performance of his or her duties with the Company
during the term of the agreement (which range from two to four years) and during
the separation period following the officer's termination of employment prior to
the end of the term of the agreement so long as the officer is receiving a
severance payment from the Company. The agreements provide that the officer may
terminate the agreement during the separation period following termination of
employment, thus terminating the officer's obligation not to compete as well as
the Company's obligation to pay severance. The agreement with Mr. Neckowitz is
for a term of four years, the agreements with Ms. Granton and Mr. Anderson are
for a term of three years and the agreement with Mr. Craver is for a term of two
years. Under their respective employment agreements, Mr. Neckowitz's annual base
salary is $300,000, Ms. Granton's annual base salary is $160,000, Mr. Anderson's
annual base salary is $125,000 and Mr. Craver's annual base salary is $135,000.
Under each of the agreements, the officer's salary may be reviewed by the
Company on an annual basis and is subject to upward adjustment in the reasonable
and good faith discretion of the Board of Directors. Each officer is eligible
for bonuses as determined by the Board in its discretion, based on the
performance of the officer and the Company. The agreements provide for severance
payments in

44
<PAGE> 45

an amount equal to base salary to the end of the term or, if greater, two years
of base salary for Mr. Neckowitz and one year of base salary for Ms. Granton,
Mr. Anderson, and Mr. Craver in the event of termination without cause or
termination following a change of control of the Company. The severance payments
are expressly conditioned on the officer not competing with the Company during
the separation period and are payable on or around the Company's normal paydays
in accordance with the Company's then-existing normal payroll practices. In the
event of a change of control, each of such employees would be entitled to the
same severance following his or her resignation from the Company resulting from
diminution of his or her duties. Upon any such payment of severance or upon any
termination by mutual agreement of the parties, the officer would also receive
full vesting of any outstanding stock options. The agreements with Messrs.
Neckowitz, Anderson and Craver and Ms. Granton require them to sign such
confidentiality and nondisclosure agreements as may be requested by the Company
from time to time, which will be deemed effective as of the date of such
officer's initial employment with the Company.

COMPENSATION OF DIRECTORS

Directors of the Company do not receive cash compensation for services
provided as a director. Under the Option Plan, Outside Directors will receive an
initial option to purchase 20,000 shares of Common Stock on the effective date
of this Offering or upon his or her initial appointment or election to the Board
of Directors and yearly grants of options to purchase 10,000 shares of Common
Stock. See "Stock Plans -- 1995 Stock Option Plan." The Company does not pay
additional amounts for committee participation or special assignments of the
Board of Directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS

During the fiscal year ended December 31, 1995, the entire Board of
Directors, of which Howard A. Neckowitz, President, Chief Executive Officer and
Chairman of the Board of the Company, and Gail E. Granton, Chief Financial
Officer, Executive Vice President, International Business Development and
Secretary of the Company, were and are members, fulfilled all functions of the
Compensation Committee with regard to compensation of executive officers of the
Company.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Pursuant to the provisions of the Delaware Law, the Company has adopted
provisions in its Certificate of Incorporation which provide that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, except for
liability as a result of (i) a breach of the director's duty of loyalty to the
Company or its stockholders; (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) an act
related to the unlawful stock repurchase or payment of a dividend under Section
174 of the Delaware Law; and (iv) transactions from which the director derived
an improper personal benefit. Such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under Delaware Law. The Company has
entered into separate indemnification agreements with its directors and officers
which are, in some cases, broader than the specific indemnification provisions
contained in the Delaware Law. The indemnification agreements require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct of
a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

45
<PAGE> 46

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

AGREEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS

In November 1992, Pacific Gateway received loan commitments aggregating
$750,000 from Ronald L. Jensen, currently a director and 16.53% stockholder of
Pacific Gateway, in connection with Mr. Jensen's purchase of a majority interest
in Pacific Gateway. In 1992, Pacific Gateway entered into a $5.0 million
revolving credit facility (the "Note") with Mr. Jensen. Since that time, Pacific
Gateway has achieved certain performance-based milestones which have resulted in
an increase in the amount available to Pacific Gateway under the Note to $9.0
million, the maximum amount provided for under the Note. The Note bears interest
at the prime rate plus 2%, payable monthly. Payments of principal and interest
under the Note are secured, under a Security and Pledge Agreement dated February
1, 1993, by all the tangible and intangible assets of Pacific Gateway other than
those pledged as security of the credit facility with a commercial lender. As of
March 31, 1996, the outstanding principal balance under the Note was $5.4
million. The Company intends to repay the balance outstanding under the Note
with a portion of net proceeds of this Offering. The revolving credit facility
will expire on the closing of this Offering. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources."

The Company has entered into indemnification agreements with its directors
and officers. Such agreements require the Company to indemnify such individuals
and are, in some cases, broader than the specific indemnification provisions
contained in the Delaware Law. See "Management -- Limitation of Liability and
Indemnification."

AGREEMENTS WITH AFFILIATES

Mr. Neckowitz has been granted proxies to vote an aggregate of 8,900,860
shares of Common Stock held by Ronald L. Jensen, Julie J. Jensen, Jeffrey J.
Jensen, Janet J. Krieger, James J. Jensen, and Jami J. Jensen. In addition, Gail
E. Granton has granted Mr. Neckowitz a proxy to vote 1,043,081 shares only in
the event the over-allotment option is exercised by the underwriters. Such
proxies expire on January 1, 1998 or, if earlier, the date on which Mr.
Neckowitz is unable to perform his duties as an officer of the Company due to
his voluntary resignation, termination for cause, illness, disability, physical
or mental incapacity or death. Mr. Jensen has entered into an Irrevocable Proxy
and Voting Agreement with Mr. Neckowitz providing that if Mr. Jensen acquires
any of such shares owned by his adult children, Mr. Neckowitz shall continue to
have the right to vote such shares in accordance with the terms of the proxies
described above.

Mr. Jensen, a director and 16.53% stockholder of Pacific Gateway, is a
director of Matrix and owns approximately 10.8% of the outstanding shares of
common stock of Matrix. Howard A. Neckowitz, President, Chief Executive Officer,
Chairman of the Board and 17.09% stockholder of Pacific Gateway, is the Chairman
of the Board of Matrix and owns approximately 3.3% of the outstanding shares of
common stock of Matrix. Gail E. Granton, Chief Financial Officer, Executive Vice
President, International Business Development, Secretary and a director of
Pacific Gateway owns approximately 1.2% of the outstanding shares of common
stock of Matrix. Ronald D. Anderson, Senior Vice President, Operations and
Engineering of Pacific Gateway, owns approximately 0.8% of the outstanding
shares of common stock of Matrix. Matrix is currently Pacific Gateway's largest
customer, with Pacific Gateway recording revenues from sales to Matrix of
approximately $9.2 million and $17.2 million for the fiscal years ended December
31, 1994 and 1995, respectively, and approximately $4.8 million for the three
months ended March 31, 1996. These revenues accounted for approximately 44% and
22% of Pacific Gateway's revenues for 1994 and 1995, respectively, and
approximately 15% for the three months ended March 31, 1996. Matrix also
provides the Company with certain data processing services for which the Company
pays Matrix a service fee on a per call processed basis which approximates the
cost of the services provided. In addition, Matrix has committed to send
substantially all of its international telecommunications traffic and its
domestic telecommunications traffic in the Northeast and California through
Pacific Gateway's network until November 1996, subject to earlier termination if
the Company does not match a bona fide competitive pricing offer Matrix may
receive from a third party. See

46
<PAGE> 47

"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Overview" and "Business -- Customers."

In February 1995, the Company accepted certain shares of common stock of a
customer as payment for accounts receivable totaling $702,000. The Company then
sold this stock to Ronald L. Jensen for $702,000. Mr. Jensen subsequently sold
the stock for $730,000.

In December 1995, the Company made an advance in the amount of $100,000 to
Howard A. Neckowitz. Such advance was due on demand and was repaid during the
first quarter of 1996.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 30, 1996, and as adjusted to
reflect the sale of the Shares offered hereby, (i) by each person who is known
by the Company to own beneficially more than 5% of the Company's Common Stock,
(ii) by each of the executive officers named in the table under "Executive
Compensation" and by each of the Company's directors, (iii) by all officers and
directors of the Company as a group, and (iv) by each Selling Stockholder.
Except pursuant to applicable community property laws or as indicated in the
footnotes to this table, each stockholder identified in the table possesses sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE SHARES BEING OWNED AFTER THE
OFFERING OFFERED OFFERING
--------------------- ------------ -----------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
- ---------------- ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Howard A. Neckowitz(1)............... 11,285,640 80.86% 223,954 11,061,686(3) 58.66%
533 Airport Blvd.
Burlingame, California 94010
Ronald L. Jensen(2).................. 2,306,760 16.53% -- 2,306,760 12.23%
5215 North O'Connor
Irving, Texas 75039
Gail E. Granton...................... 1,192,860 8.55% 112,446 1,080,414 5.73%
533 Airport Blvd.
Burlingame, California 94010
Julie J. Jensen...................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
1023 15th Street N.W.
Washington, D.C. 20005
Jeffrey J. Jensen.................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
2121 Precinct Line Road
Hurst, Texas 76054
Janet Jensen Krieger................. 1,318,820 9.45% -- 1,318,820 6.99%
9003 Airport Freeway
Fort Worth, Texas 76180
James J. Jensen...................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
6304 Alexandria Circle
Atlanta, Georgia 30326
Jami J. Jensen....................... 1,318,820 9.45% -- 1,318,820(3) 6.99%
1933 Swede Gulch
Golden, Colorado 80120
</TABLE>

47
<PAGE> 48

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED BEFORE THE BEING OWNED AFTER THE
OFFERING OFFERED OFFERING
---------------------- ------- ----------------------
OFFICERS AND DIRECTORS NUMBER PERCENT NUMBER NUMBER PERCENT
---------------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Howard A. Neckowitz(1)................. 11,285,640 80.86% 223,954 11,061,686(3) 58.66%
Ronald L. Jensen(2).................... 2,306,760 16.53% -- 2,306,760 12.23%
Gail E. Granton........................ 1,192,860 8.55% 112,446 1,080,414 5.73%
Ronald D. Anderson..................... 294,220 2.11% 30,600 263,620 1.40%
Katherine A. Chapman................... 9,400 * -- 9,400 *
Robert F. Craver....................... 135,360 * -- 135,360 *
William R. Haner....................... 78,960 * -- 78,960 *
Joyce M. Raymond....................... 78,960 * -- 78,960 *
Fred A. Weismiller..................... 135,360 * -- 135,360 *
Vernon R. Woelke....................... 17,860 * -- 17,860 *
All officers and directors as a group
(12 persons)(1)...................... 13,228,620 94.79% 367,000 12,861,620(3) 68.21%
</TABLE>

- ---------------

* Represents less than 1%.

(1) Includes 2,306,760 shares held by Ronald L. Jensen, 1,318,820 shares held by
Julie J. Jensen, 1,318,820 shares held by Jeffrey J. Jensen, 1,318,820
shares held by Janet J. Krieger, 1,318,820 shares held by James J. Jensen
and 1,318,820 shares held by Jami J. Jensen for which Mr. Neckowitz has been
given an irrevocable proxy to vote such shares. Excludes 1,020,414 shares
held by Gail Granton for which Mr. Neckowitz has been given an irrevocable
proxy to vote such shares only in the event the over-allotment option is
exercised. Such proxies held by Mr. Neckowitz expire on January 1, 1998, or,
if earlier, the date on which Mr. Neckowitz becomes unable to perform his
duties as an officer of the Company due to his voluntary resignation,
termination for cause, illness, disability, physical or mental incapacity or
death. As a proxy holder, Mr. Neckowitz may be deemed to be the beneficial
owner of such shares, but Mr. Neckowitz disclaims beneficial ownership of
all such shares. See "Certain Relationships and Related Transactions."

(2) Excludes shares held by Mr. Jensen's adult children Julie J. Jensen, Jeffrey
J. Jensen, Janet J. Krieger, James J. Jensen and Jami J. Jensen and certain
employees of companies associated with Mr. Jensen. Mr. Jensen has the right
to purchase, and each of such persons has the right to cause Mr. Jensen to
purchase, up to 40% of the shares held by each of such persons if they cease
to be employed by a Jensen related company. Mr. Jensen has entered into an
Irrevocable Proxy and Voting Agreement with Mr. Neckowitz providing that if
Mr. Jensen acquires any of such shares, Mr. Neckowitz shall continue to have
the right to vote such shares in accordance with the term of the proxies
described in footnote 1.

(3) Assumes no exercise of the over-allotment option by the Underwriters. If the
over-allotment option is exercised in full, the number of shares owned after
this Offering by Gail E. Granton will be reduced by 60,000 and the
percentage of shares beneficially owned by her after this Offering will be
5.40%, the number of shares owned by Ronald D. Anderson will be reduced by
30,000 and the percentage of shares beneficially owned by him after this
Offering will be 1.24%, the number of shares owned after this Offering by
Julie J. Jensen and Jami J. Jensen will each be reduced by 155,000 and the
percentage of shares beneficially owned by each of them after this Offering
will be 6.16%, the number of shares owned after this Offering by Jeffrey J.
Jensen and James J. Jensen will each be reduced by 115,000 and the
percentage of shares beneficially owned by each of them after this Offering
will be 6.37% and the number of shares beneficially owned after this
Offering by Howard A. Neckowitz will be reduced by 660,000 and the
percentage of shares beneficially owned by him after this Offering will be
60.45% after giving effect to the sale by him of 120,000 shares and the sale
of 540,000 shares subject to the proxies described in footnote 1 and the
effectiveness of the proxy granted by Gail Granton as described in footnote
1. If the over-allotment option is exercised in full, the remaining 40,050
shares to be sold to the Underwriters will be sold by the Company.

48
<PAGE> 49

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock, par value $.0001 per share, and 1,000,000 shares of Preferred
Stock, par value $.0001 per share. As of March 31, 1996, there were 14,100,000
shares of Common Stock issued and outstanding held of record by 27 stockholders
and no shares of Preferred Stock issued and outstanding. The following
description of the Company's capital stock does not purport to be complete and
is subject to, and qualified in its entirety by, the Certificate of
Incorporation and Bylaws of the Company that are included as exhibits to the
Registration Statement of which this Prospectus is a part and by the provisions
of applicable law.

COMMON STOCK

The holders of Common Stock are entitled to all of the rights and
privileges of holders of shares of common stock under the Delaware Law. The
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of legally
available funds. In the event of the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock do not
have preemptive rights or other rights to subscribe for additional shares. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
of the outstanding shares of Common Stock are, and the shares of Common Stock
sold in this Offering will be, when issued, duly authorized, validly issued,
fully paid and nonassessable.

Each holder of Common Stock is entitled to one vote for each share of
Common Stock on all matters submitted to the vote of stockholders, including the
election of directors. Cumulative voting for the election of directors is
prohibited by the Company's Certificate of Incorporation and Bylaws.

PREFERRED STOCK

The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the dividend rate, voting rights and other rights, preferences and
restrictions of each series, any or all of which may be greater than the rights
of the Common Stock. It is not possible to state the actual effect of the
issuance of any shares of Preferred Stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such Preferred Stock. However, the effects might include, among other
things, restricting dividends on the Common Stock, diluting the voting power of
the Common Stock, impairing the liquidation rights of the Common Stock and
delaying or preventing a change in control of the Company without further action
by the stockholders. The Company has no present plans to issue any shares of
Preferred Stock.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Delaware corporation and subject to Section 203 of the
Delaware Law, an anti-takeover law. In general, Section 203 of the Delaware Law
prevents an "interested stockholder" (defined generally as a person owning 15%
or more of a corporation's outstanding voting stock) from engaging in a
"business combination" (defined broadly to include mergers, consolidations,
sales or disposition of other assets having an aggregate value of in excess of
10% of the consolidated assets of the corporation, and certain other assets that
would increase the interested stockholder's proportionate share of ownership in
the corporation) with a Delaware corporation for three years following the date
such person became an interested stockholder, subject to certain exceptions such
as the approval of the board of directors and of the holders of at least two
thirds of the outstanding shares of voting stock not owned by the interested
stockholder. The existence of this provision would be expected to have an
anti-takeover effect, including attempts that might result in a premium over the
market price for the shares of Common Stock held by stockholders.

The Company's Certificate of Incorporation and Bylaws contain certain
provisions that may reduce the likelihood of a change in management or voting
control of the Company without the consent of the Board of Directors. The Bylaws
provide that the Board of Directors will consist of not less than five directors
and that the number of directors shall be determined by a majority of the Board
of Directors. Further, vacancies in the

49
<PAGE> 50

Board of Directors may be filled by a majority vote of the directors then in
office, though less than a quorum. Accordingly, the Board of Directors could
delay any stockholder from obtaining majority representation on the Board of
Directors by enlarging the Board of Directors and filling the new vacancies with
its own nominees until the next stockholder election. The Company's Certificate
of Incorporation also does not provide for cumulative voting in the election of
directors. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in control or management of the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock will be Chemical
Mellon Shareholder Services, L.L.C.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.

Upon completion of this Offering, the Company will have outstanding an
aggregate of 18,856,440 shares of Common Stock (an aggregate of 18,896,490
shares if the Underwriters' over-allotment option is exercised in full). Of
these shares, the 5,267,000 shares sold in this Offering (6,057,050 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), except for any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act (whose sales would be subject to certain limitations and
restrictions described below) and except for the 1,800,000 shares being
purchased by KDD. See "Sale of Shares to KDD."

The remaining 13,589,440 shares of Common Stock held by existing
stockholders were issued and sold by the Company in reliance on exemptions from
the registration requirements of the Securities Act. All such outstanding shares
will be subject to the "lock-up" agreements described below. Upon expiration of
such lock-up agreements 180 days after the date of this Prospectus, 5,568,000
shares will become eligible for sale, subject in most cases to the limitations
of Rule 144. The remaining 8,021,440 shares held by existing stockholders will
become eligible for sale at various times over a period of less than two years.

KDD will enter into an agreement not to sell any of the shares of Common
Stock being purchased by KDD during the 180-day period commencing from the date
of this Prospectus and to restrict its sales during a 180-day period thereafter
to the volume limits that would be applicable if the shares were restricted
shares eligible for sale pursuant to Rule 144 under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years (including the holding period of any prior owner except an affiliate) is
entitled to sell in "broker's transactions" or to market makers, within any
three-month period commencing 90 days after the date of this Prospectus, a
number of shares that does not exceed the greater of (i) 1% of the number of
shares of Common Stock then outstanding (approximately 189,000 shares
immediately after this Offering) or (ii) generally, the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the required
filing of a Form 144 with respect to such sale. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years, is
entitled to sell such shares without having to comply with the manner of sale,
public information, volume limitation or notice filing provisions of Rule 144.
Under Rule 701 under the Securities Act, persons who purchase shares upon
exercise of options granted prior to the effective date of this Offering are
entitled to sell such shares 90 days after the effective date of this Offering
in reliance on Rule 144, without having to comply with the holding period and
notice filing requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice filing provisions of

50
<PAGE> 51

Rule 144. The Securities and Exchange Commission has proposed certain amendments
to Rule 144 which would reduce the requisite holding period from two years to
one year.

The Company and each of its directors, executive officers and existing
stockholders have agreed not to offer, sell, contract to sell, or grant any
option to purchase or otherwise dispose of any shares of Common Stock owned by
any of them prior to the expiration of 180 days from the date of this
Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with the
prior written consent of PaineWebber Incorporated, (iii) in the case of
directors, executive officers and stockholders of the Company, transfers to
members of their families or trusts for the benefit of any of them who agree to
the terms of such "lock-up" agreement and (iv) in the case of the Company, for
the issuance of shares of Common Stock upon the exercise of options, or the
grant of options to purchase shares of Common Stock, under the Company's Option
Plan and the issuance of shares of Common Shares under the Company's Purchase
Plan.

UNDERWRITING

The underwriters named below, acting through PaineWebber Incorporated and
Alex. Brown & Sons Incorporated (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement by
and among the Company, the Selling Stockholders and the Representatives (the
"Underwriting Agreement"), to purchase from the Company and the Selling
Stockholders, and the Company and the Selling Stockholders have severally agreed
to sell to the Underwriters, respectively, 3,100,000 shares and 367,000 shares
of the Company's Common Stock, which in the aggregate equals the number of
shares of Common Stock set forth opposite the name of such Underwriters below:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
PaineWebber Incorporated.................................................. 983,500
Alex. Brown & Sons Incorporated........................................... 983,500
Bear, Stearns & Co. Inc. ................................................. 100,000
Deutsche Morgan Grenfell/C.J. Lawrence Inc. .............................. 100,000
Donaldson, Lufkin & Jenrette Securities Corporation....................... 100,000
Goldman, Sachs & Co. ..................................................... 100,000
Hambrecht & Quist LLC..................................................... 100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated........................ 100,000
Morgan Stanley & Co. Incorporated......................................... 100,000
Oppenheimer & Co., Inc. .................................................. 100,000
Smith Barney Inc. ........................................................ 100,000
Brad Peery Inc. .......................................................... 50,000
Crowell, Weedon & Co. .................................................... 50,000
Fahnestock & Co. Inc. .................................................... 50,000
Furman Selz LLC........................................................... 50,000
Gordon, Haskett Capital Corporation....................................... 50,000
Ladenburg, Thalmann & Co., Inc. .......................................... 50,000
Pennsylvania Merchant Group, Ltd. ........................................ 50,000
The Robinson-Humphrey Company, Inc. ...................................... 50,000
Rodman & Renshaw, Inc. ................................................... 50,000
Seidler Amdec Securities Inc. ............................................ 50,000
Tucker Anthony Incorporated............................................... 50,000
Unterberg Harris.......................................................... 50,000
---------
Total........................................................... 3,467,000
========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters to purchase the shares of Common Stock listed above are subject to
certain conditions. The Underwriting Agreement also provides that the
Underwriters are committed to purchase, and the Company and the Selling
Stockholders are obligated to

51
<PAGE> 52

sell, 3,467,000 of the shares of Common Stock offered by this Prospectus, if any
of the shares of Common Stock being sold pursuant to the Underwriting Agreement
are purchased (without consideration of any shares that may be purchased through
the exercise of the Underwriters' overallotment option).

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover of this Prospectus
and to certain dealers at such price less a concession not in excess of $0.47
per share. The Underwriters may allow, and such dealers may reallow, a
concession to other dealers not in excess of $0.10 per share. After the initial
public offering of the Common Stock, the public offering price, the concessions
to selected dealers and reallowance to other dealers may be changed by the
Representatives.

The Company and certain stockholders of the Company have granted to the
Underwriters an option, exercisable during the 30-day period after the date of
this Prospectus, to purchase up to an additional 40,050 and 750,000 shares,
respectively, of Common Stock at the initial public offering price set forth on
the cover page of this Prospectus, less the underwriting discounts and
commissions. To the extent the Underwriters exercise such option, each of the
Underwriters will become obligated, subject to certain conditions, to purchase
such percentage of such additional shares of Common Stock as is approximately
equal to the percentage of shares of Common Stock that it is obligated to
purchase as shown in the table set forth above. The Underwriters may exercise
such option only to cover over-allotments, if any, incurred in the sales of
shares of Common Stock.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 300,000 shares offered hereby for
officers, employees, business associates, and related persons of the Company.
The number of shares of Common Stock available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.

Prior to this Offering, there has been no public market for the Common
Stock of the Company. The initial public offering price will be determined
through negotiations among the Company, the Selling Stockholders, the
Underwriters and the Representatives. Among the factors to be considered in
determining the initial public offering price, in addition to prevailing market
conditions, will be certain financial information of the Company, the history
of, and the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, its past and present operations, the
prospects for, and timing of, future revenues of the Company, the present state
of the Company's development, and the above factors in relation to market values
and various valuation measures of other companies engaged in activities similar
to the Company. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of market
conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to this Offering at or above the initial public
offering price.

52
<PAGE> 53

As part of this Offering, the Company will sell directly to KDD 1,800,000
Shares of Common Stock at a price equal to the initial public offering price,
net of underwriting discounts and commissions. The Shares being sold to KDD are
not subject to the Underwriting Agreement and the Underwriters will not receive
any fees or commissions in connection with the sale of such Shares to KDD.

LEGAL MATTERS

The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Gray Cary Ware & Freidenrich, A
Professional Corporation, Palo Alto, California. Certain legal matters relating
to the sale of the shares of Common Stock in this Offering will be passed upon
for the Underwriters by Paul, Hastings, Janofsky & Walker, New York, New York.

EXPERTS

The balance sheets as of December 31, 1994 and 1995 and the statements of
operations, cash flows, and changes in stockholders' equity for the years ended
December 31, 1993, 1994 and 1995 included in this Prospectus have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Financial Statements and related Notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.

As a result of this Offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.

53
<PAGE> 54

GLOSSARY

Access Charges -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.

Estimated return traffic revenue backlog -- Under the terms of certain
operating agreements, the Company is contractually entitled to receive
proportional return traffic and must wait up to six months to receive this
return traffic from its foreign partner. The Company records revenue with
minimal associated direct cost when it receives the return traffic. The backlog
at the end of a period represents the amount of revenue the Company expects to
receive during the six months following the end of that period based on the
amount of traffic it has already delivered to its foreign partner.

FCC -- Federal Communications Commission.

Facilities based international carrier -- A company that owns or leases its
international network facilities including undersea fiber optic cables and
switching facilities rather than reselling time provided by another facilities
based carrier.

LECs (Local Exchange Carrier) -- A company providing Local Exchange
Services.

Local Exchange Services -- Local Exchange Services generally refers to all
services provided by a LEC including local dial tone and long distance access
services.

Long distance carriers -- Long distance carriers provide services between
local exchanges on an interstate or intrastate basis. A long distance carrier
may offer services over its own or another carriers facilities.

Operating agreement -- International long distance traffic is traditionally
exchanged pursuant to switched voice operating agreements between two long
distance carriers in two countries. The agreements provide for the termination
of traffic in, and return of traffic to, the partners' respective countries for
mutual compensation through negotiated settlement rates. The agreements
typically provide that a foreign carrier will return the same percentage of
total U.S. terminating traffic as it receives from the U.S.-based carrier, and
also provide for network coordination and accounting and settlement procedures.

PTT -- Telecommunication carrier that has been dominant in their home
market and which may be wholly or partially government-owned. They are often
referred to as Post Telephone and Telegraph or "PTT".

Private Line -- A private, dedicated telecommunications line connecting
different end user locations.

Proportional return traffic -- Under the terms of the operating agreements,
the foreign partners are required to deliver to the U.S. carriers the traffic
flowing to the U.S. in the same proportion as the U.S. carriers delivered U.S.
originated traffic to the foreign carriers.

RBOC (Regional Bell Operating Company) -- The seven local telephone
companies established by the 1982 agreement between AT&T and the Department of
Justice.

Switch -- A sophisticated computer that accepts instructions from a caller
in the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch opens or closes circuits or
selects the paths or circuits to be used for transmission of information.
Switching is a process of interconnecting circuits to form a transmission path
between users. Switches allow telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.

Undersea fiber optic cable -- Fiber optic cable is the medium of choice for
the telecommunications industry. Fiber is immune to electrical interference and
environmental factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass strands
in order to transmit digital information. A strand of fiber optic cable is as
thick as a human hair yet is said to have more bandwidth capacity than a copper
wire the size of a telephone pole. For international service, the fiber optic
cable is placed at the bottom of the oceans in order to connect the various
continents.

54
<PAGE> 55

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996 (unaudited with
respect to March 31, 1996).......................................................... F-3
Statements of Operations for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996 (unaudited with respect to the periods
ended March 31, 1995 and 1996)...................................................... F-4
Statements of Cash Flows for the Years Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996 (unaudited with respect to the periods
ended March 31, 1995 and 1996)...................................................... F-5
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1993,
1994 and 1995 and the Three Months Ended March 31, 1996 (unaudited with respect to
the period ended March 31, 1996).................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 56

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Pacific Gateway Exchange, Inc.:

We have audited the accompanying balance sheets of Pacific Gateway
Exchange, Inc., as of December 31, 1994 and 1995, and the related statements of
operations, cash flows, and changes in stockholders' equity for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pacific Gateway Exchange,
Inc., as of December 31, 1994 and 1995, and the results of their operations and
cash flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Francisco, California
May 13, 1996

F-2
<PAGE> 57

PACIFIC GATEWAY EXCHANGE, INC.

BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 9,485 $ 1,792,202 $ 3,690,607
Accounts receivable, net of allowance for doubtful
accounts of $137,038 in 1994, $824,337 in 1995 and
$959,337 in 1996.................................... 4,683,257 12,804,008 18,992,096
Accounts receivable, related party.................... 2,203,000 3,261,849 2,788,956
Advances receivable, related party.................... -- 175,000 --
Income tax recoverable................................ 54,868 -- --
----------- ----------- -----------
Total current assets........................ 6,950,610 18,033,059 25,471,659
PROPERTY AND EQUIPMENT:
Undersea fiber optic cables........................... 2,698,050 5,825,684 8,616,120
Long distance communications equipment................ 2,398,467 6,092,410 7,355,075
Office furniture and equipment........................ 337,195 748,530 816,517
----------- ----------- -----------
5,433,712 12,666,624 16,787,712
Less accumulated depreciation......................... 532,180 1,656,170 2,040,957
----------- ----------- -----------
Total property and equipment, net........... 4,901,532 11,010,454 14,746,755
Notes receivable...................................... 223,834 149,669 148,865
Deferred income tax................................... 53,309 148,247 177,743
Deposits and other assets............................. 171,334 414,317 577,493
----------- ----------- -----------
Total assets................................ $12,300,619 $29,755,746 $41,122,515
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................... $ 6,636,730 $19,418,595 $27,837,134
Accrued liabilities................................... 71,875 772,256 718,980
Income taxes payable.................................. -- 735,218 254,714
Revolving line of credit.............................. -- 3,000,000 3,000,000
Other liabilities..................................... -- 518,758 633,864
----------- ----------- -----------
Total current liabilities................... 6,708,605 24,444,827 32,444,692
Revolving line of credit, related party............... 4,487,724 2,420,339 5,420,339
----------- ----------- -----------
Total liabilities........................... 11,196,329 26,865,166 37,865,031
Commitments and Contingencies (Note 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, authorized
1,000,000 shares.................................... -- -- --
Common stock, $.0001 par value, authorized 25,000,000
shares, issued and outstanding 14,100,000 shares.... 1,410 1,410 1,410
Additional paid-in capital............................ 940,324 940,324 940,324
Retained earnings..................................... 162,556 1,948,846 2,315,750
----------- ----------- -----------
Total stockholders' equity.................. 1,104,290 2,890,580 3,257,484
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................... $12,300,619 $29,755,746 $41,122,515
=========== =========== ===========
</TABLE>

See Accompanying Notes to Financial Statements.

F-3
<PAGE> 58

PACIFIC GATEWAY EXCHANGE, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $1,817,484 $11,702,041 $59,250,454 $8,364,265 $27,480,056
Revenues -- related party................ 3,231,000 9,211,000 17,165,995 3,760,598 4,759,701
---------- ----------- ----------- ---------- -----------
Total revenues................. 5,048,484 20,913,041 76,416,449 12,124,863 32,239,757
Cost of long distance services........... 4,035,847 17,195,516 66,346,356 10,041,528 29,130,061
---------- ----------- ----------- ---------- -----------
Gross margin................... 1,012,637 3,717,525 10,070,093 2,083,335 3,109,696
Selling, general and administrative
expenses............................... 1,007,832 2,273,430 5,466,831 992,338 1,955,996
Depreciation............................. 104,241 410,115 1,123,990 188,812 384,787
---------- ----------- ----------- ---------- -----------
Total operating expenses....... 1,112,073 2,683,545 6,590,821 1,181,150 2,340,783
---------- ----------- ----------- ---------- -----------
Operating income (loss)........ (99,436) 1,033,980 3,479,272 902,185 768,913
Interest expense......................... 11,891 192,979 537,982 110,773 152,009
---------- ----------- ----------- ---------- -----------
Income (loss) before income taxes...... (111,327) 841,001 2,941,290 791,412 616,904
Provision for income taxes............... -- 205,000 1,155,000 311,000 250,000
---------- ----------- ----------- ---------- -----------
Net income (loss).............. $ (111,327) $ 636,001 $ 1,786,290 $ 480,412 $ 366,904
========== =========== =========== ========== ===========
Net income (loss) per share.... $ (0.01) $ 0.04 $ 0.12 $ 0.03 $ 0.03
========== =========== =========== ========== ===========
Weighted average number of common shares
outstanding............................ 14,300,000 14,300,000 14,300,000 14,300,000 14,300,000
========== =========== =========== ========== ===========
</TABLE>

See Accompanying Notes to Financial Statements.

F-4
<PAGE> 59

PACIFIC GATEWAY EXCHANGE, INC.

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31,
YEAR ENDED DECEMBER 31, ----------------------------
----------------------------------------- 1995 1996
1993 1994 1995 ----------- -----------
----------- ----------- ----------- (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................ $ (111,327) $ 636,001 $ 1,786,290 $ 480,412 $ 366,904
Adjustments to net income (loss):
Depreciation........................... 104,241 410,115 1,123,990 188,812 384,787
Change in provision for losses on bad
debts............................... 20,000 117,038 687,299 141,910 135,000
Provision for deferred income taxes.... -- (53,309) (94,938) -- (29,496)
Change in accounts receivable.......... (505,588) (3,978,408) (9,510,050) (5,317,295) (6,323,088)
Change in accounts receivable, related
party............................... (1,195,000) (1,008,000) (1,058,849) (485,999) 472,893
Change in notes and advances
receivable.......................... (14,333) 195,172 (100,835) -- 175,804
Change in deposits and other assets.... (55,907) (106,407) (242,983) (4,099) (163,176)
Change in accounts payable............. 2,516,204 3,692,828 12,781,865 5,712,915 8,418,539
Change in accrued liabilities.......... -- 71,875 700,381 (8,375) (53,276)
Change in other liabilities............ -- -- 518,758 34,761 115,106
Change in federal income taxes
(recoverable) payable............... -- (54,868) 790,086 120,001 (480,504)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities................ 758,290 (77,963) 7,381,014 863,043 3,019,493
----------- ----------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment....... (1,542,493) (3,744,965) (7,232,912) (241,603) (4,121,088)
Sale of stock (accepted as payment for
accounts receivable) to related
party.................................. -- -- 702,000 -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in) investing
activities............................. (1,542,493) (3,744,965) (6,530,912) (241,603) (4,121,088)
----------- ----------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings on revolving lines of
credit................................. 717,919 3,929,308 4,000,000 -- 3,000,000
Repayments on revolving lines of
credit................................. -- (159,503) (3,067,385) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by financing
activities............................. 717,919 3,769,805 932,615 -- 3,000,000
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash.......... (66,284) (53,123) 1,782,717 621,440 1,898,405
Cash at the beginning of the period...... 128,892 62,608 9,485 9,485 1,792,202
----------- ----------- ----------- ----------- -----------
Cash at the end of the period............ $ 62,608 $ 9,485 $ 1,792,202 $ 630,925 $ 3,690,607
=========== =========== =========== =========== ===========
Supplemental disclosure of cash flow
information:
Interest paid during the period........ $ -- $ 102,810 $ 576,250 $ 76,012 $ 137,527
=========== =========== =========== =========== ===========
Income taxes paid during the period.... $ -- $ 313,376 $ 682,999 $ -- $ 760,000
=========== =========== =========== =========== ===========
Non-Cash Activities:
Stocks accepted as payment for accounts
receivable.......................... $ -- $ -- $ 702,000 $ -- $ --
=========== =========== =========== =========== ===========
</TABLE>

See Accompanying Notes to Financial Statements

F-5
<PAGE> 60

PACIFIC GATEWAY EXCHANGE, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
STOCK COMMON STOCK ADDITIONAL RETAINED
COMMITTED -------------------- PAID-IN EARNINGS
TO BE ISSUED SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------------ ---------- ------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1993........ $ 850,000 3,980 $ 40 $ 91,694 $ (362,118) $ 579,616
Net loss..................... -- -- -- -- (111,327) (111,327)
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1993...... 850,000 3,980 40 91,694 (473,445) 468,289
Issuance of Common Stock..... (850,000) 11,020 110 849,890 -- --
Net income................... -- -- -- -- 636,001 636,001
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1994...... -- 15,000 150 941,584 162,556 1,104,290
940 to 1 stock split......... -- 14,085,000 1,260 (1,260) -- --
Net income................... -- -- -- -- 1,786,290 1,786,290
---------- ---------- ------ --------- ---------- ----------
Balance December 31, 1995...... -- 14,100,000 1,410 940,324 1,948,846 2,890,580
Net income (unaudited)....... -- -- -- -- 366,904 366,904
---------- ---------- ------ --------- ---------- ----------
Balance March 31, 1996
(unaudited).................. $ -- 14,100,000 $1,410 $ 940,324 $2,315,750 $3,257,484
========== ========== ====== ========= ========== ==========
</TABLE>

See Accompanying Notes to Financial Statements

F-6
<PAGE> 61

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

(1) THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Organization:

Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the "Company"), a
Delaware corporation, owns and operates an international switched and domestic
switched telecommunications network. The operations of Pacific Gateway have
grown significantly as the result of entering into additional operating
agreements with foreign partners and marketing to certain long distance
companies in the United States which do not have their own international
network.

For the periods ended March 31, 1995 and 1996, the Company believes that
the financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position and
results of operations.

Cash and Cash Equivalents:

Cash equivalents consist primarily of money market accounts which are
available on demand. The carrying amount reported in the accompanying balance
sheet approximates fair value.

Fair Value of Financial Instruments:

The carrying amounts for accounts receivable and accounts payable
approximate their fair value. The revolving lines of credit have an interest
rate which varies with the prime rate and approximates the current interest rate
for similar financial instruments. Therefore, the recorded amount of the
revolving lines of credit approximates fair value.

Property and Equipment:

Property and equipment are stated at cost. Depreciation is provided for
financial reporting purposes using the straight line method over the following
estimated useful lives:

<TABLE>
<S> <C>
Undersea fiber optic cables............................................... 20 years
Long distance communications equipment.................................... 5-7 years
Office furniture and equipment............................................ 4-7 years
</TABLE>

Maintenance and repairs are expensed as incurred. Replacements and
betterments are capitalized. The cost and related accumulated depreciation of
assets sold or retired are removed from the account balance, and any resulting
gain or loss is reflected in results of operations.

Concentration of Credit Risk:

Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. Seven of the Company's customers account
for approximately 55% and 49% of gross accounts receivable as of December 31,
1995 and March 31, 1996, respectively. The Company performs ongoing credit
evaluations of its customers but generally does not require collateral to
support customer receivables. The Company's allowance for doubtful accounts is
based on current market conditions. Losses on uncollectible accounts have
consistently been within management's expectations.

Income Taxes:

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS 109 has as its basic objective the

F-7
<PAGE> 62

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

recognition of current and deferred income tax assets and liabilities based upon
all events that have been recognized in the financial statements as measured by
the provisions of the enacted tax laws.

Valuation allowances are established when necessary to reduce deferred tax
assets to the estimated amount to be realized. Income tax expense represents the
tax payable for the current period and the change during the period in the
deferred tax assets and liabilities.

Revenue Recognition:

Revenues for telecommunication services provided to customers are
recognized as services are rendered. Revenues for return traffic received
according to the terms of the Company's operating agreements with its foreign
partners are recognized as revenue as the return traffic is received.

Earnings Per Share:

Earnings per share are calculated based on the weighted average number of
shares outstanding during the period plus the dilutive effect of stock committed
to be issued and stock options determined using the treasury stock method. The
earnings per share calculation has been adjusted for all periods presented to
reflect the 940 to 1 stock split effected October 20, 1995. Additionally, this
calculation treats stock options granted on September 30, 1995 as if they were
common stock equivalents for all periods presented. See Notes 7 and 10.

Estimates in Financial Statements:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

(2) ACCOUNTING FOR INTERNATIONAL LONG DISTANCE TRAFFIC

The Company has entered into operating agreements with 25
telecommunications carriers in 19 foreign countries under which international
long distance traffic is both delivered and received. Under these agreements,
the foreign carriers are contractually obligated to adhere to the policy of the
Federal Communications Commission (the "FCC"), whereby traffic from the foreign
country is routed to international carriers, such as the Company, in the same
proportion as traffic carried into the country. Mutually exchanged traffic
between the Company and foreign carriers is settled through a formal settlement
policy that generally extends over a six-month period at an agreed upon rate.
The Company records the amount due to the foreign partner as an expense in the
period the traffic is delivered. Of the 25 operating agreements the Company had
at March 31, 1996, 10 agreements provided that the Company generally must wait
up to six months before it actually receives the proportional return traffic.
For these agreements, the Company recognizes a loss in the period in which it
sells to a customer because the amount due to the foreign partner generally
exceeds the amount the Company charges its customers. However, when the return
traffic is received in the future period, the Company generally realizes a gross
margin on the return traffic that, when combined with the prior period loss on
the outbound traffic, results in a gross profit on the total transaction.
Although the Company can reasonably estimate the revenue it will receive under
the FCC's proportional share policy, there is no guarantee that there will be
traffic delivered back to the United States or what impact changes in future
settlement rates will have on net payments made and revenue received.

For the 10 agreements which provide for delayed return traffic, the Company
had previously deferred a portion of the costs associated with the outbound call
until the receipt of the proportional return traffic. The Company has restated
its financial statements to adopt the accounting method described above. The
impact of

F-8
<PAGE> 63

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

this restatement was to reduce income before income taxes, net income and income
per share by $5,697,130, $3,473,431 and $0.25 in 1995 and $348,762, $211,282,
and $0.02 in 1994, respectively.

(3) INCOME TAXES

The provision for income taxes is comprised of the following:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ---------------------------
1993 1994 1995 1995 1996
-------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Current................. -- $258,309 $1,249,938 $ 328,770 $ 279,496
Deferred................ -- (53,309) (94,938) (17,770) (29,496)
-------- -------- ---------- --------- ---------
-- $205,000 $1,155,000 $ 311,000 $ 250,000
======== ======== ========== ========= =========
</TABLE>

The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------ ---------------------------
1993 1994 1995 1995 1996
----- ----- ---- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Expected statutory amount.......... -- 34.0% 34.0% 34.0% 34.0%
Release of valuation allowance..... -- (15.1%) -- -- --
State income taxes, net of federal
benefit.......................... -- 5.5% 5.3% 5.3% 5.3%
Other.............................. -- -- -- -- 1.2%
----- ----- ---- ---- ----
--% 24.4% 39.3% 39.3% 40.5%
===== ===== ==== ==== ====
</TABLE>

As a result of operating losses in 1992 and 1993 and the fact that the
Company had a limited operating history, a valuation allowance equal to the
deferred tax asset was recorded at December 31, 1993 which resulted in no tax
benefit being realized for the period. The Company was profitable for the first
time in 1994 which allowed it to release the previously recorded deferred tax
asset valuation allowance.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.

The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1994 1995 1996
-------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................... $ 54,040 $ 325,613 $ 378,938
Net operating loss carry forwards................. 61,412 42,185 35,805
-------- --------- ---------
Total gross deferred tax assets........... 115,452 367,798 414,743
Deferred tax liabilities:
Depreciation...................................... 62,143 219,551 237,000
-------- --------- ---------
Net deferred tax (assets)................. $(53,309) $(148,247) $(177,743)
======== ========= =========
</TABLE>

F-9
<PAGE> 64

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

At March 31, 1996, the Company has net operating loss carryforwards of
approximately $80,000 which may be applied against future taxable income and
which expire in 2008.

(4) REVOLVING LINES OF CREDIT

At March 31, 1996, the Company had a $9,000,000 revolving line of credit
with Ronald L. Jensen, a principal stockholder of the Company, having a maturity
date that is the earlier of December 31, 1998, the closing of a public offering,
or the date of a change in ownership of 50% of the outstanding common stock of
the Company. Interest is payable monthly at prime (8.5% at March 31, 1996, 8.75%
at December 31, 1995 and 9.0% at December 31, 1994) plus 2%. There was
$3,579,661 available to be borrowed against the line of credit at March 31,
1996. The line of credit is collateralized by all the tangible and intangible
assets of the Company other than accounts receivable and the terms prohibit the
Company from disposing of any of such assets other than in the ordinary course
of business. The amount outstanding under this line, which is subordinated to
the amount due the commercial lender, was $4,487,724, $2,420,339 and $5,420,339
at December 31, 1994, December 31, 1995 and March 31, 1996, respectively.

In 1995, the Company entered into an additional revolving line of credit
with a commercial lender under which it may borrow the lesser of $3,000,000 or
70% of certain of the Company's accounts receivable. The revolving credit
facility is collateralized by all of the Company's accounts receivable and
contains covenants with respect to, among other things, the profitability and
current ratio of the Company and restrictions on the payment of dividends.
Interest is payable monthly at the lender's prime rate plus .875%. The amount
outstanding under this line was $3,000,000 at March 31, 1996. The line expires
on September 30, 1996.

(5) RELATED PARTY TRANSACTIONS

The Company provides certain domestic and international switched
telecommunication services to Matrix Telecom, Inc. ("Matrix"), which is a
switchless reseller. Ronald L. Jensen and his five adult children, as a group,
own a controlling interest in Matrix and also own a significant, but not
controlling interest in the Company. Revenues recorded from providing these
services were $3,231,000, $9,211,000, and $17,165,995 for the years ended
December 31, 1993, 1994, and 1995, respectively and $3,760,598 and $4,759,701
for the three months ended March 31, 1995 and 1996, respectively. Matrix also
provided certain data processing services to the Company for which the Company
incurred expenses of $35,000 and $166,000 in 1994 and 1995, respectively and
$15,000 and $66,000 for the three months ended March 31, 1995 and 1996,
respectively. The amount receivable from Matrix was $2,203,000, and $3,261,849
at December 31, 1994 and 1995, respectively and $2,788,956 at March 31, 1996.

In February 1995, the Company accepted certain shares of common stock, with
a fair market value of approximately $702,000, of a customer as payment for
accounts receivable totaling $702,000. The Company then sold this stock to
Ronald L. Jensen for $702,000. Mr. Jensen subsequently sold the stock over a
period of several months for a total of $730,000.

At December 31, 1995, the Company had advances receivable from the officers
of the Company totaling $175,000. These advances were due on demand and were
repaid in the first quarter of 1996.

F-10
<PAGE> 65

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

(6) SEGMENT DATA

The Company classifies its operations into one industry segment,
telecommunications services. Export sales were $694,000, $4,572,000, and
$17,619,000 for the years ended December 31, 1993, 1994, and 1995, respectively
and $2,815,000 and $8,836,000 for the three months ended March 31, 1995 and
1996, respectively. Export sales by geographic area were as follows:

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------- ----------------------------
1993 1994 1995 1995 1996
--------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Pacific Rim............... $ 664,000 $2,908,000 $10,066,000 $1,666,000 $4,054,000
Europe.................... -- 812,000 4,798,000 578,000 3,132,000
Canada.................... 30,000 852,000 2,418,000 571,000 1,245,000
Other..................... -- -- 337,000 -- 405,000
--------- ---------- ----------- ---------- ----------
$ 694,000 $4,572,000 $17,619,000 $2,815,000 $8,836,000
========= ========== =========== ========== ==========
</TABLE>

To date, the Company's international operating agreements have been with
entities operating in countries where management does not expect political or
economic forces to cause disruption in telecommunications traffic to or from
these countries.

The Company sells to the long distance companies in the United States which
do not have their own international network and to its foreign partners. At
March 31, 1996, the Company had 25 operating agreements and approximately 57
United States customers. Because it has a small number of large customers, 10%
or more of the Company's revenues have been derived from the following
customers.

YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------- ----------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Matrix Telecom, Inc. (see
Note 5)................... $3,231,000 $9,211,000 $17,165,995 $ 3,760,598 $ 4,759,701
Lightcom International,
Inc....................... 600,000 (A) (A) (A) (A)
Wiltel, Inc................. (A) 2,599,000 (A) (A) (A)
Optus Communications Pty
Limited................... (A) 2,209,000 (A) (A) (A)
</TABLE>

- ---------------

(A) Sales were less than 10% of total revenues.

(7) STOCK OPTION PLAN

On September 30, 1995, the Company adopted a stock option plan. The plan
provides for the granting of nonqualified and incentive stock options to
purchase up to 1,200,000 shares of common stock. Options granted become
exercisable over vesting periods of generally four years at exercise prices not
less than the fair market value of the stock at the date of grant and generally
must be exercised within five years. On September 30, 1995, options to purchase
509,170 shares were granted at an exercise price of $8.50 per share which the
Board of Directors determined to be the fair market value of the stock at that
time. The earnings per share calculation treats these options as if they were
common stock equivalents for the periods presented, using the treasury stock
method. In 1996, options to purchase 30,000 shares were granted at an exercise
price of $11.50 per share.

(8) EMPLOYEE BENEFIT PLANS

In September 1995, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") which is meant to qualify under section 423 of the
Internal Revenue Code. The Purchase Plan will become

F-11
<PAGE> 66

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

effective immediately upon the successful completion of a public offering of the
Company's common stock. Under the Purchase Plan, the Company reserved up to
400,000 shares of common stock for purchase by employees who meet certain
eligibility requirements. Eligible employees may contribute up to 10% of their
compensation to the Purchase Plan to purchase shares at 85% of the fair market
value of the stock on the first or the last day of each six-month offering
period as defined in the Purchase Plan.

(9) COMMITMENTS AND CONTINGENCIES

Litigation

The Company is not currently subject to any legal proceedings that will
have a material impact on the Company's financial position or results of
operations.

Leases

The Company leases office space and equipment under noncancelable operating
leases. Rental expenses for 1993, 1994, and 1995 was $52,000, $92,000, and
$142,000, respectively and $38,000 and $30,000 for the three months ended March
31, 1995 and 1996, respectively. Future minimum lease payments under these
leases as of March 31, 1996 are as follows:

<TABLE>
<S> <C>
1996.............................................. $126,000
1997.............................................. 92,000
1998.............................................. 15,000
--------
Total minimum lease payments............ $233,000
========
</TABLE>

Employment Agreements

The Company has entered into employment agreements with each of Howard
Neckowitz, President, Chief Executive Officer and Chairman of the Board, Gail
Granton, Chief Financial Officer, Executive Vice President, International
Business Development and Secretary, Ronald Anderson, Vice President, Operations
and Engineering and Robert Craver, Senior Vice President, International
Relations. The agreement with Mr. Neckowitz is for a term of four years, the
agreements with Ms. Granton and Mr. Anderson are for a term of three years and
the agreement with Mr. Craver is for a term of two years. The agreements provide
for severance payments in an amount equal to base salary to the end of the term
or, if greater, two years of base salary for Mr. Neckowitz and one year of base
salary for Ms. Granton, Mr. Anderson and Mr. Craver in the event of termination
without cause or termination following a change of control of the Company. In
the event of a change of control, each of such employees would be entitled to
severance following his or her resignation from the Company resulting from
diminution of his or her duties. Should such an event occur, the Company's
obligation for severance could range from $1,020,000 to $2,145,000. Upon any
such payment of severance, the officer would also receive full vesting of any
outstanding stock options.

Commitments

At March 31, 1996 the Company had outstanding commitments of $860,000 for
the acquisition of additional ownership interests in digital undersea fiber
optic cables.

(10) CAPITAL STOCK

In 1992, the Company entered into an agreement whereby it received $850,000
in cash and agreed to issue stock of the Company representing approximately 73%
of the Company. In 1994, the Company issued 11,020 (pre-split) shares of its
common stock to fulfill its commitment under this agreement. The earnings per

F-12
<PAGE> 67

PACIFIC GATEWAY EXCHANGE, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED WITH RESPECT TO THE PERIODS ENDED MARCH 31, 1995 AND 1996)

share calculation treats these shares as common stock equivalents prior to the
issuance of the shares for all periods presented.

On September 30, 1995, the Company's Board of Directors authorized
management to file a registration statement with the Securities and Exchange
Commission to permit the Company to sell shares of its common stock to the
public. On September 30, 1995, the Company's Board of Directors authorized an
amendment to the Certificate of Incorporation which was approved by the
shareholders on the same date. The amendment effected a 940 to 1 split of the
Company's Common Stock and adjusted the authorized shares to 25,000,000 shares
of common stock, $.0001 par value per share, and 1,000,000 shares of Preferred
Stock, $.0001 par value per share. The 940 to 1 split was effective October 20,
1995. The rights, preferences and limitations of the Preferred Stock may be
designated by the Company's Board of Directors at any time.

(11) NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (the "FASB") issued 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," which is
effective for fiscal years beginning after December 15, 1995. The Company
adopted the standard on January 1, 1996 which did not have a material impact on
its financial statements.

In October, 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective for fiscal years beginning after December 31,
1995. SFAS 123 encourages entities to adopt a fair value based method of
accounting for employee stock compensation plans; however, it also allows an
entity to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting. Under the intrinsic value based
method, companies do not recognize compensation cost for many of their stock
compensation plans. Under the fair value based method, companies would recognize
compensation costs for those same plans. The Company elects to continue to use
the intrinsic value based method, and therefore does not expect the impact on
its financial statements, if any, to be material.

F-13
<PAGE> 68

----------------------------------------------------------------------------
- -----------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Sale of Shares to KDD...................... 6
Risk Factors............................... 6
Use of Proceeds............................ 13
Dividend Policy............................ 13
Capitalization............................. 14
Dilution................................... 15
Selected Financial Data.................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 17
Business................................... 25
Management................................. 40
Certain Relationships and Related
Transactions............................. 46
Principal and Selling Stockholders......... 47
Description of Capital Stock............... 49
Shares Eligible for Future Sale............ 50
Underwriting............................... 51
Legal Matters.............................. 53
Experts.................................... 53
Additional Information..................... 53
Glossary................................... 54
Index to Financial Statements.............. F-1
</TABLE>

------------------------

UNTIL AUGUST 13, 1996, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------

------------------------------------------------------------
------------------------------------------------------------
5,267,000 SHARES
[PACIFIC GATEWAY EXCHANGE LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------

PAINEWEBBER INCORPORATED

ALEX. BROWN & SONS
INCORPORATED
------------------------

JULY 19, 1996
------------------------------------------------------------
------------------------------------------------------------