<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

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


                                    FORM 10-Q

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

For the quarterly period ended March 31, 1999

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

For the transition period from ________ to ________.

                        Commission file number 000-23783


                                 MICROMUSE INC.
             (Exact name of registrant as specified in its charter)


<TABLE>
<S>                                            <C>
DELAWARE                                                              94-3288385
-------------------------------                ---------------------------------
(State or other jurisdiction of                (IRS Employer Identification No.)
incorporation or organization)
</TABLE>


                               139 TOWNSEND STREET
                         SAN FRANCISCO, CALIFORNIA 94107
                                 (415) 538-9090
               (Address, including ZIP code, and telephone number)



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

                                Yes [X]   No [ ]



15,873,629 shares of Common Stock, $0.01 par value, were outstanding as of 
April 30, 1999.

<PAGE>   2

                                 MICROMUSE INC.


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                              Page
                                                                              ----
<S>      <C>                                                                  <C>
PART I - Financial Information

Item 1.  Condensed Consolidated Financial Statements:

              Condensed Consolidated Balance Sheets at March 31, 1999 and
                  September 30, 1998                                            3

              Condensed Consolidated Statements of Operations for the three
                  and six months ended March 31, 1999 and 1998                  4

              Condensed Consolidated Statements of Cash Flows for the six
                  months ended March 31, 1999 and 1998                          5

              Notes to Condensed Consolidated Financial Statements              6


Item 2.   Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                                           9


Item 3.   Quantitative and Qualitative Disclosures about Market Risk 
              Derivatives and Financial Instruments                            27


PART II - Other Information

Item 1.   Legal Proceedings                                                    28

Item 2.   Changes in Securities and use of Proceeds                            28

Item 3.   Defaults upon Senior Securities                                      28

Item 4.   Submission of Matters to a Vote of Security Holders                  28

Item 5.   Other Information                                                    28

Item 6.   Exhibits and Reports on Form 8-K                                     29

Signature                                                                      30
</TABLE>


                                       2

<PAGE>   3

PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


                                 MICROMUSE INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except per share data)

                                     ASSETS

<TABLE>
<CAPTION>
                                                        March 31,   September 30,
                                                          1999          1998
                                                        --------    ------------
<S>                                                     <C>           <C>     
Current assets:
 Cash and cash equivalents                              $ 13,098      $ 22,798
 Short-term investments                                   49,280        40,452
 Accounts receivable                                       7,980         6,495
 Prepaid expenses and other current assets                 3,431         1,374
                                                        --------      --------
    Total current assets                                  73,789        71,119

 Property and equipment, net                               4,004         2,968
 Long-term investments                                        --         6,557
                                                        --------      --------
                                                        $ 77,793      $ 80,644
                                                        ========      ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Accounts payable                                       $  3,999      $  2,073
 Accrued expenses                                          3,647         3,327
 Deferred revenue                                          6,890         7,526
                                                        --------      --------
    Total current liabilities                             14,536        12,926

Stockholders' equity
 Preferred stock; $0.01 par value; 5,000 shares
   authorized; no shares issued and outstanding               --            --
 Common stock; $0.01 par value; 60,000 shares
   authorized; 16,160 and 16,049 shares outstanding
   as of March 31, 1999 and September 30, 1998, 
   respectively                                              161           160
 Additional paid-in capital                               77,224        79,159
 Treasury stock, at cost: 303 shares at 
   March 31, 1999                                         (5,779)           --
 Deferred compensation                                      (131)         (159)
 Accumulated other comprehensive losses                     (185)          (42)
 Accumulated deficit                                      (8,033)      (11,400)
                                                        --------      --------
    Total stockholders' equity                            63,257        67,718
                                                        --------      --------
                                                        $ 77,793      $ 80,644
                                                        ========      ========
</TABLE>

    See accompanying notes to the condensed consolidated financial statements

<PAGE>   4

                        MICROMUSE INC.

        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except per share data)

<TABLE>
<CAPTION>
                                         Three months ended         Six months ended
                                              March 31,                 March 31,
                                        --------------------      --------------------
                                          1999        1998          1999        1998
                                        --------    --------      --------    --------
<S>                                     <C>         <C>           <C>         <C>     
Revenues:
  License                               $  9,765    $  4,914      $ 18,292    $  8,649
  Maintenance and services                 2,859       1,281         5,160       2,375
                                        --------    --------      --------    --------
    Total revenues                        12,624       6,195        23,452      11,024
                                        --------    --------      --------    --------

Cost of revenues:
  License                                    657         312         1,167         627
  Maintenance and services                 1,502         802         2,809       1,564
                                        --------    --------      --------    --------
    Total cost of revenues                 2,159       1,114         3,976       2,191
                                        --------    --------      --------    --------
       Gross profit                       10,465       5,081        19,476       8,833
                                        --------    --------      --------    --------

Operating expenses:
  Sales and marketing                      5,987       3,489        11,335       6,633
  Research and development                 2,089       1,337         3,829       2,406
  General and administrative               1,445       1,011         2,818       1,903
  Executive recruiting costs                 720          --           720          --
                                        --------    --------      --------    --------
    Total operating expenses              10,241       5,837        18,702      10,942
                                        --------    --------      --------    --------
       Income (loss) from operations         224        (756)          774      (2,109)

Other income, net                            792         160         1,708         210
                                        --------    --------      --------    --------
  Income (loss) before income taxes        1,016        (596)        2,482      (1,899)

Income tax benefit                        (1,032)         --          (885)         --
                                        --------    --------      --------    --------
  Net income (loss)                        2,048        (596)        3,367      (1,899)

Accretion on redeemable convertible
  preferred stock                             --        (444)           --      (1,334)
                                        --------    --------      --------    --------

    Net income (loss) applicable to
      holders of common stock           $  2,048    $ (1,040)     $  3,367    $ (3,233)
                                        ========    ========      ========    ========

Per share data:
  Basic net income (loss)               $   0.13    $  (0.10)     $   0.21    $  (0.40)
  Diluted net income (loss)             $   0.12    $  (0.10)     $   0.20    $  (0.40)

Weighted average shares used 
  in computing:
  Basic net income (loss) per share       15,797      10,443        15,830       8,127
  Diluted net income (loss) per share     17,180      10,443        17,096       8,127
</TABLE>


    See accompanying notes to the condensed consolidated financial statements


                                       4

<PAGE>   5

                                 MICROMUSE INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                              Six months ended
                                                                  March 31,
                                                            --------------------
                                                              1999        1998
                                                            --------    --------
<S>                                                         <C>         <C>      
Cash flows from operating activities:
  Net income (loss)                                         $  3,367    $ (1,899)
  Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
      Depreciation and amortization                              731         573
      Expense related to warrant                                 462          --
      Deferred compensation expense                               28          28
      Changes in operating assets and liabilities:
        Accounts receivable                                   (1,485)       (312)
        Prepaid expenses and other current assets             (2,057)       (181)
        Related party loan                                        --       1,153
        Accounts  payable                                      1,926        (870)
        Accrued expenses                                         320         351
        Deferred revenues                                       (636)      1,988
                                                            --------    --------
            Cash provided by operating activities              2,656         831
                                                            --------    --------

Cash flows from investing activities:
  Capital expenditures                                        (1,767)       (780)
  Purchase of short-term investments, net                     (2,271)     (6,883)
                                                            --------    --------
    Cash used in investing activities                         (4,038)     (7,663)
                                                            --------    --------
Cash flows from financing activities:
  Proceeds from issuance of common stock                          --      34,282
  Proceeds from issuance of treasury stock                     1,365          --
  Purchase of treasury stock                                  (9,540)     (5,000)
                                                            --------    --------
    Cash provided by (used in) financing activities           (8,175)     29,282
                                                            --------    --------

Effects of exchange rate changes on cash and cash
     Equivalents                                                (143)       (106)
                                                            --------    --------
Net increase (decrease) in cash and cash equivalents          (9,700)     22,344
Cash and cash equivalents at beginning of period              22,798      13,741
                                                            ========    ========
Cash and cash equivalents at end of period                  $ 13,098    $ 36,085
                                                            ========    ========

Supplemental disclosures of cash flow information: 
  Non-cash financing activities:
    Issuance of treasury stock related to the
      exercise of options                                      2,680          --
    Issuance of treasury stock related to the
      employee stock purchase plan                             1,081          --
    Accretion on redeemable convertible preferred stock           --       1,334
</TABLE>

    See accompanying notes to the condensed consolidated financial statements


                                       5

<PAGE>   6

                                 MICROMUSE INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. BASIS OF PRESENTATION

The condensed consolidated financial statements are the unaudited historical
financial statements of Micromuse Inc. and subsidiaries (the "Company") and
reflect all adjustments (consisting only of normal recurring adjustments) that,
in the opinion of management, are necessary for a fair presentation of interim
period results. These condensed consolidated financial statements should be read
in conjunction with the financial statements and notes thereto included in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively. The September 30, 1998 consolidated balance sheet included herein
was derived from audited financial statements, but does not include all
disclosures, including notes, required by generally accepted accounting
principles.

The results of operations for the current interim period are not necessarily
indicative of results to be expected for the entire current year or other future
interim periods.

Use of Estimates
The preparation of condensed consolidated 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 and disclosure of contingent assets and liabilities at the date of
the condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.

Cash Equivalents
The Company considers all highly liquid instruments with a purchased maturity of
90 days or less to be cash equivalents.

Investments
The Company has invested in certain marketable securities that are categorized
as held-to-maturity. The fair value of these investments, which are accounted
for using the amortized cost-basis of accounting, approximates their respective
carrying value defined as the amount at which the instrument could be exchanged
in a current transaction between willing parties.

Per Share Data
Basic net income (loss) per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted net income (loss)
per share is calculated using the weighted- average number of common shares
outstanding during the period and, when dilutive, the weighted average number of
potential common shares from the assumed conversion of the redeemable
convertible preferred stock and the assumed exercise of outstanding options to
purchase common stock using the treasury stock method. Excluded from the
computation of the loss per share for the quarter and six months ended March 31,
1998 were approximately 4.5 million shares of redeemable convertible preferred
stock and options to acquire 1.7 million shares of common stock, with a weighted
average exercise price of $2.08 per share, because their effect would be
anti-dilutive. A reconciliation of the numerators and denominators used in the
basic and diluted net income (loss) per share amounts follows:


                                       6

<PAGE>   7

                                 MICROMUSE INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                           Three months ended       Six months ended
                                                March 31,               March 31,
                                          --------------------    --------------------
                                            1999        1998        1999        1998
                                          --------    --------    --------    --------
<S>                                       <C>         <C>         <C>         <C>     
Numerator for basic and diluted net
  income (loss)applicable to holders 
  of common stock                         $  2,048    $ (1,040)   $  3,367    $ (3,233)
                                          ========    ========    ========    ========
Denominator for basic net income (loss)
  (loss) per share - weighted-average
  shares outstanding                        15,797      10,443      15,830       8,127
Effect of dilutive common stock options      1,383          --       1,266          --
                                          --------    --------    --------    --------
Denominator for diluted net income
(loss) per share                            17,180      10,443      17,096       8,127
                                          ========    ========    ========    ========
</TABLE>


Comprehensive Income (Loss)
Effective October 1, 1998, the Company adopted the Financial Accounting
Standards Board's (the "FASB") Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components; however, the adoption of SFAS 130 had no impact on
the Company's net income (loss) or stockholders' equity (deficit). This
Statement requires foreign currency translation adjustments, which prior to
adoption were reported separately in stockholders' equity (deficit), to be
included in other comprehensive income (loss). Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130.

Recent Pronouncement
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company has not yet determined whether it
has any separately reportable business segments.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under SFAS No. 133, entities are required to carry all
derivative instruments in the balance sheet at fair value. The accounting for
changes in the fair value of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and, if so, the
reason for holding it. The Company must adopt SFAS No. 133 by October 1, 1999.
The Company does not anticipate that SFAS No. 133 will have an effect on its
financial statements.

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1"). This SOP applies to
software that is acquired or developed solely for an entity's internal use and
requires the capitalization of qualifying costs in software application
development activities, which include design, coding, installation hardware and
testing. Capitalization of qualifying costs incurred in development stage
activities begins when the entity has committed to fund a particular internal
computer software project and the entity considers it probable that the
committed software will be used 


                                       7

<PAGE>   8

                                 MICROMUSE INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


to perform the intended function, provided that the entity has completed the
preliminary project stage activities. Preliminary project stage activities
include the conceptual formulation and evaluation of alternatives and the
determination of the existence of needed technology. Qualifying capitalizable
computer software costs include the external direct costs of materials and
services and the payroll related costs of employees who are directly involved
with the internal project. All other costs related to the project are expensed
as incurred.

SOP 98-1 will be effective for internal use computer software costs incurred in
future years commencing with the Company's fiscal year beginning October 1,
1999. The Company has followed an accounting policy of expensing as incurred all
costs related to software developed for internal use and intends to continue
this policy until the effective date of SOP 98-1. The Company has not yet
determined whether the adoption of SOP 98-1 will have a material effect on the
Company's financial position or results of operations.

NOTE 2. COMMON STOCK REPURCHASE PROGRAM

In October 1998, the Board of Directors authorized the repurchase of up to 1.5
million shares, or approximately 9% of the Company's outstanding common stock.
As of December 31, 1998, the Company had repurchased 500,000 shares of its
outstanding common stock for approximately $9.5 million pursuant to the
repurchase program. The repurchased shares are held as treasury stock and are
available for general corporate purposes including issuance under the Company's
stock option and employee stock purchase plans. In January 1999, the Company
announced the termination of the repurchase program.

NOTE 3. MANAGEMENT

In February 1999, the Company announced that Gregory Q. Brown would join the
Company as Chairman of the Board and Chief Executive Officer and on March 1,
1999, he joined the Company as a full-time employee. The Company incurred
approximately $720,000 of executive recruiting costs related to the hiring of
Mr. Brown. Included in this amount was a charge related to the fair value of the
warrant issued to the executive search firm to purchase 26,667 shares of the
Company's common stock at a price of $29.63 per share, cash fees paid to the
executive search firm and certain relocation costs. The charge for the warrant
was determined in a manner consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation" by using the Black-Scholes pricing model with the
following assumptions: expected dividend yield of 0.0%, risk-free interest rate
of 5.5%, expected volatility of 50%, and expected life of seven years.

NOTE 4. SUBSEQUENT EVENTS

In April 1999, the Company announced that Kathleen M. H. Wallman would join its
Board of Directors. Her initial term shall be until the Company's Annual Meeting
in the year 2000 or until her successor is appointed. The Company also accepted
the resignation of Senior Vice President, Sales, David Dorrance, from his
management and officer positions. On May 7, 1999, the Company announced that
Angela Dawes had resigned as a member of its Board of Directors and as an
employee.


                                       8

<PAGE>   9

                                 MICROMUSE INC.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

The following information should be read in conjunction with the condensed
consolidated historical financial information and the notes thereto included in
Item 1 of this Quarterly Report on Form 10-Q and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively.

The statements contained in this Form 10-Q that are not purely historical are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, including statements regarding the Company's expectations,
beliefs, hopes, intentions or strategies regarding the future. All
forward-looking statements in this Form 10-Q are based upon information
available to the Company as of the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Actual results could
differ materially from the Company's current expectations. Factors that could
cause or contribute to such differences include, but are not limited to:
variation in demand for the Company's software products and services; the level
and timing of sales; the extent of product and price competition; introductions
or enhancements of products or delays in introductions or enhancements of
products; hiring and retention of personnel; changes in the mix of products and
services sold; general domestic and international economic and political
conditions; and other factors and risks discussed in "Risk Factors" in the
Company's Form 10-K and Registration Statement on Form S-1 as filed with the
Securities and Exchange Commission on December 29, 1998 and July 28, 1998,
respectively, and elsewhere in this Quarterly Report.


OVERVIEW
Micromuse develops, markets and supports a family of scalable, highly
configurable, rapidly deployable software solutions that enable Service Level
Management -- the effective monitoring and management of multiple elements
underlying an Information Technology infrastructure, including network devices,
computing systems and applications, and the mapping of these elements to the
business services they impact.

Micromuse plc was incorporated in England in 1989 and in March 1997 became a
subsidiary of Micromuse Inc., a Delaware corporation formed in connection with a
corporate reorganization and relocation of the corporate headquarters to San
Francisco, California. As used herein, the term "Micromuse" or the "Company"
refers to Micromuse Inc., Micromuse plc, and their other subsidiaries, unless
the context otherwise requires or unless otherwise expressly stated. The
Company's principal executive offices are located at 139 Townsend Street, San
Francisco, California 94107, and its telephone number at that address is (415)
538-9090.


                                       9

<PAGE>   10

                                 MICROMUSE INC.


RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's consolidated
statement of operations as a percentage of total revenues, except as indicated:

<TABLE>
<CAPTION>
                                             Three months ended       Six months ended
                                                  March 31,               March 31,
                                            --------------------    --------------------
                                              1999        1998        1999        1998
                                            --------    --------    --------    --------
<S>                                         <C>         <C>         <C>         <C>     
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
    License                                   77.4%       79.3%       78.0%       78.5%
    Maintenance and services                  22.6        20.7        22.0        21.5
                                            --------    --------    --------    --------
      Total revenues                         100.0       100.0       100.0       100.0
                                            --------    --------    --------    --------

Cost of revenues:
    License                                    5.2         5.0         5.0         5.7
    Maintenance and services                  11.9        13.0        12.0        14.2
                                            --------    --------    --------    --------
      Total cost of revenues                  17.1        18.0        17.0        19.9
                                            --------    --------    --------    --------
          Gross profit                        82.9        82.0        83.0        80.1
                                            --------    --------    --------    --------

Operating expenses:
    Sales and marketing                       47.4        56.3        48.3        60.2
    Research and development                  16.6        21.6        16.3        21.8
    General and administrative                11.4        16.3        12.0        17.2
    Executive recruiting costs                 5.7          --         3.1          --
                                            --------    --------    --------    --------
      Total operating expenses                81.1        94.2        79.7        99.2
                                            --------    --------    --------    --------
          Income (loss) from operations        1.8       (12.2)        3.3       (19.1)

Other income, net                              6.2         2.6         7.3         1.9
                                            --------    --------    --------    --------
    Income (loss) before income taxes          8.0        (9.6)       10.6       (17.2)

Income tax benefit                            (8.2)         --        (3.8)         --
                                            --------    --------    --------    --------
    Net income (loss)                         16.2        (9.6)       14.4       (17.2)

Accretion on redeemable convertible
    preferred stock                             --        (7.2)         --       (12.1)
                                            --------    --------    --------    --------
      Net income (loss) applicable
      to holders of common stock              16.2       (16.8)       14.4       (29.3)
                                            ========    ========    ========    ========

AS A PERCENTAGE OF RELATED REVENUES:
Cost of license revenues                       6.7%        6.3%       6.4%         7.2%
Cost of maintenance and services revenues     52.5%       62.6%      54.4%        65.9%
</TABLE>


                                       10

<PAGE>   11

                                 MICROMUSE INC.


Revenues. The Company's revenues increased to $12.6 million and $23.5 million in
the quarter and six months ended March 31, 1999, respectively, from $6.2 million
and $11.0 million in the comparable periods of the prior year. License revenues
increased to $9.8 million and $18.3 million in the quarter and six months ended
March 31, 1999, respectively, from $4.9 million and $8.6 million in the
comparable periods of the prior year. The growth of license revenues was
primarily due to an increase in the number of product licenses sold, reflecting
the increased acceptance of Netcool/OMNIbus and the expansion of the Company's
sales organizations and product offering. Maintenance and services revenues
increased to $2.9 million and $5.2 million in the quarter and six months ended
March 31, 1999, respectively, from $1.3 million and $2.4 million in the
comparable periods of the prior year. The increase in maintenance and services
revenues was a result of providing maintenance and services to a larger
installed base of customers. The percentage of the Company's total revenue
attributable to license revenue decreased to 77% and 78% in the quarter and six
months ended March 31, 1999, respectively, from 79% in the comparable periods of
the prior year, due primarily to an increase in services revenue.

Cost of Revenues. The cost of license revenues consists primarily of technology
license fees paid to third-party software vendors and production costs. Cost of
license revenue as a percentage of license revenues increased to 7% in the
quarter ended March 31, 1999 from 6% in the comparable period of the prior year
primarily due to the increase in technology license fees paid to third-party
software vendors. Cost of license revenue as a percentage of license revenues
decreased to 6% in the six months ended March 31, 1999 from 7% in the comparable
period of the prior year due primarily to economies of scale. The cost of
maintenance and services revenues consists primarily of personnel-related costs
incurred in providing maintenance, consulting and training to customers. Cost of
maintenance and services revenues as a percentage of maintenance and services
revenues decreased to 53% and 54% in the quarter and six months ended March 31,
1999, respectively, from 63% and 66% in the comparable periods of the prior
year. These declines, which were principally due to a proportionally greater
percentage of higher-margin maintenance revenues, were partially offset by
increased personnel, facilities, and travel costs associated with expanding the
customer support and technical service organizations.

Sales and Marketing Expenses. Sales and marketing expenses increased to $6.0
million and $11.3 million in the quarter and six months ended March 31, 1999,
respectively, from $3.5 million and $6.6 million in the comparable periods of
the prior year. These increases were primarily due to the increased personnel
costs associated with the expansion of the Company's sales and technical
services departments and increased facilities costs. Sales and marketing
expenses as a percentage of total revenues declined to 47% and 48% in the
quarter and six months ended March 31, 1999, respectively, from 56% and 60% in
the comparable periods of the prior year. These reductions were primarily due to
revenues increasing at a faster rate than sales and marketing expenses.

Research and Development Expenses. Research and development expenses increased
to $2.1 million and $3.8 million in the quarter and six months ended March 31,
1999, respectively, from $1.3 million and $2.4 million in the comparable periods
of the prior year. These increases were the result of increased personnel,
additional facilities costs, and an increase in the computer systems and
software development tools required by the additional personnel. Research and
development costs as a percentage of total revenues declined to 17% and 16% in
the quarter and six months ended March 31, 1999, respectively, from 22% in the
same periods of the prior year. These reductions were primarily due to revenues
increasing at a faster rate than research and development expenses.


                                       11

<PAGE>   12

                                 MICROMUSE INC.


General and Administrative Expenses. General and administrative expenses
increased to $1.4 million and $2.8 million in the quarter and six months ended
March 31, 1999, respectively, from $1.0 million and $1.9 million in the
comparable periods of the prior year. These increases were primarily due to
increased personnel costs, professional fees, facilities costs and associated
expenses to support the Company's increased scale of operations. General and
administrative expenses as a percentage of revenues declined to 11% and 12% in
the quarter and six months ended March 31, 1999, respectively, from 16% and 17%
in the comparable periods of the prior year. These reductions were primarily due
to revenues increasing at a faster rate than general and administrative
expenses.

Executive Recruiting Costs. The executive recruiting costs include a charge
related to the fair value of the warrant issued to the executive search firm to
purchase 26,667 shares of the Company's common stock at a price of $29.63 per
share, cash fees paid to the executive search firm and certain relocation costs.

Other Income, net. Other income increased to $792,000 and $1.7 million in the
quarter and six months ended March 31, 1999, respectively, from $160,000 and
$210,000 in the comparable periods of the prior year. Other income for the
fiscal year 1999 includes the interest earned from the proceeds raised from the
Company's public offerings. The interest earned in the same periods of the prior
year was partially offset by the imputed interest expense related to the
issuance of a warrant to purchase 1.5 million shares of Series A preferred stock
at a per share exercise price of $2.00 issued in connection with the provision
of a line of credit to the Company.


LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999, the Company had $13.1 million in cash and cash equivalents
and $49.3 million in marketable securities. The net use of cash and cash
equivalents in the first six months of fiscal 1999 was due primarily to the
purchase of treasury stock, capital expenditures, and the increase in accounts
receivable and prepaid expenses and other current assets. These uses were
partially offset by net income of $3.4 million, the proceeds from the issuance
of common stock, and the increase in accounts payable. The increase in accounts
receivable and accounts payable reflects the growth in the business while the
increase in prepaid expense and other current assets includes a prepayment of
technology license fees to a third-party software vendor.

The net increase in cash and cash equivalents in the first six months of the
prior year was due primarily to the proceeds from the issuance of common stock,
the repayment of a related-party loan, and the increase in deferred revenues.
These increases were partially offset by the $5.0 million used to purchase
treasury stock and fund the net loss of $1.9 million. The increase in deferred
revenues includes additional maintenance plans related to the growing installed
base of customers.

The Company believes that its current cash balances and the cash flows generated
by operations, if any, will be sufficient to meet its anticipated cash needs for
working capital and capital expenditures for the next 12 months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to sell additional equity or
convertible debt securities or obtain credit facilities. The sale of additional
equity or debt securities could result in additional dilution to the Company's
stockholders. A portion of the Company's cash may be used to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such 


                                       12

<PAGE>   13

                                 MICROMUSE INC.


businesses, products or technologies. The Company has no current plans,
agreements or commitments, and is not currently engaged in any negotiations with
respect to any such transaction.


YEAR 2000 COMPLIANCE AND EURO CONVERSION
A significant amount of the demand that the Company has experienced in recent
years for applications software may be generated by customers in the process of
replacing and upgrading applications in order to accommodate the change in date
to the Year 2000. Once such customers have completed their preparations, the
software industry and the Company may experience a significant deceleration from
the strong annual growth rates recently experienced in the applications software
marketplace.

Although the Company has designed and tested its products to be Year 2000
compliant, there can be no assurance that the Company's current products do not
contain undetected errors or defects associated with Year 2000 date functions
that may result in material costs to the Company. In addition, certain
components of the Company's products process timestamp information from
third-party applications or local operating systems. As a result, if such
third-party applications or local operating systems are not Year 2000 compliant,
the Company's products that process such timestamp information may not be Year
2000 compliant. The Company is currently evaluating Year 2000-related risks and
corrective actions in connection with such third-party applications and local
operating systems.

Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it. In addition, in the Company's standard license agreements, the Company
provides certain warrants to licensees that its software routines and programs
are Year 2000 compliant. If any of the Company's licensees experience Year 2000
problems, such licensees could assert claims for damages against the Company.
Any such litigation could result in substantial costs and diversion of the
Company's resources even if ultimately decided in favor of the Company. With
respect to its internal information technology systems (including information
technology-based office facilities such as data and voice communications, and
building management and security systems), the Company is currently evaluating
the adoption of standard industry practices, as published by the British
Standards Institute, in preparing for the Year 2000 date change. The Company's
Year 2000 internal readiness program primarily covers: taking inventory of
hardware, software and embedded systems, assessing business and customer
satisfaction risks associated with such systems, creating action plans to
address known risks, executing and monitoring action plans, and contingency
planning. The Company currently is conducting (i) a review of its vendors and
service providers to evaluate Year 2000 readiness and (ii) ongoing risk
analysis. The Company expects to substantially complete Year 2000 readiness
preparations at the end of the second quarter of calendar 1999 with respect to
its core business and software systems and at the end of the third quarter of
calendar 1999 with respect to its hardware systems. In each case, the Company
expects to continue extensive testing through calendar 1999. The Company does
not expect the total costs associated with preparing its internal systems for
the Year 2000 to exceed $350,000. Although the Company does not currently
believe that it will experience material disruptions in its business associated
with preparing its internal systems for the Year 2000, there can be no
assurances that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal systems, which are composed of third-party
software, third-party hardware that contains embedded software and the Company's
own software products. The most reasonably likely worst case scenarios would
include: (i) corruption of data contained in the Company's internal information
systems, (ii) hardware failure and (iii) the failure of infrastructure services
provided by government 


                                       13
<PAGE>   14

                                 MICROMUSE INC.


agencies and other third parties (e.g., electricity, phone service, water
transport, internet services, etc.). The Company is in the process of conducting
its contingency planning for high-risk areas at this time and commenced
contingency planning for medium to low-risk areas in January 1999. The Company
expects its contingency plans to include, among other things, manual
"work-arounds" for software and hardware failures, as well as substitution of
systems, if necessary.

Various European countries introduced a single currency (known as the Euro) in
January 1999. The Company is currently in the process of conducting a review of
its internal information systems to identify systems that could be affected by
such Year 2000 and Euro conversion requirements. Further, to accommodate its
recent growth, the Company will be required to continue to implement and improve
a variety of operational, financial and management information systems,
procedures and controls on a timely basis. In particular, the Company will be
required to improve its accounting and financial reporting systems, which
currently require substantial management effort and will be required to
implement a U.S.-based financial and accounting system.


                                  RISK FACTORS

In addition to the other information in this Report, the following risk factors
should be considered carefully in evaluating the Company and its business. The
following factors, in addition to the other information contained in this Form
10-Q, should be considered carefully in evaluating the Company and its
prospects. This Form 10-Q (including without limitation the following Risk
Factors) 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) regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Form 10-Q.
Additionally, statements concerning future matters such as the development of
new products, enhancements or technologies, possible changes in legislation and
other statements regarding matters that are not historical are forward-looking
statements.

Although forward-looking statements in this Form 10-Q reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include, but are not limited to, those
discussed below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as those discussed elsewhere in
this Form 10-Q. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of the this Form
10-Q. The Company undertakes no obligation to revise or update any
forward-looking statements in order to reflect any event or circumstance that
may arise after the date of the Form 10-Q.

LIMITED OPERATING HISTORY AS A SOFTWARE COMPANY; 
UNCERTAINTY OF FUTURE OPERATING RESULTS 
Although the Company began offering services for the network and systems
integration market in 1989, the Company first shipped its internally developed
software product, Netcool/OMNIbus, for the Service Level Management ("SLM")
market in January 1995. Accordingly, the Company has only a limited operating
history as a developer and provider of SLM software upon which an evaluation of
its business 


                                       14

<PAGE>   15

                                 MICROMUSE INC.


and prospects can be based. Only recently has the Company's software business
been profitable. The limited operating history of the Company makes the
prediction of future results of operations difficult if not impossible, and the
Company and its prospects must be considered in light of the risks, costs and
difficulties frequently encountered by emerging companies, particularly
companies in the competitive software industry. Although the Company has
achieved recent revenue growth, there can be no assurance that the Company can
generate substantial additional revenue growth on a quarterly or annual basis,
or that any revenue growth that is achieved can be sustained. In addition, the
Company has increased, and plans to increase further, its operating expenses in
order to hire experienced senior managers, develop new distribution channels,
increase its sales and marketing efforts, implement and improve its operational,
financial and management information systems, broaden its technical services and
customer support capabilities, fund higher levels of research and development
and expand its administrative resources in anticipation of future growth. To the
extent that increases in such expenses are not subsequently followed by
increased revenues, the Company's business, operating results and financial
condition would be materially adversely affected. In addition, in view of recent
revenue growth, the rapidly evolving nature of its business and markets and its
limited operating history in its current market, the Company believes that
period-to-period comparisons of financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance. As of
March 31, 1999, the Company had accumulated net losses of $8.0 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY 
The Company's quarterly operating results have fluctuated significantly at times
in the past, and will likely fluctuate significantly at some times in the
future, as a result of a number of factors, many of which are outside the
Company's control. These factors include changes in the demand for the Company's
software products and services; the size and timing of specific sales; the
timing of new hires; the level of product and price competition that the Company
encounters; changes in the mix of, and lack of demand from, distribution
channels through which products are sold; the length of sales cycles; spending
patterns and budgetary resources of its customers on network management software
solutions; the success of the Company's new customer generation activities;
introductions or enhancements of products, or delays in the introductions or
enhancements of products, by the Company or its competitors; market acceptance
of new products; the Company's ability to anticipate and effectively adapt to
developing markets and rapidly changing technologies; the mix of products and
services sold; changes in the Company's sales incentives; changes in the renewal
rate of support agreements; the mix of international and domestic revenue;
product life cycles; software defects and other product quality problems; the
Company's ability to attract, retain and motivate qualified personnel; changes
in the mix of sales to new and existing customers; the extent of industry
consolidation; expansion of the Company's international operations; and general
domestic and international economic and political conditions. The timing of
large individual sales has been difficult for the Company to predict, and large
individual sales have, in some cases, occurred in quarters subsequent to those
anticipated by the Company. There can be no assurance that the loss or deferral
of one or more significant sales would not have a material adverse effect on the
Company's quarterly operating results. In addition, the Company's business has
experienced and may continue to experience significant seasonality.
Historically, a disproportionate amount of the Company's annual revenues have
been generated by sales of its products during the Company's fourth fiscal
quarter. There can be no assurance that this trend will not continue.

The Company continues to realize a significant portion of license revenue in the
last month of a quarter, frequently in the last weeks or even days of a quarter.
As a result, license revenue in any quarter is 


                                       15

<PAGE>   16

                                 MICROMUSE INC.


difficult to forecast because it is substantially dependent on orders booked and
shipped in that quarter. Moreover, the Company's sales cycles, from initial
evaluation to delivery of software, vary substantially from customer to
customer. In addition, the Company's expense levels are based in part on its
expectations of future orders and sales, which, given the Company's limited
operating history, are extremely difficult to predict. A substantial portion of
the Company's operating expenses is related to personnel, facilities, and sales
and marketing programs. The level of spending for such expenses cannot be
adjusted quickly and is, therefore, relatively fixed in the short term. If
revenue falls below the Company's expectations in a particular quarter, the
Company's operating results could be materially adversely affected. See "--
Lengthy Sales Cycle."

Based on all of the foregoing, the Company believes that future revenue,
expenses and operating results are likely to vary significantly from
quarter-to-quarter. As a result, quarter-to-quarter comparisons of operating
results are not necessarily meaningful or indicative of future performance.
Furthermore, the Company believes it is possible that in some future quarter the
Company's operating results will be below the expectations of public market
analysts or investors. In such event, or in the event that adverse conditions
prevail, or are perceived to prevail, with respect to the Company's business or
generally, the market price of the Company's Common Stock would likely be
materially adversely affected. See "Selected Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

MANAGEMENT OF GROWTH; NEED TO IMPROVE FINANCIAL SYSTEMS AND CONTROLS 
The Company has recently experienced a period of rapid revenue and customer
growth and a substantial expansion in the number of its personnel and in the
scope and the geographic area of its operations. The Company has grown from to
176 employees on September 30, 1998 to 248 employees on March 31, 1999 and
currently plans to continue to recruit more staff. This growth has resulted in
new and increased responsibilities for management personnel and has placed and
continues to place a significant strain upon the Company's management, operating
and financial systems and resources. Moreover, members of the Company's
management team, including, without limitation, the Chairman and Chief Executive
Officer, President and Chief Financial Officer, Senior Vice President, Sales,
and Vice President, General Counsel have been in their current positions with
the Company for a limited period of time. To accommodate recent growth, to
compete effectively and manage future growth, if any, the Company will be
required to continue to implement and improve a variety of operational,
financial and management information systems, procedures and controls on a
timely basis and to expand, train, motivate and manage its work force. In
particular, the Company will be required to improve its accounting and financial
reporting systems, which currently require substantial management effort, and to
successfully manage an increasing number of relationships with customers,
suppliers and employees. These demands will require the addition of new
management personnel, and the Company currently is in the process of recruiting
individuals to fill important management positions such as Vice President,
Marketing and Vice President, Human Resources. Further, the Company will need to
continue to develop a U.S.-based financial and accounting system. The Company's
future success will depend to a significant extent on the recruitment and
retention of these key personnel, the implementation and improvement of
operational, financial and management systems and the ability of its current and
future executive officers to operate effectively, both independently and as a
group. There can be no assurance that the Company will be able to execute on a
timely and cost-effective basis all that is necessary to successfully manage any
growth, and any failure to do so could have a material adverse effect on the
Company's business, operating results or financial condition.


                                       16

<PAGE>   17

                                 MICROMUSE INC.



NEED TO EXPAND AND IMPROVE PRODUCTIVITY OF SALES FORCE, 
TECHNICAL SERVICES AND CUSTOMER SUPPORT ORGANIZATION 
To increase market penetration, the Company continues to hire sales personnel.
Based on the Company's experience, such personnel are in high demand, difficult
to recruit and retain and it takes at least six months, if not longer, for a
salesperson to become fully productive. Although the Company increased the size
of its sales organization during the six months ended March 31, 1999, the
Company experienced difficulty in recruiting a sufficient number of qualified
sales people during the period. There can be no assurance that the Company will
be successful in recruiting additional sales personnel or increasing the
productivity of its sales personnel, and the failure to do so could have a
material adverse effect on the Company's business, financial condition or
results of operations. As a result of the recent expansion of the installed base
of Netcool/OMNIbus and the release of the Company's Netcool/Reporter,
Netcool/Internet Service Monitors, Netcool/Firewall-1, Netcool/Fusion,
Netcool/NTSM, and Netcool/Impact, the demands on the Company's technical
services and customer support resources have grown rapidly. See "-- Product
Defects; Product Liability." The Company believes that a high level of technical
services, training and customer support is essential to maintaining its
competitive position. The Company will be required to significantly expand its
technical services and customer support organizations if it is to achieve
significant additional revenue growth. Competition for additional qualified
technical personnel to perform the required functions is intense. There can be
no assurance that the Company's technical services and customer support
resources will be sufficient to manage any future growth in the Company's
business, and any failure of the Company to expand its technical services and
customer support organizations commensurate with any expansion of the installed
base of Netcool/OMNIbus or sales of Netcool/Reporter, Netcool/Internet Service
Monitors, Netcool/Firewall-1, Netcool/Fusion, Netcool/NTSM, and Netcool/Impact
would have a material adverse effect on the Company's business, operating
results and financial condition.

NEED TO EXPAND DISTRIBUTION CHANNELS; DEPENDENCE ON THIRD-PARTY RELATIONSHIPS
A key element of the Company's business strategy is to develop relationships
with leading network equipment and telecommunications providers and to expand
the third-party channel of distribution. The Company is currently investing, and
plans to continue to invest, significant resources to develop these
relationships and channels of distribution, which could adversely affect the
Company's ability to generate profits. Third-party distributors accounted for
approximately 36%, 26% and 11% of the Company's total revenues in the six months
ended March 31, 1999, and fiscal 1998 and 1997, respectively. There can be no
assurance that the Company will be able to attract additional distributors that
will be able to market the Company's products effectively. Many of the Company's
agreements with third-party distributors are nonexclusive, and many of the
companies with which the Company has agreements also have similar agreements
with the Company's competitors or potential competitors. The Company's
third-party distributors have significantly greater sales and marketing
resources than the Company, and there can be no assurance that their sales and
marketing efforts will not conflict with the Company's direct sales efforts. In
addition, although sales through third-party distributors result in reduced
sales and marketing expense with respect to such sales, the Company sells its
products to third-party distributors at reduced prices, resulting in lower gross
margins on such third-party sales. The Company believes that its success in
penetrating markets for its SLM applications depends substantially on its
ability to maintain its current distribution relationships, in particular, those
with Cisco Systems ("Cisco"), Lucent Technologies ("Lucent") and others, to
cultivate additional distribution relationships and to cultivate alternative
distribution relationships if distribution channels change. There can be no
assurance that network equipment and telecommunications providers and
distributors will not discontinue their relationships with the Company, compete
directly with the Company or form 


                                       17

<PAGE>   18

                                 MICROMUSE INC.


additional competing arrangements with the Company's competitors or that the
Company will be able to expand its distribution relationships beyond what
currently exists. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

EMERGING SERVICE LEVEL MANAGEMENT MARKET; DEPENDENCE ON TELECOMMUNICATION
CARRIERS AND OTHER SERVICE PROVIDERS; DEMAND FOR SLM PRODUCTS 
The market for the Company's products is in an early stage of development and is
very dynamic. Although the rapid expansion and increasing complexity of computer
networks in recent years and the resulting emergence of SLAs has increased the
demand for SLM software products, the awareness of and the need for such
products is a recent development. Because the market for these products is only
beginning to develop, it is difficult to assess the size of this market, the
appropriate features and prices for products to address this market, the optimal
distribution strategy and the competitive environment that will develop. Failure
of the SLM market to grow at anticipated rates or failure of the Company to
properly assess and address the demands from such market would have a material
adverse effect on the Company's business, operating results and financial
condition. In excess of 45% of the Company's software revenues to date have been
derived from the sale of its products to telecommunications carriers that
deliver advanced communications services to their customers. In addition, these
providers are the central focus of the Company's sales strategy. There can be no
assurance that telecommunications carriers and other service providers will be
able to market their communications services successfully, that SLM will gain
widespread market acceptance or that telecommunications carriers and other
service providers will use the Company's products in the deployment of their
services. Delays in the introduction of advanced services, such as network
management outsourcing, failure of such services to gain widespread market
acceptance or the decision of telecommunications carriers and other service
providers not to use the Company's products in the deployment of these services
would have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance the Company will be
able to penetrate these markets further. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

COMPETITION
The Company's products are designed for use in the evolving SLM and enterprise
network management markets. Competition in these markets is intense and is
characterized by rapidly changing technologies, new and evolving industry
standards, frequent new product introductions and rapid changes in customer
requirements. The Company's current and prospective competitors offer a variety
of solutions to address the SLM and enterprise network management markets and
generally fall within the following five categories: (i) customer's internal
design and development organizations that produce SLM and network management
applications for their particular needs, in some cases using multiple instances
of products from hardware and software vendors such as Sun Microsystems, Inc.
("Sun"), Hewlett-Packard Company ("HP") and Cabletron Systems, Inc.
("Cabletron"); (ii) vendors of network and systems management frameworks
including Computer Associates International, Inc. ("CA") and International
Business Machines Corporation ("IBM"); (iii) vendors of network and systems
management applications including HP, BMC Software, Inc, Sun and IBM; (iv)
providers of specific market applications; and (v) systems integrators serving
the telecommunications industry which primarily provide programming services to
develop customer specific applications including TCSI Corporation (formerly
Teknekron Communications Systems, Inc.) and Objective Systems Integrators, Inc.
("OSI"). In the future, as the Company enters new markets, the Company expects
that such markets will have additional, market-specific competitors. In
addition, because there are relatively low barriers to entry in the software
market, the Company has become aware of new and potential entrants in portions
of its 


                                       18

<PAGE>   19

                                 MICROMUSE INC.


market space and it expects additional competition from these and other
established and emerging companies. Increased competition is likely to result in
price reductions and may result in reduced gross margins and loss of market
share, any of which could materially adversely affect the Company's business,
operating results or financial condition.

Many of the Company's existing and potential customers and distributors
continuously evaluate whether to design and develop their own network operations
support and management applications or purchase them from outside vendors.
Sometimes these customers internally design and develop their own software
solutions for their particular needs and therefore may be reluctant to purchase
products offered by independent vendors such as the Company. As a result, the
Company must continuously educate existing and prospective customers as to the
advantages of the Company's products versus internally developed network
operations support and management applications.

Many of the Company's current and potential competitors have longer operating
histories and have significantly greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and a larger customer
base, than the Company. As a result, they may be able to devote greater
resources to the development, promotion, sale and support of their products or
to respond more quickly to new or emerging technologies and changes in customer
requirements than the Company. Existing competitors could also increase their
market share by bundling products having management functionality offered by the
Company's products with their current applications. Moreover, the Company's
current and potential competitors may increase their share of the SLM market by
strategic alliances and/or the acquisition of competing companies. In addition,
network operating system vendors could introduce new or upgrade and extend
existing operating systems or environments that include management functionality
offered by the Company's products, which could render the Company's products
obsolete and unmarketable. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results or financial condition. See "Business --
Competition."

PRODUCT DEFECTS; PRODUCT LIABILITY
Software products as internally complex as Netcool/OMNIbus, Netcool/Reporter,
Netcool/Internet Service Monitors, Netcool/Firewall-1, Netcool/Fusion,
Netcool/NTSM, and Netcool/Impact frequently contain errors or defects,
especially when first introduced or when new versions or enhancements are
released. Despite extensive product testing by the Company, the Company has in
the past released versions of Netcool/OMNIbus with defects and has discovered
software errors in certain of its products after their introduction. For
example, version 3.0 of Netcool/OMNIbus, released in 1996, had a number of
material defects. Version 1.0 of Netcool/Reporter, released in 1998, had
features and performance characteristics that had limited market appeal. To the
extent such efforts continue to require the allocation of a significant portion
of the Company's technical personnel resources, the Company could continue to
experience delays in or failure of market acceptance of products, or damage to
the Company's reputation or relationships with its customers, any of which could
have a material adverse effect on the Company's business, operating results or
financial condition. See "-- Need to Expand and Improve Productivity of Sales
Force, Technical Services and Customer Support Organization." Additionally,
there can be no assurance that, despite testing by the Company and by current
and potential customers, defects and errors will not be found in new versions or
enhancements of the Company's products after commencement of commercial
shipments which could have a material adverse effect upon the Company's
business, operating results or financial condition. See "Year 2000 Compliance
and Euro Conversion".


                                       19

<PAGE>   20

                                 MICROMUSE INC.


Since the Company's products are used by its customers to monitor and address
network problems and avoid failures of the network to support critical business
functions, any design defects, software errors, misuse of the Company's
products, incorrect data from network elements or other potential problems
within or out of the Company's control that may arise from the use of the
Company's products could result in financial or other damages to the Company's
customers. Such customers could seek damages from the Company for any such
losses, which, if successful, could have a material adverse effect on the
Company's business, operating results or financial condition. Although the
Company maintains product liability insurance, there can be no assurance that
such insurance will adequately cover, if at all, any such claims. Further,
although the Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential claims as well
as any liabilities arising from such claims, such provisions may not effectively
protect the Company against such claims and the liability and costs associated
therewith. Accordingly, any such claim could have a material adverse effect upon
the Company's business, results of operations or financial condition.

LENGTHY SALES CYCLE
The Company's software is generally used for division- or enterprise-wide,
business-critical purposes and involves significant capital commitments by
customers. Potential customers generally commit significant resources to an
evaluation of available enterprise software and require the Company to expend
substantial time, effort and money educating them about the value of the
Company's solutions. Sales of the Company's software products often require an
extensive sales effort throughout a customer's organization because decisions to
license such software generally involve the evaluation of the software by a
significant number of customer personnel in various functional and geographic
areas, each often having specific and conflicting requirements. A variety of
factors, including actions by competitors and other factors over which the
Company has little or no control, may cause potential customers to favor a
particular supplier or to delay or forego a purchase. As a result of these and
other factors, the sales cycle for the Company's products is long, typically
about three to six months. As a result of the length of the sales cycle for its
software products, the Company's ability to forecast the timing and amount of
specific sales is limited, and the delay or failure to complete one or more
large license transactions could have a material adverse effect on the Company's
business, operating results or financial condition and cause the Company's
operating results to vary significantly from quarter to quarter. See "--
Variability of Quarterly Operating Results; Seasonality".

DEPENDENCE ON KEY PERSONNEL
The Company's success is substantially dependent upon a limited number of key
management, sales, product development, technical services and customer support
personnel. The loss of the services of one or more of such key employees could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company does not generally have employment contracts
with key personnel. In addition, the Company's success will be dependent upon
its continuing ability to attract, train and retain additional highly qualified
management, sales, product development, technical services and customer support
personnel. The Company has at times and continues to experience difficulty in
recruiting qualified personnel. Because the Company faces intense competition in
its recruiting activities, there can be no assurance that the Company will be
able to attract and/or retain qualified personnel. Failure to attract and retain
the necessary qualified personnel on a timely basis could have a material
adverse effect on the Company's business, operating results or financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."


                                       20

<PAGE>   21

                                 MICROMUSE INC.


PRODUCT CONCENTRATION
All of the Company's revenues have been derived from licenses for its Netcool
family of products and related maintenance, training and consulting services.
The Company currently expects that Netcool/OMNIbus-related revenues will
continue to account for a substantial percentage of the Company's revenues
beyond fiscal 1998 and for the foreseeable future thereafter. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of Netcool/OMNIbus,
improvements to Netcool/OMNIbus and new and enhanced Netcool/OMNIbus
applications. There can be no assurance that Netcool/OMNIbus will continue to
achieve market acceptance or that the Company will be successful in developing,
introducing or marketing improvements to Netcool/OMNIbus or new or enhanced
products. The life cycles of Netcool/OMNIbus, including the Netcool/OMNIbus
applications, are difficult to estimate due in large part to the recent
emergence of many of the Company's markets, the effect of future product
enhancements and competition. A decline in the demand for Netcool/OMNIbus as a
result of competition, technological change or other factors would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".

SALES CONCENTRATION
To date, a significant portion of the Company's revenues in any particular
period has been attributable to a limited number of customers. In fiscal 1998
and 1997, entities affiliated with WorldCom accounted for 10% and 18% of the
Company's total revenue, respectively. In addition, entities affiliated with
British Telecommunications accounted for 9% of the Company's total revenues in
both fiscal 1998 and 1997. The Company expects that it will continue to be
dependent upon a limited number of customers for a significant portion of its
revenues in future periods. As a result of this concentration of sales, the
Company's business, operating results or financial condition could be materially
adversely affected by the failure of anticipated orders from significant
customers to materialize or by deferrals or cancellations of orders by
significant customers. In addition, there can be no assurance that revenue from
customers that have accounted for significant revenues in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period. The terms of the Company's agreements
with its customers typically contain a one-time license fee and a prepayment of
one year of maintenance fees. The maintenance agreement is renewable annually at
the option of the customer and there are no minimum payment obligations or
obligations to license additional software. Therefore, there can be no assurance
that any of the Company's current customers will generate significant revenues
in future periods. For example, pre-existing customers may be part of, or become
part of, large organizations that standardize using a competitive product. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

RISKS ASSOCIATED WITH INTERNATIONAL LICENSING AND OPERATIONS 
License, maintenance and service revenue outside of the United States accounted
for 36%, 39% and 48% of the Company's total revenue in the six months ending
March 31, 1999, and fiscal 1998 and 1997, respectively. The Company expects that
international license, maintenance and consulting revenue will continue to
account for a significant portion of its total revenue in future periods.
Currency exchange fluctuations in countries in which the Company licenses its
products or conducts operations historically have had, and in the future could
continue to have, a material adverse effect on the Company's business, operating
results or financial condition by resulting in pricing levels that are not
competitive or expense levels that adversely impact profitability. In such
event, gains and losses on the 


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<PAGE>   22

                                 MICROMUSE INC.


conversion to United States dollars of accounts receivable and accounts payable
arising from international operations may contribute to fluctuations in the
Company's operating results. The Company intends to enter into additional
international markets and to continue to expand its operations outside of the
United States by expanding its direct sales force and pursuing additional
strategic relationships. Such expansion will require significant management
attention and expenditure of significant financial resources and could adversely
affect the Company's ability to generate profits. To the extent that the Company
is unable to establish additional foreign operations in a timely manner, the
Company's growth, if any, in international sales will be limited, and the
Company's business, operating results or financial condition could be materially
adversely affected. The Company maintains a significant portion of its
operations, including the bulk of its software development operations, in the
United Kingdom. The Company's international operations and revenue involve a
number of inherent risks, including longer receivables collection periods and
greater difficulty in accounts receivable collection, difficulty in staffing and
managing foreign operations, an even lengthier sales cycle than with domestic
customers, the impact of possible recessionary environments in economies outside
the United States, unexpected changes in regulatory requirements, including a
slowdown in the rate of privatization of telecommunications service providers,
reduced protection for intellectual property rights in some countries and
tariffs and other trade barriers. There can be no assurance that the Company
will be able to sustain or increase revenue derived from international licensing
and service or that the foregoing factors will not have a material adverse
effect on the Company's future international license, service and other revenue,
and, consequently, on the Company's business, operating results or financial
condition. The Company pays the expenses of its international operations in
local currencies and does not currently engage in hedging transactions with
respect to such obligations. In addition, sales in Europe and certain other
parts of the world typically are adversely affected in the quarter ending
September 30, as many customers reduce their business activities during the
summer months. If the Company's international sales become a greater component
of total revenue, these seasonal factors may have a more pronounced effect on
the Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

NEW PRODUCTS AND RAPID TECHNOLOGICAL CHANGE; NEED TO MANAGE 
PRODUCT TRANSITIONS; DEPENDENCE ON THIRD-PARTY SOFTWARE PLATFORMS 
The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, changing regulatory environments,
frequent new product introductions and rapid changes in customer requirements.
The introduction or announcement of products by the Company or its competitors
embodying new technologies and the emergence of new industry standards and
practices can render existing products obsolete and unmarketable. As a result,
the life cycles of the Company's products are difficult to estimate. The
Company's future success will depend on its ability to enhance its existing
products and to develop and introduce, on a timely and cost-effective basis, new
products and product features that keep pace with technological developments and
emerging industry standards and address the increasingly sophisticated needs of
its customers. Historically, the Company has used its close working relationship
with large customers to define its product development direction. There can be
no assurance that the Company will be successful in developing and marketing new
products or product features that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of these
new products and features, or that its new products or product features will
adequately meet the requirements of the marketplace and achieve market
acceptance. In particular, the widespread adoption of the Telecommunications
Management Network ("TMN") architecture for managing telecommunications networks
would force the Company to adapt its products to such standard, and there can be
no assurance that this could be done on a timely or cost-effective basis, if at


                                       22

<PAGE>   23

                                 MICROMUSE INC.


all. In addition, to the extent that any product upgrade or enhancement requires
extensive installation and configuration, current customers may postpone or
forgo the purchase of new versions of the Company's products. If the Company is
unable, for technological or other reasons, to develop and introduce
enhancements of existing products or new products in a timely manner, the
Company's business, operating results and financial condition will be materially
adversely affected. In addition, there can be no assurance that the introduction
or announcement of new product offerings by the Company or one or more of its
competitors will not cause customers to defer licensing of existing Company
products. Any such deferment of purchases could have a material adverse effect
on the Company's business, operating results or financial condition.

The Company's products are designed to operate on a variety of hardware and
software platforms employed by its customers in their networks. The Company must
continually modify and enhance its products to keep pace with changes in
hardware and software platforms and database technology. As a result,
uncertainties related to the timing and nature of new product announcements,
introductions or modifications by systems vendors, particularly Sun, IBM, HP,
Cabletron and Cisco and by vendors of relational database software, particularly
Oracle Corporation ("Oracle") and Sybase, Inc. ("Sybase"), could materially
adversely impact the Company's business, operating results or financial
condition. For example, the Company is currently modifying certain of its
products to operate with the Microsoft Windows NT operating system. The failure
of the Company's products to operate effectively across the various existing and
evolving versions of hardware and software platforms and database environments
employed by customers could have a material adverse effect on the Company's
business, operating results or financial condition.

DEPENDENCE UPON PROPRIETARY TECHNOLOGY; 
RISK OF THIRD-PARTY CLAIMS OF INFRINGEMENT 
The Company's success and ability to compete is dependent in significant part
upon its proprietary software technology. The Company relies on a combination of
trade secret, copyright and trademark laws, nondisclosure and other contractual
agreements and technical measures to protect its proprietary rights. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the steps taken by the Company to protect its proprietary technology will
prevent misappropriation of such technology, and such protections may not
preclude competitors from developing products with functionality or features
similar to the Company's products. In addition, effective copyright and trade
secret protection may be unavailable or limited in certain foreign countries.
While the Company believes that its products and trademarks do not infringe upon
the proprietary rights of third parties, there can be no assurance that the
Company will not receive future communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of
third parties. The Company expects that software product developers will be
increasingly subject to infringement claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in different industry segments overlaps. Any such claims, with or
without merit could be time-consuming, result in costly litigation and diversion
of technical and management personnel, cause product shipment delays or require
the Company to develop non-infringing technology or enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms acceptable to the Company or at all. In the event of a
successful claim of product infringement against the Company and failure or
inability of the Company to develop non-infringing technology or license the
infringed or similar technology, the Company's business, operating results or
financial condition could be materially adversely affected.


                                       23

<PAGE>   24

                                 MICROMUSE INC.


RISKS ASSOCIATED WITH THIRD-PARTY LICENSES
The Company relies on certain software that it licenses from third parties,
including software that is integrated with internally developed software and
used in the Company's products to perform key functions. There can be no
assurance that these third-party software licenses will continue to be available
to the Company on commercially reasonable terms or at all. Although the Company
believes that alternative software is available from other third-party
suppliers, the loss of or inability to maintain any of these software licenses
or the inability of the third parties to enhance in a timely and cost-effective
manner their products in response to changing customer needs, industry standards
or technological developments could result in delays or reductions in product
shipments by the Company until equivalent software could be developed internally
or identified, licensed and integrated, which would have a material adverse
effect on the Company's business, operating results and financial condition.

YEAR 2000 COMPLIANCE AND EURO CONVERSION
A significant amount of the demand that the Company has experienced in recent
years for applications software may be generated by customers in the process of
replacing and upgrading applications in order to accommodate the change in date
to the Year 2000. Once such customers have completed their preparations, the
software industry and the Company may experience a significant deceleration from
the strong annual growth rates recently experienced in the applications software
marketplace.

Although the Company has designed and tested its products to be Year 2000
compliant, there can be no assurance that the Company's current products do not
contain undetected errors or defects associated with Year 2000 date functions
that may result in material costs to the Company. In addition, certain
components of the Company's products process timestamp information from
third-party applications or local operating systems. As a result, if such
third-party applications or local operating systems are not Year 2000 compliant,
the Company's products that process such timestamp information may not be Year
2000 compliant. The Company is currently evaluating Year 2000-related risks and
corrective actions in connection with such third-party applications and local
operating systems.

Some commentators have stated that a significant amount of litigation will arise
out of Year 2000 compliance issues, and the Company is aware of a growing number
of lawsuits against other software vendors. Because of the unprecedented nature
of such litigation, it is uncertain to what extent the Company may be affected
by it. In addition, in the Company's standard license agreements, the Company
provides certain warrants to licensees that its software routines and programs
are Year 2000 compliant. If any of the Company's licensees experience Year 2000
problems, such licensees could assert claims for damages against the Company.
Any such litigation could result in substantial costs and diversion of the
Company's resources even if ultimately decided in favor of the Company. With
respect to its internal information technology systems (including information
technology-based office facilities such as data and voice communications, and
building management and security systems), the Company is currently evaluating
the adoption of standard industry practices, as published by the British
Standards Institute, in preparing for the Year 2000 date change. The Company's
Year 2000 internal readiness program primarily covers: taking inventory of
hardware, software and embedded systems, assessing business and customer
satisfaction risks associated with such systems, creating action plans to
address known risks, executing and monitoring action plans, and contingency
planning. The Company currently is conducting (i) a review of its vendors and
service providers to evaluate Year 2000 readiness and (ii) ongoing risk
analysis. The Company expects to substantially complete Year 2000 readiness
preparations at the end of the second quarter of calendar 1999 with respect to
its core business and 


                                       24

<PAGE>   25

                                 MICROMUSE INC.


software systems and at the end of the third quarter of calendar 1999 with
respect to its hardware systems. In each case, the Company expects to continue
extensive testing through calendar 1999. The Company does not expect the total
costs associated with preparing its internal systems for the Year 2000 to exceed
$350,000. Although the Company does not currently believe that it will
experience material disruptions in its business associated with preparing its
internal systems for the Year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems, which are composed of third-party software, third-party
hardware that contains embedded software and the Company's own software
products. The most reasonably likely worst case scenarios would include: (i)
corruption of data contained in the Company's internal information systems, (ii)
hardware failure and (iii) the failure of infrastructure services provided by
government agencies and other third parties (e.g., electricity, phone service,
water transport, internet services, etc.). The Company is in the process of
conducting its contingency planning for high-risk areas at this time and
commenced contingency planning for medium to low-risk areas in January 1999. The
Company expects its contingency plans to include, among other things, manual
"work-arounds" for software and hardware failures, as well as substitution of
systems, if necessary.

Various European countries introduced a single currency (known as the Euro) in
January 1999. The Company is currently in the process of conducting a review of
its internal information systems to identify systems that could be affected by
such Year 2000 and Euro conversion requirements. Further, to accommodate its
recent growth, the Company will be required to continue to implement and improve
a variety of operational, financial and management information systems,
procedures and controls on a timely basis. In particular, the Company will be
required to improve its accounting and financial reporting systems, which
currently require substantial management effort and will be required to
implement a U.S.-based financial and accounting system.

VOLATILITY OF STOCK PRICE
The market price of the Common Stock has been and is likely to continue to be
highly volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
technological innovations, new products or new contracts by the Company or its
competitors, developments with respect to copyrights or proprietary rights,
adoption of new accounting standards affecting the software industry, general
market conditions and other factors. In addition, the stock market has from time
to time experienced significant price and volume fluctuations that have
particularly affected the market price for the common stock of technology
companies. These types of broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such company. Such litigation
could result in substantial costs and a diversion of management's attention and
resources that could have a material adverse effect upon the Company's business,
operating results or financial condition.

GENERAL ECONOMIC AND MARKET CONDITIONS
Segments of the software industry have experienced significant economic
downturns characterized by decreased product demand, price erosion, work
slowdowns and layoffs. The Company's operations may in the future experience
substantial fluctuations from period to period as a consequence of general
economic conditions affecting the timing of orders from major customers and
other factors affecting capital spending. Although the Company has a diverse
client base, it has targeted certain vertical markets. Therefore, any economic
downturns in general or in the targeted vertical segments in 


                                       25

<PAGE>   26

                                 MICROMUSE INC.


particular would have a material adverse effect on the Company's business,
operating results and financial condition.

ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION; BYLAWS AND DELAWARE LAW
Certain provisions of the Company's Restated Certificate of Incorporation and
Bylaws and certain provisions of Delaware law could delay or make difficult a
merger, tender offer or proxy contest involving the Company. The authorized but
unissued capital stock of the Company includes 5.0 million shares of preferred
stock. The Board of Directors is authorized to provide for the issuance of such
preferred stock in one or more series and to fix the designations, preferences,
powers and relative, participating, optional or other rights and restrictions
thereof. Accordingly, the Company may in the future issue a series of preferred
stock, without further stockholder approval, that will have preference over the
Common Stock with respect to the payment of dividends and upon liquidation,
dissolution or winding-up of the Company. Further, Section 203 of the General
Corporation Law of the State of Delaware (as amended from time to time, the
"DGCL"), which is applicable to the Company, prohibits certain business
combinations with certain stockholders for a period of three years after they
acquire 15% or more of the outstanding voting stock of a corporation. In
addition, the Restated Certificate of Incorporation provides that the Board of
Directors is divided into two classes of directors with each class serving a
staggered two-year term. The classification of the Board of Directors has the
effect of generally requiring at least two annual stockholder meetings, instead
of one, to replace a majority of the Board members. Any of the foregoing could
adversely affect holders of the Common Stock or discourage or make difficult any
attempt to obtain control of the Company.


                                       26

<PAGE>   27

                                 MICROMUSE INC.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DERIVATIVES
        AND FINANCIAL INSTRUMENTS

FOREIGN CURRENCY HEDGING INSTRUMENTS
The Company transacts business in various foreign currencies. Accordingly, the
Company is subject to exposure from adverse movements in foreign currency
exchange rates. This exposure is primarily related to local currency denominated
revenues and operating expenses in the U.K. However, as of March 31, 1999, the
Company had no hedging contracts outstanding.

The Company currently does not use financial instruments to hedge local currency
denominated operating expenses in the U.K. Instead, the Company believes that a
natural hedge exists, in that local currency revenues will substantially offset
the local currency denominated operating expenses. The Company assesses the need
to utilize financial instruments to hedge currency exposures on an ongoing
basis.

The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.
The Company regularly reviews its hedging program and may as part of this review
determine at any time to change its hedging program.

FIXED INCOME INVESTMENTS
The Company's exposure to market risks for changes in interest rates relate
primarily to investments in debt securities issued by U.S. government agencies
and corporate debt securities. The Company places its investments with high
credit quality issuers and, by policy, limits the amount of the credit exposure
to any one issuer.

The Company's general policy is to limit the risk of principal loss and ensure
the safety of invested funds by limiting market and credit risk. All highly
liquid investments with a maturity of three months or less at the date of
purchase are considered to be cash equivalents; investments with maturities
between three months or less are considered cash equivalents; investments with
maturities between three and twelve months are considered to be short-term
investments; investments with maturities in excess of twelve months are
considered to be long-term investments. The weighted average pre-tax interest
rate on the investment portfolio is approximately 5.5%. The Company does not
expect any material loss with respect to its investment portfolio.


                                       27

<PAGE>   28

                                 MICROMUSE INC.


PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company is not a party to any material legal proceeding.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 5. OTHER INFORMATION.

Not applicable.


                                       28

<PAGE>   29

                                 MICROMUSE INC.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

     (a) Exhibits

<TABLE>
<CAPTION>
Exhibit
Number   Description
-------  -----------------------------------------------------------------------
<S>      <C>
 2.1+    Agreement for the sale of the systems integration business of Micromuse
         plc by and among Micromuse plc, Horizon Open Systems (UK) Limited and
         Horizon Computer Services Limited, dated as of September 16, 1997.

 3.1++   Restated Certificate of Incorporation of the Registrant, as amended to
         date.

 3.2++   Amended and Restated Bylaws of the Registrant.

 4.1++   Reference is made to Exhibits 3.1, 3.2 and 10.4.

 4.2+    Specimen Common Stock certificate.

10.1+    Form of Indemnity Agreement entered into between the Registrant and its
         directors and officers.

10.2+    1997 Stock Option/Stock Issuance Plan and forms of agreements
         thereunder.

10.3+    1997 Employee Stock Purchase Plan.

10.4+    Amended and Restated Investors' Rights Agreement by and among the
         Registrant and certain stockholders of the Registrant, dated as of
         September 8, 1997.

10.5+    Office lease, dated as of March 25, 1997, by and between the Registrant
         and SOMA Partners, L.P.

10.6+    Office lease,  dated as of March 3, 1997, by and between  Micromuse plc,
         Marldown Limited and Christopher J. Dawes.

10.7+    Office lease,  dated as of March 3, 1993, by and between  Micromuse plc,
         Guildquote Limited and Christopher J. Dawes.

10.8+    Agreement for the sale of the systems integration business of Micromuse
         plc dated as of September 16, 1997. Reference is made to Exhibit 2.1.

21.1+    Subsidiaries of the Registrant.

27.1     Financial Data Schedule
</TABLE>
--------------------
+   Incorporated by reference from the exhibit of the same number in the
    Registrant's Registration Statement on Form S-1 (Registration No. 333-42177)
    as filed with the SEC on February 12, 1998.


++  Incorporated by reference from the exhibit of the same number in the
    Registrant's Registration Statement on Form S-1 (Registration No. 333-58975)
    as filed with the SEC on July 28, 1998.


     (b) Reports on Form 8-K

     There were no reports on Form 8-K filed during the quarter ended March 31,
1999.


                                       29

<PAGE>   30

                                 MICROMUSE INC.



                                    SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 17, 1999.



                                    MICROMUSE INC.
                                    (Registrant)



                                     By: /s/ STEPHEN A. ALLOTT
                                        ----------------------------------------
                                        Stephen A. Allott
                                        Director, President and Chief Financial 
                                        Officer (Principal Financial Officer and
                                        Duly Authorized Officer)



                                       30