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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                        
                                   FORM 10-K
                                        
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the fiscal year ended:  December 31, 1998

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

For the transition period from __________ to _________.

Commission File Number:  333-46019-1

 Headlands Mortgage Securities Inc. (as Sponsor under a Pooling and Servicing
Agreement dated as of October 1, 1998 providing for the issuance of the Mortgage
                   Pass-Through Certificates, Series 1998-1)

                       HEADLANDS MORTGAGE SECURITIES INC.
             (Exact Name of registrant as specified in its charter)

<TABLE>
<S>                                                                                       <C>
                              Delaware                                                     68-0397342
     (State or other jurisdiction of incorporation or organization)            (I.R.S. employer identification no.)
 
               1100 Larkspur Landing Circle, Suite 101,                                      94939
                         Larkspur, California                                              (Zip code)
               (Address of principal executive offices)

                                                          (415) 461-6790
                                       (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:       Securities registered pursuant to Section 12(g) of the Act:
 
                              None                                                           None
                        (Title of class)                                               (Title of class)
</TABLE>
                                        
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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]

State the aggregate market value of the voting stock held by non-affiliates of
Registrant.  The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of specified date within 60 days prior to the date of filing:

                                Not Applicable

                     Documents incorporated by reference:

                                 Not Applicable
<PAGE>
 
                      HEADLANDS MORTGAGE SECURITIES INC.
               MORTGAGE PASS-THROUGH CERTIFICATES SERIES 1998-1

                                     INDEX
<TABLE>
<CAPTION>
                                                                       Page
                                                                       ----
<S>                                                                     <C>
 
PART I   .............................................................  3
         ITEM 1    -    BUSINESS......................................  3
         ITEM 2    -    PROPERTIES....................................  3
         ITEM 3    -    LEGAL PROCEEDINGS.............................  3
         ITEM 4    -    SUBMISSION OF MATTERS TO A VOTE OF
                        SECURITY HOLDERS..............................  3
 
PART II  .............................................................  3
         ITEM 5    -    MARKET FOR REGISTRANT'S COMMON STOCK AND
                        RELATED STOCKHOLDER MATTERS...................  3
         ITEM 6    -    SELECTED FINANCIAL DATA.......................  3
         ITEM 7    -    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                        FINANCIAL CONDITION AND RESULTS OF OPERATIONS.  3
         ITEM 8    -    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...  3
         ITEM 9    -    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                        ON ACCOUNTING AND FINANCIAL DISCLOSURE........  3
 
PART III .............................................................  4
         ITEM 10   -    DIRECTORS AND EXECUTIVE OFFICERS OF
                        THE REGISTRANT................................  4
         ITEM 11   -    EXECUTIVE COMPENSATION........................  4
         ITEM 12   -    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                        OWNERS AND MANAGEMENT.........................  4
         ITEM 13   -    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  7
 
PART IV  .............................................................  7
         ITEM 14   -    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
                        REPORTS ON FORM 8-K...........................  7
 
SIGNATURES............................................................  8
INDEX TO EXHIBITS.....................................................  9
</TABLE>

                                       2
<PAGE>
 
                                    PART I

ITEM 1  -  BUSINESS

           Not Applicable.

ITEM 2  -  PROPERTIES

           Headlands Mortgage Securities Inc. (the "Sponsor") will furnish
information regarding the Mortgaged Properties by reference to the Annual
Compliance Certificates to be filed herein under Item 14.

ITEM 3  -  LEGAL PROCEEDINGS

           The Sponsor is not aware of any material pending legal proceedings
involving either the Mortgage Pass-Through Certificates Series 1998-1 Trust (the
"Trust"), established pursuant to the Pooling and Servicing Agreement (the
"Agreement") dated October 1, 1998 among State Street Bank and Trust Company, as
trustee (the "Trustee"), PNC Mortgage Securities Corp., as servicer (the
"Servicer"); the Trustee; the Sponsor; or the Servicer which relates to the
Trust.

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

           No matter has been submitted to a vote of the holders of beneficial
interests in the Trust through the solicitation of proxies or otherwise.

                                    PART II

ITEM 5  -  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

           To the best knowledge of the Sponsor, there is no established public
trading market for the Certificates.

           All of the Class A Certificates, Class B Certificates, Class X
Certificates, Class R Certificates and Class PO Certificates issued by the Trust
are held by the Depository Trust Company ("DTC") which in turn maintains records
of holders of beneficial interests in such Certificates.  Based on information
obtained by the Trust from DTC, as of December 31, 1998, there were one holder
of Class A-1 Certificates, two holders of Class A-2 Certificates, three holders
of Class A-3 Certificates, two holders of Class B-1 Certificates, and one holder
of each of Class B-2, Class B-3, Class B-4, Class X-1, Class X-2, Class R and
Class PO Certificates.
 
ITEM 6  -  SELECTED FINANCIAL DATA
 
           Not Applicable.
 
ITEM 7  -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS
 
           Not Applicable.
 
ITEM 8  -  FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
 
           Not Applicable.
 
ITEM 9  -  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

           There were no changes of accountants or disagreements on accounting
or financial disclosures between the Sponsor and its accountants.

                                       3
<PAGE>
 
                                   PART III

ITEM 10  -  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
            Not Applicable.
 
ITEM 11  -  EXECUTIVE COMPENSATION
 
            Not Applicable.
 
ITEM 12  -  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The following table sets forth (i) the name and address of each
entity owning more than 5% of the outstanding principal amount of each Class of
Certificates of the Trust; (ii) the principal amount of the Class of
Certificates owned by each and (iii) the percent that the principal amount of
the Class of Certificates owned by such entity represents of the outstanding
principal amount of such Class of Certificates. The information set forth in the
table for the Certificates is based upon information obtained by the Trust from
DTC and represents ownership of beneficial interest in the Certificates held by
DTC. The Sponsor is not aware of any Schedules 13D or 13G filed with the
Securities and Exchange Commission in respect of the Certificates.

 
<TABLE>
<CAPTION>
                                         Class A-1

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
PNC Bank, N.A./Pittsburgh                        245,840,000                             100%
One PNC Plaza, 9th Floor
249 5th Avenue
Pittsburgh, PA  15222-7707
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class A-2

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
Boston Safe Deposit and Trust Company            3,906,307                               48%
c/o Mellon Bank N.A.
Three Mellon Bank Center, Room 153-3015
Pittsburgh, PA  15259
 
Investors Fiduciary Trust Company/SSB            4,250,000                               52%
Global Corp Action Dept JAB5W
P.O. Box 1631
Boston, MA  02105-1631
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class A-3

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
Boston Safe Deposit and Trust Company            2,000,000                               10%
c/o Mellon Bank N.A.
Three Mellon Bank Center, Room 153-3015
Pittsburgh, PA  15259
 
Citibank, N.A.                                   13,879,800                              68%
P.O. Box 30576
Tampa, FL  33630-3576
</TABLE> 

                                       4
<PAGE>
 
<TABLE> 
<CAPTION> 
<S>                                              <C>                                     <C> 
State Street Bank and Trust Company               4,500,000                              22%
Global Corp Action Dept JAB5W
P.O. Box 1631
Boston, MA  02105-1631
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class B-1

Name and Address                                 Principal Amount                        % of Class
<S>                                              <C>                                     <C>
Compass Bank - ALFA                              6,864,323                               82%
15 South 20th Street
7th Floor
Birmingham, AL  35233
 
The Fifth Third Bank                             1,500,000                               18%
Dept. 00850-Proxy
38 Fountain Square Plaza
Cinncinati, OH  45263
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class B-2

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C> 
Boston Safe Deposit and Trust Company            4,549,017                               100%
c/o Mellon Bank N.A.
Three Mellon Bank Center, Room 153-3015
Pittsburgh, PA  15259
</TABLE> 
         
<TABLE> 
<CAPTION> 
                                         Class B-3

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
Boston Safe Deposit and Trust Company            2,201,138                               100%
c/o Mellon Bank N.A.
Three Mellon Bank Center, Room 153-3015
Pittsburgh, PA  15259
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class B-4

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C> 
Headlands Mortgage Securities, Inc.                                                      100%
1100 Larkspur Landing Circle, Suite 101
Larkspur, CA  94939
</TABLE>

                                       5
<PAGE>
 
<TABLE>
<CAPTION>
                                         Class X-1

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
The Bank of New York                             12,791,120                              100%
925 Paterson Plank Road
Secaucus, NJ  07094
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class X-2

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C> 
PWI CMO Account                                  11,923,560                              100%
1000 Harbor Boulevard, 8th Floor
Weehawken, NJ  07087
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class R

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C> 
Headlands Mortgage Securities, Inc.                                                      100%
1100 Larkspur Landing Circle, Suite 101
Larkspur, CA  94939
</TABLE> 

<TABLE> 
<CAPTION> 
                                         Class PO

Name and Address                                 Notional Amount                         % of Class
<S>                                              <C>                                     <C>
Chase Manhattan Bank                             32,276                                  100%
4 New York Plaza, 21st Floor
New York, NY  10015
</TABLE>

                                       6
<PAGE>
 
ITEM 13  -  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            None.

                                    PART IV

ITEM 14  -  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

            (a) The following documents are filed as part of this report:

                1.      Financial Statements:

                        Not applicable.

                2.      Financial Statement Schedules:

                        Not applicable.

                3.      Exhibits:

                        Exhibit No.     Description
                        -----------     -----------

                        99.1*           Statement of Compliance of the Master
                                        Servicer.

                        99.2*           Annual Report of Independent Accountant
                                        with respect to the Master Servicer's
                                        overall servicing operations.

_________________
* The document is not due to be delivered until April 30, 1999.  Such document
will be filed with the Securities and exchange Commission by amendment upon
receipt by the Registrant.

                                       7
<PAGE>
 
                                  SIGNATURES


      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Sponsor has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                    By:      HEADLANDS MORTGAGE SECURITIES INC.,
                                             as Sponsor


                                    By:  /s/ Gilbert J. MacQuarrie
                                        --------------------------------------- 
                                    Name:  Gilbert J. MacQuarrie
                                    Title: Vice President, Treasurer and 
                                           Secretary

Date: May 5, 1999.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Sponsor
and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature                                           Position                                  Date
---------                                           --------                                  ----
<S>                                          <C>                                           <C>  
/s/ Peter T. Paul
------------------------------------         President and Director                        May 5, 1999
Peter T. Paul                                (Principal Executive Officer)                     

/s/ Becky S. Poisson         
------------------------------------         Vice President and Director                   May 5, 1999
Becky S. Poisson                                                                               

/s/ Gilbert J. MacQuarrie
------------------------------------         Vice President, Treasurer, Secretary          May 5, 1999
Gilbert J. MacQuarrie                        and Director                                      
                                             (Principal Financial Officer and Principal
                                             Accounting Officer)

/s/ Steven M. Abreu
------------------------------------         Vice President and Director                   May 5, 1999
Steven M. Abreu                                                                                

/s/ Kristen Decker
------------------------------------         Vice President                                May 5, 1999
Kristen Decker                                                                                 
</TABLE>
                                       8
<PAGE>
 
                               INDEX TO EXHIBITS
                                  Item 14(C)

Exhibit No.    Description
-----------    -----------

99.1*          Statement of Compliance of the Master Servicer.

99.2*          Annual Report of Independent Accountant with respect to the
               Master Servicer's overall servicing operations.


___________________
*     The document is not due to be delivered until April 30, 1999.  Such
document will be filed with the Securities and exchange Commission by amendment
upon receipt by the Registrant.

                                       9