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                                                                    EXHIBIT 10.3

January 5, 2000


Mr. Cary Thompson


Dear Cary,


         This letter will confirm our discussions over the past few months and
evidence our agreement regarding your termination of employment with Aames
Financial Corporation ("the Company"). Assuming that you find these terms
acceptable, please sign and return a copy of the letter and execute the form of
release where indicated.

         1. TERMINATION OF EMPLOYMENT. You and the Company are parties to an
existing employment agreement (the "Employment Agreement"). On May 13, 1999, you
resigned your employment with the Company as Chief Executive Officer, and you
accepted the position of Vice Chairman. As of July 16, 1999, you resigned your
employment position as Vice Chairman of the Company, and you are no longer an
employee of the Company.

         2. WAIVER AND RELEASE. You agree and acknowledge that, upon payment of
the amounts as expressly provided in this letter, you will waive any rights to
all amounts due to you under your Employment Agreement. In consideration for the
valuable consideration provided to you under this letter, you will execute the
release in favor of the Company attached hereto as Exhibit A. /s/ CHT

         3. PAYMENT PERIOD. The "Payment Period" shall mean the period beginning
on December 1, 1999 and ending on December 1, 2000.

         4. PAYMENTS. During the Payment Period, the Company shall pay you
$50,000 per month, payable in accordance with the Company's normal payroll
practices and without any right of offset under Paragraph 7 of your Employment
Agreement.

         5. STOCK OPTIONS. Notwithstanding any other provision of your
Employment Agreement, the 1999 Aames Financial Corporation Stock Option Plan
(the "Option Plan"), or stock option agreement thereunder, to the contrary, you
and the Company agree that the Company's obligations to grant you options shall
be discharged in full with the grant of 774,049 shares of the Company's common
stock (the "Options"). The Options shall be vested and exercisable on the Grant
Date and shall remain exercisable until the one year anniversary of the date you
cease to be a director of the Company. Except as otherwise specifically provided
in this Paragraph 6, your rights and obligations shall be as set forth in the
Option Plan.

         6. AUTOMOBILE. Beginning December 1, 1999, you will have the option to
purchase your Company provided automobile for $1. This option shall lapse unless
exercised prior to February 1, 2000.3



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         7. CONFIDENTIALITY, NONSOLICITATION AND NONCOMPETITION. This Paragraph
7 will confirm that the confidentiality, nonsolicitation, and noncompetition
provisions of paragraphs 10 and 11 of your Employment Agreement shall survive
the execution of this letter.

         8. ARBITRATION. This Paragraph 8 will confirm that the arbitration
provision of paragraph 9 of your Employment Agreement shall survive the
execution of this letter.

         9. NON-DEREGATION, PUBLIC COMMENT AND COOPERATION. You agree that,
except as required by applicable law, or compelled by process of law, neither
you, nor anyone acting on your behalf, shall hereafter (a) make any derogatory,
disparaging or critical statement about the Company, or any of the Company's
current officers, directors, employees, shareholders or lenders or any persons
who were officers, directors, employees, shareholders or lenders of the Company
since March 11, 1999 through the date hereof, or (b) without the Company's prior
written consent communicated, directly or indirectly, with the press or other
media, concerning the past or present employees or business of the Company. You
further agree that during and after the Payment Period, you will provide, upon
reasonable notice, such information and assistance to the Company as may
reasonably be requested by the Company in connection with any audit,
governmental investigation or litigation in which it or any of its affiliates is
or may become a party. The Company will reimburse you for all reasonable
out-of-pocket costs incurred by you in connection with your cooperation
hereunder.

         10.      MISCELLANEOUS.

         (a)      This letter and the provisions of your Employment Agreement
explicitly incorporated by reference herein constitutes the entire agreement
between you and the Company and supercedes all prior agreements and
understandings, oral or written, between you and the Company with respect to the
subject matter hereof, including but not limited to your Employment Agreement.

         (b)      The payments due under this Agreement shall be subject to
reduction to satisfy all federal, state and local withholding tax obligations.

         (c)      This letter shall be governed by and construed in accordance
with the laws of the State of New York, without reference to principles of
conflict of laws. This letter may not be amended or modified otherwise than by
a  written  agreement  executed  by  the  parties  hereto  or  their  respective
successors or legal representatives.


                                            Sincerely,



                                            /s/ MANI A. SADEGHI
                                            -----------------------------------
                                            Mani A. Sadeghi
                                            Director


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Agreed and Accepted


/s/ CARY H. THOMPSON                        6/5/99
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Cary H. Thompson                            Date