<PAGE>   1

                                                                  EXHIBIT 10.25


                              EMPLOYMENT AGREEMENT

        THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is between Aames Financial
Corporation, a Delaware corporation (the "COMPANY"), and Neil B. Kornswiet (the
"EXECUTIVE"). This Agreement shall become effective (the "EFFECTIVE DATE") on
the "Initial Closing Date," as such term is defined in the Purchase Agreement
(defined below).

                                   BACKGROUND

               A. As of the Effective Date, the Company is or will be engaged
primarily in originating, selling and servicing home mortgage loans.

               B. The Executive is currently a stockholder and officer of the
Company, and as part of the closing (the "Closing") under the Preferred Stock
Purchase Agreement by and among the Company and Capital Z Financial Services
Fund II, L.P. ("Purchaser"), dated the 23rd day of December, 1998 (the "PURCHASE
AGREEMENT"), the Company has agreed that, after the Effective Date, the Company
will continue to employ the Executive to provide services for the benefit of the
Company on the terms of this Agreement. If the Closing does not occur, this
Agreement shall have no force or effect and the Employment Agreement dated
August 26, 1998 shall remain in force.

               C. In exchange for the benefits provided for under this
Agreement, except as otherwise specifically provided in this Agreement or in
Exhibit A hereto, as of the Effective Date, the Executive hereby waives any and
all rights and benefits accruing under all other employment, change in control,
and any and all other agreements between Executive and the Company and its
subsidiaries that provide for the payment of compensation or benefits to
Executive, other than (i) benefits provided under the Company's 401(k) plan,
(ii) benefits continued pursuant to Section 3C hereof, and (iii) stock options
granted under the Aames Financial Corporation 1997 Non-Qualified Stock Option
Plan, as Amended and Restated Effective May 22, 1998, the Aames Financial
Corporation 1997 Stock Option Plan, the Aames Financial Corporation 1996 Stock
Incentive Plan, as amended, the Aames Financial Corporation 1995 Stock Incentive
Plan, the Aames Financial Corporation 1991 Stock Incentive Plan and under those
certain assumption option agreements entered into by the Company in connection
with its acquisition of One Stop Mortgage, Inc., pursuant to an Agreement dated
August 12, 1996, which, to the extent practicable, will be modified to provide
for transfer to the Executive in the event they are forfeited by the original
grantees after August 12, 1996, provided that the Executive shall in no event
acquire greater rights under such assumption options than those held by the
optionees to whom they were originally issued, all of which options shall be
preserved.



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In consideration of the foregoing and the mutual agreements set forth below, the
parties agree as follows:

                           AGREEMENT - PRINCIPAL TERMS

         1. Employment and Duties. The Company shall employ the Executive as its
President responsible for day to day operation of the Company and its
subsidiaries, and the Executive accepts such employment on the terms and
conditions of the Agreement. The Executive shall, while this Agreement remains
in effect, have the duties, responsibilities, powers, and authority customarily
associated with such position. The Executive shall report to, and follow the
direction of, the Board of Directors of the Company (the "BOARD"). During each
year of the Term (as hereinafter defined), the Company shall nominate the
Executive for election as a member of the Board. In addition, the Executive also
shall perform such other and unrelated services and duties as the Board may
assign to him. The Executive shall diligently, competently, and faithfully
perform all duties, and shall devote his entire business time, energy,
attention, and skill to the performance of duties for the Company and its
affiliates and will use his best efforts to promote the interests of the Company
and its affiliates.

         2. Term of Employment. Unless sooner terminated as provided in this
Agreement, the initial term under this Agreement shall be five (5) years,
starting on the Effective Date (the "INITIAL TERM"). The term of employment
shall be renewed automatically for successive periods of one (1) year each (a
"RENEWAL TERM") after the expiration of the Initial Term and any subsequent
Renewal Term, unless the Board provides the Executive, or the Executive provides
the Board, with written notice to the contrary at least one hundred twenty (120)
days prior to the end of the Initial Term or any Renewal Term. The Initial Term
and the Renewal Terms are referred to collectively as "TERMS."

         3. Compensation.

                A. Salary. The Company shall pay the Executive an annual salary
of $600,000 (the "BASE SALARY"), payable in substantially equal installments in
accordance with the Company's payroll policy. The amount of Base Salary payable
to Executive shall be reviewed at least annually; provided, however, that
Executive's Base Salary shall not be reduced below $600,000 per annum during the
term of this Agreement.

                B. Performance Bonus; Other Limitations. The Executive shall be
entitled to annual cash bonuses, and other extraordinary compensation and
benefits on the basis outlined in Exhibit A. The covenants set forth in Exhibit
A shall be binding upon the parties to the same extent as if set forth herein.





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                C. Automobile. The Company's current policy with regard to the
provision of an automobile to the Executive shall be maintained during the Term
until such time as the Compensation Committee of the Board determines otherwise
and provides other benefits not materially less favorable to Executive.

                D. Vacation. Executive shall be entitled to 5 weeks of paid
vacation each year of employment with the Company for the term of this
Agreement. In each case, such entitlement shall accrue pro rata over the
contract year and shall be taken at such time or times as shall not unreasonably
interfere with the operations of the Company.

                E. Insurance. During the Term, the Company shall maintain, at no
cost to Executive, directors and officers liability insurance that covers the
Executive in an amount of not less than $45,000,000.

                F. Stock Options. The Company shall grant to the Executive on
the Effective Date an option to purchase 3,214,642 million shares of the
Company's common stock pursuant to and subject to the provisions of the
Company's 1999 Stock Option Plan. Such option shall be subject to the terms of
an option agreement substantially in the form annexed hereto as Exhibit B.

                G. Other Benefits. While this Agreement remains in effect, the
Company shall continue to provide the Executive with (i) not less than
$2,000,000 of standard term life insurance; (ii) medical and dental benefits for
the Executive and his dependents substantially comparable to that provided
immediately prior to the execution of this Agreement; (iii) a long-term
disability policy providing for payments in an amount equal to 60% of the
Executive's Base Salary, provided such a policy may be obtained at reasonable
cost; and (iv) the Executive shall participate in such other savings, pension
and retirement plans and other benefit plans or programs maintained by the
Company for the benefit of its executives.

         4. Expenses. The Company shall reimburse the Executive for all
reasonable business expenses, that are incurred in accordance with the Company's
policies as in effect from time to time, provided the Executive submits
appropriate receipts or other documentation acceptable to the Company and as
required by the Internal Revenue Service to qualify as ordinary and necessary
business expenses under the Internal Revenue Code of 1986, as amended.

         5. Termination. Notwithstanding anything in Paragraph 2 of this
Agreement to the contrary, the term of this Agreement and Executive's services
under this Agreement shall terminate upon the first to occur of the following
events:

                A. At the end of the applicable Term of this Agreement,
including any Renewal Terms.




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                B. Upon the Executive's date of death or the date the Executive
is given written notice that the Company has properly determined that he is
disabled. For purposes of this Agreement, the Executive shall be properly deemed
to be disabled if the Executive, as a result of illness or incapacity, shall be
unable to perform substantially his required duties for a period of 120
consecutive days or for any aggregate period of 183 days in any twelve (12)
month period. The Company shall notify the Executive that his employment has
been terminated by written notice. The termination shall be effective on the
tenth (10th) business day after the Executive receives the notice, unless the
Executive returns to full-time performance of his duties before such tenth
(10th) business day.

                C. On the date the Company provides the Executive with written
notice that he is being terminated for "cause." For purposes of this Agreement,
and as reasonably determined by the Company, the Executive shall be deemed
terminated for cause if the Company terminates the Executive after finding that
the Executive: (1) shall have been determined by a court of law to have
committed any felony including, but not limited to, a felony involving fraud,
theft, misappropriation, dishonesty, embezzlement, or any other crime involving
moral turpitude, or if the Executive shall have been arrested or indicted for
violation of any criminal statute constituting a felony, provided the Company
reasonably determines that the continuation of the Executive's employment after
such event would have an adverse impact on the operation or reputation of the
Company or its affiliates (subsequent references to the "Company" in this
Paragraph 5C shall be deemed to refer to the Company or its affiliates); (2)
shall have committed one or more acts of gross negligence or willful misconduct,
either within or outside of the scope of his employment that, in the good faith
opinion of the Board, materially impair the goodwill or business of the Company
or cause material damage to its property, goodwill, or business, or would, if
known, subject the Company to public ridicule; (3) shall have refused or failed
to a material degree to perform his duties hereunder (continuing without cure
for ten (10) days after receipt of written notice of need to cure); (4) shall
have violated any material written Company policy provided to the Executive
during or prior to the Term (continuing without cure for ten (10) days after
receipt of written notice of need to cure) and that has caused material harm to
the Company; or (5) knew, or should have known, that the Company materially, and
knowingly or intentionally breached any representation, warranty, or covenant
under the Purchase Agreement, or that the Executive shall have materially and
knowingly or intentionally breached any provision this Agreement; provided,
however, that no termination of Executive's employment for Cause shall be deemed
to have occurred unless Executive is given notice of the reason therefore
including the allegations which may constitute reason for such termination and
after (a) Executive is provided an opportunity to be heard by the Board or the
Executive Committee thereof, and (b)



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such decision has been upheld by the Board or Executive Committee.

                D. On the date the Executive terminates his employment for "Good
Reason." For purposes of this Agreement, "GOOD REASON" shall mean termination by
the Executive within ninety (90) days of learning of the acts which are the
basis for alleging Good Reason, because of the occurrence of any of the
following acts, without the Executive's consent: (1) he has been demoted to a
position of materially less stature or importance within the Company than the
position described in Paragraph 1, (2) he has been assigned to duties that are
of materially less importance than, or materially inconsistent with, those
required to be performed pursuant to Paragraph 1 of this Agreement, (3) the
Company has failed to pay or provide material compensation or benefits that are
required to be provided by this Agreement, or (4) the Company's principal
executive offices have been relocated to any county other than Los Angeles
County, CA or Orange County, CA., provided that no such termination shall be
treated as for Good Reason unless the Executive shall have given the Company
thirty (30) days advance written notice of his intention to terminate his
employment for Good Reason, and the Company shall have failed to cure such acts
within such thirty (30) day period.

                E. On the date the Executive terminates his employment for any
reason, other than Good Reason, provided that the Executive shall give the
Company thirty (30) days written notice prior to such date of his intention to
terminate this Agreement.

                F. On the date the Company terminates the Executive's employment
for any reason, other than a reason otherwise set forth in this Paragraph 5. Any
purported termination of the Executive's employment for Cause which is finally
determined to be without Cause shall be treated for all purposes of this
Agreement as a termination pursuant to this Paragraph 5F.

         6. Compensation Upon Termination. If the Executive's services are
terminated pursuant to Paragraph 5, the Executive shall be entitled to the Base
Salary through his final date of active employment, plus any accrued but unused
vacation pay. If the Executive's services are terminated pursuant to Paragraph
5D or 5F, the Executive shall in addition be entitled to receive severance
benefits for a period of 12 months payable in substantially equal installments
in accordance with the Company's payroll policy, in an amount equal to (i) $2
million, if such termination occurs within one year from the Effective Date,
(ii) $1.5 million, if such termination occurs after the first and on or before
the second anniversary of the Effective Date, (iii) $1.0 million, if such
termination occurs after the second and on or before the third anniversary of
the Effective Date, (iv) $0.5 million, if such termination occurs after the
fourth anniversary of the Effective Date, and (v), plus an amount, if any,



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(regardless of the date of termination) necessary to reimburse the Executive on
a net after-tax basis for any applicable federal excise tax, provided in each
case the Executive signs an agreement that releases the Company from actions,
suits, claims, proceedings, and demands related to the period of employment
and/or termination of employment. Executive agrees that if his employment is
terminated for any reason, he shall immediately resign from all officer and
director positions he then holds with the Company and each of its parents,
affiliates and subsidiaries.

         7. Offset. In the event that severance benefits become payable to the
Executive pursuant to Paragraph 6 above, such benefits, to the extent not
theretofore paid, shall be reduced, on a dollar-for-dollar basis, by (i) any
outstanding amounts owed by Executive to the Company and (ii) the amount of any
compensation for services earned by Executive on account of his employment or
consulting services with another business or on account of his self employment,
from any source, whether paid currently or deferred. In such event, Executive
shall cooperate with the Company and shall provide such information to the
Company as it may reasonably require in order to calculate the amount of the
reduction described above.

         8. COBRA. If the Executive's services are terminated pursuant to
Paragraph 5, the Executive shall also be entitled to any benefits mandated under
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") or required
under the terms of any death, insurance, or retirement plan, program, or
agreement provided by the Company and to which the Executive is a party or in
which the Executive is a participant, including, but not limited to, any
short-term or long-term disability plan or program, if applicable. If the
Executive elects COBRA continuation coverage, the Company shall pay for such
health insurance coverage for the shorter of 12 months or the remaining Term at
the same rate as it pays for health insurance coverage for its active employees
(with the Executive required to pay for any employee-paid portion of such
coverage). After the expiration of the period set forth in the prior sentence
concludes, the Executive shall be responsible for the payment of all further
premiums attributable to COBRA continuation coverage at the same rate as the
Company charges all COBRA beneficiaries. However, no provision of this Agreement
shall be construed to extend the period of time over which such COBRA
continuation coverage is required to be provided to the Executive and/or his
dependents.

         9. Arbitration. Any dispute between the parties hereto respecting the
meaning and intent of this Agreement or any of its terms and provisions shall be
submitted for expedited arbitration in Los Angeles, California, in accordance
with the National Rules of the American Arbitration Association for the
Resolution of Employment Disputes then in effect, and the arbitration
determination resulting from any such submission shall be final



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and binding upon the parties hereto. Judgment upon any arbitration award may be
entered in any court of competent jurisdiction. The parties further agree that
either party may at any time seek provisional relief, including, but not limited
to a temporary restraining order or a preliminary injunction, from any state or
federal court in California, in connection with any dispute being submitted for
arbitration.

         10. Exclusive Employment; Confidentiality; Non-Solicitation.

                A. Executive agrees to perform his duties, responsibilities and
obligations hereunder efficiently and to the best of his ability. Executive also
agrees that he will not engage in any other business activities, pursued for
gain, profit or other pecuniary advantage, that are competitive with the
activities of the Company. Executive agrees that all of his activities as an
employee of the Company shall be in conformity with all present and future
policies, rules and regulations and directions of the Company not inconsistent
with this Agreement.

                B. Executive acknowledges that his employment by the Company
will bring him into close contact with many trade secrets and other confidential
affairs of the Company and its clients and customers, including, without
limitation, non-public information pertaining to ideas, knowledge, operations,
computer hardware and software, systems, costs, profits, markets, sales,
products, programs, interfaces, networks, protocols, data bases, key personnel,
pricing policies, operational methods, concepts, data, equipment, models,
compensation, suppliers, servicing, broker lists, customer lists, customers,
potential customers, rate sheets, plans, concepts, strategies, or products,
advertising, technical processes and applications and other business affairs and
methods, plans for future developments and other information not readily
available to the public or the Company's competitors or clients (collectively
referred to hereinafter as "Information"). In consideration of the foregoing,
the Executive agrees that he: (1) will keep secret and confidential all
Information and will not use it for his own benefit or disclose it to, or use it
for the benefit of, anyone other than the Company, either during or after his
employment by the Company, except with the prior written consent of the Company;
(2) will take all reasonable action that the Company deems necessary or
appropriate to prevent unauthorized use or disclosure of or to protect the
Company's interest in Information; (3) will deliver promptly to the Company upon
termination of his employment by the Company or at any other time the Company
may so request, all memoranda, notes, documentation, equipment, files,
flowcharts, program listings, data listings, records, reports and other tangible
manifestations of the Information (and all copies thereof), that he may then
possess or have under his control; and (4) will, unless the Company otherwise
agrees in writing, and without additional compensation, promptly disclose and,
upon request, assign to the Company all rights to work product and



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business opportunities related to the present or, to the extent presented to the
Board of Directors prior to termination of employment, contemplated business of
the Company.

                C. Executive further agrees that if his employment is terminated
during the three year period beginning on the Effective Date, he will abide by
the limitations set forth in the following sentence (i) for a period of six
months from the date of termination, if his employment is terminated pursuant to
Paragraph 5B, 5D or 5F, and (ii) for a period of one year from the date of
termination, if his employment is terminated by the Company pursuant to
Paragraph 5C or if his employment is terminated by the Executive without Good
Reason (the applicable period is referred to below as the "Nonsolicitation
Period"). During the Nonsolicitation Period, the Executive agrees that he will
not, without the Company's express written consent, himself or through any
organization with which he is associated: (i) hire any person who was employed
by the Company on the Executive's date of termination of employment or at any
time within six months prior thereto, or hire any agent, consultant, or
independent contractor of the Company, or of any organization with respect to
which the Company has agreed to a similar prohibition and of which the Employee
has knowledge, or induce or attempt to induce any such person to discontinue
such employment or affiliation with the Company or such organization, as the
case may be, or (ii) induce or attempt to induce any client or customer of the
Company on the date of termination to discontinue any business relationship or
to refrain from entering into a new business relationship with the Company.

                D. Executive confirms and acknowledges that (i) he was
represented by counsel of his own choosing during the negotiation of the
limitations set forth in Paragraphs 10 and 11 of this Agreement, (ii) his strict
adherence to the limitations imposed upon him thereunder, or under any agreement
referenced therein, was a material factor in Purchaser's entering into the
Purchase Agreement and agreeing to consummate the transactions contemplated
thereby, and to pay the Executive the cash and equity-based compensation called
for in this Agreement, (iii) the Company's ability to maintain continuing
relationships with its employees without disruption was a material factor in
Purchaser's entering into the Purchase Agreement and agreeing to consummate the
transactions contemplated thereby, (iv) his failure to adhere to the obligations
imposed by Paragraphs 10 and 11 of this Agreement will expose such Purchaser to
substantial and irreparable harm. Accordingly, Executive agrees that the remedy
at law for any breach by him of the covenants and agreements set forth in this
Paragraph 10 or in Paragraph 11 below may be inadequate and that in the event of
any such breach, the Company or its respective subsidiaries may, in addition to
the other remedies that may be available to it at law, seek injunctive relief
prohibiting him (together with all those persons associated with him) from
breach of such covenants and agreements.




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         11. Non-Competition. Executive reconfirms and acknowledges his duties
and obligations under the Non-Compete Agreement dated August 28th, 1996. The
Company agrees to release him from such obligations on the earlier to occur of
(x) the expiration of any Nonsolicitation Period referred to in Section 10(c)
hereof, and (y) the third anniversary of the Effective Date.

                            AGREEMENT - MISCELLANEOUS

         12. Entire Agreement. This Agreement sets forth the entire and final
agreement and understanding of the Company and the Executive and contains all of
the agreements made between them with respect to the subject matter hereof. This
Agreement supersedes any and all other agreements, either oral or in writing,
between the Company and the Executive with respect to Executive's provision of
services to the Company. No change or modification of this Agreement shall be
valid unless in writing and signed by the Company and the Executive.

         13. Enforcement; Severability. Should a decision be entered by a court
of competent jurisdiction that the character, duration or geographical scope of
any provision of this Agreement is unreasonable, or that any provision of this
Agreement is invalid or unenforceable for any reason, in whole or in part, then
the Company and the Executive agree that such provision shall be construed by
the court in such a manner as to impose all those restrictions on the
Executive's conduct set forth in this Agreement or in the Non-Compete Agreement
dated August 28, 1996 that are reasonable in light of the circumstances and as
are necessary to assure to the Company the benefits of this Agreement and to
render the provision valid and enforceable, and this Agreement shall be
construed and enforced to the maximum extent permitted by law, as if such
provision had been originally incorporated in this Agreement as so modified,
restricted, or reformulated or as if such provision had not been originally
included in this Agreement, as the case may be. The parties further agree to
seek a lawful substitute for any provision found to be unlawful; provided, that,
if the parties are unable to agree upon a lawful substitute, the parties desire
and request that the arbitrator or other authority called upon to decide the
enforceability of this Agreement modify those provisions such that, once
modified, this Agreement will be enforceable to the maximum extent permitted by
the law in existence at the time of the requested enforcement.

         14. Miscellaneous.

                A. Notices. All notices required in connection with this
Agreement shall be sufficiently given only if transmitted in writing and (i)
personally delivered, or sent by first class, registered or certified mail,
return receipt requested, postage prepaid, or by recognized overnight courier,
(ii) sent by facsimile, provided a hard copy is mailed on that date to the party
for whom such notices are intended, or (iii) sent by other



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means at least as fast and reliable as first class mail. A written notice shall
be deemed to have been given to the recipient party on the earliest of (1) the
date it shall be delivered to the address required by this Agreement; (2) the
date delivery shall have been refused at the address required by this Agreement;
(3) with respect to notices sent by mail or overnight courier, the date as of
which the Postal Service or overnight courier, as the case may be, shall have
indicated such notice to be undeliverable at the address required by this
Agreement; or (4) with respect to a facsimile, the date on which the facsimile
is sent and receipt is confirmed. Any and all notices referred to in this
Agreement, or which either party desires to give to the other shall, in the case
of the Executive, be addressed to the residence address given to the Company by
the Executive in writing for this purpose, or failing receipt of such notice, to
the last residence address on the Company's records, or in the case of the
Company, to its principal office with a copy to Capital Z's principal office.

                B. Waiver of Breach. A waiver by the Company of a breach of any
provision of this Agreement by the Executive shall not operate or be construed
as a waiver of any subsequent breach by the Executive. No waiver shall be valid
unless it is in writing and signed by an authorized officer of the Company
(other than the Executive).

                C. Assignment. The Executive acknowledges that the services he
is to render are unique and personal. Accordingly, the Executive may not assign
any of his rights or delegate any of his duties or obligations under this
Agreement. The rights and obligations of the Company under this Agreement shall
inure to the benefit of and shall be binding upon the successors and assigns of
the Company.

                D. Construction. The heading in this Agreement are inserted for
convenience only and are not to be considered a construction of the provisions
hereof. The Background recitals are incorporated in this Agreement as an
integral part hereof and shall be considered as substantive and not precatory
language.

                E. Execution of Agreement. This Agreement may be executed in
several counterparts, each of which shall be considered an original, but which
when taken together, shall constitute one agreement.

                F. Governing Law. This agreement shall be construed in
accordance with the laws of the State of California.

COMPANY:                                       EXECUTIVE:



By: /s/ David Sklar                             /s/  Neil B. Kornswiet
    ---------------------------                ---------------------------






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                                    EXHIBIT A

-   Within two weeks of the Effective Date, Company shall pay Executive
    $1,460,000, such amount being in full and complete satisfaction of all
    amounts owed Executive in respect of his June 1998 bonus accrued by the
    Company.

-   Subject to execution by the Executive of the promissory note attached hereto
    as Exhibit C, the Company shall pay Executive a guaranteed cash bonus for
    the 1999 calendar year (the "1999 Bonus"), such bonus to be paid within two
    weeks following the Effective Date, in an amount equal to $540,000. The 1999
    Bonus shall be paid in the form of a recourse loan, which shall be forgiven
    and treated as paid in full so long as Executive remains employed by the
    Company through the first anniversary of the Effective Date, or through the
    date of any earlier termination of Executive's employment under Paragraphs
    5B, 5D or 5F of the Employment Agreement. Executive to receive a cash
    supplemental bonus for his first year of employment of $300,000, such bonus
    to be paid within 2-1/2 months after the first anniversary of the Effective
    Date, subject to the Board's determination that the Company has completed a
    satisfactory program of cost reductions by such anniversary date (the "1999
    Supplemental Bonus").

-   For bonuses after the 1999 calendar year, Executive shall receive a cash
    bonus paid annually on a calendar year basis ranging from 0-100% of total
    Base Salary, with an expected bonus of $400,000, and a bonus in excess of
    100% of Base Salary for extraordinary performance. Bonuses shall be paid
    according to a budget approved by the Board of Directors of the Company and
    the achievement of other non-financial goals adopted by such Board.

-   Subject to execution by the Executive of the promissory note attached hereto
    as Exhibit I-2 to the Management Investment Agreement, the Company shall
    loan Executive an amount equal to the purchase price of 100% of his pro-rata
    ownership position in the shareholders rights offering (the "Rights Offering
    Advance"). The Rights Offering Advance shall be in the form of a loan, which
    shall be nonrecourse provided Executive remains employed by the Company
    through the first anniversary of the Effective Date, or through the date of
    any earlier termination of Executive's employment under Paragraph 5B, 5D or
    5F of the Employment Agreement.

-   For so long as Capital Z and/or its Designated Purchasers under the Purchase
    Agreement own at least 25% of the outstanding voting securities of the
    Company, Executive covenants and agrees not to sell, assign or otherwise
    transfer, during his employment with the Company, in any one twelve month
    period, more than 25% of the aggregate amount of shares of Company stock
    which the Executive owned immediately





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<PAGE>   12


prior to the Effective Date. The Company, by action of its Board of Directors,
agrees to consider whether to waive all or part of such limitation in the event
of extraordinary hardship, which consent shall not be unreasonably withheld.









                                      A-2

<PAGE>   13

                                                                       EXHIBIT B

                                                          MODEL OPTION AGREEMENT




                                  NON-QUALIFIED

                             STOCK OPTION AGREEMENT

                                    UNDER THE

                        1999 AAMES FINANCIAL CORPORATION

                                STOCK OPTION PLAN



               THIS AGREEMENT, made this   day of      ,    , by and between 
Aames Financial Corporation, a Delaware corporation (the "Company"), and    
(the "Optionee")


                              W I T N E S S E T H:


               WHEREAS, the Optionee is now employed by the Company in a key
capacity, and the Company desires to have him remain in such employment and to
afford him the opportunity to acquire, or enlarge, his ownership of the
Company's Common Stock, par value $.01 per share ("Stock"), so that he may have
a direct proprietary interest in the Company's success;



               WHEREAS, all capitalized terms not otherwise defined herein shall
have the same meaning as set forth in the Company's Stock Option Plan;



               NOW, THEREFORE, in consideration of the covenants and agreements
herein contained, the parties hereto hereby agree as follows:



                                      B-1



<PAGE>   14

               1. GRANT OF OPTION. Subject to the terms and conditions set forth
herein and in the Company's Stock Option Plan (the "Plan"), the Company hereby
grants to the Optionee, during the period commencing on the date of this
Agreement and ending ten years from the date hereof (the "Termination Date"),
the right and option (the right to purchase any one share of Stock hereunder
being an "Option") to purchase from the Company, at a price of $1.00 per share,
an aggregate of shares of Stock.



               2. LIMITATIONS ON EXERCISE OF OPTION. (a) Subject to the terms
and conditions set forth herein, all Options shall vest and become exercisable
on the ninth anniversary of the date of grant (the "Grant Date"), provided that
Optionee remains an employee of the Company on such date, subject to earlier
vesting, based upon the Company's attainment of the following share price
values: (i) 25% of the Options shall vest at such time as the Stock's Fair
Market Value is first, while the Optionee is employed by the Company and after
the Grant Date, at or above $1.30 per share; (ii) an additional 25% of the
Options shall vest at such time as the Stock's Fair Market Value is first, while
the Optionee is employed by the Company and after the Grant Date, at or above
$1.75 per share; and (iii) an additional 50% of the Options shall vest at such
time as the Stock's Fair Market Value is first, while the Optionee is employed
by the Company and after the Grant Date, at or above $2.50 per share; provided,
however, that any such acceleration shall be limited according to the following
schedule: not more than 15% of the Options that have become vested based upon
performance shall become exercisable before the first anniversary of the Grant
Date; not more than an additional 15% of the Options that have become vested
based upon performance shall become exercisable before the second anniversary of
the Grant Date; not more than an additional 20% of the Options that have become
vested based upon performance shall become exercisable before each of the third
and fourth anniversaries of the Grant Date; and the remaining 30% of the Options
that have become vested based upon performance shall not become exercisable
before the fifth anniversary of the Grant Date; and further provided, that if
the Optionee is terminated without Cause or the Optionee terminates his
employment for Good Reason, after a date when any of the performance thresholds
set forth in clause (i), (ii) or (iii) of this paragraph 2(a) has been
satisfied, then , in computing the exercisability limitation set forth in the
preceding proviso, an additional 15% of the Options that have become vested
based upon performance shall be exercisable over and above the Options that
become exercisable without regard to this proviso.



               (b) Any provision of paragraph 2(a) hereof to the contrary
notwithstanding, but subject to Article XI(c) of the Plan, upon a Change in
Control, 100% of the Options shall vest and






                                      B-2
<PAGE>   15


become exercisable, provided, however, that no such exercise rights shall arise
unless (i) if a Change in Control occurs within 12 months of the consummation of
the transactions contemplated by the Purchase Agreement (the "Closing Date"),
the Change in Control Price is at or above $1.50 per share or (ii) if a Change
in Control occurs more than twelve months from the Closing Date, the Change in
Control Price is at or above $2.50 per share (or if the Change in Control Price
is less than $2.50 but above $1.30 or $1.75 per share the acceleration of
vesting shall result, but only to the extent such acceleration would have
resulted pursuant to paragraph 2(a)(i) or 2(a)(ii) above, without regard to
service requirements).



               3. TERMINATION OF EMPLOYMENT. An Optionee's rights upon
termination of employment shall be as set forth in Article VI of the Plan.



               4. METHOD OF EXERCISING OPTION. (a) The Optionee may exercise any
or all of the Options by delivering to the Company a written notice signed by
the Optionee stating the number of Options that the Optionee has elected to
exercise at that time and full payment of the purchase price of the shares to be
thereby purchased from the Company. Payment of the purchase price of the shares
may be made (a) by certified or bank cashier's check payable to the order of the
Company, (b) by surrender or delivery to the Company of shares of Stock or other
property acceptable to the Committee in its sole discretion, which Stock or
other property shall have a value equal to the purchase price or (c) by delivery
to the Committee of a copy of irrevocable instructions to a stockbroker to
deliver promptly to the Company an amount of sale or loan proceeds sufficient to
pay the purchase price.



               (b) At the time of exercise, the Optionee shall pay to the
Company such amount as the Company deems necessary to satisfy its obligation to
withhold Federal, state or local income or other taxes incurred by reason of the
exercise or the transfer of shares thereupon.





                                      B-3
<PAGE>   16



               5. ISSUANCE OF SHARES. As promptly as practical after receipt of
such written notification and full payment of such purchase price and any
required income tax withholding amount, the Company shall issue or transfer to
the Optionee the number of shares with respect to which Options have been so
exercised, and shall deliver to the Optionee a certificate or certificates
therefor, registered in the Optionee's name.



               6. COMPANY; OPTIONEE. (a) The term "Company" as used in this
Agreement with reference to employment shall include the Company and its
subsidiaries. The term "subsidiary" as used in this Agreement shall mean any
subsidiary of the Company as defined in Section 424(f) of the Code.



               (b) Whenever the word "Optionee" is used in any provision of this
Agreement under circumstances where the provision should logically be construed
to apply to the executors, the administrators, or the person or persons to whom
the Options may be transferred by will or by the laws of descent and
distribution, the word "Optionee" shall be deemed to include such person or
persons.



               7. NON-TRANSFERABILITY. The Options are not transferable by the
Optionee otherwise than by will or the laws of descent and distribution and are
exercisable during the Optionee's lifetime only by him. No assignment or
transfer of the Options, or of the rights represented thereby, whether voluntary
or involuntary, by operation of law or otherwise (except by will or the laws of
descent and distribution), shall vest in the assignee or transferee any interest
or right herein whatsoever, but immediately upon such assignment or transfer the
Options shall terminate and become of no further effect. Unless otherwise
provided by the Committee at the time of exercise, Optionee shall enter into a
binding agreement with the Company at the time of grant pursuant to which
Optionee agrees, during any period when the Minimum Stock Ownership Threshold is
met or exceeded, (i) not to sell, assign or otherwise transfer more than 25% of
the Stock purchased pursuant to an Option in any given year and (ii) in
aggregate not to sell, assign or otherwise transfer more than 25% of the Stock
purchased pursuant to an Option over a five year period beginning on the
effective date of the Plan. Appropriate legends shall be placed on the stock
certificates evidencing shares issued upon exercise of options to reflect such
transfer restrictions.





                                      B-4
<PAGE>   17


               8. RIGHTS AS STOCKHOLDER. The Optionee or a transferee of the
Options shall have no rights as a stockholder with respect to any share covered
by the Options until he shall have become the holder of record of such share,
and no adjustment shall be made for dividends or distributions or other rights
in respect of such share for which the record date is prior to the date upon
which he shall become the holder or record thereof.



               9. RECAPITALIZATIONS, REORGANIZATIONS, ETC. (a) The existence of
the Options shall not affect in any way the right or power of the Company or its
stockholders to make or authorize any or all adjustments, recapitalizations,
reorganizations or other changes in the Company's capital structure or its
business, or any merger or consolidation of the Company, or any issue of stock
or of options, warrants or rights to purchase stock or of bonds, debentures,
preferred or prior preference stocks ahead of or affecting the Stock or the
rights thereof or convertible into or exchangeable for Stock, or the dissolution
or liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.



               (b) The shares with respect to which the Options are granted are
shares of Stock of the Company as presently constituted, but if, and whenever,
prior to the delivery by the Company of all of the shares of the Stock with
respect to which the Options are granted, the Company shall effect a subdivision
or consolidation of shares of the Stock outstanding, without receiving
compensation therefor in money, services or property, the number and price of
shares remaining under the Options shall be appropriately adjusted. Such
adjustment shall be made by the Committee, whose determination as to what
adjustment shall be made, and the extent thereof, shall be final, binding and
conclusive. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to the Options.


               (c) In the event of any change in the outstanding shares of Stock
by reason of any recapitalization, merger, consolidation, spin-off, combination
or exchange of shares or other corporate change, or any distributions to common
shareholders other than cash dividends, the Committee shall make such
substitution or adjustment, if any, as it deems to be equitable, as to the
number or kind or shares of Stock or other securities covered by the Options and
the option price thereof. The Committee shall notify the Optionee of any
intended sale of



                                      B-5
<PAGE>   18


all or substantially all of the Company's assets within a reasonable time prior
to such sale.



               (d) Except as hereinbefore expressly provided, the issue by the
Company of shares of stock of any class, or securities convertible into or
exchangeable for shares of stock of any class, for cash or property, or for
labor or services, either upon direct sale or upon the exercise of options,
rights or warrants to subscribe therefore, or to purchase the same, or upon
conversion of shares or obligation of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Stock subject to the
Options.



               10. COMPLIANCE WITH LAW. Notwithstanding any of the provisions
hereof, the Optionee hereby agrees that he will not exercise the Options, and
that the Company will not be obligated to issue or transfer any shares to the
Optionee hereunder, if the exercise hereof or the issuance or transfer of such
shares shall constitute a violation by the Optionee or the Company of any
provisions of any law or regulation of any governmental authority. Any
determination in this connection by the Committee shall be final, binding and
conclusive. The Company shall in no event be obliged to register any securities
pursuant to the Securities Act of 1933 (as now in effect or as hereafter
amended) or to take any other affirmative action in order to cause the exercise
of the Options or the issuance or transfer of shares pursuant thereto to comply
with any law or regulation of any governmental authority.



               11. NOTICE. Every notice or other communication relating to this
Agreement shall be in writing, and shall be mailed to or delivered to the party
for whom it is intended at such address as may from time to time be designated
by it in a notice mailed or delivered to the other party as herein provided,
provided that, unless and until some other address be so designated, all notices
or communications by the Optionee to the Company shall be mailed or delivered to
the Company at its principal executive office, and all notices or communications
by the Company to the Optionee may be given to the Optionee personally or may be
mailed to him at the address shown below his signature to this Agreement.



               12. NON-QUALIFIED OPTIONS. The Options granted hereunder are not
intended to be incentive stock options within the meaning of Section 422 of the
Code.




                                      B-6
<PAGE>   19

               13. BINDING EFFECT. Subject to Section 7 hereof, this Agreement
shall be binding upon the heirs, executors, administrators and successors of the
parties hereto.



               14. GOVERNING LAW. This Agreement shall be construed and
interpreted in accordance with the laws of the State of Delaware.



               15. PLAN. The terms and provisions of the Plan are incorporated
herein by reference. In the event of a conflict or inconsistency between
discretionary terms and provisions of the Plan and the express provisions of
this Agreement, this Agreement shall govern and control. In all other instances
of conflicts or inconsistencies or omissions, the terms and provisions of the
Plan shall govern and control.







                                      B-7
<PAGE>   20


IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.



                                           AAMES FINANCIAL CORPORATION





                                           By: _______________________________

                                                        Optionee







                                      B-8
<PAGE>   21

                                                                      EXHIBIT C



                           PROMISSORY NOTE AND WAIVER



$540,000                                             LOS ANGELES, CALIFORNIA
                                                     January __, 1999



               FOR VALUE RECEIVED, the undersigned Neil B. Kornswiet
(hereinafter "Kornswiet") hereby promises to pay to the order of Aames Financial
Corporation, 350 S. Grand Avenue, Los Angeles, California 90071 (hereinafter
called the "Company") the principal amount of FIVE HUNDRED AND FORTY THOUSAND
DOLLARS ($540,000) together with the interest on the unpaid balance of such
principal amount from the date hereof at the lowest rate of interest prescribed
by Section 7872 of the Internal Revenue Code of 1986 that would permit
imputation of interest under such section to be avoided.

               This Note and the indebtedness evidenced hereby are being
provided pursuant to the terms of the agreement effective as of January , 1999
between Kornswiet and the Company (the "Employment Agreement").

               Subject to the terms and conditions herein, if Kornswiet is
employed by the Company for the full period from January __, 1999 through the
first anniversary of the "Effective Date", as such term is defined in
Kornswiet's Employment Agreement (the "Effective Date") or through the date of
any earlier termination of Executive's employment by the Company pursuant to
Paragraphs 5A, B, or F of the Employment Agreement or by the Executive pursuant
to Paragraph 5D of the Employment Agreement, the principal on this Note,
together with the interest accrued on such principal shall be forgiven by the
Company in full and this Note shall be marked canceled. The Company shall also
reimburse Kornswiet on a net after-tax basis for any tax liability attributable
to the forgiveness of interest.

               In the event Kornswiet's employment with the Company is
terminated prior to the first anniversary of the Effective Date, pursuant to
Paragraph 5C of the Employment Agreement or in the event that Kornswiet
terminates his employment with the Company prior to the first anniversary of the
Effective Date for other than "good reason" (as defined in the Paragraph 5D of
the Employment Agreement), Kornswiet shall repay the full principal amount
evidenced by this Note, together with the interest accrued on such principal,
within fourteen (14) days of such termination date.

               Unless this note is forgiven by the Company pursuant to the third
paragraph hereof, the Company shall have the right to set off any amounts which
Kornswiet owes the Company hereunder



                                      C-1
<PAGE>   22


against any monies which the Company or any of its subsidiaries may owe to
Kornswiet, of any nature whatsoever, including without limitation, any
compensation and any severance owed under the Employment Agreement or any other
benefit owed to or held by Kornswiet as an employee of the Company or any of its
subsidiaries, and Kornswiet hereby agrees to and authorizes any such setoff.

               If payment of the principal, together with the interest accrued
on such principal, on this Note is not paid in accordance with the terms
aforementioned, then this Note shall be deemed to be in default and if suit is
brought to collect this Note, the Company shall be entitled to collect, in
addition to any principal outstanding, together with the interest accrued on
such Note, all reasonable costs and expenses to include, but not necessarily be
limited to, reasonable attorneys' fees and expenses.

               Presentment, notice of dishonor and protest are hereby waived by
Kornswiet. This Note shall be binding upon Kornswiet and his heirs, executors,
administrators, and legal representatives.

               No delay or omission on the part of the Company in exercising any
rights hereunder shall operate as a waiver of such rights or of any other right
of the Company, nor shall any delay, omission or waiver on any one occasion be
deemed as a bar to or waiver of the same or any other right on any future
occasion. This Note may not be changed or terminated orally.

               Kornswiet shall have the right to prepay the principal of this
Note, together with the accrued and unpaid interest on such principal, in whole
or in part, at any time or times, without penalty.

               Regardless of whether this Note is forgiven, Kornswiet
acknowledges having received the entire principal amount of this Note from the
Company and hereby waives all rights, if any, to his 1999 Bonus (as defined in
Exhibit A of the Employment Agreement).

               All rights and obligations hereunder shall be governed by, and
construed and enforced in accordance with, the substantive laws of the State of
Delaware, and this Note is executed as, and shall have effect of, a sealed
instrument. If any provision of this transaction is inconsistent with the laws
and statutes of the State of Delaware, the rest of the transaction shall not be
affected, and that part that is not in accord with the said laws shall be
adjusted to so comply.






                                      C-2
<PAGE>   23


               IN WITNESS WHEREOF, the undersigned has executed this Note as an
instrument under seal this ____ day of January, 1999.



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










                                      C-3