<PAGE>   1
                                                                    EXHIBIT 10.3

                                    [IAC
                          IRVINE APARTMENT COMMUNITIES
                                  LETTERHEAD]

February 26, 1998


Mr. James Mead
1979 Port Claridge Place
Newport Beach, CA 92660

Dear Jim:

This letter confirms the terms of your employment as approved by the Board of
Directors on February 6, 1998. To ensure our mutual understanding, the basic
provisions are:

Time Frame:         The terms of this employment agreement extend from January
                    1, 1998 to December 31, 2002.

Base Salary:        $20,833/month ($250,000 annual equivalency). During the five
                    year term, you will be eligible for salary increases as
                    approved by the Compensation Committee.

Cash Bonus:         You will be eligible to earn an annual payment of 0-100% of
                    your base salary, based upon your performance and the
                    Company's performance.

Stock Options:      You have been awarded 38,000 stock options on February 6,
                    1998 at an exercise price equivalent to the closing price of
                    the stock on February 6, 1998 ($31.625 per share). In
                    addition, you will be awarded 25,000 stock options in 1999
                    and 20,000 stock options in 2000, assuming your continued
                    employment with the Company. All of these options will
                    vest at the rate of one third each year over a three year
                    period following their grant date.

Restricted Stock:   You have been awarded 20,000 shares of restricted stock in
                    1998, which will become eligible for vesting over a five
                    year period at the rate of 0%, 20%, 20%, 20%, 40%, based on
                    IAC's performance in achieving FAD per share targets as
                    determined by the Compensation Committee for 1998 awards.

                    In addition, you will be awarded 10,000 shares of restricted
                    stock in 1999, assuming continued employment. This award
                    shall be eligible for vesting over a four year period at the
                    rate of 0%, 20%, 20% 60% based upon achievement of FAD per
                    share targets as determined by the Compensation Committee
                    for 1999 awards.


<PAGE>   2
James Mead
Page 2
February 26, 1998


                    In addition, you will be awarded 10,000 shares of restricted
                    stock in 2000, assuming continued employment. This award
                    shall be eligible for vesting over a three year period at
                    the rate of 0%, 20%, 80% based upon achievement of FAD per
                    share targets as determined by the Compensation Committee
                    for 2000 awards.

                    Despite the accelerated vesting schedule of the 1999 and
                    2000 restricted stock awards, both of these awards will
                    retain the normal five year opportunity for "catch-up"
                    vesting of previously unearned shares. Specifically, all of
                    the shares of the 1999 award may be earned by 2002; but any
                    shares that are not earned by 2002 may still be earned by
                    applying the FAD achieved in 2003 to the previous FAD
                    targets for each vesting date. Similarly, all of the shares
                    from the 2000 award that are still unearned by 2002, may
                    still be earned by applying the FAD achieved in 2003 and
                    2004 to the previous FAD targets for each vesting date.

Dividend
Equivalents:        You will receive quarterly dividend equivalent payments on
                    the shares of restricted stock in amounts, and at such
                    times, as shareholders receive dividends on IAC shares.

Severance:          You will be provided with a payment of 24 months salary if
                    your employment is terminated involuntarily prior to
                    December 31, 2000. You will be provided with 18 months
                    salary if your employment is terminated involuntarily
                    between January 1, 2001 and December 31, 2002. However,
                    severance will not be provided if your termination is for
                    "just cause". A "just cause" employment termination shall
                    exist in the following circumstances: (1) dishonesty, fraud
                    or breach of trust, or (2) willful engagement in any
                    misconduct in the performance of duties that materially
                    injures the Company, or (3) willful and substantial
                    non-performance of assigned duties, provided that such
                    nonperformance has continued for more than ten days after
                    the Company has given notice of such nonperformance and of
                    its intention to terminate your employment because of such
                    nonperformance.

Auto Allowance:     $700 per month.

Benefits:           You will continue to participate in corporate fringe
                    benefits programs (health, life insurance, etc.) as
                    established by Company policy.
<PAGE>   3
James Mead
Page 3
February 26, 1998


Your confirmation that the terms of your employment are accurately described
above will be indicated by signing and returning the duplicate of this letter
to me. If you have any questions, please do not hesitate to ask.

Sincerely,

[SIG]

William McFarland
President


I understand and accept that the terms of this employment letter are all
inclusive and supersede all other verbal or written discussions of my terms of
employment.

Signature:     [SIG]                           Date:   03/20/98
            -------------------------------            ------------
            James Mead