SEPARATION AGREEMENT


        This is a Separation Agreement dated as of December 31, 1998 between
Fort James Operating Company, its parent, affiliates, subsidiaries,
predecessors, successors and assigns (collectively "Fort James" or the
"Company") and Timothy G. Reilly ("Reilly").
        A. Reilly has been employed by Fort James as President, North American
Commercial business under his employment agreement dated as of June 5, 1997 (the
"Employment Agreement") and wishes to resign that employment. Fort James and
Reilly have agreed on the terms under which he will terminate his employment
with the Company. The parties desire to resolve matters involving Reilly's
employment, the Employment Agreement and Reilly's separation from employment
with Fort James.
        B. Reilly and Fort James further desire to settle, resolve and release
any and all existing or potential claims, controversies, differences, disputes
or disagreements, known or unknown, that Reilly may have with Fort James in
exchange for Fort James' agreement to provide Reilly certain compensation and
benefits to which he otherwise he may not be entitled.
        C. Fort James also desires to provide Reilly with additional
compensation over the next two (2) years in return for Reilly agreeing (i) not
to compete against Fort James, (ii) not to hire former Fort James employees who
worked with Reilly in the Consumer Products Business of Fort James and (iii) to
cooperate with Fort James.
        THEREFORE, in consideration of the above premises and the mutual
covenants and promises contained herein, Reilly and Fort James agree as follows:
               1. TERMINATION OF EMPLOYMENT. Reilly agrees to voluntarily
terminate his employment effective at the close of business on December 31, 1998
(his "Date of Termination"). He will be paid all of his regular compensation and
benefits through that date. His last day of work and responsibilities shall be
December 31, 1998.

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               2. SEVERANCE PAYMENTS. Fort James shall pay Reilly in a lump sum,
the amount of $1,845,000 representing three (3) times the sum of (i) his current
base salary and (ii) his 1997 Management Incentive Bonus, less authorized
deductions and deductions for required taxes. In addition, Fort James shall pay
Reilly $63,001.34 representing three (3) times the Company's 1998 401(k) and
related SERP contributions for the benefit of Reilly.
               3. 1998 MIP BONUS PAYMENT. Fort James shall pay Reilly $300,000
representing his bonus under the 1998 Management Incentive Plan.

               4. PENSION AND OTHER BENEFITS.

                      (a) All Company provided medical, prescription and dental
coverage, life insurance, accidental death and dismemberment and long term
disability benefits shall be provided to Reilly and members of his family for
three (3) years following his Date of Termination, to the extent provided in his
Employment Agreement.
                      (b) Reilly is the beneficiary of 12,933 restricted shares
and 14,550 performance shares issued pursuant to the 1996 Stock Incentive Plan
(the "Plan"). Reilly agrees to relinquish all right to the restricted and
performance shares as of December 31, 1998. In return, the Company agrees to pay
Reilly on or before January 29, 1999, an amount equivalent to the value on
December 31, 1998 of 27,483 shares of Common Stock of the Company (the "Common
Stock") determined by calculating the average of the high and low price (the
"Average Price") of the Common Stock plus an amount equal to $13,095,
representing the accrued dividends on such shares.
                      (c) Reilly's existing stock options shall be amended
effective December 31, 1998 as set forth in Exhibit A hereto.
                      (d) Nothing herein shall forfeit or otherwise affect
Reilly's right to vested benefits in the Fort Howard 401(k) Plan and related
SERP, which benefits shall be paid to Reilly according to such plan.


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<PAGE>

                      (e) Reilly shall not be entitled to any other bonus
payments or profit sharing awards including any payments under the Management
Incentive Plan.
                      (f) All payments referred to herein are gross payments
from which Fort James may withhold legal and authorized amounts for payment to
taxing authorities as required by law.
                      (g) The Company shall pay Reilly $21,000 for tax advice
and tax preparation expenses for calendar years 1999 through 2001.
                      (h) The Company will pay Reilly $38,169.14 representing
the mortgage buydown on his Lake Forest, Illinois residence for three (3) years
commencing 1/1/99.
                      (i) The Company will pay the cost of the $1,500,000 life
insurance policy provided to Reilly under the split-dollar insurance program for
the years 1999 through 2001. Thereafter, Reilly will be responsible for the
payments should he elect to continue the policy.
                      (j) The Company will reimburse Reilly for reasonable legal
expenses in connection with the negotiation of this Separation Agreement, not to
exceed $6,000. The Company agrees to pay as incurred, to the full extent
permitted by law, all legal fees and expenses which Reilly may reasonably incur
as a result of any contest (regardless of the outcome thereof) by the Company,
Reilly or others of the validity or enforceability of, or liability under, any
provision of the Employment Agreement or this Separation Agreement or any
guarantee of performance thereof (including as a result of any contest by Reilly
about the amount of any payment pursuant to this Agreement), plus in each case
interest on any delayed payment at the applicable Federal rate provided for in
Section 7872 (f) (2) (A) of the Internal Revenue Code of 1986, as amended (the
"Code").
               5. METHOD OF PAYMENT. All cash payments required by this
Agreement shall be made by wire transfer to Reilly's account or accounts which
he shall designate in writing


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<PAGE>

to the Company's Senior Vice President, General Counsel. Such transfers shall be
authorized and released in advance so as to arrive in Reilly's account(s) by
January 29, 1999, (the "Payment Date").
               6. COMPANY CAR. Fort James agrees to transfer to Reilly no later
than January 29, 1999, the certificate of title to the automobile previously
provided him for his personal and business use. Reilly acknowledges that after
transfer of the title to the car to him, Fort James will no longer be
responsible for providing insurance or maintenance for the vehicle in any manner
and he shall be responsible for all costs associated with the vehicle from that
date forward.
               7. RELOCATION. The Company will arrange for and pay the cost of
moving Reilly's household and personal property to Green Bay, Wisconsin and will
guarantee the original purchase price and improvements of $923,480 paid by
Reilly for his home in Lake Forest, Illinois.
               8. GENERAL RELEASE. In consideration of all payments due him
hereunder or under the Employment Agreement, Reilly hereby agrees, for himself,
his successors, heirs, representatives, executors, agents and assigns, to
release and forever discharge Fort James, including its affiliates,
subsidiaries, parents, predecessors, successors and assigns and their respective
directors, officers, employees and agents thereof from any and all claims,
debts, responsibilities and liabilities of every kind and character whatsoever,
known or unknown, suspected or unsuspected, which he has ever had or may have
against Fort James, including but not limited to, any and all claims arising out
of Reilly's employment or termination of employment with Fort James. Reilly
acknowledges that this Release includes any and all claims whether in contract
or in tort, claims that may be brought on his behalf by others, claims brought
before any court or administrative agency, or claims under any national,
federal, state or local statute or ordinance, including any claims under Title
VII of the Civil Rights Act of 1964, the


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<PAGE>

Age Discrimination in Employment Act, the Americans with Disabilities Act or any
other law.
               It is acknowledged that this Separation Agreement does not
release Reilly's right to any vested benefits in the Fort James Corporation
StockPLUS Plan (the "StockPLUS Plan"). Reilly's eligibility for benefits in the
StockPLUS Plan will be controlled by the terms of the plan.
               9. SPECIAL RELEASE NOTIFICATION. This Separation Agreement
includes a release of all claims under the Age Discrimination in Employment Act,
("ADEA"), and, therefore, pursuant to the requirements of the ADEA, Reilly
acknowledges that he has been advised (1) that this release includes but is not
limited to, all rights or claims arising under the ADEA up to and including the
date of execution of this release, but does not waive rights or claims that may
arise after the date of execution; (2) to consult with an attorney or other
advisor of his choosing concerning his rights and obligations under this
release; (3) to fully consider this release before executing it, and that he has
been offered at least twenty-one (21) days to do so; (4) that this release shall
become effective and enforceable seven (7) days following execution of this
Separation Agreement, during which seven (7) day period Reilly understands that
he may revoke his acceptance of this Separation Agreement by delivering written
notice to Clifford A. Cutchins, IV, Senior Vice President and General Counsel,
Fort James Corporation, 1650 Lake Cook Road, Deerfield, Illinois 60015.

               10.    POST EMPLOYMENT RESTRICTIONS, OBLIGATIONS

                      (a) Reilly agrees to comply with the terms of his
Confidentiality Agreement executed between himself and Fort James and not to
otherwise use or disclose Fort James confidential information in the future. A
copy of this Agreement is attached as Exhibit B.

                      (b) In return for the extension of the option exercise
period, the vesting and payment for the restricted shares and the performance
shares as set forth in Paragraph 4(b), Reilly agrees, in order to protect the
Company's goodwill, trade secrets and confidential information and thereby help
ensure the long-term success and development of the business, not


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<PAGE>

to engage in competitive activities on behalf of a competitive business for a
period of two (2) years following the Date of Termination with the Company for
whatever reason, without first obtaining written permission from either the
Senior Vice President and General Counsel or the Senior Vice President, Human
Resources, which shall not be unnecessarily withheld or delayed. "Engage in
competitive activities" means rendering services or being involved directly or
indirectly in any way or in any capacity whether as an officer, director,
employee, agent, owner, shareholder or consultant (excluding ownership of less
than 5% of the stock of a publicly traded company), in the manufacture,
development, promotion or sale of any towel, tissue or foodservice cup, plate or
cutlery product of the type manufactured by Fort James (the "Covered Products").
A "competitive business" means any person or entity engaged in the manufacture
or non-retail sale of the Covered Products. Reilly acknowledges that products of
the Company are sold throughout North America and Western Europe. Accordingly,
the geographic area covered by this restraint shall include any county, city,
town, province or comparable unit of local government where the Covered Products
are manufactured, marketed or sold by the Company. The parties agree that this
non-compete provision supersedes all prior agreements between them on this
subject.
                      (c) Reilly agrees for a period of two (2) years not to
solicit directly or indirectly for employment any employee or former employee of
Fort James or its affiliates, who worked in the North American Commercial
business as of December 31, 1998, without the written consent of the Senior Vice
President, Human Resources for the Company, which shall not be unreasonably
withheld or delayed. Further, Reilly agrees that if any such Fort James employee
approaches him for employment, he will refer them to the appropriate hiring
official of his employer and will have no involvement either in the hiring of
the employee or in working with the employee should such employee work for the
same company for which Reilly works.

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<PAGE>

                      (d) Reilly agrees that as President of the Company's North
American Commercial business, he possesses intimate knowledge about all aspects
of the Company's business, business plans and other confidential or propriety
information. He also agrees that these restrictions are reasonable and necessary
to protect the Company's business and in consideration of the substantial
benefits provided him hereunder. If Reilly violates any of his obligations under
this paragraph 10, the Company shall have no further obligation to him under
this Agreement as on the date of breach. Reilly agrees that the Company will be
irreparably harmed and will be entitled to immediate injunctive relief in the
event of such breach in addition to any other monetary remedies.
                      (e) If any aspect of the above post employment
restrictions are deemed void or unenforceable by any court of competent
jurisdiction, the parties agree that the court should modify these restrictions
to a point they would be enforceable and enforce the restrictions to that
extent.

               11. INDEMNITY. Fort James agrees to continue to indemnify and
save Reilly harmless from all claims, actions and liabilities which may arise in
connection with his reasonable performance of his duties for the Company. Such
indemnification shall be to the same extent as its indemnification of active
executives of equal rank but shall relate only to Reilly's alleged actions or
failure to act during the period in which he was employed by the Company. In
addition, the Company agrees to reimburse Reilly for any federal excise tax
pursuant to Internal Revenue Code Section 4999, which may be imposed on any
payments made to Reilly pursuant to this Separation Agreement and will provide
Reilly the benefits of Paragraph 8 of the Employment Agreement.
               12. FUTURE COOPERATION. Reilly agrees to cooperate in providing
transition assistance related to his departure as may be reasonably required of
him by Fort James, including presences as a witness in legal proceedings as may
be necessary, both before and after his Date


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<PAGE>

of Termination. Fort James will reimburse Reilly for any reasonable expenses
incurred in this regard.
               13. RESIGNATION. By his signature hereto, Reilly hereby resigns
his position as President, North American Commercial business and any and all
other positions with the Company, its subsidiaries, its parent and its
affiliates.
               14. CONFIDENTIALITY. Reilly agrees that he will not divulge the
contents of this Separation Agreement which are agreed to be confidential in
nature except (a) Reilly may divulge the contents to his spouse, attorney,
financial advisor and income tax preparer; or (b) except as may be required to
comply with legal process. It is further agreed by Reilly that if it is
necessary that this Agreement or a significant portion be disclosed to those
listed above, Reilly agrees to instruct and request each of them, or use such
other efforts as may be reasonable, to keep any information so disclosed
confidential. If Reilly materially breaches this provision, the Company will
have no further obligation to him under this Agreement.
               15. ENTIRE AGREEMENT. Reilly understands and agrees that all
terms of this Separation Agreement are contractual and are not a mere recital.
The parties represent and warrant that in negotiating and executing this
Separation Agreement, each have had an opportunity to consult with legal counsel
or other representatives of their own choosing concerning the meaning and effect
of each term or provision hereof, and that there are no representations,
promises or agreements other than those specifically referred to or set forth in
writing herein.
                      The parties represent and warrant that they have read this
Separation Agreement in its entirety, fully understand and agree to its term and
provisions, and intend and agree that it is a final and legal binding settlement
and release of all claims Reilly may have.


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<PAGE>

               16. SEVERABILITY. If any portions of this Separation Agreement
are void or deemed unenforceable for any reason, the unenforceable portions
shall be deemed severed from the remaining portions of this Agreement which
shall otherwise remain in full force and effect.
               17. NO WAIVER. The decision of either party not to assert a claim
for breach of the Separation Agreement shall not be construed as a waiver of
that or any subsequent breach which might occur.
               18. CORPORATE AUTHORITY. The officer executing this Separation
Agreement on behalf of Fort James represents that he has full corporate
authority to do so and to bind the Company, its parents, affiliates,
subsidiaries, predecessors, successors and assigns.
               19. GOVERNING LAW. This Agreement shall be governed and construed
according to the laws of the Commonwealth of Virginia.

               IN WITNESS WHEREOF, the parties have affixed their signatures:

                                       /s/ TIMOTHY G. REILLY
                                       ---------------------
                                       Timothy G. Reilly





                                       FORT JAMES OPERATING COMPANY



                                By:    /s/ DANIEL J. GIRVAN
                                       ---------------------
                                       Daniel J. Girvan
                                       Senior Vice President

                                       9

<PAGE>

                             FORT JAMES CORPORATION

                           AMENDMENT TO STOCK OPTIONS


        FORT JAMES CORPORATION (the "Company") and Timothy G. Reilly (the
"Participant") hereby agree to this Amendment to Stock Options as of December
31, 1998.

        WHEREAS, the Participant has been granted certain options to acquire
shares of common stock of the Company ("Company Stock") which are listed below.

        WHEREAS, in connection with the Participant's termination of employment
without cause, the Company and the Participant wish to modify certain terms of
such options.

        WHEREAS, the terms of this Amendment to Stock Options have been approved
by the Compensation Committee of Fort James Corporation (the "Committee").

        THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter, the Company and the Participant agree as follows:

        1.  The options granted to the Participant on January 6, 1998 for 80,000
            shares (the "1998 Options") shall be vested and exercisable as of
            December 31, 1998:

        2.  The 1998 Options and the options for 46,750 shares granted to
            Participant on December 6, 1995 and December 9, 1996 (the "1995 and
            1996 Options") may be exercised at any time on or before December
            31, 2000. Options for 8,938 shares granted to Participant on June
            27, 1990 (the "1990 Options") may be exercised at anytime on or
            before June 26, 2000. Options for 16,088 shares granted to
            Participant on April 30, 1991 (the "1991 Options") may be exercised
            at anytime on or before April 29, 2001. To the extent not previously
            exercised, the 1995, 1996 and 1998 Options shall expire and cease to
            be exercisable on January 1, 2001. The 1990 Options shall expire and
            cease to be exercisable on June 27, 2000. The 1991 Options shall
            expire and cease to be exercisable on April 30, 2001.

        3.  Any provisions of the options relating to the time for vesting or
            the period to exercise the options are superseded by this Amendment
            to Stock Options, including provisions requiring the continuing
            employment of the Participant or measuring periods to exercise the
            options based on termination of employment by the Participant.

        4.  To the extent not specifically amended by the provisions of this
            Amendment to Stock Options, the terms and conditions of the options
            shall continue to apply.

        5.  Any controversy concerning this Amendment to Stock Options shall be
            resolved by the Committee as it deems proper, and any interpretation
            of this Amendment


                                       -1-
<PAGE>

            to Stock Options or other decision of the Committee shall be final
            and conclusive.

        6.  If the Participant dies before an option expires, all of the options
            that he held at the time of his death may be exercised by the
            personal representative of his estate. The options may be exercised
            at any time until the expiration date of the options.

        7.  As a further condition of this Amendment to Stock Options, and in
            consideration of receipt of these rights, the Participant agrees to
            comply with all provisions of the Separation Agreement between the
            Participant and Fort James Operating Company. If the Committee
            determines that the Participant has violated the provisions of the
            Separation Agreement, the options shall terminate as of the date
            when a violation of the Separation Agreement first occurred as
            determined by the Committee (the "Violation Date") and the options
            shall no longer be exercisable as of the Violation Date.

        8.  Any notice to be given under the terms of this Amendment to Stock
            Options shall be addressed to Fort James Corporation, Corporate
            Secretary, P.O. Box 89, Deerfield, Illinois 60015, and any notice to
            be given to the Participant or to his personal representative shall
            be addressed to him at the last address on the records of the
            Company or at such other address as either party may hereafter
            designate in writing to the other. Notices shall be deemed to have
            been duly given if mailed, postage prepaid, addressed as aforesaid.


        IN WITNESS WHEREOF, the Company and the Participant have caused this
Amendment to Stock Options to be signed, as of the dates below.

                                    FORT JAMES CORPORATION



Date 12/31/98                       By  /s/ MILES L. MARSH
                                        ------------------------------
                                        Chairman of the Board and CEO



                                    TIMOTHY G. REILLY



Date 12/31/98                       Signature /s/ TIMOTHY G. REILLY
                                              -----------------------
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