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                            AMERICAN PAD & PAPER COMPANY
                           17304 PRESTON ROAD, SUITE 700
                                  DALLAS, TX 75252
                                          
                                  October 13, 1998

Mr. Timothy E. Needham
5908 Crownover Court
Plano, TX 75093               

Dear Tim:

          This letter sets forth our agreement (the "Letter Agreement")
relating to your resignation as an officer and employee of American Pad & Paper
Company and its subsidiaries (the "Company") and your continuing relationship
with the Company.  Reference is made to that certain Employment Agreement dated
as of July 2, 1996, as amended on August 7, 1998 (the "Employment Agreement"),
by and among you and the Company.  The capitalized terms used herein and not
defined herein have the meanings specified in the Employment Agreement.  Our
agreement consists of the following:

          1.  TERMINATION AND CONSULTING ARRANGEMENT.  

          (a)  Effective October 31, 1998, your employment with the Company and
its subsidiaries will be terminated and you will resign as an officer of the
Company and its subsidiaries.  For purposes of the Employment Agreement, your
termination will be deemed to be a termination by the Company without Cause.

          (b)  Effective October 31, 1998, in addition to the severance and
other benefits described herein, the Company hereby engages you as an
independent contractor, and not as an employee, to render consulting services to
the Company as hereinafter provided, and you hereby accept such engagement, for
a period ending on December 31, 1999 (the "Consulting Period").  You will not
have any authority to bind or act on behalf of the Company or its subsidiaries. 
During the Consulting Period, you will render such consulting services to the
Company as are mutually agreed upon by you and the Company at mutually
convenient times.  These obligations shall not interfere or prohibit any other
consulting services or employment in which you are engaged.  In addition, you
will not make any disparaging remarks regarding the Company, and the Company
will not make any disparaging remarks regarding you.

          (c)  The Company will reimburse you for all reasonable expenses
incurred by you in the course of performing your duties under this Letter
Agreement which are consistent with the Company's standard policies in effect
from time to time with respect to travel and other business expenses, subject to
the Company's requirements with respect to reporting and documentation of such
expenses.  In addition, during the Consulting Period, you agree to attend on
behalf of the Company, 

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Timothy E. Needham
October 13, 1998
Page 2


and the Company will reimburse you for the reasonable travel, lodging and 
meal expenses incurred by you in attending, the trade association meetings 
for the National Paper Trade Association, the NCCJ Paper Division and the 
Post Office Museum.

          (d)  You will file all tax returns and reports required to be filed by
you on the basis that you are an independent contractor, rather than an
employee, as defined in Treasury Regulations Section 31.3121(d)-1(c)(2), and you
will indemnify the Company for the amount of any employment taxes paid by the
Company as the result of you not paying employment taxes from the payment
described in paragraph (e) below.  The Company agrees to report all income
earned from the payments described in paragraph (e) below on a Form 1099 and
agrees to deliver such form to you within the required statutory time period.

          (e)    In consideration for the consulting services described above
and your compliance with all of your obligations set forth herein, in Sections
5, 6 and 7 of the Employment Agreement and in the Release, on July 2, 2000 the
Company hereby agrees to pay you an amount equal to $240,000 (the "Consulting
Payment").  In the event that any amounts are still owed by you on July 2, 2000
under that certain Promissory Note, dated July 2, 1996, as amended on February
6, 1998 and August 7, 1998 (the "Note"), issued by you to the Company, the
Company shall have the right to set off the amounts owing under the Note against
the Consulting Payment.  Additionally, to the extent that the Consulting Payment
is owed by the Company to you and the Company does not pay such amount to you,
the Consulting Payment will be deemed to have been paid and the outstanding
amounts under the Note will be deemed to be reduced by the amount of the
Consulting Payment.  In the event that the Company believes that you are not in
compliance with the obligations described above, the Company will promptly
notify you of such noncompliance and give you the opportunity to cure such
noncompliance (to the extent cure is possible).

           2.  SEVERANCE PAYMENT. In lieu of (a) the severance payments of your
Base Salary for 18 months following the end of the Employment Period, (b) your
Bonus and (c) your car allowance under paragraph 3(b)(iii) of the Employment
Agreement, the Company hereby agrees, and you hereby accept, two lump sum
payments as severance, payable as follows: (i) upon the later to occur of (A)
the effectiveness of this agreement and the Release and (B) October 31, 1998,
$56,000; and (ii) on January 1, 1999, $570,000.  The Company agrees to withhold
taxes in specified amounts at your request from the amounts payable under this
Section 2.

          3.  BENEFITS.  For 18 months following the end of the Employment
Period, the Company, at its sole cost and expense, will provide you and your
family with health, disability and other benefits set forth in paragraph 3(a) of
the Employment Agreement and the fringe benefits described in paragraphs
3(b)(vi) and 3(b)(vii) of the Employment Agreement.  At the end of the 18 month
period, you will be entitled to receive continuous insurance coverage in the
manner and to the extent required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended.  

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Timothy E. Needham
October 13, 1998
Page 3


In addition, for 18 months following the end of the Employment Period, the 
Company will provide you with the following additional benefits:

          (i)  the use and access to an executive secretary of the Company, as
               deemed reasonably necessary by you; and

          (ii) the use of a computer, mobile phone (for which the Company will
               pay the monthly service fee and you will be responsible for all
               roaming and long distance charges), the Company's voicemail and
               fax machine (and you will be entitled to retain the hardware
               (other than the voicemail) at no cost following the end of the
               18-month period).

          4.  SALE OF THE COMPANY AGREEMENT. The Company and you hereby agree
that the certain Sale of the Company Agreement dated as of August 7, 1998 by and
between you and the Company is hereby terminated and of no further force and
effect.

          5.  OUTPLACEMENT SERVICES.  The Company will provide you, at its sole
cost and expense, with outplacement services for the purposes of obtaining other
employment for a period of 9 months following the end of the Employment Period,
such service to be selected by you with the approval of the Company (where
approval will not be unreasonably withheld).

          6.  NON-COMPETE AND OTHER PROVISIONS.  The Company and you agree that
the non-compete and non-solicitation set forth in paragraph 7 of the Employment
Agreement will run for a period from the date hereof to and including 18 months
following the end of the Employment Period.  The Company and you agree that the
confidentiality and intellectual property provisions of paragraphs 5 and 6 of
the Employment Agreement continue to apply to you during the Consulting Period.

          7.  D&O INDEMNIFICATION.  The Company hereby agrees and acknowledges
that it will continue to honor its indemnification obligations to you set forth
in its certificate of incorporation and/or bylaws with respect to any existing
or future lawsuit against the Company and any other actions pursuant to which
you would be entitled to indemnification. In addition, you shall have the right
to retain separate counsel with regard to any such lawsuit or action and the
Company will indemnify you for the costs and expenses incurred with respect
thereto, regardless of whether the costs and expenses of such separate
representation are covered by insurance, to the extent such rights and
indemnities are provided in the Company's certificate of incorporation and/or
bylaws.

          8.  RELEASE.  Attached hereto as Exhibit I is a release ("Release")
which you agree to execute and deliver to the Company.  It is understood and
agreed that the effectiveness of the Release is conditioned upon the Company's
compliance with its obligations under this Letter Agreement, and will otherwise
be of no force and effect.

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Timothy E. Needham
October 13, 1998
Page 4


          9.  PRESS RELEASES.  The parties to this Letter Agreement agree that
they will not issue any public statement regarding your termination of
employment with the Company or regarding this Letter Agreement without the prior
written consent of the other party hereto, except as required by law. 

          10.  COMPLETE AGREEMENT.  The parties hereto agree that the Employment
Agreement will continue in full force and effect, including but not limited to
paragraph 18 thereof, except as modified by this Letter Agreement, such
modifications to include but not be limited to paragraph 2(b).

          11.  BINDING EFFECT.  This Letter Agreement is binding on the Company
subject only to your not revoking the Release prior to the expiration of the
seven day period following your execution of the Release.  Notification of
revocation by you during the seven day period must be accomplished by hand
delivered written notice of revocation to the Company at 17304 Preston Road,
Suite 700, Dallas, TX 75252, Attention: General Counsel, with a copy to the
Company's counsel, James L. Learner, Kirkland & Ellis, 200 E. Randolph Drive,
Chicago, IL 60601, before midnight of the seventh day after the execution date
of the Release.  No attempted revocation after the expiration of such seven day
period will have any effect on the terms of this Letter Agreement or the
Release.

          12.  STOCK OPTIONS.  The Company hereby agrees that (a) you are deemed
vested with respect to 50,000 shares under the stock options granted to you by
the Company on April 8, 1998 with  an exercise price of $6.9375 per share and
with respect to 50,000 shares under the stock options granted to you by the
Company on August 12, 1998 which has an exercise price of $1.753 per share and
(b) such vested options are hereby exercisable until June 30, 2000 in accordance
with the terms of such options.  In addition, the Company and you hereby agree
that all other stock options granted to you by the Company are hereby
terminated.  The Company represents that it has taken all necessary actions to
authorize this Letter Agreement and the terms hereof, including the accelerated
vesting of the stock options.

          13.  LEGAL FEES.  The Company hereby agrees to reimburse you for the
reasonable legal fees and expenses incurred by you in connection with the
negotiation and execution of this Letter Agreement.

          14.  NOTICES AND CONTACTS.  In the event that you intend to notify or
contact the Company regarding this Letter Agreement, such notices or contacts
should be directed to the Company's General Counsel at 17304 Preston Road, Suite
700, Dallas, TX 75252.  All notices to you shall be sent to you at 5908
Crownover Court, Plano, TX 75093, with a copy to Baker & Botts, L.L.P., 2001
Ross Avenue, Dallas, TX 75201, Attention: Catherine Bowe.

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Timothy E. Needham
October 13, 1998
Page 5


          If you are in agreement with the terms of this Letter Agreement,
please sign in the space provided below.

                                       Very truly yours,

                                       AMERICAN PAD & PAPER COMPANY

                                       By
                                         ----------------------------------

                                       Its
                                          ---------------------------------


Agreed and accepted
the __ day of October, 1998:


----------------------------- 
TIMOTHY E. NEEDHAM