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                                December 21, 1998



Mr. David L. Pugh                               PERSONAL AND CONFIDENTIAL
2900 Hidden Lake Road
Mequon, Wisconsin 53092

              Re:     Offer of Employment; President & Chief Operating Officer

Dear David:

              This letter sets forth the proposed terms of your employment with
Applied Industrial Technologies, Inc. ("Applied"), commencing effective January
1, 1999:

              1.     POSITION. Your title will be President & Chief Operating
                     Officer and you will report to me.

              2.     BASE SALARY. As is the case with all Applied officers,
                     compensation and benefits are set by the Board's Executive
                     Organization & Compensation Committee (the "Committee").
                     Under present procedures, annual base salary is reviewed in
                     October of each year, with changes effective November 1.
                     Your starting annual base salary will be $375,000.

              3.     1999 MANAGEMENT INCENTIVE PLAN. You will be designated a
                     participant in the Management Incentive Plan for the fiscal
                     year ending June 30, 1999. The Management Incentive Plan
                     provides for incentive payments based on both Applied and
                     the officer achieving certain goals. The Committee and the
                     full Board of Directors set the goals at the beginning of
                     each fiscal year, with payments, if any, distributed in
                     August following the end of the year. If Applied fails to
                     achieve its corporate goals, there are no payments under
                     the Plan. Assuming the corporate goals are achieved, the
                     payout is based upon a formula. The target incentive
                     payment for each officer is a multiple of the salary
                     midpoint for the officer position as set by the Committee
                     and a target percentage assigned to the position.

                     For fiscal 1999, you and I will have Applied's corporate
                     goals (which were set in July) for our individual goals.
                     Your midpoint for fiscal 1999 will be $375,000 and the
                     target percentage assigned is 60%, 


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Mr. David Pugh
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                     giving you a target incentive payment, if all target goals
                     are met, of $225,000 multiplied by a fraction, the
                     numerator of which is equal to the number of full months
                     during fiscal 1999 that you are an Applied employee and the
                     denominator of which is 12. The maximum payment, if the
                     maximum levels for all corporate and individual goals are
                     met, would be 150% of the target payment and the minimum
                     payment, if only the threshold levels for all goals are
                     met, would be 50% of the target payment. Your incentive
                     payment for fiscal 1999 is guaranteed to be at least
                     $100,000.

                     Under Applied's Deferred Compensation Plan (described in
                     greater detail in the "Overview of Executive Benefit
                     Programs," enclosed), you may defer your receipt of (and
                     payment of taxes on) all or a portion of your Management
                     Incentive Plan awards. If you defer at least 50% of an
                     annual Management Incentive Plan award and elect to have it
                     invested in Applied common stock, your Deferred
                     Compensation Plan account will be credited with 110% of
                     that deferred amount (i.e. a 10% kicker).

              4.     STOCK-BASED AWARDS. The Committee will grant you the
                     following stock-based awards under our 1997 Long-Term
                     Performance Plan promptly following the commencement of
                     your employment with Applied:

                     a.     Stock Options. You will be awarded non-statutory
                            options to purchase 60,000 shares of Applied common
                            stock. The exercise price for the stock options will
                            be the fair market value of Applied common stock on
                            the date of grant. The options will become 25%
                            exercisable after the first year of continuous
                            employment following the date of grant and an
                            additional 25% for each year of continuous
                            employment thereafter. The option agreement term
                            will be 10 years. In addition, you will be paid cash
                            in the amount of the aggregate spread on the options
                            in the event of your termination following a change
                            in control of Applied under the circumstances
                            described in "Change in Control Agreement," below.

                     b.     Restricted Stock. You will be awarded 40,000
                            restricted shares of Applied common stock. The
                            shares will become 25% vested after the first year
                            of continuous employment following the date of grant
                            and an additional 25% for each year of continuous
                            employment thereafter. The shares will bear transfer
                            restrictions for a period of two years following
                            vesting. In the event of a change in control, these
                            shares will become 100% vested and the transfer
                            restrictions will be removed.
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Mr. David Pugh
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                     c.     Performance-Accelerated Restricted Stock. You will
                            be awarded 40,000 shares of Performance-Accelerated
                            Restricted Stock ("PARS") under the terms of a
                            standard PARS agreement. The PARS are restricted
                            shares of Applied common stock that will vest
                            automatically on August 7, 2003 assuming your
                            continuous employment through that date. The PARS
                            can vest at an earlier date, however, if Applied
                            achieves certain performance hurdles based on stock
                            price and annual pre-tax return on assets ("ROA").
                            Fifty percent of the PARS will vest on the
                            achievement of either an ROA of 13.5%, or a stock
                            price of $33.33 per share for 20 consecutive trading
                            days. The remaining 50% will vest on the achievement
                            of either an ROA of 17.5%, or a stock price of
                            $37.33 for 20 consecutive trading days. The shares
                            will become 100% vested in the event of a change in
                            control.

              5.      CHANGE IN CONTROL AGREEMENT. You will receive our standard
                      officer change-in-control agreement. This agreement
                      provides that if, within three years following a change in
                      control of Applied, your employment with Applied is
                      terminated either by you "for good cause" or by Applied
                      "without cause", then you will receive a severance payment
                      equal to three times your total compensation (base salary
                      plus the average of your three most recent years'
                      incentive pay), plus three years of continued benefits.

              6.     SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS PLAN ("SERP").
                     The Committee will name you a participant in the SERP. The
                     SERP provides a non-qualified straight life retirement
                     benefit at age 65 equal to 45% of the average of your
                     highest three years' total compensation (base salary plus
                     incentive), reduced by 1/20th for each year that the number
                     of your years of service with Applied is less than 20. The
                     SERP also provides that in the event of a change in
                     control, you are eligible to receive the present value
                     actuarial equivalent of your retirement benefit in a lump
                     sum. Your annual straight life benefit at age 65 will be
                     guaranteed to be at least $50,000. In addition, if, while
                     employed by Applied, you die prior to the end of your fifth
                     year of service with Applied, you shall be credited with
                     five years of service for purposes of the SERP. The SERP is
                     described in greater detail in the enclosed "Overview of
                     Executive Benefit Programs."
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Mr. David Pugh
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              7.     OTHER EXECUTIVE PLANS AND PROGRAMS. As an Applied officer,
                     you will be eligible to participate in the following
                     executive plans and programs:

                     a.    Life Insurance Program;
                     b.    Long-Term Disability Program; and,
                     c.    Deferred Compensation Plan (also referenced above 
                           under "Management Incentive Plan").

                     Each of these benefits is detailed in the "Overview of
                     Executive Benefit Programs." The plan descriptions set
                     forth in the overview are supplemented and qualified in
                     their entirety by the plans themselves.

              8.     VACATION. You will be eligible to take five weeks of
                     vacation time annually, which amount will be prorated for
                     fiscal 1999 based on the date you commence employment.

              9.     RELOCATION. It is understood that you will relocate to
                     Cleveland immediately following your acceptance of this
                     offer. You will receive our standard relocation package,
                     subject to our understanding that you are not using Cendant
                     Mobility in connection with the sale of your home. I have
                     enclosed a copy of our relocation policy for your review.
                     Applied will also reimburse you for your family's
                     reasonable temporary residence expenses until you find a
                     permanent residence; this reimbursement obligation will
                     not, however, extend to expenses incurred after May 1999.

              10.    AUTOMOBILE ALLOWANCE. You will receive an allowance for
                     your automobile. The current monthly allowance for your
                     position is $1,026.10.

              11.    PERQUISITES. In addition to the foregoing, you are eligible
                     to receive the following at Applied's expense:

                     a.    Executive tax preparation services;
                     b.    Membership dues for The Union Club and a country 
                           club; and, 
                     c.    An annual physical examination.

                     For personal income tax purposes, the annual value of these
                     items will be included in your W-2 form.


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Mr. David Pugh
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              12.    OTHER ASSOCIATE BENEFITS. Normal benefits available to all
                     Applied employees include:

                     a.     Health Insurance. We offer HMO and PPO options
                            administered by Aetna and dental coverage
                            administered by Jardine. Because you become eligible
                            for this benefit only after a 30-60 day waiting
                            period, Applied will reimburse you for interim COBRA
                            costs.

                     b.     Retirement Savings Plan. Applied's section 401(k)
                            plan provides for compensation deferral and a
                            company match in Applied common stock with respect
                            to the first 6% of compensation deferred. A variety
                            of investment options are available. The company
                            match ranges from a minimum of 25% to a maximum of
                            100% per quarter based on Applied achieving certain
                            earnings hurdles set annually by the Board. An
                            additional 5% bonus match is made with respect to
                            officer contributions invested in the Applied Stock
                            Fund. Applied also makes annual profit sharing
                            contributions depending on Applied's profitability
                            during the previous fiscal year. The company match
                            and profit sharing contributions vest at the rate of
                            25% for each year of your employment with Applied.

                     c.     Supplemental Defined Contribution Plan (the "Shadow
                            Plan"). Highly compensated associates are eligible
                            for the Shadow Plan, a non-qualified plan maintained
                            in conjunction with the Retirement Savings Plan. The
                            Shadow Plan provides you a vehicle for saving on a
                            tax-deferred basis even if the tax laws limit the
                            amount of contributions you can make to the
                            Retirement Savings Plan

                     I have enclosed a copy of our brochure, "Your Ticket to
                     Your 1998 Benefits," which provides additional information
                     about various plans available to our associates. The plan
                     descriptions set forth in this letter are supplemented and
                     qualified in their entirety by the materials contained in
                     the enclosed benefits materials and the plans themselves.

              13.    Your Covenants.
                     --------------

                     a.     Noncompetition Covenant. During the two-year period
                            following the date of termination of any and all of
                            your relationships with Applied (other than as a
                            shareholder), including any and all relationships as
                            a director, officer or employee of Applied or its
                            affiliates, you covenant and agree that you will
                            not, directly or indirectly, with or through another
                            individual or organization, whether as a shareholder
                            (other than as the holder of less than 1% 
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Mr. David Pugh
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                            of the outstanding shares of a publicly held
                            company), partner, member, director, officer,
                            employee, agent or consultant, or in any other
                            capacity, in competition with Applied or any of its
                            affiliates, anywhere within the United States,
                            Canada, or any other nation in which Applied or its
                            affiliates hereafter conducts business, (i)
                            distribute products that are the same or similar to
                            products now or hereafter sold, designed, or
                            distributed by Applied or any of its affiliates, or
                            (ii) provide services that are the same or similar
                            to services now or hereafter provided by Applied or
                            any of its affiliates. The foregoing clause "(ii)"
                            shall not, however, be deemed to prevent you from
                            being a shareholder, partner, member, director,
                            officer, employee, agent or consultant of any
                            organization whose primary operations are not in
                            direct competition with Applied or its affiliates so
                            long as the organization was not among the top 25
                            product suppliers to Applied and its affiliates (as
                            determined by the dollar volume of purchases from
                            the organization) during the fiscal year ending
                            prior to your termination.

                     b.     Confidential Information. During the five-year
                            period following the date of termination of any and
                            all of your relationships with Applied (other than
                            as a shareholder), including any and all
                            relationships as a director, officer or employee of
                            Applied or its affiliates, you covenant and agree to
                            keep confidential and not disclose to others
                            information relating to Applied or any of its
                            affiliates, or their respective businesses,
                            including, but not limited to, information regarding
                            (i) customers or potential customers; (ii) vendors
                            or suppliers; (iii) pricing structure and profit
                            margins; (iv) business plans and strategies; (v)
                            employees and payroll policies; (vi) computer
                            systems; (vii) facilities or properties; and (viii)
                            other proprietary, confidential or secret
                            information relating to Applied or any of its
                            affiliates ("Confidential Information"). You shall
                            use all reasonable care to protect, and prevent
                            unauthorized disclosure of, any Confidential
                            Information unless such information (a) is now or
                            becomes generally known or available to the public
                            without any violation of this agreement; or (b) is
                            required to be disclosed by applicable law or court
                            or governmental order.

                     c.     Remedies; Severability. You acknowledge that a
                            breach of your covenants in this Section 13 would
                            result in irreparable injury to Applied for which
                            monetary damages alone would not be an adequate
                            remedy. Therefore, you consent to the issuance of
                            injunctive relief in the event of a breach of your
                            covenants, in addition to any other remedies to
                            which Applied may be entitled at 

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                            law or in equity. In addition, if any provision of
                            this Section 13 or the application of any provision
                            to any person or circumstances is held invalid,
                            unenforceable, or otherwise illegal, including
                            without limitation, as to time, geographic area, or
                            scope of activity, that provision shall be severable
                            from the other provisions of this Section and the
                            remainder of this Section and the application of
                            that provision to any other person or circumstance
                            shall not be affected, and the provision so held to
                            be invalid, unenforceable or otherwise illegal shall
                            be reformed to the extent (and only to the extent)
                            necessary to make it enforceable, valid, and legal.

              14.    YOUR REPRESENTATIONS. You represent to Applied that (a)
                     entering into an employment relationship with Applied will
                     not violate any provision of or result in a breach under
                     any agreement to which you are a party or by which you are
                     bound; (b) you are not a party to, or bound by, any
                     agreement, understanding, covenant, policy, other
                     arrangement, or fiduciary obligation, that would affect or
                     limit your ability to provide services to, or to carry out
                     your responsibilities with Applied, including without
                     limitation any noncompetition, nonsolicitation, employment,
                     consulting or other agreement; and (c) you have not
                     retained, nor will you use in connection with your
                     employment with Applied, any proprietary or confidential
                     information of any previous employer or other person or
                     entity.

              As with the other Applied officers, you will not have an
employment agreement assuring continued employment. Officers serve at the will
of our Board of Directors.


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Mr. David Pugh
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              I hope the foregoing and the enclosures are useful to you in
understanding the program we are offering. We are all excited about the prospect
of having you as our President & Chief Operating Officer.

              Please acknowledge your acceptance of our offer and your agreement
to the matters set forth in this letter by signing and returning the enclosed
extra copy of this letter. If you have any questions about the details of our
compensation plans, please call Bob Stinson, our Vice President-Chief
Administrative Officer, General Counsel & Secretary, at 216-426-4510; or if I
can be of any further assistance, please call me.

                                          Cordially,


                                          /s/ John C. Dannemiller
                                          -------------------------------------
                                          John C. Dannemiller
                                          Chairman, Chief Executive Officer
                                                   & President
Enclosures

              I acknowledge and accept this offer to commence employment
effective January 1, 1999.

Date:    December 21      , 1998          /s/ David L. Pugh
      --------------------                -------------------------------------
                                          David L. Pugh


