<DOCUMENT>
<TYPE>DEF 14A
<SEQUENCE>1
<FILENAME>proxy08.txt
<DESCRIPTION>2008 ALLETE DEFINITIVE PROXY DEF 14A
<TEXT>
<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                            SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
                                (AMENDMENT NO. )

Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ]  Preliminary Proxy Statement
[ ]  CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY
     (AS PERMITTED BY RULE 14a-6(e)(2))
[X]  Definitive Proxy Statement
[ ]  Definitive Additional Materials
[ ]  Soliciting Material Pursuant to Section 240.14a-12

                                  ALLETE, INC.
--------------------------------------------------------------------------------
                (Name of Registrant as Specified in its Charter)

--------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11

     (1) Title of each class of securities to which transaction applies:

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

     (2) Aggregate number of securities to which transaction applies:

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

     (3) Per  unit  price or  other  underlying  value of  transaction  computed
         pursuant to  Exchange Act Rule 0-11 (set forth  the amount on which the
         filing fee is calculated and state how it was determined):

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

     (4) Proposed maximum aggregate value of transaction:

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

     (5) Total fee paid:

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

[ ] Fee paid previously with preliminary materials.
[ ] Check box  if any part of  the fee  is offset  as provided  by Exchange  Act
    Rule 0-11(a)(2) and  identify  the filing for  which the offsetting  fee was
    paid  previously. Identify  the  previous filing  by  registration statement
    number, or the Form or Schedule and the date of its filing.

     (1) Amount Previously Paid:

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

     (2) Form, Schedule or Registration Statement No.:

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

     (3) Filing Party:

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

     (4) Date Filed:

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<PAGE>
[GRAPHIC OMITTED]

                                                          2008
                                                          NOTICE
                                                          AND
                                                          PROXY
                                                          STATEMENT

                                                  [ALLETE LOGO]
                                                  ANNUAL MEETING OF SHAREHOLDERS
                                                  TUESDAY, MAY 13, 2008
                                                  DULUTH, MINNESOTA

<PAGE>

[ALLETE LOGO]
                                        March 25, 2008

Dear Fellow Shareholder:

     You are cordially invited to the 2008 Annual Meeting of Shareholders of
ALLETE, Inc. to be held on Tuesday, May 13, 2008 at 10:30 a.m. CDT in the Duluth
Entertainment Convention Center (DECC) auditorium. The DECC is located on the
waterfront of Lake Superior at 350 Harbor Drive in Duluth, Minnesota. On behalf
of the ALLETE Board of Directors, I encourage you to attend.

     At this year's meeting, you will be asked to elect ten directors and to
ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm.

     Roger Peirce is not standing for election this year due to his retirement
from the Board. Mr. Peirce brought an outstanding background in business and
finance to the Board. I want to take this opportunity to thank him for his
service and commitment to ALLETE.

     During the past year, we welcomed Douglas C. Neve to the Board. Mr. Neve's
wealth of business and financial experience will continue to benefit ALLETE as
we pursue our strategy.

     Following the Annual Meeting, you are invited to visit with our directors,
officers, and employees over lunch in the Lake Superior Ballroom located in the
DECC.

     Your vote is important. Whether or not you plan to attend the Annual
Meeting, your shares should be represented and voted. After reading the Proxy
Statement, you can vote your shares online; by a toll-free telephone call; or by
signing, dating, and returning your Proxy Card. Specific instructions on how to
vote are provided on your Proxy Card, or if you received these materials
electronically, in the e-mail message that you received notifying you of the
availability of these materials.

     Thank you for your investment in ALLETE.

                                        Sincerely,

                                        Donald J. Shippar

                                        Donald J. Shippar
                                        Chairman, President, and Chief Executive
                                        Officer

                               [GRAPHIC OMITTED]
--------------------------------------------------------------------------------
                      ANNUAL MEETING OF SHAREHOLDERS

                    TUESDAY, MAY 13, 2008 AT 10:30 A.M.
                            (DOORS OPEN AT 9:00 A.M.)

           DULUTH ENTERTAINMENT CONVENTION CENTER--DULUTH, MINNESOTA
                        - FREE PARKING   - LUNCH PROVIDED

          QUESTIONS?
         CALL ALLETE SHAREHOLDER SERVICES 218-723-3974 OR 800-535-3056
--------------------------------------------------------------------------------

<PAGE>

             NOTICE OF ANNUAL MEETING OF SHAREHOLDERS--MAY 13, 2008

                                 ALLETE, INC.
                          30 WEST SUPERIOR STREET
                          DULUTH, MINNESOTA 55802

     The Annual Meeting of Shareholders of ALLETE, Inc. will be held in the
auditorium of the Duluth Entertainment Convention Center, 350 Harbor Drive,
Duluth, Minnesota, on Tuesday, May 13, 2008 at 10:30 a.m. CDT for the following
purposes:

     1. To elect a Board of ten directors to serve for the ensuing year;

     2. To ratify the appointment of PricewaterhouseCoopers LLP as ALLETE's
        independent registered public accounting firm for 2008; and

     3. To transact such other business as may properly come before the
        meeting or any adjournments thereof.

     Shareholders of record on the books of ALLETE at the close of business on
March 14, 2008 are entitled to notice of and to vote at the Annual Meeting.

     All shareholders are invited and encouraged to attend the Annual Meeting in
person. The holders of a majority of the shares entitled to vote at
the meeting must be present in person or by proxy to constitute a quorum.

     Your early response will facilitate an efficient tally of your votes. To
vote your shares online or by a toll-free telephone call, please follow the
instructions on your Proxy Card, or if you received these materials
electronically, follow the instructions in the e-mail message notifying you of
the availability of these materials. To vote by mail, please sign, date, and
return your Proxy Card in the envelope provided.

By order of the Board of Directors,

Deborah A. Amberg

Deborah A. Amberg
Senior Vice President, General Counsel, and Secretary

March 25, 2008
Duluth, Minnesota

<PAGE>

                                PROXY STATEMENT
                               TABLE OF CONTENTS

GENERAL INFORMATION...........................................................1
  Proxy Solicitation..........................................................1
  Purpose of the Meeting......................................................1
  Shareholders Entitled to Vote...............................................1
  Shareholders of Record; Beneficial Owners...................................1
  Quorum; Required Votes......................................................2
  How to Vote.................................................................2
  Revocation of Proxies.......................................................2
  Delivery of Proxy Materials to Households...................................3
  How to Enroll for Electronic Delivery of Future Proxy Materials.............3
OWNERSHIP OF ALLETE COMMON STOCK..............................................4
  Securities Owned by Certain Beneficial Owners...............................4
  Securities Owned by Directors and Management................................4
  Section 16(a) Beneficial Ownership Reporting Compliance.....................4
ITEM NO. 1--ELECTION OF DIRECTORS.............................................5
  Nominees for Director.......................................................5
CORPORATE GOVERNANCE..........................................................7
  Corporate Governance Guidelines.............................................7
  Director Independence Standards.............................................7
  Related Person Transactions and Director Independence Determinations........8
  Director Nominations........................................................9
  Committee Membership, Meetings, and Functions..............................10
  Communications Between Shareholders and the Board of Directors.............10
  Common Stock Ownership Guidelines..........................................10
  Code of Ethics.............................................................11
DIRECTOR COMPENSATION--2007..................................................11
COMPENSATION DISCUSSION AND ANALYSIS.........................................13
  Compensation Philosophy and Objectives.....................................13
  Process for Determining Executive Compensation.............................14
  Elements of Executive Compensation.........................................18
  Benefits...................................................................20
  Perquisites................................................................21
  Employment, Severance, and Change in Control Agreements....................21
EXECUTIVE COMPENSATION COMMITTEE REPORT......................................22
COMPENSATION OF EXECUTIVE OFFICERS...........................................23
  Summary Compensation Table--2007 and 2006..................................23
  Grants of Plan-Based Awards--2007..........................................25
  Grants of Plan-Based Awards Discussion.....................................26
  Outstanding Equity Awards at Fiscal Year-End--2007.........................30
  Option Exercises and Stock Vested--2007....................................31
  Pension Benefits--2007.....................................................31
  Pension Benefits Discussion................................................32
  Nonqualified Deferred Compensation--2007...................................33
  Potential Payments Upon Termination or Change in Control...................34
EQUITY COMPENSATION PLAN INFORMATION.........................................36
AUDIT COMMITTEE REPORT.......................................................37
  Audit Committee Pre-Approval Policies and Procedures.......................37
  Audit and Non-Audit Fees...................................................38
ITEM NO. 2--RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
  ACCOUNTING FIRM............................................................39
OTHER BUSINESS...............................................................39
  Shareholder Proposals for the 2009 Annual Meeting..........................39

<PAGE>

--------------------------------------------------------------------------------
                                PROXY STATEMENT

                                  ALLETE, INC.
                            30 WEST SUPERIOR STREET
                            DULUTH, MINNESOTA 55802
--------------------------------------------------------------------------------
                              GENERAL INFORMATION

PROXY SOLICITATION

     These proxy materials are being delivered to shareholders of ALLETE, Inc.
(ALLETE or Company) in connection with the solicitation of proxies by the Board
of Directors to be voted at the Company's 2008 Annual Meeting of Shareholders.
The Annual Meeting will be held at 10:30 a.m. CDT on Tuesday, May 13, 2008 at
the Duluth Entertainment Convention Center, Duluth, Minnesota.

     We expect to solicit proxies primarily by mail. We will also solicit
proxies by e-mail from the majority of our employee shareholders as well as from
shareholders who previously requested to receive proxy materials electronically.
We have retained Georgeson Shareholder Communications, Inc. to assist in the
solicitation of proxies. Directors or Company officers, other employees, or
retirees also may solicit proxies in person or by telephone at a nominal cost.
Brokers, and other custodians, nominees, and fiduciaries will be asked to
solicit proxies or authorizations from beneficial owners and will be reimbursed
for their reasonable expenses. The total fees we expect to pay in connection
with the solicitation of proxies are approximately $10,000 plus expenses. The
cost of soliciting proxies will be paid by the Company.

     This Notice of Annual Meeting, Proxy Statement, form of proxy, and voting
instructions were first mailed to shareholders on or about March 25, 2008.

PURPOSE OF THE MEETING

     The purpose of the Annual Meeting is to elect a Board of ten directors to
serve for the ensuing year, to ratify the appointment of PricewaterhouseCoopers
LLP (PricewaterhouseCoopers) as the Company's independent registered public
accounting firm for 2008, and to transact such other business as may properly
come before the meeting.

     The Board is not aware of any matter to be presented at the Annual Meeting
of Shareholders other than those set forth in the accompanying notice. If any
other matters properly come before the meeting, all shares represented by valid
proxies will be voted in accordance with the judgment of the appointed proxies.

SHAREHOLDERS ENTITLED TO VOTE

     Each share of common stock of the Company, without par value (Common
Stock), of record on the books of the Company at the close of business on March
14, 2008 is entitled to notice of and to vote at the Annual Meeting of
Shareholders. As of March 14, 2008 there were 30,840,240 outstanding shares of
Common Stock, each entitled to one vote.

SHAREHOLDERS OF RECORD; BENEFICIAL OWNERS

     If shares of Common Stock are registered directly in a person's name with
our transfer agent, Wells Fargo Bank, N.A., that person is considered the
"shareholder of record" with respect to those shares and these proxy materials
have been sent directly to such person by the Company.

     If a person holds shares of Common Stock in a brokerage account or through
a bank or other holder of record, that person is considered the "beneficial
owner" of shares held in street name. These proxy materials have been forwarded
to the beneficial owners by the broker, bank, or other holder of record who is
considered the shareholder of record with respect to those shares. A beneficial
owner has the right to direct the broker, bank, or other holder of record on how
to vote the beneficially owned shares.

                                       1
<PAGE>


QUORUM; REQUIRED VOTES

     The holders of a majority of the shares of Common Stock entitled to vote at
the meeting must be present in person or represented by proxy to constitute a
quorum.

     The affirmative vote of a majority of the shares of Common Stock entitled
to vote at the Annual Meeting is required for the election of each director. The
affirmative vote of a majority of the shares of Common Stock present at the
Annual Meeting and entitled to vote is required for ratification of the
appointment of PricewaterhouseCoopers as the Company's independent registered
public accounting firm for 2008.

     Abstentions are included in the number of shares present and voting, and
have the same effect as votes against a particular proposal.

     Broker non-votes are not counted for or against any proposal, but are
treated as present for purposes of determining a quorum. A "broker non-vote"
occurs when a broker submits a proxy card for shares to the Company but does not
indicate a vote on a particular matter because the broker has not received
timely voting instructions from the beneficial owner of the shares and the
broker does not have the authority to vote on the matter without such
instructions. Under the rules of the New York Stock Exchange (NYSE), a broker
may vote shares on Items Nos. 1 and 2, and on other routine matters in the
absence of timely voting instructions from the beneficial owner.

     An automated system administered by Broadridge Financial Solutions, Inc.
will tabulate the votes.

HOW TO VOTE

     Shareholders of record may vote their shares by proxy using any of the
following methods:

     - BY TELEPHONE: Vote by calling 1-800-690-6903 and following the
       instructions on your proxy card or, if you received these materials
       electronically, the instructions in the e-mail message that you received
       notifying you of the availability of these materials. If you vote by
       phone, do not return your proxy card.

     - ONLINE: You may vote online at WWW.PROXYVOTE.COM. Follow the instructions
       on your proxy card or, if you received these materials electronically,
       the instructions in the e-mail message notifying you of the availability
       of these materials. If you vote online, do not return your proxy card.

     - BY MAIL: Complete, sign, and date each proxy card that you received and
       return it in the prepaid envelope provided to ALLETE, Inc., c/o
       Broadridge Financial Solutions, Inc., 51 Mercedes Way, Edgewood, NY
       11717-8368.

     Telephone and Internet voting will be available until 12:00 p.m., CDT, on
May 12, 2008.

     If you received these materials electronically, you did not receive a proxy
card. If you wish to request paper copies of these materials, including a proxy
card, you may do so by calling ALLETE Shareholder Services at 800-535-3056 or
218-723-3974.

     Unless contrary instructions are provided, all shares of Common Stock
represented by valid proxies will be voted "FOR" the election of all nominees
for director named herein and "FOR" ratification of the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for 2008.

REVOCATION OF PROXIES

     A proxy may be revoked at any time before it is voted by giving written
notice of revocation to ALLETE, Inc., Shareholder Services, 30 West Superior
Street, Duluth, MN 55802-2093, or by delivering a proxy bearing a later date
using any of the voting methods described above.

                                        2
<PAGE>


DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS

     Only one copy of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2007 (Annual Report), filed with the United States
Securities and Exchange Commission (SEC) on February 15, 2008, and one Proxy
Statement for the 2008 Annual Meeting will be delivered to an address where two
or more shareholders reside unless we have received contrary instructions from a
shareholder at the address. A separate Proxy Card will be delivered to each
shareholder at the shared address who has not elected to receive proxy materials
electronically.

     If you are a shareholder who lives at a shared address and would like
additional copies of the Annual Report, this Proxy Statement, or any future
annual reports or proxy statements, contact ALLETE Shareholder Services, 30 West
Superior Street, Duluth, MN 55802-2093, telephone number 800-535-3056 or
218-723-3974, and copies will be mailed to you promptly.

     If you share the same address with another of our shareholders and you
currently receive multiple copies of annual reports or proxy statements, you may
request delivery of a single copy of future annual reports or proxy statements
at any time by calling ALLETE Shareholder Services at 800-535-3056 or
218-723-3974, or by writing to our transfer agent, Wells Fargo Bank, N.A.,
Shareowner Services, Attn: Householding, P.O. Box 64854, St. Paul, MN
55164-0854.

     If you did not receive the Annual Report, which includes the Company's
audited Consolidated Financial Statements, please notify ALLETE Shareholder
Services, 30 West Superior Street, Duluth, MN 55802-2093, telephone number
800-535-3056 or 218-723-3974, and a copy will be sent to you promptly.

     Many brokerage firms and other shareholders of record have procedures for
the delivery of single copies of company documents to households with multiple
beneficial shareholders. If your family has one or more "street name" accounts
under which you beneficially own shares of Common Stock, please contact your
broker, financial institution, or other shareholder of record directly if you
require additional copies of this Proxy Statement or the Annual Report, or if
you have other questions or directions concerning your "street name" account.

HOW TO ENROLL FOR ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS

     We are pleased to offer our shareholders the convenience and benefits of
viewing proxy statements, annual reports, and other shareholder materials
online. With your consent, we can stop sending you paper copies of these
documents. Instead, beginning next year we would send you an e-mail notification
that the shareholder materials have been filed with the SEC and are available
for you to view. The notification would include a link to the website on which
you could view the materials. We would also provide you with a link to allow you
to vote your Common Stock shares online.

     To enroll for electronic receipt of shareholder materials, follow these
easy directions:

     1. Log onto the Internet at WWW.ALLETE.COM.
     2. Click on "Investors."
     3. Click on "Shareholder Services."
     4. Click on "Electronic Delivery."
     5. Follow the prompts to submit your electronic consent.

The website for viewing shareholder materials will be available on a 24-hours-a-
day, 7-days-a-week basis. You will receive an e-mail confirmation of your
enrollment. Your enrollment will remain in effect for as long as you remain a
shareholder and the e-mail account you provide the Company remains active.
However, you may choose to cancel your enrollment at any time.

--------------------------------------------------------------------------------
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
SHAREHOLDER MEETING TO BE HELD ON MAY 13, 2008. THE COMPANY'S PROXY STATEMENT,
ANNUAL REPORT ON FORM 10-K, AND PROFILE ARE AVAILABLE AT WWW.PROXYVOTE.COM.
--------------------------------------------------------------------------------
                                        3
<PAGE>


                        OWNERSHIP OF ALLETE COMMON STOCK

SECURITIES OWNED BY CERTAIN BENEFICIAL OWNERS

     Company records and other information available from outside sources,
including information filed with the SEC, indicate that, as of March 14, 2008,
only one shareholder was a beneficial owner of more than 5 percent of any class
of the Company's voting securities. As of that date, Wachovia Bank, N.A.
("Wachovia"), NC1156 Three Wachovia Center, 401 South Tryon Street, Charlotte,
NC 28288 held 4,666,332 shares, or 15 percent, of the Common Stock in its
capacity as Trustee of the Minnesota Power and Affiliated Companies Retirement
Savings and Stock Ownership Plan (RSOP). Generally, these shares will be voted
in accordance with instructions received by Wachovia from participants in the
RSOP, and shares for which Wachovia does not receive instructions from RSOP
participants will be voted proportionately with the instructions it does
receive.

SECURITIES OWNED BY DIRECTORS AND MANAGEMENT

     The following table presents the shares of Common Stock beneficially owned
as of March 14, 2008 by Directors, nominees for Director, executive officers
named in the Summary Compensation Table that appears subsequently in this Proxy
Statement, and all Directors and executive officers of the Company as a group.
Unless otherwise indicated, the persons shown have sole voting and investment
power over the shares listed. Common Stock ownership guidelines applicable to
Directors are discussed on page 10. Directors are expected to own 3,000 shares
within three years of election--the following directors have served less than
three years: Ms. Brekken, Mr. Emery, Mr. Hoolihan, and Mr. Neve. Common Stock
ownership guidelines applicable to the Named Executive Officers are discussed on
page 13. Because the Common Stock ownership guidelines were recently adopted,
Named Executive Officers are still progressing toward meeting them by their
respective deadlines.

<TABLE>
<CAPTION>

                                                              Company                                           Options
                                                               Share             Number of Shares             Exercisable
                                Name of                      Ownership             Beneficially             within 60 days
                                Beneficial Owner           Guidelines<F1>               Owned<F2>        after March 14, 2008
---------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                        <C>                   <C>                     <C>
Directors                       Kathleen A. Brekken            3,000                   3,768                         0
                                Heidi J. Eddins                3,000                   5,721                         0
                                Sidney W. Emery, Jr.           3,000                   2,609                         0
                                James J. Hoolihan              3,000                   3,066                         0
                                Madeleine W. Ludlow            3,000                   7,808                         0
                                George L. Mayer                3,000                  18,836                     3,879
                                Douglas C. Neve                3,000                   1,949                         0
                                Roger D. Peirce                3,000                   4,760                         0
                                Jack I. Rajala                 3,000                  12,133                     3,879
                                Bruce W. Stender               3,000                  13,531                         0
Named Executive Officers        Donald J. Shippar             58,901                  28,285                    60,619
                                Mark A. Schober               14,461                  16,395                    20,025
                                Laura A. Holquist                  -                  11,165                     8,224
                                Deborah A. Amberg             13,610                   6,545                    18,072
                                Claudia Scott Welty           12,646                  13,391                    23,837
All Directors and executive
officers as a group (17):                                          -                 156,890                   149,741
---------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The amounts in this column for the Named Executive Officers were determined  based  on 2007 base salaries and the closing
     share price of $35.76 on March 14, 2008.
<F2> Includes: (i) shares as to which voting and investment power is shared with the person's spouse: Mr. Hoolihlan--2,438, Mr.
     Neve--1,433, Mr. Schober--4,366, and  Ms. Welty--6,680; (ii) shares owned by  the person's spouse: Ms. Holquist--103; and
     (iii)  shares  held by the person's minor children: Mr. Schober--118.  Each Director and  executive  officer owns only a
     fraction of 1 percent of the Common  Stock, and all Directors and executive officers as a group also own less than 1 percent
     of the Common Stock.
</FN>
</TABLE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Directors, executive officers, and persons who beneficially own more
than 10 percent of a registered class of the Company's equity securities, to
file reports of initial ownership of Common Stock and other equity securities
and subsequent changes in that ownership with the SEC and the NYSE. Based on a
review of such reports and the written representations of our Directors and
executive officers, the Company believes that all such filing requirements were
met during 2007.

                                        4
<PAGE>

                        ITEM NO. 1--ELECTION OF DIRECTORS

     All shares represented by the proxy will be voted, unless authority is
withheld, "FOR" the election of the ten nominees for Director named below and on
the following page. Directors are elected to serve until the next annual
election of Directors and until a successor is elected and qualified, or until a
Director's earlier resignation or removal. If any nominee should become
unavailable, which is not anticipated, the Board may provide by resolution for a
lesser number of Directors, or designate substitute nominees, who would receive
the votes represented by proxies.

NOMINEES FOR DIRECTOR
--------------------------------------------------------------------------------

[PHOTO OMITTED]   KATHLEEN A. BREKKEN, 58, of Cannon Falls, Minnesota, has been
                  a Director since 2006. She is a member of the Executive
                  Compensation Committee and the Corporate Governance and
                  Nominating Committee. Ms. Brekken is the retired President and
                  Chief Executive Officer of Midwest of Cannon Falls, Inc., a
                  company that designs, wholesales, and distributes home
                  accessories and giftware. She previously served on the ALLETE
                  Board of Directors from 1997 to 2003. Ms. Brekken is a board
                  member of the Cannon Falls Medical Center--Mayo Health System
                  and serves on the advisory board of Oxygen Plus, Inc.

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

[PHOTO OMITTED]   HEIDI J. EDDINS, 51, of St. Augustine, Florida, has been a
                  Director since 2004. She is Chair of the Corporate Governance
                  and Nominating Committee. Ms. Eddins is the Executive Vice
                  President, Secretary and General Counsel of Florida East Coast
                  Railway, LLC, a railway company that is a successor to Florida
                  East Coast Industries, Inc.'s transportation business. Ms.
                  Eddins joined Florida East Coast Industries, Inc. in 1999 and
                  was responsible for all legal and governmental affairs of the
                  corporation in addition to managing a variety of real estate
                  transactions. She continues to be responsible for all legal
                  and governmental affairs of Florida East Coast Railway, LLC.
                  Ms. Eddins also serves as a director of the Flagler Hospital
                  Foundation.

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

[PHOTO OMITTED]   SIDNEY W. EMERY, JR., 61, of Minneapolis, Minnesota, has been
                  a director since 2007. He is a member of the Executive
                  Compensation Committee. Mr. Emery is currently Chairman of the
                  Board of Directors and served as the Chief Executive Officer
                  of MTS Systems Corporation (NASDAQ: MTSC), a global supplier
                  of mechanical testing systems and industrial position sensors,
                  from 1998 to January 15, 2008. He also serves as a director of
                  Urologix, Inc., a Minneapolis-based manufacturer of minimally
                  invasive medical products, and chairs the Board of Governors
                  of the University of St. Thomas School of Engineering in St.
                  Paul, Minnesota.

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

[PHOTO OMITTED]   JAMES J. HOOLIHAN, 55, of Grand Rapids, Minnesota, has been a
                  Director since 2006. He is a member of the Audit Committee.
                  Mr. Hoolihan is the President and Chief Executive Officer of
                  the Blandin Foundation, a private, philanthropic foundation
                  whose mission is to strengthen communities in rural Minnesota.
                  From 1981 to 2004, Mr. Hoolihan was the President of
                  Industrial Lubricant Company, which provides industrial
                  supplies and services to logging, railroad, taconite, and coal
                  mining industries. He serves as the Chairman of the Board of
                  Directors of Industrial Lubricant Company. Mr. Hoolihan served
                  as the elected Mayor of the City of Grand Rapids from 1990 to
                  1995.
--------------------------------------------------------------------------------

[PHOTO OMITTED]   MADELEINE W. LUDLOW, 53, of Cincinnati, Ohio, has been a
                  Director since 2004. She is Chair of the Executive
                  Compensation Committee. Since January 2005, Ms. Ludlow has
                  been a Principal of LudlowWard Capital Advisors, a
                  Cincinnati-based investment banking firm serving small and
                  middle market companies. She was the Chairman, Chief Executive
                  Officer, and President of Cadence Network, Inc., a web-based
                  provider of utility expense management services from 2000 to
                  2004. Ms. Ludlow was formerly the Vice President and Chief
                  Financial Officer of Cinergy Corp. She also serves as a
                  trustee of the Darden Graduate School of Business
                  Administration at the University of Virginia.

                                        5
<PAGE>

NOMINEES FOR DIRECTOR
--------------------------------------------------------------------------------

[PHOTO OMITTED]   GEORGE L. MAYER, 63, of Essex, Connecticut, has been a
                  Director since 1996. He is a member of the Audit Committee and
                  the Corporate Governance and Nominating Committee. Mr. Mayer
                  is the founder and President of Manhattan Realty Group, a real
                  estate investment and management company. Mr. Mayer is also a
                  director of Schwaab, Inc., one of the nation's largest
                  manufacturers of rubber stamps and associated products.

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

[PHOTO OMITTED]   DOUGLAS C. NEVE, 52, of Eden Prairie, Minnesota, has been a
                  director since July 2007. He is a member of the Audit
                  Committee. Mr. Neve is the former Executive Vice President and
                  Chief Financial Officer of Minneapolis-based Ceridian Corp., a
                  multinational human resources company, where he worked from
                  February 2005 until March 2007. Prior to February 2005 he was
                  an audit partner with Deloitte & Touche LLP, a public
                  accounting firm. He also is a board member of Tyndale House
                  Publishers, Inc. and the Audit Committee chair for Luther
                  College. Mr. Neve was recommended to the Board by an executive
                  officer of the Company.

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

[PHOTO OMITTED]   JACK I. RAJALA, 68, of Grand Rapids, Minnesota, has been a
                  Director since 1985. He is a member of the Executive
                  Compensation Committee and the Corporate Governance and
                  Nominating Committee. Mr. Rajala is the Chairman and Chief
                  Executive Officer of Rajala Companies, and Director and
                  President of Rajala Mill Company, both of which manufacture
                  and trade lumber. Mr. Rajala also serves as Chairman and Chief
                  Executive Officer of Boundary Company, a forestland investment
                  company.

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

[PHOTO OMITTED]   DONALD J. SHIPPAR, 59, of Superior, Wisconsin, has been a
                  Director since 2004 and has been Chairman of ALLETE since
                  January 2006. Mr. Shippar was named President and Chief
                  Executive Officer of ALLETE in 2004. Since joining the Company
                  in 1976, Mr. Shippar has served as Vice President of
                  Transmission and Distribution, Senior Vice President for
                  Customer Service and Delivery, Chief Operating Officer of
                  Minnesota Power, and President of Minnesota Power. Mr. Shippar
                  also serves as a trustee of the College of St. Scholastica in
                  Duluth, Minnesota.

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

[PHOTO OMITTED]   BRUCE W. STENDER, 66, of Duluth, Minnesota, has been a
                  Director since 1995. Mr. Stender, as Lead Director, is an
                  ex-officio member of each Board committee. Mr. Stender served
                  as Chairman of ALLETE from September 2004 to January 2006. He
                  is Vice Chair of Duluth-based Labovitz Enterprises, Inc.,
                  which owns and manages hotels and commercial real estate. Mr.
                  Stender serves as a trustee of the Blandin Foundation and as
                  member of the Chancellor's Advisory Committee for the
                  University of Minnesota-Duluth.

                                        6
<PAGE>

                              CORPORATE GOVERNANCE

     Corporate governance refers to the internal policies and practices by which
the Company is operated and controlled on behalf of its shareholders. Sound
corporate governance starts with a strong, independent Board that is accountable
to the Company and its shareholders. The role of the Board is to effectively
govern the affairs of the Company for the benefit of its shareholders, and to
the extent appropriate under Minnesota law, other constituencies, including the
Company's employees, customers, suppliers, and the communities in which ALLETE
does business. The Company views good corporate governance as a source of
competitive advantage, because the Company's ultimate goal is to best focus and
direct its resources.

     In 2007, the Board and its committees reviewed and enhanced established
corporate governance practices. This ensures that the Board and its committees
have the necessary authority and practices in place to review and evaluate the
Company's business operations, as needed, and to make decisions that are
independent of the Company's management. As examples, the Board and its
committees undertake an annual self-evaluation process, meet regularly without
members of management present, have direct access to and meet individually with
members of management, and retain their own advisors as they deem appropriate.

     In an effort to further develop the Board, Directors are asked to attend an
independent educational seminar each year and to share their experiences and
observations with the other Directors. In addition to seminars, Board members
attended educational presentations hosted by the Company during 2007 addressing
investor relations and enterprise risk management, and regulated utility and
real estate accounting. In 2008 the Company has provided an educational
presentation to the Board about wholesale and retail utility rate cases.

CORPORATE GOVERNANCE GUIDELINES

     The Company's Corporate Governance Guidelines, initially adopted in 2002,
were revised in January 2008. The Corporate Governance Guidelines address the
Board's roles and responsibilities, Board selection and composition policies,
Board operating policies, Board committee responsibilities, Director
compensation, Director stock ownership, and other matters. Each committee of the
Board also has a charter pursuant to which it operates. The Executive
Compensation Committee Charter was last revised in October 2007, the Audit
Committee Charter was last revised in January 2007, and the Corporate Governance
and Nominating Committee Charter was last revised in January 2008. Current
copies of our Corporate Governance Guidelines and the committee charters are
available on the Company's website at WWW.ALLETE.COM. Shareholders may request
free printed copies of these documents from ALLETE Shareholder Services, 30 West
Superior Street, Duluth, MN 55802-2093.

DIRECTOR INDEPENDENCE STANDARDS

     The Board has adopted independence standards into the Company's Corporate
Governance Guidelines that are consistent with the director independence
standards of the NYSE. An "independent" Director has no material relationship
with the Company (either directly or as a partner, shareholder, or officer of an
organization that has a relationship with the Company). The Board has adopted
certain categorical standards to assist in determining each Director's
independence. The Board considers a "material relationship" with the Company to
exist where:

     -  the Director has been employed by the Company within the last three
        years;

     -  a member of the Director's immediate family has been employed by the
        Company as an executive officer within the last three years;

     -  the Director is an employee or a partner, or the Director's immediate
        family member is a partner, of the Company's current independent
        registered public accounting firm; or an immediate family member is an
        employee of the Company's current independent registered public
        accounting firm and participates in the firm's audit, assurance or tax
        compliance (but not tax planning) practice; or the Director or an
        immediate family member was within the last three years (but is no
        longer) an employee or partner of the Company's current independent
        registered public accounting firm and personally worked on the Company's
        audit within that time;

     -  the Director or a member of the Director's immediate family has been
        employed within the last three years as an executive officer of any
        business organization for which any of the Company's executive officers
        currently serves as a member of that business organization's
        compensation committee;

                                        7
<PAGE>

     -  the Director has received in any of the last three years more than
        $100,000 in direct compensation from the Company (other than Director
        and committee fees, pension, and other deferred compensation);

     -  a member of the Director's immediate family has received in any 12-
        month period within the last three years more than $100,000 in direct
        compensation from the Company;

     -  the Director is a current employee, or a member of the Director's
        immediate family is a current executive officer, of any business
        organization that has made payments to the Company, or received payments
        from the Company, for property or services in any of the last three
        fiscal years in an amount that exceeds the greater of $1,000,000 or 2
        percent of the other company's consolidated gross revenue;

     -  the Director has been an employee within the last three years, or a
        member of the Director's immediate family has been an executive officer
        within the last three years, of any business organization to which the
        Company was indebted at any time within the last three years in an
        aggregate amount in excess of 5 percent of the Company's total assets;

     -  the Director or a member of the Director's immediate family has served
        within the last three years as an executive officer or a general partner
        of an entity that has received an investment from the Company or any of
        its subsidiaries which exceeds the greater of $1,000,000 or 2 percent of
        such entity's total invested capital in any of the last three years; or

     -  the Director or a member of the Director's immediate family has been
        an executive officer of a foundation, university, non-profit trust or
        other charitable organization within the last three years for which
        contributions from the Company accounted for more than the greater of
        $250,000 or 2 percent of such organization's consolidated gross revenue
        in any of the last three years.

RELATED PERSON TRANSACTIONS AND DIRECTOR INDEPENDENCE DETERMINATIONS

     The Board has adopted a policy to review transactions between the Company
and related persons. Related persons include Directors, Director nominees,
executive officers, and 5 percent shareholders, as well as immediate family
members and any entity controlled by or in which these individuals have a
substantial financial interest. A copy of the policy is available on our website
at WWW.ALLETE.COM.

     The Related Person Transaction Policy applies to a financial transaction,
arrangement, or a series of similar transactions or arrangements of $25,000 or
more. These transactions generally require advance approval by the Corporate
Governance and Nominating Committee (Corporate Governance Committee). If a new
situation arises where advance approval is not practical, it is discussed with
the Chair of the Corporate Governance Committee, and an appropriate course of
action may include subsequent ratification by the Corporate Governance
Committee.

     The Corporate Governance Committee considers factors it deems relevant in
determining whether to approve a transaction, including but not limited to the
following: whether the terms are comparable to those that could be obtained in
an arm's-length transaction with an unrelated third party; whether there are
business reasons to enter into the transaction; whether the transaction could
impair the independence of a Director; and whether the transaction would present
an improper conflict of interest, taking into account the size of the
transaction, the overall financial position of the related person, the direct or
indirect relationship of the related person, and the ongoing nature of any
proposed relationships. The Corporate Governance Committee will also
periodically review and assess relationships to ensure ongoing fairness to the
Company. Any member of the Corporate Governance Committee who has an interest in
a transaction will abstain from voting, but may participate in the discussion if
invited to do so by the Chair of the Corporate Governance Committee.

     The Corporate Governance Committee examined all transactions between
Directors and the Company in light of the Company's independence standards and
the NYSE's corporate governance rules and determined that each Director, except
Mr. Shippar, is "independent."

     Specifically, the Corporate Governance Committee considered that Mr.
Hoolihan has an ownership interest in Industrial Lubricant Company (ILCO), which
provides lubricant products to one of the Company's generating facilities and to
one of the Company's wholly owned subsidiaries, BNI Coal, Ltd. Mr. Hoolihan also
has an ownership interest in ILCO Ground Technologies LLC, which provides
equipment to the mining industry.

                                        8
<PAGE>

During 2007, Company purchases from ILCO and ILCO Ground Technologies LLC
totaled $389,572. After discussion, the Corporate Governance Committee
recommended to the Board that these relationships with the Company are not
material to Mr. Hoolihan, or to any person or organization with whom he has an
affiliation. Based on this, the Corporate Governance Committee determined that
these relationships do not impair Mr. Hoolihan's independence.

     The Corporate Governance Committee also considered contracts made with
Hoover Construction prior to the retirement of Peter Johnson from the Board. Mr.
Johnson's son has an ownership interest in Hoover Construction. The Corporate
Governance Committee reviewed two contracts that were awarded on a competitive
bid basis before Mr. Johnson's retirement in 2007 and concluded that the
contracts were in the ordinary course of business and of a nature that would not
affect Mr. Johnson's independence.

     The Corporate Governance Committee considered the sales of wood and wood
chips to the Company by companies in which Mr. Rajala has a material interest.
These companies, Rajala Timber (of which Mr. Rajala is Secretary, Treasurer, and
a director) and Rajala Mill Company (of which Mr. Rajala is President and a
director), received payments from the Company for the purchase of wood and wood
chips that are used as fuel at the Company's Rapids Energy Center. The purchases
were made through a competitive bid process and represented a modest amount of
the revenue for Mr. Rajala's companies in 2007. The Corporate Governance
Committee determined that these transactions do not impair Mr. Rajala's
independence.

     The Corporate Governance Committee also considered the payments by the
Company to the Holiday Inn in Duluth, Minnesota, in which Mr. Stender has an
indirect ownership interest. The Company made payments to the hotel for lodging,
food, meeting expenses, and conservation improvements. The Corporate Governance
Committee concluded that the payments were in the ordinary course of business,
small, and of a nature that would not affect Mr. Stender's independence.

DIRECTOR NOMINATIONS

     The Corporate Governance Committee recommends director candidates to the
Board and will consider for such recommendations director candidates proposed by
management, other Directors, search firms, and shareholders. All director
candidates will be evaluated based on the criteria identified below, regardless
of the identity of the individual or the entity or person who proposed the
director candidate. A shareholder who wishes to propose a candidate may provide
the candidate's name and a detailed background of the candidate's qualifications
to the Corporate Governance and Nominating Committee, c/o the Secretary of
ALLETE, 30 West Superior Street, Duluth, MN 55802-2093.

     In selecting director nominees, the Board considers factors it deems
appropriate. The Board may engage a search firm to assist in identifying,
evaluating, and conducting due diligence on potential director nominees. Factors
will include integrity, achievements, judgment, intelligence, personal
character, the interplay of the candidate's relevant experience with the
experience of other Board members, the willingness of the candidate to devote
adequate time to Board duties and the likelihood that he or she will be willing
and able to serve on the Board for a sustained period. The Corporate Governance
Committee will consider the candidate's independence, as defined in the
Corporate Governance Guidelines, and the rules of the NYSE and SEC. In
connection with the selection, due consideration will be given to the Board's
overall balance of diversity of perspectives, backgrounds, and experiences.
Experience, knowledge, and skills to be represented on the Board include, among
other considerations, financial expertise (including an "audit committee
financial expert" within the meaning of the SEC's rules), electric utility
and/or real estate knowledge and contacts, financing experience, strategic
planning, business development, and community leadership.

     The Corporate Governance Committee will review all candidates, and before
any contact is made with a potential candidate, will notify the Board of its
intent to do so, will provide the candidate's name and background information to
the Board, and will allow time for Directors to comment. The Corporate
Governance Committee will screen, personally interview, and recommend candidates
to the Board. A majority of the Corporate Governance Committee members will
interview any candidate before recommending that candidate to the Board. The
recommendations of the Corporate Governance Committee will be timed so as to
allow interested Board members an opportunity to interview the candidate prior
to the nomination of the candidate.

                                        9
<PAGE>

COMMITTEE MEMBERSHIP, MEETINGS, AND FUNCTIONS

     The Board has three standing committees: the Corporate Governance
Committee, the Audit Committee, and the Executive Compensation Committee
(Compensation Committee).

     The current members of the Corporate Governance Committee are Ms. Brekken,
Ms. Eddins (Chair), Mr. Mayer, Mr. Rajala, and Mr. Stender (ex-officio). Mr.
Peter Johnson and Mr. Nick Smith were each members of this committee until their
retirements in 2007. Mr. Stender served as Chair of this committee for a portion
of 2007. The Corporate Governance Committee met four times during 2007. The
Corporate Governance Committee provides recommendations to the Board with
respect to Board organization, membership, function, committee structure and
membership, succession planning for executive management, and the application of
corporate governance principles. The Corporate Governance Committee also
performs the functions of a director nominating committee, leads the Board's
annual evaluation of the Chief Executive Officer, and is authorized to exercise
the authority of the Board in the intervals between meetings.

     The current members of the Audit Committee are Mr. Hoolihan, Mr. Mayer, Mr.
Neve, Mr. Peirce (Chair), and Mr. Stender (ex-officio). Ms. Ludlow was a member
of this committee during a portion of 2007; Mr. Mayer served as Chair during a
portion of 2007; Mr. Johnson was a member of this committee until his
retirement; and Mr. Neve became a member in October 2007. The Audit Committee
held nine meetings in 2007. The Audit Committee recommends the selection of an
independent registered public accounting firm, reviews the independence and
performance of the independent registered public accounting firm, reviews and
evaluates ALLETE's accounting policies, reviews periodic financial reports to be
provided to the public, and reviews, and upon favorable review, recommends
approval of the Consolidated Financial Statements.

     The current members of the Compensation Committee are Ms. Brekken, Mr.
Emery, Ms. Ludlow (Chair), Mr. Rajala, and Mr. Stender (ex-officio). Mr. Peirce
was a member of this committee during a portion of 2007; Mr. Rajala served as
Chair during a portion of 2007; Mr. Emery joined the Compensation Committee when
he became a Director in May 2007; and Mr. Smith was a member of this committee
until his retirement. The Compensation Committee held six meetings in 2007. The
Compensation Committee establishes compensation and benefit arrangements for
ALLETE's executive officers and other key executives that are intended to be
equitable, competitive in the marketplace, and consistent with the Company's
executive compensation philosophy.

     Mr. Stender, as Lead Director, is an ex-officio member of all committees.
It is anticipated that committee chairs will rotate among Directors in the
future. The Board recognizes that the practice of chair rotation provides
development for the Directors and allows a variety of perspectives in leadership
positions.

     Mr. Stender presides over all executive sessions of the nonmanagement
Directors. Executive sessions of nonmanagement Directors are regularly scheduled
in connection with Board and committee meetings.

     During 2007, the Board held six meetings. All Directors standing for
election attended 75 percent or more of the aggregate number of meetings of the
Board and applicable committee meetings in 2007. All Directors standing for
election are expected to attend the Annual Meeting and all did attend in 2007,
except Ms. Eddins, who had an unavoidable schedule conflict.

COMMUNICATIONS BETWEEN SHAREHOLDERS AND THE BOARD OF DIRECTORS

     Shareholders and other interested parties who wish to communicate directly
with the Board or with the nonmanagement Directors may do so by addressing the
Lead Director, c/o the Secretary of ALLETE, 30 West Superior Street, Duluth, MN
55802-2093.

COMMON STOCK OWNERSHIP GUIDELINES

     The Corporate Governance Committee has determined that Directors and
executive officers whose primary job responsibilities affect all business units
of the Company should have a significant equity interest in the Company. The
Corporate Governance Committee believes that such equity ownership aligns the
interest of Directors and certain executive management with the interests of the
Company's shareholders. Accordingly, the Board has adopted Common Stock
ownership guidelines. Directors are expected to purchase at least 500 shares of
Common Stock prior to their election to the Board and to own 3,000 shares of
Common Stock within three years after election. The Common Stock ownership
guidelines applicable to Named Executive Officers is discussed in the
Compensation Discussion and Analysis section on page 13.

                                       10
<PAGE>

CODE OF ETHICS

     The Company has adopted a written Code of Ethics that applies to Directors
and all Company employees, including ALLETE's chief executive officer, chief
financial officer and controller. A copy of the Company's Code of Ethics is
available on our website at WWW.ALLETE.COM and printed copies are available upon
request without charge. Any amendment to or waiver of the Code of Ethics will be
disclosed on our website at WWW.ALLETE.COM promptly following the date of such
amendment or waiver.

                           DIRECTOR COMPENSATION--2007

     The Compensation Committee has primary responsibility for the process of
developing and evaluating the non-employee Director compensation programs. The
Board approves the non-employee Director compensation programs.

     The following table sets forth the non-employee Director compensation
earned in 2007.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
        (a)                     (b)                 (c)            (d)                (e)                  (f)              (g)
                                                                                Change in Pension
                                                                                    Value and
                                                                                  Nonqualified
                                                                                    Deferred
                           Fees Earned or           Stock         Option          Compensation           All Other
Name                       Paid in Cash<F1>        Awards<F2>    Awards<F3>       Earnings <F4>       Compensation<F5>    Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>                     <C>           <C>            <C>                   <C>                <C>
Kathleen A. Brekken           $43,833              $63,125           $0               $111                   $0          $107,069
Heidi J. Eddins               $41,083<F6>          $63,125           $0                 $0                   $0          $104,208
Sidney W. Emery, Jr.          $25,000              $60,000           $0                 $0              $30,916          $115,916
James J. Hoolihan             $38,458              $63,125           $0                 $0               $7,033          $108,616
Peter J. Johnson              $14,958               $3,125           $0                 $0                   $0           $18,083
Madeleine W. Ludlow           $28,667<F7>          $84,625<F7>       $0                 $0                   $0          $113,292
George L. Mayer               $44,874              $63,125           $0                 $0                   $0          $107,999
Douglas C. Neve               $19,500              $60,000           $0                 $0                   $0           $79,500
Roger D. Peirce               $47,500              $63,125           $0                 $0                   $0          $110,625
Jack I. Rajala                $42,874              $63,125           $0                 $0                   $0          $105,999
Nick Smith                    $14,458               $3,125           $0                 $0                   $0           $17,583
Bruce W. Stender              $56,500              $63,125           $0                 $0                 $377          $120,002
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The Directors' annual retainer  fee  increased February 15, 2007.  The  amounts  shown in column (b)  include $1,625 for  each
     Director, except Mr. Stender, Mr. Emery, and Mr. Neve, as a proration of the increased fee from February 15, 2007 to April 30,
     2007.
<F2> The annual  stock retainer was paid on June  1, 2007; except as noted below, each Director was  allocated 1,314.830 shares of
     Common Stock at a price of $48.01 per share, which includes an award for $3,125 as a proration of the increased annual stock
     retainer for the period from February 15, 2007 to April 30, 2007. Mr. Emery, who joined the Board in May 2007, was allocated
     1,249.740 shares of Common Stock on June 1, 2007 at a price of $48.01 per share. Mr. Johnson and Mr. Smith, who retired from
     the Board on May 8, 2007, were allocated 65.091 shares of Common Stock on June 1, 2007 at a price of $48.01 per share. Mr.
     Neve, who joined the Board in July 2007, was allocated 1,419.111 shares of Common Stock on September 1, 2007 at a price of
     $42.28 per share. Prices per share reflect fair market value on the date of issuance and all shares are fully vested on the
     date of issuance.
<F3> The following Directors had fully-vested stock option awards outstanding as of December 31, 2007: George L. Mayer--3,879;
     Jack I. Rajala--3,879.
<F4> The amount shown in column (e) is comprised of above-market interest on deferred compensation.
<F5> The amounts shown in column (f) for Mr. Emery and Mr. Hoolihan include  compensation paid to them in 2007 for the period during
     which each was a nominee and during which each attended Board Meetings and performed services comparable to that of a Director;
     Mr. Hoolihan's compensation relates to services actually provided in 2006. The total paid to Mr. Emery and Mr. Hoolihan for
     such services equalled the compensation that each would have received if they had been a Director. Perquisites to Directors are
     generally modest and were less than $10,000 to each Director in 2007. The amounts shown in column (f) for Mr. Hoolihan and Mr.
     Stender include tax reimbursement related to spousal travel.
<F6> Ms. Eddins elected to defer all of her Director fees under the ALLETE Director Compensation Deferral Plan.
<F7> Ms. Ludlow elected to receive a portion of her Director cash retainer fees  in the  form  of Common Stock. Accordingly, an
     additional 447.824 shares were allocated at a price of $48.01 per share on June 1, 2007. Because Director cash retainer fees
     are paid in arrears, the additional allocation was for fees earned for the period of November 2006 to April 2007.
</FN>
</TABLE>

                                       11
<PAGE>

     Employee Directors receive no additional compensation for their services as
Directors. The Company pays each non-employee Director under the terms of the
ALLETE Director Stock Plan an annual retainer fee, a portion of which is paid in
cash and a portion of which is paid in Common Stock as set forth below:

<TABLE>
<CAPTION>

                                               2007 Annual Retainer Fees
                                            Cash                      Stock
                                        ----------------------------------------
     <S>                                <C>                          <C>
     Lead Director                         $55,000                   $60,000
     All Other Directors                   $30,000                   $60,000
</TABLE>

In addition, the Company pays each non-employee Director, other than the Lead
Director, annual cash retainer fees for each committee and chair assignments as
set forth below:

<TABLE>
<CAPTION>

                                           2007 Committee Retainer Fees
                                      Member Fee     Chair (Includes Member Fee)
                                    --------------------------------------------
     <S>                            <C>              <C>
     Audit Committee                    $9,000                 $17,500
     Compensation Committee             $7,500                 $13,000
     Corporate Governance Committee     $7,500                 $12,000
</TABLE>


     The amounts shown above reflect changes in Director retainer fees that
became effective February 15, 2007. The actual amounts received by Directors
during 2007 were pro-rated to reflect service under the applicable fee schedule.

     Directors may elect to defer all or part of the cash portion of the
retainer fees under the terms of the ALLETE Director Compensation Deferral Plan.
Directors may also elect to receive all or part of the cash portions of their
retainer fees in Common Stock. The Lead Director receives the Lead Director cash
retainer and the Director stock retainer fee, but does not receive any other
committee or chair retainers.

                                       12
<PAGE>

                      COMPENSATION DISCUSSION AND ANALYSIS

     This discussion is meant to help you understand how we compensate the Named
Executive Officers. This look at our compensation goals, policies, and practices
provides context for the detailed compensation tables and narrative discussions
that follow starting on page 23.

COMPENSATION PHILOSOPHY AND OBJECTIVES

     Our executive compensation is designed to attract and retain quality
people, and to reward Named Executive Officers for designing and implementing
business strategies that we believe will result in increased shareholder value
over the long term. Our core values and fundamental principles relating to
executive compensation include the following:

     PAY IS LINKED TO PERFORMANCE. Executive pay is linked to Company
performance. Named Executive Officers are rewarded for achieving annual goals
tied to ALLETE's business strategy. Long-term incentives promote a stable,
experienced executive management team and reward growth in total shareholder
return.

     COMPENSATION ELEMENTS ARE BALANCED. We use a mix of compensation elements
to accomplish varying objectives. Base pay and executive retirement benefits are
designed to attract and retain executive talent. Annual incentives focus Named
Executive Officers on achieving strong annual performance. Long-term incentives
encourage executives to enhance our long-term success and profitability and also
provide incentive to remain employed with the Company. Severance benefits have
recently been put in place to encourage continued dedication and objectivity
from Named Executive Officers when evaluating transactions that could result in
the loss of employment in connection with a change in control of the Company.
Perquisites are offered, but only on a modest basis to facilitate the Named
Executive Officers' performance of their responsibilities.

     WE PROVIDE FAIR AND COMPETITIVE PAY. We strive to offer fair and
competitive compensation to Named Executive Officers. We use data, emphasizing
energy services and real estate industry data, to establish a range for
executive compensation. In setting pay levels, we consider the individual's
experience in the position, past performance, job responsibilities, and equity
within the executive management group. For a Named Executive Officer with
sufficient experience to fully perform the duties of his or her position, we
generally set compensation levels so that when target performance is achieved
under each of the Company's incentive compensation plans, total compensation is
near the midpoint of the pay range established using market comparison data. The
process of how comparison companies are selected for various purposes is
discussed in the next section, "Process for Determining Executive Compensation."
Consistent with our pay-for-performance philosophy, Named Executive Officers can
earn higher compensation if actual performance exceeds target performance goals.
Conversely, total compensation to Named Executive Officers in any year in which
the Company does not meet target performance goals will generally fall below the
midpoint in comparison to other companies. Total compensation generally
increases as position and responsibility increase, but at the same time, a
greater percentage of total compensation is tied to performance--and is
therefore at risk--as position and responsibility increase. This is reflected in
the differences between Named Executive Officers' opportunities under our annual
and long-term incentive plans.

     EXECUTIVE STOCK OWNERSHIP IS EXPECTED. We believe all executive officers of
ALLETE should be ALLETE shareholders. We reinforce this expectation by using
Common Stock to fund long-term incentive compensation awards and Company
contributions to its tax-qualified defined-contribution retirement plan. All
Named Executive Officers (except Ms. Holquist, who is not an ALLETE officer) are
expected to hold this Common Stock so long as they hold their executive
positions. Common Stock acquired through stock option exercises is not subject
to this holding policy because we believe that the Named Executive Officers
should have the ability to access a portion of their long-term incentive
compensation and to diversify their investments. Named Executive Officers
(except Ms. Holquist) are expected to attain Common Stock ownership in
accordance with the following guidelines:

<TABLE>
<CAPTION>

  Position                        Stock Ownership Value as a Multiple of Salary
  ------------------------------  ---------------------------------------------
  <S>                             <C>
  Chief Executive Officer                                4X
  ALLETE Senior Vice President                           2X
  ALLETE Vice President                                  1X
</TABLE>

                                       13
<PAGE>

The Common Stock ownership guidelines were established in October 2005. Named
Executive Officers subject to the ownership guidelines who held their current
positions as of October 2005 have until October 2010 to meet the guidelines;
Named Executive Officers appointed after October 2005 are given seven years from
their appointment to meet the guidelines. The Board periodically reviews
executive officers' Common Stock ownership to confirm that the Named Executive
Officers are progressing toward the ownership guidelines. Although the
guidelines are relatively new, we believe that the Named Executive Officers are
making adequate progress toward meeting them, as shown on the table on page 4.

     WE ALSO CONSIDER CORPORATE TAX DEDUCTIONS AND ACCOUNTING RULES. We
generally structure the Named Executive Officers' compensation so that all
elements of pay are tax deductible by the Company. Section 162(m) of the
Internal Revenue Code of 1986, as amended (Tax Code), limits the amount of
compensation that we may deduct in any one year for Mr. Shippar and each of the
next three most-highly-compensated executive officers other than the Chief
Financial Officer to $1 million. We believe that stock options and performance
shares awarded under the ALLETE Executive Long-Term Incentive Compensation Plan
(LTIP) are fully tax deductible because they meet the "performance-based"
compensation standard of Section 162(m). Moreover, our Executive Annual
Incentive Plan (AIP) provides that if the Company would otherwise be limited in
its ability to deduct any portion of an AIP award due to the limits imposed by
Section 162(m), then the Compensation Committee will defer that amount to the
Supplemental Executive Retirement Plan, which is described on page 21. Section
280G of the Tax Code limits the amount that we may deduct for payments in
connection with a change of control, commonly referred to as "parachute
payments." If total payments in connection with a change of control exceed the
limits of Section 280G, the Company's deduction is limited and the recipient is
subject to an excise tax. Our severance plan provides that if plan payments to a
participant would exceed the Section 280G limits, payments to the participant
will be reduced to the maximum amount that can be paid without causing the
Company to lose its deduction. If, however, that reduction results in the
participant receiving less than 85 percent of the amount that otherwise would
have been received, plan payments will not be reduced and the participant will
instead receive an additional gross-up payment to make the participant whole for
the excise tax. We also consider the accounting implications of each
compensation element given to Named Executive Officers; however, because the
primary objectives of our compensation programs are tied to performance, we may
offer compensation regardless of whether it qualifies for a tax deduction or
more favorable accounting treatment whenever it deems that compensation to be in
the Company's best interest.

     THE COMPENSATION COMMITTEE AND THE BOARD EXERCISE INDEPENDENT JUDGMENT. The
Compensation Committee and the Board ensure on behalf of shareholders that
executive compensation is appropriate and effective. The Compensation Committee
and the Board have access to compensation advisors and consultants, but exercise
independent judgment in determining executive compensation types and levels.

PROCESS FOR DETERMINING EXECUTIVE COMPENSATION

     ROLE OF THE COMPENSATION COMMITTEE. The Compensation Committee establishes
our compensation philosophy and policies regarding executive compensation, and
oversees the administration of our executive compensation programs. The
Compensation Committee sets Mr. Shippar's compensation, which is reviewed by the
Board without participation by Mr. Shippar. In setting Mr. Shippar's
compensation, the Compensation Committee reviews and considers the Corporate
Governance Committee's annual evaluation of Mr. Shippar's performance, which,
among other things, assesses his performance relative to specific annual
objectives established by the Board. The Compensation Committee also reviews
"benchmarking" data, comparing Mr. Shippar's compensation to the compensation of
top-level executives at other companies. Benchmarking data is adjusted to
account for the Company's size as measured by revenue and provides a broader
market context for the Compensation Committee's deliberations and decisions. The
Compensation Committee also reviews and approves the components and amounts of
the compensation of the other Named Executive Officers, as recommended by Mr.
Shippar.

                                       14
<PAGE>

     In early 2007, our Human Resources department provided the Compensation
Committee with the results of its analysis of Mr. Shippar's base pay and annual
incentives paid in 2006 as compared to survey data from energy services and
general industry companies. We retained Hewitt Associates (Hewitt) to provide
custom survey data comparing total compensation (base pay, target-level annual
incentives, and target-level long-term incentives) for Mr. Shippar's position in
general industry and energy services companies.1 Survey sources also included
Towers Perrin and Watson Wyatt Worldwide. The Compensation Committee reviewed
the benchmarking analysis directly with Hewitt and reached the conclusions that
are described below, under "Management Directed 2007 Executive Compensation
Study."

  1  The Hewitt peer group consisted of: AGL Resources, Inc.; Allegheny Energy,
     Inc.; Ameren Corporation; American Electric Power, Inc.; Aquila, Inc.;
     Black Hills Corporation; CenterPoint Energy, Inc.; Cinergy Corp.; Cleco
     Corporation; CMS Energy Corporation; DTE Energy Company; Duquesne Light
     Holdings, Inc.; Dynegy Inc.; E.ON U.S. LLC; Edison International; El Paso
     Electric Company; Entergy Corporation; Ferrellgas Partners, L.P.;
     FirstEnergy Corp.; FPL Group, Inc.; IDACORP, Inc.; Kansas City Power &
     Light Company; Kinder Morgan, Inc.; Midwest Independent Transmission System
     Operator, Inc.; Mirant Corporation; New York Power Authority; NiSource
     Inc.; PacificCorp; Pepco Holdings, Inc.; PG&E Corporation; Pinnacle West
     Capital Corporation; PNM Resources, Inc.; Portland General Electric
     Company; PPL Corporation; Prisma Energy International Services LLC;
     Progress Energy, Inc.; Puget Sound Energy, Inc.; Questar Corporation;
     Reliant Energy, Inc.; SCANA Corporation; Sempra Energy; SUEZ Energy North
     America, Inc.; Tennessee Valley Authority; TransAlta Corporation;
     TransCanada Energy USA Inc.; TXU Corp.; WGL Holdings, Inc.; WPS Resources
     Corporation; and Xcel Energy Inc.

     In January of each year, the Compensation Committee, in consultation with
Mr. Shippar and Mr. Schober, sets annual performance goals for the AIP and the
Results Sharing program, which is a Company-wide profit-sharing opportunity. At
the same time, the Compensation Committee establishes performance goals in
connection with the LTIP. Specifically, the Compensation Committee sets
multi-year total shareholder return (TSR) objectives relative to a designated
peer group in connection with performance shares and sets the terms for stock
options, restricted stock units, and long-term cash awards, such as award dates,
vesting periods, expiration dates and forfeiture provisions.

     ROLE OF MANAGEMENT. For all other Named Executive Officers, Mr. Shippar
recommends compensation levels to the Compensation Committee for approval.
Recommendations are based, in part, on each Named Executive Officer's experience
and responsibility level, and on Mr. Shippar's assessment of her or his
performance. The recommendations are also based on executive compensation
studies as described below.

     Approximately once every three years, management hires a compensation
consultant to conduct a broader review of base salary, annual incentives and
long-term incentives for our executive officers. Management also recommends to
the Compensation Committee financial and non-financial goals, tied to our
strategy under the Company's incentive compensation plans.

     -  MANAGEMENT-DIRECTED 2007 EXECUTIVE COMPENSATION  STUDY. In preparation
     for setting base salaries effective June 1 and target-level annual and
     long-term incentive opportunities, management hired Hewitt in early 2007 to
     assist our Human Resources department in analyzing then-current aggregate
     compensation. For purposes of the study, aggregate compensation consists of
     base pay, target annual incentives, and target long-term incentives of our
     executive officers, except for Ms. Holquist, whose compensation was
     compared to real estate company compensation survey data. The survey
     sources were the same as were provided to the Compensation Committee for
     consideration in connection with setting Mr. Shippar's salary with
     additional data from American Compensation Resources, Inc. and CompAnalyst
     from Salary.com.

     The Hewitt studies indicated that the base salaries for the Named Executive
     Officers were near the 50th percentile of energy services company
     benchmarks and the results of the studies supported a modest annual market
     adjustment of base salaries. Target-level annual incentive opportunities
     were also near the 50th percentile of energy services company benchmarks,
     except for Mr. Shippar's, whose target-level annual incentive opportunities
     were below the 50th percentile. The studies also indicated that
     target-level long-term incentive opportunities for all Named Executive
     Officers were below the 50th percentile of energy services company
     benchmarks. These percentiles were determined by adjusting the market data
     to account for the Company's size based on revenue.

     -  MANAGEMENT-DIRECTED 2007 REAL ESTATE EXECUTIVE COMPENSATION STUDY.
     Unlike other Named Executive Officers, Ms. Holquist focuses exclusively on
     leading ALLETE Properties, LLC.

                                       15
<PAGE>

     Ms. Holquist's compensation program is tied directly to ALLETE Properties'
     business strategy. CEL & Associates, Inc. is a real estate business
     consultant hired by management to advise the Company on executive
     compensation practices of the real estate industry. In early 2007, the
     consultant prepared a study comparing Ms. Holquist's compensation--namely
     base pay, annual incentives, and long-term incentives--with the
     compensation of comparable executive-level positions at a 12-company peer
     group. The companies were selected by CEL & Associates, Inc., based on
     comparability to ALLETE Properties, LLC in terms of industry, geographic
     location, and size as measured by net income and revenue. In several
     instances operating division-level leadership was a more appropriate
     position match for Ms. Holquist, due to the size of the overall company.
     The companies in the peer group were as follows:

     American Land Lease, Inc.                Ram Realty
     Services Biltmore Farms, LLC             Regency Centers
     Bonita Bay Group                         The United Properties, Inc.
     Brookfield Homes Corporation             Watson Land Company
     Carlson Real Estate Company              Woodlands Operating Company
     Opus Corporation                         ZOM, Inc.

     The CEL & Associates, Inc. study concluded that Ms. Holquist's base pay was
     near the 50th percentile, her annual bonus earned in 2006 was above the
     50th percentile, and her long-term incentive compensation target
     opportunity was below the 50th percentile. When elements of compensation
     were considered in total, Ms. Holquist's actual compensation was near the
     50th percentile.

     Both compensation benchmarking studies provided context for Mr. Shippar's
recommendations for the other Named Executive Officers' annual base salary
increases and incentive compensation.

     COMPENSATION COMMITTEE'S 2007 EXECUTIVE COMPENSATION STUDY. Following up on
the management-directed executive compensation studies, the Compensation
Committee directed Hewitt to perform a comprehensive review of substantially all
executive compensation elements to assist the Compensation Committee in
evaluating whether then-current target-level compensation and pay elements were
consistent with our compensation philosophy. Hewitt analyzed aggregate
compensation, meaning base pay, annual incentives, and long-term incentives, of
our five most-highly compensated executive officers in 2006--namely, Mr.
Shippar, Mr. Schober, Ms. Holquist, Ms. Welty, and Ms. Amberg--as compared to
the five most-highly compensated executive officers among a 15-company peer
group. The study used substantially the same peer group as was used to measure
our 2006 performance under the LTIP and the companies were selected by the
Compensation Committee based on comparability to ALLETE in terms of size (i.e.,
market capitalization and enterprise value), industry, and stock-trading
characteristics (i.e., dividend yield, price-earnings ratio, and market-to-book
value). The companies in the peer group were as follows:

     Avista Corporation                     Nicor Inc.
     Black Hills Corporation                Otter Tail Corporation
     CH Energy Group, Inc.                  TECO Energy, Inc.
     Consolidated-Tomoka Land Company       The Empire District Electric Company
     Great Plains Energy Incorporated       The St. Joe Company
     IDACORP, Inc.                          Vectren Corporation
     Integrys Energy Group, Inc.            Wisconsin Energy Corporation
     MDU Resources Group, Inc.

The energy services and general industry data previously considered in the
management-directed executive compensation studies was also included in this
study.

     The Hewitt Associates study also looked at key design elements of our AIP
and LTIP including financial performance measures, performance requirements to
earn threshold, target, and maximum awards, and the mix of long-term incentive
awards.

                                       16
<PAGE>

     In addition, the study compared the value of the accumulated payment
obligations of the Company to the Named Executive Officers under our qualified
and nonqualified executive retirement plans; the then-current value of
unexercised stock options, performance share awards, unvested restricted stock
units, long-term incentive cash, and common stock owned by each Named Executive
Officer; and the value of potential change in control severance benefits.

     Upon review, the Compensation Committee determined that the energy services
industry data was the most relevant reference for evaluating the Named Executive
Officers' compensation levels, except for Ms. Holquist's.

     The study indicated that base salaries for the Named Executive Officers
were near the 50th percentile of the energy services company benchmarks. The
study also indicated that target-level annual incentive opportunities for the
Named Executive Officers fell near the 50th percentile of energy services
company benchmarks, except for Mr. Shippar whose target-level annual incentive
opportunity was below the 50th percentile of the energy services company
benchmarks. The grant-date value of long-term incentive compensation for the
Named Executive Officers was well below the 50th percentile of the energy
services company benchmarks. When these elements of compensation were considered
in total, the Named Executive Officers' target-level compensation generally fell
below the 50th percentile of the energy services company benchmarks. These
percentiles were determined by adjusting the market data to account for the
Company's size based on revenue.

     The Hewitt study indicated that the key design elements of the AIP and LTIP
were appropriate, but that our net income and TSR targets are higher than the
targets used by our peer group. Upon review of the study, accumulated retirement
benefits were determined by the Compensation Committee to be fair and
appropriate. Hewitt concluded and the Compensation Committee agreed that
potential payments to the Named Executive Officers upon termination of their
employment in connection with a change in control of the Company, and the
potential for wealth accumulation through the LTIP were substantially below the
benefit values provided by the companies in the peer group.

     This market data, along with other considerations the Compensation
Committee deemed relevant, such as executive experience, tenure, and
performance, formed the basis for the Compensation Committee's deliberations and
compensation decisions for the Named Executive Officers in 2007 and in early
2008.

     EXECUTIVE COMPENSATION DESIGN CHANGES. Based on the 2007 reviews, the
Compensation Committee determined that the Named Executive Officer's
compensation included appropriate elements and that the total compensation for
2007 was fair and appropriate, except as to Mr. Shippar's target annual
incentive opportunity, which was determined to be low compared to market
competitive levels. In early 2008, the Compensation Committee increased Mr.
Shippar's 2008 target AIP opportunity from 40 percent of base salary to 50
percent. In addition, the Compensation Committee awarded Mr. Shippar a bonus of
1,000 shares of ALLETE common stock. The value of this bonus was approximately
equal to the difference between the AIP award Mr. Shippar earned for 2007 and
the award he would have earned if his AIP target annual incentive opportunity
had been 50 percent of base salary.

     The Compensation Committee's analysis of the executive compensation studies
also identified opportunities for executive compensation policy changes to
better align our executive compensation programs with our compensation
philosophy and objectives described above beginning on page 13. The Committee
decided to place more emphasis on long-term performance, increased stock
ownership, and executive retention--three factors the Compensation Committee
believes better align the Named Executive Officer's compensation with
shareholders' interests. To accomplish those objectives, the Compensation
Committee directed the Company to take the following actions in early 2008:

     -  The Company increased the 2008 LTIP target award opportunity for each
        Named Executive Officer to provide a fair and competitive compensation
        opportunity while at the same time placing more

                                       17
<PAGE>

        emphasis on pay for performance, increased stock ownership, internal
        equity and retention. The table below shows the specific changes that
        were implemented.

<TABLE>
<CAPTION>
        -----------------------------------------------------------------------
                                    LONG-TERM INCENTIVE TARGET OPPORTUNITY
                                       2007                         2008
                                  -------------                -------------
        <S>                       <C>                          <C>
        Mr. Shippar                  $365,500                    $450,000
        Mr. Schober                   $98,900                    $150,000
        Ms. Holquist                 $182,900                    $191,000
        Ms. Amberg                    $84,000                    $100,000
        Ms. Welty                     $78,300                    $100,000
        -----------------------------------------------------------------------
</TABLE>
     -  The Company lowered the performance requirement to earn a threshold-
        level and target-level performance share award under the LTIP as
        measured by the Company's TSR relative to the 2008 16-company peer group
        for performance periods beginning after 2007. A target-level award is
        earned if the Company's TSR, measured over a three-year performance
        period, ranks ninth among the peer group (formerly seventh); and a
        threshold-level award is earned if the Company's three-year TSR ranks
        twelfth among the peer group (formerly tenth).

     -  The Company implemented the ALLETE and Affiliated Companies Change In
        Control Severance Plan (Severance Plan) and amended the Supplemental
        Executive Retirement Plan (both as discussed below on page 21) to
        encourage the continued dedication and objectivity of the Named
        Executive Officers and other key members of the Company's management in
        the event of a potential change in control.

ELEMENTS OF EXECUTIVE COMPENSATION

     OVERVIEW. Named Executive Officers receive total compensation consisting of
base salary, annual incentives, long-term incentives, retirement benefits, and
health and welfare benefits. Named Executive Officers' 2007 compensation
elements are discussed below and also in the narrative following the Summary
Compensation Table and Grants of Plan-Based Awards Table that begins on page 23.

     BASE SALARY. Base salary is designed to attract and retain experienced,
qualified leaders. Named Executive Officers received annual market-adjustment
salary increases, ranging from 4.1 percent to 5.2 percent, effective June 1,
2007.

     ANNUAL INCENTIVE AWARDS. Annual incentives reward Named Executive Officers
for accomplishing annual goals. We have two annual incentive plans--the Results
Sharing program and the AIP. Annually, the Compensation Committee, in
consultation with Mr. Shippar and Mr. Schober, approves goal measures for both
plans. The Compensation Committee, in consultation with Mr. Shippar, also
reviews and approves target award opportunities under these plans.

     -  RESULTS SHARING. Named Executive Officers, except Ms. Holquist,
     participate in the Results Sharing program. Results Sharing, a
     profit-sharing program open to virtually all our employees, is designed to
     motivate employees to achieve and exceed financial and operational
     performance goals. The 2007 Results Sharing program provided a target-level
     opportunity equal to 5 percent of base pay.

     -  ANNUAL INCENTIVE PLAN. Participation in the AIP is limited to certain
     management-level employees, including each Named Executive Officer. The
     Compensation Committee approves the AIP goals. For each Named Executive
     Officer, except Ms. Holquist, AIP awards were designed to reward annual
     growth in corporate earnings and cash flow, and to reward the
     accomplishment of strategic initiatives. Earnings growth was selected
     because it is widely tracked and reported by external financial analysts
     and used as a measure to evaluate the Company's performance. Cash flow was
     selected as a financial measure because it is used to evaluate the
     Company's ability to generate funds from internal operations for capital
     projects, repayment of debt, and dividend payments. Earnings and cash flow
     were also selected because both measures can impact the Company's stock
     price. AIP awards are expressed as a percentage of salary for Named
     Executive Officers, except Ms. Holquist; target AIP opportunities ranged
     from 30 percent to 40 percent of salary.

                                       18
<PAGE>

     Ms. Holquist's AIP award was designed to create an incentive for her to
     lead the effort to secure entitlements for existing real estate assets, to
     oversee orderly and profitable sales of real estate assets, and to position
     ALLETE Properties for future growth. Ms. Holquist's target AIP award was
     expressed as a percentage of revenue from land sales and net income from
     real estate operations that could be earned based on the accomplishment of
     her goals.

     The AIP opportunity levels for all Named Executive Officers were
     established so that if target goals were achieved, the combination of
     salary and annual incentives for the Named Executive Officer would result
     in total annual compensation near the midpoint of the salary ranges
     established using comparative benchmarking data.

     Mr. Shippar, in consultation with the Compensation Committee, determines to
     what extent AIP strategic initiatives have been met.

     LONG-TERM INCENTIVE AWARDS. Long-term incentive compensation is used to
encourage Named Executive Officers to develop and implement business strategies
that grow TSR over time, and to reward executives when TSR goals are achieved.
Long-term incentive compensation programs also encourage executives to stay with
the Company because they deliver rewards over time and contain forfeiture
provisions for certain terminations of employment. Long-term incentive awards
are granted annually to the Named Executive Officers by the Compensation
Committee under the LTIP. The Compensation Committee approves LTIP awards in
January each year, effective as of the first business day in February to allow
for the orderly administration, communication, and reporting of the awards. We
do not have any plan or program in place to time equity awards to the release of
material non-public information. The LTIP was most recently amended and approved
by shareholders in May 2005.

     For 2007, the aggregate target value of the LTIP award to Named Executive
Officers ranged from 45 percent to 90 percent of annual base salary. LTIP awards
granted in 2007 to each Named Executive Officer, except Ms. Holquist, consisted
of nonqualified stock options with a ten-year term and three-year vesting
period, and performance shares with a three-year performance period. Generally,
the target value of the LTIP awards are allocated evenly between stock options
and performance shares; Mr. Shippar's LTIP award, however, is more heavily
weighted toward performance shares because of his higher Common Stock ownership
requirement. Ms. Holquist's LTIP award was comprised of restricted stock units
and a long-term cash award that vests over three years. Her cash award was
designed to reward her for achieving goals specific to the Company's real estate
business; both forms of long-term compensation encourage her retention. The
table below shows the face value of the LTIP target opportunity for each Named
Executive Officer and the allocation of this opportunity between stock options,
performance shares, restricted stock units and cash awards. Each long-term
incentive compensation element is described below following the table.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                            Allocation of Long-Term Incentive Target Opportunity
                                                    (as a % of Total Opportunity)
                   Long-Term Incentive
                    Target Opportunity       Stock      Performance     Restricted
Name               (as a % of Base Pay)     Options        Shares       Stock Units     Cash Awards
--------------     --------------------     -------     -----------     -----------     -----------
<S>                <C>                      <C>         <C>             <C>             <C>
Mr. Shippar                 90%               40%           60%              -               -
Mr. Schober                 50%               50%           50%              -               -
Ms. Holquist                77.5%              -             -              52%             48%
Ms. Amberg                  45%               50%           50%              -               -
Ms. Welty                   45%               50%           50%              -               -
----------------------------------------------------------------------------------------------------
</TABLE>

     -  STOCK OPTIONS. Stock options reward Named Executive Officers for
     increases in the price of Common Stock over the long term and encourage
     Named Executive Officers to remain with the Company.

     -  PERFORMANCE SHARES. Performance shares reward executives for strong
     multi-year performance, measured by TSR relative to a group of peer
     companies. Relative TSR was selected by the Compensation Committee because
     it measures the benefit our shareholders realize on their investment in
     Common Stock compared to investment opportunities available in other
     similar companies.

                                       19
<PAGE>

     The Compensation Committee, in consultation with Mr. Shippar and Mr.
     Schober, selects the TSR peer group based on comparability to the Company
     in terms of size (i.e., market capitalization and enterprise value),
     industry, and stock-trading characteristics (i.e., dividend yield,
     price-earnings ratio, and market-to-book value). The Compensation Committee
     approves the peer group companies prior to the start of each performance
     period. The peer group approved for the performance periods beginning after
     2005 was changed to include utilities that have diversified operations and
     companies whose primary business is real estate operations. These changes
     better align the peer group to our current operations. The applicable peer
     groups are as follows:

<TABLE>
                                TSR PEER GROUPS
<CAPTION>
      Performance Periods                            Performance Period
    2006-2008 and 2007-2009                              2005-2007
---------------------------------           ---------------------------------
<S>                                         <C>
Avista Corporation                           Alliant Energy Corporation
Black Hills Corporation                      Avista Corporation
Brookfield Asset Management Inc.             Black Hills Corporation
CH Energy Group, Inc.                        Central Vermont Public Service Corporation
Consolidated-Tomoka Land Company             CH Energy Group, Inc.
Great Plains Energy Incorporated             Cleco Corporation
IDACORP, Inc.                                Great Plains Energy Incorporated
Integrys Energy Group, Inc.                  IDACORP, Inc.
MDU Resources Group, Inc.                    Integrys Energy Group, Inc.
Nicor Inc.                                   MGE Energy, Inc.
Otter Tail Corporation                       OGE Energy Corp.
TECO Energy, Inc.                            Otter Tail Corporation
The Empire District Electric Company         The Empire District Electric Company
The St. Joe Company                          UIL Holdings Corporation
Vectren Corporation                          UniSource Energy Corporation
Wisconsin Energy Corporation                 Westar Energy, Inc.
</TABLE>

     -  RESTRICTED STOCK UNITS. Restricted stock units are used as a retention
        incentive. A restricted stock unit entitles the recipient to one share
        of Common Stock after a lapse of time specified in the award.

     -  LONG-TERM INCENTIVE CASH AWARD. Long-term incentive cash rewards Ms.
        Holquist for achieving her AIP goals and, because the amount earned
        vests over three years, encourages her retention.

BENEFITS

     We offer benefits, including retirement benefits, to attract and retain
Named Executive Officers; retirement benefits also reward long-term service with
the Company. Named Executive Officers are eligible to participate in a range of
broad-based employee benefits, including vacation pay, sick pay, disability
benefits, an employee stock purchase plan, and both active and post-retirement
medical, dental, and group term life insurance. Named Executive Officers are
eligible for retirement benefits under the same pension and retirement savings
plans available to other eligible employees and under our supplemental executive
retirement plan. Retirement benefits are described in more detail below.

     TAX-QUALIFIED RETIREMENT BENEFITS. We provide retirement income benefits to
most of our employees, including the Named Executive Officers, from two primary
sources--a tax-qualified defined contribution retirement saving and stock
ownership plan (RSOP) that has features of both an employee stock ownership plan
and a 401(k) savings plan, and traditional tax-qualified defined benefit pension
plans. Since October 2006, we have emphasized delivering nonunion retirement
benefits through the RSOP. Named Executive Officers' service through September
30, 2006 is counted for calculating his or her benefit under the nonunion
pension plan. The

                                       20
<PAGE>


present value on December 31, 2007 of each Named Executive Officers' pension
benefits is shown in the Pension Benefits Table on page 31. The 2007 increase in
the pension benefits value for each Named Executive Officer is included in
column (h) of the Summary Compensation Table.

     We make contributions to the RSOP accounts of all Named Executive Officers
and each may also elect to defer his or her salary and/or Results Sharing awards
within RSOP and Tax Code limits. We make contributions to the Named Executive
Officers' RSOP accounts including a Company match of elective deferrals up to 4
percent of base salary and Company contributions of 7.5 to 11.5 percent,
dependent on age. Amounts contributed by the Company under the RSOP to the Named
Executive Officers are included in column (i) of the Summary Compensation Table
on page 23.

     SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS. Supplemental retirement
benefits are provided to the Named Executive Officers through a
non-tax-qualified retirement plan called the ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan (SERP). Generally, the SERP is designed
to provide retirement benefits to the Named Executive Officers that, in
aggregate, substantially equal the benefits they would have been entitled to
receive if the Tax Code did not impose limitations on the types and amounts of
compensation that can be included in the benefit calculations under qualified
benefit plans. The compensation generally used to calculate SERP benefits is AIP
awards and the sum of annual salary and Results Sharing award amounts in excess
of the compensation limits imposed on our tax-qualified benefit plans.

     The SERP has three components: a supplemental pension benefit, a
supplemental defined contribution benefit, and a deferral account benefit. The
present value on December 31, 2007 of each Named Executive Officer's SERP
pension benefit is shown in the Pension Benefits Table on page 31. The 2007
increase in the SERP pension benefit value for each Named Executive Officer is
included in column (h) of the Summary Compensation Table on page 23. The amount
of the 2007 SERP defined contribution benefit received by each Named Executive
Officer is included in column (i) of the Summary Compensation Table.

     Under the SERP, each Named Executive Officer can also elect to defer, on a
before-tax basis, some or all of his or her salary and annual incentive award.
Named Executive Officers whose base salary is below the tax-qualified benefit
plans' annual compensation limit can also elect to defer some or all of his or
her SERP defined contribution benefit. The aggregate amount each Named Executive
Officer elected to defer under the SERP in 2007 is shown in the Non-Qualified
Deferred Compensation Table on page 33. Named Executive Officers can select
among different crediting rates to apply to deferral balances under the SERP,
which generally match the investment options available under the RSOP.

PERQUISITES

     The Company provides Named Executive Officers with fringe benefits, or
perquisites, but only on a modest basis. The Compensation Committee has reviewed
these fringe benefits and determined that the perquisites provided to the Named
Executive Officers are reasonable and in line with other energy services and
general industry companies. Perquisites paid in 2007 are included in column (i)
of the Summary Compensation Table on page 23.

EMPLOYMENT, SEVERANCE, AND CHANGE IN CONTROL AGREEMENTS

     We currently have no employment agreements with our Named Executive
Officers, all of whom have long tenures with the Company. We have generally
promoted senior executives from within our ranks and attracted strong talent
with ties to our area of operations. On February 13, 2008 the Board of Directors
approved the Severance Plan, which provides the Named Executive Officers and
other key executives with severance benefits in connection with a change in
control of the Company. The purpose of the Severance Plan is to enable and
encourage the continued dedication and objectivity of members of the Company's
management in the event of a potential change in control. In the event of a
potential change in control of the Company, the Severance Plan allows the Named
Executive Officers to focus their attention on obtaining the best possible
transaction for the shareholders and to make an independent evaluation of all
possible transactions without being diverted by concerns regarding the impact
various transactions may have on the security of their jobs and benefits.

                                       21
<PAGE>

     Under the Severance Plan, Named Executive Officers are entitled to receive
specific benefits in the event of an involuntary termination of employment
(including resignation by the employee following specified changes in duties,
termination of compensation, or benefits that are treated as involuntary
terminations) occurring six months before and up to two years after a change in
control. We think that using two trigger events, a change in control and
termination of employment, is the most effective way to meet the objectives of
the Severance Plan--to allow the Named Executive Officers to remain neutral and
obtain the best deal for the shareholders.

     The Board of Directors also approved an amendment to the SERP to accelerate
the payment of the supplemental pension benefits and the deferral account
benefits earned after 2004 upon a termination of employment in connection with a
change in control. There are also change in control features in both the AIP and
the LTIP. The potential value of change in control severance benefits are
discussed in the section titled, "Potential Payments Upon Termination or Change
in Control" starting on page 34.

                     EXECUTIVE COMPENSATION COMMITTEE REPORT

     The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis with management. Based upon such review and the related
discussions, the Compensation Committee has recommended to the Board that the
Compensation Discussion and Analysis be included in the Proxy Statement to be
delivered to Company shareholders.

March 25, 2008

Executive Compensation Committee

Madeleine W. Ludlow, Chair
Kathleen A. Brekken
Sidney W. Emery, Jr.
Jack I. Rajala

                                       22
<PAGE>

<TABLE>
                                                COMPENSATION OF EXECUTIVE OFFICERS

                                            SUMMARY COMPENSATION TABLE--2007 AND 2006
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
       (a)            (b)          (c)          (d)          (e)          (f)          (g)          (h)         (i)            (j)
                                                                                                Change in
                                                                                                 Pension
                                                                                                  Value
                                                                                                   and
                                                                                                 Nonqual-
                                                                                   Non-Equity     ified
                                                                                   Incentive     Deferred
                                                                                     Plan        Compen-     All Other
Name and                                                   Stock        Option      Compen-      sation       Compen-
Principal Position   Year         Salary      Bonus       Awards<F2>   Awards<F3>  sation<F4>   Earnings<F5>  sation<F6>     Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                  <C>        <C>           <C>         <C>          <C>         <C>          <C>          <C>          <C>
DONALD J. SHIPPAR    2007       $526,577      $37,770<F1> $252,144     $155,869    $176,033      $528,777     $118,697    $1,795,867
Chairman, President, 2006       $499,616           $0     $198,893     $147,464    $260,893      $789,804     $130,749    $2,027,419
and Chief Executive
Officer

MARK A. SCHOBER      2007       $258,562           $0      $51,732      $53,057     $77,068       $87,381      $62,624      $590,424
Senior Vice          2006       $225,970           $0      $41,158      $38,104    $105,626       $86,648      $56,187      $553,693
President and
Chief Financial
Officer

LAURA A. HOLQUIST    2007       $242,754           $0      $62,133       $9,800    $249,948       $26,032       $66,586     $657,253
President of ALLETE  2006       $233,508           $0      $59,160      $13,236    $325,248       $69,678       $54,852     $755,682
Properties, LLC

DEBORAH A. AMBERG    2007       $243,339           $0      $48,220      $37,289     $63,522       $17,504       $55,023     $464,897
Senior Vice          2006       $233,643           $0      $32,209      $23,260     $94,447       $34,703       $47,268     $465,530
President, General
Counsel, and
Secretary

CLAUDIA SCOTT WELTY  2007       $226,108           $0      $48,007      $42,021     $58,915       $69,218       $55,872     $500,141
Senior Vice          2006       $215,223           $0      $42,228      $39,618     $87,895       $135,783      $54,911     $575,658
President and
Chief Administrative
Officer
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> This amount reflects a stock bonus of 1,000 shares of common stock valued at the February 13, 2008 closing price of $37.77.
<F2> The amounts shown in column (e) relate to performance share opportunities for all Named Executive Officers and to restricted
     stock unit opportunities for Ms. Holquist. The disclosures reflect the dollar amounts the Company recognized as compensation
     expense for financial statement reporting purposes for the fiscal years ended December 31, 2007 and December 31, 2006 in
     accordance with Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123R), but do
     not take into consideration the effect of estimated forfeitures. SFAS 123R requires the Company to estimate forfeitures when
     stock awards are granted and to reduce its estimated compensation expense accordingly. The Summary Compensation Table was
     prepared assuming none of the stock awards will be forfeited. The assumptions used to calculate these amounts are disclosed in
     Note 16 to the Company's Consolidated Financial Statements included in the Annual Report, which was filed with the SEC on
     February 15, 2008. The Company recognizes expense for performance shares over the three-year performance period of each award
     granted; the cost of restricted stock units is also spread over the three-year vesting period. Therefore, the amount shown in
     column (e) for each Named Executive Officer reflects the sum of one-third of the expense associated with each of his or her
     performance share awards outstanding as of December 31, 2007 and December 31, 2006; the amount shown for Ms. Holquist also
     includes 30 percent of the expense associated with her outstanding restricted stock unit awards outstanding as of December 31,
     2007 and December 31, 2006. The values shown for stock awards are theoretical. The value a Named Executive Officer actually
     earns will depend on the extent to which his or her LTIP goals are achieved and on the market price of our Common Stock.
<F3> The amounts shown in column (f) reflect the dollar amounts the Company recognized as compensation expense for financial
     statement reporting purposes for the fiscal year ended December 31, 2007 and December 31, 2006 in accordance with SFAS 123R,
     but does not take into consideration the effect of estimated forfeitures. SFAS 123R requires the Company to estimate
     forfeitures when option awards are granted and to reduce estimated compensation expense accordingly. The Summary Compensation
     Table was prepared assuming none of the option awards will be forfeited. The assumptions used to calculate these amounts are
     disclosed in Note 16 to the Company's Consolidated Financial Statements included in the Annual Report. For all Named Executive
     Officers, except Ms. Holquist and Ms. Amberg, who are not retirement-eligible under the Company's retirement plans, the amount
     shown represents the grant-date fair value of the stock option award granted in 2007 and 2006. The amount shown for Ms.
     Holquist and Ms. Amberg reflects the sum of one-third of the grant-date fair value of the stock option awards outstanding as of
     December 31, 2007 and December 31, 2006. The values shown for stock options are theoretical. The value a Named Executive
     Officer actually realizes will depend on the extent to which the Common Stock's market value exceeds the exercise price when
     the stock options are exercised.

                                       23
<PAGE>

<F4> The amounts shown in column (g) include amounts that were earned, as well  as amounts that were earned and deferred at the
     election of the Named Executive Officer, pursuant to the AIP and the long-term cash award earned by Ms. Holquist under the
     LTIP. Also included for all Named Executive Officers, except Ms. Holquist, are amounts that were earned, as well as amounts
     that were earned and deferred at the election of the Named Executive Officer, under the Results Sharing program. By program
     design, a portion of Results Sharing awards were paid in the form of a Company contribution to the Named Executive Officer's
     RSOP account and SERP deferral account.
<F5> The amounts in column (h) are comprised of the following:

                                                  Aggregate Change in
                                                Actuarial Present Value of
                                                  Accumulated Defined              Above-Market Interest on
                                              Benefit Pensions During Year          Deferred Compensation
                                             -----------------------------        --------------------------
     Donald J. Shippar       2007                       $528,224                              $553
     Mark A. Schober         2007                        $87,131                              $250
     Laura A. Holquist       2007                        $26,032                                $0
     Deborah A. Amberg       2007                        $17,504                                $0
     Claudia Scott Welty     2007                        $69,218                                $0

<F6> The amounts in column (i) are comprised of the following:


                                                                                   Contributions to          Contributions to the
                                Perquisites and Other            Tax                the RSOP and           Supplemental Executive
                                 Personal Benefits *        Reimbursements **    Flexible Benefit Plan         Retirement Plan
                               -----------------------     -------------------  -----------------------   --------------------------
Donald J. Shippar      2007           $22,347                   $8,318                  $44,338                   $43,694
Mark A. Schober        2007           $16,375                     $780                  $35,781                    $9,688
Laura A. Holquist      2007           $13,323                      $36                  $33,525                   $19,702
Deborah A. Amberg      2007           $16,089                     $751                  $30,938                    $7,245
Claudia Scott Welty    2007           $15,035                      $16                  $34,831                    $5,990

*    Amounts paid in 2007 include: (1) car allowances: Mr. Shippar--$16,900, Mr. Schober--$13,780, Ms. Holquist--$13,260, Ms.
     Amberg--$13,780, Ms. Welty--$13,780; and (2) meal and entertainment expenses for Named Executive Officer's spouse paid by the
     Company: Mr. Shippar--$2,923. Amounts also include reimbursement for financial and tax planning services (up to $1,500
     annually), an office parking space, and club memberships having a primary business purpose (but which may also allow Named
     Executive Officers personal use of the facilities or services). The value assigned to each perquisite given to a Named
     Executive Officer is based on the aggregate incremental cost to the Company associated with the fringe benefit. The amounts
     reflect the full, actual cost of the fringe benefit in all cases, except for spouses' travel and entertainment expenses. The
     aggregate cost to the Company for spousal travel, meals, and entertainment was calculated as the full actual cost of each
     benefit in excess of the amount the Company would have paid had the Named Executive Officer been traveling or eating without
     his or her spouse.
**   The tax reimbursements relate to imputed income from spousal travel, executive physicals, and miscellaneous perquisites.
</FN>
</TABLE>

                                       24
<PAGE>

                        GRANTS OF PLAN-BASED AWARDS--2007

     The following Grants of Plan-Based Awards Table shows the range of each
Named Executive Officer's annual and long-term incentive award opportunities
granted for the fiscal year ended December 31, 2007. The narrative following the
table describes the terms of each incentive award opportunity.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
        (a)           (b)       (c)       (d)     (e)      (f)      (g)      (h)     (i)     (j)        (k)       (l)      (m)
                                                                                           All Other  All Other
                                                                                             Stock     Option
                                      Estimated Future Payouts        Estimated Future      Awards:    Awards:  Exercise Grant Date
                             Date of      Under Non-Equity          Payouts Under Equity     Number   Number of  or Base Fair Value
                             Compen-   Incentive Plan Awards<F2>   Incentive Plan Awards   of Shares Securities Price of of Stock
                              sation  -------------------------- ------------------------- of Stock  Underlying  Option    and
Name and             Grant  Committee                             Threshold Target Maximum or Units    Options    Awards  Option
Award Type<F1>        Date    Action  Threshold  Target  Maximum     (#)      (#)    (#)      (#)        (#)      ($/sh)  Awards<F3>
------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>     <C>       <C>       <C>      <C>      <C>       <C>    <C>     <C>       <C>        <C>      <C>
DONALD J. SHIPPAR
 Results Sharing    1/23/07   1/23/07   $15,721  $26,202  $78,606       -       -        -         -          -        -         -
 AIP                1/23/07   1/23/07   $80,250 $214,000 $428,000       -       -        -         -          -        -         -
 Stock Options      2/01/07   1/23/07         -        -       -        -       -        -         -     19,125   $48.65  $155,869
 Performance Shares 2/01/07   1/23/07         -        -       -    2,831   5,661   11,322         -          -        -  $308,525

MARK A. SCHOBER
 Results Sharing    1/23/07   1/23/07    $7,719  $12,865  $38,595       -       -        -         -          -        -         -
 AIP                1/23/07   1/23/07   $34,519  $92,050 $184,100       -       -        -         -          -        -         -
 Stock Options      2/01/07   1/23/07         -        -        -       -       -        -         -      6,510   $48.65   $53,057
 Performance Shares 2/01/07   1/23/07         -        -        -     643   1,285    2,570         -          -        -   $70,033

LAURA A. HOLQUIST
 AIP                1/23/07   1/23/07         - $266,375        -       -       -        -         -          -        -         -
 Long-Term
 Incentive Cash     1/23/07   1/23/07   $70,800  $88,500 $106,200       -       -        -         -          -        -         -
 Restricted Stock
  Units             2/01/07   1/23/07         -        -        -       -       -        -     1,940          -        -   $87,824

DEBORAH A. AMBERG
 Results Sharing    1/23/07   1/23/07    $7,265  $12,109  $36,327       -       -        -         -          -        -         -
 AIP                1/23/07   1/23/07   $27,788  $74,100 $148,200       -       -        -         -          -        -         -
 Stock Options      2/01/07   1/23/07         -        -        -       -       -        -         -      5,531   $48.65   $45,078
 Performance Shares 2/01/07   1/23/07         -        -        -     546   1,091    2,182         -          -        -   $59,460

CLAUDIA SCOTT
 WELTY
 Results Sharing    1/23/07   1/23/07    $6,752  $11,253  $33,758       -       -        -         -          -        -         -
 AIP                1/23/07   1/23/07   $25,763  $68,700 $137,400       -       -        -         -          -        -         -
 Stock Options      2/01/07   1/23/07         -        -        -       -       -        -         -      5,156   $48.65   $42,021
 Performance Shares 2/01/07   1/23/07         -        -        -     509   1,017    2,034         -          -            $55,427
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Results sharing awards are made under the Results Sharing program. The AIP bonus is awarded under the AIP. Performance shares
     and stock options, and for Ms. Holquist long-term incentive cash and restricted stock units, are awarded under the LTIP.
<F2> Actual awards earned are shown in column (g) of the Summary Compensation Table on page 23.
<F3> The amounts shown in column (m) were calculated in accordance with SFAS  123R, using the same assumptions used in the valuation
     of compensation expense for the Company's Consolidated Financial Statements contained in the Annual Report but does not take
     into consideration the effect of estimated forfeitures. The amounts shown for stock options, performance shares and restricted
     stock units are the values of the awards for accounting purposes; the value a Named Executive Officer actually realizes from
     stock options will depend on the extent to which the Common Stock's market value exceeds the exercise price when the stock
     options are exercised. The value a Named Executive Officer realizes from performance shares will depend on actual Common Stock
     performance relative to the peer group, and market price appreciation and dividend yield. The value Ms. Holquist realizes from
     restricted stock units will depend on the market price appreciation of Common Stock.
</FN>
</TABLE>
                                       25
<PAGE>


                     GRANTS OF PLAN-BASED AWARDS DISCUSSION

     The Company's 2007 incentive awards for all Named Executive Officers except
Ms. Holquist consisted of two annual incentive opportunities--Results Sharing
and the AIP--and two long-term incentive opportunities--performance shares and
stock options. Ms. Holquist's 2007 incentive opportunities consisted of the AIP,
long-term incentive cash, which, to the extent earned, vests over a three-year
period, and restricted stock units. Each incentive is discussed below. The
annual incentives are presented first, followed by a description of the long-
term incentives.

     RESULTS SHARING. The 2007 target-level Results Sharing financial goal was
to achieve net income from continuing operations of $85.8 million, excluding
certain non-operational events (NICO). The 2007 Results Sharing program also had
specific operational goals related to safety, reliability, and environmental
protection. Results Sharing awards are adjusted downward by up to 40 percent if
the operational goals are not met. The amounts shown in column (d) in the Grants
of Plan-Based Awards Table above reflect the minimum Results Sharing awards
payable, which was set at 3 percent of salary, and would have resulted if the
financial target had been met but no operational goals were achieved. The target
Results Sharing awards shown in column (e) was set at 5 percent of salary, and
would have been payable if the financial target and all operational goals were
met. The amounts shown in column (f) reflect the maximum Results Sharing awards
payable, which were set at 15 percent of salary, and would have been earned if
the financial results had exceeded the target by 45 percent and all operational
goals were met.

     The amount shown in column (g) of the Summary Compensation Table includes
Results Sharing awards earned in 2007 equal to 4.2 percent of base salary for
each Named Executive Officer, except Ms. Holquist who does not participate in
the program. The award amount reflects results of NICO exceeding target by
$640,000 and 80 percent of the operational goals having been met. The Company
contributes half of the Results Sharing award as Common Stock to the Named
Executive Officer's RSOP account. Named Executive Officers, like all Results
Sharing participants, may elect to receive the remaining portion of the award in
cash or to contribute some or all of it to their RSOP account. Named Executive
Officers who retire, die, or become disabled during the year remain eligible to
receive a Results Sharing award on a prorated basis. Subject to the Compensation
Committee's discretion, Named Executive Officers who terminate employment for
other reasons may be eligible for a prorated Results Sharing award.

     ANNUAL INCENTIVE PLAN. For all the Named Executive Officers, except Ms.
Holquist whose 2007 AIP opportunity is discussed separately below, the following
were the 2007 AIP performance goals, measures, and goal weighing:

<TABLE>
<CAPTION>
                                             Goal Measure
AIP Performance Goals                   (Threshold Performance)   Goal Weighting
---------------------                   -----------------------   --------------
<S>                                     <C>                       <C>
NICO                                         $85.8 million              50%

Cash from Operating Activities (CFOA)         $126 million              25%

Strategic Goals                            Various; See below           25%
</TABLE>

     Strategic goals for 2007 were related to the Company's ability to obtain
regulatory approval of certain environmental initiatives and implementing those
initiatives, which is discussed in Part I, Item 1 of the Annual Report. Other
strategic goals were related to leadership development and succession planning.

     A threshold performance level was established for each AIP performance goal
and each goal's achievement was independently measured. By design, no awards are
earned if both financial goal results fall below their threshold performance
levels and no progress is made on the strategic goals. The amounts shown in

                                       26
<PAGE>

column (d) of the Grants of Plan-Based Awards Table reflect the minimum AIP
award that would be payable--ranging from 11.3 percent to 15 percent of base
salary--if both financial results are at threshold and if there is no progress
on strategic goals. The amounts shown in column (e) reflect the AIP target-level
awards that would be payable--ranging from 30 percent to 40 percent of base
salary--if NICO and CFOA results exceed the threshold by 5 percent and all
strategic goals are achieved. The amount shown in column (f) reflects maximum
AIP awards that would be payable--ranging from 60 percent to 80 percent of base
salary--if NICO and CFOA results exceed the threshold by 15 percent and all
strategic goals are exceeded. Actual 2007 NICO exceeded the threshold by 1
percent, or $830,000; CFOA fell below threshold by 2 percent, or $2.9 million;
and strategic goals, overall, were exceeded. As a result, the amounts shown in
column (g) of the Summary Compensation Table include AIP awards earned at 72
percent of target in 2007 ranging from 22 percent to 29 percent of base salary
for the Named Executive Officers, other than Ms. Holquist.

     Ms. Holquist's 2007 AIP award opportunity was established based on a
stepped percentage of ALLETE Properties' revenue from land sales (ranging from 0
percent if revenue was less than $38.5 million up to 0.38 percent if revenue
exceeded $68.5 million) plus a stepped percentage of net income from real estate
operations (ranging from 0 percent if net income from real estate operations was
less than $14.2 million up to 0.16 percent if net income from real estate
operations exceeded $24.4 million). Ms. Holquist could have earned from 0
percent to 120 percent of the award opportunity based on the achievement of
specific goals. Her goals for 2007 included meeting several strategic goals
including: completing infrastructure construction of Palm Coast Park, planning,
engineering design and permitting for Ormond Crossings, and identifying real
estate acquisition opportunities, all of which are discussed in Part I, Item 1
of the Annual Report. Other strategic goals related primarily to operational
improvements.

     The amount shown in column (e) of the Grants of Plan-Based Awards Table on
page 25 reflects Ms. Holquist's 2007 AIP target opportunity, which would be
payable if ALLETE Properties' revenue from land sales was $64.1 million, if net
income from real estate operations was $23.7 million, and if Ms. Holquist
achieved her strategic goals. The amount shown for Ms. Holquist in column (g) of
the Summary Compensation Table on page 23 includes the AIP award she earned in
2007, which was calculated on the basis of ALLETE Properties having realized
$44.2 million of revenue from land sales (after the deduction of minority
interests) and having earned $17.7 million of net income from real estate
operations, and the fact that, overall, Ms. Holquist achieved her strategic
goals.

     Named Executive Officers may elect to receive their AIP award in cash, or
to defer some or all of it to an account under the SERP. Named Executive
Officers who retire, die, or become disabled during the year remain eligible to
receive a prorated AIP award if the applicable performance goals are achieved.
Named Executive Officers who terminate employment for any other reason forfeit
the AIP award.

     STOCK OPTIONS. The Named Executive Officers, except Ms. Holquist, received
stock option awards in 2007 under the LTIP. The number of stock options granted
to the Named Executive Officers is shown in column (k) of the Grants of
Plan-Based Awards Table on page 25. Once vested, each stock option gives the
Named Executive Officer the right to purchase one share of Common Stock at an
exercise price equal to the closing share price of Common Stock on the grant
date. The stock options vest in three equal installments--on the first, second,
and third anniversary of the grant date, respectively. Stock options expire ten
years from the grant date. The stock options vest immediately upon retirement,
disability, or death and expire on the earlier of the original expiration date
or three years from the accelerated vesting (in the case of retirement) or one
year from the accelerated vesting (in the case of disability or death); stock
options also vest immediately upon a change in control event, without triggering
any change in the expiration date. If the Company terminates a Named Executive
Officer's employment for cause, outstanding stock options are forfeited. If a
Named Executive Officer terminates his or her employment for any other reason,
he or she has 90 days in which to exercise vested stock options and unvested
stock options are forfeited. The Company's compensation expense for 2007 and
2006 for stock option awards recorded in its Consolidated Financial Statements
included in the Annual Report to each Named Executive Officer is reported in
column (f) of the Summary Compensation Table on page 23.

                                       27
<PAGE>

     PERFORMANCE SHARES. Four performance share awards, each encompassing a
different multi-year performance period, are reflected in the compensation
tables. These performance share awards are summarized as follows:

<TABLE>
<CAPTION>
                                                     Status of Performance
   Performance Period      Performance Period          Share Award as of
       Beginning                 Ending                December 21, 2007
   ------------------      ------------------        ---------------------
<S>                        <C>                       <C>
    January 1, 2007         December 31, 2009         Unearned; Not Vested
    January 1, 2006         December 31, 2008         Unearned; Not Vested
    January 1, 2005         December 31, 2007         Not Earned
    January 1, 2004         December 31, 2006         Earned; Vested
</TABLE>

     In 2007, the Named Executive Officers, except Ms. Holquist, were granted
performance share awards for the three-year performance period beginning on
January 1, 2007 and ending on December 31, 2009. The number of shares of Common
Stock earned pursuant to the 2007 performance share awards will be based on the
Company's TSR ranking relative to a 16-company peer group. A more detailed
discussion of the TSR peer group is contained in the Compensation Discussion and
Analysis section on page 20.

     The amounts shown in column (g) of the Grants of Plan-Based Awards Table
reflect the minimum 2007 performance share award payable, set at 50 percent of
the target amount shown in column (h), which will be earned if ALLETE's TSR for
the three-year performance period ranks 10th among the peer group. The amounts
shown in column (h) reflect the target performance share award payable if
ALLETE's TSR for the three-year performance period ranks 7th among the peer
group. The amount shown in column (i) reflects the maximum performance share
award payable, set at 200 percent of the target amount, which will be earned if
ALLETE's TSR ranks 3rd or higher among the peer group. A performance share award
is earned at each ranking from tenth to first.

     Dividend equivalents accrue during the performance period and are paid in
shares, but only to the extent performance goals are achieved. If earned, 100
percent of the performance shares will be paid in Common Stock after the end of
the performance period. Upon the retirement, disability, or death of a Named
Executive Officer, earned performance share awards would pay out on a prorated
basis. If a change in control event were to occur, performance share awards
would immediately pay out on a prorated basis, including dividend equivalents,
at the greater of the target level or the level earned based on then-current
actual TSR ranking as compared to the peer group companies. The amount recorded
as compensation expense for performance share awards to each Named Executive
Officer in the Company's Consolidated Financial Statements included in the
Annual Report is shown in column (e) of the Summary Compensation Table on page
23.

     Performance shares awarded for both the 2007-2009 and the 2006-2008
performance periods remain unearned. The number of performance shares awarded to
each Named Executive Officer in each of those periods is shown in column (h) of
the Outstanding Equity Awards at Fiscal Year-End Table on page 30. An estimated
market value of the unearned and unvested performance shares, assuming threshold
performance in the case of the 2007-2009 and the 2006-2008 performance periods
is shown in column (i) of that table. The actual value, if any, to the Named
Executive Officers will be determined at the end of 2008 and 2009, respectively,
based on the Company's actual TSR ranking for the three-year performance period
relative to the peer group.

     During the three-year performance period 2005-2007, the Company's
shareholders realized a TSR of 20.9 percent on their investment in Common Stock,
ranking the Company twelfth among the peer group of 16 comparable companies. As
a result, the Named Executive Officers did not earn a performance share payout
for the 2005-2007 performance period.

     The Named Executive Officers received a payout in 2007 associated with
performance share awards for the 2004-2006 performance period. The Company's TSR
during the three-year performance period was 45.2 percent, ranking the Company
ninth among its peer group and resulting in a payout that was 66.7 percent of
target. The performance share payout for each Named Executive Officer is shown
in column (d) and (e), respectively, of the Option Exercises and Stock Vested
Table on page 31.

                                       28
<PAGE>

     RESTRICTED STOCK UNITS. The number of restricted stock units awarded to
Ms. Holquist in 2007 is shown in column (j) of the Grants of Plan-Based Awards
Table. Each restricted stock unit entitles her to receive one share of Common
Stock after the time lapse specified in the award. The restricted stock units
granted to Ms. Holquist in 2007 vest in three installments, with 30 percent
vesting on each of the first and second anniversaries of the award date and 40
percent vesting on the third anniversary of the award date. Ms. Holquist must
remain employed by the Company at the time restricted stock units vest to
receive the Common Stock. Ms. Holquist will receive no dividend equivalents
during the vesting period. The restricted stock units would vest immediately on
a prorated basis upon retirement, disability, or death. If a change in control
event were to occur, restricted stock units would vest immediately. The
compensation expense recorded on the Company's Consolidated Financial Statement
for the restricted stock units awarded to Ms. Holquist is included in the amount
shown for her in column (e) of the Summary Compensation Table on page 23. The
number of restricted stock units awarded to Ms. Holquist is shown in column (f)
of the Outstanding Equity Awards at Fiscal Year-End Table, while the value of
the award is shown in column (g).

     LONG-TERM INCENTIVE CASH AWARD. Payment of the long-term incentive cash
opportunity awarded to Ms. Holquist in 2007 was contingent on her achievement of
her 2007 AIP strategic goals. The amount shown in column (d) of the Grants of
Plan-Based Awards Table in connection with Long-Term Incentive Cash reflects the
minimum long-term incentive cash award payable, set at 80 percent of target,
which she would earn if she made some progress toward her AIP strategic goals.
The amount shown in column (e) of the Grants of Plan-Based Awards Table in
connection with Long-Term Incentive Cash reflects a target-level award that
would be payable if Ms. Holquist met all of her 2007 AIP strategic goals. The
amount shown in column (f) of the Grants of Plan-Based Awards Table on page 25
reflects the maximum award payable, set at 120 percent of target, which Ms.
Holquist would earn if she exceeded her 2007 AIP strategic goals. The long-term
incentive cash award earned is payable in three installments, with 30 percent
vesting on each of the first and second anniversaries of the award date, and 40
percent vesting on the third anniversary of the award date. Ms. Holquist must
remain employed by the Company on the vesting dates to receive the cash
payments. The long-term incentive cash award earned would vest immediately on a
prorated basis upon retirement, disability, or death. Upon the occurrence of a
change in control event, the long-term incentive cash award would be calculated
as if the end of the performance year had occurred, based on performance through
the change in control event date. The long-term incentive cash award actually
earned by Ms. Holquist in 2007, equal to 36 percent of her base salary, is shown
in column (g) of the Summary Compensation Table on page 23. The award amount was
based on the fact that Ms. Holquist, overall, met her 2007 AIP strategic goals.

                                       29
<PAGE>

<TABLE>

                                         OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END--2007
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
(a)                     (b)          (c)          (d)       (e)          (f)              (g)              (h)              (i)
                                     Option Awards                                             Stock Awards
                   ------------------------------------------------  ---------------------------------------------------------------
                                                                                                         Equity           Equity
                                                                                                     Incentive Plan  Incentive Plan
                                                                                                         Awards:         Awards:
                            Number of                                 Number of                        Number of        Market or
                            Securities                                 Shares                          Unearned      Payout Value
                            Underlying                               or Units of     Market Value    Shares, Unit,    of Unearned
                       Unexercised Options                              Stock        of Shares or   or Other Rights  Shares, Units,
                   --------------------------   Option     Option    That Have Not  Units of Stock   That Have Not   or Other Rights
                   Exercisable  Unexercisable  Exercise  Expiration     Vested       That Have Not      Vested        That Have Not
Name                   (#)          (#)<F1>      Price      Date         (#)<F2>       Vested<F3>         (#)<F4>        Vested<F5>
------------------------------------------------------------------------------------------------------------------------------------
<S>                <C>          <C>            <C>       <C>         <C>            <C>             <C>              <C>
Donald J. Shippar                                                           0            $0.00            6,425          $254,302
                      7,217             0        $29.79   1/02/2012
                     13,905             0        $37.76   2/02/2014
                     13,078         6,540        $41.35   2/01/2015
                      6,752        13,504        $44.15   2/01/2016
                          0        19,125        $48.65   2/01/2017
------------------------------------------------------------------------------------------------------------------------------------
Mark A. Schober                                                             0            $0.00            1,279           $50,623
                      4,413             0        $29.79   1/02/2012
                      2,207             0        $23.79   2/03/2013
                      3,579             0        $37.76   2/02/2014
                      2,778         1,389        $41.35   2/01/2015
                      1,744         3,490        $44.15   2/01/2016
                          0         6,510        $48.65   2/01/2017
------------------------------------------------------------------------------------------------------------------------------------
Laura A. Holquist                                                       3,391         $134,216                -                 -
                      3,708             0        $37.76   2/02/2014
                      3,010         1,506        $41.35   2/01/2015
------------------------------------------------------------------------------------------------------------------------------------
Deborah A. Amberg                                                           0            $0.00            1,255           $49,673
                      1,819             0        $25.45   1/04/2009
                      2,011             0        $18.85   1/03/2010
                      1,360             0        $27.40   1/02/2011
                      1,209             0        $29.79   1/02/2012
                      1,209             0        $23.79   2/03/2013
                      1,070             0        $37.76   2/02/2014
                      2,366         1,183        $41.35   2/01/2015
                      2,001         4,003        $44.15   2/01/2016
                          0         5,531        $48.65   2/01/2017
------------------------------------------------------------------------------------------------------------------------------------
Claudia Scott
Welty                                                                       0            $0.00            1,152           $45,596
                      3,862             0        $27.40   1/02/2011
                      3,367             0        $29.79   1/02/2012
                      3,367             0        $23.79   2/03/2013
                      3,557             0        $37.76   2/02/2014
                      2,892         1,446        $41.35   2/01/2015
                      1,814         3,628        $44.15   2/01/2016
                      0             5,156        $48.65   2/01/2017


------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Each option award has a ten-year term. Therefore, the grant date for each  award is the date ten years prior to the date shown
     in column (e). Options vest in three equal installments on each of the first, second, and third anniversaries of the grant
     date.
<F2> The amounts shown in column (f) reflect that a performance share payout was not earned for the 2005-2007 performance period.
     For Ms. Holquist the amount shown includes 1,451 restricted stock units granted to her in February 2006 and 1,940 restricted
     stock units granted in February 2007. Thirty percent of the restricted stock units vest on the first and second anniversaries
     of the grant date, and 40 percent vest on the third anniversary of the grant date.
<F3> The amount shown was calculated by multiplying the number of units in   column (f) by the closing price of Common Stock on
     December 31, 2007.
<F4> Represents the Common Stock that would be payable for outstanding  performance share awards if threshold performance were
     achieved for the performance periods 2006-2008 and 2007-2009.
<F5> These amounts were calculated by multiplying the number of shares and units in column (h) by the closing price of Common Stock
     on December 31, 2007.
</FN>
</TABLE>

                                       30
<PAGE>


<TABLE>
                            OPTION EXERCISES AND STOCK VESTED--2007
<CAPTION>
----------------------------------------------------------------------------------------------------
      (a)                   (b)                (c)                  (d)                   (e)
                                   Option Awards                          Stock Awards
                     --------------------------------------   --------------------------------------
                      Number of Shares
                        Acquired on                            Number of Shares
                         Exercise         Value Realized      Acquired on Vesting    Value Realized
Name                        (#)            on Exercise              (#)<F1>            on Vesting
----------------------------------------------------------------------------------------------------
<S>                   <C>                 <C>                 <C>                    <C>
Donald J. Shippar              -                   -                 2,547              $122,490
Mark A. Schober                -                   -                   656               $31,534
Laura A. Holquist              -                   -                 1,301               $62,918
Deborah A. Amberg            993             $15,204                   196                $9,418
Claudia Scott Welty            -                   -                   652               $31,352
--------------------------------- ------------------------------------- ----------------------------
<FN>
<F1> The amounts shown in column (d) are comprised of the following: (i) the performance shares
     earned for the 2004-2006 performance period, which were paid in Common Stock on February 2,
     2007; and (ii) for Ms. Holquist, 30 percent of the restricted stock units granted to her in
     February 2006.
</FN>
</TABLE>

<TABLE>
                                                      PENSION BENEFITS--2007

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
       (a)                               (b)                             (c)                 (d)                         (e)
                                                                      Number of
                                                                         of
                                                                        Years
                                                                      Credited
                                                                       Service         Present Value of         Payments During Last
Name                                    Plan Name                        (#)        Accumulated Benefit<F1>          Fiscal Year
------------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>                                           <C>           <C>                         <C>
Donald J. Shippar       Minnesota Power and Affiliated Companies        28.67               $709,986                    $0
                        Retirement Plan A

                        Minnesota Power and Affiliated Companies         1.08                $97,840                    $0
                        Retirement Plan B

                        ALLETE and Affiliated Companies                 30.75             $2,345,955                    $0
                        Supplemental Executive Retirement Plan

Mark A. Schober         Minnesota Power and Affiliated Companies        28.67               $535,679                    $0
                        Retirement Plan A

                        ALLETE and Affiliated Companies                 29.67               $357,543                    $0
                        Supplemental Executive Retirement Plan

Laura A. Holquist       Minnesota Power and Affiliated Companies        19.58               $172,676                    $0
                        Retirement Plan A

                        ALLETE and Affiliated Companies                 20.58               $199,177                    $0
                        Supplemental Executive Retirement Plan

Deborah A. Amberg       Minnesota Power and Affiliated Companies        16.17               $108,701                    $0
                        Retirement Plan A

                        ALLETE and Affiliated Companies                 17.08                $54,598                    $0
                        Supplemental Executive Retirement Plan

Claudia Scott Welty     Minnesota Power and Affiliated Companies        27.67               $592,149                    $0
                        Retirement Plan A

                        ALLETE and Affiliated Companies                 28.67               $382,697                    $0
                        Supplemental Executive Retirement Plan
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The amounts shown in column (d) represent the discounted net present values of the annual annuity payments to which the Named
     Executive Officers would be entitled at retirement assuming they retire at age 62, the earliest age at which Named Executive
     Officers may receive unreduced pension benefits. In addition to retirement age, the following assumptions were used to
     calculate the present value of accumulated benefits: discount rate of 6.25 percent; cost of living adjustment of 2.5 percent;
     and female spouses are assumed to be three years younger than male spouses. The amounts reflect the accumulated pension
     benefits over the entire career of the Named Executive Officers.
</FN>
</TABLE>
                                       31
<PAGE>

                           PENSION BENEFITS DISCUSSION

     Minnesota Power and Affiliated Companies Retirement Plan A (Retirement Plan
A) is a tax-qualified defined benefit pension plan that covers the majority of
our nonunion employees, including the Named Executive Officers. Pension benefits
are based on the employee's years of service and the employee's final average
earnings. Final average earnings covered by Retirement Plan A include the
highest consecutive 48 months of salary and Results Sharing awards in the last
15 years of service. As the result of a Company-wide nonunion benefit change,
Named Executive Officers have not accrued additional credited service under
Retirement Plan A since September 30, 2006. The pension benefit is calculated as
a life annuity using the following formula:

[0.8%  X  years of credited service from July 1, 1980] X final average earnings
           through September 30, 2006

       PLUS (for Named Executive Officers hired before July 1, 1980)

       [10% + (1% x years of credited service] X final average earnings
                   prior to July 1, 1980)

     Mr. Shippar is also entitled to a pension benefit under the Minnesota Power
and Affiliated Companies Retirement Plan B (Retirement Plan B), a tax-qualified
defined benefit pension plan that covers the majority of our union employees.
His Retirement Plan B pension benefit is calculated as a life annuity using the
following formula:

      [10% + (1% x years of credited service)] X final average earnings

The 10 percent portion of the formulas is prorated, based on years of service,
between Retirement Plan A and Retirement Plan B for Mr. Shippar. Final average
earnings covered by Retirement Plan B include the highest consecutive 48 months
of salary and Results Sharing awards in the last 10 years of service. The
remaining terms of Retirement Plan B are substantially the same as Retirement
Plan A (Retirement Plan A and Retirement Plan B are collectively referred to as
the Retirement Plans).

     Normal retirement age under the Retirement Plans is age 65 with at least
five years of continuous service with the Company. Named Executive Officers
become eligible for an unreduced early retirement benefit at age 62 if they have
at least 10 years of continuous service, or at age 58 if they have at least 40
years of continuous service. Named Executive Officers are first eligible for a
reduced early-retirement benefit at age 50 with at least 10 years of continuous
service. Early retirement benefits are calculated by applying a 4 percent
reduction factor to the benefit for each year and partial year between age 62
and the early retirement benefit commencement age. Mr. Shippar, Mr. Schober, and
Ms. Welty are currently eligible to receive early retirement benefits. Ms.
Holquist and Ms. Amberg have a vested Retirement Plan A benefit, but are not
currently eligible to receive early retirement benefits.

     Each Named Executive Officer is married. The normal form of Retirement Plan
A benefit payment for married participants is a life annuity with a 60 percent
surviving spouse benefit. The normal form of Retirement Plan B benefit payment
for married participants is a life annuity with a 50 percent surviving spouse
benefit. At normal retirement age, the optional form of benefit payment is the
actuarial equivalent of the normal form of benefit payment for both Retirement
Plans. Lump sum distributions are not offered. Once pension benefit payments
have commenced, the benefit adjusts in future years to reflect changes in cost
of living, with a maximum adjustment of 3 percent per year.

     Both the annual earnings that may be considered in calculating benefits
under the Retirement Plans and the annual benefit amount that the Retirement
Plans may deliver to a Named Executive Officer are limited by the Tax Code. The
SERP is designed to provide supplemental pension benefits, paid out of general
Company assets, to eligible executives including the Named Executive Officers,
in amounts sufficient to maintain total pension benefits upon retirement at the
level which would have been provided by our Retirement Plans if benefits were
not restricted by the Tax Code. The SERP plan formula is calculated as follows:

                                       32
<PAGE>

[0.8% X years of credited service from July 1, 1980] X SERP final average
      through retirement or termination date               earnings

       PLUS (for Named Executive Officers hired before July 1, 1980)

  [10% + (1% x years of credited service] X SERP final average earnings
            prior to July 1, 1980)

     The compensation generally used to calculate SERP benefits is the sum of
annual salary and Results Sharing awards in excess of the Tax Code limits
imposed on Retirement Plan A and AIP awards. Final average earnings for SERP are
equal to the highest-consecutive 48 months of this SERP compensation. The
highest-consecutive 48-month salary and AIP awards can result from different
periods; however, both the salary and the AIP awards must fall within the last
15 years of service.

     The normal form of payment for SERP benefits is a 15-year annuity. The
optional form of payment is a life annuity, which is the actuarial equivalent of
the normal form of payment. Payments commence upon retirement. The SERP benefits
accrued after December 31, 2004 are accelerated upon a termination in connection
with a change in control under the Severance Plan.

     SERP benefits are only payable if the Named Executive Officer retires after
reaching age 50 with 10 years of service. In all other respects, the eligibility
requirements for SERP retirement benefits and the calculation of SERP early
retirement benefits mirror Retirement Plan A's eligibility requirements and
early retirement benefits discussed above.

<TABLE>
                                              NONQUALIFIED DEFERRED COMPENSATION--2007
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
        (a)                                  (b)                                (c)                                   (d)

                                   Executive Contributions                   Aggregate                      Aggregate Balance as of
Name                                      in 2007<F1>                    Earnings in 2007<F2>                    December 31, 2007
------------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>                                   <C>                                <C>
Donald J. Shippar                          $149,434                            $36,579                            $1,292,658
Mark A. Schober                            $143,415                            $38,605                            $1,416,416
Laura A. Holquist                          $229,983                            $11,162                            $1,824,707
Deborah A. Amberg                           $70,924                            $19,103                              $416,906
Claudia Scott Welty                        $188,546                            $24,056                            $1,264,475
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> The amounts shown in column (b) include the following amounts of salary  earned and deferred in 2007 that were also reported
     in column (c) of the Summary Compensation Table: Mr. Shippar--$22,923; Mr. Schober--$39,749; Ms. Holquist--$36,242; and Ms.
     Welty--$116,758. The remaining amounts shown in column (b) reflect compensation that was earned in 2006 and deferred in 2007,
     which, therefore, are not reported in the 2007 Summary Compensation Table.
<F2> The amounts shown in column (c) represent realized earnings, including above-market interest earned in 2007 on non-qualified
     deferral balances, which is also reported in column (h) of the Summary Compensation Table as follows: Mr. Shippar--$553 and Mr.
     Schober--$250. Unrealized gains or losses are excluded from the amounts shown.
</FN>
</TABLE>

     Annually, each Named Executive Officer may elect to defer to a SERP
deferral account, on a before-tax basis, some or all of his or her salary and
AIP award. Named Executive Officers whose base salary is below the tax-qualified
benefit plan's annual compensation limits may also elect to defer some or all of
the SERP defined contribution benefit. Named Executive Officers can select among
different crediting rates to apply to deferral balances under the SERP, which
match the investment options available to all employees under the RSOP. These
investment options include mutual funds and similar investments. The Named
Executive Officers may change their investment elections at any time.

     Each Named Executive Officer has elected a date when payments from his or
her SERP deferral account will commence and has elected the form of benefit
payment. Generally, SERP deferral account benefit payments will not begin
earlier than the elected commencement date. However, the full SERP deferral
account balance will be paid prior to the scheduled commencement date to any
Named Executive Officer who is not eligible to retire at the time he or she
terminates employment with the Company. Contributions made after December 31,
2004 will

                                       33
<PAGE>


be paid in full upon a termination of employment in connection with a change in
control. In addition, a Named Executive Officer may request an early
distribution of some or all of his or her SERP deferral account balance upon a
demonstrated severe financial need, or at any time prior to the first scheduled
payment date, may elect an early withdrawal of contributions made to his or her
account prior to January 1, 2005 subject to a 10 percent early withdrawal
penalty. A Named Executive Officer is not allowed to elect to receive an early
withdrawal of amounts contributed after January 1, 2005 to his or her SERP
deferral account, except that he or she may request early withdrawal in the
event of an unforeseen emergency, which request is subject to the approval of
the Compensation Committee.

     A Named Executive Officer may elect to receive his or her SERP deferral
account balance in the form of either a lump sum payment or monthly installments
over a 5-, 10-, or 15-year period, or a combination of both. A Named Executive
Officer who retired before April 1, 2007 received a fixed 8 percent annual
interest crediting rate on his or her deferral account balance until paid in
full. A Named Executive Officer who retires on or after April 1, 2007 will
receive a fixed 7.5 percent annual interest crediting rate on his or her
deferral account balance until paid in full.

     Prior to 1996, the Company also provided executives an opportunity to elect
to defer salary and AIP awards under the Minnesota Power and Affiliated
Companies Executive Investment Plan II (EIP II), a nonqualified deferred
compensation plan. EIP II has been closed to new contributions since 2002. The
amount shown in column (d) for Mr. Shippar and Mr. Schober includes amounts
deferred under the EIP II as follows: Mr. Shippar--$188,200 and Mr.
Schober--$85,223. The Company resets the crediting rate under the EIP II
annually at 120 percent of the rolling average of the 10-year Treasury Note. The
EIP II benefits become payable upon retirement in the form of monthly annuity
payments over a 5-, 10-, or 15-year period as elected by the executive.
Generally, EIP II benefit payments will not begin earlier than the elected
commencement date. However, the Named Executive Officer may request an early
distribution of some or all of his EIP II account balance upon a demonstrated
severe financial need, or at any time prior to the first scheduled payment date,
he may elect an early withdrawal of his account balance subject to a 10 percent
early withdrawal penalty.

            POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

     On February 13, 2008 the Board of Directors approved the Severance Plan
covering each Named Executive Officer as well as other key executives
(collectively, Participants). Under the Severance Plan a change in control of
ALLETE generally means any one of the following events:

     -  Acquisition by any person, entity, or group acting together of more than
        50 percent of the total fair market value or total voting power of the
        Company's Common Stock;

     -  Acquisition in any 12-month period of 40 percent or more of the
        Company's assets by any person, entity, or group acting together;

     -  Acquisition in any 12-month period of 30 percent or more of the total
        voting power of the Company's Common Stock by any person, entity, or
        group acting together; or

     -  A majority of members of the Board of Directors is replaced during any
        12-month period.

     Each Named Executive Officer is entitled to receive specified benefits in
the event his or her employment is involuntarily terminated six months before or
up to two years after a change in control. An involuntary termination is deemed
to occur if (i) the Company terminates the employment of the Named Executive
Officer other than for cause; or (ii) the Named Executive Officer resigns from
his or her employment with good reason. Cause generally includes reasons such as
failure to perform duties, willful misconduct, and felony convictions. Good
reason generally means a material reduction in the Named Executive Officer's
responsibilities or authority; a material reduction in his or her supervisor's
responsibilities or authority; a material reduction in base salary, incentive
compensation, or other benefits; a material breach by the Company of an
agreement under which a Named Executive Officer provides services; or
reassignment to another geographic location more than 50 miles from the Named
Executive Officer's current job location.

     Under the Severance Plan, Mr. Shippar, Mr. Schober, Ms. Amberg, and Ms.
Welty would be entitled to receive a lump sum severance payment of 2.5 times
their annual compensation. Ms. Holquist would receive a

                                       34
<PAGE>

severance payment of 1.5 times her annual compensation. Annual compensation
includes base salary and an amount representing a "target" award under the AIP
and Results Sharing. The Severance Plan also provides a lump sum benefit
continuation payment to Mr. Shippar, Mr. Schober, Ms. Amberg, and Ms. Welty
approximately equal in value to the benefits (as specified below) that they
would have received had they remained in the employ of the Company after their
termination for an additional 2.5 years, and in the case of Ms. Holquist, an
additional 1.5 years. The lump sum benefit continuation payment includes the
value of the following benefits: (i) premiums for medical, dental, and basic
group term life insurance benefits, (ii) Company contributions under the
Flexible Benefit Plan, (iii) the present value of additional SERP benefits the
Participant would have received under the SERP had employment continued for 2.5
or 1.5 years after the later of the change in control event or termination, as
applicable.

     As a condition of receiving the payments under the Severance Plan,
Participants will be required to sign a waiver of potential claims against the
Company, and to agree not to disclose confidential information, engage in any
business in competition with the Company for a period of one year, recruit any
employee or director of the Company for employment for a period of two years, or
publicly criticize the Company.

     Upon the occurrence of a change in control event, awards under the AIP
would be calculated as if the end of the performance year had occurred, based on
the Company's performance through the change in control event date. AIP awards
could range from zero to 200 percent of the target award opportunity depending
on actual goal results. The SERP also provides for a lump sum payment of
benefits earned after December 31, 2004 through the termination of employment in
connection with a change in control. Under the LTIP, if a change in control
event were to occur, unvested stock options, restricted stock units, and long
term incentive cash would immediately vest; performance share awards would
immediately pay out on a prorated basis at the target level or the level earned
based on then-current actual TSR ranking as compared to the peer group
companies, whichever were greater; and long-term incentive cash awards would be
calculated as if the end of the performance year had occurred, based on
performance through the change in control event date. These change in control
features of the AIP, LTIP, and SERP are designed to prevent substantial losses
to Named Executive Officers if a change in control event were to occur.

     The total amount of severance payments due under the Severance Plan plus
any payments accelerated under the AIP, LTIP, and SERP, due to a change in
control, will be limited to an amount which would result in no portion of such
amount being subject to excise tax under Section 4999 of the Tax Code, unless
the payment would have to be reduced to an amount less than 85 percent of the
amount the Named Executive Officer would otherwise have received, absent the
imposition of the excise tax. If payments to a Named Executive Officer would
need to be reduced to an amount less than 85 percent of the amount the Named
Executive Officer would otherwise have received, total payments would not be
reduced and the Named Executive Officer would instead receive an additional
gross-up payment that would provide the Named Executive Officer with the same
net after-tax payment the Named Executive Officer would have received if the
excise tax had not applied to any of the payments.

     If the Severance Plan had been in effect and if a change in control event
had occurred on December 31, 2007, the following table illustrates the value
Named Executive Officers would have received upon termination of employment.

                                       35
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Payments                                            Mr. Shippar      Mr. Schober      Ms. Holquist      Ms. Amberg       Ms. Welty
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>              <C>              <C>               <C>              <C>
Severance                                            $1,939,375        $810,534         $644,514          $833,625        $772,875
Annual Incentive Plan<F1>                                     0               0                0                 0               0
Unvested Stock Options<F2>                                    0               0                0                 0               0
Performance Shares<F3>                                  412,470          82,032           38,543            78,345          80,960
Unvested Restricted Stock Units<F4>                           0               0          134,222                 0               0
Unvested Long-Term Incentive Cash                             0               0          150,847                 0               0
SERP Pension<F5>                                        366,046         110,978                0                 0          31,147
SERP Defined Contribution<F6>                           136,620          28,710           34,841            19,994          15,517
Benefits                                                 40,581          38,894           22,661            36,925          38,569
Outplacement Services                                    25,000          25,000           25,000            25,000          25,000
Excise Tax & Gross-Up                                 1,159,873               0                0           415,655               0
                                                     ----------      ----------       ----------        ----------        --------
Total Payments                                       $4,079,965      $1,096,148       $1,050,628        $1,409,544        $964,068
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Because the performance period ended on December 31, 2007, no acceleration of benefits would have occurred under this scenario.
<F2> The award values for stock options were calculated based on the difference between the option exercise price and the closing
     stock price on December 31, 2007.
<F3> Outstanding performance shares for the periods January 1, 2005-December 31, 2007, January 1, 2006-December 31, 2008, and
     January 1, 2007-December 31, 2009 would be accelerated under this scenario. The amounts shown assume that target TSR
     performance would be used to calculate each award payout and were calculated based on the closing share price on December 31,
     2007.
<F4> The award values for restricted stock units were calculated based on the closing share price on December 31, 2007.
<F5> Ms. Amberg and Ms. Holquist would not be eligible for retirement benefits even after being credited with an additional 2.5 and
     1.5 years of service, respectively.
<F6> The amounts shown reflect 2.5 years and 1.5 years, as applicable, of SERP defined contribution benefits.
</FN>
</TABLE>

     The LTIP also provides for immediate accelerated vesting of stock options,
restricted stock units, and long term incentive cash upon the retirement,
disability, or death of the Named Executive Officer. Named Executive Officers
are given three years from retirement, and one year from disability or death, to
exercise all outstanding stock options. The value Named Executive Officers,
except Ms. Holquist, would have received solely in connection with accelerated
stock option vesting triggered by a retirement, disability, or death had such
event occurred on December 31, 2007 would have been the same as is shown in the
table above in connection with a change in control event; however, because Ms.
Amberg was not retirement eligible on December 31, 2007, the amount shown for
her for performance shares could only be triggered by disability or death. Had
Ms. Holquist, who is also not retirement eligible, become disabled or died on
December 31, 2007, she would have received $0 in connection with an accelerated
stock option vesting, $63,882 in connection with an accelerated restricted stock
unit vesting, and $71,213 in connection with accelerated long-term incentive
cash vesting.

                      EQUITY COMPENSATION PLAN INFORMATION

         The following table sets forth the shares of Common Stock available for
issuance under the Company's equity compensation plans as of December 31, 2007.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                     Number of Securities                                                  Number of Securities
                                      to be Issued Upon                   Weighted-Average                 Remaining Available
                                         Exercise of                      Exercise Price of                for Future Issuance
                                     Outstanding Options                 Outstanding Options                  Under Equity
Plan Category                        Warrants, and Rights               Warrants, and Rights               Compensation Plans<F1>
------------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                                <C>                                <C>
Equity Compensation                         510,992                            $39.83                           1,159,142
   Plans Approved by
   Security Holders

Equity Compensation                               0                               N/A                                   0
   Plans Not Approved
   by Security Holders
------------------------------------------------------------------------------------------------------------------------------------
Total                                       510,992                            $39.83                           1,159,142
------------------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Excludes the number of securities to be issued upon exercise of outstanding ptions, warrants, and rights. The amount shown is
     comprised of: (i) 975,115 shares available for issuance under the LTIP in the form of options, rights, restricted stock,
     performance units, shares, and other grants as approved by the Compensation Committee of the Board; (ii) 81,127 shares
     available for issuance under the Director Stock Plan as payment for a portion of the annual retainer payable to non-employee
     Directors; and (iii) 102,900 shares available for issuance under the ALLETE and Affiliated Companies Employee Stock Purchase
     Plan.
</FN>
</TABLE>
                                       36
<PAGE>

                             AUDIT COMMITTEE REPORT

     The Audit Committee of the Board is comprised of four non-employee
Directors, each of whom has been determined by the Board to be "independent"
under ALLETE's Corporate Governance Guidelines, and within the meaning of the
rules of both the NYSE and the SEC. The Board has also determined that each
member of the Audit Committee is financially literate and that Mr. Peirce is an
"audit committee financial expert" within the meaning of the rules of the SEC.
The Audit Committee operates pursuant to a written charter that was amended and
restated in January 2007. The current Audit Committee charter is available on
the Company's website at WWW.ALLETE.COM. The Audit Committee assists the Board's
oversight of the integrity of the Company's financial reports, compliance with
legal and regulatory requirements, the qualifications and independence of the
independent registered public accounting firm, both the internal and external
audit process, and internal controls over financial reporting. The Audit
Committee reviews and recommends to the Board that the audited financial
statements be included in the Annual Report.

     During 2007, the Audit Committee met and held separate discussions with
members of management and the Company's independent registered public accounting
firm, PricewaterhouseCoopers, regarding certain audit activities and the plans
for and results of selected internal audits. The Audit Committee reviewed the
quarterly financial statements. It reviewed with management and the independent
registered public accounting firm the effectiveness of internal controls over
financial reporting, and the Company's compliance with laws and regulations. It
also reviewed the Company's process for communicating its code of business
conduct and ethics. The Audit Committee approved the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for the year 2008, subject to shareholder ratification. The Company's
independent registered public accounting firm provided to the Audit Committee
the written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and the Audit Committee
discussed with the independent registered public accounting firm, the firm's
independence.

     The Audit Committee has: (i) reviewed and discussed the Company's
Consolidated Financial Statements for the year ended December 31, 2007 with the
Company's management and with the Company's independent registered public
accounting firm; (ii) met with management to discuss all financial statements
prior to their issuance and to discuss significant accounting issues; and (iii)
discussed with the Company's independent registered public accounting firm the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards), as may be modified or supplemented, which include, among
other items, matters related to the conduct of the audit of the Company's
financial statements. Management represented to the Audit Committee that the
Company's Consolidated Financial Statements were prepared in accordance with
accounting principles generally accepted in the United States of America.

     Based on the above-mentioned review and discussions, the Audit Committee
recommended to the Board that the audited financial statements be included in
the Annual Report.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

     The Audit Committee has pre-approval policies and procedures related to the
provision of audit and non-audit services by the independent registered public
accounting firm. Under these procedures, the Audit Committee pre-approves both
the type of services to be provided by the independent registered public
accounting firm and the estimated fees related to these services. During the
pre-approval process, the Audit Committee considers the impact of the types of
services and the related fees on the independence of the independent registered
public accounting firm. The services and fees must be deemed compatible with the
maintenance of the independence of the independent registered public accounting
firm, including compliance with the SEC's rules and regulations.

     The Audit Committee will, as necessary, consider and, if appropriate,
pre-approve the provision of additional audit and non-audit services by the
independent registered public accounting firm that were not encompassed by the
Audit Committee's annual pre-approval and that are not prohibited by law. The
Audit Committee has delegated to the Chair of the Audit Committee the authority
to pre-approve, on a case-by-case basis, these additional audit and non-audit
services, provided that the Chair shall promptly report any decisions to
pre-approve such services to the Audit Committee.

                                       37
<PAGE>

AUDIT AND NON-AUDIT FEES

     The following table presents fees for professional audit services rendered
by PricewaterhouseCoopers for the audit of the Company's annual financial
statements for the years ended December 31, 2007 and December 31, 2006, and fees
billed for other services rendered by PricewaterhouseCoopers during those
periods.

     All audit and non-audit services and fees for 2007 were pre-approved by the
Audit Committee. We have considered and determined that the provision of the
non-audit services noted below is compatible with maintaining
PricewaterhouseCoopers' independence.

<TABLE>
<CAPTION>
                                    2007                       2006
                                 ------------------------------------
<S>                              <C>                       <C>
Audit Fees<F1>                   $1,294,000                $1,298,000
Audit-Related Fees<F2>                3,000                    54,000
Tax Fees<F3>                        104,000                   211,000
All Other Fees<F4>                   38,000                    12,000
                                 ------------------------------------
Total                            $1,439,000                $1,575,000

<FN>
<F1> Audit fees were comprised of audit work performed on the integrated audit
     of the Consolidated Financial Statements, as well as work generally only
     the independent registered public accounting firm can reasonably be
     expected to provide, such as statutory audits, subsidiary audits, and
     security offerings.
<F2> Audit-related fees were comprised of assurance services, including
     accounting consultations.
<F3> Tax fees were comprised of tax compliance services, including assistance
     with the preparation of tax returns and claims for tax refunds, and tax
     consultation and planning services, including assistance with tax audits
     and appeals, mergers and acquisitions, and employee benefit plans, and
     requests for rulings or technical advice from taxing authorities. In 2007,
     tax compliance services totaled $29,000, and tax consulting and planning
     services totaled $75,000. In 2006, tax compliance services totaled
     $173,000, and tax consulting and planning services totaled $38,000.
<F4> Other fees were comprised of license fees and maintenance fees for
     internal audit work paper software and accounting research software, and
     fees for attendance at training sessions sponsored by
     PricewaterhouseCoopers.
</FN>
</TABLE>

March 25, 2008

Audit Committee

Roger D. Peirce, Chair
James J. Hoolihan
George L. Mayer
Douglas C. Neve

                                       38
<PAGE>

                   ITEM NO. 2--RATIFICATION OF APPOINTMENT OF
                 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     The Audit Committee of the Board recommends shareholder ratification of the
appointment of PricewaterhouseCoopers as the Company's independent registered
public accounting firm for the year 2008. PricewaterhouseCoopers has acted in
this capacity since October 1963.

     A representative of PricewaterhouseCoopers will be present at the Annual
Meeting of Shareholders, will have an opportunity to make a statement if he or
she so desires, and will be available to respond to appropriate questions.

     The Board recommends a vote "FOR" ratifying the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for 2008.

                                 OTHER BUSINESS

     The Board knows of no other business to be presented at the Annual Meeting.
However, if any other matters properly come before the Annual Meeting, it is the
intention of the persons named in the proxy form to vote pursuant to the proxies
in accordance with their judgment in such matters.

     All shareholders are respectfully asked to vote their proxies promptly so
that the necessary vote may be present at the Annual Meeting.

SHAREHOLDER PROPOSALS FOR THE 2009 ANNUAL MEETING

         All proposals from shareholders to be considered for inclusion in the
Proxy Statement relating to the Annual Meeting scheduled for May 12, 2009 must
be received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN
55802-2093 not later than November 25, 2008. The Company's Bylaws provide that
for business to be properly brought before an annual meeting by a shareholder,
the shareholder must have delivered timely notice to the Company's Secretary. To
be timely, advance notice generally must be received not less than 90 days nor
more than 120 days prior to the anniversary of the immediately preceding annual
meeting of shareholders. Therefore, for the Annual Meeting scheduled for May 12,
2009, ALLETE must receive a shareholder's notice between January 13, 2009 and
February 12, 2009. A shareholder's notice must also comply with informational
and other requirements set forth in the Company's Bylaws. The persons to be
named as proxies in the proxy cards relating to the 2009 Annual Meeting may have
the discretion to vote their proxies in accordance with their judgment on any
matter as to which ALLETE did not have notice in accordance with the advance
notice process prior to February 12, 2009, without discussion of such matter in
the Proxy Statement relating to the 2009 Annual Meeting.

By order of the Board of Directors,

Deborah A. Amberg

Deborah A. Amberg
Senior Vice President, General Counsel, and Secretary

March 25, 2008
Duluth, Minnesota


                                       39

<PAGE>


                "Printed using soy based inks on recycled paper
                     containing post consumer waste fibre."

                   [RECYCLE LOGO] [LOGO PRINTED WITH SOY INK]

<PAGE>

                                 [ALLETE LOGO]
                         ANNUAL MEETING OF SHAREHOLDERS

                              TUESDAY, MAY 13, 2008
                                   10:30 A.M.

                              DULUTH ENTERTAINMENT
                               CONVENTION CENTER
                                350 HARBOR DRIVE
                                   DULUTH, MN



IMPORTANT  NOTICE  REGARDING INTERNET  AVAILABILITY OF  PROXY MATERIALS FOR  THE
ANNUAL MEETING:
The Notice and Proxy  Statement,  Annual Report on  Form 10-K  and  Profile  are
available at www.proxyvote.com.


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

--------------------------------------------------------------------------------
                  ALLETE, INC.
   [ALLETE LOGO]  30 WEST SUPERIOR STREET                               PROXY
                  DULUTH, MINNESOTA 55802-2093
--------------------------------------------------------------------------------

   THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL
   MEETING ON MAY 13, 2008.

   Donald J. Shippar and Deborah A. Amberg, or either of them, with power  of
   substitution, are hereby appointed Proxies of the  undersigned to vote all
   shares  of  ALLETE, Inc.  stock  owned  by  the  undersigned at the Annual
   Meeting  of  Shareholders  to  be  held  in the  auditorium of the  Duluth
   Entertainment  Convention Center, 350 Harbor  Drive, Duluth, Minnesota, at
   10:30 a.m. on  Tuesday,  May 13, 2008, or any  adjournments  thereof, with
   respect to the election  of Directors, ratification  of the appointment of
   an independent registered public  accounting  firm, and any other  matters
   as may properly come before the meeting.

   THIS PROXY CONFERS AUTHORITY  TO VOTE EACH  PROPOSAL  LISTED ON THE  OTHER
   SIDE UNLESS OTHERWISE  INDICATED. In  any other business is  transacted at
   said meeting,  this  Proxy  shall be  voted in  accordance  with the  best
   judgment of the  Proxies. The  Board  of Directors recommends a vote "FOR"
   each of the listed  proposals. This Proxy  is solicited on  behalf  of the
   Board of  Directors  of  ALLETE,  Inc., and  may  be  revoked prior to its
   exercise. PLEASE MARK, SIGN,  DATE AND  RETURN THIS  PROXY CARD USING  THE
   ENCLOSED  ENVELOPE.  ALTERNATIVELY, AUTHORIZE  THE ABOVE-NAMED  PROXIES TO
   VOTE  THE SHARES  REPRESENTED ON  THIS  PROXY CARD  BY PHONE OR  ONLINE AS
   DESCRIBED  ON  THE  OTHER  SIDE.  Shares  cannot  be  voted  unless  these
   instructions are followed, or  other  specific  arrangements  are  made to
   have the shares  represented at the  meeting. By  responding promptly, you
   may help save the costs of additional Proxy solicitations.

   --------------------------------------------------------------------------
      ADDRESS CHANGES/COMMENTS:
                               -------------------------------------------

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

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

               (If you noted any Address Changes/Comments above,
              please mark corresponding box on the reverse side.)

                      SEE REVERSE FOR VOTING INSTRUCTIONS.

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

<PAGE>

[ALLETE LOGO]                           VOTE BY INTERNET - WWW.PROXYVOTE.COM
ATTN: SHAREHOLDER SERVICES                                 -----------------
30 WEST SUPERIOR STREET                 Use the Internet to transmit your voting
DULUTH, MN 55802-2093                   instructions and for electronic delivery
                                        of information up  until 12:00 p.m.(CDT)
                                        on May 12, 2008. Have your proxy card in
                                        hand when  you access  the web  site and
                                        follow the instructions  to obtain  your
                                        records  and  to  create  an  electronic
                                        voting instruction form.

                                        ELECTRONIC DELIVERY OF FUTURE
                                        SHAREHOLDER COMMUNICATIONS
                                        If you would  like to  reduce the  costs
                                        incurred  by  ALLETE,  Inc.  in  mailing
                                        proxy  materials,  you  can  consent  to
                                        receiving  all  future proxy statements,
                                        proxy    cards    and   annual   reports
                                        electronically   via   e-mail   or   the
                                        Internet.  To  sign  up  for  electronic
                                        delivery, please follow the instructions
                                        above to vote  using the  Internet  and,
                                        when  prompted, indicate that  you agree
                                        to   receive   or   access   shareholder
                                        communications  electronically in future
                                        years.

                                        VOTE BY PHONE - 1-800-690-6903
                                        Use any touch-tone telephone to transmit
                                        your voting  instructions up until 12:00
                                        p.m.  (CDT) on  May 12, 2008.  Have your
                                        proxy  card in  hand when  you call  and
                                        then follow the instructions.

                                        VOTE BY MAIL
                                        Mark, sign and date  your proxy card and
                                        return it in  the postage-paid  envelope
                                        we have provided or return it to ALLETE,
                                        Inc.,  c/o  Broadridge, 51 Mercedes Way,
                                        Edgewood, NY 11717.




TO VOTE, MARK BLOCKS BELOW IN                                  KEEP THIS PORTION
BLUE OR BLACK INK AS FOLLOWS:                        ALLET1    FOR YOUR RECORDS
--------------------------------------------------------------------------------
                                                               DETACH AND RETURN
                                                               THIS PORTION ONLY
                          THIS PROXY CARD IS VALID ONLY
                             WHEN SIGNED AND DATED.
--------------------------------------------------------------------------------
 ALLETE, INC.
 THE BOARD OF DIRECTORS                                        [GRAPHIC OMITTED]
 RECOMMENDS A VOTE FOR
 ITEMS 1 AND 2.

 VOTE ON DIRECTORS             FOR   WITHHOLD  FOR ALL   To  withhold  authority
                               ALL     ALL     EXCEPT    to   vote    for    any
                                                         individual  nominee(s),
 1.  Election of Directors     [ ]     [ ]       [ ]     mark "For  All  Except"
     01) Brekken    06) Mayer                            and write the number(s)
     02) Eddins     07) Neve                             of  the  nominee(s)  on
     03) Emery      08) Rajala                           the line below.
     04) Hoolihan   09) Shippar
     05) Ludlow     10) Stender
                                                         -----------------------

 VOTE ON PROPOSAL                                        FOR   AGAINST   ABSTAIN

 2. Ratification    of    the    appointment    of       [ ]      [ ]      [ ]
    PricewaterhouseCoopers    LLP   as    ALLETE's
    independent registered public accounting firm.

 THIS  PROXY WHEN  PROPERLY EXECUTED WILL BE VOTED
 AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE
 VOTED FOR ITEMS 1 AND 2.

 Please  sign  exactly  as  your name(s) appear(s)
 on Proxy. If held  in joint  tenancy, all persons
 must sign. Trustees, administrators, etc., should
 include title and authority.  Corporations should
 provide  full  name of  corporation  and title of
 authorized  officer signing the Proxy.

       IF YOU VOTE BY PHONE OR ONLINE, PLEASE DO NOT MAIL YOUR PROXY CARD

 For address changes and/or comments, please check this     [ ]
 box and write them on the reverse side where indicated.





 ----------------------------------------     ----------------------------------
                                    |                                      |
 ----------------------------------------     ----------------------------------
 Signature [PLEASE SIGN WITHIN BOX]  Date     Signature (Joint Owners)      Date

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

<PAGE>


                                        April __, 2008


Dear Shareholder:

     ALLETE has not yet  received  your vote on issues  to come before the  2008
Annual Meeting of Shareholders on May 13, 2008. Proxy materials were sent to you
on or  about  March 25, 2008. Please  take a  few  moments to  review  the Proxy
materials and vote your shares using one of the three options available to you:

     1. BY MAIL - Complete the enclosed duplicate Proxy Card and return it in
        the self-addressed stamped envelope provided;

     2. BY TELEPHONE - Call the toll-free number  listed on  the Proxy  Card and
        follow the instructions; or

     3. ONLINE - Log onto  the website  listed on the  Proxy Card and follow the
        instructions.

     On  behalf of  the  Board of  Directors, we  again extend  to you a cordial
invitation  to attend ALLETE's Annual Meeting of  Shareholders to be held in the
auditorium  of  the Duluth  Entertainment  Convention Center, 350 Harbor  Drive,
Duluth, Minnesota on Tuesday, May 13, 2008 at 10:30 a.m.

     Your prompt response is appreciated.


                                        Sincerely,



                                        Deborah A. Amberg
                                        Senior Vice President, General Counsel
                                        and Secretary


Enclosures
</TEXT>
</DOCUMENT>
