<TABLE>

                                                       Exhibit 13-A

Selected consolidated financial data
-----------------------------------------------------------------------------------------------
                               1998      1997     1996       1995     1994      1993      1988
                              ------    ------   ------     ------   ------    ------    ------
                                                 (thousands except per-share data)
<S>                          <C>       <C>       <C>       <C>       <C>       <C>       <C>
Revenues
Electric                     $227,477  $205,121  $199,345  $203,925  $198,812  $192,290  $178,221
Manufacturing                  86,030    81,543    64,568    38,690    13,083     8,473         -
Health services                68,728    66,185    61,697    50,896    45,555    32,068         -
Other business operations      48,843    41,430    45,323    32,818    29,276    32,396         -
                             --------  --------  --------  --------  --------  --------  --------
   Total operating revenues  $431,078  $394,279  $370,933  $326,329  $286,726  $265,227  $178,221

Special charges              $  9,522  $      -  $      -  $      -  $      -  $      -  $      -
Cumulative change in
  accounting principle (1)   $  3,819  $      -  $      -  $      -  $      -  $      -  $      -
Net income                   $ 34,520  $ 32,346  $ 30,624  $ 28,945  $ 28,475  $ 27,369  $ 25,317
Cash flow from operations    $ 63,959  $ 69,398  $ 68,611  $ 58,077  $ 51,832  $ 53,255  $ 47,675
Total assets                 $655,612  $655,441  $669,704  $609,196  $578,972  $563,905  $476,363
Long-term debt               $181,046  $189,973  $163,176  $168,261  $162,196  $166,563  $121,815
Redeemable preferred         $ 18,000  $ 18,000  $ 18,000  $ 18,000  $ 18,000  $ 18,000  $ 15,925
Common shares outstanding
   (2) (thousands)             11,880    11,731    11,536    11,180    11,180    11,180    11,968
Number of common
  shareholders (3)             13,699    13,753    13,829    13,933    14,115    13,634    14,595
Basic and diluted earnings  
  per share (4) (5)          $   2.73  $   2.58  $   2.46  $   2.38  $   2.34  $   2.23  $   1.92  
Dividends per common share   $   1.92  $   1.86  $   1.80  $   1.76  $   1.72  $   1.68  $   1.48
-------------------------------------------------------------------------------------------------
Notes:
(1) In the first quarter of 1998 the Company changed its method of 
    electric revenue recognition in the states of Minnesota and South 
    Dakota from meter-reading dates to energy-delivery dates.
    The amount presented is net of income tax of $2,545.
(2) Number of shares outstanding at year-end.
(3) Holders of record at year-end.
(4) Based on average number of shares outstanding.
(5) 1998 includes cumulative effect of change in accounting principle 
    of 32 cents per share


</TABLE>


              Management's discussion and analysis of
           financial condition and results of operations

Management's major financial objective is to increase shareholder 
value by earning returns for shareholders that exceed returns 
available from comparable risk investments.  This objective can be 
met by earning the returns allowed by regulators in electric 
operations combined with successfully growing diversified operations.  
Meeting this objective enables the Company to preserve and enhance 
its financial capability by maintaining optimal capitalization ratios 
and a strong interest coverage position, providing excellent returns 
to the common shareholder in the form of capital appreciation and 
dividends, and preserving strong credit ratings on outstanding 
securities, which in the form of lower interest rates benefits both 
the Company's customers and shareholders.


Liquidity:  

Liquidity is the ability to generate adequate amounts of cash
to meet the Company's needs, both short-term and long-term.  
Historically, the Company's liquidity has been a function of its 
capital expenditures and debt service requirements, its net internal 
funds generation, and its access to long-term securities markets and 
credit facilities for external capital.

Over the years the Company has achieved a high degree of long-term 
liquidity by maintaining desired capitalization ratios through timely 
stock and debt issuances or repurchases, maintaining strong bond 
ratings, implementing cost-containment programs, evaluating 
operations and projects on a cost-benefit approach, investing in 
projects that enhance shareholder value, and implementing sound tax 
reduction strategies.  

Cash provided by operating activities of $64 million, as shown on the 
Consolidated Statement of Cash Flows for the year ended December 31, 
1998, combined with cash provided by the issuance of $5.5 million in 
common stock and funds on hand of $5.3 million at December 31, 1997, 
allowed the Company to pay dividends, retire short- and long-term 
debt, meet sinking fund payment requirements on its outstanding First 
Mortgage Bonds, acquire an additional business, and finance its 
consolidated capital expenditures in 1998. 

In 1998 the Company issued 148,426 common shares under its Automatic 
Dividend Reinvestment and Share Purchase Plan, generating proceeds of 
$5.5 million. In 1999 the Company plans to purchase shares on the 
open market to fulfill the requirements of the Plan.  

The Company estimates that funds internally generated net of 
forecasted dividend payments, combined with funds on hand, will be 
sufficient to meet all sinking fund payments for First Mortgage Bonds 
in the next five years and to provide for its estimated 1999 through 
2003 consolidated capital expenditures. Additional short-term or 
long-term financing will be required in the period 1999 through 2003 
for the maturity of First Mortgage Bonds and other long-term debt and 
in the event the Company decides to refund or retire early any of its 
presently outstanding debt or cumulative preferred shares or for 
other corporate purposes.


Capital requirements: 

The Company's consolidated capital requirements include periodic 
and timely replacement of technically obsolete or worn out equipment,
new equipment purchases, and plant upgrades to accommodate anticipated
growth.  The electric segment has a construction and capital investment
program to provide facilities necessary to meet forecasted customer 
demands and provide reliable service.  The construction program is
subject to continuing review and is revised annually in light of changes
in demands for energy, environmental laws, regulatory changes, technology,
the costs of labor, materials and equipment, and the Company's financial
condition (including cash flow and earnings). 

Consolidated capital expenditures for the years 1998, 1997, and 1996 
were $29 million, $42 million, and $65 million, respectively.  The 
reduction in capital expenditures since 1996 reflects an initiative 
started by the Company in 1997 to more closely evaluate capital 
expenditures. 

The estimated capital expenditures for 1999 are $33 million and the 
total expenditures for the five-year period 1999 through 2003 are 
expected to be approximately $175 million.  The breakdown of 1998 
actual and 1999 through 2003 estimated capital project expenditures 
by segment is as follows:

                                     1998    1999    1999-2003
                                    ------  ------  -----------
                                         (in millions)
  Electric utility                   $ 18    $ 20      $105
  Manufacturing                         5       7        19
  Health services                       3       4        42
  Other business operations             3       2         9
                                     ----    ----      ----
     Total                           $ 29    $ 33      $175

In addition to these capital requirements, funds totaling 
approximately $49 million will be needed during the five-year period 
1999 through 2003 to retire First Mortgage Bonds and other long-term 
obligations, including subsidiary long-term obligations, at maturity 
and through sinking fund payments.


Capital resources:

Financial flexibility is provided by unused lines of credit, financial
coverages in excess of the minimum levels required for issuance of 
securities, strong credit ratings, the pledging of assets owned by 
the Company, and alternative financing arrangements such as leasing.

As of December 31, 1998, the Company had $3.9 million in cash and 
cash equivalents and $35.4 million in unused lines of credit 
available.  Bank lines of credit are a key source of operating 
capital and can provide interim financing of working capital and 
other capital requirements, if needed. The Company had $824,000 of 
credit lines in use at December 31, 1998. Borrowing rates on the 
Company's bank line of credit averaged 6.65 percent for 1998. The 
notes and credit lines of the subsidiaries are secured by a pledge of 
all of the common stock of the subsidiaries. (See note 11 to 
consolidated financial statements for further information.)

The Company's coverage ratios improved in 1998 compared to 1997 as a 
result of a decreased level of debt and lower interest rates.  The 
fixed charge coverage ratio after taxes was 4.0 for 1998 as compared 
to 3.0 for 1997 and the long-term debt interest coverage ratio before 
taxes was 4.3 for 1998, as compared to 4.0 for 1997. The Company 
expects these coverages to remain stable during 1999. 

The Company's credit ratings affect its access to the capital market.  
The current credit ratings for the Company's First Mortgage Bonds at 
December 31, 1998, which remain unchanged from 1997, are as follows: 

  Moody's Investors Service     Aa3
  Duff and Phelps               AA
  Standard and Poor's           AA-

The Company's disclosure of these security ratings is not a 
recommendation to buy, sell, or hold the Company's securities.

As of December 31, 1998, the Company had the capacity under its 
Indenture of Mortgage to issue an additional $170 million principal 
amount of First Mortgage Bonds.  (See note 9 to consolidated 
financial statements for further information.)


Results of operations:

Electric operations
-------------------

(bar graph of information in following table)

   Electric operating income
         (millions)
   -------------------------
   1996                $45.3
   1997                $45.0
   1998                $42.2

(end of graph) 

Otter Tail Power Company provides electrical service to over 125,000 
customers in a service territory of over 50,000 square miles. 

                                            1998       1997      1996
                                           ------     ------    ------
                                                  (in thousands)
 Operating revenues                      $227,477   $205,121   $199,345
 Production fuel                           34,234     31,362     27,913
 Purchased power                           40,609     24,420     28,378
 Other operation and maintenance expenses  70,584     72,112     66,401
 Special charges                            7,022        --         --
 Depreciation and amortization             22,128     21,442     19,880
 Property taxes                            10,684     10,819     11,494
                                         --------   --------   --------
 Operating income                        $ 42,216   $ 44,966   $ 45,279

The 10.9 percent increase in electric operating revenues in 1998, as 
compared to 1997, is due to a $17.9 million increase in power pool 
revenues, combined with increases of $2.7 million in other electric 
revenue and $1.7 million in retail revenue.  Power pool kilowatt-hour 
(kwh) sales increased 96 percent and revenue per power pool kwh sold 
increased 33 percent.  An increase in energy available for sale 
enabled the Company to respond to unusually high wholesale market 
demands, resulting in the increase in power pool sales in 1998. The 
evolution of a competitive wholesale electricity market is reflected 
in market-based increases in revenue per power pool kwh sold and the 
cost per kwh of purchased power. Other electric revenue increased as 
a result of more electrical contract work done for other utilities 
and an increase in payments from other utilities for the use of 
shared transmission facilities.  Retail revenue increased 0.9 percent 
despite a 0.3 percent decline in retail kwh sales.  Revenue per 
retail kwh increased 1.2 percent in 1998, as compared to 1997, as a 
result of increases in the Minnesota Conservation Improvement Program 
(CIP) surcharge rate and an increase in cost-of-energy revenues.  

Significantly milder weather during the first quarter of 1998 was the 
main contributing factor to the decline in retail kwh sales as 
heating degree days were down 18.7 percent for 1998 as compared to 
1997. Heating degree days, which generally correlate to increases or 
decreases in the use of electricity by residential customers, were 
7,827 for 1998, 9,628 for 1997, and 10,349 for 1996. 

The 2.9 percent increase in electric operating revenues in 1997, as 
compared to 1996, reflects increases of 1.0 percent in revenue from 
retail kwh sales, 56.5 percent in other electric revenue, and 8.6 
percent in revenue from power pool sales. The increase in retail 
revenue is mainly due to increases in kwh sales to industrial 
customers and increases in cost-of-energy revenue related to power 
purchased for sale to retail customers in the first half of 1997. The 
increase in other electric revenue in 1997, as compared to 1996, 
reflects Minnesota CIP lost margins recovery approved by the 
Minnesota Public Utilities Commission (MPUC). Increases in 
transmission service charge revenue and electric property rental 
income also contributed to the increase in other electric revenue in 
1997, as compared to 1996. Power pool sales increased as a result of 
strong sales in the fourth quarter of 1997, which offset lower sales 
earlier in the year.

Increases or decreases in fuel and purchased power costs arising from 
changing prices results in adjustments to the Company's rate 
schedules through the cost of energy adjustment clause.  Over the 
last five years this has resulted in savings of nearly $42 million to 
the Company's customers.

Greater plant availability in 1998, which allowed the Company to sell 
more wholesale power, resulted in a 9.1 percent increase in kwhs 
generated and a 9.2 percent increase in production fuel expense in 
1998 as compared to 1997. The 66.3 percent increase in purchased 
power costs in 1998 as compared to 1997 is due to a 161 percent 
increase in cost of power purchased for resale combined with a 6.8 
percent increase in cost of power purchased for system use.  The cost 
of power purchased for system use increased despite a 5.1 percent 
decrease in the volume of energy purchased for system use as a result 
of generally higher market prices for purchased power during 1998. 
Power purchased for resale increased due to a 96 percent increase in 
power pool sales combined with a 40 percent increase in cost per kwh 
purchased for resale.

Production fuel expense increased 12.4 percent in 1997, as compared 
to 1996, while purchased power expense decreased 13.9 percent over 
the comparable periods for a net decrease in production fuel and 
purchased power expenses of 0.9 percent.  The net reduction in 
production fuel and purchased power expenses in 1997, as compared to 
1996, was achieved despite a slight increase in total kwh sales of 
0.4 percent mainly as a result of having Big Stone Plant, the 
Company's lowest-cost generating unit, available for generation 
during all of 1997, as compared to 1996, when it was shut down two 
months for a major overhaul.  In 1997 Big Stone Plant generated a 
record net output of 3,166,398 mwh for a single year exceeding its 
previous record output by 515,627 mwh.  The increase in generation at 
Big Stone Plant contributed to a decrease in purchased power in 1997 
and helped alleviate a shortage in available generation caused by the 
scheduled maintenance shutdown of Coyote Station in the Spring of 
1997.

Other electric operation and maintenance expenses for 1998 as 
compared to 1997, decreased 2.1 percent.  This decrease, in part, 
reflects the effect of the Company's early retirement program, which 
resulted in a workforce reduction of 55 employees by June 1, 1998.  
Maintenance expenses were higher in 1997 than in 1998 due to the 10-
week overhaul of Coyote Station in 1997.

The primary contributors to the 8.6 percent increase in other 
electric operation and maintenance expense in 1997 were the overhaul 
of the Coyote Station in the second quarter of 1997 and increased 
expenditures for outside and contracted services in 1997. 

Special charges incurred in 1998 of $7 million represent two items 
related to electric operations: (1) a noncash charge of $6.3 million 
associated with a voluntary early retirement program offered by the 
Company, and (2) the write-off of $717,000 in accumulated costs 
related to a rail spur project at Big Stone Plant. (See note 3 to 
consolidated financial statements for further information including 
the net-of-tax and earnings per share impact of these charges.) The 
Company incurred insignificant additional costs related to the early 
retirement offer after the first quarter. 

Depreciation and amortization expense for 1998 as compared to 1997, 
increased 3.2 percent due to a slight increase in electric plant in 
service. The 7.9 percent increase in depreciation and amortization 
expense in 1997 is the result of property additions including 
upgrades made to Big Stone Plant in the latter part of 1996. 

The decrease in property taxes of 5.9 percent in 1997 compared to 
1996 reflects reductions in Minnesota property taxes as a result of 
legislative action affecting Minnesota commercial and industrial 
property class rates for 1997 and lower assessed values on Minnesota 
utility property. 


Manufacturing operations
------------------------

(bar graph of information in following table)

   Manufacturing operating
           income
         (millions)
   -----------------------
   1996               $6.5
   1997               $7.9
   1998               $8.7

(end of graph)

Manufacturing operations is made up of businesses involved in the 
production of agricultural equipment, automobile and truck frame-
straightening equipment and accessories, plastic pipe extrusion, and 
metal parts stamping and fabrication.
                             
                            1998        1997        1996
                           ------      ------      ------
                                   (in thousands)         
 Operating revenues       $86,030     $81,543     $64,568
 Cost of goods sold        64,390      61,361      48,269
 Operating expenses        12,979      12,237       9,795
                          -------     -------     -------
 Operating income         $ 8,661     $ 7,945     $ 6,504

Manufacturing operating revenue increased 5.5 percent in 1998 as a 
result of increased sales volumes of 15 percent within the  
manufacturing companies that produce agricultural equipment and metal 
parts stamping.  These increases were offset by a reduction in sales 
of automobile and truck frame-straightening equipment and a decrease 
in revenues from the sales of PVC pipe. The increase in manufacturing 
operating revenue of 26.3 percent in 1997 reflects increased sales at 
all six of the Company's manufacturing subsidiaries.  

During 1998 manufacturing cost of goods sold increased 4.9 percent as 
a result of the increased sales volumes, offset by a decrease in 
prices for resins used in the manufacture of PVC pipe.  The increase 
in operating expenses for 1998 of 6.1 percent was primarily due to 
increased labor costs and the use of outside professional services.  
The increases of 27.1 percent in manufacturing cost of goods sold and 
24.9 percent in manufacturing operating expenses in 1997, as compared 
to 1996, correspond to the increase in sales over the same comparable 
periods.  The increase in cost of goods sold in 1997 also reflects 
increases in prices for resins used in the manufacture of PVC pipe. 


Health services operations
--------------------------

(bar graph of information in following table)

   Health services
   operating income
     (millions)
   -----------------
   1996         $5.1
   1997         $4.3
   1998         $6.5

(end of graph)

Health services operations include businesses involved in the sale, 
service, rental, refurbishing, and operation of medical imaging 
equipment and the sale of related supplies and accessories to various 
medical institutions primarily in the Midwest.                          

                         1998         1997        1996
                        ------       ------      ------
                                 (in thousands)
 Operating revenues    $68,728      $66,185     $61,697
 Cost of goods sold     35,913       38,922      34,032
 Operating expenses     26,305       22,968      22,528
                       -------      -------     -------
 Operating income      $ 6,510      $ 4,295     $ 5,137

The 3.8 percent increase in health services operating revenue in 
1998, as compared to 1997, is due to an increase in sales volumes of 
diagnostic medical equipment combined with an increase in the number 
of medical imaging scans performed offset by a decrease in the 
average fee per scan.  Health services cost of goods sold decreased 
7.7 percent in 1998, as compared to 1997 due to the recording of 
equipment valuation adjustments in 1997. The 14.5 percent increase in 
health services operating expense in 1998 as related to 1997 reflects 
the increase in rental costs of diagnostic imaging equipment and 
increased repairs and maintenance expense on mobile imaging 
equipment. The increase in health services operating revenue of 7.3 
percent in 1997 and the increase in health services operating 
expenses of 2 percent in 1997 is related to the 1996 acquisitions of 
two medical imaging services companies. The increase in health 
services cost of goods sold in 1997, as compared to 1996, is due to 
valuation adjustments related to equipment held for sale and 
increased costs associated with customer service contracts.  


Other business operations
-------------------------

(bar graph of information in following table)

   Other business operations
       operating income
           (millions)
   --------------------------
   1996                  $2.5
   1997                  $1.8
   1998                 ($0.2)

The Company's other business operations include telephone utilities 
and businesses involved in electrical and telephone construction 
contracting, entertainment, and waste incinerating. On May 1, 1998, 
the Company acquired PAM Natural Gas, Inc. (PAM), a marketer of 
natural gas to commercial and institutional customers.  Upon 
acquisition, PAM's name was changed to Otter Tail Energy Management, 
Inc. (See note 4 to consolidated financial statements for more 
information.)

In December 1998 Varistar Corporation (formerly Mid-States 
Development, Inc.) entered into a definitive agreement to sell 
certain assets of the radio stations and video production company 
owned by KFGO, Inc., and the radio stations owned by Western 
Minnesota Broadcasting Company to an unrelated party.  (See 
additional discussion under "Factors affecting future earnings" on 
page 25.)

                           1998        1997       1996
                          ------      ------     ------
                                 (in thousands)
 Operating revenues      $48,843     $41,430    $45,323
 Cost of goods sold       29,133      23,393     28,297
 Special charges           2,500         --         --
 Operating expenses       17,367      16,210     14,574
                          ------     -------    -------
 Operating income         $ (157)    $ 1,827    $ 2,452

Other business operations operating revenues, cost of goods sold, and 
operating expenses increased 17.9 percent, 24.5 percent and 7.1 
percent, respectively, in 1998, as compared to 1997, primarily as a 
result of the PAM acquisition.  Special charges of $2.5 million 
recorded during the first quarter of 1998 represent an impairment 
loss associated with the Quadrant Co. (Quadrant) waste incineration 
plant. Substantially all of the first quarter charge was used to 
reduce the plant book value to zero.  The plant ceased operations 
during the third quarter of 1998. During the fourth quarter of 1998, 
an additional provision of $250,000 was included in operating 
expenses for plant disposition costs. Pro forma operating income for 
other business operations without Quadrant would have been 
$3,016,000, $2,426,000, and $2,237,000 in 1998, 1997, and 1996, 
respectively. (See note 3 to consolidated financial statements and 
discussion under "Factors affecting future earnings" on page 25 for 
further information on the Quadrant waste incineration plant, 
including the net-of-tax and earnings per share impact of this 
special charge.)

The 8.6 percent decrease in other business operations operating 
revenue in 1997, as compared to 1996, is due to a decline in revenue 
and reductions in material cost pass-through billings at the 
Company's construction subsidiaries, offset slightly by increases in 
media and telecommunications revenue due to the acquisition of 
several radio stations in 1996. The decrease in construction activity 
and material cost pass-through billings are the main factors 
contributing to the 17.3 percent decrease in cost of goods sold in 
1997. The increase in operating expenses from other business 
operations of 11.2 percent in 1997 reflects the acquisitions of four 
radio stations during 1996. 


Consolidated other income and deductions--net
---------------------------------------------

(bar graph of information in following table)

   Other income and deductions
           (millions)
   ---------------------------
   1996                   $2.1
   1997                   $6.1
   1998                   $4.2

(end of graph) 

The 32 percent decrease in other income and deductions--net for 
1998, as compared to 1997, reflects the 1997 sale of a Direct 
Broadcast Satellite franchise for $1.8 million.  Included in other 
income and deductions for 1998 is $839,000 of dividend income and a 
$500,000 increase in revenue recognition relating to Minnesota CIP 
financial incentives. A gain on the sale of the Direct Broadcast 
Satellite franchise, in which the Company's telecommunications 
subsidiary, Midwest Information Systems, Inc., held a one-third 
ownership interest, accounted for $1.8 million of the increase in 
other income and deductions--net in 1997, as compared to 1996.  
Realized gains on sales of investments of $751,000 and an increase of 
$1,322,000 in miscellaneous nonoperating income, including 
compensation for the abandonment of certain microwave frequencies 
licensed to the Company, also contributed to the 1997 increase in 
other income and deductions--net. The remainder of the increase in 
other income and deductions--net for 1997 reflects an increase in 
revenue recognition related to Minnesota CIP financial incentives of 
$307,000.  


Consolidated interest charges
-----------------------------

(bar graph of information in following table)

   Interest charges
      (millions)
   ----------------
   1996       $16.9
   1997       $18.5
   1998       $15.6

(end of graph)

The 15.9 percent decrease in interest charges in 1998 as compared to 
1997 is a result of a lower average interest rate on line of credit 
borrowings and refinancing of various subsidiary companies' fixed and 
variable interest rate debt with lower fixed rate debt in November 
1997.  In addition, the decrease can be attributed to the 
implementation of a consolidated cash management function within the 
subsidiaries that allowed excess cash to be used to reduce 
outstanding borrowings.  Also the medical imaging subsidiary reduced 
debt by entering into a $16 million sale/leaseback transaction in 
November 1997. Interest charges increased 9.8 percent in 1997 as a 
result of increased debt at the Company's subsidiaries due to 
acquisitions and growth and increased use of short-term debt at the 
parent-company level.


Consolidated income taxes
-------------------------

(bar graph of information in following table)

    Income taxes
    (millions)
   ------------
   1996   $14.0
   1997   $14.3
   1998   $15.1

(end of graph)

The 5.8 percent increase in income taxes in 1998 as compared to 1997 
reflects the use of a capital loss carryforward in 1997 combined with 
an increase in net income before tax for 1998. The increase of 2.1 
percent in 1997 income taxes over 1996 income taxes mainly is due to 
an increase in income before income taxes for the same comparable 
periods.  Part of the increase in taxes on increased operating income 
was offset by an increase in affordable housing tax credits earned in 
1997 over 1996. (See note 14 and "Investments" under note 1 to 
consolidated financial statements for more information.) 


Cumulative effect of change in accounting principle
---------------------------------------------------

In the first quarter of 1998 the Company changed its method of 
revenue recognition in the states of Minnesota and South Dakota from 
meter-reading dates to energy-delivery dates.  This change results in 
better matching of revenues and expense and is consistent with 
predominant industry practice. The change is also consistent with the 
way the Company has been recording electric revenue for its North 
Dakota customers since 1993 under an order from the North Dakota 
Public Service Commission. The cumulative effect of this change was 
$3,819,000 (net of income taxes of $2,545,000) or $0.32 per share. 
(See note 2 to consolidated financial statements for more 
information.)


Impact of inflation
-------------------

The Company operates under regulatory provisions that allow price 
increases in the cost of fuel and purchased power to be passed to 
customers through automatic adjustments to its rate schedules under 
the cost of energy adjustment clause.  Other increases in the cost of 
electric service must be recovered through timely filings for rate 
relief with the appropriate regulatory agency.

The Company's health services, manufacturing and other business 
operations consist almost entirely of unregulated businesses.  
Increased operating costs are reflected in product or services 
pricing with any limitations on price increases determined by the 
marketplace.  The impact of inflation upon these segments has been 
less significant during the past few years because of the relatively 
low rates of inflation experienced in the United States.  Raw 
material costs, labor costs, and interest rates are important 
components of costs for companies in these segments.  Any or all of 
these components could be impacted by inflation, with a possible 
adverse effect on the Company's profitability.


Factors affecting future earnings

Growth of electric revenue
--------------------------
The results of operations discussed above are not necessarily 
indicative of future earnings.  Anticipated higher operating costs 
and carrying charges on increased investment in plant, if not offset 
by proportionate increases in operating revenues and other income 
(either by appropriate rate increases, increases in unit sales, or 
increases in nonelectric operations), will affect future earnings.

Growth in electric sales will be subject to a number of factors, 
including the volume of power pool sales to other utilities, the 
effectiveness of demand-side management programs, weather, 
competition, and the rate of economic growth or decline in the 
Company's service area.  The Company's electric business is primarily 
dependent upon the use of electricity by customers in our service 
area.  Percentage changes in the Company's electric kwh sales to 
retail customers over the prior year for the last three years showed 
a decrease of 0.3 percent in 1998 and increases of 1.4 percent in 
1997, and 4.0 percent in 1996.

Market factors beyond the Company's control such as mergers and 
acquisitions, geographical location, transmission costs and the 
effects of deregulation could have a negative impact on 
noncontractual power pool sales.

Rates of return earned on utility operations are subject to review by 
the various state commissions that have jurisdiction over the 
electric rates charged by the Company.  These reviews may result in 
future revenue reductions when actual rates of return are deemed by 
regulators to be in excess of allowed rates of return.

Demand-side management
----------------------
Demand-side management (DSM) efforts will continue in all 
jurisdictions served by the Company.  The goal of DSM is to encourage 
the wise and efficient use of electricity by customers.  Currently, 
Minnesota is the only jurisdiction that mandates investments in DSM. 

In 1998 the Minnesota Public Utility Commission (MPUC) approved the 
Company's 1997 financial incentive filing along with a 2.75 percent 
surcharge on all Minnesota customers' bills starting on July 1, 1998, 
for the recovery of conservation-related costs over and above those 
being recovered in current rates.  The approved surcharge in effect 
from July 1, 1997 through June 30, 1998 was 1.75 percent and the 
approved surcharge from July 1, 1996, through June 30, 1997, was 1.25 
percent.  The current surcharge rate will be in place until June 30, 
1999, when it will be revised for subsequent years' program results. 

During 1998 the Minnesota Department of Public Service (MDPS) 
recommended to the MPUC that demand-side management incentives for 
all Minnesota electric utilities be terminated as of January 1, 1998.  
At a hearing held November 19, 1998, the MPUC did not accept the MDPS 
recommendation, however, the MPUC put electric and gas utilities on 
notice that the ability to earn demand-side management incentives 
could end as early as January 1, 1999.  Incentives accrued for 1998 
totaled $1,750,000. A MPUC Chair's Round Table has been convened to 
examine demand-side management programs and related incentives.  A 
report from the Round Table is due to the MPUC by May 1, 1999. (See 
note 5 to consolidated financial statements for more information.)

Fuel Costs
----------
The Company began purchasing subbituminous coal for Big Stone Plant 
in August 1995 under a contract that runs through December 1999. The 
Company expects to execute a new coal contract in 2000 near current 
contract prices.

In November 1995 the Company and two other Coyote Station owners 
initiated a lawsuit against Knife River Coal Mining Company and its 
parent, MDU Resources Group Inc., in an attempt to resolve disputes 
over pricing in the Coyote coal agreement.  The case was remanded to 
arbitration in 1997 and a resolution is still pending.  Any fuel cost 
savings that may result from resolution of this dispute will be 
passed on to customers through the cost of energy adjustment clause.  

Environmental
-------------
Current regulations under the Federal Clean Air Act (the Act) are not 
expected to have a significant impact on future capital requirements 
or operating costs. However, proposed or future regulations under the 
Act, changes in the future coal supply market, and/or other laws and 
regulations could impact such requirements or costs.  It is 
anticipated that, under current regulatory principles, any such costs 
could be recovered through rates. 

The Company's plants are not subject to the Act's phase one 
requirements. Phase two standards of the Act must be met by the year 
2000.  The Company intends that Big Stone Plant will maintain current 
levels of operation and meet phase two requirements for sulfur 
dioxide emissions by burning subbituminous coal. Based on current 
market conditions, the Company expects to execute a new coal contract 
in 2000 near current contract prices. Under EPA regulations, 
modifications would be required at Big Stone Plant by 2000 to satisfy 
nitrogen oxide emission standards.  During 1997 the Company conducted 
tests at Big Stone Plant to determine if nitrogen oxide emissions 
could be reduced through modifications to existing equipment.  The 
results of the tests were positive and modifications have been 
completed. The Company is a member of the Utility Air Regulatory 
Group (UARG). In 1998, the Federal Court rejected a petition filed by 
the UARG for reconsideration of the standards based on 
inconsistencies in current laws. 

The Company's Coyote Station is equipped with sulfur dioxide removal 
equipment. Compliance with the phase two requirements is not expected 
to significantly impact operations at that plant.  Hoot Lake Plant 
already uses low-sulfur subbituminous coal. Minor modifications have 
been completed at Hoot Lake Plant to meet the phase two nitrogen 
oxide emission requirements by 2000.

Regulation and legislation
--------------------------
In 1995 the Federal Energy Regulatory Commission (FERC) issued a 
Notice of Proposed Rulemaking (NOPR) to promote competition and 
deregulation in wholesale electric markets by requiring owners of 
transmission facilities to offer nondiscriminatory open-access 
transmission and ancillary services to wholesale sellers and 
purchasers of electric energy in interstate commerce.  On April 24, 
1996, the FERC issued two final rules, Order Nos. 888 and 889, which 
may have a potentially significant impact on wholesale markets.

Order No. 888, effective July 9, 1996, requires electric utilities 
and other transmission providers to abide by, and to offer to other 
transmission users, terms, conditions and pricing comparable to those 
they use for themselves in transmitting power.  The Company filed its 
initial transmission tariff on July 9, 1996, as required by Order No. 
888.  A revised rate schedule became effective in the first quarter 
of 1997.

Order No. 889, which became effective January 3, 1997, requires 
public utilities to implement Standards of Conduct and an Open Access 
Same-Time Information System (OASIS).  These rules require 
transmission personnel to provide information about their 
transmission systems to all customers, including their marketing 
associates within their respective companies, through the OASIS.  The 
FERC issued orders after rehearing, 888A and B, further clarifying 
its intent to prevent any discriminatory abuse of market power by 
utilities controlling both transmission and generation assets.

The U.S. Congress ended its 1998 legislative session without taking 
action on proposed electric industry restructuring legislation.  
Federal restructuring legislation in 1999 is not anticipated due to 
the complexity of issues involved with federal intervention.  The 
Minnesota Public Utilities Commission issued its Wholesale 
Competition Report in 1996 and its Retail Competition Report in 1997 
and continues to work on specific topics in the areas of potential 
stranded costs, unbundled rates, and affiliated transactions.  The 
Minnesota Legislature did not take any significant legislative action 
on electric utility restructuring in 1998, and no significant action 
is expected during 1999.  In 1997 the North Dakota Legislature 
created a subcommittee to investigate the impact of electric utility 
industry restructuring on North Dakota. The North Dakota Legislature 
plans to deal with tax issues surrounding restructuring first. The 
South Dakota Public Utility Commission has not taken any action with 
regards to industry restructuring or retail competition.

Competition
-----------
As the electric industry moves towards deregulation the Company 
expects the industry to become more competitive. The Company is 
taking a number of steps to position itself for success in a 
competitive marketplace.  It has initiated the process of 
functionally unbundling its energy supply, energy delivery, and 
energy services operations. The Company is developing the necessary 
accounting systems to capture costs and determine the profitability 
of each of these business units and to identify areas for improvement 
and opportunities for increased profitability.  The Company has 
established an energy services business unit to promote the energy-
related products and services traditionally offered to the Company's 
customers and to develop new products and services to be offered to 
current and potential customers in order to distinguish the Company 
from the competition. 

In January 1998 the Company announced a voluntary early retirement 
program for all nonunion electric utility employees age 55 and over. 
The offer of early retirement was accepted by 55 of the 67 eligible 
utility employees during the enrollment period. (See note 3 to 
consolidated financial statements for further information regarding 
this voluntary early retirement program.) The Company anticipates 
that most of the staff reductions will be permanent, resulting in 
enhanced future earnings through reduced payroll expenses. 

As the electric industry evolves and becomes more competitive, the 
Company believes it is well positioned to maintain its customer base 
and may have opportunities to increase its market share.  The 
Company's generation capacity appears poised for competition due to 
unit heat rate improvements and reductions in fuel and freight costs.  
A comparison of the Company's electric retail rates to the rates of 
other investor-owned utilities, cooperatives, and municipals in the 
states the Company serves indicates that its rates are competitive.  
In addition, the Company would attempt more flexible pricing 
strategies under an open, competitive environment.

The markets in which the Company's manufacturing companies, health 
services companies, and other businesses compete are characterized by 
intense competition and are subject to the effects of general 
economic conditions in each of their respective industries. The 
various markets the companies compete in have many established 
manufacturers with broader product lines, greater distribution 
capabilities, greater capital resources, and larger marketing, 
research and development staffs and facilities. 

Year 2000 readiness disclosure
------------------------------
Many computer software systems, as well as certain hardware and 
equipment containing date-sensitive data, were structured to utilize 
a two-digit year field meaning that they may not be able to properly 
recognize dates in the year 2000.  The Company recognizes that the 
year 2000 occurrence puts all of its electronic systems on all 
platforms at risk.  Application systems, information technology 
systems, and technology that includes embedded systems are being 
reviewed, in order, from highly critical to less critical.  These 
systems include the Company's financial software, customer-
information system, energy-management system, power plant control 
systems, manufacturing processes, and diagnostic medical imaging 
equipment.  In order to address the year 2000 issue from a total 
business perspective, the Company is working with its major vendors, 
customers, banks, regulatory and government agencies, and utility 
alliances.  

In order to improve business information systems, the Company's 
operating businesses began replacing major financial software 
applications in 1996.  The electric utility has replaced its major 
in-house developed financial software applications with financial 
applications from Oracle Corporation, while at the same time, 
replacing the hardware (platforms) on which these applications 
reside. Because of the recent implementation, these systems should 
require minimal remediation efforts. The costs of replacing these 
major financial computer systems are not included in the cost 
estimates discussed below. 

The Company's plan to resolve the year 2000 issues involves three 
phases: inventory, assessment and remediation/testing.  As of 
December 31, 1998, the inventory phase is complete within the 
electric utility and ranges from 88 percent to 100 percent complete 
for the other companies. The assessment phase is 95 percent complete 
for the electric utility as of December 31, 1998 and will be 
completed by the end of February 1999. Within the other companies the 
assessment phase completion ranges from 50 percent to 100 percent. 
Remediation and testing for the electric utility is 55 percent 
complete and ranges from 25 percent to 98 percent complete for 
the other companies as of December 31, 1998.  The Company is on 
schedule to complete remediation and testing by June 1, 1999. 

In addition, the Company's operating businesses are in the process of 
communicating with critical external parties in order to determine 
how vulnerable the Company may be to these parties' failure to 
resolve their own year 2000 issues.  There can be no guarantee that 
the third parties of business importance to the Company will 
successfully reprogram or replace and test all of their own computer 
hardware, software, and process control systems in a timely manner.  
While the failure of a single third party to achieve year 2000 
readiness should not have a material adverse effect on the Company's 
financial results or operations, the failure of several key third 
parties could have such an effect.  The Company expects to have third 
party assessments completed by March 1999.  The Company is developing 
plans to alter business relationships in the event certain third 
parties fail to become year 2000 compliant.

The electric utility industry is unique in its dependence upon a 
complex network of interrelated systems of the power pool grid in 
order to support and maintain reliable, efficient operations.  The 
Company's year 2000 readiness effort is linked to the readiness 
efforts of other utilities, as well as those of major customers whose 
loads support the integrity of the power pool grid. The Company is 
contacting its large customers to assess their level of year 2000 
readiness and to discuss their operating plans for January 1, 2000. 
The Company is coordinating its year 2000 effort with that of the 
Mid-Continent Area Power Pool and with plans established by the North 
America Electric Reliability Council (NERC) under the direction of 
the U.S. Department of Energy. In April and September of 1999 the 
Company will participate in NERC defined readiness drills.  These 
drills will be carried out at the power pool level.  While the 
Company is supporting these cooperative efforts, it cannot guarantee 
the successful implementation of solutions of third parties.  A 
failure of a system within the power pool grid could have a material 
impact on the Company and its customers. 

The costs of the Company's year 2000 readiness effort are being 
funded with cash flows from operations. These costs are not expected 
to vary substantially from normal ongoing costs incurred for systems 
development, implementation, and maintenance due to the use of 
internal resources and the deferral of other projects. Total 
expenditures related to remediation, testing, conversion, 
replacement, and upgrading of system applications are expected to 
range from $975,000 to $1,350,000 for 1997 to 2000. Expenditures 
incurred through December 31, 1998 were $350,000.

The Company's medical subsidiary owns diagnostic imaging equipment 
that has computer software vulnerable to year 2000 issues.  While the 
medical subsidiary will negotiate to have its vendors pay the costs 
to solve the year 2000 issues, there can be no assurances the vendors 
will absorb the costs. In the event the vendors do not pay all or 
some portion of the costs, the medical subsidiary may have to absorb 
the majority of the costs. These costs are included in the estimates 
shown above. 

Contingency plans are also being developed for certain critical 
business and electrical processes. The business critical processes 
contingency plans will be approved during the first quarter of 1999.
The Company's electrical system contingency plan uses templates 
provided by the NERC and are to be completed by June 30, 1999.

At this time the Company believes its worst-case scenario is that key 
customers could experience significant reductions in their power 
needs due to their own year 2000 issues.  Although the Company does 
not believe that this scenario is likely to occur, the Company 
expects that such a scenario would not have a material adverse affect 
on the Company's consolidated financial position. The Company 
believes a more probable worst-case scenario is a temporary 
disruption of service to its electric customers, including the effect 
of cascading disruptions caused by other entities whose electrical 
systems are connected to the Company's.  The Company has assessed the 
risk of this scenario, and believes that contingency plans would 
mitigate the long-term effect of such a scenario.  In the event that 
a temporary disruption in service does occur, the Company does not 
expect that it would have a material adverse effect on its 
consolidated financial position.

While the Company believes it will be able to resolve its year 2000 
issues in a timely manner, if it is unable to complete the required 
changes to existing critical systems, or if those with whom the 
Company conducts business are unsuccessful in implementing timely 
solutions, the year 2000 issue could have a material adverse effect 
upon the Company's consolidated results of operations.

The costs of the project and the completion dates are based on 
management's best estimates, which were derived from assumptions of 
future events including the availability of resources, third party 
modification plans, and other factors.  There can be no guarantee 
that these estimates will be achieved and actual results could vary 
due to uncertainties.

The forward-looking statements contained in this section under the 
heading "Year 2000 readiness disclosure" should be read in 
conjunction with the Company's disclosure below under the heading 
"Cautionary Statements for Purposes of the Safe Harbor Provisions of 
the Private Securities Litigation Reform Act of 1995."

Diversification
---------------
In March 1998 the Company recorded a $2.5 million noncash accounting 
charge related to the impairment of its Quadrant Co. waste 
incineration plant. (See note 3 to consolidated financial statements 
for further information.) In July 1998, Quadrant's waste incinerators 
were shut down for alleged noncompliance with Minnesota Pollution 
Control Agency (MPCA) particulate emissions regulations. Quadrant and 
the Company received from the MPCA a Notice of Violation dated 
October 15, 1998, outlining claimed violations of emission limits, 
operating requirements, and reporting requirements applicable to 
Quadrant under Minnesota law.  Quadrant and the MPCA are in the 
process of negotiating a penalty settlement and intend to negotiate 
the terms and conditions of a stipulation agreement involving a 
compliance schedule, a civil penalty for past alleged violations, and 
stipulated penalties for any future violations of the stipulation 
agreement.  The outcome of the negotiations is not known at this 
time; however, it is not expected to have a material financial impact 
on the Company.  The Company does not expect any further costs 
related to the plant's disposition to have a material effect upon 
future consolidated earnings.

In December 1998 Varistar entered into a definitive agreement to sell 
certain assets of the radio stations and video production company 
owned by KFGO, Inc., and the radio stations owned by Western 
Minnesota Broadcasting Company to an unrelated party.  The sale is 
subject to approval by the Federal Communications Commission and 
other governmental authorities. Operating income related to these 
radio stations did not have a significant effect on consolidated 
operating income for 1998, 1997, and 1996. When regulatory approvals 
are received, the Company will recognize a one-time gain on the sale 
of the radio stations.

The Company continues to investigate acquisitions of additional 
businesses (both utility and nonutility) and expects continued growth 
in this area.  The success of these businesses and any future 
business purchases will affect future earnings. Increased revenues 
from the Company's nonregulated businesses could result in greater 
earnings and stock price volatility.


Accounting pronouncements

In June 1998 the Financial Accounting Standards Board issued 
Statement of Financial Accounting Standards (SFAS) 133 - Accounting 
for Derivative Instruments and Hedging Activities, effective for 
financial statements issued for periods beginning after June 15, 
1999.  SFAS 133 establishes accounting and reporting standards for 
derivative instruments and for hedging activities.  It requires that 
all derivatives be recognized as either assets or liabilities and 
that those financial instruments be measured at fair value.  The 
accounting for changes in the fair value of a derivative depends on 
the intended use of the derivative.  The adoption of this statement 
is not expected to have a material impact on the Company's financial 
position as presently reported.

In 1998 the Company adopted SFAS 131 -- Disclosures about Segments of 
an Enterprise and Related Information and SFAS 132 -- Employers' 
Disclosures about Pensions and Other Postretirement Benefits.  The 
adoption of SFAS 131 and 132 did not affect the Company's 1998 
operations or financial position.  (See note 1 to consolidated 
financial statements for further information.)


Cautionary Statements for Purposes of the Safe Harbor Provisions of 
the Private Securities Litigation Reform Act of 1995

The information in this annual report includes forward-looking 
statements.  Important risks and uncertainties that could cause 
actual results to differ materially from those discussed in such 
forward-looking statements are set forth above under "Factors 
affecting future earnings."  Other risks and uncertainties may be 
presented from time to time in the Company's future Securities and 
Exchange Commission filings.

<TABLE>
Otter Tail Power Company

Consolidated Statements of Income
For the Years Ended December 31                    1998     1997     1996
-----------------------------------------------------------------------------
                                     (in thousands, except per-share amounts)
<S>                                             <C>       <C>       <C>
Operating revenues
  Electric                                      $227,477  $205,121  $199,345
  Manufacturing                                   86,030    81,543    64,568
  Health services                                 68,728    66,185    61,697
  Other business operations                       48,843    41,430    45,323
                                                --------   -------  --------
    Total operating revenues                     431,078   394,279   370,933

Operating expenses
  Production fuel                                 34,234    31,362    27,913
  Purchased power                                 40,609    24,420    28,378
  Electric operation and maintenance expenses     70,584    72,112    66,401
  Special charges                                  9,522        -         -
  Cost of goods sold                             129,436   123,676   110,598
  Other nonelectric expenses                      52,926    47,275    43,351
  Depreciation and amortization                   25,813    25,536    23,387
  Property taxes                                  10,724    10,865    11,533
                                                --------  --------  --------
     Total operating expenses                    373,848   335,246   311,561

Operating Income
  Electric                                        42,216    44,966    45,279
  Manufacturing                                    8,661     7,945     6,504
  Health services                                  6,510     4,295     5,137
  Other business operations                         (157)    1,827     2,452
                                                --------  --------  --------
    Total operating income                        57,230    59,033    59,372

Other income and deductions -- net                 4,177     6,140     2,125
Interest charges                                  15,566    18,519    16,863
                                                --------  --------  --------
Income before income taxes                        45,841    46,654    44,634
Income taxes                                      15,140    14,308    14,010
                                                --------  --------  --------
Income before cumulative effect of change
 in accounting principle                          30,701    32,346    30,624
Cumulative effect of change in accounting
 principle (net-of-tax of $2,545)                  3,819        -         -
                                                --------  --------  --------
Net income                                        34,520    32,346    30,624
Preferred dividend requirements                    2,358     2,358     2,358
                                                --------  --------  --------
Earnings available for common shares            $ 32,162  $ 29,988  $ 28,266
                                                ========  ========  ========
Average number of common shares outstanding       11,798    11,639    11,503
Basic and diluted earnings per share
  Before cumulative effect of change in
   accounting principle                            $2.41     $2.58      $2.46
  Cumulative effect of change in accounting
   principle                                        0.32        -          -
                                                --------  --------   --------
    Basic and diluted earnings per share           $2.73     $2.58      $2.46
Dividends per common share                         $1.92     $1.86      $1.80

See accompanying notes to consolidated financial statements.
</TABLE>


<TABLE>
Otter Tail Power Company

Consolidated Balance Sheets, December 31                    1998       1997
-----------------------------------------------------------------------------
                                                            (in thousands)
                                 Assets
<S>                                                      <C>        <C>
Plant
  Electric plant in service                              $ 770,887  $ 758,551
  Diversified operations                                    89,094     89,716
                                                         ---------  ---------
          Total                                            859,981    848,267
  Less accumulated depreciation and amortization           370,290    350,647
                                                         ---------  ---------
  Plant-net of accumulated depreciation and amortization   489,691    497,620
  Construction work in progress                             10,495     12,146
                                                         ---------  ---------
          Net plant                                        500,186    509,766
                                                         ---------  ---------

Investments                                                 20,612     20,048
                                                         ---------  ---------
Intangibles--net                                            21,176     20,911
                                                         ---------  ---------
Other assets                                                 3,968      5,932
                                                         ---------  ---------  
Current assets
  Cash and cash equivalents                                  3,919      5,301
  Accounts receivable:
    Trade (less accumulated provision for uncollectible 
          accounts: 1998, $1,444,000; 1997, $1,026,000)     40,029     33,304
    Other                                                    8,065      6,796
  Materials and supplies:
    Fuel                                                     3,418      3,425
    Inventory, materials, and operating supplies            23,138     24,160
  Deferred income taxes                                      2,730      4,738
  Accrued utility revenues                                  11,179      4,271
  Other                                                      6,310      3,795
                                                         ---------  ---------
    Total current assets                                    98,788     85,790
                                                         ---------  ---------

Deferred debits
  Unamortized debt expense and reacquisition premiums       3,737       4,187
  Regulatory assets                                         3,774       5,060
  Other                                                     3,371       3,747
                                                        ---------   ---------
    Total deferred debits                                  10,882      12,994
                                                        ---------   ---------
            Total                                       $ 655,612   $ 655,441
                                                        =========   =========

See accompanying notes to consolidated financial statements.
</TABLE>

<TABLE>
Otter Tail Power Company

Consolidated Balance Sheets, December 31                      1998     1997
-----------------------------------------------------------------------------
                                                              (in thousands)
                                Liabilities and Equity
<S>                                                     <C>        <C>
Capitalization (page 32)
  Common shares, par value $5 per share -- authorized, 
    25,000,000 shares; outstanding, 1998 -- 11,879,504
    shares; 1997 -- 11,731,078 shares                   $  59,398  $  58,655
  Premium on common shares                                 39,919     35,196
  Retained earnings                                       125,462    115,942
  Accumulated other comprehensive income                      297        363
                                                        ---------  ---------
     Total common equity                                  225,076    210,156

  Cumulative preferred shares                              38,831     38,831
  Long-term debt:
     Electric utility                                     153,389    154,279
     Diversifed operations                                 27,657     35,694
                                                        ---------  ---------
         Total capitalization                             444,953    438,960
                                                        ---------  ---------

Current liabilities
   Short-term debt                                            824      2,100
   Sinking fund requirements and current maturities         5,794     12,324
   Accounts payable                                        32,411     28,427
   Accrued salaries and wages                               3,946      3,835
   Federal and state income taxes accrued                   2,192      2,572
   Other taxes accrued                                     11,119     11,122
   Interest accrued                                         3,120      3,339
   Other                                                    3,826      2,980
                                                        ---------  ---------
     Total current liabilities                             63,232     66,699
                                                        ---------  ---------

Noncurrent liabilities                                     22,842     17,805
                                                        ---------  ---------

Commitments (note 8)                                           -          -
                                                        ---------  ---------

Deferred credits
  Accumulated deferred income taxes                        90,964     97,583
  Accumulated deferred investment tax credit               17,481     18,666
  Regulatory liabilities                                   11,692     12,121
  Other                                                     4,448      3,607
                                                        ---------  ---------
    Total deferred credits                                124,585    131,977
                                                        ---------  ---------
     Total                                              $ 655,612  $ 655,441
                                                        =========  =========

See accompanying notes to consolidated financial statements.
</TABLE>


                  Independent Auditors' Report


To the Shareholders of Otter Tail Power Company:

We have audited the accompanying consolidated balance sheets and 
statements of capitalization of Otter Tail Power Company and its 
subsidiaries (the Company) as of December 31, 1998, and 1997, and the 
related consolidated statements of income, changes in equity, and 
cash flows for each of the three years in the period ended December 
31, 1998.  These consolidated financial statements are the 
responsibility of the Company's management.  Our responsibility is to 
express an opinion on these consolidated financial statements based 
on our audits. 

We conducted our audits in accordance with generally accepted 
auditing standards.  Those standards require that we plan and perform 
the audit to obtain reasonable assurance about whether the 
consolidated financial statements are free of material misstatement.  
An audit includes examining, on a test basis, evidence supporting the 
amounts and disclosures in the consolidated financial statements.  An 
audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the 
overall financial statement presentation.  We believe that our audits 
provide a reasonable basis for our opinion. 

In our opinion, such consolidated financial statements present 
fairly, in all material respects, the financial position of the 
Company at December 31, 1998, and 1997, and the results of its 
operations and its cash flows for each of the three years in the 
period ended December 31, 1998, in conformity with generally accepted 
accounting principles. 

As disclosed in note 2 to the consolidated financial statements, the 
Company changed its method of accounting for unbilled revenues in 
1998.

DELOITTE & TOUCHE LLP




February 1, 1999
Minneapolis, Minnesota

<TABLE>
Otter Tail Power Company

Consolidated Statements of Changes in Equity
----------------------------------------------------------------------------------------------------------
                                                      Par      Premium              Accumulated
                                           Common     value,     on                     other
                                           shares     common   common    Retained   comprehensive   Total
                                         outstanding  shares   shares    earnings      income      equity
                                         -----------  ----------------------------------------------------
                                                (in thousands, except common shares outstanding)

<S>    <C>        <C> <C>                <C>         <C>       <C>       <C>        <C>    <C>    <C>
Balance, December 31, 1995               11,180,136  $55,901   $30,335   $ 98,006   $        -    $184,242
  Effects of pooling transactions,
     January 1, 1996:
    Peoples Telephone                       163,758      819      (798)     2,058          216       2,295
    Chassis Liner                           157,646      788      (588)       381                      581
  Common stock issuances                     34,516      172       936                               1,108
  Comprehensive income:
    Net income                                                             30,624                   30,624
    Unrealized gains on available-
     for-sale securities                                                                   403         403
                                                                                                   -------
       Total comprehensive income                                                                   31,027
  Cumulative preferred dividends at
     required annual rates                                                 (2,358)                  (2,358)
  Common dividends                                                        (20,124)                 (20,124)
  Distributions by pooled entities                                           (723)                    (723)
                                         ----------  -----------------------------------------------------
Balance, December 31, 1996               11,536,056  $57,680   $29,885   $107,864   $      619    $196,048
  Cash portion of Peoples pooling
     transaction, January 1, 1997                                 (209)                               (209)
  Common stock issuances                    195,022      975     5,520                               6,495
  Comprehensive income:
    Net income                                                             32,346                   32,346
    Unrealized gains on available
      -for-sale securities                                                                 103         103
    Reversal of previously
      recorded unrealized gains
      on available-for-sale
      securities sold in 1997                                                             (359)       (359)
                                                                                                   -------
        Total comprehensive income                                                                  32,090
  Cumulative preferred dividends at
     required annual rates                                                 (2,358)                  (2,358)
  Common dividends                                                        (21,496)                 (21,496)
  Distributions by pooled entities                                           (414)                    (414)
                                         ----------  -----------------------------------------------------
Balance, December 31, 1997               11,731,078  $58,655   $35,196   $115,942   $      363    $210,156
  Common stock issuances                    148,426      743     4,723                               5,466
  Comprehensive income:
    Net income                                                             34,520                   34,520
    Unrealized loss on available-
      for-sale securities                                                                  (66)        (66)
                                                                                                   -------
        Total comprehensive income                                                                  34,454
  Cumulative preferred dividends at                                        (2,358)                  (2,358)
    required annual rates
  Common dividends                                                        (22,642)                 (22,642)
                                         ----------  -----------------------------------------------------
Balance, December 31, 1998               11,879,504  $59,398   $39,919   $125,462   $      297     225,076
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>

<TABLE>
Otter Tail Power Company

Consolidated Statements of Cash Flows
For the Years Ended December 31                                         1998        1997        1996
------------------------------------------------------------------------------------------------------
                                                                                (in thousands)
<S>                                                                <C>         <C>         <C>
Cash flows from operating activities
  Net income                                                       $ 34,520    $ 32,346    $ 30,624
  Adjustments to reconcile net income to net cash provided
     by operating activities:
    Depreciation and amortization                                    34,965      39,302      35,305
    Deferred investment tax credit--net                              (1,186)     (1,186)     (1,186)
    Deferred income taxes                                            (6,253)     (3,155)     (5,277)
    Change in deferred debits and other assets                           99       1,204       3,679
    Change in noncurrent liabilities and deferred credits             2,129       1,960       3,389
    Allowance for equity (other) funds used during
     construction                                                      (103)          -        (325)
    Loss/(Gain) on investments in and disposal of
     noncurrent assets                                                  607      (1,722)        555
    Voluntary early retirement program charges                        6,305           -           -
    Cumulative effect of change in accounting principle              (3,819)          -           -
    Asset impairment losses                                           3,217           -           -
  Cash provided by (used for) current assets and current
     liabilities:
    Change in receivables, materials, and supplies                   (5,765)     (2,270)        396
    Change in other current assets                                   (2,962)      1,752        (922)
    Change in payables and other current liabilities                  2,804         908         867
    Change in interest and income taxes payable                        (599)        259       1,506
                                                                    -------     -------     -------
       Net cash provided by operating activities                     63,959      69,398      68,611
                                                                    -------     -------     -------
Cash flows from investing activities
  Gross capital expenditures                                        (29,289)    (41,973)    (64,823)
  Proceeds from disposal of noncurrent assets                         3,359      20,802       4,734
  Proceeds from the sales of marketable securities                        -         785           -
  Purchase of subsidiaries, net of cash acquired                     (1,372)          -     (10,006)
  Change in temporary cash investments                                    -           -       2,208
  Change in other investments                                        (1,585)       (470)    (10,640)
                                                                    -------     -------     -------
      Net cash used in investing activities                         (28,887)    (20,856)    (78,527)
                                                                    -------     -------     -------
Cash flows from financing activities
  Change in short-term debt--net issuances                           (1,276)    (23,500)     25,600
  Proceeds from issuance of long-term debt                            1,559     178,272     118,083
  Proceeds from issuance of common stock                              5,466       6,286       1,719
  Payments for debt and common stock issuance expense                   (82)       (244)        (22)
  Payments for retirement of long-term debt                         (17,121)   (181,917)   (111,957)
  Dividends paid                                                    (25,000)    (24,268)    (23,244)
                                                                    -------     -------     -------
      Net cash (used in)/provided by financing activities           (36,454)    (45,371)     10,179
                                                                    -------     -------     -------

Net change in cash and cash equivalents                              (1,382)      3,171         263
Cash and cash equivalents at beginning of year                        5,301       2,130       1,867
                                                                    -------     -------     -------
Cash and cash equivalents at end of year                           $  3,919    $  5,301    $  2,130
                                                                   ========    ========    ========
Supplemental disclosures of cash flow information
  Cash paid during the year for:
      Interest (net of amount capitalized)                        $ 15,189    $ 18,203    $ 16,650
      Income taxes                                                $ 22,966    $ 18,057    $ 18,832

See accompanying notes to consolidated financial statements.
</TABLE>

<TABLE>
Otter Tail Power Company

Consolidated Statements of Capitalization, December 31            1998         1997
------------------------------------------------------------ ------------------------
                                                                    (in thousands)
<S>                                                            <C>          <C>
Total common shareholders' equity                              $ 225,076    $ 210,156
                                                               ---------    ---------
Cumulative preferred shares -- without par value (stated and
  liquidating value $100 a share) -- authorized 1,500,000 shares;
  outstanding:
    Series subject to mandatory redemption:
      $6.35, 180,000 shares; 9,000 shares due 2002-06;
      135,000 shares due 2007                                      18,000       18,000
                                                                ---------    ---------

  Other series:
      $3.60, 60,000 shares                                          6,000        6,000
      $4.40, 25,000 shares                                          2,500        2,500
      $4.65, 30,000 shares                                          3,000        3,000
      $6.75, 40,000 shares                                          4,000        4,000
      $9.00, 53,311 shares                                          5,331        5,331
                                                                ---------    ---------
            Total other preferred                                  20,831       20,831
                                                                ---------    ---------

Cumulative preference shares -- without par value, authorized
  1,000,000 shares; outstanding: none

Long-term debt
  First mortgage bond series:
      7.25%, due August 1, 2002                                    18,800       19,000
      8.75%, due September 15, 2021                                18,600       18,800
      8.25%, due August 1, 2022                                    28,200       28,500
      Pollution control series:
       6.30-6.80%, due February 1, 2006, Big Stone project          5,307        5,367
       6.30-6.90%, due February 1, 2019, Coyote project            21,264       21,499
                                                                ---------    ---------
            Total first mortgage bond series                       92,171       93,166

  Senior debentures 6.375%, due December 1, 2007                   50,000       50,000
  Long-term lease obligation (5.625% pollution control revenue
   bonds due July 1, 1998)                                              -        2,200
  Industrial development refunding revenue bonds
    5.00% due December 1, 2002                                      3,010        3,010
  Pollution control refunding revenue bonds
    variable 3.85% at December 31, 1998, due December 1, 2012      10,400       10,400
  Obligations of Varistar Corporation:
    7.80% ten-year term note                                       18,169       22,500
    Various at 1.9% to 9% at December 31, 1998                      4,112       10,775
  Obligations of Midwest Information Systems, Inc.
    variable 6.7% to 7.27% at December 31, 1998                    10,169       11,542
  Other                                                                 6            6
                                                                ---------    ---------
      Total                                                       188,037      203,599
  Less:
    Current maturity                                                4,799       11,329
    Sinking fund requirement                                          995          995
    Unamortized debt discount and premium -- net                    1,197        1,302
                                                                ---------    ---------
             Total long-term debt                                 181,046      189,973
                                                                ---------    ---------
Total capitalization                                            $ 444,953    $ 438,960
                                                                =========    =========

See accompanying notes to consolidated financial statements.
</TABLE>

Otter Tail Power Company
Notes to consolidated financial statements
For the three years ended December 31, 1998

1. Summary of accounting policies

System of accounts--In 1997 the Company implemented an activity based 
costing system along with an entirely new account code structure that 
will enable it to capture costs to facilitate decision-making in a 
less regulated and more competitive electric industry. For regulatory 
reporting purposes, all new account code combinations can be 
translated into the accounts of the Uniform System of Accounts 
prescribed by the Federal Energy Regulatory Commission (FERC), the 
Public Service Commission of North Dakota, and the Public Utilities 
Commissions of Minnesota and South Dakota. 

Principles of consolidation--The consolidated financial statements 
include the accounts of the Company and all wholly owned 
subsidiaries.  Profits on sales from the regulated electric utility 
company to nonregulated affiliates are eliminated. However, profits 
on sales to the regulated electric utility company from nonregulated 
affiliates are not eliminated, in accordance with the requirements of 
Statement of Financial Accounting Standards (SFAS) No. 71 - 
Accounting for the Effects of Certain Types of Regulation. 

Plant, retirements, and depreciation--Utility plant is stated at 
original cost. The cost of additions includes contracted work, direct 
labor and materials, allocable overheads, and allowance for funds 
used during construction.  The cost of depreciable units of property 
retired plus removal costs less salvage is charged to the accumulated 
provision for depreciation.  Maintenance, repairs, and replacement of 
minor items of property are charged to operating expenses.  Repairs 
to property made necessary by storm damage are charged to the reserve 
therefor.  The provisions for utility depreciation for financial 
reporting purposes are made on the straight-line method based on the 
estimated service lives of the properties.  Such provisions as a 
percent of the average balance of depreciable electric utility 
property were 3.12 percent in 1998, 3.08 percent in 1997, and 3.00 
percent in 1996.

Property and equipment of nonutility and subsidiary operations are 
carried at historical cost, or at the current appraised value if 
acquired in a business combination accounted for under the purchase 
method of accounting, and are depreciated on a straight-line basis 
over the useful lives (3 to 40 years) of the related assets.  Upon 
sale or retirement of property and equipment, the cost and related 
accumulated depreciation are eliminated from the respective accounts 
and the resulting gain or loss is included in the consolidated 
financial statements.

Jointly owned plants--The consolidated financial statements include 
the Company's 53.9 percent and 35 percent ownership interests in the 
assets, liabilities and expenses of Big Stone Plant and Coyote 
Station, respectively.  Amounts at December 31, 1998 and 1997 
included in electric plant in service for Big Stone were $111,754,000 
and $108,273,000, respectively, and the accumulated provision for 
depreciation and amortization was $63,635,000 and $61,650,000, 
respectively. Amounts at December 31, 1998 and 1997 included in 
electric plant in service for Coyote were $145,899,000 and 
$145,720,000, respectively, and the accumulated provision for 
depreciation and amortization was $63,463,000 and $61,820,000, 
respectively.  The Company's share of direct expenses of the jointly 
owned plants in service is included in the corresponding operating 
expenses in the statement of income.

Allowance for funds used during construction (AFC)--AFC, a noncash 
item, is included in construction work in progress. In 1998 and 1996 
AFC was based on a composite rate that assumes funds used for 
construction were provided by borrowed funds and equity funds. In 
1997 the average level of short-term borrowing exceeded the average 
level of construction work in progress; consequently, 1997 AFC was 
based entirely on the year's average short-term debt borrowing rate. 
The AFC included in construction work in progress will ultimately be 
included in the rate base used in establishing rates for utility 
services.  The rate for AFC was 10.25 percent for 1998, 5.67 percent 
for 1997, and 8.50 percent for 1996.

Recoverability of long-lived assets--The Company reviews its long-
lived assets whenever events or changes in circumstances indicate the 
carrying amount of the assets may not be recoverable.  The Company 
determines potential impairment by comparing the carrying value of 
the assets with net cash flows expected to be provided by operating 
activities of the business or related assets.  Should the sum of the 
expected future net cash flows be less than the carrying values, the 
Company would determine whether an impairment loss should be 
recognized.  An impairment loss would be quantified by comparing the 
amount by which the carrying value exceeds the fair value of the 
asset where fair value is based on the discounted cash flows expected 
to be generated by the asset.

Income taxes--Comprehensive interperiod income tax allocation is used 
for substantially all book and tax temporary differences.  Deferred 
income taxes arise for all temporary differences between the book and 
tax basis of assets and liabilities.  Deferred taxes are recorded 
using the tax rates scheduled by tax law to be in effect when the 
temporary differences reverse.  The Company amortizes the investment 
tax credit over the estimated lives of the related property.

Operating revenues--Electric customers' meters are read and bills are 
rendered on a cycle basis. In the first quarter of 1998, the Company 
changed its method of revenue recognition in the states of Minnesota 
and South Dakota from meter-reading dates to energy-delivery dates, resulting
in the accrual of estimated unbilled revenue from sales of electricity 
through the end of the accounting period.  This change is consistent 
with the way the Company has been recording electric revenue from its 
North Dakota customers since 1993 under an order from the North 
Dakota Public Service Commission. See note 2 for the cumulative 
effect of recording Minnesota and South Dakota unbilled revenue as of 
January 1, 1998.

The Company's rate schedules applicable to substantially all 
customers include a cost of energy adjustment clause under which the 
rates are adjusted to reflect changes in average cost of fuels and 
purchased power.  Since July 1, 1995, rate schedules applicable to 
Minnesota customers also include a surcharge for recovery of 
conservation-related expenses: 2.75 percent as of July 1, 1998, 1.75 
percent from July 1, 1997 through June 30, 1998, and 1.25 percent 
from July 1, 1996, through June 30, 1997, and .503 percent from July 1,
1995, through June 30, 1996. (See further discussion under note 5.)

Health services' operating revenues on major equipment and 
installation contracts are recorded using the percentage-of-
completion method. Amounts received in advance under customer service 
contracts are deferred and recognized on a straight-line basis over 
the contract period. 

Manufacturing operating revenues are recorded when products are 
shipped, when services are rendered, and on a percentage-of-
completion basis for large items that are assembled over several 
months.

Other business operations' operating revenues are recorded when 
services are rendered or products are shipped.  In the case of 
construction contracts, the percentage-of-completion method is used.

Storm damage provision--The Company is required under its Indenture 
of Mortgage to make annual provisions for storm damage of not less 
than 0.5 percent gross electric operating revenues.  Provisions for 
loss have been used in determining rates approved by the applicable 
regulatory commissions.  Provisions for 1998, 1997, and 1996 were 
$1,354,000, $1,423,000, and $1,247,000, respectively.

Employee incentive plan--The Company has incentive plans covering 
employees that are based upon certain performance measures.  Total 
amounts of accrued compensation for these incentive plans in 1998, 
1997, and 1996 were $3,083,000, $3,826,000, and $2,810,000, 
respectively. 

Use of estimates--In recording transactions and balances resulting 
from business operations, the Company uses estimates based on the 
best information available.  Estimates are used for such items as 
plant depreciable lives, tax provisions, uncollectible accounts, 
workers' compensation claims, injuries and damages reserve, unbilled 
revenues, service contract maintenance costs and actuarially 
determined benefit costs.  As better information becomes available 
(or actual amounts are determinable) the recorded estimates are 
revised.  Consequently, operating results can be affected by 
revisions to prior accounting estimates. 

Reclassifications--Certain prior year amounts have been reclassified 
to conform to 1998 presentation.  Such reclassification had no impact 
on net income and shareholders' equity.

Cash equivalents--The Company considers all highly liquid debt 
instruments purchased with a maturity of 90 days or less to be cash 
equivalents.

Debt reacquisition premiums--In accordance with regulatory treatment, 
the Company defers utility debt redemption premiums and amortizes 
such costs over the original life of the reacquired bonds. The 
unamortized balance was $2,490,000 on December 31, 1998. 

Investments--At December 31, 1998 and 1997, the Company had 
noncurrent investments of $7,540,000 and $6,761,000, respectively, in 
limited partnerships that invest in tax-credit qualifying affordable 
housing projects.  These investments, accounted for under the equity 
method, provided the Company with tax credits of $1,330,000 and 
$1,057,000, in 1998 and 1997, respectively.  At December 31, 1998 and 
1997, the Company had $590,000 and $703,000 respectively, invested in 
marketable equity securities classified as available-for-sale and 
recorded at market value. The balance of investments at December 31, 
1998 consists of $1,911,000 in additional investments accounted for 
under the equity method, and $10,571,000 in financial instruments, 
with $1,515,000 related to participation in economic development loan 
pools. The balance of investments at December 31, 1997 consists of 
$2,071,000 in additional investments accounted for under the equity 
method, and $10,513,000 in financial instruments, with $2,070,000 
related to participation in economic development loan pools. (See 
further discussion under note 12.)

Inventories--The electric operation inventories are reported at 
average cost.  The health service, manufacturing, and other business 
operation inventories are stated at the lower of cost (first-in, 
first-out) or market. 

Short-term debt--The composite interest rate on short-term debt 
outstanding as of December 31, 1998 and 1997, was 8.75 percent and 
6.15 percent, respectively.  The average interest rate paid on short-
term debt during 1998 and 1997 was 6.65 percent and 5.67 percent, 
respectively.

Intangible assets--The majority of the Company's intangible assets 
consist of goodwill associated with the acquisition of subsidiaries.  
Intangible assets are amortized on a straight-line basis over periods 
of 40 years for the telephone company and 15 years or less for all 
other intangibles.  The Company periodically evaluates the recovery 
of intangible assets based on an analysis of undiscounted future cash 
flows. Total intangibles as of December 31 are as follows:

                                   1998        1997
                                ---------    ---------
                                   (in thousands)    
Goodwill on telephone company    $ 7,749     $ 7,749 
Other intangible assets           21,808      20,594
                                ---------    ---------
Total                             29,557      28,343
Less accumulated amortization      8,381       7,432
                                ---------    ---------
Intangibles-net                  $21,176     $20,911 	

Adoption of new accounting pronouncements--In 1998 the Company adopted 
Statement of Financial Accounting Standards (SFAS) 131 - Disclosures 
about Segments of an Enterprise and Related Information.  SFAS 131 
supersedes SFAS 14, Financial Reporting for Segments of a Business 
Enterprise, replacing the "industry segment" approach with the 
"management" approach. The management approach designates the 
internal organization that is used by management for making operating 
decisions and assessing performance as the source of the Company's 
reportable segments.  SFAS 131 also requires disclosures about 
products and services, geographic areas, and major customers.  The 
adoption of SFAS 131 did not change the Company's reportable segments 
or affect results of operations or financial position.

In February 1998 the Financial Accounting Standards Board (FASB) 
issued SFAS 132 -- Employers' Disclosures about Pensions and Other 
Postretirement Benefits, which was effective for the Company on 
January 1, 1998.  SFAS 132 revises employers' disclosures about 
pension and other postretirement benefit plans. The adoption of SFAS 
132 did not affect the Company's 1998 results of operations or 
financial position. Note 10 reflects the adoption of SFAS 132.  

In 1997 the Company adopted SFAS 128 - Earnings Per Share.  SFAS 128 
requires certain public companies to present both basic and diluted 
earnings per share (EPS) on the face of their income statements.  
Diluted EPS reflects the dilution that could occur if securities or 
other contracts to issue common stock (options, warrants, convertible 
debt or preferred stock, contingent share arrangements, etc.) were 
exercised or converted into common stock or resulted in the issuance 
of common stock that then shared in the earnings of the entity.  
Other than the Company's outstanding $9.00 exchangeable cumulative 
preferred shares, which are not redeemable or exchangeable until 
after August 9, 1999, the Company has no financial instruments 
outstanding similar to those mentioned above. Additionally, if the 
outstanding $9.00 preferred shares were exchanged for shares of the 
Company's common stock, the effect on the Company's 1998 EPS would be 
antidilutive.  Therefore, the Company's basic and diluted EPS are the 
same and are effectively disclosed on the face of the Company's 1998, 
1997, and 1996 consolidated statements of income included in this 
report.

In June 1997 the FASB issued SFAS 130 - Reporting Comprehensive 
Income, which was adopted by the Company in 1997. SFAS 130 
establishes standards for reporting and display of comprehensive 
income and its components (revenues, expenses, gains, and losses) in 
a full set of general purpose financial statements and requires that 
all items required to be recognized under accounting standards as 
components of comprehensive income be reported in a financial 
statement that is displayed with the same prominence as other 
financial statements. The Consolidated Statements of Changes in 
Equity reflects the adoption of SFAS 130. 

New accounting pronouncement--In June 1998 the FASB issued Statement 
of Financial Accounting Standards (SFAS) 133 -- Accounting for 
Derivative Instruments and Hedging Activities, effective for 
financial statements issued for periods beginning after June 15, 
1999.  SFAS 133 establishes accounting and reporting standards for 
derivative instruments and for hedging activities.  It requires that 
all derivatives be recognized as either assets or liabilities and 
that those financial instruments be measured at fair value.  The 
accounting for changes in the fair value of a derivative depends on 
the intended use of the derivative. The adoption of this statement is 
not expected to have a material impact on the Company's financial 
position as presently reported.  

2. Change in accounting principle

Effective January 1, 1998 the Company changed its method of revenue 
recognition in the states of Minnesota and South Dakota from meter-
reading dates to energy-delivery dates, resulting in the accrual of
estimated unbilled revenue from sales of electricity through the end
of the accounting period.  This change is consistent with the way the
Company has been recording electric revenue from its North Dakota 
customers since 1993 under an order from the North Dakota Public Service
Commission. The cumulative effect of recording Minnesota and South Dakota
unbilled revenue as of January 1, 1998, increased 1998 net income by 
$3,819,000 (net of income taxes of $2,545,000) or $0.32 per share.  
The effect on 1998 income of this accounting change, not including 
the cumulative effect, was an increase in net income of approximately 
$193,000 or $0.02 per share.  

If the Company had been recording Minnesota and South Dakota unbilled 
revenue in previous accounting periods, its reported electric revenue 
for 1997 and 1996 would have been $203,778,000 and $200,640,000, 
respectively, and its reported net income would have been $31,540,000 
or $2.51 per share and $31,401,000 or $2.52 per share, for 1997 and 
1996, respectively. 

3. Special charges

In January 1998 the Company announced a voluntary early retirement 
program for all nonunion electric utility employees age 55 and over.  
The offer of early retirement was accepted by 55 of 67 eligible 
utility employees during the enrollment period that ended March 23, 
1998.  Most of the cash costs of the program will be funded through 
the Company's pension plan. The Company recorded a noncash charge to 
operating expenses of $6,305,000 ($3,783,000 net-of-tax or $0.32 per 
share) in 1998 for special termination benefits and the recognition 
of previously unrecognized prior service costs related to pension and 
postretirement benefits.  The electric utility will experience a 
reduction in payroll costs as a result of the voluntary early 
retirement program. 

In March 1998 the Company recorded a noncash accounting charge 
related to the impairment of its Quadrant Co. (Quadrant) waste 
incineration plant. Quadrant operates a municipal waste burning 
facility located in Perham, Minnesota.  The facility processed solid 
waste for three Minnesota counties. Quadrant is included in the other 
business operations segment. Due to developments which may have 
required additional capital investment in the plant to be in 
compliance with current air-pollution rules, reductions in waste 
flows and related revenue, and increased costs associated with 
repairs and maintenance due to the age of the facility, it was 
determined that future cash flows from this facility were less than 
the carrying value of the assets requiring the recognition of an 
impairment loss.  The impaired assets include buildings, machinery, 
and equipment used to burn waste.  The revised carrying value of this 
group of assets was determined to be zero, which was calculated on 
the basis of discounted estimated future cash flows. The pre-tax 
noncash charge of $2,500,000 ($1,500,000 net-of-tax or $0.13 per 
share) pertaining to the write down includes $248,000 for selling or 
disposal costs.

The recognition of this impairment is in accordance with the 
provisions of Statement of Financial Accounting Standards No. 121 -- 
Accounting for the Impairment of Long-Lived Assets and for Long-Lived 
Assets to Be Disposed Of.  The $2,500,000 impairment loss is included 
in operating expenses under the caption of special charges and in 
operating income from other business operations on the Company's 
Statement of Income for the year ended December 31, 1998.  In the 
fourth quarter of 1998 an additional provision of $250,000 was 
recorded under other nonelectric expenses for plant disposition 
costs. 

In the first quarter of 1998, as a result of an unfavorable court 
decision related to the construction of a rail spur intended to serve 
Big Stone Plant, the Company wrote off $717,000 ($430,000 net-of-tax 
or $0.04 per share) in capitalized project related costs.  

4. Business combinations and segment information

Effective November 1998 Mid-States Development, Inc., a subsidiary of 
the Company since 1989, changed its name to Varistar Corporation 
(Varistar).  On January 1, 1999 the Company's telecommunications 
subsidiary, North Central Utilities, Inc. (NCU) merged with Varistar.  
Subsidiaries previously owned by NCU became wholly owned subsidiaries 
of Varistar.

On May 1, 1998 the Company acquired PAM Natural Gas, Inc. (PAM) for 
approximately $1.8 million in stock purchased on the open market and 
an earn out amount to be paid over seven years contingent upon the 
achievement of certain financial results.  PAM is a Sioux Falls, 
South Dakota-based marketer of natural gas to commercial and 
institutional customers in Iowa, South Dakota, North Dakota and 
Minnesota. Upon acquisition PAM's name was changed to Otter Tail 
Energy Management, Inc. The PAM acquisition was accounted for as a 
purchase.  The pro forma effect of the PAM acquisition on 1998 and 
1997 revenue, net income, or earnings per share was not significant.  

On January 2, 1997, the Company acquired all of the outstanding 
common stock of The Peoples Telephone Co. of Bigfork (Peoples), a 
telephone company with 1,903 access lines serving five communities in 
Northern Minnesota, in exchange for 163,758 newly issued shares of 
the Company's common stock and $209,000 in cash.  On June 30, 1997, 
the Company's subsidiary, Varistar acquired all of the outstanding 
common stock of Chassis Liner Corporation (Chassis Liner), a 
manufacturer of auto and truck frame-straightening equipment with 
facilities in Alexandria and Lucan, Minnesota, in exchange for 
157,646 newly issued shares of the Company's common stock. These 
acquisitions have been accounted for under the pooling of interests 
method of accounting.  There were no transactions between the 
Company, Peoples, and Chassis Liner prior to the acquisitions.  Costs 
incurred to effect these mergers were not significant. The Company's 
1996 consolidated financial statements were restated to include both 
Peoples and Chassis Liner. 

In 1996 Varistar purchased a Montana-based supplier of X-ray supplies 
and accessories in February, a mobile medical diagnostic services 
company located in Minnesota in April, and four radio stations 
located in the Fargo, North Dakota/ Moorhead, Minnesota, market area: 
two in June, one in October, and one in December.  NCU acquired two 
small cable TV systems in 1996. 

In the 1996 acquisitions, the purchase method of accounting was used 
and the acquisitions would have had no significant pro forma effect 
on the Company's operating revenues, net income, or earnings per 
share for 1996.  The total price for the businesses acquired was 
$11,060,000 in 1996. 

Segment information--The accounting policies of the segments are the 
same as those described in the note 1 -- Summary of accounting 
policies.  The Company's business operations, which are based mainly 
in Minnesota, North Dakota, and South Dakota are broken down into 
four segments based upon products and services.  Electric operations 
includes the electric utility only.  Health services operations 
consists of businesses involved in the sale, service, rental, 
refurbishing and operations of medical imaging equipment and the sale 
of related supplies and accessories to various medical institutions 
located primarily in the Midwestern United States.  Manufacturing 
operations includes production of agricultural equipment, plastic 
pipe, automobile and truck frame-straightening equipment and 
accessories, and fabricated metal parts. Other business operations 
consists of businesses diversified in such areas as electrical and 
telephone construction contracting, entertainment, waste 
incinerating, and telecommunications.  The Company evaluates the 
performance of its business segments and allocates resources to them 
based on earnings contribution and return on investment. Information 
for the business segments for 1998, 1997 and 1996 is presented in the 
table below.

                                1998          1997          1996
                             --------      --------      --------
                                         (in thousands)
Operating revenue
  Electric                    $227,477      $205,121      $199,345
  Manufacturing                 86,030        81,543        64,568
  Health services               68,728        66,185        61,697
  Other business operations     48,843        41,430        45,323
                              --------      --------      --------
    Total                     $431,078      $394,279      $370,933

Operating income
  Electric                    $ 42,216      $ 44,966      $ 45,279
  Manufacturing                  8,661         7,945         6,504
  Health services                6,510         4,295         5,137
  Other business operations       (157)        1,827         2,452
                              --------      --------      --------
    Total                     $ 57,230      $ 59,033      $ 59,372

Depreciation and amortization
  Electric                    $ 22,128      $ 21,442      $ 19,880
  Manufacturing                    510           542           594
  Health services                  541           638           585
  Other business operations      2,634         2,914         2,328
                              --------      --------      --------
    Total                     $ 25,813      $ 25,536      $ 23,387

Capital expenditures
  Electric                    $ 17,939      $ 26,603      $ 38,224
  Manufacturing                  5,536         6,264         4,787
  Health services                3,101         3,800        16,230
  Other business operations      2,713         5,306         5,582
                              --------      --------      --------
    Total                     $ 29,289      $ 41,973      $ 64,823

Identifiable assets
  Electric                    $525,226      $526,679      $523,509
  Manufacturing                 41,579        40,814        34,354
  Health services               36,241        35,738        65,140
  Other business operations     52,566        52,210        46,701
                              --------      --------      --------
    Total                     $655,612      $655,441      $669,704

No single external customer accounts for 10 percent or more of the 
Company's revenues. Substantially all sales and long-lived assets of 
the Company are within the United States.


5. Rate matters

On July 1, 1995, the Company began charging all Minnesota customers a 
 .5030 percent surcharge on their electric service statements for 
recovery of conservation-related costs exceeding the amount already 
included in base rates.  On July 1, 1996, the rate was increased to 
1.25 percent, on July 1, 1997, the rate was increased to 1.75 percent 
and on July 1, 1998 the rate was increased to 2.75 percent.  The 
conservation-related costs being recovered through the surcharge and 
in base rates include Conservation Improvement Program (CIP) 
expenditures, carrying charges on costs incurred in excess of costs 
currently being recovered, lost margins on avoided kilowatt-hour 
sales, and bonus incentives related to energy savings.  The MPUC 
approved recovery of 1997, 1996, and 1995 lost margins and bonus 
incentives in 1998, 1997, and 1996, respectively. The Company 
recorded revenues related to 1998, 1997, and 1996 lost margins and 
bonus incentives of $1,750,000, $1,931,000, and $1,266,000, 
respectively. As these costs are recovered through the monthly 
billing process, the amounts billed are offset by the amortization of 
deferred CIP charges. 

During 1998 the Minnesota Department of Public Service (MDPS) 
recommended to the Minnesota Public Utilities Commission (MPUC) that 
demand-side management incentives for all Minnesota electric 
utilities be terminated as of January 1, 1998.  At a hearing held 
November 19, 1998, the MPUC did not accept the MDPS recommendation, 
however, the MPUC put electric and gas utilities on notice that the 
ability to earn demand-side management incentives could end as early 
as January 1, 1999.  A MPUC Chair's Round Table has been convened to 
examine demand-side management programs and related incentives.  A 
report from the Round Table is due to the MPUC by May 1, 1999.


6. Common shares

New issuances--On August 30, 1996, the Company filed a shelf 
registration statement with the Securities and Exchange Commission 
for the issuance of up to 1,000,000 common shares pursuant to the 
Company's Automatic Dividend Reinvestment and Share Purchase Plan 
(the Plan), which will permit shares purchased by shareholders, 
employees, or customers who participate in the Plan to be either new 
issue common shares or common shares purchased on the open market.  
In December 1996 the Company began issuing newly issued common shares 
under the Plan: 148,426 shares were issued in 1998, 161,831 shares 
were issued in 1997 and 34,516 shares were issued in 1996.  In 1999 
the Company plans to purchase shares on the open market for the Plan. 
Additional common stock issuances in 1997 included 321,404 
unregistered shares to effect the pooling acquisitions, 30,561 shares 
to the Company's leveraged employee stock ownership plan and 2,630 
shares issued as a bonus to a consultant. 

Shareholder rights plan--On January 27, 1997, the Company's Board of 
Directors declared a dividend of one preferred share purchase right 
(Right) for each outstanding common share held of record as of 
February 10, 1997.  One Right was also issued with respect to each 
common share issued after February 10, 1997.  Each Right entitles the 
holder to purchase from the Company one one-hundredth of a share of 
newly created Series A Junior Participating Preferred Stock at a 
price of $70, subject to certain adjustment.  The Rights are 
exercisable when, and are not transferable apart from the Company's 
common shares until, a person or group has acquired 15 percent or 
more, or commenced a tender or exchange offer for 15 percent or more, 
of the Company's common shares.  If the specified percentage of the 
Company's common shares is acquired, each Right will entitle the 
holder (other than the acquiring person or group) to receive, upon 
exercise, common shares of either the Company or the acquiring 
company having value equal to two times the exercise price of the 
Right.  The Rights are redeemable by the Company's Board of Directors 
in certain circumstances and expire on January 27, 2007. 


7. Retained earnings restriction

The Company's Indenture of Mortgage and Articles of Incorporation, as 
amended, contain provisions that limit the amount of dividends that 
may be paid to common shareholders.  Under the most restrictive of 
these provisions, retained earnings at December 31, 1998, were 
restricted by $10,008,000.


8. Commitments

At December 31, 1998, the Company had commitments under contracts in 
connection with construction programs aggregating approximately 
$2,973,000. For capacity requirements the Company has agreements 
extending through April 2005, at annual costs of approximately 
$5,340,000 in 1999, $2,300,000 in each year of 2000 through 2004, and 
$760,000 in 2005.

The Company also has several long-term coal contracts in which it is 
responsible for making payment only upon the delivery of the coal.  
The risk of loss from nonperformance of the contracts is considered 
nominal because of the availability of other suppliers and the 
expected continued reliability of the current fuel suppliers.  
Furthermore, the cost of energy adjustment provision in the rate-
making process lessens the risk of loss (in the form of increased 
costs) from market price changes because it assures recovery of 
almost all fuel costs.

In 1996 the Big Stone Plant joint owners entered into operating 
leases for 250 new aluminum coal cars for transporting coal to Big 
Stone Plant.  The terms of the leases are 15 years.  The new cars 
began transporting coal in October 1996.  In November 1997 Varistar's 
medical imaging services subsidiary entered into a sale/leaseback 
transaction whereby $16,000,000 of diagnostic medical equipment was 
sold and leased back under two operating leases with terms of three 
and four years.  The amounts of future operating lease payments are 
as follows:

                               Electric      Subsidiary
                                utility       companies     Total
                               --------      ----------   --------
                                           (in thousands)
                  1999            $939         $10,315    $11,254
                  2000             939           9,771     10,710
                  2001             939           8,008      8,947
                  2002             939           4,079      5,018
                  2003             939             919      1,858
                  Later years    3,912             557      4,469

Rent expense was $13,016,000, $6,714,000, and $6,288,000 for 1998, 
1997, and 1996, respectively. 


9. Long-term obligations

Preferred shares--The $6.35 cumulative preferred shares are 
redeemable in whole or in part at the option of the Company after 
December 1, 1998, at $102.540, declining linearly to $100.00 at 
December 31, 2002. 

The $9.00 exchangeable cumulative preferred shares are redeemable in 
whole or in part at the option of the Company after August 9, 1999, 
for $100.00 per share payable in cash or, at the holder's election, 
common shares.  Subject to certain conditions, such shares are 
exchangeable at the option of the holder after August 9, 1999, for 
$100.00 per share in cash or common shares.

Long-term debt--All utility property, with certain minor exceptions, 
is subject to the lien of the Indenture of Mortgage of the Company 
securing its First Mortgage Bonds.  The Company is required by the 
Indenture to make annual payments (exclusive of redemption premiums) 
for sinking fund purposes, except that the requirement with respect 
to certain series may be satisfied by the delivery of bonds of such 
series of equal principal amount.  The Company issued First Mortgage 
Bonds of its pollution control series to secure payment of a like 
principal amount of revenue bonds that were issued by local 
governmental units to finance facilities leased or purchased and that 
the Company has capitalized. Varistar's ten-year term note and credit 
line borrowings are secured by a pledge of all of the common stock of 
the companies owned by Varistar.  The aggregate amounts of maturities 
and sinking fund requirements on bonds outstanding and other long-
term obligations at December 31, 1998, for each of the next five 
years are $5,794,000 for 1999, $5,618,000 for 2000, $5,189,000 for 
2001, $26,026,000 for 2002, and $4,304,000 for 2003. 


10. Pension plan and other postretirement benefits  

The utility company's noncontributory funded pension plan covers 
substantially all electric utility employees.  The plan provides 100 
percent vesting after 5 vesting years of service and for retirement 
compensation at age 65, with reduced compensation in cases of 
retirement prior to age 62.  The utility company reserves the right 
to discontinue the plan, but no change or discontinuance may affect 
the pensions theretofore vested.  The utility company's policy is to 
fund pension costs accrued. All past service costs have been provided 
for.  The total pension cost was $3,670,000 for 1998, $1,104,000 for 
1997, and $1,292,000 for 1996.

The pension plan has a trustee who is responsible for pension 
payments to retirees.  Five investment managers are responsible for 
managing the plan's assets.  In addition, an independent actuary 
performs the necessary actuarial valuations for the plan.

Net periodic pension cost for 1998, 1997, and 1996 includes the 
following components:
                                                  1998      1997      1996
                                                -------   -------   -------
                                                     (in thousands)
Service cost--benefit earned during the period  $ 2,319   $ 2,385   $ 2,273
Interest cost on projected benefit obligation     7,823     7,131     6,754
Expected return on assets                       (10,988)   (9,036)   (8,443)
Amortization of transition asset                   (235)     (235)     (235)
Amortization of prior-service cost                1,069       980       943
Amortization of net gain                           (344)     (121)       --
                                                -------   -------   -------
Net periodic pension cost                       $  (356)  $ 1,104   $ 1,292
1998 early retirement and curtailment             4,026        --        --
                                                -------   -------   -------
Total expense                                   $ 3,670   $ 1,104   $ 1,292
                                                =======   =======   =======

The plan assets consist of common stock and bonds of public 
companies, U.S. Government Securities, cash, and cash equivalents.

The following tables provide a reconciliation of the changes in the 
plan's benefit obligations and fair value of assets over the two-year 
period ending December 31, 1998 and a statement of the funded status 
as of December 31 of both years:
                                                  1998        1997
                                               --------    --------
                                                  (in thousands)
Reconciliation of benefit obligation:
  Obligation at January 1                      $107,357    $100,664
  Service cost                                    2,319       2,385
  Interest cost                                   7,823       7,131
  Plan amendments                                   --        1,658
  Actuarial loss                                 13,924         807
  Benefit payments                               (6,813)     (5,288) 
  1998 early retirement and curtailment           3,895         --
                                               --------    --------
  Obligation at December 31                    $128,505    $107,357
                                               ========    ========

Reconciliation of fair value of plan assets:
  Fair value of plan assets at January 1       $137,560    $121,506
  Actual return on plan assets                   19,054      21,119
  Pension purchase options rollovers                225         223
  Benefit payments                               (6,813)     (5,288)
                                               --------    --------
  Fair value of plan assets at December 31     $150,026    $137,560
                                               ========    ========

Funded status:
  Funded status at December 31                 $ 21,521    $ 30,203
  Unrecognized transition asset                    (780)     (1,015)
  Unrecognized prior-service cost                 9,393      10,594
  Unrecognized net actuarial gain               (31,174)    (37,152)
                                               --------    --------
  Net amount recognized                        $ (1,040)   $  2,630
                                               ========    ========

The following table provides the amounts recognized in the statement 
of financial position as of December 31 of both years:

                                                 1998        1997
                                               --------    --------
                                                  (in thousands)
Prepaid benefit cost                         $     --      $  2,630
Accrued benefit liability                        1,040          --
                                               --------    -------- 
Net amount recognized                        $  (1,040)    $  2,630
                                               ========    ========
The assumptions used for actuarial valuations were:
                                                  1998       1997
                                                --------   --------
Discount rate                                     6.50%      7.25%  
Rate of increase in future compensation level     4.25%      4.25%  
Long-term rate of return on assets                9.50%      8.50%  

In addition to providing pension benefits to all electric utility 
employees, the Company has an unfunded, nonqualified benefit plan for 
executive officers and certain key management employees. This plan 
provides defined benefit payments to these employees upon their 
retirements or to their beneficiaries upon their deaths for a 15-year 
period.  Life insurance carried on the plan participants is payable 
to the Company upon the employee's death. There are no plan assets in 
this nonqualified benefit plan due to the nature of the plan. The net 
periodic pension cost of this program in 1998, 1997, and 1996 was 
$562,000, $482,000, and $485,000, respectively.  

Net periodic pension cost for 1998, 1997, and 1996 includes the 
following components:
                                                   1998     1997     1996
                                                --------  -------  -------
                                                         (in thousands)
Service cost--benefit earned during the period  $   (88)  $ (140)  $ (132)
Interest cost on projected benefit obligation       521      475      467
Amortization of transition obligation                18       20       20
Amortization of prior service cost                  111      127      130
                                                -------   ------    -----
Net periodic pension cost                       $   562   $  482    $ 485
1998 early retirement and curtailment             1,413       --       --
                                                -------   ------    -----
Total expense                                   $ 1,975   $  482    $ 485
                                                =======   ======    =====

The following tables provide a reconciliation of the changes in the 
plan's benefit obligations over the two-year period ending December 
31, 1998 and a statement of the funded status as of December 31 of 
both years:

                                                  1998       1997
                                               --------   --------
                                                  (in thousands)
Reconciliation of benefit obligation:
  Obligation at January 1                       $ 6,964    $ 6,636
  Service cost                                      (88)      (140)
  Interest cost                                     521        475
  Actuarial loss                                    807        128
  Benefit payments                                 (273)      (135)
  1998 early retirement and curtailment           1,140         --
                                                -------    -------
  Obligation at December 31                     $ 9,071    $ 6,964
                                                =======    =======

Funded status:
  Funded status at December 31                 $ (9,071)  $ (6,964)
  Unrecognized transition obligation                 34         62
  Unrecognized prior-service cost                 1,273      1,647
  Unrecognized net actuarial loss                 1,422        615
                                                -------    -------
  Net amount recognized                        $ (6,342)  $ (4,640)
                                               =========  =========

The following table provides the amounts recognized in the statement 
of financial position as of December 31 of both years:

                                                 1998       1997
                                              --------   --------
                                                 (in thousands)
Accrued benefit liability                    $  (7,649)  $ (5,355)
Intangible asset                                 1,307        715
                                               -------    -------
Net amount recognized                        $  (6,342)  $ (4,640)
                                              =========  =========


The assumptions used for actuarial valuations were:
                                                 1998       1997
                                                ------     ------
Discount rate                                    6.50%      7.25%
Rate of increase in future compensation level    5.00%      5.00%

In addition to providing pension benefits, the electric utility 
provides a portion of health insurance benefits for retired electric 
utility employees.  Substantially all of the Company's electric 
utility employees may become eligible for health insurance benefits 
if they reach age 55 and have 10 years of service. Upon adoption of 
SFAS 106 - Employers' Accounting for Postretirement Benefits Other 
Than Pensions - in January 1993, the Company elected to recognize its 
transition obligation related to postretirement benefits earned of 
approximately $14,964,000 over a period of 20 years.  There are no 
plan assets.

The net postretirement benefit cost for 1998, 1997, and 1996 includes 
the following components:
                                                  1998      1997      1996
                                               --------  --------  --------
                                                        (in thousands)
Service cost - benefit earned during the period $  563    $  578    $  484
Interest cost on accumulated postretirement
    benefit obligation                           1,281     1,159     1,132
Amortization of transition obligation              748       748       748
Amortization of net gain                          (209)     (251)     (210)
Life insurance curtailment gain                     --        --      (749)
                                                ------    ------    ------
Net periodic postretirement benefit cost        $2,383    $2,234    $1,405
1998 early retirement and curtailment              954        --        --
                                                ------    ------    ------
Total expense                                   $3,337    $2,234    $1,405
                                                ======    ======    ======

The following tables provide a reconciliation of the changes in the 
plan's benefit obligations over the two-year period ending December 
31, 1998 and a statement of the funded status as of December 31 of 
both years:
                                                 1998       1997
                                               --------   --------
                                                  (in thousands)
Reconciliation of benefit obligation:
  Obligation at January 1                      $ 17,707   $ 16,323
  Service cost                                      563        578
  Interest cost                                   1,281      1,159
  Actuarial loss                                  4,726        337
  Benefit payments                               (1,412)    (1,057)
  Participant premium payments                      492        367
  1998 early retirement and curtailment             271         --
                                               --------   --------
  Obligation at December 31                    $ 23,628   $ 17,707
                                               ========   ========

Funded status:
  Funded status at December 31                $ (23,628) $ (17,707)
  Unrecognized transition obligation             10,474     11,223
  Unrecognized loss (gain)                          802     (3,449)
                                              ---------  ---------
  Net amount recognized                       $ (12,352) $  (9,933)
                                              =========  =========

The following table provides the amounts recognized in the 
statement of financial position as of December 31 of both
years:

                                                  1998       1997
                                               --------   --------
                                                  (in thousands)
Accrued benefit liability                      $(12,352)  $ (9,933)

The assumed health-care cost-trend rate used in measuring the 
accumulated postretirement benefit obligation as of December 31, 
1998, was 7.5 percent for 1999, decreasing linearly each successive 
year until it reaches 5.0 percent in 2003, after which it remains 
constant.  The assumed health care cost trend rate used in measuring 
the accumulated postretirement benefit obligation as of December 31, 
1997, was 8.0 percent for 1998, decreasing linearly each successive 
year until it reaches 5.0 percent in 2003, after which it remains 
constant.  The assumed discount rate used in determining the 
accumulated postretirement benefit obligation as of December 31, 1998 
and 1997, was 6.50 percent and 7.25 percent, respectively.

Assumed health-care cost-trend rates have a significant effect on the 
amounts reported for health care plans.  A one-percentage-point 
change in assumed health-care cost-trend rates for 1998 would have 
the following effects:

                                                1 percent    1 percent
                                                 increase     decrease
                                                ---------    ---------
Effect on total of service and interest             (in thousands)
  cost components                                $   304     $   (261)
Effect on the postretirement benefit obligation  $ 2,525     $ (2,281)

The Company has a leveraged employee stock ownership plan (ESOP) for 
the benefit of all its electric utility employees.  Contributions 
made by the Company were $1,078,000 for 1998, $1,055,000 for 1997, 
and $1,010,000 for 1996. 


11. Compensating balances and short-term borrowings

The Company maintains formal bank lines of credit for its electric 
utility operations separate from lines and letters of credit 
maintained by the subsidiary companies.  They make available to the 
Company bank loans for short-term financing and provide backup 
financing for commercial paper notes.  At December 31, 1998, the 
Company maintained no compensating balances to support formal bank 
lines of credit.  The Company's bank lines of credit for electric 
utility operations totaled $18,000,000, none of which was used at 
December 31, 1998. The subsidiary companies' bank lines and letters 
of credit, which require no compensating balances, totaled 
$18,263,000 of which $824,000 was used at December 31, 1998. 


12. Fair value of financial instruments

The following methods and assumptions were used to estimate the fair 
value of each class of financial instruments for which it is 
practicable to estimate that value:

Cash and short-term investments--The carrying amount approximates 
fair value because of the short-term maturity of those instruments.

Other investments--The carrying amount approximates fair value.  A 
portion of other investments is in financial instruments that have 
variable interest rates that reflect fair value.  The remainder of 
other investments is accounted for by the equity method which, in the 
case of operating losses, results in a reduction of the carrying 
amount.

Redeemable preferred stock--The fair value is estimated based on the 
current rates available to the Company for the issuance of redeemable 
preferred stock.

Long-term debt--The fair value of the Company's long-term debt is 
estimated based on the current rates available to the Company for the 
issuance of debt.  About $20 million of the Company's long-term debt, 
which is subject to variable interest rates, approximates fair value.

                                          1998                   1997
                                ---------------------   ---------------------
                                                 (in thousands)
                                 Carrying     Fair      Carrying     Fair
                                  amount      value      amount      value
                                ---------  ---------   ---------  ---------
Cash and short-term investments $   3,919  $   3,919   $   5,301  $   5,301
Other investments                  20,612     20,612      20,048     20,048
Redeemable preferred stock        (18,000)   (19,252)    (18,000)   (19,619)
Long-term debt                   (181,046)  (203,789)   (189,973)  (207,063)

The Company's marketable securities are included in investments on 
the balance sheet and are classified as available for sale.  These 
securities are recorded at fair value with any unrealized gain or 
loss included in accumulated other comprehensive income in the equity 
section of the balance sheet net of deferred income taxes of $210,000 
at year-end 1998 and $257,000 at year-end 1997.  Realized gains and 
losses are computed on each specific investment sold.  The amounts 
recognized on the balance sheet as of December 31, 1998 and 1997, and 
amounts sold for each year are as follows:

                                              1998           1997
                                           --------       --------
Available for sale - securities                 (in thousands)
Cost                                       $    83        $    83
Gross unrealized gain                          507            620
                                           -------        -------
     Fair value                            $   590        $   703
                                           =======        =======
Proceeds from sale                         $    --        $   785
Gross realized gains                            --            707


13.  Property, plant, and equipment

                                                       1998          1997
                                                     --------      --------
                                                   (December 31, in thousands)
Electric plant:
  Production                                          309,109      $305,147
  Transmission                                        143,822       141,956
  Distribution                                        234,671       227,463
  General                                              83,285        83,985
                                                     --------      --------
      Electric plant                                  770,887       758,551
Less accumulated depreciation and amortization        332,315       315,011
                                                      -------      --------
      Electric plant net of accumulated depreciation  438,572       443,540
Construction work in progress                          10,495        12,146
                                                     --------      --------
      Net electric plant                             $449,067      $455,686
                                                     --------      --------

Diversified operations plant                         $ 89,094      $ 89,716
Less accumulated depreciation and amortization         37,975        35,636
                                                     --------      --------
      Net diversified operations plant               $ 51,119      $ 54,080
                                                     --------      --------
       Net plant                                     $500,186      $509,766
                                                     ========      ========


14. Income taxes

The total income tax expense differs from the amount computed by 
applying the federal income tax rate (35 percent in 1998, 1997 and 
1996) to net income before total income tax expense for the following 
reasons: 

                                                     1998      1997     1996
                                                   -------- -------- --------
                                                           (in thousands)
Tax computed at federal statutory rate              $18,272  $16,329  $15,378
Increases (decreases) in tax from:
  State income taxes net of federal income tax
    benefit                                           2,665    2,224    1,835
  Investment tax credit amortization                 (1,186)  (1,186)  (1,186)
  Depreciation differences--flow-through
    method reversal                                   1,133      408     (138)
  Differences reversing in excess of federal rates   (1,639)    (994)  (1,030)
  Dividend received/paid deduction                     (643)    (620)    (604)
  Affordable housing tax credits                     (1,330)  (1,057)    (593)
  Permanent and other differences                       413     (796)     348
                                                    -------  -------  -------
    Total income tax expense                        $17,685  $14,308  $14,010
                                                    =======  =======  =======

Overall effective federal and state income tax rate   33.9%    30.7%    31.4%

Income tax expense includes the following:
  Charges (credits) related to operations:
    Current federal income taxes                    $20,198  $17,123  $18,014
    Current state income taxes                        4,182    3,300    3,608
    Deferred federal income taxes                    (4,085)  (3,410)  (4,657)
    Deferred state income taxes                        (206)    (205)    (480)
    Investment tax credit amortization               (1,186)  (1,186)  (1,186)
                                                    -------  -------  -------
        Total                                       $18,903  $15,622  $15,299
                                                    -------  -------  -------

 Charges (credits) related to other income
    and deductions:
    Current federal income taxes                       (280)    (645)    (430)
    Affordable housing tax credits                   (1,330)  (1,057)    (593)
    Current state income taxes                           (9)      19     (103)
    Deferred federal and state income taxes             401      369     (163)
                                                    -------  -------  -------
      Total income tax expense                      $17,685  $14,308  $14,010
                                                    =======  =======  =======

The Company's deferred tax assets and liabilities were composed of 
the following on December 31, 1998 and 1997:
                                                         1998        1997
                                                       -------     -------
                                                           (in thousands)
Deferred tax assets
    Amortization of tax credits                      $  11,497   $  12,258
    Vacation accrual                                     1,202       1,121
    Unearned revenue                                     1,844       4,105
    Operating reserves                                  10,026       7,890
    Differences related to property                      2,209         936
    Transfer to regulatory asset                           124         (61)
    Other                                                  991         811
                                                     ---------   ---------
      Total deferred tax assets                      $  27,893   $  27,060
Deferred tax liabilities		
    Differences related to property                   (108,968)   (111,300)
    Excess tax over book - pensions                        --       (1,043)
    Transfer to regulatory asset                        (3,744)     (4,999)
    Transfer to regulatory liability                       --         (188)
    Other                                               (3,415)     (2,375)
                                                     ---------   ---------
      Total deferred tax liabilities                 $(116,127)  $(119,905)
                                                     ---------   ---------
        Deferred income taxes                        $ (88,234)  $ (92,845)
                                                     =========   =========


15. Quarterly information (unaudited)

The quarterly data shown below reflects seasonal and timing 
variations that are common in the utility industry.
<TABLE>
                                                               Three Months Ended
                                         March 31        June 30         September 30       December 31
                                      --------------  ---------------   ---------------   ---------------
                                       1998    1997    1998     1997     1998     1997     1998     1997
                                      ------  ------  ------   ------   ------   ------   ------   ------
                                                        (in thousands except per share data)
<S>                                  <C>     <C>     <C>      <C>     <C>      <C>      <C>      <C>
Operating revenues                   $96,909 $94,289 $106,946 $91,096 $112,171 $101,858 $115,052 $107,036
Operating income                     $ 5,558 $19,741 $ 14,685 $ 9,798 $ 17,856 $ 13,753 $ 19,131 $ 15,742
Income before cumulative effect
 of change in accounting principle   $ 1,939     --       --      --       --       --       --       --
Cumulative effect of change in
 accounting principle -- net-of-tax  $ 3,819     --       --      --       --       --       --       --
                                     ------- 
Net income                           $ 5,758 $10,690 $  8,015 $ 5,393 $  9,877 $  7,785 $  10,870 $  8,478
Earnings available for common shares $ 5,168 $10,101 $  7,426 $ 4,803 $  9,287 $  7,195 $  10,281 $  7,889

Basic and diluted earnings per share
 Before cumulative effect of change
  in accounting principle            $  .12      --       --      --       --       --        --       --
 Cumulative effect of change in
  accounting principle               $  .32      --       --      --       --       --        --       -- 
                                     ------  
Basic and diluted earnings per share $  .44  $  .87  $   .63  $  .41  $   .79  $   .62  $   .87   $   .67 
Dividends paid per common share      $  .48  $  .465 $   .48  $  .465 $   .48  $   .465 $   .48   $   .465

Price range:
  High                               $38 3/4 $34 3/4 $37 3/4  $34 1/4 $40 3/4  $34 1/2  $42 3/4   $38 3/8
  Low                                $36     $31 1/2 $30 1/8  $30     $35      $31 1/2  $37       $32 1/8

Average number of common shares
  outstanding                         11,740  11,569  11,777   11,621  11,818   11,661   11,855    11,704

</TABLE>
In the first quarter of 1998 the Company changed its method of 
electric revenue recognition in the states of Minnesota
and South Dakota from meter-reading dates to energy-delivery dates 
resulting in the recognition of $6,364,000 ($3,819,000 net-of-tax) in 
unbilled revenue. The first quarter of 1998 also reflects the recording of 
special charges related to the voluntary early retirement program, Quadrant 
Co. asset impairment and the write-off of the Big Stone plant rail spur 
project. 

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


Stock listing
-------------

Otter Tail common stock is traded on The Nasdaq Stock Market.
(Nasdaq: National Association of Securities Dealers Automated 
Quotation.)