**UNITED        STATES**

**SECURITIES        AND EXCHANGE COMMISSION**

**WASHINGTON,        DC 20549**

**FORM        10-Q**

| T | Quarterly                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange                  Act of                  1934 |
|---|--------------------------------------------------------------------------------------------------------------------------------------------|

**SEPTEMBER 30, 2007**

| £ | Transition                  Report Pursuant to Section 13 or 15(d) of the Securities Exchange                  Act of                  1934 |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

**1-3548**

**ALLETE,        Inc.**

| **Minnesota**                                                                   |   | **41-0418150**                                     |
|---------------------------------------------------------------------------------|--------|----------------------------------------------------|
| (State                  or other jurisdiction of incorporation or organization) |   | (IRS                  Employer Identification No.) |

**30        West Superior Street**

**Duluth,        Minnesota 55802-2093**

**(218)        279-5000**

| Large                  Accelerated Filer T | Accelerated                  Filer £ | Non-Accelerated                  Filer £ |
|--------------------------------------------|-------------------------------------------|-----------------------------------------------|

----

**INDEX**

|                                                                                                                        |                                                        |                                                                                                                          | Page   |
|-----------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
| Definitions                                                                                                                 |                                                        |                                                                                                                          | 3      |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
| Safe                  Harbor Statement** **Under the Private Securities                  Litigation Reform Act of 1995 | 4                                                           |                                                                                                                          |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
| Part                  I.                                                                                                    | Financial                  Information                      |                                                                                                                          |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  1.                                    | Financial                  Statements                                                                                         |   |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Consolidated                  Balance Sheet -               |                                                                                                                          |   |
|                                                                                                                        |                                                        | September                  30, 2007 and December 31, 2006                                                                     | 5      |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Consolidated                  Statement of Income -         |                                                                                                                          |   |
|                                                                                                                        |                                                        | Quarter                  and Nine Months Ended September 30, 2007 and 2006                                                    | 6      |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Consolidated                  Statement of Cash Flows -     |                                                                                                                          |   |
|                                                                                                                        |                                                        | Nine                  Months Ended September 30, 2007 and 2006                                                                | 7      |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Notes                  to Consolidated Financial Statements | 8                                                                                                                             |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  2.                                    | Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations | 19     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  3.                                    | Quantitative                  and Qualitative Disclosures about Market Risk                                                   | 31     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  4.                                    | Controls                  and Procedures                                                                                      | 32     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
| Part                  II.                                                                                                   | Other                  Information                          |                                                                                                                          |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  1.                                    | Legal                  Proceedings                                                                                            | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  1A.                                   | Risk                  Factors                                                                                                 | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  2.                                    | Unregistered                  Sales of Equity Securities and Use of Proceeds                                                  | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  3.                                    | Defaults                  Upon Senior Securities                                                                              | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  4.                                    | Submission                  of Matters to a Vote of Security Holders                                                          | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  5.                                    | Other                  Information                                                                                            | 33     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
|                                                                                                                        | Item                  6.                                    | Exhibits                                                                                                                      | 34     |   |
|                                                                                                                        |                                                        |                                                                                                                          |   |   |
| Signatures                                                                                                                  |                                                        |                                                                                                                          | 35     |   |

----

**DEFINITIONS**

| **Abbreviation                  or Acronym** | **Term**                                                                                                                                                                      |
|----------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2006                  Form 10-K              | ALLETE’s                  Annual Report on Form 10-K for the Year Ended December 31,                  2006                                                              |
| AFUDC                                        | Allowance                  for Funds Used During Construction                                                                                                                 |
| ALLETE                                       | ALLETE,                  Inc.                                                                                                                                                 |
| ALLETE                  Properties           | ALLETE                  Properties, LLC                                                                                                                                       |
| AREA                                         | Arrowhead                  Regional Emission Abatement Plan                                                                                                                   |
| ATC                                          | American                  Transmission Company LLC                                                                                                                            |
| BNI                  Coal                    | BNI                  Coal, Ltd.                                                                                                                                               |
| Boswell                                      | Boswell                  Energy Center                                                                                                                                        |
| Company                                      | ALLETE,                  Inc. and its subsidiaries                                                                                                                            |
| DOC                                          | Minnesota                  Department of Commerce                                                                                                                             |
| EITF                                         | Emerging                  Issues Task Force Issue No.                                                                                                                         |
| EPA                                          | Environmental                  Protection Agency                                                                                                                              |
| ESOP                                         | Employee                  Stock Ownership Plan                                                                                                                                |
| FASB                                         | Financial                  Accounting Standards Board                                                                                                                         |
| FERC                                         | Federal                  Energy Regulatory Commission                                                                                                                         |
| FIN                                          | FASB                  Interpretations                                                                                                                                         |
| GAAP                                         | Accounting                  Principles Generally Accepted in the United States of                  America                                                                    |
| Heating                  Degree Days         | Measure                  of the extent to which the average daily temperature is below 65                  degrees                  Fahrenheit, increasing demand for heating |
| Laskin                                       | Laskin                  Energy Center                                                                                                                                         |
| Minnesota                  Power             | An                  operating division of ALLETE, Inc.                                                                                                                        |
| Minnkota                  Power              | Minnkota                  Power Cooperative, Inc.                                                                                                                             |
| MISO                                         | Midwest                  Independent Transmission System Operator, Inc.                                                                                                       |
| Moody’s                                | Moody’s                  Investors Service, Inc.                                                                                                                        |
| MPCA                                         | Minnesota                  Pollution Control Agency                                                                                                                           |
| MPUC                                         | Minnesota                  Public Utilities Commission                                                                                                                        |
| MW                                           | Megawatt(s)                                                                                                                                                                   |
| Note                  ___                    | Note                  ___ to the consolidated financial statements in this Form                  10-Q                                                                         |
| NOX                                          | Nitrogen                  Oxide                                                                                                                                               |
| Palm                  Coast Park             | Palm                  Coast Park development project in northeast Florida                                                                                                     |
| Palm                  Coast Park District    | Palm                  Coast Park Community Development District                                                                                                               |
| PSCW                                         | Public                  Service Commission of Wisconsin                                                                                                                       |
| Resource                  Plan               | Integrated                  Resource Plan                                                                                                                                     |
| SEC                                          | Securities                  and Exchange Commission                                                                                                                           |
| SFAS                                         | Statement                  of Financial Accounting Standards No.                                                                                                              |
| SO2                                          | Sulfur                  Dioxide                                                                                                                                               |
| Square                  Butte                | Square                  Butte Electric Cooperative                                                                                                                            |
| Standard                  & Poor’s | Standard                  & Poor’s Ratings Group, a division of McGraw-Hill                  Companies                                                              |
| SWL&P                                    | Superior                  Water, Light and Power Company                                                                                                                      |
| Taconite                  Harbor             | Taconite                  Harbor Energy Center                                                                                                                                |
| Town                  Center                 | Town                  Center at Palm Coast development project in northeast                  Florida                                                                          |
| Town                  Center District        | Town                  Center at Palm Coast Community Development District                                                                                                     |
| WDNR                                         | Wisconsin                  Department of Natural Resources                                                                                                                    |

----

**Safe        Harbor Statement**

**Under        the Private Securities Litigation Reform Act of 1995**

| · | our                  ability to successfully implement our strategic                  objectives;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | our                  ability to manage expansion and integrate acquisitions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| · | prevailing                  governmental policies, regulatory actions, and legislation including                  those                  of the United States Congress, state legislatures, the FERC, the                  MPUC, the                  PSCW, and various local and county regulators, and city administrators,                  about allowed rates of return, financings, industry and rate structure,                  acquisition and disposal of assets and facilities, real estate                  development, operation and construction of plant facilities, recovery                  of                  purchased power and capital investments, present or prospective                  wholesale                  and retail competition (including but not limited to transmission                  costs),                  zoning and permitting of land held for resale and environmental                  regulation; |
| · | effects                  of restructuring initiatives in the electric industry;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| · | economic                  and geographic factors, including political and economic                  risks;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | changes                  in and compliance with laws and policies;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | weather                  conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| · | natural                  disasters and pandemic diseases;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | war                  and acts of terrorism;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | wholesale                  power market conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | population                  growth rates and demographic patterns;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| · | effects                  of competition, including competition for retail and wholesale                  customers;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | changes                  in the real estate market;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| · | pricing                  and transportation of commodities;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | changes                  in tax rates or policies or in rates of inflation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · | unanticipated                  project delays or changes in project costs;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | availability                  of construction materials and skilled construction labor for capital                  projects;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · | unanticipated                  changes in operating expenses and capital expenditures;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| · | global                  and domestic economic conditions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | our                  ability to access capital markets and bank financing;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| · | changes                  in interest rates and the performance of the financial                  markets;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | our                  ability to replace a mature workforce and retain qualified, skilled                  and                  experienced personnel; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | the                  outcome of legal and administrative proceedings (whether civil                  or                  criminal) and settlements that affect the business and profitability                  of                  ALLETE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

----

| **PART                  I.** | **FINANCIAL                  INFORMATION** |
|------------------------------|--------------------------------------------|

| **ITEM                  1.** | **FINANCIAL                  STATEMENTS** |
|------------------------------|-------------------------------------------|

**ALLETE**

**CONSOLIDATED        BALANCE SHEET**

**Millions        – Unaudited**

|                                                                                                    |                                                                               |                                            | ** September                  30,** | ** December                  31,** |
|---------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|-------------------------------------------------|------------------------------------------|-----------------------------------------|
|                                                                                                    |                                                                               |                                            | **2007**                                 | **2006**                                |
|                                                                                                    |                                                                               |                                            |                                     |                                    |   |   |   |
| **Assets**                                                                                              |                                                                               |                                            |                                     |                                    |   |   |
| Current                  Assets                                                                         |                                                                               |                                            |                                     |                                    |   |
|                                                                                                    | Cash                  and Cash Equivalents                                         | $                                               | 61.4                                     | $                                       | 44.8 |   |
|                                                                                                    | Short-Term                  Investments                                            |                                            | 70.4                                     |                                    | 104.5 |   |
|                                                                                                    | Accounts                  Receivable (Less Allowance of $1.0 at September 30, 2007 |                                            |                                     |                                    |   |   |
|                                                                                                    |                                                                               | and                  $1.1 at December 31, 2006) |                                     | 61.8                                    |   | 70.9 |   |
|                                                                                                    | Inventories                                                                        |                                            | 48.6                                     |                                    | 43.4 |   |
|                                                                                                    | Prepayments                  and Other                                             |                                            | 25.4                                     |                                    | 23.8 |   |
|                                                                                                    | Deferred                  Income Taxes                                             |                                            |  –                            |                                    | 0.3 |   |
|                                                                                                    |                                                                               | Total                  Current Assets           |                                     | 267.6                                   |   | 287.7 |   |
| Property,                  Plant and Equipment - Net                                                    |                                                                               | 1,033.8                                         |                                     | 921.6                                   |   |
| Investments                                                                                             |                                                                               | 206.4                                           |                                     | 189.1                                   |   |
| Other                  Assets                                                                           |                                                                               |  138.7                                     |                                     | 135.0                                   |   |
| **Total                  Assets**                                                                       | $                                                                                  |  1,646.5                                   | $                                        | 1,533.4                                 |   |
|                                                                                                    |                                                                               |                                            |                                     |                                    |   |   |   |
| **Liabilities                  and Shareholders' Equity**                                               |                                                                               |                                            |                                     |                                    |   |
| **Liabilities**                                                                                         |                                                                               |                                            |                                     |                                    |   |
| Current                  Liabilities                                                                    |                                                                               |                                            |                                     |                                    |   |
|                                                                                                    | Accounts                  Payable                                                  | $                                               | 52.0                                     | $                                       | 53.5 |   |
|                                                                                                    | Accrued                  Taxes                                                     |                                            | 13.8                                     |                                    | 23.3 |   |
|                                                                                                    | Accrued                  Interest                                                  |                                            | 5.9                                      |                                    | 8.6 |   |
|                                                                                                    | Long-Term                  Debt Due Within One Year                                |                                            | 29.4                                     |                                    | 29.7 |   |
|                                                                                                    | Deferred                  Profit on Sales of Real Estate                           |                                            | 5.3                                      |                                    | 4.1 |   |
|                                                                                                    | Other                                                                              |                                            |  23.2                               |                                    | 24.3 |   |
|                                                                                                    |                                                                               | Total                  Current Liabilities      |                                     | 129.6                                   |   | 143.5 |   |
| Long-Term                  Debt                                                                         |                                                                               | 409.0                                           |                                     | 359.8                                   |   |
| Deferred                  Income Taxes                                                                  |                                                                               | 137.3                                           |                                     | 130.8                                   |   |
| Other                  Liabilities                                                                      |                                                                               | 237.1                                           |                                     | 226.1                                   |   |
| Minority                  Interest                                                                      |                                                                               |  9.0                                       |                                     | 7.4                                     |   |
|                                                                                                    | Total                  Liabilities                                                 |                                            | 922.0                                    |                                    | 867.6 |   |
|                                                                                                    |                                                                               |                                            |                                     |                                    |   |   |   |
| **Commitments                  and Contingencies**                                                      |                                                                               |                                            |                                     |                                    |   |
|                                                                                                    |                                                                               |                                            |                                     |                                    |   |   |   |
| **Shareholders'                  Equity**                                                               |                                                                               |                                            |                                     |                                    |   |
| Common                  Stock Without Par Value, 43.3 Shares Authorized, 30.8 and                  30.4 |                                                                               |                                            |                                     |                                    |   |
|                                                                                                    | Shares                  Outstanding                                                |                                            | 460.0                                    |                                    | 438.7 |   |
| Unearned                  ESOP Shares                                                                   |                                                                               | (66.1)                                          |                                     |  (71.9)                            |   |
| Accumulated                  Other Comprehensive Loss                                                   |                                                                               | (7.5)                                           |                                     |  (8.8)                             |   |
| Retained                  Earnings                                                                      |                                                                               |  338.1                                     |                                     | 307.8                                   |   |
|                                                                                                    | Total                  Shareholders' Equity                                        |                                            |  724.5                              |                                    | 665.8 |   |
| **Total                  Liabilities and Shareholders' Equity**                                         | $                                                                                  |  1,646.5                                   | $                                        | 1,533.4                                 |   |

The        accompanying notes are an integral        part of these statements.

----

**ALLETE**

**CONSOLIDATED        STATEMENT OF INCOME**

**Millions        Except Per Share Amounts – Unaudited**

|                                                                   |                                           |                                          | **Quarter                  Ended** | **Nine                  Months Ended** |
|------------------------------------------------------------------------|------------------------------------------------|-----------------------------------------------|------------------------------------|----------------------------------------|
|                                                                   |                                           |                                          | **September                  30,** | **September                  30,**     |
|                                                                   |                                           |                                          | **2007**                           | **2006**                               | **2007** | **2006** |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Operating                  Revenue**                                 | $                                              | 200.8                                    | $                                  | 199.1                                  | $ |  629.4 | $ | 569.9 |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Operating                  Expenses**                                |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | Fuel                  and Purchased Power      |                                          | 91.8                               |                                   | 79.5 |   | 262.4 |   | 211.9 |
|                                                                   | Operating                  and Maintenance     |                                          | 72.1                               |                                   | 68.7 |   | 231.3 |   | 220.0 |
|                                                                   | Depreciation                                   |                                          |  12.2                         |                                   | 12.2 |   |  35.8 |   | 36.6 |
|                                                                   |                                           | Total                  Operating Expenses     |                               |  176.1                            |   | 160.4 |   |  529.5 |   | 468.5 |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Operating                  Income from Continuing Operations**       |                                           |  24.7                                    |                               | 38.7                                   |   |  99.9 |   | 101.4 |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Other                  Income (Expense)**                            |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | Interest                  Expense              |                                          | (6.3)                              |                                   | (7.3) |   | (18.7) |   | (20.1) |
|                                                                   | Equity                  Earnings in ATC        |                                          | 3.2                                |                                   | 1.0 |   | 9.3 |   | 1.0 |
|                                                                   | Other                                          |                                          |  3.2                          |                                   | 2.7 |   |  11.9 |   | 7.8 |
|                                                                   |                                           | Total                  Other Income (Expense) |                               | 0.1                                    |   | (3.6) |   |  2.5 |   | (11.3) |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Income                  from Continuing Operations Before Minority** |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | **Interest                  and Income Taxes** |                                          | 24.8                               |                                   | 35.1 |   | 102.4 |   | 90.1 |
| **Income                  Tax Expense**                                |                                           | 8.1                                           |                               | 12.1                                   |   | 35.4 |   | 32.6 |
| **Minority                  Interest**                                 |                                           |  0.2                                     |                               | 1.1                                    |   |  1.6 |   | 3.2 |
| **Income                  from Continuing Operations**                 |                                           | 16.5                                          |                               | 21.9                                   |   | 65.4 |   | 54.3 |
| **Loss                  from Discontinued Operations**                 |                                           |  –                                 |                               | (0.1)                                  |   |  – |   | (0.5) |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Net                  Income**                                        | $                                              |  16.5                                    | $                                  | 21.8                                   | $ |  65.4 | $ | 53.8 |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Average                  Shares of Common Stock**                    |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | Basic                                          |                                          | 28.5                               |                                   | 27.8 |   | 28.2 |   | 27.7 |
|                                                                   | Diluted                                        |                                          |  28.5                         |                                   | 27.9 |   |  28.3 |   | 27.8 |
| **Basic                  Earnings Per Share of Common Stock**          |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | Continuing                  Operations         | $                                             | 0.58                               | $                                      | 0.78 | $ | 2.31 | $ | 1.96 |
|                                                                   | Discontinued                  Operations       |                                          |  –                      |                                   | –  |   |  – |   | (0.02) |
|                                                                   |                                           |                                          | $                                  | 0.58                                   | $ | 0.78 | $ | 2.31 | $ | 1.94 |
| **Diluted                  Earnings Per Share of Common Stock**        |                                           |                                          |                               |                                   |   |   |   |   |
|                                                                   | Continuing                  Operations         | $                                             | 0.58                               | $                                      | 0.78 | $ | 2.31 | $ | 1.95 |
|                                                                   | Discontinued                  Operations       |                                          |  –                      |                                   |  – |   |  – |   | (0.02) |
|                                                                   |                                           |                                          | $                                  |  0.58                             | $ | 0.78 | $ | 2.31 | $ | 1.93 |
|                                                                   |                                           |                                          |                               |                                   |   |   |   |   |   |   |
| **Dividends                  Per Share of Common Stock**               | $                                              | 0.4100                                   | $                                  | 0.3625                                 | $ | 1.2300  | $ | 1.0875 |

----

**ALLETE**

**CONSOLIDATED        STATEMENT OF CASH FLOWS**

**Millions        - Unaudited**

|                                                                  |                                                                                  |                                                  | Nine                  Months Ended |
|-----------------------------------------------------------------------|---------------------------------------------------------------------------------------|-------------------------------------------------------|------------------------------------|
|                                                                  |                                                                                  |                                                  | September                  30,     |
|                                                                  |                                                                                  |                                                  | 2007                               | 2006 |
|                                                                  |                                                                                  |                                                  |                               |   |   |   |
| **Operating                  Activities**                             |                                                                                  |                                                  |                               |   |
|                                                                  | Net                  Income                                                           | $                                                     | 65.4                               | $ | 53.8 |
|                                                                  | Loss                  from Discontinued Operations                                    |                                                  | -                                  |   | 0.5 |
|                                                                  | Income                  from Equity Investments, net of dividends                     |                                                  | (1.9)                              |   | (0.2) |
|                                                                  | Gain                  on Sale of Assets                                               |                                                  | (2.1)                              |   | - |
|                                                                  | Depreciation                                                                          |                                                  | 35.8                               |   | 36.6 |
|                                                                  | Deferred                  Income Taxes                                                |                                                  | 3.8                                |   | 19.3 |
|                                                                  | Minority                  Interest                                                    |                                                  | 1.6                                |   | 3.2 |
|                                                                  | Stock                  Compensation Expense                                           |                                                  | 1.5                                |   | 1.4 |
|                                                                  | Bad                  Debt Expense                                                     |                                                  | 0.8                                |   | 0.4 |
|                                                                  | Changes                  in Operating Assets and Liabilities                          |                                                  |                               |   |   |
|                                                                  |                                                                                  | Accounts                  Receivable                  |                               | 11.3 |   | 17.3 |
|                                                                  |                                                                                  | Inventories                                           |                               | (5.2) |   | (10.0) |
|                                                                  |                                                                                  | Prepayments                  and Other                |                               | (1.6) |   | 0.2 |
|                                                                  |                                                                                  | Accounts                  Payable                     |                               | (6.1) |   | (13.5) |
|                                                                  |                                                                                  | Other                  Current Liabilities            |                               | (14.5) |   | (6.3) |
|                                                                  | Other                  Assets                                                         |                                                  | 0.1                                |   | (4.8) |
|                                                                  | Other                  Liabilities                                                    |                                                  | 9.5                                |   | 5.7 |
|                                                                  | Net                  Operating Activities for Discontinued Operations                 |                                                  | -                             |   | (13.1) |
|                                                                  |                                                                                  | Cash                  from Operating Activities       |                               | 98.4 |   | 90.5 |
|                                                                  |                                                                                  |                                                  |                               |   |   |   |
| **Investing                  Activities**                             |                                                                                  |                                                  |                               |   |
|                                                                  | Proceeds                  from Sale of Available-For-Sale Securities                  |                                                  | 374.3                              |   | 483.9 |
|                                                                  | Payments                  for Purchase of Available-For-Sale Securities               |                                                  | (340.2)                            |   | (488.6) |
|                                                                  | Changes                  to Investments                                               |                                                  | (18.0)                             |   | (35.3) |
|                                                                  | Additions                  to Property, Plant and Equipment                           |                                                  | (136.7)                            |   | (53.3) |
|                                                                  | Proceeds                  from Sale of Assets                                         |                                                  | 1.4                                |   | - |
|                                                                  | Other                                                                                 |                                                  | 3.0                                |   | (10.5) |
|                                                                  | Net                  Investing Activities from Discontinued Operations                |                                                  |  -                       |   | 2.2 |
|                                                                  |                                                                                  | Cash                  for Investing Activities        |                               | (116.2) |   | (101.6) |
|                                                                  |                                                                                  |                                                  |                               |   |   |   |
| **Financing                  Activities**                             |                                                                                  |                                                  |                               |   |
|                                                                  | Issuance                  of Common Stock                                             |                                                  | 19.9                               |   | 12.5 |
|                                                                  | Issuance                  of Debt                                                     |                                                  | 110.3                              |   | 77.8 |
|                                                                  | Payments                  of Long-Term Debt                                           |                                                  | (61.4)                             |   | (81.4) |
|                                                                  | Dividends                  on Common Stock and Distributions to Minority Shareholders |                                                  | (34.4)                             |   | (32.6) |
|                                                                  | Net                  Decrease in Book Overdrafts                                      |                                                  |  -                       |   | (3.4) |
|                                                                  |                                                                                  | Cash                  from (for) Financing Activities |                               | 34.4 |   | (27.1) |
|                                                                  |                                                                                  |                                                  |                               |   |   |   |
| **Change                  in Cash and Cash Equivalents**              |                                                                                  | 16.6                                                  |                               | (38.2) |
| **Cash                  and Cash Equivalents at Beginning of Period** |                                                                                  |  44.8                                            |                               | 89.6 |
|                                                                  |                                                                                  |                                                  |                               |   |   |   |
| **Cash                  and Cash Equivalents at End of Period**       | $                                                                                     |  61.4                                            | $                                  | 51.4 |

----

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE        1.                      OPERATIONS        AND SIGNIFICANT ACCOUNTING POLICIES**

**Inventories.**

|                                    | **September                  30,** | **December                  31,** |
|-----------------------------------------|------------------------------------|-----------------------------------|
| **Inventories**                         | **2007**                           | **2006**                          |
| **Millions**                            |                               |                              |
| Fuel                                    | $21.7                              | $18.9                             |
| Materials                  and Supplies | 26.9                               | 24.5                              |
|                                    |                               |                              |
| Total                  Inventories      | $48.6                              | $43.4                             |

**Asset        Retirement Obligation (ARO)**

**Supplemental        Statement of Cash Flows Information.**

| **Consolidated                  Statement of Cash Flows****Supplemental                  Disclosure****For                  the Nine Months Ended September 30,** | **2007** | **2006** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|----------|
| **Millions**                                                                                                                                                      |     |     |
| Cash                  Paid During the Period for                                                                                                                  |     |     |
| Interest                  – Net of Amounts Capitalized                                                                                                      | $24.0    | $21.9    |
| Income                  Taxes                                                                                                                                     | $29.3    | $16.9    |
|                                                                                                                                                              |     |     |
| Noncash                  Investing Activities                                                                                                                     |     |     |
| Accounts                  Payable for Capital Additions to                                                                                                        |     |     |
| Property                  Plant and Equipment                                                                                                                     | $4.6     | –  |

**New        Accounting Standards. **
*SFAS 157*

*SFAS        159*
** **

----

**NOTE        2.                      BUSINESS        SEGMENTS**

|                                                                                                          |             | **Energy**    |             |                        |
|---------------------------------------------------------------------------------------------------------------|------------------|---------------|------------------|-----------------------------|
|                                                                                                          |             |          | **Nonregulated** |                        |   |   |
|                                                                                                          |             | **Regulated** | **Energy**       | **Investment**              | **Real** |   |
|                                                                                                          | **Consolidated** | **Utility**   | **Operations**   | **In                  ATC** | **Estate** | **Other** |
| **Millions**                                                                                                  |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| **For                  the Quarter Ended September 30, 2007**                                                 |             |          |             |                        |   |   |
| Operating                  Revenue                                                                            | $200.8           | $179.0        | $16.9            | –                     | $4.8 | $0.1 |
| Fuel                  and Purchased Power                                                                     | 91.8             | 91.8          | –          | –                     | – | – |
| Operating                  and Maintenance                                                                    | 72.1             | 52.6          | 15.4             | –                     | 3.4 | 0.7 |
| Depreciation                                                                                                  | 12.2             | 11.0          | 1.1              | –                     | 0.1 | – |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Income (Loss) from Continuing Operations                                           |  24.7       |  23.6    |  0.4        |  –               |  1.3 |  (0.6) |
| Interest                  Expense                                                                             | (6.3)            | (5.3)         | (0.6)            | –                     | (0.1) | (0.3) |
| Equity                  Earnings in ATC                                                                       | 3.2              | –       | –          | $3.2                        | – | – |
| Other                  Income                                                                                 | 3.2              | 1.0           | 0.5              | –                     | – | 1.7 |
|                                                                                                          |             |          |             |                        |   |   |
| Income                  from Continuing Operations Before Minority Interest and Income                  Taxes | 24.8             | 19.3          | 0.3              | 3.2                         | 1.2 | 0.8 |
| Income                  Tax Expense (Benefit)                                                                 | 8.1              | 6.3           | (0.3)            | 1.3                         | 0.4 | 0.4 |
| Minority                  Interest                                                                            | 0.2              | –       | –          | –                     | 0.2 | – |
| Income                  from Continuing Operations                                                            | 16.5             | $13.0         | $0.6             | $1.9                        | $0.6 | $0.4 |
| Loss                  from Discontinued Operations – Net of Tax                                         | –          |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Net                  Income                                                                                   | $16.5            |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| **For                  the Quarter Ended September 30, 2006**                                                 |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Revenue                                                                            | $199.1           | $168.1        | $15.9            | –                     | $15.1 | – |
| Fuel                  and Purchased Power                                                                     | 79.5             | 79.5          | –          | –                     | – | – |
| Operating                  and Maintenance                                                                    | 68.7             | 49.7          | 13.6             | –                     | 4.9 | $                  0.5 |
| Depreciation                                                                                                  | 12.2             | 11.1          | 1.0              | –                     | 0.1 | – |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Income (Loss) from Continuing Operations                                           | 38.7             | 27.8          | 1.3              | –                     | 10.1 | (0.5) |
| Interest                  Expense                                                                             | (7.3)            | (5.0)         | (1.0)            | –                     | – | (1.3) |
| Equity                  Earnings in ATC                                                                       | 1.0              | –       | –          | $1.0                        | – | – |
| Other                  Income                                                                                 | 2.7              | 0.1           | 0.9              | –                     | – | 1.7 |
|                                                                                                          |             |          |             |                        |   |   |
| Income                  from Continuing Operations Before Minority Interest and Income                  Taxes | 35.1             | 22.9          | 1.2              | 1.0                         | 10.1 | (0.1) |
| Income                  Tax Expense (Benefit)                                                                 | 12.1             | 9.2           | 0.1              | 0.4                         | 3.9 | (1.5) |
| Minority                  Interest                                                                            | 1.1              | –       | –          | –                     | 1.1 | – |
| Income                  from Continuing Operations                                                            | 21.9             | $13.7         | $1.1             | $0.6                        | $5.1 | $1.4 |
| Loss                  from Discontinued Operations – Net of Tax                                         | (0.1)            |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Net                  Income                                                                                   | $21.8            |          |             |                        |   |   |

----

| **NOTE                  2.** | **BUSINESS                  SEGMENTS (Continued)** |
|------------------------------|----------------------------------------------------|

|                                                                                                          |             | **Energy**    |             |                        |
|---------------------------------------------------------------------------------------------------------------|------------------|---------------|------------------|-----------------------------|
|                                                                                                          |             |          | **Nonregulated** |                        |   |   |
|                                                                                                          |             | **Regulated** | **Energy**       | **Investment**              | **Real** |   |
|                                                                                                          | **Consolidated** | **Utility**   | **Operations**   | **in                  ATC** | **Estate** | **Other** |
| **Millions**                                                                                                  |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| **For                  the Nine Months Ended September 30, 2007**                                             |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Revenue                                                                            | $629.4           | $538.2        | $49.9            | –                     | $41.0 | $0.3 |
| Fuel                  and Purchased Power                                                                     | 262.4            | 262.4         | –          | –                     | – | – |
| Operating                  and Maintenance                                                                    | 231.3            | 170.7         | 44.7             | –                     | 14.1 | 1.8 |
| Depreciation                                                                                                  | 35.8             | 32.3          | 3.3              | –                     | 0.1 | 0.1 |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Income (Loss) from Continuing Operations                                           | 99.9             | 72.8          | 1.9              | –                     | 26.8 | (1.6) |
| Interest                  Expense                                                                             | (18.7)           | (15.7)        | (1.4)            | –                     | (0.3) | (1.3) |
| Equity                  Earnings in ATC                                                                       | 9.3              | –       | –          | $9.3                        | – | – |
| Other                  Income                                                                                 | 11.9             | 2.4           | 3.2              | –                     | – | 6.3 |
|                                                                                                          |             |          |             |                        |   |   |
| Income                  from Continuing Operations Before Minority Interest and Income                  Taxes | 102.4            | 59.5          | 3.7              | 9.3                         | 26.5 | 3.4 |
| Income                  Tax Expense                                                                           | 35.4             | 21.6          | 0.3              | 3.7                         | 9.7 | 0.1 |
| Minority                  Interest                                                                            | 1.6              | –       | –          | –                     | 1.6 | – |
| Income                  from Continuing Operations                                                            | 65.4             | $37.9         | $3.4             | $5.6                        | $15.2 | $3.3 |
| Loss                  from Discontinued Operations – Net of Tax                                         | –          |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Net                  Income                                                                                   | $65.4            |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| **At                  September 30, 2007**                                                                    |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Total                  Assets                                                                                 | $1,646.5         | $1,264.5      | $78.9            | $65.0                       | $86.7 | $151.4 |
| Property,                  Plant and Equipment – Net                                                    | $1,033.8         | $983.1        | $47.3            | –                     | – | $3.4 |
| Accumulated                  Depreciation                                                                     | $843.2           | $799.3        | $42.1            | –                     | – | $1.8 |
| Capital                  Expenditures                                                                         | $141.3           | $140.2        | $1.1             | –                     | – | – |
|                                                                                                          |             |          |             |                        |   |   |
| **For                  the Nine Months Ended September 30, 2006**                                             |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Revenue                                                                            | $569.9           | $477.0        | $48.7            | –                     | $44.0 | $0.2 |
| Fuel                  and Purchased Power                                                                     | 211.9            | 211.9         | –          | –                     | – | – |
| Operating                  and Maintenance                                                                    | 220.0            | 162.7         | 41.8             | –                     | 13.2 | 2.3 |
| Depreciation                                                                                                  | 36.6             | 33.3          | 3.1              | –                     | 0.1 | 0.1 |
|                                                                                                          |             |          |             |                        |   |   |
| Operating                  Income (Loss) from Continuing Operations                                           |  101.4      |  69.1    |  3.8        |  –               |  30.7 |  (2.2) |
| Interest                  Expense                                                                             | (20.1)           | (15.0)        | (2.0)            | –                     | – | (3.1) |
| Equity                  Earned in ATC                                                                         | 1.0              | –       | –          | $1.0                        | – | – |
| Other                  Income                                                                                 | 7.8              | 0.6           | 1.2              | –                     | – | 6.0 |
|                                                                                                          |             |          |             |                        |   |   |
| Income                  from Continuing Operations Before Minority Interest and Income                  Taxes | 90.1             | 54.7          | 3.0              | 1.0                         | 30.7 | 0.7 |
| Income                  Tax Expense (Benefit)                                                                 | 32.6             | 21.2          | 0.1              | 0.4                         | 11.8 | (0.9) |
| Minority                  Interest                                                                            | 3.2              | –       | –          | –                     | 3.2 | – |
| Income                  from Continuing Operations                                                            | 54.3             | $33.5         | $2.9             | $0.6                        | $15.7 | $1.6 |
| Loss                  from Discontinued Operations – Net of Tax                                         | (0.5)            |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Net                  Income                                                                                   | $53.8            |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| **At                  September 30, 2006**                                                                    |             |          |             |                        |   |   |
|                                                                                                          |             |          |             |                        |   |   |
| Total                  Assets                                                                                 | $1,400.9         | $1,009.9      | $78.9            | $35.2                       | $84.9 | $192.0 |
| Property,                  Plant and Equipment – Net                                                    | $877.9           | $822.6        | $50.5            | –                     | – | $4.8 |
| Accumulated                  Depreciation                                                                     | $816.5           | $775.9        | $39.0            | –                     | – | $1.6 |
| Capital                  Expenditures                                                                         | $53.3            | $52.5         | $0.8             | –                     | – | – |

----

**NOTE        3.                      INVESTMENTS**

**Short-Term        Investments. **

**Long-Term        Investments.**

|                                             | **September                  30,** | **December                  31,** |
|--------------------------------------------------|------------------------------------|-----------------------------------|
| **Investments**                                  | **2007**                           | **2006**                          |
| **Millions**                                     |                               |                              |
|                                             |                               |                              |
| Real                  Estate Assets              | $86.7                              | $89.8                             |
| Debt                  and Equity Securities      | 46.4                               | 36.4                              |
| Investment                  in ATC               | 65.0                               | 53.7                              |
| Emerging                  Technology Investments | 8.3                                | 9.2                               |
| Total                  Investments               | $206.4                             | $189.1                            |

|                                                  |                                      | **September                  30,** | **December                  31,** |
|-------------------------------------------------------|-------------------------------------------|------------------------------------|-----------------------------------|
| **Real                  Estate Assets**               |                                      | **2007**                           | **2006**                          |
|                                                  |                                      |                               |                              |
| **Millions**                                          |                                      |                               |                              |
|                                                  |                                      |                               |                              |
| Land                  Held for Sale Beginning Balance | $58.0                                     | $48.0                              |
| Additions                  during period:             | Capitalized                  Improvements | 6.9                                | 18.8                              |
|                                                  | Purchases                                 | –                            | 1.4                               |
| Deductions                  during period:            | Cost                  of Real Estate Sold | (5.9)                              | (10.2)                            |
|                                                  |                                      |                               |                              |
| Land                  Held for Sale Ending Balance    |                                      | 59.0                               | 58.0                              |
| Long-Term                  Finance Receivables        |                                      | 14.3                               | 18.3                              |
| Other                  *(a)*                          |                                      | 13.4                               | 13.5                              |
|                                                  |                                      |                               |                              |
| Total                  Real Estate Assets             |                                      | $86.7                              | $89.8                             |

*(a)      Consisted        primarily of a shopping center.*

**Finance        Receivables.**

----

**NOTE        3.                      INVESTMENTS        (Continued)**

**Investment        in ATC.**

| **ALLETE's                  Interest in ATC**                    |   |   |   |   |   |
|------------------------------------------------------------------|--------|--------|--------|--------|--------|
| **As                  of September 30, 2007**                    |   |   |   |   |   |
| **Millions**                                                     |   |   |   |   |   |   |   |
|                                                             |   |   |   |   |   |   |   |
| Equity                  Investment Balance at December 31, 2006  |   |   | $53.7  |
| 2007                  Investments                                |   |   |   |   |   | 8.7 |
| Equity                  in Earnings                              |   |   |   |   |   | 9.3 |
| Earnings                  Distributions                          |   |   |   |   |   | (6.7) |
| Equity                  Investment Balance at September 30, 2007 |   |   | $65.0  |

**NOTE        4.                      SHORT-TERM        AND LONG-TERM DEBT**

| **NOTE                  5.** | **OTHER                  INCOME (EXPENSE)** |
|------------------------------|---------------------------------------------|

|                                                            | **Quarter                  Ended** | **Nine                  Months Ended** |
|-----------------------------------------------------------------|------------------------------------|----------------------------------------|
|                                                            | **September                  30,** | **September                  30,**     |
|                                                            | **2007**                           | **2006**                               | **2007** | **2006** |
| **Millions**                                                    |                               |                                   |   |   |
|                                                            |                               |                                   |   |   |
| Gain                  (Loss) on Emerging Technology Investments | $(0.2)                             | $0.1                                   | $(1.0) | $(1.1) |
| AFUDC                  –                  Equity          | 1.0                                | 0.1                                    | 2.2 | 0.2 |
| Investment                  and Other Income                    | 2.4                                | 2.5                                    | 10.7 | 8.7 |
|                                                            |                               |                                   |   |   |
| Total                  Other Income                             | $3.2                               | $2.7                                   | $11.9 | $7.8 |

----

| **NOTE                  6.** | **INCOME                  TAX EXPENSE** |
|------------------------------|-----------------------------------------|

|                                                             |    | **Quarter                  Ended** | **Nine                  Months Ended** |
|------------------------------------------------------------------|---------|------------------------------------|----------------------------------------|
|                                                             |    | **September                  30,** | **September                  30,**     |
|                                                             |    | **2007**                           | **2006***(a)*                          | **2007** | **2006***(a)* |
| **Millions**                                                     |    |                               |                                   |   |   |   |   |   |
|                                                             |    |                               |                                   |   |   |   |   |   |   |
| Current                  Tax Expense                             |    |                               |                                   |   |   |   |   |   |
|                                                             | Federal | $                                  | 2.5                                    | $ | (15.2) | $ | 24.5 | $ | 5.2 |
|                                                             | State   |                               |  0.7                              |   | 3.3 |   |  7.1 |   | 8.1 |
|                                                             |    |                               | 3.2                                    |   | (11.9) |   | 31.6 |   | 13.3 |
|                                                             |    |                               |                                   |   |   |   |   |   |   |
| Deferred                  Tax Expense (Benefit)                  |    |                               |                                   |   |   |   |   |   |
|                                                             | Federal |                               | 3.5                                    |   | 24.3 |   | 2.2 |   | 20.8 |
|                                                             | State   |                               |  1.7                              |   |  – |   |  2.4 |   | (0.5) |
|                                                             |    |                               | 5.2                                    |   | 24.3 |   | 4.6 |   | 20.3 |
|                                                             |    |                               |                                   |   |   |   |   |   |   |
| Deferred                  Tax Credits                            |    |  (0.3)                        |                                   | (0.3) |   |  (0.8) |   | (1.0) |
|                                                             |    |                               |                                   |   |   |   |   |   |   |
| Income                  Tax Expense from Continuing Operations   |    | 8.1                                |                                   | 12.1 |   | 35.4 |   | 32.6 |
| Income                  Tax Benefit from Discontinued Operations |    | –                       |                                   |  – |   | –  |   | (0.3) |
|                                                             |    |                               |                                   |   |   |   |   |   |   |
| Total                  Income Tax Expense                        | $       |  8.1                          | $                                      | 12.1 | $ |  35.4 | $ | 32.3 |

| *(a)  * | *Included                  a current federal tax benefit of $24.3 million and a deferred federal                  tax                  expense of $24.3 million related to the Kendall County                  refund.* |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Uncertain        Tax Positions.**

----

**NOTE        6.                      INCOME        TAX EXPENSE (Continued)**

| **NOTE                  7.** | **DISCONTINUED                  OPERATIONS** |
|------------------------------|----------------------------------------------|

|                                               | **Quarter                  Ended** | **Nine                  Months Ended** |
|----------------------------------------------------|------------------------------------|----------------------------------------|
| **Discontinued                  Operations**       | **September                  30,** | **September                  30,**     |
| **Summary                  Income Statement**      | **2006**                           | **2006**                               |
| **Millions**                                       |                               |                                   |
| Loss                  on Disposal                  |                               |                                   |
| Water                  Services                    | $(0.1)                             | $(0.8)                                 |
|                                               |                               |                                   |
| Income                  Tax Benefit                |                               |                                   |
| Water                  Services                    | –                            | 0.3                                    |
|                                               |                               |                                   |
| Net                  Loss on Disposal              | (0.1)                              | (0.5)                                  |
|                                               |                               |                                   |
| Loss                  from Discontinued Operations | $(0.1)                             | $(0.5)                                 |

**NOTE        8.                      COMPREHENSIVE        INCOME (LOSS)**

| **Accumulated                  Other Comprehensive**                    | **September                  30,** |
|-------------------------------------------------------------------------|------------------------------------|
| **Income                  (Loss) – Net of Tax**                   | **2007**                           | **2006** |
| **Millions**                                                            |                               |   |
|                                                                    |                               |   |
| Unrealized                  Gain on Securities                          | $4.4                               | $2.7 |
| Defined                  Benefit Pension and Other Postretirement Plans | (11.9)                             | – |
| Additional                  Pension Liability                           | –                            | (14.9) |
|                                                                    |                               |   |
| Total                  Accumulated Other Comprehensive Loss             | $(7.5)                             | $(12.2) |

----

| **NOTE                  9.** | **EARNINGS                  PER SHARE** |
|------------------------------|-----------------------------------------|

|                                                         |      | **2007**       |        |      | **2006**       |        |
|--------------------------------------------------------------|-----------|----------------|-------------|-----------|----------------|-------------|
| **Reconciliation                  of Basic and Diluted**     |      | **Dilutive**   |        |      | **Dilutive**   |        |
| **Earnings                  Per Share**                      | **Basic** | **Securities** | **Diluted** | **Basic** | **Securities** | **Diluted** |
| **Millions                  Except Per Share Amounts**       |      |           |        |      |           |        |
|                                                         |      |           |        |      |           |        |
| **For                  the Quarter Ended September 30,**     |      |           |        |      |           |        |
|                                                         |      |           |        |      |           |        |
| Income                  from Continuing Operations           | $16.5     | –        | $16.5       | $21.9     | –        | $21.9       |
| Common                  Shares                               | 28.5      | –        | 28.5        | 27.8      | 0.1            | 27.9        |
| Per                  Share from Continuing Operations        | $0.58     | –        | $0.58       | $0.78     | –        | $0.78       |
|                                                         |      |           |        |      |           |        |
| **For                  the Nine Months Ended September 30,** |      |           |        |      |           |        |
|                                                         |      |           |        |      |           |        |
| Income                  from Continuing Operations           | $65.4     | –        | $65.4       | $54.3     | –        | $54.3       |
| Common                  Shares                               | 28.2      | 0.1            | 28.3        | 27.7      | 0.1            | 27.8        |
| Per                  Share from Continuing Operations        | $2.31     | –        | $2.31       | $1.96     | –        | $1.95       |

| **NOTE                  10.** | **PENSION                  AND OTHER POSTRETIREMENT BENEFIT                  PLANS** |
|-------------------------------|--------------------------------------------------------------------------------------|

|                                                            |        |                                 | **Postretirement** |
|-----------------------------------------------------------------|-------------|--------------------------------------|--------------------|
|                                                            | **Pension** | **Health                  and Life** |
| **Components                  of Net Periodic Benefit Expense** | **2007**    | **2006**                             | **2007**           | **2006** |
| **Millions**                                                    |        |                                 |               |   |
| **For                  the Quarter Ended September 30,**        |        |                                 |               |   |
|                                                            |        |                                 |               |   |
| Service                  Cost                                   | $1.3        | $2.3                                 | $1.2               | $1.1 |
| Interest                  Cost                                  | 5.7         | 5.5                                  | 2.1                | 1.9 |
| Expected                  Return on Plan Assets                 | (7.7)       | (7.1)                                | (1.6)              | (1.4) |
| Amortization                  of Prior Service Costs            | 0.2         | 0.1                                  | –            | – |
| Amortization                  of Net Loss                       | 0.8         | 1.2                                  | 0.4                | 0.4 |
| Amortization                  of Transition Obligation          | –     | –                              | 0.6                | 0.6 |
|                                                            |        |                                 |               |   |
| Net                  Periodic Benefit Expense                   | $0.3        | $2.0                                 | $2.7               | $2.6 |
|                                                            |        |                                 |               |   |
| **For                  the Nine Months Ended September 30,**    |        |                                 |               |   |
|                                                            |        |                                 |               |   |
| Service                  Cost                                   | $3.9        | $6.9                                 | $3.1               | $3.3 |
| Interest                  Cost                                  | 17.1        | 16.6                                 | 5.8                | 5.6 |
| Expected                  Return on Plan Assets                 | (23.0)      | (21.4)                               | (4.8)              | (4.2) |
| Amortization                  of Prior Service Costs            | 0.5         | 0.5                                  | –            | – |
| Amortization                  of Net Loss                       | 2.4         | 3.6                                  | 0.7                | 1.3 |
| Amortization                  of Transition Obligation          | –     | (0.1)                                | 1.8                | 1.8 |
|                                                            |        |                                 |               |   |
| Net                  Periodic Benefit Expense                   | $0.9        | $6.1                                 | $6.6               | $7.8 |

**Employer        Contributions. **

----

**NOTE        11.                      COMMITMENTS,        GUARANTEES AND CONTINGENCIES**

**Off-Balance        Sheet Arrangements. **
*Square Butte Power Purchase Agreement.*

*Leasing        Agreements.*

*Coal,        Rail and Shipping Contracts.*

**Emerging        Technology Portfolio.**

**Environmental        Matters.**

----

| **NOTE                  11.** | **COMMITMENTS,                  GUARANTEES AND CONTINGENCIES                  (Continued)** |
|-------------------------------|---------------------------------------------------------------------------------------------|

**Environmental        Matters. (Continued)**

*SWL&P        Manufactured Gas Plant*

*EPA        Clean Air Interstate Rule and Clean Air Mercury Rule.*

**Community        Development District Obligations.**
*Town Center.*

----

**NOTE        11.                      COMMITMENTS,        GUARANTEES AND CONTINGENCIES (Continued)**

**Community        Development District Obligations. (Continued)**

*Palm        Coast Park. *

**Other.**

----

| **ITEM                  2.** | **MANAGEMENT’S                  DISCUSSION AND ANALYSIS OF                  FINANCIAL** |
|------------------------------|-----------------------------------------------------------------------------------------------|

**CONDITION        AND RESULTS OF OPERATIONS**

**EXECUTIVE        SUMMARY**

**Energy**
**Real Estate**

**Energy**

|   | · | **Regulated                  Utility** includes retail and wholesale rate regulated electric,                  natural gas and water services in northeastern Minnesota and northwestern                  Wisconsin under the jurisdiction of state and federal regulatory                  authorities. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Nonregulated                  Energy Operations** includes our coal mining activities in North                  Dakota, approximately 50 MW of nonregulated generation and Minnesota                  land sales. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | **Investment                  in ATC** includes our equity ownership interest in                  ATC. |
|--------|--------|--------------------------------------------------------------------------------------------------------|

**Real        Estate**

**Other**

----

**EXECUTIVE        SUMMARY (Continued)**

|                                            |                                   |        |                                         | **Quarter                  Ended** | **Nine                  Months Ended** |
|-------------------------------------------------|----------------------------------------|-------------|----------------------------------------------|------------------------------------|----------------------------------------|
|                                            |                                   |        |                                         | **September                  30,** | **September                  30,**     |
| **Kilowatthours                  Sold**         | **2007**                               | **2006**    | **2007**                                     | **2006**                           |
| **Millions**                                    |                                   |        |                                         |                               |                                   |
|                                            |                                   |        |                                         |                               |                                   |   |   |
| Regulated                  Utility              |                                   |        |                                         |                               |
|                                            | Retail                  and Municipals |        |                                         |                               |                                   |
|                                            |                                   | Residential | 258.8                                        | 263.0                              | 832.1                                  | 800.1 |
|                                            |                                   | Commercial  | 360.5                                        | 361.7                              | 1,033.6                                | 1,005.9 |
|                                            |                                   | Municipals  | 255.7                                        | 248.6                              | 751.3                                  | 684.0 |
|                                            |                                   | Industrial  | 1,775.8                                      | 1,836.9                            | 5,215.2                                | 5,429.1 |
|                                            |                                   | Other       | 21.5                                         | 20.8                               | 62.8                                   | 59.4 |
|                                            |                                   |        |                                         |                               |                                   |   |   |
|                                            |                                   |        | Total                  Retail and Municipals | 2,672.3                            | 2,731.0                                | 7,895.0 | 7,978.5 |
|                                            | Other                  Power Suppliers | 571.9       | 584.3                                        | 1,608.8                            | 1,604.9                                |
|                                            |                                   |        |                                         |                               |                                   |   |   |
|                                            |                                   |        | Total                  Regulated Utility     | 3,244.2                            | 3,315.3                                | 9,503.8 | 9,583.4 |
| Nonregulated                  Energy Operations | 60.7                                   | 60.4        | 184.2                                        | 181.3                              |
|                                            |                                   |        |                                         |                               |                                   |   |   |
|                                            |                                   |        |                                         | 3,304.9                            | 3,375.7                                | 9,688.0 | 9,764.7 |

|                                                               | **Quarter                  Ended** | **Nine                  Months Ended** |
|--------------------------------------------------------------------|------------------------------------|----------------------------------------|
|                                                               | **September                  30,** | **September                  30,**     |
| **Real                  Estate**                                   | **2007**                           | **2006**                               | **2007** | **2006** |
| **Revenue                  and Sales Activity *(a)***              | **Qty**                            | **Amount**                             | **Qty** | **Amount** | **Qty** | **Amount** | **Qty** | **Amount** |
| **Dollars                  in Millions**                           |                               |                                   |   |   |   |   |   |   |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Town                  Center Sales                                 |                               |                                   |   |   |   |   |   |   |
| Commercial                  Sq. Ft.                                | 50,000                             | $1.8                                   | 114,300 | $3.6 | 474,476 | $14.5 | 364,995 | $9.8 |
| Residential                  Units                                 | –                            | –                                | 356 | 3.8 | 130 | 1.6 | 542 | 9.4 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Palm                  Coast Park                                   |                               |                                   |   |   |   |   |   |   |
| Commercial                  Sq. Ft.                                | –                            | –                                | – | – | 40,000 | 2.0 | – | – |
| Residential                  Units                                 | –                            | –                                | 200 | 3.0 | 406 | 11.1 | 200 | 3.0 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Other                  Land Sales                                  |                               |                                   |   |   |   |   |   |   |
| Acres                  *(b)*                                       | 83                                 | 3.0                                    | 242 | 4.9 | 450 | 8.9 | 708 | 20.4 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Contract                  Sales Price *(c)*                        |                               | 4.8                                    |   | 15.3 |   | 38.1 |   | 42.6 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Revenue                  Recognized from Previously Deferred Sales |                               | 0.1                                    |   | 1.0 |   | 2.4 |   | 5.3 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Deferred                  Revenue                                  |                               | (1.1)                                  |   | (2.9) |   | (4.2) |   | (6.8) |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Adjustments                  *(d)*                                 |                               | –                                |   | 0.6 |   | – |   | (0.9) |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Revenue                  from Land Sales                           |                               | 3.8                                    |   | 14.0 |   | 36.3 |   | 40.2 |
|                                                               |                               |                                   |   |   |   |   |   |   |
| Other                  Revenue                                     |                               | 1.0                                    |   | 1.1 |   | 4.7 |   | 3.8 |
|                                                               |                               |                                   |   |   |   |   |   |   |
|                                                               |                               | $4.8                                   |   | $15.1 |   | $41.0 |   | $44.0 |

*(a)      Quantity        amounts are approximate until final build-out.*

*(b)      Acreage        amounts are shown on a gross basis, including wetlands and minority        interest.*

| *(c)* | *Reflected                  total contract sales price on closed land                  transactions.* |
|-------|-------------------------------------------------------------------------------------------------------|

| *(d)* | *Contributed                  development dollars, which are credited to cost of real estate                  sold.* |
|-------|----------------------------------------------------------------------------------------------------------------------|

----

**EXECUTIVE        SUMMARY (Continued)**

**NET        INCOME**

**Regulated        Utility**

|   | · | increased                  electric sales to residential, commercial and municipal customers,                  as well                  as increased gas sales at SWL&P due to colder weather in the first                  quarter of 2007; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | rate                  increases, effective January 1, 2007, at                  SWL&P; |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | commencement                  of current revenue cost recovery on AREA project environmental                  capital                  expenditures; and |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | higher                  AFUDC related to increased capital                  expenditures. |
|--------|--------|-------------------------------------------------------------------------------------------|

**Nonregulated        Energy Operations**

**Investment        in ATC**

**Real        Estate**

**Other**

**COMPARISON        OF THE QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006**

**Regulated        Utility**

***Operating        revenue***

----

**COMPARISON        OF THE QUARTERS ENDED SEPTEMBER 30, 2007 AND 2006        (Continued)**

**Regulated        Utility (Continued)**

***Operating        expenses***

*Fuel        and Purchased Power*
*Expense*

*Operating        and Maintenance Expense *

*Depreciation*
*** ***

***Other        income***

**Nonregulated        Energy Operations**

***Operating        revenue***

***Operating        expenses***

**Investment        in ATC**

***Equity        Earnings***

**Real        Estate**

***Operating        revenue***

***Operating        expenses***

**Other**

***Interest        Expense***

**Income        Taxes**

----

**COMPARISON        OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006**

**Regulated        Utility**

***Operating        revenue***

***Operating        expenses***

*Fuel        and Purchased Power Expense*

|   | · | scheduled                  outage at Boswell Unit 3; |
|--------|--------|------------------------------------------------------|

|   | · | scheduled                  outages at Laskin Unit 1 and Taconite Harbor Unit 2 relating to                  AREA plan                  environmental upgrades; and |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | unplanned                  outages at Boswell Unit 4. |
|--------|--------|-------------------------------------------------------|

*Operating        and Maintenance Expense*

*Depreciation        *

***Interest        Expense***

***Other        income***

----

**COMPARISON        OF THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006        (Continued)**

**Nonregulated        Energy Operations**

***Operating        revenue***

***Operating        expenses***

***Other        income***

**Investment        in ATC**

***Equity        Earnings***

**Real        Estate**

***Operating        revenue***

***Operating        expenses***

**Other**

***Operating        expenses***

***Interest        expense***

***Other        income***

**Income        Taxes**

----

**CRITICAL        ACCOUNTING ESTIMATES**

**OUTLOOK**

**Earnings        Guidance. **

**Energy.**

*Rate        *
*Cases*

*Large        Power Customers*

*AREA        and Boswell 3 Emission Reduction Plan.*

----

**OUTLOOK        (Continued)**

**Energy        (Continued)**

*Integrated        Resource Plan.*

*Minnesota        Fuel Clause.*

*Renewable        Energy. *

----

**OUTLOOK        (Continued)**

**Investment        in ATC. **

**Real        Estate. **

| **Real                  Estate**                                 |                                |                             |
|------------------------------------------------------------------|-------------------------------------|----------------------------------|
| **Pending                  Contracts *(a,                  b)*** |                                | **Contract**                     |
| **At                  September 30, 2007**                       | **Quantity                  *(c)*** | **Sales                  Price** |
| **Dollars                  in Millions**                         |                                |                             |
|                                                             |                                |                             |
| Town                  Center                                     |                                |                             |
| Commercial                  Sq. Ft.                              | 331,724                             | $10.1                            |
| Residential                  Units                               | 910                                 | 14.6                             |
|                                                             |                                |                             |
| Palm                  Coast Park                                 |                                |                             |
| Commercial                  Sq. Ft.                              | –                             | –                          |
| Residential                  Units                               | 1,981                               | 39.1                             |
|                                                             |                                |                             |
| Other                  Land                                      |                                |                             |
| Acres                                                            | 183                                 | 9.4                              |
|                                                             |                                | $73.2                            |

| *(a)* | *During                  the first nine months of 2007, there were two contracts canceled                  at Town                  Center ($3.2 million) and three contracts canceled at Lehigh ($3.7                  million) in the “Other Land” category                  above.* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(b)* | *Pending                  contracts are contracts for which the due diligence period has                  ended, and                  the contract deposit is non-refundable subject to performance by                  the                  seller.* |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(c)* | *Acreage                  amounts are approximate and shown on a gross basis, including wetlands                  and                  minority interest. Acreage amounts may vary due to platting or                  surveying                  activity. Wetland amounts vary by property and are often not formally                  determined prior to sale. Commercial square feet and residential                  units are                  estimated and include minority interest. The actual property allocation                  at                  full build-out may be different than these                  estimates.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**OUTLOOK        (Continued)**

**Real        Estate. (Continued)**

----

**OUTLOOK        (Continued)**

**Real        Estate. (Continued)**

| **Summary                  of Development Projects** |
|------------------------------------------------------|
| **For                  the Nine Months Ended**       |   | **Total** | **Residential** | **Commercial** |
| **September                  30, 2007**              | **Ownership** | **Acres                  *(a)*** | **Units                  *(b)*** | **Sq.                  Ft. *(b, c)*** |
| Town                  Center                         | 80% |   |   |   |
| At                  December 31, 2006                |   | 1,356 | 2,222 | 2,705,310 |
| Property                  Sold                       |   | (91) | (130) | (474,476) |
| Change                  in Estimate *(a)*            |   | 17 | 177 | 51,688 |
|                                                 |   | 1,282 | 2,269 | 2,282,522 |
| Palm                  Coast Park                     | 100% |   |   |   |
| At                  December 31, 2006                |   | 4,337 | 3,760 | 3,156,800 |
| Property                  Sold                       |   | (863) | (406) | (40,000) |
| Change                  in Estimate *(a)*            |   | 112 | – | – |
|                                                 |   | 3,586 | 3,354 | 3,116,800 |
| Ormond                  Crossings                    | 100% |   |   |   |
| At                  December 31, 2006                |   | 5,960 | *(d)* | *(d)* |
| Change                  in Estimate *(a)*            |   | 8 |   |   |
|                                                 |   | 5,968 |   |   |

| *(a)* | *Acreage                  amounts are approximate and shown on a gross basis, including wetlands                  and                  minority interest. Acreage amounts may vary due to platting or                  surveying                  activity. Wetland amounts vary by property and are often not formally                  determined prior to sale.* |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(b)* | *Estimated                  and includes minority interest. The actual property breakdown at                  full                  build-out may be different than these                  estimates.* |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(c)* | *Includes                  industrial, office, institutional and retail square                  footage.* |
|-------|-----------------------------------------------------------------------------------------------------------|

| *(d)* | *A                  development order approval from the City of Ormond Beach was received                  in                  December 2006, for up to 3,700 residential units and 5 million                  commercial                  square feet. A development order from Flagler County is currently                  under                  review, and if approved, Ormond Crossings will receive entitlements                  for up                  to 700 additional residential units*. *Actual build-out, however,                  will consider market demand as well as infrastructure and mitigation                  costs.* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Summary                  of Other Land Inventories**  |                                      |      |                           |            |           |             |
|--------------------------------------------------------------|-------------------------------------------|-----------|--------------------------------|-----------------|----------------|------------------|
| **For                  the Nine Months Ended**               |                                      |      |                           |            |           |             |
| **September                  30, 2007**                      | **Ownership**                             | **Total** | **Mixed                  Use** | **Residential** | **Commercial** | **Agricultural** |
| **Acres                  *(a)***                             |                                      |      |                           |            |           |             |
|                                                         |                                      |      |                           |            |           |             |   |
| Palm                  Coast Holdings                         | 80%                                       |      |                           |            |           |             |
|                                                         | At                  December 31, 2006     |      | 2,136                          | 1,404           | 346            | 247              | 139 |
|                                                         | Property                  Sold            |      | (78)                           | (59)            | –        | (19)             | – |
|                                                         | Change                  in Estimate *(a)* |      | (666)                          | (474)           | (244)          | 101              | (49) |
|                                                         |                                      |      | 1,392                          | 871             | 102            | 329              | 90 |
| Lehigh                                                       | 80%                                       |      |                           |            |           |             |
|                                                         | At                  December 31, 2006     |      | 223                            | –         | 140            | 74               | 9 |
|                                                         | Change                  in Estimate *(a)* |      | –                        | –         | –        | –          | – |
|                                                         |                                      |      | 223                            | –         | 140            | 74               | 9 |
| Cape                  Coral                                  | 100%                                      |      |                           |            |           |             |
|                                                         | At                  December 31, 2006     |      | 30                             | –         | 1              | 29               | – |
|                                                         | Property                  Sold            |      | (8)                            | –         | –        | (8)              | – |
|                                                         |                                      |      | 22                             | –         | 1              | 21               | – |
| Other                  *(b)*                                 | 100%                                      |      |                           |            |           |             |
|                                                         | At                  December 31, 2006     |      | 934                            | –         | –        | –          | 934 |
|                                                         | Property                  Sold            |      | (364)                          | –         | –        | –          | (364) |
|                                                         | Change                  in Estimate *(a)* |      | (113)                          | –         | –        | –          | (113) |
|                                                         |                                      |      | 457                            | –         | –        | –          | 457 |

| *(a)* | *Acreage                  amounts are approximate and shown on a gross basis, including wetlands                  and                  minority interest. Acreage amounts may vary due to platting or                  surveying                  activity. Wetland amounts vary by property and are often not formally                  determined prior to sale. The actual property allocation at full                  build-out                  may be different than these                  estimates.* |
|-------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(b)* | *Includes                  land located in Palm Coast, Florida not included in development                  projects.* |
|-------|------------------------------------------------------------------------------------------------------------------------|

----

**OUTLOOK        (Continued)**

**Income        Taxes. **

**LIQUIDITY        AND CAPITAL RESOURCES**

**Cash        Flow Activities**

**Operating        Activities.**

**Investing        Activities.**

**Financing        Activities.**

**Working        Capital.**
*Invest        Direct*

**Securities**

----

**LIQUIDITY        AND CAPITAL RESOURCES (Continued)**

**Off-Balance        Sheet Arrangements**

**Capital        Requirements**

**ENVIRONMENTAL        MATTERS AND OTHER**

**NEW        ACCOUNTING STANDARDS**

| **ITEM                  3.** | **QUANTITATIVE                  AND QUALITATIVE DISCLOSURES ABOUT MARKET                  RISK** |
|------------------------------|--------------------------------------------------------------------------------------------------|

**SECURITIES        INVESTMENTS**

**Available-For-Sale        Securities.**

**Emerging        Technology Portfolio.**
* *

----

| **ITEM                  3.** | **QUANTITATIVE                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                  (Continued)** |
|------------------------------|--------------------------------------------------------------------------------------------------------------|

**COMMODITY        PRICE RISK**

**POWER        MARKETING**

| **ITEM                  4.** | **CONTROLS                  AND PROCEDURES** |
|------------------------------|----------------------------------------------|

**Evaluation        of Disclosure Controls and Procedures.**

**Changes        in Internal Controls.**

----

| **PART                  II.** | **OTHER                  INFORMATION** |
|-------------------------------|----------------------------------------|

| **ITEM                  1.** | **LEGAL                  PROCEEDINGS** |
|------------------------------|----------------------------------------|

| **ITEM                  1A.** | **RISK                  FACTORS** |
|-------------------------------|-----------------------------------|

| **ITEM                  2.** | **UNREGISTERED                  SALES OF EQUITY SECURITIES AND USE OF                  PROCEEDS** |
|------------------------------|---------------------------------------------------------------------------------------------------|

| **ITEM                  3.** | **DEFAULTS                  UPON SENIOR SECURITIES** |
|------------------------------|------------------------------------------------------|

| **ITEM                  4.** | **SUBMISSION                  OF MATTERS TO A VOTE OF SECURITY                  HOLDERS** |
|------------------------------|-------------------------------------------------------------------------------------------|

|   | None. |
|--------|-------|

**ITEM        5.                      OTHER        INFORMATION**

| **Minimum                  Revenue and Demand Under Contract** | **Minimum**                                | **Monthly**   |
|----------------------------------------------------------------|--------------------------------------------|---------------|
| **As                  of September 30, 2007**                  | **Annual                  Revenue (a, b)** | **Megawatts** |
|                                                           |                                       |          |
| 2007                                                           | $110.0                                     | 722           |
| 2008                                                           | $59.3                                      | 366           |
| 2009                                                           | $25.9                                      | 148           |
| 2010                                                           | $25.5                                      | 148           |
| 2011                                                           | $23.3                                      | 136           |
|                                                           |                                       |          |

| *(a)  * | *Based                  on past experience, we believe revenue from our large power customers                  will                  be substantially in excess of the minimum contract                  amounts.* |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(b)  * | *Although                  several contracts have a feature that allows demand to go to zero                  after a                  two-year advance notice of a permanent closure, this minimum revenue                  summary does not reflect this occurrence happening in the forecasted                  period because we believe it is                  unlikely.* |
|-------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**ITEM        6.                 EXHIBITS**

**Exhibit**

**Number**

|   | 31(a) | Rule                  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer                  Pursuant                  to Section 302 of the Sarbanes-Oxley Act of                  2002. |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 31(b) | Rule                  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer                  Pursuant                  to Section 302 of the Sarbanes-Oxley Act of                  2002. |
|--------|-------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 32 | Section                  1350 Certification of Periodic Report by the Chief Executive Officer                  and                  Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley                  Act                  of 2002. |
|--------|----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | 99 | ALLETE                  News Release dated October 26, 2007, announcing 2007 third quarter                  earnings. **(This exhibit has been furnished and shall not be deemed                  “filed” for purposes of Section 18 of the Securities Exchange Act of                  1934, nor shall it be deemed incorporated by reference in any filing                  under                  the Securities Act of 1933, except as shall be expressly set forth                  by                  specific reference in such                  filing.)** |
|--------|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|   | **SIGNATURES** |
|--------|----------------|

| **ALLETE,                  Inc.** |
|-----------------------------------|
|                              |   |   |
|                              |   |   |
|                              |   |   |
|                              |   |   |
|                              |   |   |
| October                  26, 2007 |   | /s/                  Mark A. Schober |
|                              |   | Mark                  A. Schober |
|                              |   | Senior                  Vice President and Chief Financial Officer |
|                              |   |   |
|                              |   |   |
|                              |   |   |
|                              |   |   |
|                              |   |   |
| October                  26, 2007 |   | /s/                  Steven Q. DeVinck |
|                              |   | Steven                  Q. DeVinck |
|                              |   | Controller |

----