<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549





                                    FORM 10-Q



(Mark One)

/X/  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

For the quarterly period ended JUNE 30, 2004

                                       or

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



                           Commission File No. 1-3548

                                  ALLETE, INC.


                             A Minnesota Corporation
                   IRS Employer Identification No. 41-0418150
                             30 West Superior Street
                          Duluth, Minnesota 55802-2093
                           Telephone - (218) 279-5000


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
                  Yes     X      No         
                        -----         -----


Indicate  by  check mark  whether  the  registrant is  an accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).
                  Yes     X      No         
                        -----         -----


                           Common Stock, no par value,
                          88,647,015 shares outstanding
                               as of July 31, 2004




<PAGE>

                                      INDEX

                                                                            Page

Definitions                                                                   2

Safe Harbor Statement Under the Private Securities
  Litigation Reform Act of 1995                                               3


Part I.  Financial Information


         Item 1.   Financial Statements

              Consolidated Balance Sheet -
                   June 30, 2004 and December 31, 2003                        4

              Consolidated Statement of Income -
                   Quarter and Six Months Ended June 30, 2004 and 2003        5

              Consolidated Statement of Cash Flows -
                   Six Months Ended June 30, 2004 and 2003                    6

              Notes to Consolidated Financial Statements                      7


         Item 2.   Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       19


         Item 3.   Quantitative and Qualitative Disclosures about
                   Market Risk                                               28


         Item 4.   Controls and Procedures                                   30


Part II. Other Information


         Item 1.   Legal Proceedings                                         30


         Item 2.   Changes in Securities, Use of Proceeds and
                   Issuer Purchases of Equity Securities                     30


         Item 4.   Submission of Matters to a Vote of Security Holders       31


         Item 5.   Other Information                                         31


         Item 6.   Exhibits and Reports on Form 8-K                          33

Signatures                                                                   35

1                     ALLETE Second Quarter 2004 Form 10-Q


<PAGE>


                                   DEFINITIONS

The following abbreviations or acronyms are used in the text. References in this
report  to "we,"  "us" and  "our"  are to  ALLETE,  Inc.  and its  subsidiaries,
collectively.

ABBREVIATION OR ACRONYM              TERM
--------------------------------------------------------------------------------

2003 Form 10-K                       ALLETE's Annual Report on Form 10-K for
                                          the Year Ended December 31, 2003
Aqua America                         Aqua America, Inc.
ADESA                                ADESA, Inc.
ADESA Impact                         Collectively, Automotive Recovery Services,
                                          Inc. and Impact Auto Auctions Ltd.
ADESA Importation                    ADESA Importation Services, Inc.
AFC                                  Automotive Finance Corporation
ALLETE                               ALLETE, Inc.
ALLETE Properties                    ALLETE Properties, Inc.
APB                                  Accounting Principles Board
Company                              ALLETE, Inc. and its subsidiaries
EBITDA                               Earnings Before Interest, Taxes,
                                          Depreciation and Amortization Expense
EPA                                  Environmental Protection Agency
ESOP                                 Employee Stock Ownership Plan
FASB                                 Financial Accounting Standards Board
FERC                                 Federal Energy Regulatory Commission
Florida Water                        Florida Water Services Corporation
FPSC                                 Florida Public Service Commission
GAAP                                 Generally Accepted Accounting Principles in
                                          the United States
GeoInsight                           GeoInsight, Inc.
IPO                                  Initial Public Offering
MTBE                                 Methyl Tertiary-Butyl Ether
Minnesota Power                      An operating division of ALLETE, Inc.
Minnkota Power                       Minnkota Power Cooperative, Inc.
MPUC                                 Minnesota Public Utilities Commission
MW                                   Megawatt(s)
Note ___                             Note ___ to the consolidated financial
                                          statements in this Form 10-Q
NRG Energy                           NRG Energy, Inc.
NYSE                                 New York Stock Exchange
PSCW                                 Public Service Commission of Wisconsin
SEC                                  Securities and Exchange Commission
SFAS                                 Statement of Financial Accounting Standards
                                          No.
Split Rock Energy                    Split Rock Energy LLC
Square Butte                         Square Butte Electric Cooperative
SWL&P                                Superior Water, Light and Power Company
Taconite Harbor                      Taconite Harbor Energy Center
WDNR                                 Wisconsin Department of Natural Resources


                      ALLETE Second Quarter 2004 Form 10-Q                     2


<PAGE>


                              SAFE HARBOR STATEMENT
           UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

In  connection  with  the  safe  harbor  provisions  of the  Private  Securities
Litigation  Reform  Act of 1995,  we are  hereby  filing  cautionary  statements
identifying  important  factors  that could  cause our actual  results to differ
materially from those projected in  forward-looking  statements (as such term is
defined in the Private  Securities  Litigation Reform Act of 1995) made by or on
behalf of ALLETE in this  Quarterly  Report on Form 10-Q, in  presentations,  in
response to questions or otherwise.  Any  statements  that  express,  or involve
discussions as to,  expectations,  beliefs,  plans,  objectives,  assumptions or
future events or performance (often, but not always, through the use of words or
phrases such as "anticipates,"  "believes,"  "estimates,"  "expects," "intends,"
"plans,"   "projects,"   "will  likely   result,"  "will  continue"  or  similar
expressions) are not statements of historical facts and may be forward-looking.

Forward-looking   statements   involve   estimates,   assumptions,   risks   and
uncertainties  and are  qualified  in their  entirety by  reference  to, and are
accompanied by, the following important factors, which are difficult to predict,
contain  uncertainties,  are beyond our control and may cause actual  results or
outcomes  to  differ   materially  from  those   contained  in   forward-looking
statements:

  -  our ability to  successfully implement our strategic  objectives, including
     the  completion  and  impact  of the  planned  spin-off  of our  Automotive
     Services business;

  -  war and acts of terrorism;

  -  prevailing governmental policies and regulatory actions, including those of
     the  United  States  Congress,  Canadian  federal  government,   state  and
     provincial  legislatures,  the FERC,  the MPUC,  the  FPSC,  the PSCW,  and
     various county regulators and city  administrators,  about allowed rates of
     return, financings,  industry and rate structure,  acquisition and disposal
     of assets and facilities,  operation and construction of plant  facilities,
     recovery  of  purchased  power and  capital  investments,  and  present  or
     prospective wholesale and retail competition  (including but not limited to
     transmission  costs) as well as  vehicle-related  laws,  including  vehicle
     brokerage and auction laws;

  -  unanticipated  effects  of restructuring initiatives  in  the  electric and
     automotive industries;

  -  economic and geographic factors, including political and economic risks;

  -  changes in and compliance with environmental and safety laws and policies;

  -  weather conditions;

  -  natural disasters;

  -  market factors affecting supply and demand for used vehicles;

  -  wholesale power market conditions;

  -  population growth rates and demographic patterns;

  -  the  effects of competition, including competition for retail and wholesale
     customers, as well as sellers and buyers of vehicles;

  -  pricing and transportation of commodities;

  -  changes in tax rates or policies or in rates of inflation;

  -  unanticipated project delays or changes in project costs;

  -  unanticipated changes in operating expenses and capital expenditures;

  -  capital market conditions;

  -  competition for economic expansion or development opportunities;

  -  our ability to manage expansion and integrate acquisitions; and

  -  the  outcome  of  legal and  administrative  proceedings  (whether civil or
     criminal) and  settlements  that affect the business and  profitability  of
     ALLETE.

Additional  disclosures  regarding  factors  that could  cause our  results  and
performance to differ from results or performance anticipated by this report are
discussed in Item 7. under the heading  "Factors that May Affect Future Results"
beginning on page 46 of our 2003 Form 10-K. Any forward-looking statement speaks
only as of the  date on  which  such  statement  is made,  and we  undertake  no
obligation  to  update  any  forward-looking  statement  to  reflect  events  or
circumstances  after the date on which that  statement is made or to reflect the
occurrence of unanticipated  events. New factors emerge from time to time and it
is not  possible  for  management  to predict all of these  factors,  nor can it
assess the impact of each of these  factors on the  businesses  of ALLETE or the
extent to which any factor, or combination of factors,  may cause actual results
to differ  materially  from those  contained in any  forward-looking  statement.
Readers are urged to carefully review and consider the various  disclosures made
by us in our 2003  Form 10-K and in our other  reports  filed  with the SEC that
attempt  to  advise  interested  parties  of the  factors  that may  affect  our
business.

3                     ALLETE Second Quarter 2004 Form 10-Q


<PAGE>



PART I.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

<TABLE>

                                                        ALLETE
                                              CONSOLIDATED BALANCE SHEET
                                                 Millions - Unaudited
<CAPTION>
                                                                                    JUNE 30,         DECEMBER 31,
                                                                                      2004               2003
--------------------------------------------------------------------------------------------------------------------

<S>                                                                                 <C>              <C> 
ASSETS

Current Assets
     Cash and Cash Equivalents                                                      $  602.9           $  219.6
     Restricted Cash                                                                   155.8                3.4
     Accounts Receivable (Less Allowance of $14.1 and $26.4)                           551.3              403.8
     Inventories                                                                        40.7               37.9
     Prepayments and Other                                                              15.6               15.8
     Discontinued Operations                                                             9.6               14.9
--------------------------------------------------------------------------------------------------------------------

        Total Current Assets                                                         1,375.9              695.4

Property, Plant and Equipment - Net                                                  1,484.7            1,499.0

Investments                                                                            184.6              204.6

Goodwill                                                                               509.5              511.0

Other Intangible Assets                                                                 30.7               33.3

Other Assets                                                                            88.0               70.1

Discontinued Operations                                                                  8.2               87.9
--------------------------------------------------------------------------------------------------------------------

TOTAL ASSETS                                                                        $3,681.6           $3,101.3
--------------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES

Current Liabilities
     Accounts Payable                                                               $  396.0           $  243.9
     Accrued Taxes and Interest                                                         43.5               35.2
     Notes Payable                                                                         -               53.0

     Long-Term Debt Due Within One Year                                                320.1               37.5
     Other                                                                              98.8              107.1
     Discontinued Operations                                                            15.0               49.5
--------------------------------------------------------------------------------------------------------------------

        Total Current Liabilities                                                      873.4              526.2

Long-Term Debt                                                                         790.9              747.7

Accumulated Deferred Income Taxes                                                      182.2              160.7

Minority Interest                                                                       74.3                8.4

Other Liabilities                                                                      157.5              153.1

Discontinued Operations                                                                  2.7               45.0

Commitments and Contingencies
--------------------------------------------------------------------------------------------------------------------

        Total Liabilities                                                            2,081.0            1,641.1
--------------------------------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY

Common Stock Without Par Value, 130.0 Shares Authorized
     88.6 and 87.3 Shares Outstanding                                                  963.7              859.2

Unearned ESOP Shares                                                                   (43.8)             (45.4)

Accumulated Other Comprehensive Gain                                                     8.4               14.5

Retained Earnings                                                                      672.3              631.9
--------------------------------------------------------------------------------------------------------------------

        Total Shareholders' Equity                                                   1,600.6            1,460.2
--------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                          $3,681.6           $3,101.3
--------------------------------------------------------------------------------------------------------------------

                           The accompanying notes are an integral part of these statements.
</TABLE>


                      ALLETE Second Quarter 2004 Form 10-Q                     4


<PAGE>


<TABLE>
                                                        ALLETE
                                           CONSOLIDATED STATEMENT OF INCOME
                                    Millions Except Per Share Amounts - Unaudited

<CAPTION>
                                                                     QUARTER ENDED             SIX MONTHS ENDED
                                                                       JUNE 30,                    JUNE 30,
                                                                 2004            2003        2004           2003
--------------------------------------------------------------------------------------------------------------------

<S>                                                            <C>             <C>          <C>            <C> 
OPERATING REVENUE
     Energy Services
         Regulated Utility                                      $136.9          $125.8      $278.3         $263.8
         Nonregulated                                             47.0            32.7        87.9           73.8
     Automotive Services                                         232.1           240.7       479.8          473.6
     Investments                                                  (0.7)           10.7        27.8           21.6
--------------------------------------------------------------------------------------------------------------------

         Total Operating Revenue                                 415.3           409.9       873.8          832.8
--------------------------------------------------------------------------------------------------------------------

OPERATING EXPENSES
     Fuel and Purchased Power
         Regulated Utility                                        65.9            56.8       123.0          112.8
         Nonregulated                                             11.3             8.1        23.1           19.5
     Operations
         Regulated Utility                                        53.2            52.5       110.6          110.3
         Nonregulated                                             33.7            24.5        62.2           52.8
         Automotive and Investments                              180.7           189.9       384.1          380.0
     Interest                                                     13.8            16.0        26.9           32.9
--------------------------------------------------------------------------------------------------------------------

         Total Operating Expenses                                358.6           347.8       729.9          708.3
--------------------------------------------------------------------------------------------------------------------

OPERATING INCOME FROM CONTINUING OPERATIONS                       56.7            62.1       143.9          124.5

INCOME TAX EXPENSE                                                23.8            25.0        57.9           49.4
--------------------------------------------------------------------------------------------------------------------

INCOME FROM CONTINUING OPERATIONS                                 32.9            37.1        86.0           75.1
INCOME FROM
     DISCONTINUED OPERATIONS - NET OF TAX                          1.8             7.3         1.2           13.6
--------------------------------------------------------------------------------------------------------------------

NET INCOME                                                      $ 34.7          $ 44.4      $ 87.2         $ 88.7
--------------------------------------------------------------------------------------------------------------------

AVERAGE SHARES OF COMMON STOCK
     Basic                                                        85.1            82.6        84.7           82.4
     Diluted                                                      85.6            82.9        85.2           82.6
--------------------------------------------------------------------------------------------------------------------

BASIC EARNINGS PER SHARE OF COMMON STOCK
         Continuing Operations                                   $0.39           $0.45       $1.02          $0.91
         Discontinued Operations                                  0.02            0.09        0.01           0.17
--------------------------------------------------------------------------------------------------------------------

                                                                 $0.41           $0.54       $1.03          $1.08
--------------------------------------------------------------------------------------------------------------------

DILUTED EARNINGS PER SHARE OF COMMON STOCK
         Continuing Operations                                   $0.38           $0.45       $1.01          $0.91
         Discontinued Operations                                  0.02            0.08        0.01           0.16
--------------------------------------------------------------------------------------------------------------------

                                                                 $0.40           $0.53       $1.02          $1.07
--------------------------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE OF COMMON STOCK                            $0.2825         $0.2825      $0.565         $0.565
--------------------------------------------------------------------------------------------------------------------

                           The accompanying notes are an integral part of these statements.
</TABLE>


5                     ALLETE Second Quarter 2004 Form 10-Q


<PAGE>


<TABLE>
                                                        ALLETE
                                         CONSOLIDATED STATEMENT OF CASH FLOWS
                                                 Millions - Unaudited
<CAPTION>

                                                                                           SIX MONTHS ENDED
                                                                                               JUNE 30,
                                                                                     2004                   2003
--------------------------------------------------------------------------------------------------------------------

<S>                                                                                 <C>                     <C>
OPERATING ACTIVITIES
       Net Income                                                                   $ 87.2                  $ 88.7
       Depreciation and Amortization                                                  43.0                    42.9
       Deferred Income Taxes                                                           7.1                    12.0
       Gain on Sale of Plant                                                         (15.5)                  (17.0)
       Changes in Operating Assets and Liabilities
          Accounts Receivable                                                       (146.4)                  (84.8)
          Inventories                                                                 (1.8)                    3.2
          Prepayments and Other                                                       (0.2)                   (1.8)
          Accounts Payable                                                           118.7                    54.6
          Other Current Liabilities                                                  (13.2)                   (3.2)
       Other Assets                                                                   (4.1)                    2.4
       Other Liabilities                                                               3.6                     8.5
--------------------------------------------------------------------------------------------------------------------
              Cash from Operating Activities                                          78.4                   105.5
--------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
       Proceeds from Sale of Plant                                                    75.4                       -
       Proceeds from Sale of Available-For-Sale Securities                             1.6                     6.4
       Changes to Investments                                                         16.3                    (2.4)
       Additions to Property, Plant and Equipment                                    (43.4)                 (118.6)
       Other                                                                          (1.5)                  (15.0)
--------------------------------------------------------------------------------------------------------------------
              Cash from (for) Investing Activities                                    48.4                  (129.6)
--------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
       Issuance of Common Stock                                                       34.9                    17.8
       Issuance of Subsidiary Common Stock                                           136.0                       -
       Issuance of Long-Term Debt                                                    405.6                    65.9
       Net Increase in Book Overdrafts                                                31.2                    70.8
       Payments for Debt Issuance Costs                                               (9.9)                      -
       Changes in Notes Payable - Net                                                (52.2)                  (72.9)
       Reductions of Long-Term Debt                                                  (81.5)                   (3.2)
       Dividends on Common Stock                                                     (46.8)                  (45.6)
       Transfer to Restricted Cash                                                  (152.4)                      -
--------------------------------------------------------------------------------------------------------------------
              Cash from Financing Activities                                         264.9                    32.8
--------------------------------------------------------------------------------------------------------------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                               (6.4)                   30.8
--------------------------------------------------------------------------------------------------------------------

CHANGE IN CASH AND CASH EQUIVALENTS                                                  385.3                    39.5

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                     226.1                   203.0
--------------------------------------------------------------------------------------------------------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD <F1>                                     $611.4                  $242.5
--------------------------------------------------------------------------------------------------------------------

SUPPLEMENTAL CASH FLOW INFORMATION
       Cash Paid During the Period for
          Interest - Net of Capitalized                                              $26.4                   $33.2
          Income Taxes                                                               $59.6                   $22.6

--------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $8.5 million of cash from Discontinued Operations at June 30, 2004 ($9.7 million at June 30, 2003).
</FN>
                           The accompanying notes are an integral part of these statements.
</TABLE>


                      ALLETE Second Quarter 2004 Form 10-Q                     6


<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited consolidated financial statements and notes should be
read in  conjunction  with our 2003 Form 10-K. In our opinion,  all  adjustments
necessary for a fair  presentation  of the results for the interim  periods have
been  included.  The results of operations  for an interim period may not give a
true indication of the results for the year.

NOTE 1.    BUSINESS SEGMENTS
Millions

<TABLE>
<CAPTION>
                                                                 ENERGY SERVICES                       
                                                              ---------------------                    INVESTMENTS
                                                              REGULATED     NON-       AUTOMOTIVE     AND CORPORATE
                                             CONSOLIDATED      UTILITY    REGULATED     SERVICES         CHARGES
-------------------------------------------------------------------------------------------------------------------


<S>                                          <C>              <C>         <C>          <C>            <C>
FOR THE QUARTER ENDED JUNE 30, 2004

Operating Revenue                               $415.3          $136.9     $ 47.0        $232.1<F2>       $(0.7)
Operation and Other Expense                      323.5           109.2       42.4         165.2             6.7
Depreciation and Amortization Expense             21.3             9.9        2.6           8.8               -
Interest Expense                                  13.8             4.6        0.6           4.7             3.9
-------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
    Continuing Operations                         56.7            13.2        1.4          53.4           (11.3)
Income Tax Expense (Benefit)                      23.8             5.0        0.3          21.1            (2.6)
-------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations          32.9             8.2        1.1          32.3            (8.7)
Income (Loss) from
    Discontinued Operations - Net of Tax           1.8<F1>           -          -          (4.0)              -
-------------------------------------------------------------------------------------------------------------------

Net Income (Loss)                               $ 34.7<F1>        $8.2     $  1.1        $ 28.3           $(8.7)
-------------------------------------------------------------------------------------------------------------------


FOR THE QUARTER ENDED JUNE 30, 2003

Operating Revenue                               $409.9          $125.8     $ 32.7        $240.7<F2>       $10.7
Operation and Other Expense                      309.9            98.9       30.1         171.3             9.6
Depreciation and Amortization Expense             21.9            10.4        2.5           8.9             0.1
Interest Expense                                  16.0             5.0        0.7           3.7             6.6
-------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
    Continuing Operations                         62.1            11.5       (0.6)         56.8            (5.6)
Income Tax Expense (Benefit)                      25.0             4.6       (0.5)         22.7            (1.8)
-------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations          37.1             6.9       (0.1)         34.1            (3.8)
Income (Loss) from
    Discontinued Operations - Net of Tax           7.3<F1>           -          -          (0.1)              -
-------------------------------------------------------------------------------------------------------------------

Net Income (Loss)                               $ 44.4<F1>      $  6.9     $ (0.1)      $  34.0           $(3.8)
-------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $5.8 million of income from the Water Services businesses in 2004 ($7.4 million in 2003).
<F2> Included $43.3 million of Canadian operating revenue in 2004 ($47.6 million in 2003).
</FN>
</TABLE>


7                     ALLETE Second Quarter 2004 Form 10-Q                     

<PAGE>


NOTE 1.    BUSINESS SEGMENTS (CONTINUED)
Millions

<TABLE>
<CAPTION>
                                                                   ENERGY SERVICES                       
                                                                ---------------------                    INVESTMENTS  
                                                                REGULATED     NON-       AUTOMOTIVE     AND CORPORATE
                                               CONSOLIDATED      UTILITY    REGULATED     SERVICES         CHARGES
---------------------------------------------------------------------------------------------------------------------

<S>                                            <C>              <C>         <C>          <C>            <C>
FOR THE SIX MONTHS ENDED JUNE 30, 2004

Operating Revenue                                 $873.8          $278.3     $ 87.9        $479.8<F3>       $27.8
Operation and Other Expense                        660.0           213.8       80.2         344.7            21.3
Depreciation and Amortization Expense               43.0            19.8        5.1          18.1               -
Interest Expense                                    26.9             9.3        0.9           8.7             8.0
---------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
     Continuing Operations                         143.9            35.4        1.7         108.3            (1.5)
Income Tax Expense                                  57.9            13.3        0.2          42.7             1.7
---------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations            86.0            22.1        1.5          65.6            (3.2)
Income (Loss) from
     Discontinued Operations - Net of Tax            1.2<F1>           -          -          (4.0)              -
---------------------------------------------------------------------------------------------------------------------

Net Income (Loss)                                 $ 87.2<F1>      $ 22.1     $  1.5        $ 61.6           $(3.2)
---------------------------------------------------------------------------------------------------------------------

Total Assets                                    $3,681.6<F2>    $1,212.4     $244.6      $2,076.8<F4>      $130.0
Property, Plant and Equipment - Net             $1,484.7          $734.2     $190.7        $555.8            $4.0
Accumulated Depreciation                          $870.5          $709.2      $47.4        $113.9               -
Capital Expenditures                               $43.4<F2>       $27.9       $6.6          $5.7            $0.2


FOR THE SIX MONTHS ENDED JUNE 30, 2003

Operating Revenue                                 $832.8          $263.8     $ 73.8       $ 473.6<F3>       $21.6
Operation and Other Expense                        632.6           202.4       67.3         347.5            15.4
Depreciation and Amortization Expense               42.8            20.7        5.0          17.0             0.1
Interest Expense                                    32.9            10.2        1.1           8.1            13.5
---------------------------------------------------------------------------------------------------------------------

Operating Income (Loss) from
     Continuing Operations                         124.5            30.5        0.4         101.0            (7.4)
Income Tax Expense (Benefit)                        49.4            12.2       (0.3)         40.2            (2.7)
---------------------------------------------------------------------------------------------------------------------

Income (Loss) from Continuing Operations            75.1            18.3        0.7          60.8            (4.7)
Income from Discontinued Operations - Net of Tax    13.6<F1>           -          -           0.4               -
---------------------------------------------------------------------------------------------------------------------

Net Income (Loss)                                 $ 88.7<F1>      $ 18.3     $  0.7        $ 61.2           $(4.7)
---------------------------------------------------------------------------------------------------------------------

Total Assets                                    $3,409.2<F2>      $922.8     $214.5      $1,718.5<F4>      $163.3
Property, Plant and Equipment - Net             $1,480.6          $730.5     $174.3        $571.8            $4.0
Accumulated Depreciation                          $819.7          $686.6      $40.1         $93.0               -
Capital Expenditures                               $67.5<F2>       $23.7      $14.4         $12.8               -

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

<FN>
<F1> Included $5.2 million of income from the Water Services businesses in 2004 ($13.2 million in 2003).
<F2> Discontinued Operations represented $17.8 million of total assets in 2004 ($390.1 million in 2003) and $3.0
     million of capital expenditures in 2004 ($16.6 million in 2003).
<F3> Included $89.1 million of Canadian operating revenue in 2004 ($87.7 million in 2003).
<F4> Included $241.3 million of Canadian assets in 2004 ($214.6 million in 2003).
</FN>
</TABLE>


                      ALLETE Second Quarter 2004 Form 10-Q                     8


<PAGE>


NOTE 2.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTS  RECEIVABLE.  AFC sells the majority of U.S. dollar denominated finance
receivables on a revolving basis to a wholly owned,  bankruptcy remote,  special
purpose  subsidiary that is consolidated  for accounting  purposes.  AFC and the
special purpose  subsidiary  amended its  securitization  agreement in June 2004
concurrent with the completion of ADESA's IPO. The agreement  expires in January
2005  subject to annual  renewal  and allows  for the  revolving  sale to a bank
conduit  facility of up to a maximum of $500 million in  undivided  interests in
eligible finance receivables subject to committed liquidity. The special purpose
subsidiary had $425 million of committed liquidity at June 30, 2004. Receivables
sold are not reported on our consolidated financial statements. At June 30, 2004
AFC managed total finance  receivables of $599 million ($533 million at December
31, 2003), of which $522 million had been sold to the special purpose subsidiary
($458 million at December 31, 2003). The special purpose subsidiary then in turn
sold loans, with recourse to the special purpose subsidiary,  of $370 million to
the bank conduit  facility at June 30, 2004 ($334  million at December 31, 2003)
leaving $229 million of finance receivables recorded on our consolidated balance
sheet at June 30, 2004 ($199  million at December 31,  2003).  Proceeds from the
revolving sale of receivables to the bank conduit facility were used to fund new
loans to customers. AFC and the special purpose subsidiary must maintain certain
financial covenants  including,  among others,  limits on the amount of debt AFC
can incur,  minimum levels of tangible net worth, and termination events tied to
the  performance  of  the  finance  receivables  portfolio.  The  securitization
agreement  also  incorporates  the  financial  covenants  of ADESA's  new credit
facility. AFC has historically performed better than the covenant thresholds set
forth in the  securitization  agreement,  and we are not  aware of any  changing
circumstances  that  would  put AFC or us in  noncompliance  with the  covenants
therein.

ACCOUNTING  FOR  STOCK-BASED  COMPENSATION.  We  have  elected  to  account  for
stock-based  compensation in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees."  Accordingly,  we recognize  expense for performance
share awards  granted and do not  recognize  expense for employee  stock options
granted.  The after-tax  expense  recognized  for  performance  share awards was
approximately  $0.8  million for the first six months of 2004 ($1.4  million for
the first six months of 2003). The following table illustrates the effect on net
income and  earnings  per share if we had  applied  the fair  value  recognition
provisions of SFAS 123, "Accounting for Stock-Based Compensation."


<TABLE>
<CAPTION>
                                                                  QUARTER ENDED               SIX MONTHS ENDED
EFFECT OF SFAS 123                                                  JUNE 30,                      JUNE 30,
ACCOUNTING FOR STOCK-BASED COMPENSATION                        2004           2003          2004            2003
-------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts

<S>                                                           <C>             <C>          <C>              <C>
Net Income
     As Reported                                              $34.7           $44.4        $87.2            $88.7
     Less: Employee Stock Compensation Expense
           Determined Under SFAS 123 - Net of Tax               0.1             0.1          0.2              0.2
-------------------------------------------------------------------------------------------------------------------

     Pro Forma Net Income                                     $34.6           $44.3        $87.0            $88.5
-------------------------------------------------------------------------------------------------------------------

Basic Earnings Per Share
     As Reported                                              $0.41           $0.54        $1.03            $1.08
     Pro Forma                                                $0.41           $0.54        $1.03            $1.07

Diluted Earnings Per Share
     As Reported                                              $0.40           $0.53        $1.02            $1.07
     Pro Forma                                                $0.40           $0.53        $1.02            $1.07
-------------------------------------------------------------------------------------------------------------------
</TABLE>


In the previous table, the expense for employee stock options granted determined
under SFAS 123 was calculated using the  Black-Scholes  option pricing model and
the following assumptions:

<TABLE>
<CAPTION>
                                                                              2004                          2003
-------------------------------------------------------------------------------------------------------------------

<S>                                                                           <C>                           <C> 
Risk-Free Interest Rate                                                        3.3%                          3.1%
Expected Life - Years                                                             5                             5
Expected Volatility                                                           28.1%                         25.2%
Dividend Growth Rate                                                             2%                            2%
-------------------------------------------------------------------------------------------------------------------
</TABLE>


RESTRICTED  CASH.  Our  Automotive  Services  business  had  $155.8  million  of
restricted  cash at June 30, 2004  primarily  consisting of funds held in escrow
for the redemption of certain debt in August 2004. (See Note 7.)

9                     ALLETE Second Quarter 2004 Form 10-Q                     


<PAGE>


NOTE 2.    OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NEW ACCOUNTING STANDARDS.  In May 2004 the FASB issued FASB Staff Position (FSP)
106-2,   "Accounting  and  Disclosure   Requirements  Related  to  the  Medicare
Prescription  Drug,  Improvement  and  Modernization  Act of 2003" (Act),  which
provides   accounting  and  disclosure   guidance  for  employers  that  sponsor
postretirement  health care plans that provide  prescription drug benefits.  FSP
106-2  requires  that the  Accumulated  Postretirement  Benefit  Obligation  and
Postretirement  Benefit Cost reflect the impact of the Act upon adoption,  which
is required for the first  interim  period  beginning  after June 15,  2004.  We
provide  postretirement health benefits that include prescription drug benefits,
and expect our  postretirement  prescription drug benefits to qualify us for the
federal  subsidy to be  provided  for under the Act.  We expect that the federal
subsidy will reduce our postretirement  benefit cost by approximately $2 million
pretax annually. We will adopt FSP 106-2 in the third quarter of 2004.


NOTE 3.    SPIN-OFF AND IPO OF AUTOMOTIVE SERVICES

In  October  2003 our Board of  Directors  approved a plan to spin off to ALLETE
shareholders our Automotive Services business as a publicly traded company doing
business as ADESA, Inc. In March 2004 our Board of Directors  approved an IPO of
less than 20 percent of all ADESA  common  stock  outstanding.  On June 21, 2004
ADESA issued 6.3 million  shares of common stock through an IPO priced at $24.00
per  share.  This  represented  6.6  percent  of  ADESA's  94.9  million  shares
outstanding. As a result of the IPO, ALLETE recorded a $73.1 million increase to
Common Stock with no gain being recognized.  We will account for the 6.6 percent
public  ownership of ADESA as a minority  interest.  We will continue to own and
consolidate the remaining portion of ADESA until the completion of the spin-off.
The  spin-off  is  expected  to take the form of a tax-free  stock  dividend  to
ALLETE's  shareholders,  who would  receive a pro rata number of shares of ADESA
common  stock for each share of ALLETE  common stock that they own. The spin-off
is subject to the  approval  of the final plan by ALLETE's  Board of  Directors,
favorable  market  conditions,  receipt  of tax  opinions  and  other  customary
conditions.  ALLETE's Board of Directors is expected to meet in late August 2004
to finalize details of the spin-off of Automotive Services, which is expected to
be completed by the end of September 2004.

In  accordance  with SFAS 144,  "Accounting  for the  Impairment  or Disposal of
Long-Lived   Assets,"  we  will  report  the  Automotive  Services  business  in
discontinued operations after the spin-off. For the quarter and six months ended
June 30,  2004,  $0.3  million of  minority  interest  expense  was  included in
Automotive and Investment  Operations Expenses on our consolidated  statement of
income.


NOTE 4.    DISCONTINUED OPERATIONS

During 2003, we sold,  under  condemnation or imminent  threat of  condemnation,
substantially  all of our water  assets in Florida  for a total  sales  price of
approximately  $445 million.  Earnings  from  Discontinued  Operations  for 2003
included  a $71.6  million,  or $0.86 per share,  after-tax  gain on the sale of
substantially  all our Water  Services  businesses  ($0.2 million first quarter;
$0.2 million second quarter;  $3.0 million,  or $0.04 per share,  third quarter;
$68.2  million,  or $0.82 per share,  fourth  quarter).  The gain was net of all
selling,  transaction  and employee  termination  benefit  expenses,  as well as
impairment losses on certain remaining assets.

In June 2004 we  essentially  concluded our strategy to exit our Water  Services
businesses  when we completed the sales of our North  Carolina  water assets and
the sale of the  remaining  72 water and  wastewater  systems in  Florida.  Aqua
America  purchased  our North  Carolina  water  assets for $48  million  and the
assumption of  approximately  $28 million in debt,  and also purchased 63 of our
water and  wastewater  systems  in  Florida  for $14  million.  Seminole  County
purchased  the  remaining  9  Florida  systems  for a total of $4  million.  The
transactions  related to the sale of our remaining  water systems in Florida are
subject to regulatory  approval by the FPSC. The approval  process may result in
an adjustment to the final purchase price based on the FPSC's  determination  of
plant investment for the systems. Earnings from Discontinued Operations for 2004
included a $5.4 million, or $0.06 per share, after-tax gain on the sale of North
Carolina  water assets and  remaining  water and  wastewater  systems in Florida
($0.4 million of after-tax expenses first quarter and $5.8 million, or $0.06 per
share, net gain second quarter).

The net cash proceeds from the sale of all water assets in 2003 and 2004,  after
transaction  costs,  retirement of most Florida Water debt and payment of income
taxes, were approximately  $300 million.  These net proceeds were used to retire
debt at ALLETE. We expect to sell our water assets in Georgia in the second half
of 2004.

                      ALLETE Second Quarter 2004 Form 10-Q                    10


<PAGE>


NOTE 4.    DISCONTINUED OPERATIONS (Continued)

In October 2003 the FPSC voted to initiate an investigation  into the ratemaking
considerations of the gain on sale of Florida Water's assets,  and whether gains
should be shared with the  previous  customers  of Florida  Water.  In June 2004
Florida enacted  legislation  which provides that gains or losses resulting from
the purchase or condemnation of a utility's assets, which results in the loss of
customers and revenue served by such assets, are to be borne by the shareholders
of the  utility.  This  applies  to all  transactions  prior  to and  after  the
effective date of the new law.


<TABLE>

SUMMARY OF DISCONTINUED OPERATIONS
-------------------------------------------------------------------------------------------------------------------------
Millions
<CAPTION>
                                                                  QUARTER ENDED               SIX MONTHS ENDED
                                                                    JUNE 30,                      JUNE 30,
INCOME STATEMENT                                              2004             2003          2004             2003
-------------------------------------------------------------------------------------------------------------------------

<S>                                                           <C>             <C>           <C>              <C>  
Operating Revenue                                             $7.6            $31.2         $15.2            $62.1
-------------------------------------------------------------------------------------------------------------------------

Pre-Tax Income (Loss) from Operations                         $0.2            $11.5         $(0.2)           $19.4
Income Tax Expense                                             0.2              4.4             -              7.5
-------------------------------------------------------------------------------------------------------------------------

                                                                 -              7.1          (0.2)            11.9
-------------------------------------------------------------------------------------------------------------------------

Gain on Disposal                                               8.7<F1>          0.4           8.1<F1>          3.1<F2>
Income Tax Expense                                             6.9              0.2           6.7              1.4
-------------------------------------------------------------------------------------------------------------------------

                                                               1.8              0.2           1.4              1.7
-------------------------------------------------------------------------------------------------------------------------

Income from Discontinued Operations                           $1.8             $7.3          $1.2            $13.6
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                             JUNE 30,                 DECEMBER 31,
BALANCE SHEET INFORMATION                                                      2004                       2003
-------------------------------------------------------------------------------------------------------------------------

<S>                                                                          <C>                      <C> 
Assets of Discontinued Operations
    Cash and Cash Equivalents                                                 $ 8.5                     $  6.5
    Other Current Assets                                                        1.1                        8.4
    Property, Plant and Equipment                                               6.0                       81.2
    Other Assets                                                                2.2                        6.7
-------------------------------------------------------------------------------------------------------------------------

                                                                              $17.8                     $102.8
-------------------------------------------------------------------------------------------------------------------------

Liabilities of Discontinued Operations
    Current Liabilities                                                       $15.0                      $49.5
    Long-Term Debt                                                                -                       19.9
    Other Liabilities                                                           2.7                       25.1
-------------------------------------------------------------------------------------------------------------------------

                                                                              $17.7                      $94.5
-------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Included $6.6 million of accrued charges related to our vehicle import business. (See ADESA Importation Litigation.)
<F2> Included a $2.0 million recovery from a settlement related to the 2002 sale of our vehicle transport business.
</FN>
</TABLE>


ADESA IMPORTATION  LITIGATION.  In 2002 a former employee of ADESA  Importation,
our vehicle import business, which we exited in the first quarter of 2003, filed
suit against ADESA and ADESA Importation  alleging breach of contract and breach
of  other  oral   agreements   related  to  ADESA   Importation's   purchase  of
International Vehicle Importers,  Inc. in December 2000. ADESA Importation filed
a counterclaim against the former employee including  allegations of a number of
improper acts by the employee including breach of contract,  breach of fiduciary
duty and fraud. Pursuant to Michigan law, the case was originally evaluated by a
three attorney panel.  During the mandatory case evaluation  process,  the three
attorney  panel  awarded the former  employee  damages of $153,000.  At the same
time, the panel awarded ADESA and ADESA Importation  damages of $225,000 for its
counterclaims.  The former employee rejected the panel's decision resulting in a
jury trial. On June 1, 2004 a jury awarded damages of $5.8 million to the former
employee  related to the  allegation  that ADESA  breached  oral  agreements  to
provide funding to ADESA Importation.  The jury also found in favor of ADESA and
ADESA  Importation on three of its  counterclaims  including breach of contract,
breach  of  fiduciary  duty and fraud and  awarded  ADESA and ADESA  Importation
$69,000.  ADESA and ADESA  Importation  believe that they have valid grounds for
appeal in this matter and intend to appeal the jury award,  seeking  reversal of
the verdict or a new trial.  Post-trial  motions were filed with the trial court
in July 2004.  In prior  periods ADESA did not accrue an amount for this matter,
based upon the finding of the three attorney  panel during the case  evaluation.
As a result of the jury trial verdict,  ADESA accrued $6.6 million ($4.0 million
after  taxes)  for the jury  award  plus  interest  and legal fees in the second
quarter of 2004 as a loss from discontinued operations.

11                    ALLETE Second Quarter 2004 Form 10-Q                     


<PAGE>


NOTE 5.    INVESTMENTS

At June  30,  2004  Investments  included  the  real  estate  assets  of  ALLETE
Properties,  debt and equity securities consisting primarily of $45.0 million of
securities  held for employee  benefits ($41.4 million at December 31, 2003) and
$34.5 million of economic development revenue bonds held by ADESA in conjunction
with a capital lease of a vehicle auction  facility in Georgia ($34.5 million at
December 31, 2003), and our emerging technology investments.

<TABLE>
<CAPTION>

                                                                            JUNE 30,                 DECEMBER 31,
INVESTMENTS                                                                   2004                       2003
---------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                         <C>                      <C>    
Real Estate Assets                                                          $  76.1                    $  78.5
Debt and Equity Securities                                                     81.6                       88.6
Emerging Technology Investments                                                26.9                       37.5
---------------------------------------------------------------------------------------------------------------------

                                                                            $ 184.6                    $ 204.6
---------------------------------------------------------------------------------------------------------------------
</TABLE>


We account for our emerging  technology  investments under the cost method,  and
review for impairment on a quarterly basis. During the second quarter of 2004 we
recorded $7.9 million ($4.7 million after taxes) of impairment  losses primarily
related to direct investments in certain privately-held start-up companies whose
future business prospects have diminished significantly.  Recent developments at
these companies indicate that future commercial viability is unlikely, as is new
financing necessary to continue development.

Our total  carrying  value of $26.9  million  at June 30,  2004  included  $20.4
million for  investments in three venture capital funds that have a current fund
reported value of approximately $10 million. The venture capital funds invest in
many privately-held  start-up companies,  and generally value the investments at
the most recent round of equity financing with failed  investments  written down
to zero. Experience indicates that failures in the fund's portfolio emerge early
while successful companies tend to take longer to materialize.  In addition, the
most recent round of equity  financing  may produce a low  valuation as it would
not reflect subsequent positive developments  occurring at the various companies
in which the funds have invested. Based on our evaluation of these three venture
capital  funds,  we  anticipate  that the funds'  future  value will  exceed our
carrying value as successful  companies emerge and become fully valued.  We have
the ability and intent to hold our investment in these venture capital funds for
a  reasonable  period of time  sufficient  for the  forecasted  valuation  to be
realized. As such, we did not consider these venture capital fund investments to
be other-than-temporarily impaired at June 30, 2004.


NOTE 6.    GOODWILL AND OTHER INTANGIBLES

We conduct our annual goodwill  impairment testing in the second quarter of each
year and the 2004  test  resulted  in no  impairment.  No  event or  change  has
occurred that would  indicate the carrying  amount has been  impaired  since our
annual test.

<TABLE>
<CAPTION>

GOODWILL
--------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                                                     <C>         
Carrying Value, December 31, 2003                                                                       $511.0
Acquired during Year                                                                                         -
Change due to Foreign Currency Translation Adjustment                                                     (1.5)
--------------------------------------------------------------------------------------------------------------------

Carrying Value, June 30, 2004                                                                           $509.5
--------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                            JUNE 30,                 DECEMBER 31,
OTHER INTANGIBLE ASSETS                                                       2004                       2003
--------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                         <C>                      <C>   
Customer Relationships                                                      $  29.6                     $ 29.6
Computer Software                                                              29.1                       28.1
Other                                                                           5.5                        5.7
Accumulated Amortization                                                      (33.5)                     (30.1)
--------------------------------------------------------------------------------------------------------------------

                                                                            $  30.7                     $ 33.3
--------------------------------------------------------------------------------------------------------------------
</TABLE>


Other  Intangible   Assets  are  amortized  using  the   straight-line   method.
Amortization periods are seven to twenty-five years for Customer  Relationships,
one to seven years for Computer Software and three to ten years for Other.

                      ALLETE Second Quarter 2004 Form 10-Q                    12


<PAGE>


NOTE 7.    LONG-TERM DEBT

<TABLE>
<CAPTION>
                                                                                JUNE 30,             DECEMBER 31,
LONG-TERM DEBT                                                                    2004                   2003
--------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                             <C>                  <C>
ALLETE<F1>
    First Mortgage Bonds
       6.68% Series Due 2007                                                     $ 20.0                 $ 20.0
       7% Series Due 2007                                                          60.0                   60.0
       7 1/2% Series Due 2007                                                      35.0                   35.0
       7% Series Due 2008                                                          50.0                   50.0
       6% Pollution Control Series E Due 2022                                     111.0                  111.0
    Senior Notes, 7.80% Due 2008                                                  125.0                  125.0
    Variable Demand Revenue Refunding Bonds
       Series 1997 A, B, C and D Due 2007 - 2020                                   39.0                   39.0
    Industrial Development Revenue Bonds 6.5% Due 2025                             35.1                   35.1
    Other Long-Term Debt, 1.1% - 8.8% Due 2004 - 2025                              76.2                   75.2
--------------------------------------------------------------------------------------------------------------------

                                                                                  551.3                  550.3
    Less Due Within One Year                                                      159.0                   35.6
--------------------------------------------------------------------------------------------------------------------

                                                                                  392.3                  514.7
--------------------------------------------------------------------------------------------------------------------

Automotive Services (ADESA)
    Variable Term Loan A Facility Due 2009                                        175.0                      -
    Variable Term Loan B Facility Due 2010                                        100.0                      -
    Senior Notes
       7.70% Series A Due 2006                                                     90.0                   90.0
       8.10% Series B Due 2010                                                     35.0                   35.0
    Senior Subordinated Notes 7 5/8% Series Due 2012                              125.0                      -
    Variable Notes
       Due 2006                                                                       -                   45.0
       Due 2020                                                                       -                   28.4
    Capital Lease Obligation                                                       34.5                   34.5
    Other Long-Term Debt, 6% Due 2004 - 2005                                        0.2                    2.0
--------------------------------------------------------------------------------------------------------------------

                                                                                  559.7                  234.9
    Less Due Within One Year                                                      161.1                    1.9
--------------------------------------------------------------------------------------------------------------------

                                                                                  398.6                  233.0
--------------------------------------------------------------------------------------------------------------------

Net Long-Term Debt                                                               $790.9                 $747.7
--------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Excluded Automotive Services.
</FN>
</TABLE>


In January 2004 ALLETE used internally  generated funds to retire  approximately
$3.5 million in principal amount of Industrial  Development Revenue Bonds Series
1994-A, due January 1, 2004.

In June 2004 ALLETE  called $125  million in  principal  amount of 7.80%  Senior
Notes due 2008. Proceeds from the sale of our water assets and proceeds received
from  ADESA were used to repay  this debt on July 26,  2004.  As a result of the
redemption,  we  recognized  an expense of $18.5 million in the third quarter of
2004 comprised of an early  redemption  premium and the write-off of unamortized
debt issuance  costs.  We have accounted for this debt as due within one year in
the table above.

In July 2004 ALLETE  called,  for  redemption  in August  2004,  $111 million in
principal amount of  Collateralized 6% Pollution Control Refunding Revenue Bonds
Series E due 2022 and expects to refinance  these bonds in August 2004 at a more
favorable interest rate.

In  June  2004  ADESA  substantially  completed  the  restructuring  of  debt in
conjunction  with its June IPO and planned  spin-off  from ALLETE.  In June 2004
ADESA  issued  $125  million of 7 5/8% Senior  Subordinated  Notes at par with a
maturity  date of June 15, 2012,  borrowed $275 million under a new $525 million
credit  facility,  and repaid $75.1 million of previously  existing debt and all
intercompany  debt  outstanding  to  ALLETE.  In  July  2004  ADESA  called  for
redemption all of its $90 million in principal  amount of 7.70% Senior Notes due
2006 and all of its $35 million in  principal  amount of 8.10%  Senior Notes due
2010.  The  redemptions  are  scheduled to occur on August 11,  2004,  and ADESA
expects to recognize  expenses of approximately $14 million in the third quarter
comprised of an early  redemption  premium and the write-off of unamortized debt
issuance costs. We have accounted for the $125 million of debt to be redeemed by
ADESA as due within one year in the table above.

13                    ALLETE Second Quarter 2004 Form 10-Q                     


<PAGE>


NOTE 7.    LONG-TERM DEBT (CONTINUED)

ADESA's  new  credit  facility  contains  customary   affirmative  and  negative
covenants,  including  restrictions on the ability to incur indebtedness,  grant
liens,  pay  dividends  or make  distributions  to  shareholders  and  make  any
prepayment or redemption with respect to the senior  subordinated notes. The new
credit facility also contains  financial  covenants  including:  a maximum total
leverage  ratio,  a minimum  interest  coverage ratio and a minimum fixed charge
coverage  ratio.  At June 30, 2004,  ADESA was in compliance  with the covenants
contained in the new credit facility.

In June 2004 ADESA entered into two interest rate swap  agreements with notional
amounts of $105 million and $60 million to manage its exposure to interest  rate
movements on its variable rate debt. Both interest rate swap agreements  contain
amortizing  provisions  and mature in December  2006.  ADESA has  designated its
interest  rate  swap  agreements  as cash  flow  hedges.  The fair  value of the
interest rate swap  agreements is estimated  using pricing models widely used in
financial markets and represents the estimated amount ADESA would receive or pay
to terminate  the  agreement at the  reporting  date.  At June 30, 2004 the fair
value of the interest rate swap agreements is an unrealized loss of $0.6 million
and is recorded in accrued  expenses and other  liabilities on the  consolidated
balance sheet.  In accordance  with the provisions of SFAS 133,  "Accounting for
Derivative Instruments and Hedging Activities," changes in the fair value of the
interest  rate swap  agreements  designated  as cash flow hedges are recorded in
Accumulated Other Comprehensive  Income.  ADESA is exposed to credit loss in the
event of nonperformance by the  counterparties;  however,  nonperformance is not
anticipated.


NOTE 8.    SHORT-TERM BORROWINGS

In April 2004 ALLETE used internally  generated funds and proceeds from the sale
of water  assets to repay the  remaining  $53.0  million  outstanding  on a $250
million credit agreement which would have expired in July 2004.


NOTE 9.    PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

<TABLE>
<CAPTION>
                                                                                            POSTRETIREMENT HEALTH
                                                                  PENSION                         AND LIFE 
                                                          ------------------------          ----------------------        
COMPONENTS OF PERIODIC BENEFIT EXPENSE                     2004            2003             2004            2003
------------------------------------------------------------------------------------------------------------------
Millions
<S>                                                       <C>              <C>              <C>             <C>  
FOR THE QUARTER ENDED JUNE 30,

Service Cost                                              $ 2.1            $ 1.7            $1.1            $ 0.9
Interest Cost                                               5.2              4.9             1.8              1.7
Expected Return on Plan Assets                             (6.9)            (7.2)           (1.1)            (1.0)
Amortization of Prior Service Costs                         0.2              0.2               -                -
Amortization of Net Loss                                    0.4                -             0.3                -
Amortization of Transition Obligation                         -                -             0.6              0.6
------------------------------------------------------------------------------------------------------------------

   Periodic Benefit Expense (Benefit)                     $ 1.0            $(0.4)           $2.7            $ 2.2
------------------------------------------------------------------------------------------------------------------

FOR THE SIX MONTHS ENDED JUNE 30,

Service Cost                                              $ 4.2            $ 3.4            $2.2             $1.8
Interest Cost                                              10.4              9.8             3.6              3.4
Expected Return on Plan Assets                            (13.8)           (14.4)           (2.2)            (2.0)
Amortization of Prior Service Costs                         0.4              0.4               -                -
Amortization of Net Loss                                    0.8               -              0.5                -
Amortization of Transition Obligation                       0.1              0.1             1.2              1.2
------------------------------------------------------------------------------------------------------------------

   Periodic Benefit Expense (Benefit)                     $ 2.1            $(0.7)           $5.3             $4.4
------------------------------------------------------------------------------------------------------------------
</TABLE>



                      ALLETE Second Quarter 2004 Form 10-Q                    14


<PAGE>


NOTE 10.      INCOME TAX EXPENSE

<TABLE>
<CAPTION>
                                                               QUARTER ENDED                  SIX MONTHS ENDED
                                                                 JUNE 30,                         JUNE 30,
                                                           2004            2003             2004            2003
------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                       <C>              <C>             <C>              <C>
Current Tax Expense
     Federal                                              $16.2            $15.3           $38.3            $31.9
     Foreign                                                4.1              7.3             7.8              9.2
     State                                                  3.0              2.3             8.0              6.0
------------------------------------------------------------------------------------------------------------------

                                                           23.3             24.9            54.1             47.1
------------------------------------------------------------------------------------------------------------------

Deferred Tax Expense
     Federal                                                0.5              0.2             4.1              2.4
     State                                                  0.2              0.1             0.5              0.5
------------------------------------------------------------------------------------------------------------------

                                                            0.7              0.3             4.6              2.9
------------------------------------------------------------------------------------------------------------------

Deferred Tax Credits                                       (0.2)            (0.2)           (0.8)            (0.6)
------------------------------------------------------------------------------------------------------------------

Income Tax Expense on Continuing Operations                23.8             25.0            57.9             49.4
Income Tax Expense on Discontinued Operations               7.1              4.6             6.7              8.9
------------------------------------------------------------------------------------------------------------------

Total Income Tax Expense                                  $30.9            $29.6           $64.6            $58.3
------------------------------------------------------------------------------------------------------------------
</TABLE>



NOTE 11.      EARNINGS PER SHARE

The  difference  between  basic  and  diluted  earnings  per share  arises  from
outstanding  stock  options  and  performance  share  awards  granted  under our
Executive and Director Long-Term Incentive Compensation Plans.

<TABLE>
<CAPTION>

                                                        QUARTER ENDED                     SIX MONTHS ENDED
                                                          JUNE 30,                            JUNE 30,
                                                 -------------------------------     -------------------------------
RECONCILIATION OF BASIC AND DILUTED                       DILUTIVE                            DILUTIVE
EARNINGS PER SHARE                               BASIC   SECURITIES     DILUTED      BASIC   SECURITIES    DILUTED
--------------------------------------------------------------------------------------------------------------------

Millions

<S>                                              <C>     <C>            <C>          <C>     <C>           <C>
2004

Net Income from Continuing Operations            $32.9         -         $32.9       $86.0         -         $86.0
Common Shares                                     85.1       0.5          85.6        84.7       0.5          85.2
Per Share from Continuing Operations             $0.39         -         $0.38       $1.02         -         $1.01

2003

Net Income from Continuing Operations            $37.1         -         $37.1       $75.1         -         $75.1
Common Shares                                     82.6       0.3          82.9        82.4       0.2          82.6
Per Share from Continuing Operations             $0.45         -         $0.45       $0.91         -         $0.91
--------------------------------------------------------------------------------------------------------------------
</TABLE>



NOTE 12.      COMPREHENSIVE INCOME

For the quarter ended June 30, 2004 total comprehensive income was $30.7 million
($66.3  million for the quarter ended June 30,  2003).  For the six months ended
June 30, 2004 total  comprehensive  income was $81.1 million ($122.9 million for
the six months ended June 30, 2003).  Total  comprehensive  income  includes net
income,    unrealized   gains   and   losses   on   securities   classified   as
available-for-sale  and interest rate swaps,  additional  pension  liability and
foreign currency translation adjustments.

<TABLE>
<CAPTION>

                                                                         JUNE 30,                    DECEMBER 31,
ACCUMULATED OTHER COMPREHENSIVE GAIN                                       2004                          2003
------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                      <C>                         <C>   
Unrealized Gain on Securities                                              $ 1.1                         $ 0.8
Interest Rate Swaps                                                         (0.3)                            -
Foreign Currency Translation Gain                                           17.4                          23.5
Additional Pension Liability                                                (9.8)                         (9.8)
------------------------------------------------------------------------------------------------------------------

                                                                           $ 8.4                         $14.5
------------------------------------------------------------------------------------------------------------------
</TABLE>


15                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>


NOTE 13.      COMMITMENTS, GUARANTEES AND CONTINGENCIES

SQUARE BUTTE POWER  PURCHASE  AGREEMENT.  Minnesota  Power has a power  purchase
agreement with Square Butte that extends through 2026 (Agreement). It provides a
long-term  supply  of  low-cost  energy to  customers  in our  electric  service
territory and enables  Minnesota Power to meet power pool reserve  requirements.
Square Butte, a North Dakota cooperative  corporation,  owns a 455-MW coal-fired
generating  unit (Unit) near  Center,  North  Dakota.  The Unit is adjacent to a
generating unit owned by Minnkota Power, a North Dakota cooperative  corporation
whose Class A members are also members of Square Butte. Minnkota Power serves as
the operator of the Unit and also purchases power from Square Butte.

Minnesota  Power is entitled to  approximately  71 percent of the Unit's  output
under the  Agreement.  After 2005 and upon  compliance  with a two-year  advance
notice  requirement,  Minnkota Power has the option to reduce Minnesota  Power's
entitlement by 5 percent annually,  to a minimum of 50 percent. In December 2003
we  received  notice  from  Minnkota  Power  that they will  reduce  our  output
entitlement,  effective  January  1,  2006,  by 5 percent  to  approximately  66
percent.  Minnesota  Power  is  obligated  to pay its pro rata  share of  Square
Butte's costs based on Minnesota Power's  entitlement to Unit output.  Minnesota
Power's payment  obligation  shall be suspended if Square Butte fails to deliver
any power,  whether  produced  or  purchased,  for a period of one year.  Square
Butte's fixed costs consist  primarily of debt service.  At June 30, 2004 Square
Butte had total debt  outstanding of $287.7  million.  Total annual debt service
for Square  Butte is  expected  to be  approximately  $23 million in each of the
years 2004 through  2008.  Variable  operating  costs  include the price of coal
purchased from BNI Coal, our subsidiary,  under a long-term contract.  Minnesota
Power's  payments to Square Butte are approved as a purchased  power expense for
ratemaking purposes by both the MPUC and the FERC.

LEASING  AGREEMENTS.  We lease  properties and equipment  under  operating lease
agreements  with terms expiring  through 2019.  The aggregate  amount of minimum
lease  payments for all operating  leases  during 2004 is $19.9  million  ($16.1
million in 2005;  $13.6 million in 2006;  $6.5 million in 2007;  $5.9 million in
2008;  and $49.5  million  thereafter).  Automotive  Services'  portion of these
minimum lease  payments is $18.8 million in 2004 ($15.2  million in 2005;  $12.7
million in 2006;  $5.9 million in 2007;  $5.6 million in 2008; and $48.8 million
thereafter).

KENDALL  COUNTY  POWER  PURCHASE  AGREEMENT.  We  have  275  MW of  nonregulated
generation (non rate-base generation sold at market-based rates to the wholesale
market)  through an agreement with a wholly owned  subsidiary of NRG Energy that
extends  through  September  2017.  Under the agreement we pay a fixed  capacity
charge for the right, but not the obligation,  to capacity and energy from a 275
MW  generating  unit at NRG  Energy's  Kendall  County  facility  near  Chicago,
Illinois.  The annual fixed capacity charge is approximately $21 million. We are
also  responsible for arranging the natural gas fuel supply.  Our strategy is to
enter into long-term  contracts to sell a significant portion of the 275 MW from
the Kendall County facility; the balance will be sold in the spot market through
short-term  agreements.  We currently  have 130 MW (100 MW in 2003) of long-term
capacity sales contracts for the Kendall County generation,  with 50 MW expiring
in April 2012 and 80 MW expiring in September  2017.  Neither the Kendall County
agreement  nor the  related  sales  contracts  are  derivatives  under SFAS 133,
"Accounting  for Derivative  Instruments  and Hedging  Activities." To date, the
Kendall  County  facility has operated at a loss due to negative  spark  spreads
(the  differential  between  electric  and natural gas prices) in the  wholesale
power market and our resulting  inability to cover the fixed capacity  charge on
unsold  capacity  (currently  145 MW).  We expect the  facility  to  continue to
generate losses until such time as spark spreads improve or we are able to enter
into additional  long-term capacity sales contracts.  We are currently exploring
options to minimize or eliminate these ongoing losses.  We are utilizing Tenaska
Power Services  Company to provide  operational and scheduling  services for the
Kendall County generating unit.

COAL AND SHIPPING  CONTRACTS.  We have three coal supply agreements with various
expiration  dates ranging from December 2006 to December 2009. We also have rail
and  shipping  agreements  for  transportation  of all of our coal with  various
expiration dates ranging from December 2005 to December 2011. Our minimum annual
obligation under these coal and shipping agreements range from approximately $28
million in 2004 to $10 million in 2008.

EMERGING TECHNOLOGY  INVESTMENTS.  We have investments in emerging  technologies
through minority  investments in venture capital funds and direct investments in
privately-held   start-up  companies.  We  have  committed  to  make  additional
investments in certain emerging technology holdings. The total future commitment
was $4.7  million at June 30, 2004 ($4.8  million at December  31,  2003) and is
expected to be invested at various times through 2007.

                      ALLETE Second Quarter 2004 Form 10-Q                    16


<PAGE>


NOTE 13.      COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

ENVIRONMENTAL  MATTERS. Our businesses are subject to regulation by various U.S.
and  Canadian  federal,  state,  provincial  and  local  authorities  concerning
environmental   matters.   We  do  not  currently   anticipate   that  potential
expenditures for environmental matters will be material;  however, we are unable
to predict the outcome of the issues discussed below.

We review environmental matters on a quarterly basis. Accruals for environmental
matters are recorded  when it is probable that a liability has been incurred and
the amount of the liability can be  reasonably  estimated,  based on current law
and  existing   technologies.   These  accruals  are  adjusted  periodically  as
assessment and remediation efforts progress or as additional  technical or legal
information  becomes  available.  Accruals  for  environmental  liabilities  are
included in the balance  sheet at  undiscounted  amounts and exclude  claims for
recoveries from insurance or other third parties. Costs related to environmental
contamination treatment and cleanup are charged to expense unless recoverable in
rates from customers.

SWL&P  MANUFACTURED  GAS PLANT.  In May 2001 SWL&P received notice from the WDNR
that the City of Superior had found soil  contamination on property  adjoining a
former  Manufactured  Gas Plant (MGP) site owned and operated by SWL&P from 1889
to 1904. The WDNR requested  SWL&P to initiate an  environmental  investigation.
The WDNR also issued  SWL&P a  Responsible  Party letter in February  2002.  The
environmental  investigation  is underway.  In February  2003 SWL&P  submitted a
Phase II  environmental  site  investigation  report  to the WDNR.  This  report
identified  some MGP-like  chemicals that were found in the soil near the former
plant site.  During March and April 2003 sediment samples were taken from nearby
Superior  Bay. The report on the results of this sampling was completed and sent
to  the  WDNR  during  the  first  quarter  of  2004.  The  next  phase  of  the
investigation  will be to determine  any impact to soil or ground water  between
the  former  MGP  site  and  Superior  Bay.  A work  plan  for  this  additional
investigation by SWL&P was filed in December 2003 with the WDNR. Permission from
landowners is currently being obtained to perform the additional tests. Although
it  is  not  possible  to  quantify  the  potential   clean-up  cost  until  the
investigation  is  completed  and a work  plan  is  developed,  a  $0.5  million
liability  was  recorded  in  December  2003  to  address  the  known  areas  of
contamination.  We have recorded a  corresponding  dollar amount as a regulatory
asset to offset this liability.  The PSCW has approved SWL&P's deferral of these
MGP environmental investigation and potential clean-up costs for future recovery
in rates, subject to regulatory prudency review.

MINNESOTA POWER COAL-FIRED  GENERATING  FACILITIES.  During 2002 Minnesota Power
received and responded to a third request from the EPA, under Section 114 of the
federal  Clean Air Act  Amendments of 1990 (Clean Air Act),  seeking  additional
information  regarding capital expenditures at all of its coal-fired  generating
stations.  This  action  is part  of an  industry-wide  investigation  assessing
compliance with the New Source Review and the New Source  Performance  Standards
(emissions  standards  that apply to new and changed units) of the Clean Air Act
at electric generating stations. We have received no feedback from the EPA based
on the information we submitted. There is, however, ongoing litigation involving
the EPA and other electric  utilities for alleged  violations of these rules. It
is  expected  that the  outcome of some of the cases  could  provide the utility
industry direction on this topic. We are unable to predict what actions, if any,
may be required as a result of the EPA's request for  information.  As a result,
we have not accrued any liability for this environmental matter.

SQUARE BUTTE GENERATING  FACILITY.  In June 2002 Minnkota Power, the operator of
Square Butte,  received a Notice of Violation from the EPA regarding alleged New
Source  Review  violations at the M.R.  Young Station which  includes the Square
Butte  generating  unit. The EPA claims certain  capital  projects  completed by
Minnkota  Power  should have been  reviewed  pursuant  to the New Source  Review
regulations  potentially  resulting  in new  air  permit  operating  conditions.
Minnkota  Power has held  several  meetings  with the EPA to discuss the alleged
violations. Based on an EPA request, Minnkota Power performed a study related to
the technological  feasibility of installing  various controls for the reduction
of nitrogen oxides and sulfur dioxide  emissions.  Discussions  with the EPA are
ongoing  and we are unable to predict  the  outcome or cost  impacts.  If Square
Butte is required to make  significant  capital  expenditures to comply with EPA
requirements,  we expect such  capital  expenditures  to be debt  financed.  Our
future  cost of  purchased  power  would  include  our pro  rata  share  of this
additional debt service.

17                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>


NOTE 13.      COMMITMENTS, GUARANTEES AND CONTINGENCIES (CONTINUED)

ADESA IMPACT TAUNTON FACILITY. In December 2003 the Massachusetts  Department of
Environmental  Protection (MDEP)  identified ADESA as a potentially  responsible
party  regarding  contamination  of several  private  drinking  water wells in a
residential  development that abuts the Taunton,  Massachusetts  salvage auction
facility. The wells had elevated levels of MTBE. MTBE is an oxygenating additive
in  gasoline  to reduce  harmful  emissions.  The EPA has  identified  MTBE as a
possible carcinogen.  ADESA engaged GeoInsight,  an environmental services firm,
to conduct  tests of the soil and  groundwater  at the salvage  vehicle  auction
site.

In December 2003 GeoInsight collected soil samples,  conducted groundwater tests
and provided  oversight  for the  installation  of  monitoring  wells in various
locations on and adjacent to the property  adjoining the residential  community.
The results of the soil and water tests indicated  levels of MTBE exceeding MDEP
standards.  In January 2004 GeoInsight collected air samples from two residences
that were identified as having elevated  drinking water  concentrations of MTBE.
ADESA has determined that inhalation of, or contact  exposure to, this air poses
minimal  risk to human  health.  In response to its  empirical  findings,  ADESA
proposed to the MDEP that we install water filtration units in the approximately
33 affected residences. Thirty-two units have been installed.

GeoInsight  prepared an immediate response action (IRA) plan, which was required
by the MDEP,  to  determine  the extent of the  environmental  impact and define
activities to prevent further environmental  contamination.  The IRA plan, which
was filed in January 2004, describes the initial activities ADESA performed, and
proposes additional measures that it will use to further assess the existence of
any imminent hazard to human health. In addition, as required by the MDEP, ADESA
has  conducted an analysis to identify  sensitive  receptors  that may have been
affected,  including  area  schools and  municipal  wells.  GeoInsight  does not
believe that an imminent hazard condition  exists at the Taunton site;  however,
the investigation and assessment of site conditions are ongoing.

ADESA  submitted  an  IRA  plan  status  report  to  the  MDEP  in  March  2004.
Additionally,  ADESA is  submitting  bi-weekly  status  updates  to the MDEP.  A
comprehensive  ground water sampling event and  residential  sampling event were
conducted  in April 2004.  ADESA's  representatives  met with the  Taunton  City
Council to propose that ADESA extend  municipal  water services to the adjoining
residential community at an approximate cost of $1 million. In August 2004 ADESA
expects to present a detailed engineering proposal to the Taunton City Council.

ADESA has an  accrual  of $1.2  million  at June 30,  2004 with  respect to this
matter,  including the estimated costs (as of June 30, 2004) associated with the
proposal to extend the municipal water service.

ADESA has filed a claim with our insurance  carrier with respect to this matter.
On March 30, 2004 our insurance  carrier responded with a request for additional
information regarding the claims.

In addition to the activity described above,  ADESA has received  correspondence
from an attorney  representing  residents of the adjoining residential community
suggesting that ADESA enter into discussions  concerning  property damage claims
for  diminution  in  value  due to the  MTBE  release.  Accordingly,  there is a
possibility  that  property  damage  litigation  may  be  filed  against  ADESA.
Potential  losses  in  these  matters  are  not  considered  probable  by  ADESA
management  or  cannot  be  reasonably  estimated.  Accordingly,  ADESA  has not
recorded an accrual for the respective costs of these matters.

OTHER.  We are involved in litigation  arising in the normal course of business.
Also in the normal course of business,  we are involved in tax,  regulatory  and
other  governmental  audits,  inspections,  investigations and other proceedings
that involve state and federal taxes, safety, compliance with regulations,  rate
base and cost of service  issues,  among other things.  While the  resolution of
such matters could have a material effect on earnings and cash flows in the year
of  resolution,  none of these  matters are  expected to change  materially  our
present liquidity position,  nor have a material adverse effect on our financial
condition.

See Note 4 for a discussion on the ADESA Importation litigation.

                      ALLETE Second Quarter 2004 Form 10-Q                    18


<PAGE>



I
TEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS

ALLETE'S  operations are comprised of three business  segments.  ENERGY SERVICES
includes  electric  and  gas  services,   coal  mining  and  telecommunications.
AUTOMOTIVE  SERVICES,  with  operations  across  the United  States,  Canada and
Mexico,  includes wholesale vehicle auctions and related vehicle  redistribution
services as well as dealer  financing.  Auctions  and related  services  include
wholesale used vehicle and salvage vehicle  auctions.  INVESTMENTS AND CORPORATE
CHARGES  includes our Florida real estate  operations,  investments  in emerging
technologies,  and general  corporate  charges  and  interest  not  specifically
related to any one business segment.  General corporate charges include employee
salaries  and  benefits  as  well as  legal  and  other  outside  service  fees.
DISCONTINUED OPERATIONS includes our Water Services businesses,  and our vehicle
transport and import businesses.

Through a June 2004 IPO our  Automotive  Services  business,  doing  business as
ADESA,  Inc.  (NYSE:  KAR),  issued 6.3 million shares of common stock at an IPO
price of $24.00 per share.  This  represented  6.6 percent of total ADESA common
stock  outstanding.  ALLETE will continue to own the  remaining  93.4 percent of
ADESA until the planned  spin-off,  which is expected to be completed by the end
of  September  2004.  In  connection  with the IPO,  ADESA filed a  registration
statement  on Form S-1 with the SEC and also  became  subject  to the  reporting
requirements  under the  Securities  Exchange Act of 1934.  These  documents are
available through the SEC's website at www.sec.gov.


<TABLE>
CONSOLIDATED OVERVIEW
<CAPTION>
                                                                    QUARTER ENDED              SIX MONTHS ENDED
                                                                      JUNE 30,                     JUNE 30,
                                                                  2004           2003       2004             2003
----------------------------------------------------------------------------------------------------------------------
Millions Except Per Share Amounts

<S>                                                              <C>            <C>         <C>             <C>
Operating Revenue
     Energy Services                                             $183.9         $158.5      $366.2          $337.6
     Automotive Services                                          232.1          240.7       479.8           473.6
     Investments                                                   (0.7)          10.7        27.8            21.6
----------------------------------------------------------------------------------------------------------------------

                                                                 $415.3         $409.9      $873.8          $832.8
----------------------------------------------------------------------------------------------------------------------

Operating Expenses
     Energy Services                                             $169.3         $147.6      $329.1          $306.7
     Automotive Services                                          178.7          183.9       371.5           372.6
     Investments and Corporate Charges                             10.6           16.3        29.3            29.0
----------------------------------------------------------------------------------------------------------------------

                                                                 $358.6         $347.8      $729.9          $708.3
----------------------------------------------------------------------------------------------------------------------

Net Income (Loss)
     Energy Services                                              $ 9.3          $ 6.8       $23.6           $19.0
     Automotive Services                                           32.3           34.1        65.6            60.8
     Investments and Corporate Charges                             (8.7)          (3.8)       (3.2)           (4.7)
----------------------------------------------------------------------------------------------------------------------

     Continuing Operations                                         32.9           37.1        86.0            75.1

     Discontinued Operations                                        1.8            7.3         1.2            13.6
----------------------------------------------------------------------------------------------------------------------
                                                                  $34.7          $44.4       $87.2           $88.7
----------------------------------------------------------------------------------------------------------------------

Diluted Average Shares of Common Stock - Millions                  85.6           82.9        85.2            82.6
----------------------------------------------------------------------------------------------------------------------

Diluted Earnings Per Share of Common Stock
     Continuing Operations                                        $0.38          $0.45       $1.01           $0.91
     Discontinued Operations                                       0.02           0.08        0.01            0.16
----------------------------------------------------------------------------------------------------------------------

                                                                  $0.40          $0.53       $1.02           $1.07
----------------------------------------------------------------------------------------------------------------------
</TABLE>


Net income for the  quarter  and six months  ended June 30,  2004  decreased  22
percent and 2 percent,  respectively,  from the same periods in 2003 and diluted
earnings per share for the quarter and six months ended June 30, 2004  decreased
25 percent and 5 percent, respectively, from the same periods in 2003.

For the quarter  ended June 30, 2004 net income and diluted  earnings  per share
from continuing  operations  decreased 11 percent and 16 percent,  respectively,
from the same period in 2003.  For the six months ended June 30, 2004 net income
and diluted earnings per share from continuing operations

19                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>

increased 15 percent and 11 percent, respectively, from the same period in 2003.
In 2004 net income reflected a $4.7 million after-tax impairment on our emerging
technology  portfolio  in the quarter and six months  ended June 30,  separation
expenses related to the spin-off of ADESA totaling $1.4 million after tax in the
quarter ($3.1 million in the six months ended June 30) and additional  corporate
overhead  expenses  at ADESA of $1.7  million  after  tax in the  quarter  ($2.6
million in the six months ended).

NON-GAAP  MEASURE OF LIQUIDITY.  We believe  earnings  before  interest,  taxes,
depreciation and amortization  expense (EBITDA) provides  meaningful  additional
information  that helps us monitor and evaluate our ongoing  results and trends.
EBITDA should not be considered in isolation nor as a substitute for measures of
liquidity prepared in accordance with GAAP which include:


<TABLE>
<CAPTION>

CONSOLIDATED CASH FLOW
SIX MONTHS ENDED JUNE 30,                                                 2004                            2003
----------------------------------------------------------------------------------------------------------------------
Millions

<S>                                                                      <C>                             <C>   
Cash from Operating Activities                                            $78.4                           $105.5
Cash from (for) Investing Activities                                      $48.4                          $(129.6)
Cash from Financing Activities                                           $264.9                            $32.8
----------------------------------------------------------------------------------------------------------------------
</TABLE>


We believe  EBITDA is a widely  accepted  measure  of  liquidity  considered  by
investors,  financial analysts and rating agencies. EBITDA is not an alternative
to cash flows as a measure of liquidity and may not be comparable with EBITDA as
defined by other companies.

<TABLE>
<CAPTION>

                                                                      ENERGY SERVICES                      
                                                                  -----------------------                  INVESTMENTS
                                                                  REGULATED       NON-      AUTOMOTIVE    AND CORPORATE
EBITDA                                           CONSOLIDATED      UTILITY      REGULATED    SERVICES        CHARGES
-------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>              <C>           <C>         <C>           <C>
FOR THE QUARTER ENDED JUNE 30, 2004

Net Income                                           $34.7
Less: Income from Discontinued Operations              1.8
-------------------------------------------------------------

Income (Loss) from Continuing Operations              32.9          $ 8.2         $1.1         $32.3          $(8.7)
Add Back: Income Tax Expense (Benefit)                23.8            5.0          0.3          21.1           (2.6)
          Interest Expense                            13.8            4.6          0.6           4.7            3.9
          Depreciation and Amortization Expense       21.3            9.9          2.6           8.8              -
-------------------------------------------------------------------------------------------------------------------------

EBITDA                                               $91.8          $27.7         $4.6         $66.9          $(7.4)
-------------------------------------------------------------------------------------------------------------------------

FOR THE QUARTER ENDED JUNE 30, 2003

Net Income                                          $ 44.4
Less: Income from Discontinued Operations              7.3
-------------------------------------------------------------

Income (Loss) from Continuing Operations              37.1          $ 6.9        $(0.1)        $34.1          $(3.8)
Add Back: Income Tax Expense (Benefit)                25.0            4.6         (0.5)         22.7           (1.8)
          Interest Expense                            16.0            5.0          0.7           3.7            6.6
          Depreciation and Amortization Expense       21.9           10.4          2.5           8.9            0.1
-------------------------------------------------------------------------------------------------------------------------

EBITDA                                              $100.0          $26.9        $ 2.6         $69.4          $ 1.1
-------------------------------------------------------------------------------------------------------------------------

SIX MONTHS ENDED JUNE 30, 2004

Net Income                                          $ 87.2
Less: Income from Discontinued Operations              1.2
-------------------------------------------------------------

Income (Loss) from Continuing Operations              86.0          $22.1         $1.5        $ 65.6          $(3.2)
Add Back: Income Tax Expense                          57.9           13.3          0.2          42.7            1.7
          Interest Expense                            26.9            9.3          0.9           8.7            8.0
          Depreciation and Amortization Expense       43.0           19.8          5.1          18.1              -
-------------------------------------------------------------------------------------------------------------------------

EBITDA                                              $213.8          $64.5         $7.7        $135.1          $ 6.5
-------------------------------------------------------------------------------------------------------------------------

SIX MONTHS ENDED JUNE 30, 2003

Net Income                                          $ 88.7
Less: Income from Discontinued Operations             13.6
-------------------------------------------------------------

Income (Loss) from Continuing Operations              75.1          $18.3        $ 0.7        $ 60.8          $(4.7)
Add Back: Income Tax Expense (Benefit)                49.4           12.2         (0.3)         40.2           (2.7)
          Interest Expense                            32.9           10.2          1.1           8.1           13.5
          Depreciation and Amortization Expense       42.8           20.7          5.0          17.0            0.1
-------------------------------------------------------------------------------------------------------------------------

EBITDA                                              $200.2          $61.4        $ 6.5        $126.1          $ 6.2
-------------------------------------------------------------------------------------------------------------------------

</TABLE>


                      ALLETE Second Quarter 2004 Form 10-Q                    20


<PAGE>


<TABLE>
<CAPTION>

                                                              QUARTER ENDED                  SIX MONTHS ENDED
                                                                JUNE 30,                         JUNE 30,
STATISTICAL INFORMATION                                   2004            2003            2004           2003
--------------------------------------------------------------------------------------------------------------------

<S>                                                     <C>              <C>           <C>             <C>
ENERGY SERVICES
Millions of Kilowatthours Sold
    Regulated Utility
       Retail and Municipals
           Residential                                    228.8            223.9           539.1           536.8
           Commercial                                     294.3            289.6           626.2           616.0
           Industrial                                   1,770.0          1,655.1         3,536.8         3,373.6
           Municipals                                     189.0            204.5           402.8           405.1
           Other                                           17.8             18.3            38.0            38.8
--------------------------------------------------------------------------------------------------------------------

                                                        2,499.9          2,391.4         5,142.9         4,970.3

       Other Power Suppliers                              168.4            300.8           385.6           508.1
--------------------------------------------------------------------------------------------------------------------
                                                        2,668.3          2,692.2         5,528.5         5,478.4
    Nonregulated                                          414.6            281.1           848.6           700.2
--------------------------------------------------------------------------------------------------------------------

                                                        3,082.9          2,973.3         6,377.1         6,178.6
--------------------------------------------------------------------------------------------------------------------

AUTOMOTIVE SERVICES
    Vehicles Sold
       Used                                             445,000          471,000         926,000         933,000
       Salvage                                           50,000           49,000         108,000          98,000
--------------------------------------------------------------------------------------------------------------------

                                                        495,000          520,000       1,034,000       1,031,000

    Conversion Rate <F1> - Used Vehicles                  61.7%            61.1%           65.0%           61.8%

    Loan Transactions                                   273,000          241,000         536,000         474,000
--------------------------------------------------------------------------------------------------------------------
<FN>
<F1>  Conversion rate is the percentage of vehicles sold from those that were offered at auction.
</FN>
</TABLE>



NET INCOME

The  following net income  discussion  summarizes a comparison of the six months
ended June 30, 2004 to the six months ended June 30, 2003.

ENERGY  SERVICES'  net income in 2004 was up $4.6 million.  At Minnesota  Power,
higher retail electric sales contributed to the increase. In addition, despite a
decline in kilowatthour sales to other power suppliers,  power marketing margins
improved  in  2004  due to the  expiration  of an  unprofitable  purchase  power
arrangement in 2003.

AUTOMOTIVE SERVICES reported a $4.8 million increase in net income primarily due
to improved margins and a 13 percent increase in loan transactions at AFC. These
increases were partially offset by additional  corporate  charges and separation
expenses incurred as ADESA prepares to be a stand-alone publicly traded company.

INVESTMENTS  AND  CORPORATE  CHARGES'  net loss was $1.5  million  lower in 2004
reflecting  strong  demand for our real estate in Florida  and reduced  interest
expense.  These positive  developments  were partially  offset by an increase in
general corporate  charges  primarily  resulting from $1.5 million of separation
expenses  associated with the planned  spin-off of Automotive  Services and $4.7
million of impairment losses related to our emerging technology  portfolio.  Net
income from ALLETE Properties,  our real estate operations,  was up $3.8 million
in 2004  ($13.2  million  in 2004;  $9.4  million in 2003)  primarily  due to an
increase in the number as well as the profitability of real estate sales closing
during the first six months of 2004. The timing of real estate sales varies from
quarter to quarter.

DISCONTINUED  OPERATIONS  included the financial  results of the Water  Services
businesses,  and the vehicle transport and import businesses. We will report our
Automotive  Services'  business  in  discontinued  operations  after the planned
spin-off  which  is  expected  in  September  2004.  Overall,  net  income  from
discontinued operations decreased $12.4 million, primarily because the first six
months of 2003 included  $12.8 million from the operations of our Water Services
businesses,  the majority of which were sold in the fourth  quarter of 2003. The
first  six  months of 2004  included  a $5.4  million  gain on the sale of water
assets  ($0.4  million for the first six months of 2003).  Net income from other
discontinued  operations  included $4.0 million of charges in 2004 in connection
with a  lawsuit  related  to the  vehicle  import  business  and a $1.3  million
recovery in 2003 from the  settlement of a lawsuit  associated  with the vehicle
transport business.

21                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>

COMPARISON OF THE QUARTERS ENDED JUNE 30, 2004 AND 2003

ENERGY SERVICES

Regulated  utility  operations  include  retail  and  wholesale  rate  regulated
activities under the jurisdiction of state and federal  regulatory  authorities.
Nonregulated  operations  consist  of  nonregulated  generation  (non-rate  base
generation sold at market-based rates to the wholesale market),  coal mining and
telecommunication activities.  Nonregulated generation consists primarily of the
Taconite  Harbor Energy  Center in northern  Minnesota  and  generation  secured
through the Kendall County power purchase agreement,  a 15-year agreement with a
wholly owned subsidiary of NRG Energy at a facility near Chicago, Illinois.

OPERATING  REVENUE  in  total  was up  $25.4  million,  or 16  percent,  in 2004
reflecting increases at both our regulated utility and nonregulated  operations.
Regulated utility revenue was up $11.1 million,  or 9 percent, in 2004 primarily
due to higher fuel clause  recoveries  resulting from  increased  purchase power
costs (see operating  expenses below), and increased retail electric sales. Much
of the  increase  in retail  electric  sales  was  attributable  to large  power
customers due to higher  production levels in 2004.  Overall,  regulated utility
kilowatthour sales were similar to last year (down 1 percent) as increased sales
to  retail  customers  reduced  the  energy  available  for sale to other  power
suppliers.  An outage at one of the  Company's  generating  units (see Outlook -
Energy  Services) also  contributed  to less energy being  available for sale to
other power suppliers. Nonregulated revenue was up $14.3 million, or 44 percent,
in 2004  reflecting  a $7.8  million  increase  in  revenue  from the  Company's
telecommunications  business  due to more  equipment  sales  and a $4.7  million
increase  in  revenue  from  nonregulated  generation  operations.  Nonregulated
kilowatthour sales were up 47 percent in 2004.

Revenue from electric  sales to taconite  customers  accounted for 11 percent of
consolidated  operating revenue in 2004 (10 percent in 2003).  Electric sales to
paper and pulp mills accounted for 4 percent of consolidated  operating  revenue
in both 2004 and 2003.

OPERATING  EXPENSES  in total were up $21.7  million,  or 15  percent,  in 2004.
Regulated  utility  operating  expenses  were up  $9.4  million,  or 8  percent,
reflecting increased purchased power expense necessitated by an outage at one of
the  Company's  generating  units (see  Outlook - Energy  Services),  and higher
pension  and  benefit  expenses  partially  offset  by the  absence  of a  power
marketing  demand  payment  associated  with a purchased  power  agreement  that
expired in 2003.  Nonregulated  operating expenses were up $12.3 million,  or 37
percent, reflecting increased fuel and purchased power expenses, and higher cost
of   goods   sold   associated   with   increased   sales   at   the   Company's
telecommunications business.

AUTOMOTIVE SERVICES

OPERATING  REVENUE was down $8.6 million,  or 4 percent,  in 2004.  Revenue from
auctions and related  services was down $10.1 million,  or 5 percent,  primarily
due to  decreased  vehicle  sales  volume.  The number of  vehicles  sold at the
Company's  vehicle  auction  facilities  decreased 5 percent from last year. The
used  vehicle  market  shift  from  institutional  vehicles  to dealer  vehicles
continued during the second quarter of 2004 reflecting an anticipated decline in
off-lease  vehicles  as well as a decline  in  vehicles  repossessed  by ADESA's
customers available for redistribution.  The decrease in institutional  vehicles
available  for  redistribution  was  partially  offset by an  increase in dealer
vehicles  sold, a trend that is expected to continue for the  remainder of 2004.
Dealer financing revenue was up $1.5 million, or 6 percent, in 2004 reflecting a
13 percent  increase in the number of loan  transactions.  The  increase in loan
transactions  was a result  of an  increase  in the  number  of  active  dealers
combined with an increase in floorplan utilization by the existing dealer base.

OPERATING EXPENSES were down $5.2 million,  or 3 percent,  in 2004 primarily due
to lower expenses as a result of processing fewer vehicles at our wholesale used
vehicle auctions.  The used vehicle market shift from institutional  vehicles to
dealer  vehicles also  contributed to decreased cost of services  because dealer
vehicles  cost less to process since fewer  ancillary  services are utilized for
these  vehicles  as  compared  to  institutional  vehicles.  This  decrease  was
partially offset by additional  corporate charges of $2.8 million and separation
expenses  of $1.4  million  incurred  as  Automotive  Services  prepared to be a
stand-alone  publicly traded company.  In addition,  interest expense was higher
due to the new debt issued in June 2004.

                      ALLETE Second Quarter 2004 Form 10-Q                    22


<PAGE>


INVESTMENTS AND CORPORATE CHARGES

OPERATING  REVENUE was down $11.4 million in 2004  primarily due to $7.9 million
($4.7 million after tax) of  impairment  losses  recorded in 2004 related to our
emerging technology portfolio and a $7.4 million decrease in revenue from ALLETE
Properties  as a result of fewer land sales.  In 2004 one large real estate sale
contributed $2.0 million to revenue,  while in 2003 four large real estate sales
contributed  $7.9 million to revenue.  Revenue in 2003  included $3.5 million of
losses   related  to  the  sale  of  shares  the   Company   held   directly  in
publicly-traded emerging technology investments.

OPERATING EXPENSES were down $5.7 million,  or 35 percent, in 2004 primarily due
to lower  interest  expense and fewer real estate sales.  Operating  expenses at
ALLETE  Properties  were down $2.4  million in 2004 because of fewer land sales.
Interest expense not specifically  related to any one business segment decreased
$2.7 million ($3.9 million in 2004;  $6.6 million in 2003) due to the redemption
of quarterly  income preferred  securities and various  long-term debt issues in
2003 with both the proceeds from the sale of our Water  Services  businesses and
internally generated cash.


COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003

ENERGY SERVICES

OPERATING  REVENUE  in  total  was up  $28.6  million,  or 8  percent,  in 2004.
Regulated utility revenue was up $14.5 million,  or 6 percent, in 2004 primarily
due to higher fuel clause  recoveries  resulting from  increased  purchase power
costs (see operating  expenses below), and increased retail electric sales. Much
of the  increase  in retail  electric  sales  was  attributable  to large  power
customers due to higher  production levels in 2004.  Overall,  regulated utility
kilowatthour  sales were similar to last year (up 1 percent) as increased  sales
to  retail  customers  reduced  the  energy  available  for sale to other  power
suppliers.  An outage at one of the  Company's  generating  units (see Outlook -
Energy  Services) also  contributed  to less energy being  available for sale to
other  power  suppliers.  Equity in net income  from Split Rock  Energy was $5.1
million lower in 2004 as a result of Minnesota Power withdrawing from Split Rock
Energy.  Nonregulated  revenue  was up $14.1  million,  or 19  percent,  in 2004
reflecting   an  $8.6   million   increase   in  revenue   from  the   Company's
telecommunications  business  due to more  equipment  sales  and a $5.1  million
increase  in  revenue  from  nonregulated  generation  operations.  Nonregulated
kilowatthour sales were up 21 percent in 2004.

Revenue from electric  sales to taconite  customers  accounted for 10 percent of
consolidated  operating  revenue in both 2004 and 2003.  Electric sales to paper
and pulp mills accounted for 4 percent of consolidated operating revenue in both
2004 and 2003.

OPERATING  EXPENSES  in  total  were up $22.4  million,  or 7  percent  in 2004.
Regulated  utility  operating  expenses  were up  $9.6  million,  or 4  percent,
reflecting increased purchased power expense necessitated by an outage at one of
the  Company's  generating  units (see  Outlook - Energy  Services),  and higher
pension  and  benefit  expenses  partially  offset  by the  absence  of a  power
marketing  demand  payment  associated  with a purchased  power  agreement  that
expired in 2003.  Nonregulated utility operating expenses were up $12.8 million,
or 17 percent, reflecting increased fuel and purchased power expense, and higher
cost  of  goods  sold   associated   with  increased   sales  at  the  Company's
telecommunications business.

AUTOMOTIVE SERVICES

OPERATING  REVENUE was up $6.2  million,  or 1 percent,  in 2004.  Revenue  from
auctions and related  services was up $1.6 million,  or less than 1 percent,  in
2004 primarily due to a favorable Canadian exchange rate. The number of vehicles
sold at the Company's  vehicle auction  facilities in total were similar to last
year reflecting fewer institutional vehicles and vehicles repossessed by ADESA's
customers available for redistribution  offset by an increase in dealer vehicles
sold. The increase in dealer  vehicle  demand  contributed to an increase in the
number of vehicles  sold as a  percentage  of the number of vehicles  entered or
offered for sale at used vehicle  auctions.  The conversion  percentage was 65.0
percent in 2004 (61.8  percent in 2003).  Dealer  financing  revenue was up $4.6
million, or 9 percent, in 2004 reflecting a 13 percent increase in the number of
loan transactions. The increase in loan transactions was a result of an increase
in the  number  of  active  dealers  combined  with  an  increase  in  floorplan
utilization by the existing dealer base.

23                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>

OPERATING  EXPENSES  were down $1.1  million,  or less than 1  percent,  in 2004
primarily due to the impact of the used vehicle market shift towards more dealer
vehicles  and higher  average used vehicle  conversion  rates.  The used vehicle
market shift from  institutional  vehicles to dealer vehicles  decreased cost of
services  in 2004  because  dealer  vehicles  cost less to process  since  fewer
ancillary  services are utilized for these vehicles as compared to institutional
vehicles.  This decrease was partially offset by additional corporate charges of
$4.3  million and  separation  expenses of $2.6 million  incurred as  Automotive
Services  prepared to be a stand-alone  publicly  traded  company.  In addition,
interest expense was higher due to the new debt issued in June 2004. Expenses in
2004 also  reflected the negative  impact of higher  Canadian  exchange rates in
2004.

INVESTMENTS AND CORPORATE CHARGES

OPERATING REVENUE was up $6.2 million, or 29 percent, in 2004 primarily due to a
$9.3 million increase in revenue from ALLETE Properties as a result of more land
sales. In 2004 11 large real estate sales  contributed $22.0 million to revenue,
while in 2003  eight  large  real  estate  sales  contributed  $14.5  million to
revenue.  This increase was partially offset by $7.9 million ($4.7 million after
tax) of impairment  losses  recorded in 2004 related to our emerging  technology
portfolio.  Revenue in 2003 included $3.5 million of losses  related to the sale
of shares the Company  held  directly  in  publicly-traded  emerging  technology
investments.

OPERATING  EXPENSES  were up  slightly  in 2004 as more  real  estate  sales and
increased  general  corporate  charges  were offset by lower  interest  expense.
Operating  expenses at ALLETE Properties were up $2.9 million in 2004 because of
more land sales. Corporate charges increased $3.0 million ($9.0 million in 2004;
$6.0 million in 2003) reflecting higher compensation and benefit costs, and $1.7
million of costs  associated with the planned  spin-off of Automotive  Services.
Interest expense not specifically  related to any one business segment decreased
$5.5 million ($8.0 million in 2004; $13.5 million in 2003) due to the redemption
of quarterly  income preferred  securities and various  long-term debt issues in
2003 with both the proceeds from the sale of our Water  Services  businesses and
internally generated cash.


CRITICAL ACCOUNTING POLICIES

Certain  accounting  measurements  under  applicable  GAAP involve  management's
judgment  about  subjective  factors  and  estimates,  the  effects of which are
inherently uncertain.  Accounting measurements that we believe are most critical
to  our  reported  results  of  operations  and  financial   condition  include:
uncollectible  receivables  and allowance for doubtful  accounts,  impairment of
goodwill  and  long-lived  assets,  pension and  postretirement  health and life
actuarial assumptions, valuation of investments and provisions for environmental
remediation.  These policies are reviewed with the Audit  Committee of our Board
of Directors on a regular basis and summarized in our 2003 Form 10-K.


OUTLOOK

SPIN-OFF OF AUTOMOTIVE SERVICES. In June 2004 ADESA issued 6.3 million shares of
common stock  through an IPO priced at $24.00 per share.  This  represented  6.6
percent of ADESA's 94.9 million shares outstanding.  ALLETE will account for the
6.6 percent public ownership of ADESA as a minority interest and continue to own
and  consolidate  the  remaining  portion of ADESA until the  completion  of the
spin-off of ADESA from ALLETE. Also in June 2004, ADESA substantially  completed
the  restructuring of debt in conjunction with its June IPO and planned spin-off
from ALLETE.  (See Note 7.)  ALLETE's  Board of Directors is expected to meet in
late August 2004 to finalize  details of the  spin-off of  Automotive  Services,
which is expected to be completed by the end of September  2004. The spin-off is
expected to take the form of a tax-free stock dividend to ALLETE's shareholders,
who would  receive a pro rata  number of shares of ADESA  common  stock for each
share of ALLETE  common  stock  that they own.  The  spin-off  is subject to the
approval  of the final plan by ALLETE's  Board of  Directors,  favorable  market
conditions, receipt of tax opinions and other customary conditions.

                      ALLETE Second Quarter 2004 Form 10-Q                    24


<PAGE>

2004 EARNINGS GUIDANCE.  After the spin-off of Automotive Services is completed,
ALLETE will be comprised of what is now classified as (1) Energy  Services,  and
(2) Investments and Corporate Charges.  In 2003 net income from these operations
totaled  $28.3  million.  ALLETE  estimates  that  2004 net  income  from  these
remaining  businesses will increase 15 percent over 2003. The earnings  guidance
does not include  approximately  $15 million  after tax of  Automotive  Services
spin-off related expenses for advisor fees and debt retirement premiums that are
being incurred this year. This guidance does reflect the impact of cash received
from ADESA after the IPO which was invested and used for debt reduction.

ENERGY  SERVICES.  In February 2004 we  experienced  a generator  failure at our
534-MW  Boswell  Energy Center Unit 4 (Unit 4). Unit 4 came back into service in
June.  As a result of the failure,  we replaced  significant  components  of the
generator at a capital  cost of  approximately  $6 million.  The majority of the
replacement  cost was  covered  by  insurance,  subject  to a  deductible  of $1
million.  We entered into power  purchase  agreements  to replace the power lost
during the Unit 4 outage.  The cost of this additional  power is being recovered
through the regulated utility fuel adjustment clause in Minnesota.  While Unit 4
was down,  some work  originally  planned  for 2005 and 2006 was done during the
outage to minimize future outages. This outage did not have a material impact on
our results of operations.  Wisconsin Public Power, Inc. owns 20 percent of Unit
4.

Minnesota  Power  does not expect to file a request  to  increase  rates for its
retail utility operations during 2005. We will, however, continue to monitor the
costs of serving our retail customers and evaluate the need for a rate filing in
the future.

SWL&P's application with the PSCW for authority to increase retail utility rates
6.1 percent for its  Wisconsin  electric  utility  operations  was filed in June
2004. The request covers increases in the cost of doing business.  New rates, if
approved, are expected to go into effect in early 2005.

We will file an  integrated  resource plan with the MPUC in the third quarter of
2004  detailing  our retail energy demand  projections  and our energy  sourcing
options to meet the projected  demand.  The projections  will include the future
energy needs of our existing customers,  including contemplated  expansions.  We
expect to see modest growth in our retail and regulated wholesale loads over the
next 15 years with  potential  for more robust  growth  depending on several key
expansion  opportunities  being  pursued by  customers  in the steel,  paper and
pipeline industries we serve.

INVESTMENTS AND CORPORATE CHARGES.  ALLETE  Properties,  our Florida real estate
operations,  owns approximately 17,000 acres of land near Fort Myers, Palm Coast
and  Ormond  Beach,  Florida,  as well as Winter  Haven  Citi  Centre,  a retail
shopping  center  in Winter  Haven,  Florida.  We add value to the land  through
entitlements and infrastructure improvements, and then sell it at current market
prices. Historically, proceeds from land sales have been three to four times our
carrying  value.  Rental  income at the retail  shopping  center in Winter Haven
provides a recurring stream of revenue.  At June 30, 2004 our basis in land held
by ALLETE Properties was $47.1 million.  ALLETE Properties occasionally provides
seller financing, and outstanding finance receivables were $10.8 million at June
30,  2004  with  maturities  ranging  up  to  ten  years.   Outstanding  finance
receivables  accrue  interest  at  market-based  rates.  At June 30, 2004 ALLETE
Properties also had $18.2 million of other assets which  consisted  primarily of
Winter Haven Citi Centre. We may selectively acquire additional land if it meets
our   strategy  of  adding  value   through   entitlement   and   infrastructure
improvements.

SALE OF  REMAINING  WATER  ASSETS.  In June 2004 we  essentially  concluded  our
strategy to exit our Water  Services  businesses  when we completed the sales of
our North  Carolina  water  assets  and the sale of the  remaining  72 water and
wastewater systems in Florida.  The net cash proceeds from the sale of all water
assets in 2003 and 2004,  after  transaction  costs,  retirement of most Florida
Water debt and payment of income taxes, were approximately  $300 million.  These
net proceeds  were used to  strengthen  our balance  sheet and retire  debt.  We
continue  to expect to sell our water  assets in Georgia  in the second  half of
2004.

25                    ALLETE Second Quarter 2004 Form 10-Q                    



<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW ACTIVITIES

A primary goal of our  strategic  plan is to improve cash flow from  operations.
Our  strategy  includes  growing the  businesses  both  internally  by expanding
facilities,  services and operations (see Capital Requirements),  and externally
through acquisitions.

Consolidated  cash and cash  equivalents was $602.9 million at June 30, 2004, an
increase of $383.3 million since December 31, 2003. Of total  consolidated  cash
and cash equivalents at June 30, 2004, $275.0 million was at Automotive Services
with the balance of $327.9  million  held by ALLETE and its other  subsidiaries.
Our Automotive  Services  business had $155.8 million of restricted cash at June
30, 2004  primarily  consisting  of funds held in escrow for the  redemption  of
certain debt in August 2004. (See Note 7.)

In June 2004 ADESA completed an initial public offering of 6.3 million shares at
$24.00 per share which  netted  proceeds  of $136.0  million  after  transaction
costs.  ADESA also completed the  restructuring  of its debt in conjunction with
the IPO and planned  spin-off from ALLETE,  and in June 2004 issued $125 million
of senior  notes and  borrowed  $275  million  under a new $525  million  credit
facility.  With these funds,  ADESA repaid $75.1 million of previously  existing
debt and all intercompany  debt  outstanding to ALLETE.  In July 2004 ADESA also
announced the August 2004  redemption of $125 million in  outstanding  long-term
debt.  See Note 3 for  additional  detail  on the IPO and Note 7 for  additional
detail on debt issued, repaid and slated for redemption.

In the first half of 2004, ALLETE repaid $56.3 million in outstanding debt using
internally  generated  funds and  proceeds  from the sale of our Water  Services
assets.  In July 2004 ALLETE repaid $125 million in senior  long-term notes with
proceeds received from ADESA and the sale of our Water Services assets.  Also in
July 2004,  ALLETE  announced the August 2004  redemption  of $111.0  million in
long-term  debt that is  expected  to be  refinanced  in  August  2004 at a more
favorable  interest rate. See Notes 7 and 8 for additional detail on debt repaid
and slated for redemption.

During  the  first  six  months  of 2004 and  2003,  cash  flow  from  operating
activities  was  affected  by a  number  of  factors  representative  of  normal
operations.

WORKING CAPITAL.  Additional working capital,  if and when needed,  generally is
provided by the sale of commercial  paper.  Approximately  3.4 million  original
issue  shares of our common stock are  available  for  issuance  through  Invest
Direct, our direct stock purchase and dividend reinvestment plan.

A substantial  amount of ADESA's  working  capital is generated  internally from
payments for services provided.  ADESA had historically funded short term swings
in working  capital  through  lines of credit  from  ALLETE.  In June 2004 ADESA
secured  a  revolving  line of  credit  and  expects  this  credit  facility  to
sufficiently  meet its working  capital needs and the needs of its  subsidiaries
for the foreseeable future.  During the sales process,  ADESA does not generally
take title to or  ownership of the  vehicles  consigned  for auction but instead
facilitates the transfer of vehicle ownership directly from sellers to buyers.

AFC offers  floorplan  financing  for  dealers to  purchase  vehicles  mostly at
auctions and takes a security interest in each financed  vehicle.  The financing
is provided  through  the earlier of the date the dealer  sells the vehicle or a
general borrowing term of 30 to 45 days.

Significant changes in accounts receivable and accounts payable balances at June
30, 2004 compared to December 31, 2003 were due to increased sales and financing
activity  at  Automotive  Services.  Typically  auction  volumes are down during
December  because  of the  holidays.  As a  result,  ADESA  and AFC  had  higher
receivables and higher payables at June 30, 2004.

AFC  RECEIVABLES.  AFC sells the  majority of U.S.  dollar  denominated  finance
receivables on a revolving basis to a wholly owned,  bankruptcy remote,  special
purpose  subsidiary that is consolidated  for accounting  purposes.  AFC and the
special  purpose  subsidiary  amended it  securitization  agreement in June 2004
concurrent with the completion of ADESA's IPO. The agreement  expires in January
2005  subject to annual  renewal  and allows  for the  revolving  sale to a bank
conduit  facility of up to a maximum of $500 million in  undivided  interests in
eligible finance receivables subject to committed  liquidity.  AFC's receivables
are discussed in Note 2.

                      ALLETE Second Quarter 2004 Form 10-Q                    26


<PAGE>


SECURITIES.  In March 2001  ALLETE,  ALLETE  Capital II and ALLETE  Capital III,
jointly filed a  registration  statement with the SEC pursuant to Rule 415 under
the Securities Act of 1933. The registration statement,  which has been declared
effective by the SEC, relates to the possible issuance of a remaining  aggregate
amount of $387 million of  securities  which may include  ALLETE  common  stock,
first mortgage bonds and other debt securities, and ALLETE Capital II and ALLETE
Capital  III  preferred  trust  securities.   ALLETE  also  previously  filed  a
registration  statement,  which has been declared effective by the SEC, relating
to the possible  issuance of $25 million of first  mortgage bonds and other debt
securities.  We may sell all or a portion of the remaining registered securities
if warranted by market  conditions and our capital  requirements.  Any offer and
sale  of the  above  mentioned  securities  will  be made  only  by  means  of a
prospectus  meeting the requirements of the Securities Act of 1933 and the rules
and regulations thereunder.

CREDIT RATINGS

Our securities have been rated by Standard & Poor's Ratings Services, a division
of The McGraw-Hill Companies,  Inc. (Standard & Poor's) and by Moody's Investors
Service, Inc. (Moody's).

In May 2004 Standard & Poor's affirmed ALLETE's BBB+ corporate credit rating and
removed the rating from  CREDITWATCH with developing  implications.  Also in May
2004,  Moody's  affirmed  ALLETE's senior secured debt at a Baa1 rating,  Issuer
Rating and senior  unsecured  debt at Baa2,  and  Prime-2  short term rating for
commercial paper.  Both agencies  indicated that the spin-off of ADESA would not
impact these ratings.

Rating agencies use both quantitative and qualitative  measures in determining a
company's credit rating.  These measures include business risk,  liquidity risk,
competitive position,  capital mix, financial condition,  predictability of cash
flows,  management  strength  and  future  direction.  Some of the  quantitative
measures  can  be  analyzed  through  a few  key  financial  ratios,  while  the
qualitative ones are more subjective.  The disclosure of these credit ratings is
not a recommendation to buy, sell or hold our securities. Ratings are subject to
revision or withdrawal at any time by the assigning  rating  organization.  Each
rating should be evaluated independently of any other rating.

CAPITAL REQUIREMENTS

Consolidated capital expenditures for the six months ended June 30, 2004 totaled
$43.4 million  ($67.5  million in 2003).  Expenditures  for the six months ended
June 30, 2004  included  $34.5  million for Energy  Services,  $5.7  million for
Automotive  Services and $0.2 million for  Investments  and  Corporate  Charges.
Expenditures  for the six months ended June 30, 2004 also  included $3.0 million
to maintain  our  remaining  Water  Services  businesses  while they were in the
process of being sold.  Internally  generated  funds were the primary  source of
funding for these expenditures.


ENVIRONMENTAL MATTERS AND OTHER

Our businesses  are subject to regulation by various U.S. and Canadian, federal,
state, provincial and local authorities concerning  environmental matters. We do
not currently anticipate that potential  expenditures for environmental  matters
will be  material;  however,  we are unable to predict the outcome of the issues
discussed in Note 13.


NEW ACCOUNTING STANDARDS

New accounting standards are discussed in Note 2.
                                    
                         ----------------------------                          

READERS ARE CAUTIONED THAT FORWARD-LOOKING  STATEMENTS INCLUDING THOSE CONTAINED
ABOVE,  SHOULD BE READ IN CONJUNCTION  WITH OUR  DISCLOSURES  UNDER THE HEADING:
"SAFE HARBOR  STATEMENT UNDER THE PRIVATE  SECURITIES  LITIGATION  REFORM ACT OF
1995" LOCATED ON PAGE 3 OF THIS FORM 10-Q.

27                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>



I
TEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SECURITIES INVESTMENTS

Investments  include certain  securities  held for an indefinite  period of time
which are accounted  for as  available-for-sale  securities.  Available-for-sale
securities are recorded at fair value with unrealized  gains and losses included
in accumulated other  comprehensive  income, net of tax.  Unrealized losses that
are other than  temporary  are  recognized  in  earnings.  At June 30,  2004 our
available-for-sale  securities  portfolio  consisted of  securities in a grantor
trust  established to fund certain  employee  benefits.  Our  available-for-sale
securities  portfolio  had a fair value of $21.1 million at June 30, 2004 ($20.2
million at December  31,  2003) and a total  unrealized  after-tax  gain of $1.1
million at June 30, 2004 ($0.8 million at December 31, 2003).

As  part  of  our  emerging  technology  portfolio,  we  have  several  minority
investments in venture  capital funds and direct  investments in  privately-held
start-up  companies.  These  investments are accounted for using the cost method
and  included  in  Investments  on our  consolidated  balance  sheet.  The total
carrying  value of these  investments  was $26.9 million at June 30, 2004 ($37.5
million  at  December  31,  2003).  Our  policy  is to  quarterly  review  these
investments  for  impairment by assessing  such factors as continued  commercial
viability of products,  cash flow and earnings.  Any impairment would reduce the
carrying value of the investment.  During the second quarter of 2004 we recorded
$7.9 million ($4.7 million after taxes) of impairment  losses primarily  related
to direct investments in certain privately-held  start-up companies whose future
business prospects have diminished  significantly.  Recent developments at these
companies  indicate  that future  commercial  viability is  unlikely,  as is new
financing necessary to continue development.

The total carrying value at June 30, 2004 included $20.4 million for investments
in three  venture  capital  funds  that have a current  fund  reported  value of
approximately   $10  million.   The  venture   capital   funds  invest  in  many
privately-held  start-up  companies,  and generally value the investments at the
most recent round of equity  financing with failed  investments  written down to
zero.  Experience  indicates that failures in the fund's  portfolio emerge early
while successful companies tend to take longer to materialize.  In addition, the
most recent round of equity  financing  may produce a low  valuation as it would
not reflect subsequent positive developments  occurring at the various companies
in which the funds have invested. Based on our evaluation of these three venture
capital  funds,  we  anticipate  that the funds'  future  value will  exceed our
carrying value as successful  companies emerge and become fully valued.  We have
the ability and intent to hold our investment in these venture capital funds for
a  reasonable  period of time  sufficient  for the  forecasted  valuation  to be
realized. As such, we did not consider these venture capital fund investments to
be other-than-temporarily impaired at June 30, 2004.


FOREIGN CURRENCY

Our foreign  currency  exposure is limited to the  conversion  of the  operating
results of our  Automotive  Services'  Canadian  subsidiaries  and,  to a lesser
extent,  Mexican  subsidiaries.  We have not entered  into any foreign  exchange
contracts to hedge the  conversion of Automotive  Services'  Canadian or Mexican
operating  results  into  United  States  dollars.  Mexican  operations  are not
material.


INTEREST RATES

In June 2004 ADESA entered into two interest rate swap  agreements with notional
amounts of $105 million and $60 million to manage its exposure to interest  rate
movements on its variable rate debt. Both interest rate swap agreements  contain
amortizing  provisions  and mature in December  2006.  ADESA has  designated its
interest  rate  swap  agreements  as cash  flow  hedges.  The fair  value of the
interest rate swap  agreements is estimated  using pricing models widely used in
financial markets and represents the estimated amount ADESA would receive or pay
to terminate  the  agreement at the  reporting  date.  At June 30, 2004 the fair
value of the interest rate swap agreements is an unrealized loss of $0.6 million
and is recorded in accrued  expenses and other  liabilities on the  consolidated
balance sheet.  In accordance  with the provisions of SFAS 133,  "Accounting for
Derivative Instruments and Hedging Activities," changes in the fair value of the
interest  rate swap  agreements  designated  as cash flow hedges are recorded in
Accumulated Other Comprehensive  Income.  ADESA is exposed to credit loss in the
event of nonperformance by the  counterparties;  however,  nonperformance is not
anticipated.

                      ALLETE Second Quarter 2004 Form 10-Q                    28


<PAGE>


COMMODITY PRICE RISK

Our regulated utility operations in Minnesota and Wisconsin incur costs for fuel
(primarily  coal),  power and natural gas  purchased for resale in our regulated
service  territories,  and  related  transportation.  Our  regulated  utilities'
exposure to price risk for these  commodities is significantly  mitigated by the
current ratemaking  process and regulatory  environment which generally allows a
fuel clause  surcharge  if costs are in excess of those in our last rate filing.
Conversely,  costs below those in our last rate filing  result in a rate credit.
We  prudently  manage our  customers'  exposure to price risk by  entering  into
contracts of various  durations and terms for the purchase of coal and power (in
Minnesota),  power and natural gas (in  Wisconsin),  and related  transportation
costs.


POWER MARKETING

Our power marketing activities consist of (i) purchasing energy in the wholesale
market  for resale in our  regulated  service  territories  when  retail  energy
requirements  exceed  generation  output,  and  (ii)  selling  excess  available
regulated   utility   generation  and  purchased   power,  as  well  as  selling
nonregulated generation.

From  time-to-time,  our regulated utility operations may have excess generation
that is  temporarily  not  required  by retail and  municipal  customers  in our
regulated service  territory.  We actively sell this generation to the wholesale
market to optimize the value of our generating  facilities.  This  generation is
generally  sold in the spot  market  or under  short-term  contracts  at  market
prices.

We have  approximately 500 MW of nonregulated  generation  available for sale to
the wholesale  markets.  This primarily consists of about 200 MW at our Taconite
Harbor  facility in  northern  Minnesota  and 275 MW obtained  through a 15-year
power  purchase  agreement  with a wholly owned  subsidiary of NRG Energy at the
Kendall County facility near Chicago, Illinois.

The majority of Taconite  Harbor's  capability of approximately  200 MW has been
sold through  various  short-term and long-term  capacity and energy  contracts.
Short term, we have  approximately 180 MW of capacity and energy sales contracts
and a 15 MW forward  energy  sales  contract,  all of which  expire on April 30,
2005.  Long term,  we have entered into two capacity and energy sales  contracts
totaling 175 MW (201 MW including a 15 percent  reserve) which are effective May
1, 2005 and expire on April 30,  2010.  Both  contracts  contain  fixed  monthly
capacity charges and fixed minimum energy charges.  One contract provides for an
annual  escalator  to the energy  charge based on increases in our cost of coal,
subject to a small minimum annual  escalation.  The other contract provides that
the energy  charge  will be the greater of a fixed  minimum  charge or an amount
based on the variable  production cost of a combined cycle natural gas unit. Our
exposure  in the  event  of a full or  partial  outage  at our  Taconite  Harbor
facility  is  significantly  limited  under  both  contracts.  When the buyer is
notified at least two months prior to an outage,  there is no exposure.  Outages
with less than two months  notice are subject to an annual  duration  limitation
typical of this type of contract.

Under the Kendall County  agreement,  which expires in September  2017, we pay a
fixed capacity  charge for the right,  but not the  obligation,  to capacity and
energy from a 275 MW  generating  unit.  We are  responsible  for  arranging the
natural gas fuel supply.  Our strategy is to sell a significant  portion of this
generation through long-term contracts of various durations. The balance will be
sold in the daily spot market or through short-term contracts. We currently have
long-term capacity sales contracts for 130 MW, with 50 MW expiring in April 2012
and the balance expiring in September 2017. To date, the Kendall County facility
has operated at a loss due to negative spark spreads (the  differential  between
electric and natural gas prices) in the wholesale power market and our resulting
inability to cover the fixed capacity charge on the unsold  capacity  (currently
145 MW). We expect the  facility to continue to generate  losses until such time
as spark  spreads  improve  or we are able to enter  into  additional  long-term
capacity  sales  contracts.  We are currently  exploring  options to minimize or
eliminate these ongoing losses.

29                    ALLETE Second Quarter 2004 Form 10-Q                    



<PAGE>



ITEM 4.    CONTROLS AND PROCEDURES

We maintain a system of controls and procedures  designed to provide  reasonable
assurance  as  to  the  reliability  of  the  financial   statements  and  other
disclosures  included  in  this  report,  as well as to  safeguard  assets  from
unauthorized  use or disposition.  We evaluated the  effectiveness of the design
and operation of our disclosure  controls and procedures  under the  supervision
and with the participation of management,  including our chief executive officer
and chief  financial  officer,  as of the end of the period covered by this Form
10-Q.  Based  upon  that  evaluation,  our  chief  executive  officer  and chief
financial  officer  concluded  that our  disclosure  controls and procedures are
effective  in  timely  alerting  them to  material  information  required  to be
included in our periodic  SEC filings.  There has been no change in our internal
control over  financial  reporting  that occurred  during our most recent fiscal
quarter that has  materially  affected,  or is  reasonably  likely to materially
affect, our internal control over financial reporting.



PART II.   OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Material  legal and  regulatory  proceedings  are included in the  discussion of
Other Information in Item 5. and are incorporated by reference herein.

In late 2003 the staff of the SEC initiated an informal  inquiry relating to our
internal  audit  function,  internal  financial  reporting  and  the  loan  loss
methodology at AFC. We have fully and  voluntarily  cooperated with the informal
inquiry,  and the SEC staff has not asserted  that we have acted  improperly  or
illegally.  Although  we cannot  predict  the  length,  scope or  results of the
informal  inquiry,  based upon  extensive  review by the Audit  Committee of our
Board  of  Directors  with  the  assistance  of  independent   counsel  and  our
independent  auditors, we believe that we have acted appropriately and that this
inquiry  will not result in action that has a material  adverse  impact on us or
our  reported  results  of  operations.  The  results of the review by our Audit
Committee  and  independent  counsel were  submitted to the SEC in late February
2004. We have had no further communication with the SEC on this matter.

See Note 4 for a discussion on the ADESA Importation litigation.



ITEM 2.    CHANGES IN SECURITIES, USE OF PROCEEDS AND
           ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>
                                                                                  TOTAL NUMBER         MAXIMUM
                                                                                    OF SHARES         NUMBER OF
                                                                                  PURCHASED AS       SHARES THAT
                                                                                     PART OF         MAY YET BE
                                                   TOTAL                            PUBLICLY          PURCHASED
                                                 NUMBER OF          AVERAGE        ANNOUNCED          UNDER THE
ALLETE COMMON STOCK REPURCHASES                   SHARES          PRICE PAID        PLANS OR          PLANS OR
AS OF JUNE 30, 2004                            PURCHASED<F1>       PER SHARE        PROGRAMS          PROGRAMS
--------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                <C>             <C>                <C>
For the Quarter Ended March 31, 2004

January                                                -                 -              -                 -
February                                           6,333            $31.75              -                 -
March                                             15,247            $34.14              -                 -
--------------------------------------------------------------------------------------------------------------------

                                                  21,580            $33.44              -                 -
--------------------------------------------------------------------------------------------------------------------

For the Quarter Ended June 30, 2004

April                                              4,751            $34.99              -                 -
May                                                    -                 -              -                 -
June                                               5,220            $35.81              -                 -
--------------------------------------------------------------------------------------------------------------------

                                                   9,971            $35.42              -                 -
--------------------------------------------------------------------------------------------------------------------

Six Months Ended June 30, 2004                    31,551            $34.06              -                 -
--------------------------------------------------------------------------------------------------------------------

<FN>
<F1> Repurchased pursuant to the stock-for-stock exercise of employee options granted under the ALLETE Executive
     Long-Term Incentive Compensation Plan.
</FN>
</TABLE>


                      ALLETE Second Quarter 2004 Form 10-Q                    30


<PAGE>



ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)  We held our Annual Meeting of Shareholders on May 11, 2004.

(b)  Included in (c) below.

(c)  The  election of  directors and  the ratification  of  the  appointment  of
     independent auditors were voted on at the Annual Meeting of Shareholders.

     The results were as follows:
     
<TABLE>
     <CAPTION>
                                                                  VOTES
                                                                 WITHHELD                                 BROKER
                                              VOTES FOR         OR AGAINST          ABSTENTIONS          NONVOTES
     ---------------------------------------------------------------------------------------------------------------

     <S>                                     <C>                <C>                 <C>                  <C>
     DIRECTORS

     Wynn V. Bussmann                        73,129,135          1,603,112               -                   -
     David G. Gartzke                        73,389,211          1,343,036               -                   -
     Dennis O. Green                         73,061,647          1,670,600               -                   -
     Peter J. Johnson                        73,200,980          1,531,267               -                   -
     George L. Mayer                         73,189,932          1,542,315               -                   -
     Roger D. Peirce                         73,598,134          1,134,113               -                   -
     Jack I. Rajala                          73,462,836          1,269,411               -                   -
     Nick Smith                              73,745,576            986,671               -                   -
     Bruce W. Stender                        73,225,683          1,506,564               -                   -
     Donald C. Wegmiller                     73,385,366          1,346,881               -                   -
     Deborah L. Weinstein                    73,665,887          1,066,360               -                   -

     INDEPENDENT AUDITORS

     PricewaterhouseCoopers LLP              72,408,856          1,893,568            429,823                -

     ---------------------------------------------------------------------------------------------------------------
     </TABLE>


(d)  Not applicable.



ITEM 5.    OTHER INFORMATION

Reference  is made to our 2003  Form  10-K  for  background  information  on the
following updates. Unless otherwise indicated,  cited references are to our 2003
Form 10-K.


Ref. Page 12 - First Full Paragraph

In October 2003 the FPSC voted to initiate an investigation  into the ratemaking
considerations of the gain on sale of Florida Water's assets,  and whether gains
should be shared with the  previous  customers  of Florida  Water.  In June 2004
Florida enacted  legislation  which provides that gains or losses resulting from
the purchase or condemnation of a utility's assets, which results in the loss of
customers and revenue served by such assets, are to be borne by the shareholders
of the  utility.  This  applies  to all  transactions  prior  to and  after  the
effective date of the new law.


Ref. Page 17 - Fifth Paragraph

Minnesota  Power  does not expect to file a request  to  increase  rates for its
retail utility operations during 2005. We will, however, continue to monitor the
costs of serving our retail customers and evaluate the need for a rate filing in
the future.


Ref. Page 17 - Following the Sixth Paragraph

On May 21, 2004 the MPUC  approved  Minnesota  Power's  2004  capital  structure
petition.  Minnesota Power requested a common equity ratio of 58.44 percent with
a  contingency  window  of plus or  minus 15  percent  (49.67  percent  to 67.21
percent). The Company's total consolidated  capitalization was requested at $3.0
billion with a contingency cap of $300 million.  The Company requested  approval
of a total consolidated capitalization of $1.5 billion with a contingency cap of
$150 million once the spin-off of Automotive Services is completed.

31                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>

Ref. Page 17 - Ninth Paragraph

On June 3,  2004  SWL&P  filed an  application  with the PSCW for  authority  to
increase retail utility rates 6.1 percent. This average increase is comprised of
a 4.0 percent  increase in electric  rates, a 7.0 percent  increase in gas rates
and a 12.1 percent  increase in water rates.  The proposed  increases are due to
increased operating costs, primarily pension,  insurance, gross receipts tax and
parent  company  service  costs.  SWL&P is requesting a 12.25 percent  return on
common equity.  Hearings are  anticipated to be held in late 2004 with new rates
expected to go into effect in early 2005.


Ref. Page 18 - First Paragraph
Ref. Form 10-Q for the quarter ended March 31, 2004, Page 26 - Fourth Paragraph

On June 7, 2004 Save Our Unique Lands (SOUL) and the North American Water Office
(NAWO) filed a complaint  against  Minnesota  Power at the MPUC.  The  complaint
alleges  that  Minnesota  Power  does not  intend  to own the  Duluth  to Wausau
transmission  line,  that  the  American  Transmission  Company  (ATC)  is not a
jurisdictional utility under Minnesota law and lacks the power of eminent domain
and the ability to conduct business,  and that the technical aspects of the line
have changed  significantly  since the  Minnesota  Environmental  Quality  Board
(MEQB) approved  Minnesota Power's request to be exempt from the requirements of
the  Minnesota  Power Plant Siting Act for the  construction  of the 12 miles of
line in Minnesota.  For those  reasons,  SOUL and NAWO  requested  that the MPUC
overturn the MEQB decision, assert jurisdiction over the project, require ATC to
obtain a  Certificate  of Need to build  the  line,  and  direct  the  Office of
Attorney  General to initiate  proceedings  against  Minnesota Power and ATC for
unauthorized  transmission construction in Minnesota. On July 15, 2004 Minnesota
Power  filed a reply  to the  MPUC's  request  for  comments  on the  complaint.
Minnesota  Power stated that the MEQB exemption was still effective and that the
complaint had no merit. The Minnesota Department of Commerce supported Minnesota
Power's position in their comments.


Ref. Page 26 - Second through Fifth Paragraphs
Ref. Form 10-Q for the quarter ended March 31, 2004, Page 26 - Sixth Paragraph

In August 2004 ADESA expects to present a detailed  engineering  proposal to the
Taunton City Council.

ADESA has an  accrual  of $1.2  million  at June 30,  2004 with  respect to this
matter,  including the estimated costs (as of June 30, 2004) associated with the
proposal to extend the municipal water service.

In addition,  ADESA has received  correspondence  from an attorney  representing
residents of the adjoining  residential  community  suggesting  that ADESA enter
into discussions  concerning  property damage claims for diminution in value due
to the MTBE release.  Accordingly,  there is a possibility  that property damage
litigation may be filed against ADESA. Potential losses in these matters are not
considered  probable  by ADESA  management  or cannot be  reasonably  estimated.
Accordingly, ADESA has not recorded an accrual for the respective costs of these
matters.


Ref. Page 28 - Executive Officers of the Registrant
Ref. Page 54 - Fourth Paragraph

Effective July 20, 2004 Donald W.  Stellmaker was appointed  treasurer of ALLETE
by our Board of Directors.  Stellmaker,  47, joined ALLETE in 1980. His previous
positions  included  manager and  director of corporate  financial  planning and
budgeting at ALLETE.

                      ALLETE Second Quarter 2004 Form 10-Q                    32



<PAGE>


ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

            3   Bylaws of ALLETE, Inc., as amended effective July 20, 2004.

           *4   Indenture, dated June 21, 2004, between  ADESA, Inc. and LaSalle
                Bank  National  Association,  as trustee  (filed as  Exhibit 4.2
                to ADESA, Inc.'s June 30, 2004 Form 10-Q, File No. 1-32198).

       +10(a)   July 2004 amendment  to the ALLETE  Executive  Annual  Incentive
                Plan.

       +10(b)   July  2004  amendment  to  the  Minnesota Power  and  Affiliated
                Companies Executive Investment Plan I.

       +10(c)   July  2004  amendment  to  the  Minnesota Power  and  Affiliated
                Companies Executive Investment Plan II.

       +10(d)   July 2004 amendment to the  ALLETE Executive Long-Term Incentive
                Compensation Plan.

       +10(e)   July 2004 amendment to the ALLETE Director Stock Plan.

      *+10(f)   ADESA,  Inc.  2004  Equity and Incentive  Plan (filed as Exhibit
                10.14 to ADESA's  June 11,  2004  S-1/A,  File No. 333-113499).

      *+10(g)   ADESA, Inc. Director  Compensation  Plan (filed as Exhibit 10.15
                to ADESA's June 11, 2004 S-1/A, File No. 333-113499).

      *+10(h)   ADESA,  Inc.  Director  Compensation  Deferral  Plan (filed   as
                Exhibit   10.16   to  ADESA's   June 11,  2004  S-1/A,  File No.
                333-113499).

      *+10(i)   ADESA, Inc. Employee Stock Purchase Plan (filed as Exhibit 10.17
                to ADESA's June 11, 2004 S-1/A, File No. 333-113499).

      *+10(j)   ADESA, Inc. (formerly ADESA Corporation) Supplemental  Executive
                Retirement  Plan and  First  through Fifth  Amendments (filed as
                Exhibits 10.18 through 10.23 to ADESA's June 30, 2004 Form 10-Q,
                File No. 1-32198).

       *10(k)   Credit  Agreement, dated  June 21,  2004,  among ADESA, Inc., as
                Borrower,   the   Guarantors   party   thereto,   as  Subsidiary
                Guarantors, the Lenders party thereto and UBS Securities LLC and
                Merrill   Lynch   &   Co.,   as   Joint   Lead   Arrangers   and
                Co-Bookmanagers,   Bank  One,  N.A.,  General  Electric  Capital
                Corporation,  Keybank  National  Association,  SunTrust Bank and
                U.S.  Bank  National  Association  as  Co-Documentation  Agents,
                Merrill  Lynch & Co., as  Syndication  Agent,  UBS AG,  Stamford
                Branch,  as Issuing Bank,  Administrative  Agent and  Collateral
                Agent,  and UBS Loan Finance LLC, as Swingline  Lender (filed as
                Exhibit 10.5 to ADESA,  Inc.'s June 30, 2004 Form 10-Q, File No.
                1-32198).

       *10(l)   Second Amended and Restated Receivable Purchase Agreement, dated
                June  15,  2004,  among  AFC  Funding  Corporation,  as  Seller,
                Automotive  Finance  Corporation,  as Servicer,  Fairway Finance
                Company,  LLC and such other  entities  from time to time as may
                become  Purchasers  thereunder,  Harris  Nesbitt  Corp.,  as the
                Initial  Agent  and  as  Purchaser  Agent  for  Fairway  Finance
                Company, LLC and XL Capital Assurance Inc., as Insurer (filed as
                Exhibit 10.6 to ADESA,  Inc.'s June 30, 2004 Form 10-Q, File No.
                1-32198).

       *10(m)   Amendment  No. 1  to Amended  and  Restated  Purchase  and  Sale
                Agreement,  dated June 15, 2004, between AFC Funding Corporation
                and  Automotive  Finance  Corporation  (filed as Exhibit 10.7 to
                ADESA, Inc.'s June 30, 2004 Form 10-Q, File No. 1-32198).

       *10(n)   Master Separation Agreement, dated June 4, 2004, between ALLETE,
                Inc. and ADESA,  Inc.  (filed as Exhibit  10.1 to ADESA,  Inc.'s
                June 30, 2004 Form 10-Q, File No. 1-32198).


33                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>

        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.

We are a party to other long-term debt instruments that,  pursuant to Regulation
S-K, Item  601(b)(4)(iii),  are not filed as exhibits  since the total amount of
debt authorized under each such omitted instrument does not exceed 10 percent of
our total consolidated assets. These instruments include the following:

            -   $38,995,000 City of  Cohasset, Minnesota,  Variable  Rate Demand
                Revenue   Refunding  Bonds  (Minnesota  Power  &  Light  Company
                Project)  Series 1997A,  Series  1997B,  Series 1997C and Series
                1997D.

            -   $35,105,000  Collier  County  Industrial  Development Authority,
                6.50% Industrial  Development  Refunding  Revenue Bonds (Florida
                Water Services Corporation,  formerly Southern States Utilities,
                Inc., Project) Series 1996.

We will furnish copies of these instruments to the SEC upon its request.

-------------------------
* Incorporated herein by reference as indicated.
+ Management contract or compensatory plan or arrangement.


(b) Reports on Form 8-K.

    Report on Form 8-K filed June 1, 2004 with  respect to  Item 5. Other Events
    and Regulation FD Disclosure.

    Report on Form 8-K filed June 16, 2004 with  respect to Item 5. Other Events
    and Regulation FD Disclosure.

    Report on Form 8-K filed June 22, 2004 with  respect to Item 5. Other Events
    and Regulation FD Disclosure.

    Report on Form 8-K filed  July 1, 2004 with  respect to Item 5. Other Events
    and Regulation FD Disclosure.

                      ALLETE Second Quarter 2004 Form 10-Q                    34


<PAGE>



                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                ALLETE, INC.





August 6, 2004                                James K. Vizanko                
                            ----------------------------------------------------
                                              James K. Vizanko
                            Senior Vice President and Chief Financial Officer




August 6, 2004                                 Mark A. Schober                
                            ----------------------------------------------------
                                               Mark A. Schober
                                    Senior Vice President and Controller




35                    ALLETE Second Quarter 2004 Form 10-Q                    


<PAGE>


                                  EXHIBIT INDEX


EXHIBIT
NUMBER
--------------------------------------------------------------------------------
      3    Bylaws of ALLETE, Inc., as amended effective July 20, 2004.

  10(a)    July 2004 amendment to the ALLETE Executive Annual Incentive Plan.

  10(b)    July 2004 amendment to the Minnesota Power and  Affiliated  Companies
           Executive Investment Plan I.

  10(c)    July 2004 amendment to  the  Minnesota Power and Affiliated Companies
           Executive Investment Plan II.

  10(d)    July 2004 amendment  to  the  ALLETE  Executive  Long-Term  Incentive
           Compensation Plan.

  10(e)    July 2004 amendment to the ALLETE Director Stock Plan.

  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.



                      ALLETE Second Quarter 2004 Form 10-Q                    




<PAGE>

                                                                      EXHIBIT 3







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


                                    BYLAWS OF

                                  ALLETE, INC.

                       As Amended Effective July 20, 2004


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






<PAGE>
                                              As Amended Effective July 20, 2004

                                   BYLAWS OF
                                  ALLETE, INC.

     Section 1. The annual meeting of the  shareholders of this  Corporation for
the election of Directors and the transaction of such other  corporate  business
as may  properly  come  before  such  meeting  shall be held at a time and place
anywhere  within or without the State of Minnesota as may be  designated  by the
Board of  Directors  on the  second  Tuesday  of May in each year after the year
1923,  unless such day is a legal  holiday,  in which case such meeting shall be
held on the next day thereafter which is not a legal holiday or a Sunday.

     Section 2. Special  meetings of the shareholders of this Corporation may be
called for any purpose or purposes at any time by the Chairman of the Board,  by
the President, by the Board of Directors or any two or more members thereof, the
Executive  Committee,  or, in the manner  hereinafter  provided,  by one or more
shareholders  as  permitted  under  Minnesota  law.  The  place of such  special
meetings  shall be at the  registered  office  of this  Corporation  in  Duluth,
Minnesota, or at such other place in Duluth as the Directors may determine.

     Upon request in writing,  by registered
  mail or delivered in person to the
Chairman of the Board,  the President,  a  Vice-President  or Secretary,  by any
person or persons  entitled to call a meeting of  shareholders,  it shall be the
duty of such officer  forthwith to cause notice to be given to the  shareholders
entitled  to vote of a meeting to be held at such time as such  officer may fix,
not less than ninety (90) days after the receipt of such request. If such notice
shall not be given within sixty (60) days after  delivery or the date of mailing
of such request,  the person or persons  requesting the meeting may fix the time
of meeting and give notice in the manner hereinafter provided.

                                       2


<PAGE>

                                              As Amended Effective July 20, 2004

     Notice of special meetings shall state the time, place and purpose thereof.

     Section 3. Notice of every meeting of  shareholders  shall be mailed by the
Secretary or the officer or other person performing the Secretary's  duties, not
more than sixty (60) days and not less than ten (10) days before the meeting, to
each  shareholder of record  entitled to vote, at his or her post office address
as shown by this Corporation's records; provided, however, that if a shareholder
waives notice thereof before, at, or after the meeting, notice of the meeting to
such shareholder is unnecessary.  It shall not be necessary to publish notice of
any meeting of shareholders.

     No business may be transacted at an annual meeting of  shareholders,  other
than  business  that is either (a)  specified  in the notice of meeting  (or any
supplement  thereto)  given by or at the direction of the Board of Directors (or
any duly authorized  committee  thereof),  (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized  committee  thereof),  or (c) otherwise  properly  brought before the
annual meeting by any shareholder of the Corporation (i) who is a shareholder of
record on the date of the giving of the notice  provided  for in this  Section 3
and on the record date for the determination of shareholders  entitled to notice
of and to vote at such  annual  meeting  and (ii) who  complies  with the notice
procedures set forth in this Section 3.

     In  addition  to any other  applicable  requirements,  for  business  to be
properly  brought before an annual meeting by a  shareholder,  such  shareholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.

                                       3


<PAGE>

                                              As Amended Effective July 20, 2004

     To be timely, a shareholder's  notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation not
less than ninety (90) days nor more than one hundred  twenty (120) days prior to
the   anniversary   date  of  the  immediately   preceding   annual  meeting  of
shareholders;  provided,  however,  that in the event that the annual meeting is
called for a date that is not within  twenty-five (25) days before or after such
anniversary  date,  notice by the  shareholder  in order to be timely must be so
received not later than the close of business on the tenth (10th) day  following
the day on which  such  notice of the date of the annual  meeting  was mailed or
such public  disclosure  of the date of the annual  meeting was made,  whichever
first occurs.

     To be in proper written form, a shareholder's  notice to the Secretary must
set forth as to each matter such shareholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual  meeting  and the  reasons  for  conducting  such  business at the annual
meeting,  (ii) the name and record address of such shareholder,  (iii) the class
or series  and number of shares of capital  stock of the  Corporation  which are
owned  beneficially or of record by such shareholder,  (iv) a description of all
arrangements or understandings  between such shareholder and any other person or
persons (including their names) in connection with the proposal of such business
by such  shareholder  and any  material  interest  of such  shareholder  in such
business and (v) a  representation  that such  shareholder  intends to appear in
person or by proxy at the  annual  meeting  to bring  such  business  before the
meeting.

     No business shall be conducted at the annual meeting of shareholders except
business brought before the annual meeting in

                                       4


<PAGE>

                                              As Amended Effective July 20, 2004

accordance  with the procedures set forth in this Section 3; provided,  however,
that,  once  business has been  properly  brought  before the annual  meeting in
accordance  with such  procedures,  nothing in this Section 3 shall be deemed to
preclude discussion by any shareholder of any such business.  If the Chairman of
an annual meeting  determines that business was not properly  brought before the
annual meeting in accordance with the foregoing  procedures,  the Chairman shall
declare to the meeting that the business  was not  properly  brought  before the
meeting and such business shall not be transacted.

     Section 4. The  presence in person or by proxy of the holders of a majority
of the shares entitled to vote at any meeting shall  constitute a quorum for the
transaction  of  business.  In the  absence  of a  quorum,  any  meeting  may be
adjourned from time to time.

     Section 5.  Meetings  of the  shareholders  shall be  presided  over by the
Chairman of the Board, if there be a Chairman of the Board present, otherwise by
the President,  or, if the President is not present, by a Vice-President,  or if
neither the  President  nor a  Vice-President  is  present,  by a Chairman to be
elected at the meeting. The Secretary of this Corporation shall act as Secretary
of such meetings, if present.

     Section 6.  Subject to the  provisions  of Article  III of the  Articles of
Incorporation as amended, each shareholder entitled to vote shall be entitled to
one vote for each share of voting stock held by the shareholder and may vote and
otherwise act in person or by proxy at each meeting of shareholders.

     Section  7.  Any  unissued  stock  of this  Corporation,  not or  hereafter
authorized,  may be issued and disposed of by the Board of Directors at any time
and from time to time, to such persons, firms,

                                       5


<PAGE>

                                              As Amended Effective July 20, 2004

corporations or associations,  upon such terms and for such consideration as the
Board of Directors may, in its discretion,  determine,  except as may be limited
by law or by the Articles of  Incorporation of this  Corporation.  Shares of the
Corporation's  stock may be  certificated or  uncertificated,  as provided under
Minnesota  law.  Certificates  of stock  shall be of such form and device as the
Board of Directors  may elect,  and shall be signed by the Chairman of the Board
or the President or a Vice-President and the Treasurer or an Assistant Treasurer
or the  Secretary or an  Assistant  Secretary  of this  Corporation,  but when a
certificate is signed by a Transfer Agent or Registrar the signature of any such
corporate  officer and the corporate seal, if any, upon such  certificate may be
facsimiles, engraved or printed.

     Section  8.  The  stock  of  this  Corporation  shall  be  transferable  or
assignable  on the  books of this  Corporation  by the  holders  in person or by
attorney,  and in the case of stock represented by a certificate on surrender of
the  certificates  therefor.  The Board of  Directors  may  appoint  one or more
transfer  agents and  registrars of the stock.  The Board of Directors may fix a
time not exceeding sixty (60) days and not less than ten (10) days preceding the
date of any meeting of shareholders as the record date for the  determination of
the shareholders  entitled to notice of and to vote at such meeting, and in such
case  only  shareholders  of  record  on  the  date  so  fixed  or  their  legal
representatives  shall be  entitled  to notice  of and to vote at such  meeting,
notwithstanding any transfer of any shares on the books of the Corporation after
any  record  date so fixed.  The Board of  Directors  may close the books of the
Corporation  against  transfer  of shares  during  the whole or any part of such
period.

     Section 9.  Subject to the  provisions  of Article  III of the  Articles of
Incorporation of this Corporation,  (1) the management of this Corporation shall
be vested in a Board of Directors, the number of which

                                       6


<PAGE>

                                              As Amended Effective July 20, 2004

shall be fixed from time to time exclusively by the Board of Directors  pursuant
to a resolution adopted by affirmative vote of the majority of the Disinterested
Directors,  as defined in Article VII of the Articles of Incorporation,  but the
number of  Directors  shall be no less than nine (9) and no greater than fifteen
(15),  but no  decrease  shall  have the  effect of  shortening  the term of any
incumbent  Director.  Directors shall be elected annually by the shareholders by
ballot by a majority of all the  outstanding  stock  entitled  to vote,  to hold
office until their successors are elected and qualify; (2) subject to any rights
then  existing  by  applicable  law  with  respect  to  cumulative  voting,  the
shareholders  at any  meeting by a majority  vote of all the  outstanding  stock
entitled to vote, at an election of Directors,  may remove any Director and fill
the vacancy;  (3) subject to the rights of the holders of any class or series of
the then outstanding  shares of voting capital stock of this Corporation,  newly
created  directorships  resulting from an increase in the  authorized  number of
Directors  or any  vacancies  in the Board of  Directors  resulting  from death,
resignation,  retirement,  disqualification,  removal from office or other cause
may be filled only by the  shareholders or by the affirmative vote of a majority
of the  Disinterested  Directors  then in office,  although  less than a quorum.
Directors  so elected  shall hold office for a term  expiring at the time of the
next annual election of Directors by the shareholders and until their successors
are duly elected and qualify.

     The Board of Directors,  as soon as may be after the election in each year,
shall  elect from their  number a Chairman  of the Board and shall  elect one of
their number President of the  Corporation,  one of whom shall be designated the
Chief  Executive  Officer of the  Corporation,  and shall also elect one or more
Vice-President,  a Secretary  and  Treasurer and shall from time to time appoint
such other officers as they may deem proper.  The same person may hold more than
one office, except those of

                                       7


<PAGE>

                                              As Amended Effective July 20, 2004

President and  Vice-President.  The Board of Directors also may designate,  from
time to time,  former  Directors of this Corporation as Directors  Emeritus,  in
recognition of their long and faithful  service to this  Corporation.  Directors
Emeritus  shall  have no  duties  or  responsibilities  in  connection  with the
management of the Corporation.

     The officers of the Corporation  shall have such powers and duties,  except
as modified by the Board of  Directors,  as generally  pertain to their  offices
respectively,  as well as such  powers  and  duties  as from time to time may be
conferred upon them by the Board of Directors.

     The Board of Directors may, by unanimous  affirmative  action of the entire
Board,  designate  two or  more of  their  number  to  constitute  an  Executive
Committee which, to the extent determined by unanimous affirmative action of the
entire  Board,  shall  have  and  exercise  the  authority  of the  Board in the
management  of the  business  of the  Corporation,  except  the  power  to  fill
vacancies  in the  Board  and the  power to  change  the  membership  of or fill
vacancies in said Committee.  Any such Executive Committee shall act only in the
interval  between  meetings  of the Board,  and shall be subject at all times to
control and direction of the Board.  By unanimous vote, the Board shall have the
power  at any  time to  change  the  membership  of such  Committee  and to fill
vacancies in it. The Executive  Committee may make such rules for the conduct of
its business and may appoint such Chairman and  committees  and assistants as it
may deem necessary. A majority of the members of said Committee shall constitute
a quorum.

     Only persons who are nominated in accordance with the following  procedures
shall be eligible for election as directors of the Corporation, except as may be
otherwise provided in the Articles of Incorporation with respect to the right of
holders of preferred stock of the Corporation to

                                       8


<PAGE>

                                              As Amended Effective July 20, 2004

nominate and elect a specified  number of  directors  in certain  circumstances.
Nominations of persons for election to the Board of Directors may be made at any
annual meeting of shareholders, or at any special meeting of shareholders called
for the purpose of electing  directors,  (a) by or at the direction of the Board
of  Directors  (or  any  duly  authorized  committee  thereof)  or  (b)  by  any
shareholder of the Corporation (i) who is a shareholder of record on the date of
the giving of the notice  provided  for in this Section 9 and on the record date
for the determination of shareholders  entitled to notice of and to vote at such
meeting  and (ii) who  complies  with the  notice  procedures  set forth in this
Section 9.

     In addition to any other  applicable  requirements,  for a nomination to be
made by a shareholder, such shareholder must have given timely notice thereof in
proper written form to the Secretary of the Corporation.

     To be timely, a shareholder's  notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Corporation (a)
in the case of an annual  meeting,  not less than ninety (90) days nor more than
one hundred twenty (120) days prior to the  anniversary  date of the immediately
preceding annual meeting of shareholders;  PROVIDED,  HOWEVER, that in the event
that the annual meeting is called for a date that is not within twenty-five (25)
days before or after such anniversary  date,  notice by the shareholder in order
to be timely  must be so  received  not later than the close of  business on the
tenth  (10th) day  following  the date on which  such  notice of the date of the
annual  meeting was mailed or such public  disclosure  of the date of the annual
meeting  was  made,  whichever  first  occurs;  and (b) in the case of a special
meeting of shareholders called for the purpose of electing directors,  not later
than the close of business on the tenth  (10th) day  following  the day on which
notice of the date of the special meeting was

                                       9


<PAGE>

                                              As Amended Effective July 20, 2004

mailed  or  public  disclosure  of the date of the  special  meeting  was  made,
whichever first occurs.

     To be in proper written form, a shareholder's  notice to the Secretary must
set forth (a) as to each person whom the  shareholder  proposes to nominate  for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal  occupation or employment of the person, (iii)
the class or series  and number of shares of  capital  stock of the  Corporation
which are owned  beneficially  or of  record  by the  person  and (iv) any other
information  relating to the person that would be required to be  disclosed in a
proxy  statement  or  other  filings  required  to be  made in  connection  with
solicitations of proxies for election of directors pursuant to Section 14 of the
Securities  Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder; and (b) as to the shareholder giving the
notice (i) the name and record  address of such  shareholder,  (ii) the class or
series and number of shares of capital stock of the Corporation  which are owned
beneficially  or of  record  by such  shareholder,  (iii) a  description  of all
arrangements  or  understandings  between  such  shareholder  and each  proposed
nominee and any other  person or persons  (including  their  names)  pursuant to
which  the  nomination(s)   are  to  be  made  by  such   shareholder,   (iv)  a
representation  that such shareholder intends to appear in person or by proxy at
the  meeting  to  nominate  the  persons  named in its  notice and (v) any other
information  relating to such shareholder that would be required to be disclosed
in a proxy  statement or other filings  required to be made in  connection  with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated  thereunder.  Such notice
must be accompanied by a written

                                       10

<PAGE>

                                              As Amended Effective July 20, 2004

consent of each  proposed  nominee to being named as a nominee and to serve as a
director if elected.

     No person shall be eligible  for election as a director of the  Corporation
unless  nominated in accordance with the procedures set forth in this Section 9.
If the  Chairman of the meeting  determines  that a  nomination  was not made in
accordance  with the  foregoing  procedures,  the Chairman  shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.

     Section 10.  Meetings of the Board of Directors  shall be held at the times
fixed by resolution of the Board, or upon call of the Chairman of the Board, the
President, or a Vice-President,  or any two Directors.  The Secretary or officer
performing  his or her duties  shall give two days'  notice of all  meetings  of
Directors,  provided that a meeting may be held without notice immediately after
the annual  election,  and notice need not be given of regular  meetings held at
times fixed by resolution of the Board. Meetings may be held at any time without
notice  if all of the  Directors  are  present,  or if those not  present  waive
notice,  either  before or after the  meeting.  Notice by  mailing  to the usual
business  or  residence  address  of the  Director  not less than the time above
specified before the meeting shall be sufficient.  A majority of the Board shall
constitute  a quorum.  Less than such a quorum  shall have power to adjourn  any
meeting from time to time without notice.

     Section 11. Any and all officers of this Corporation may be required at any
time to give bonds for the  faithful  discharge  of their duties in such sum, or
sums, and with such sureties, as the Board of Directors may determine.

                                       11


<PAGE>

                                              As Amended Effective July 20, 2004

     Section  12.  The term of  office of all  officers  shall be until the next
election of  Directors  and until  their  respective  successors  are chosen and
qualify,  but any officer may be removed from office at any time by the Board of
Directors,  unless  otherwise  agreed by agreement in writing duly authorized by
the Board of Directors; and no agreement for the employment of any officer for a
longer period than one year shall be so authorized.

     Section  13. The  officers of this  Corporation  shall have such powers and
duties as  generally  pertain to their  offices,  respectively,  as well as such
powers and duties as from time to time shall be conferred upon them by the Board
of Directors or the Executive Committee.

     In case any officer of the  Corporation  who shall have signed any bonds or
certificates  of stock  heretofore or hereafter  issued by the  Corporation,  or
attested the seal  thereon,  or whose  facsimile  signature  appears on any bond
coupon or stock  certificates  shall cease to be such officer of the Corporation
before  the bonds or stock  certificates  so signed  or sealed  shall  have been
authenticated,   delivered   or  issued,   such  bonds  or  stock   certificates
nevertheless may be  authenticated,  delivered or issued with the same force and
effect as though the person or persons who had signed same or attested  the seal
thereon, or whose facsimile signature appears thereon, had not ceased to be such
officer of the Corporation.

     The  Corporation  shall  reimburse  or  indemnify  each  present and future
Director and officer of the  Corporation  (and his or her heirs,  executors  and
administrators) for or against all expenses reasonably incurred by such Director
or officer in connection  with or arising out of any action,  suit or proceeding
in which such  Director  or officer may be involved by reason of being or having
been  a  Director  or  officer  of the  Corporation.  Such  indemnification  for
reasonable expenses is to be to the

                                       12


<PAGE>

                                              As Amended Effective July 20, 2004

fullest extent permitted by the Minnesota  Business  Corporation Act,  Minnesota
Statutes  Chapter  302A. By  affirmative  vote of the Board of Directors or with
written   approval  of  the  Chairman   and  Chief   Executive   Officer,   such
indemnification  may be extended  to include  agents and  employees  who are not
Directors or officers of the Corporation, but who would otherwise be indemnified
for acts and omissions under Chapter 302A of the Minnesota Business  Corporation
Act, if such agent or employee were an officer of the Corporation.

     Reasonable  expenses  may  include  reimbursement  of  attorneys'  fees and
disbursements,  including  those  incurred  by a person  in  connection  with an
appearance as a witness.

     Upon written  request to the  Corporation  and approval by the Chairman and
Chief Executive Officer, an agent or employee for whom  indemnification has been
extended,  or an officer or  Director  may  receive  an advance  for  reasonable
expenses if such agent,  employee,  officer or Director is made or threatened to
be made a party to a proceeding involving a matter for which  indemnification is
believed to be available under Minnesota Statutes Chapter 302A.

     The  foregoing  rights  shall not be exclusive of other rights to which any
Director or officer may otherwise be entitled and shall be available  whether or
not the Director or officer continues to be a Director or officer at the time of
incurring such expenses and liabilities.

     Section 14. A Director of this Corporation shall not be disqualified by his
or her office  from  dealing or  contracting  with this  Corporation,  either as
vendor,  purchaser or otherwise,  nor shall any  transaction or contract of this
Corporation be void or voidable by reason of the fact that any Director,  or any
firm of which any Director is a member, or any

                                       13


<PAGE>

                                              As Amended Effective July 20, 2004

corporation  of which any Director is a shareholder  or director,  is in any way
interested in such  transaction or contract,  provided that such  transaction or
contract is or shall be authorized, ratified or approved either (1) by vote of a
majority of a quorum of the Board of  Directors or of the  Executive  Committee,
without counting in such majority of quorum any Director so interested, or being
a member of a firm so interested,  or shareholder or a director of a corporation
so  interested,  or (2) by vote at a  shareholders'  meeting of the holders of a
majority of all the outstanding shares of the stock of this Corporation entitled
to vote, or by a writing or writings  signed by a majority of such holders,  nor
shall any  Director  be liable to  account  to this  Corporation  for any profit
realized by the  Director  from or through any  transaction  or contract of this
Corporation,  authorized,  ratified or approved as  aforesaid,  by reason of the
fact that the  Director,  or any firm of which the Director is a member,  or any
corporation of which the Director is a shareholder  or director,  was interested
in such transaction or contract;  provided however,  that this Corporation shall
not lend any of its assets to any of its  officers or  Directors,  nor to any of
its  shareholders  on the security of its own shares.  Nothing herein  contained
shall  create  any  liability  in the events  above  described  or  prevent  the
authorization, ratification or approval of such contracts or transactions in any
other manner provided by law.

     Section 15. The Board of Directors is authorized to select such  depository
or depositories as they shall deem proper for the funds of this Corporation. All
checks and drafts against such deposited  funds shall be signed by persons to be
specified by the Chairman of the Board, by the President or a Vice-President  of
the Corporation with the concurrence of its Treasurer.

     Section  16.  The Board of  Directors  shall have  power to  authorize  the
payment of compensation to the Directors for services to this

                                       14


<PAGE>

                                              As Amended Effective July 20, 2004

Corporation,  including  fees  for  attendance  at  meetings  of  the  Board  of
Directors, and to determine the amount of such compensation and fees.

     Section 17. The corporate seal of this Corporation shall be in such form as
the Board of Directors shall prescribe.

     Section 18. The  shareholders may alter or amend these Bylaws by a majority
vote of all the outstanding  stock of this  Corporation  entitled to vote at any
meeting duly held as above provided,  the notice of which includes notice of the
proposed alteration or amendment. The Board of Directors may also alter or amend
these  Bylaws  at any time by  affirmative  vote of a  majority  of the Board of
Directors given at a duly convened meeting of the Board of Directors, the notice
of which includes notice of the proposed alteration or amendment, subject to the
power of the  shareholders  to change or repeal such Bylaws;  provided  that the
Board of  Directors  shall not make or alter any  Bylaws  fixing  their  number,
qualifications,  classifications,  or term of office,  or changing the number of
shares required to constitute a quorum for a shareholders' meeting.

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

     The  undersigned,  Secretary of ALLETE,  Inc., does hereby certify that the
foregoing is a correct and complete copy of the Bylaws of ALLETE, Inc. effective
as of July 20, 2004.


                                                        /s/ Deborah A. Amberg
                                                     ---------------------------
                                                               Secretary


                                       15


<PAGE>
                                                                   EXHIBIT 10(a)

                                AMENDMENT TO THE
                     ALLETE EXECUTIVE ANNUAL INCENTIVE PLAN


The ALLETE Executive Annual Incentive Plan effective January 1, 1996, is amended

as follows:

       1. Effective July 20, 2004, Section 2.3. is amended to add the following
          at the end of the Section:

          Notwithstanding the above, a Change in Control of the Company shall
          not occur as a result of the distribution by the Company to its
          shareholders of all of its shares of common stock of ADESA, Inc.,
          representing its residual interest in ADESA, Inc., following ADESA,
          Inc.'s Initial Public Offering.


                                        ALLETE, INC.



                                        By:        /s/ Donald J. Shippar
                                           -------------------------------------
                                           Donald J. Shippar
                                           President and Chief Executive Officer



Attest:      /s/ Deborah A. Amberg
       ---------------------------------
       Deborah A. Amberg
       Vice President
       General Counsel & Secretary




<PAGE>
                                                                   EXHIBIT 10(b)

                      AMENDMENT TO THE AMENDED AND RESTATED
               MINNESOTA POWER AND AFFILIATED COMPANIES EXECUTIVE
                               INVESTMENT PLAN I


The Amended and Restated Minnesota Power and Affiliated Companies Executive

Investment Plan I effective January 1, 1988, is amended as follows:

       1. Effective July 20, 2004, Section 2.1(f) is amended to add the
          following at the end of the Section:

          Notwithstanding the above, a Change in Control of the Company shall
          not occur as a result of the distribution by the Company to its
          shareholders of all of its shares of common stock of ADESA, Inc.,
          representing its residual interest in ADESA, Inc., following ADESA,
          Inc.'s Initial Public Offering.


                                        ALLETE, INC.



                                        By:        /s/ Donald J. Shippar
                                           -------------------------------------
                                           Donald J. Shippar
                                           President and Chief Executive Officer



Attest:      /s/ Deborah A. Amberg
       ---------------------------------
       Deborah A. Amberg
       Vice President
       General Counsel & Secretary





<PAGE>
                                                                   EXHIBIT 10(c)

                      AMENDMENT TO THE AMENDED AND RESTATED
               MINNESOTA POWER AND AFFILIATED COMPANIES EXECUTIVE
                               INVESTMENT PLAN II


The Amended and Restated Minnesota Power and Affiliated Companies Executive

Investment Plan II effective January 1, 1988, is amended as follows:

       1. Effective July 20, 2004, Section 2.1(f) is amended to add the
          following at the end of the Section:

          Notwithstanding the above, a Change in Control of the Company shall
          not occur as a result of the distribution by the Company to its
          shareholders of all of its shares of common stock of ADESA, Inc.,
          representing its residual interest in ADESA, Inc., following ADESA,
          Inc.'s Initial Public Offering.


                                        ALLETE, INC.



                                        By:        /s/ Donald J. Shippar
                                           -------------------------------------
                                           Donald J. Shippar
                                           President and Chief Executive Officer



Attest:      /s/ Deborah A. Amberg
       ---------------------------------
       Deborah A. Amberg
       Vice President
       General Counsel & Secretary




<PAGE>
                                                                   EXHIBIT 10(d)

                                AMENDMENT TO THE
             ALLETE EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN


The ALLETE Executive Long-Term Incentive Compensation Plan effective January 1,

1996, is amended as follows:

       1. Effective July 20, 2004, Section 2.4. is amended to add the following
          at the end of the Section:

          Notwithstanding the above, a Change in Control of the Company shall
          not occur as a result of the distribution by the Company to its
          shareholders of all of its shares of common stock of ADESA, Inc.,
          representing its residual interest in ADESA, Inc., following ADESA,
          Inc.'s Initial Public Offering.


                                        ALLETE, INC.



                                        By:        /s/ Donald J. Shippar
                                           -------------------------------------
                                           Donald J. Shippar
                                           President and Chief Executive Officer



Attest:      /s/ Deborah A. Amberg
       ---------------------------------
       Deborah A. Amberg
       Vice President
       General Counsel & Secretary




<PAGE>
                                                                   EXHIBIT 10(e)

                                AMENDMENT TO THE
                           ALLETE DIRECTOR STOCK PLAN

         The ALLETE Director Stock Plan (the "Plan") dated May 9, 1995 is
amended as follows:

A new section X. F. "Tax Withholding" is added as follows:

         The Company is authorized to withhold from the Annual Retainer
         including from the Stock Payment, amounts of withholding and other
         taxes due in connection with such payment by the Company and to take
         such other action as the Company may deem advisable to enable the
         Company and each Director or Participant to satisfy obligations
         relating to the payment of any Annual Retainer.


                                        ALLETE, INC.



                                        By:        /s/ Donald J. Shippar
                                           -------------------------------------
                                           Donald J. Shippar
                                           President and Chief Executive Officer



Attest:      /s/ Deborah A. Amberg
       ---------------------------------
       Deborah A. Amberg
       Vice President
       General Counsel & Secretary




<PAGE>
                                                                   EXHIBIT 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

     I, Donald J. Shippar, President and Chief Executive Officer of ALLETE, Inc.
     (ALLETE), certify that:

1.   I have reviewed this quarterly report on Form 10-Q for the quarterly period
     ended June 30, 2004 of ALLETE;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure
   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b.   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c.   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent function):

     a.   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b.   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Date:  August 5, 2004                   Donald J. Shippar
                                        ----------------------------------------
                                        Donald J. Shippar
                                        President and Chief Executive Officer



                      ALLETE Second Quarter 2004 Form 10-Q


<PAGE>
                                                                   EXHIBIT 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

     I, James K. Vizanko, Senior Vice  President and Chief  Financial Officer of
     ALLETE, Inc. (ALLETE), certify that:

1.   I have reviewed this quarterly report on Form 10-Q for the quarterly period
     ended June 30, 2004 of ALLETE;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material  fact or omit to state a  material  fact  necessary  to make the
     statements made, in light of the circumstances  under which such statements
     were made,  not  misleading  with  respect  to the  period  covered by this
     report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in  this  report,  fairly  present  in all  material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The  registrant's  other  certifying  officer  and  I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     a.   Designed  such  disclosure  controls  and  procedures,  or caused such
          disclosure
   controls  and   procedures  to  be  designed   under  our
          supervision,  to ensure  that  material  information  relating  to the
          registrant,  including its consolidated subsidiaries, is made known to
          us by others within those entities,  particularly during the period in
          which this report is being prepared;

     b.   Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures and presented in this report our conclusions  about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     c.   Disclosed  in this  report  any  change in the  registrant's  internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's  fourth fiscal quarter in
          the case of an annual  report)  that has  materially  affected,  or is
          reasonably  likely to materially  affect,  the  registrant's  internal
          control over financial reporting; and

5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent function):

     a.   All significant  deficiencies and material weaknesses in the design or
          operation  of internal  control  over  financial  reporting  which are
          reasonably  likely to  adversely  affect the  registrant's  ability to
          record, process, summarize and report financial information; and

     b.   Any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          control over financial reporting.


Date:  August 5, 2004          James K. Vizanko
                               -------------------------------------------------
                               James K. Vizanko
                               Senior Vice President and Chief Financial Officer



                      ALLETE Second Quarter 2004 Form 10-Q


<PAGE>
                                                                      EXHIBIT 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


Pursuant  to Section 906 of  the  Sarbanes-Oxley Act  of 2002, 18 U.S.C. Section
1350,  each of the  undersigned  officers of  ALLETE, Inc. (ALLETE), does hereby
certify that:

1.  The  Quarterly Report on Form 10-Q of ALLETE for the  quarterly period ended
    June 30, 2004 (Report) fully complies with the requirements of Section 13(a)
    of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and

2.  The  information  contained  in the  Report fairly presents, in all material
    respects, the financial condition and results of operations of ALLETE.



Date:  August 5, 2004          Donald J. Shippar
                               -------------------------------------------------
                               Donald J. Shippar
                               President and Chief Executive Officer



Date:  August 5, 2004          James K. Vizanko
                               -------------------------------------------------
                               James K. Vizanko
                               Senior Vice President and Chief Financial Officer




This certification shall not be deemed "filed" for purposes of Section 18 of the
Securities  Exchange Act of 1934 or otherwise  subject to liability  pursuant to
that  section.  Such  certification  shall not be deemed to be  incorporated  by
reference  into any filing under the  Securities  Act of 1933 or the  Securities
Exchange Act of 1934, except
 to the extent that ALLETE specifically incorporates
it by reference.

A signed  original of this written  statement  required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the  electronic  version of this written  statement
required  by Section  906,  has been  provided to ALLETE and will be retained by
ALLETE and furnished to the Securities and Exchange Commission or its staff upon
request.


                      ALLETE Second Quarter 2004 Form 10-Q