EXECUTIVE ANNUAL INCENTIVE PLAN
                          AS AMENDED EFFECTIVE 01/01/99
                      WITH AMENDMENTS THROUGH JANUARY 2003
                                 MINNESOTA POWER
                         EXECUTIVE ANNUAL INCENTIVE PLAN
        1.1       ESTABLISHMENT OF THE PLAN.  Minnesota Power, Inc., a Minnesota
Corporation (the "Company"), hereby establishes an annual incentive compensation
plan (the "Plan"), as set forth in this document. The Plan allows for annual
cash payments to Participants based on the Company's annual performance relative
to both financial and nonfinancial goals.
                  The Plan shall be effective as of January 1, 1996 and shall
remain in effect until superseded by a new plan, as approved by the Board of
        1.2       PURPOSE OF THE PLAN.  The purpose of the Plan is to motivate
Eligible Employees to work toward improved annual performance in two areas:
        - Financial health of the Participant's business unit (financial)
        - Business unit operations (nonfinancial)
        The Plan is further intended to assist the Company in its ability to
attract and retain the services of Participants upon whom the successful conduct
of its operations is largely dependent.
        Whenever used in the Plan, the following terms shall have the meanings
set forth below and, when such meaning is intended, the initial letter of the
word is capitalized:
        2.1       "AWARD" means the payment made to the Participant based on
Business Unit financial and nonfinancial performance.
        2.2       "BUSINESS UNIT" means any subsidiary or division of the
Company labeled as a business unit for the purposes of the Plan.
        2.3       "CHANGE IN CONTROL" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
        (a)       the dissolution of the Company;
        (b)       a reorganization, merger or consolidation of the Company with
one or more unrelated corporations, as a result of which the Company is not the
surviving corporation;
        (c)       the sale, exchange, transfer or other disposition of shares of
the common stock of the Company (or shares of the stock of any person that is a
shareholder of the Company) in one or more transaction, related or unrelated, to
one or more persons unrelated to the Company if, as a result of such
transactions, any person (or any person and its affiliates) owns more than
twenty percent of the voting power of the outstanding common stock of the
Company; or
        (d)       the sale of all or substantially all the assets of the
        2.4       "CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
        2.5       "COMMITTEE" means the Executive Compensation Committee,
appointed by the Board of Directors to administer the Plan.
        2.6       "DISABILITY" shall have the meaning ascribed to such term
under Section 22(e)(3) of the Code.
        2.7       "ELIGIBLE EMPLOYEE" means an employee who is eligible to
participate in the Plan, as approved by the Committee.
        2.8       "PARTICIPANT" means an employee who has received an Award
under the Plan.
        2.9       "PERFORMANCE YEAR" shall mean the period from January 1
through December 31 of any given year upon which the next Award payout is based.
        2.10      "PRORATION" means an award calculation that accounts for time
spent in a position or Business Unit, based on the number of whole months spent,
counting a whole month in the calculation if the Participant was in the position
or Business Unit as of the 15th of the month or earlier.
        2.11      "RETIREMENT" shall have the meaning ascribed to such term in
the tax-qualified defined benefit pension plan maintained by the Company.
        2.12      "TARGET AWARD" means the percent of base salary set out at the
beginning of the Performance Year, a percentage of which is earned based on
        3.1       THE COMMITTEE.  The Plan shall be administered by the
Executive Compensation Committee of the Board.
        3.2       AUTHORITY OF THE COMMITTEE.  The Committee shall have full
power to
        - determine the size of Awards under the Plan;
        - determine the terms and conditions under which Awards will be made;
        - to interpret the Plan as it deems appropriate;
        - to establish, amend or waive rules relating to the administration of
          the Plan;
        - delegate its authority as it deems appropriate.
        3.3       COSTS.  The Company shall pay all costs of administration of
the Plan.
        4.1       REQUIRED FUNDING.  The required funding for Awards under the
Plan will be determined before the start of each Performance Year by summing the
Target Awards of the Participants.
        4.2       ADJUSTMENTS. As soon as practical after the end of the
Performance Year, Awards will be calculated and the funded Award pool will be
adjusted accordingly. If the sum total of actual Awards is greater than the sum
total of Target Awards, the difference will be paid out of the additional
Company profit generated by the results causing the higher payout.
        5.1       ELIGIBILITY. Persons eligible to participate in the Plan
include officers and key employees of the Company and its Business Units, as
determined by the Business Unit heads and approved by the Committee, including
employees who are members of the Board.
        6.1       FINANCIAL MEASURES EMPLOYED.  Within 90 days of the start of
the Performance Year, the Committee shall approve financial performance goals
for each Business Unit, such as the following:
        (a)       return on gross investment (ROGI)
        (b)       free cash flow
        (c)       revenue growth
        (d)       earnings before interest, taxes, depreciation, amortization
                  and leases (EBITDAL)
        (e)       earnings per share (EPS)
        6.2       NONFINANCIAL MEASURES EMPLOYED. Within 90 days of the start of
the Performance Year, the Committee will approve nonfinancial performance goals
based on strategic objectives for each Business Unit.
        7.1       AWARD CALCULATION. As soon as possible after the close of the
Performance Year, based on audited financial statements (for financial goals)
and other records (for nonfinancial goals), each Participant's Award shall be
calculated. The Committee reserves the right to select from all Eligible
Employees, an employee or employees who will not receive Awards under the Plan
due to individual performance.
        7.2       PAYOUT.  As soon as is practical after the Award calculation,
actual payouts shall be made to participants.
        The Committee shall have the right to make other Awards which it deems
appropriate based on outstanding individual or team performance. The Committee
may grant shares of the Company's common stock in lieu of cash from time to
        Each Participant under the Plan may name any beneficiary to whom any
benefit under the Plan is to be paid in case of his or her death before he or
she receives any or all of such benefit. Each such designation shall revoke all
prior designations by the same Participant, shall be in a form prescribed by the
Committee, and will be effective only when filed by the Participant in writing
with the Committee during the Participant's lifetime. In the absence of any such
designation, benefits remaining unpaid at the Participant's death shall be paid
to the Participant's estate.
        The Committee may permit a Participant to defer such Participant's
receipt of the payment of cash due to the Participant based on satisfaction of
the financial and nonfinancial goals. If any such deferral election is
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
        Eligible new employees may participate in the Plan. The Award paid will
reflect a Prorated adjustment based upon the number of months employed during
the Performance Year.
        Transferred employees are eligible to earn a Prorated Award based on a
sum of (i) the performance of the first business unit and Prorated for the
number of months spent in the Business Unit during the Performance Year and (ii)
the performance of the Business Unit to which the Participant is transferred and
Prorated for the number of months spent in the business unit, assuming the
employee is eligible based on position level in both Business Units.
        Promoted employees are eligible to earn a Prorated Award based on a sum
of (i) the award that would have been earned under the first position Prorated
for the number of months spent in the position during the Performance Year and
(ii) the award earned under the new position Prorated for the number of months
spent in the position, assuming the employee is eligible based on position level
in both positions.
        In the case of Retirement or Disability, the Participant will receive a
Prorated Award based on the number of months spent in the employ of the Company
during the Performance Year.
        Prorated Awards earned based on the number of months during the
Performance Year spent in the employ of the Company until death will be paid to
the Participant's beneficiary or, if no beneficiary is named, to the
Participant's estate.
        Termination other than for retirement, disability or death before
December 31 of any Performance Year results in forfeiture of any Award.
        17.1      EMPLOYMENT. Nothing in the Plan shall interfere with or limit
in any way the right of the Company to terminate any Participant's employment at
any time, for any reason or for no reason in the Company's sole discretion, nor
confer upon any Participant any right to continue in the employ of the Company.
        17.2      PARTICIPATION. No employee shall have the right to be selected
to receive an Award under the Plan, or, having been so selected, to be selected
to receive a future Award.
        Upon the occurrence of a Change-in-Control, as defined herein, Awards
under the Plan will be calculated as if the end of the Performance Year had
occurred, based on the Company's performance to date.
        The Company shall have the power and the right to deduct or withhold, or
require a Participant to remit to the Company, an amount sufficient to satisfy
federal, state and local taxes (including the Participants' FICA obligation)
required by law to be withheld with respect to an Award made under the Plan.
                                                 MINNESOTA POWER
                                                 By  /s/ Edwin L. Russell
                                                     Its Chief Executive Officer
By        /s/ Philip R. Halverson
            Corporate Secretary
                                     TO THE
                                 MINNESOTA POWER
                         EXECUTIVE ANNUAL INCENTIVE PLAN
        The Minnesota Power Executive  Annual Incentive  Plan (the "Plan") dated
January 1, 1999, is amended as follows:
1.      Effective September 1, 2000, Section 1.1, is amended to read as follows:
        ESTABLISHMENT   OF  THE  PLAN.   ALLETE,   Inc.,   a  Minnesota
        corporation,   formerly   Minnesota   Power  &  Light   Company
        (hereinafter referred to as the "Company"),  hereby establishes
        an annual  incentive  compensation  plan (the  "Plan"),  as set
        forth  in this  document.  The  Plan  allows  for  annual  cash
        payments  to  Participants   based  on  the  Company's   annual
        performance relative to both financial and non-financial goals.
2.      Effective September 1, 2000, the title of the Plan is  amended to be the
ALLETE Executive Annual Incentive Plan.
3.      Effective January 23, 2002, Section 2.11 is amended to read as follows:
        "RETIREMENT"  shall,  with respect to a  Participant,  have the
        meaning  ascribed to such term in the tax qualified  retirement
        plan maintained by the Company or subsidiary for the benefit of
        such  Participant.  In the event  Participant  is eligible  for
        benefits  under  more  than one such tax  qualified  retirement
        plan,  the earliest date provided under any of said plans shall
        be the meaning ascribed under this Plan.