10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-8520

TERRA INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization) 52-1145429
(I.R.S. Employer
Identification No.)

Terra Centre
P.O. Box 6000
600 Fourth Street	51102-6000
Sioux City, Iowa	(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (712) 277-1340

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ  Accelerated filer o  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes þ No

As April 25, 2008, the following shares of the registrant’s stock were outstanding:

Common Shares, without par value 91,378,108 shares

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Consolidated Statements of Changes in Common Shareholders’ Equity	7
Notes to Consolidated Financial Statements	8
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures about Market Risk	37
Item 4. Controls and Procedures	37
Part II — OTHER INFORMATION
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults upon Senior Securities	39
Item 4. Submission of Matters to a Vote of Security Holders	40
Item 5. Other Information	40
Item 6. Exhibits	41
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)
(unaudited)

	March 31,			December 31,			March 31,
	2008			2007			2007
Assets
Cash and cash equivalents	$	817,197		$	698,238		$	233,310
Accounts receivable, less allowance for doubtful accounts of $267, $264 and $410		159,418			171,183			184,096
Inventories		210,237			129,321			230,651
Other current assets		44,771			28,833			26,594
Current assets held for sale - discontinued operations		45,593			2,335			14,489
Total current assets		1,277,216			1,029,910			689,140
Property, plant and equipment, net		379,746			389,728			619,554
Equity method investments		330,678			351,986			166,746
Deferred plant turnaround costs, net		34,753			42,190			36,615
Intangible assets, net		3,293			3,763			5,174
Other assets		26,235			27,721			23,125
Noncurrent assets held for sale - discontinued operations		—			43,029			89,908
Total assets	$	2,051,921		$	1,888,327		$	1,630,262
Liabilities
Accounts payable		160,661			110,687			130,567
Customer prepayments		282,397			299,351			136,047
Accrued and other current liabilities		68,479			102,655			46,353
Current liabilities held for sale - discontinued operations		16,764			4,993			16,654
Total current liabilities		528,301			517,686			329,621
Long-term debt		330,000			330,000			330,000
Deferred taxes		137,837			99,854			37,758
Pension liabilities		9,594			9,268			124,667
Other liabilities		80,172			84,876			84,236
Minority interest		107,329			109,729			98,850
Noncurrent liabilities held for sale - discontinued operations		—			739			4,069
Total liabilities and minority interest		1,193,233			1,152,152			1,009,201
Preferred Shares - liquidation value of $120,000		115,800			115,800			115,800
Common Shareholders’ Equity
Capital stock
Common Shares, authorized 133,500 shares; 91,382; 89,587 and 92,486 outstanding		143,964			142,170			145,192
Paid-in capital		619,384			618,874			694,621
Accumulated other comprehensive loss		(25,301	)		(45,328	)		(48,350	)
Retained earnings (accumulated deficit)		4,841			(95,341	)		(286,202	)
Total stockholders’ equity		742,888			620,375			505,261
Total liabilities and stockholders’ equity	$	2,051,921		$	1,888,327		$	1,630,262

See Accompanying Notes to the Consolidated Financial Statements.

3

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per-share amounts)
(unaudited)

	Three Months Ended
	March 31,
	2008			2007
Revenues
Product revenues	$	573,202		$	499,466
Other income		1,502			1,458
Total revenues		574,704			500,924
Costs and Expenses
Cost of sales		406,989			422,264
Selling, general and administrative expense		12,704			17,057
Equity earnings of unconsolidated affiliates (Note 8)		(13,290	)		(5,617	)
Total cost and expenses		406,403			433,704
Income from operations		168,301			67,220
Interest income		8,408			2,887
Interest expense		(7,058	)		(8,909	)
Loss on early retirement of debt		—			(38,662	)
Income before income taxes and minority interest		169,651			22,536
Income tax provision		(59,504	)		(5,157	)
Minority interest		(18,126	)		(8,636	)
Equity earnings of affiliates (Note 8)		9,284			—
Income from continuing operations		101,305			8,743
Income (loss) from discontinued operations, net of tax (Note 2)		152			(1,533	)
Net income		101,457			7,210
Preferred share dividends		(1,275	)		(1,275	)
Income Available to Common Shareholders	$	100,182		$	5,935
Weighted average shares outstanding:
Basic		90,165			91,860
Diluted		104,429			95,258
Earnings per share — basic
Income from continuing operations	$	1.11		$	0.08
Income (loss) from discontinued operations (Note 2)		—			(0.02	)
Net income	$	1.11		$	0.06
Earnings per share — diluted
Income from continuing operations	$	0.97		$	0.08
Income (loss) from discontinued operations (Note 2)		—			(0.02	)
Net Income	$	0.97		$	0.06

See Accompanying Notes to the Consolidated Financial Statements.

4

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)
(unaudited)

	Three Months Ended
	March 31,
	2008			2007
Operating Activities
Net income	$	101,457		$	7,210
Income (loss) from discontinued operations		152			(1,533	)
Income from continuing operations		101,305			8,743
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation of property, plant and equipment and amortization of deferred plant turnaround costs		19,853			23,626
Loss on sale of property, plant and equipment		477			—
Deferred income taxes		37,901			8,290
Minority interest in earnings		18,126			8,636
Distributions less than equity earnings		(332	)		(5,617	)
Equity earnings GrowHow UK Limited		(9,284	)		—
Non-cash gain on derivatives		(661	)		(2,832	)
Share-based compensation		1,264			2,868
Amortization of intangible and other assets		1,938			2,341
Non-cash loss on early retirement of debt		—			4,662
Changes in operating assets and liabilities:
Accounts receivable		10,890			14,940
Inventories		(85,084	)		(18,472	)
Accounts payable and customer prepayments		32,805			32,911
Other assets and liabilities, net		(30,661	)		619
Net cash flows from operating activities — continuing operations		98,537			80,715
Net cash flows from operating activities — discontinued operations		11,037			(1,127	)
Net cash flows from operating activities		109,574			79,588
Investing Activities
Purchase of property, plant and equipment		(6,472	)		(6,736	)
Plant turnaround expenditures		(627	)		(8,842	)
Proceeds from sale of property, plant and equipment		1,614			—
Distributions received from unconsolidated affiliates		6,927			—
Contribution settlement received from GrowHow UK Limited		27,890			—
Net cash flows from investing activities — continuing operations		29,332			(15,578	)
Net cash flows from investing activities — discontinued operations		—			—
Net cash flows from investing activities		29,332			(15,578	)
Financing Activities
Issuance of debt		—			330,000
Payments under borrowing arrangements		—			(328,800	)
Payments for debt issuance costs		—			(5,429	)
Preferred share dividends paid		(1,275	)		(1,275	)
Common stock issuances and vestings		(5,873	)		276
Excess tax benefits from equity compensation plans		7,695			—
Distributions to minority interests		(20,526	)		(4,474	)
Net cash flows from financing activities — continuing operations		(19,979	)		(9,702	)
Net cash flows from financing activities — discontinued operations		—			—

5

Consolidated Statements of Cash Flows (continued)

	Three Months ended
	March 31
	2008			2007
Net cash flows from financing activities		(19,979	)		(9,702	)
Effect of exchange rate changes on cash		32			(15	)
Increase to cash and cash equivalents		118,959			54,293
Cash and cash equivalents at beginning of period		698,238			179,017
Cash and cash equivalents at end of period	$	817,197		$	233,310
Supplemental cash flow information:
Interest paid	$	11,850		$	10,619
Income tax refunds received	$	—		$	100
Income taxes paid	$	5,527		$	4,566
Supplemental schedule of non-cash investing and financing activities:
Conversion of warrants to common stock	$	1,486		$	—
Supplemental schedule of unconsolidated affiliates distributions received:
Equity earnings of unconsolidated affiliates	$	13,290		$	5,617
Distribution less than equity earnings		(332	)		(5,617	)
Distributions received from unconsolidated affiliates		6,927			—
Total cash distributions received from unconsolidated affiliates	$	19,885		$	—

See Accompanying Notes to the Consolidated Financial Statements.

6

TERRA INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(in thousands)
(unaudited)

						Accumulated			(Accumulated
						Other			Deficit)
	Common		Paid-In			Comprehensive			Retained						Comprehensive
	Stock		Capital			Loss			Earnings			Total			Income
Balance at January 1, 2008	$	142,170	$	618,874		$	(45,328	)	$	(95,341	)	$	620,375
Comprehensive income (loss):
Net income		—		—			—			101,457			101,457		$	101,457
Foreign currency translation adjustment		—		—			(2,886	)		—			(2,886	)		(2,886	)
Change in fair value of derivatives, net of taxes of $12,337		—		—			22,913			—			22,913			22,913
Comprehensive income															$	121,484
Preferred share dividends		—		—			—			(1,275	)		(1,275	)
Exercise of stock options		11		23			—			—			34
Nonvested stock		297		1,491			—			—			1,788
Conversion of warrants		1,486		(1,486	)		—			—			—
Share-based compensation		—		482			—			—			482
Balance March 31, 2008	$	143,964	$	619,384		$	(25,301	)	$	4,841		$	742,888

					Accumulated
					Other
	Common		Paid-In		Comprehensive			Accumulated						Comprehensive
	Stock		Capital		Loss			Deficit			Total			Income
Balance at January 1, 2007	$	144,976	$	693,896	$	(63,739	)	$	(292,137	)	$	482,996
Comprehensive income (loss):
Net income		—		—		—			7,210			7,210		$	7,210
Foreign currency translation adjustment		—		—		817			—			817			817
Change in fair value of derivatives, net of taxes of $7,848		—		—		14,572			—			14,572			14,572
Comprehensive income														$	22,599
Preferred share dividends		—		—		—			(1,275	)		(1,275	)
Share-based compensation		—		665		—			—			665
Exercise of stock options		216		60		—			—			276
Balance at March 31, 2007	$	145,192	$	694,621	$	(48,350	)	$	(286,202	)	$	505,261

See Accompanying Notes to the Consolidated Financial Statements.

7

TERRA INDUSTRIES INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	Financial Statement Presentation
	Basis of Presentation
	The accompanying unaudited consolidated financial statements and notes thereto contain all adjustments necessary, in the opinion of management, to summarize fairly the financial position of Terra Industries Inc. and all majority-owned subsidiaries (“Terra”, “the Company”, “our” “we” and “us”) and the results of operations for the periods presented. Because of the seasonal nature of our operations and effects of weather-related conditions in several of its marketing areas, results of any interim reporting period should not be considered as indicative of results for a full year. These statements should be read in conjunction with our 2007 Annual Report on Form 10-K to Shareholders.
	Revenue Recognition
	Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable.
	Revenues are primarily comprised of sales of our nitrogen-based products, including any realized hedging gains or losses related to nitrogen product derivatives, and are reduced by estimated discounts and trade allowances. We classify amounts directly or indirectly billed to our customers for shipping and handling as revenue.
	Cost of Sales
	Cost of sales are primarily manufacturing costs related to our nitrogen-based products, including any realized hedging gains or losses related to natural gas derivatives. We classify amounts directly or indirectly billed for delivery of products to our customers or our terminals as cost of sales.
	Derivatives and Financial Instruments
	We enter into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the effect of changes in natural gas costs and to manage the prices of our nitrogen products. We report the fair value of the derivatives on our balance sheet. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in earnings in the period of change. If the derivative is designated as a hedge, and to the extent such hedge is determined to be effective, changes in fair value are reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in cost of sales in the period the offsetting hedged transaction occurs.
	Segment Reporting
	We review our reportable industry segments based upon the guidance provided in Statement of Financial Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise and Related Information (SFAS 131). The methanol industry segment does not meet the quantitative thresholds of SFAS 131 because we have reclassified the Beaumont, Texas related assets and liabilities as held for sale and have included earnings related to these assets in discontinued operations as required by SFAS 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). As a wholesale nitrogen producer we are no longer reporting industry segments in a separate disclosure because the only reportable industry segment is nitrogen.

8

	Inventories
	Inventories are stated at the lower of average cost or estimated net realizable value. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. The analysis of estimated realizable value is based on customer orders, market trends, and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.
	Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activity. The cost of inventories is determined using the first- in, first-out method.
	We estimate a reserve for obsolescence and excess of our materials and supplies inventory. Inventory is stated net of the reserve.
	Plant Turnaround Costs
	Costs related to the periodic scheduled major maintenance of continuous process production facilities (plant turnarounds) are deferred and charged to product costs on a straight-line basis during the period until the next scheduled turnaround, generally two years.
	Impairment of Long-Lived Assets
	We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.
	Use of Estimates in Preparation of the Financial Statements
	The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2.	Discontinued Operations
	During 2007, we entered into an agreement for Eastman Chemical Company to purchase our Beaumont, Texas assets, including the methanol and ammonia production facilities. We anticipate closing the sale on or before January 1, 2009. In connection with this sales agreement, we evaluated our Beaumont facility for impairment. We determined that this facility’s carrying values were impaired and we recorded a $39 million impairment charge in the third quarter of 2007.
	Pursuant to the requirements of SFAS 144, we classified and accounted for certain assets as held for sale at March 31, 2008. As the anticipated sales date is within one year of our quarterly reporting date, the property, plant and equipment has been reclassified to other current assets as of March 31, 2008. SFAS 144 requires that assets held for sale are valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying those provisions, we considered cash flow analyses, and offers related to those assets. In accordance with the provisions of SFAS 144, assets for sale are not depreciated.

9

Results of the Beaumont operations are reported for all periods presented on a net of tax basis as discontinued operations. In addition, assets and liabilities of the business held for sale have been reclassified to assets and liabilities held for sale accounts in the accompanying Balance Sheet.

Summarized Financial Results of Discontinued Operations

	Three months ended
(in thousands)	March 31,
2008
Operating revenue	$	1,421
Operating and other expenses		(1,187	)
Pretax income from operations of discontinued components		234
Income tax expense		(82	)
Income from discontinued operations	$	152
2007
Operating revenue	$	1,362
Operating and other expenses		(3,912	)
Pretax loss from operations of discontinued components		(2,550	)
Income tax benefit		1,017
Loss from discontinued operations	$	(1,533	)

The major classes of assets and liabilities held for sale and related to discontinued operations as of March 31, 2008, December 31, 2007 and March 31, 2007 are as follows:

	March 31,		December 31,		March 31,
(in thousands)	2008		2007		2007
Trade receivables	$	232	$	45	$	12,213
Inventory		2,203		2,203		2,203
Other current assets		43,158		87		73
Current Assets	$	45,593	$	2,335	$	14,489
Property, plant and equipment — net	$	—	$	42,212	$	89,091
Other non-current assets		—		817		817
Non-current assets	$	—	$	43,029	$	89,908
Accounts payable	$	302	$	18	$	5
Other current liabilities		16,462		4,975		16,649
Current liabilities	$	16,764	$	4,993	$	16,654
Other non-current liabilities	$	—	$	739	$	4,069
Non-current liabilities	$	—	$	739	$	4,069

10

3.	Income (Loss) Per Share
	Basic income (loss) per share data is based on the weighted-average number of common shares outstanding during the period. Diluted income (loss) per share data is based on the weighted-average number of common shares outstanding and the effect of all dilutive potential common shares including stock options, nonvested shares, convertible preferred shares and common stock warrants. Nonvested stock carries dividend and voting rights, but is not involved in the weighted average number of common shares outstanding used to compute basic income (loss) per share.
	The following table provides a reconciliation between basic and diluted income (loss) per share for the three-month period ended March 31, 2008 and 2007:

	Three Months Ended
	March 31,
(in thousands, except per-share amounts)	2008			2007
Basic income (loss) per share computation:
Income from continuing operations	$	101,305		$	8,743
Less: Preferred share dividends		(1,275	)		(1,275	)
Income from continuing operations available to common shareholders		100,030			7,468
Income (loss) from discontinued operations available to common shareholders		152			(1,533	)
Weighted average shares outstanding		90,165			91,860
Income per share — continuing operations		1.11			0.08
Income (loss) per share — discontinued operations		—			(0.02	)
Net income per share	$	1.11		$	0.06
Diluted income (loss) per share computation:
Income from continuing operations available to common shareholders	$	100,030		$	7,468
Add: Preferred share dividends		1,275			—
Income available to common shareholders and assumed conversions	$	101,305		$	7,468
Weighted average shares outstanding		90,165			91,860
Add incremental shares from assumed conversions:
Preferred shares		12,048			—
Nonvested stock		397			607
Common stock warrants		1,815			2,610
Common stock options		4			181
Dilutive potential common shares		104,429			95,258
Income per share — continuing operations	$	0.97		$	0.08
Income (loss) per share — discontinued operations		—			(0.02	)
Net income per share	$	0.97		$	0.06

11

	For the three-month period ending March 31, 2007, 120,000 preferred shares were excluded from the computation of diluted earnings per share. These preferred shares were antidilutive using the if-converted method.
4.	Inventories
	Inventories consisted of the following:

	March 31,		December 31,		March 31,
(in thousands)	2008		2007		2007
Raw materials	$	15,766	$	17,765	$	20,694
Supplies		33,736		35,909		55,445
Finished goods		160,735		75,647		154,512
Total	$	210,237	$	129,321	$	230,651

	Inventory is valued at actual first-in, first-out cost. Costs include raw material, labor and overhead.
5.	Derivative Financial Instruments
	We manage risk using derivative financial instruments for changes in natural gas supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk and market risk.
	To manage credit risk, we enter into derivative transactions only with counter-parties who are currently rated as BBB or better or equivalent as recognized by a national rating agency. We will not enter into transactions with a counter-party if the additional transaction will result in credit exposure exceeding $20 million. The credit rating of counter-parties may be modified through guarantees, letters of credit or other credit enhancement vehicles.
	We classify a derivative financial instrument as a hedge if all of the following conditions are met:

1.	The item to be hedged must expose us to price risk.
2.	It must be probable that the results of the hedge position substantially offset the effects of price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item).
3.	The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge.

Natural gas supplies to meet production requirements at our North American production facilities are purchased at market prices. Natural gas market prices are volatile and we effectively fix prices for a portion of our natural gas production requirements and inventory through the use of swaps, basis swaps and options. The North American contracts reference physical natural gas prices or appropriate NYMEX futures contract prices. Contract physical prices for North America are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our North American production facilities are purchased at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the change in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

12

A swap is a financial instrument whereby we agree to pay a counterparty a fixed rate, and the counterparty pays us a variable rate. Option contracts give the holder the right to either own or sell a futures or swap contract. The option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from us for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.

We may also use a collar structure where we will enter into a swap, sell a call at a higher price and buy a put. The collar structure allows for greater participation in a decrease to natural gas prices and protects against moderate price increases. However, the collar exposes us to large price increases. At March 31, 2008 there were no collars outstanding.

The following summarizes open natural gas derivative contracts at March 31, 2008 and 2007 and December 31, 2007:

	Other		Other
	Current		Current			Deferred			Net
(in thousands)	Assets		Liabilities			Taxes			Asset (Liability)
March 31, 2008	$	28,001	$	(902	)	$	(9,315	)	$	17,784
December 31, 2007	$	4,798	$	(14,733	)	$	3,022		$	(6,913	)
March 31, 2007	$	11,037	$	(3,949	)	$	(1,474	)	$	5,614

Certain derivatives outstanding at March 31, 2008 and 2007, which settled during April 2008 and 2007, respectively, are included in the position of open natural gas derivatives in the table above. The April 2008 derivatives settled for an approximate $9.4 million gain compared to the April 2007 derivatives which settled for an approximate $1.0 million gain. Substantially all open derivatives will settle during the next twelve months.

We determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $0.5 million and $2.9 million, respectively, to cost of sales for the three-month period ending March 31, 2008 and 2007, respectively.

The effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX natural gas contract prices.

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The activity to accumulated other comprehensive income (loss), net of income taxes, relating to current period hedging transactions for the three-month periods ended March 31, 2008 and 2007 follows:

	Three Months Ended
	March 31,
	2008						2007
(in thousands)	Gross			Net of tax			Gross			Net of tax
Beginning accumulated loss	$	(8,635	)	$	(5,612	)	$	(18,210	)	$	(11,836	)
Reclassification into earnings		(7,497	)		(4,873	)		2,727			1,773
Net change in market value		42,747			27,786			19,693			12,799
Ending accumulated gain	$	26,615		$	17,301		$	4,210		$	2,736

	Approximately $26.6 million of the net accumulated gain at March 31, 2008 will be reclassified into earnings during the next twelve months.
	At times, we also use forward derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes. At March 31, 2008, we did not have any open contracts for nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three-month period ending March 31, 2008, there were no gains or losses on nitrogen forward derivative instruments. For the three-month period ending March 31, 2007, we recognized a loss of $0.9 million on nitrogen forward derivative instruments.
6.	Fair Value Measurements
	On January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157), which, among other things, requires enhanced disclosure of assets and liabilities measured and reported at fair value. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delayed for one year the applicability of SFAS 157’s fair-value measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008, except as it applies to those nonfinancial assets and liabilities as affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on our financial statements.
	SFAS 157 establishes a three level hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of asset or liability and their characteristics. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
	The three levels are defined as follows:

• Level 1 — inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

• Level 2 — inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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We evaluated our assets and liabilities to determine which items should be disclosed according to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value. The inputs included in the fair value measurement of our derivative contract use adjusted quoted prices from an active market which are classified at level 2 as a significant other observable input in the disclosure hierarchy framework as defined by SFAS 157.

The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of March 31, 2008:

	Quoted Market		Significant Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets
Derivative contracts	$	—	$	28,001	$	—
Total	$	—	$	28,001	$	—
Liabilities
Derivative contracts	$	—	$	902	$	—
Total	$	—	$	902	$	—

7.	Other Liabilities
	Other liabilities consisted of the following:

	March 31,		December 31,		March 31,
(in thousands)	2008		2007		2007
Unrecognized tax benefit	$	33,560	$	33,560	$	33,560
Long-term medical and closed facility reserve		24,316		24,368		23,321
Long-term deferred revenue		10,656		10,885		—
Accrued phantom shares		5,018		9,231		5,525
Long-term retiree medical and post employment reserve		6,099		6,112		7,381
Other		523		720		14,449
	$	80,172	$	84,876	$	84,236

8.	Equity Investments
	Trinidad and United States

Our investment in companies that are accounted for on the equity method of accounting and included in operations consist of the following: (1) 50% ownership interest in Point Lisas Nitrogen Limited, (“PLNL”) which operates an ammonia production plant in Trinidad (2) 50% interest in an ammonia storage joint venture located in Houston, Texas and (3) 50% interest in a joint venture in Oklahoma CO₂ at our Verdigris nitrogen plant. These investments were $145.4 million at March 31, 2008. We include the net earnings of these investments as an element of income from operations as the investees’ operations provide additional capacity to our operations.

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The combined results of operations and financial position of our equity method investments are summarized below:

	Three Months Ended
	March 31,
(in thousands)	2008		2007
Condensed income statement information:
Net sales	$	98,535	$	29,363
Net income	$	31,281	$	7,112
Terra’s equity in earnings of unconsolidated affiliates	$	13,290	$	5,617

	March 31,		March 31,
(in thousands)	2008		2007
Condensed balance sheet information:
Current assets	$	72,576	$	53,018
Long-lived assets		186,981		204,146
Total assets	$	259,557	$	257,164
Current liabilities	$	47,464	$	25,356
Long-term liabilities		11,265		—
Equity		200,828		231,808
Total liabilities and equity	$	259,557	$	257,164

The carrying value of these investments at March 31, 2008 was $45.0 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately fifteen years. Our equity in earnings of unconsolidated subsidiaries is different than our ownership interest in income reported by the unconsolidated subsidiaries due to deferred profits on intergroup transactions and amortization of basis differences.

We have transactions in the normal course of business with PLNL whereby we are obliged to purchase 50% of the ammonia produced by PLNL at current market prices. During the three-month period ending March 31, 2008, we purchased approximately $33.3 million of ammonia from PLNL. During the three-month period ending March 31, 2007, we purchased approximately $22.2 million of ammonia from PLNL. During the first quarter of 2007, PLNL performed a turnaround, resulting in lower production levels and consequently, lower purchases by us.

We received $18.8 million and $17.5 million in distributions from PLNL in the 2008 and 2007 first quarters, respectively.

United Kingdom

On September 14, 2007, we completed the formation of GrowHow UK Limited (GrowHow), a joint venture between us and Kemira GrowHow Oyj (Kemira). Pursuant to the joint venture agreement, we contributed our United Kingdom subsidiary Terra Nitrogen (UK) Limited to the joint venture for a 50% interest. Subsequent to September 14, 2007, we have accounted for our investment in GrowHow as an equity method investment. This investment was $185.3 million at March 31, 2008.

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Our interest in the joint venture is classified as a nonoperating equity investment. We do not include the net earnings of this investment as an element of income from operations since the investees’ operations do not provide additional capacity to us, nor are its operations integrated with our supply chain in North America.

The results of operations and financial position of our equity method investment in GrowHow at March 31, 2008 were:

(in thousands)	2008
Condensed income statement information:
Net sales	$	266,827
Net income	$	21,366
Terra’s equity in earnings of unconsolidated affiliates	$	9,284
Condensed balance sheet information:
Current assets	$	260,910
Long-lived assets		263,130
Total assets	$	524,040
Current liabilities	$	143,182
Long-term liabilities		173,942
Equity		206,916
Total liabilities and equity	$	524,040

The carrying value of these investments at March 31, 2008 was $81.8 million more than our share of the affiliates’ book value. The excess is attributable primarily to the step-up in basis for fixed asset values, which is being depreciated over a period of approximately twelve years. Our equity earnings of GrowHow are different than our ownership interest in GrowHow’s net income due to the amortization of basis differences.

We contributed Terra Nitrogen (UK) Limited to the joint venture for a 50% interest in the joint venture, and Kemira contributed its Kemira GrowHow UK Limited subsidiary for the remaining 50% interest. The GrowHow joint venture in the United Kingdom includes the Kemira site at Ince and our Teeside and Severnside sites. Pursuant to the GrowHow Agreements with Kemira, we are eligible to receive a balancing consideration payment from GrowHow in 2011. We will receive a minimum balancing consideration payment of £20 million, and have the right to receive up to £60 million, based on GrowHow’s calculation of earnings and cash flows.

In January 2008 GrowHow closed the Severnside manufacturing facility. Pursuant to the agreement with Kemira, we are responsible for any remediation costs required to prepare the Severnside site for disposal. We anticipate remediation costs to be approximately $5.0 million to $10.0 million. We have an option to purchase the Severnside land for a nominal amount at any time prior to sale. If we elect not to exercise this option we are still entitled to receive the sales proceeds. We anticipate that the proceeds related to the sale of the Severnside land would exceed the total cost of reclamation of site.

We received $27.9 million from GrowHow during the 2008 first quarter for the refund of working capital contributions in excess of amounts specified in the Joint Venture Contribution Agreement.

There were no distributions from the United Kingdom equity investment since the inception in 2007.

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9.	Long-term Debt
	Long-term debt consisted of the following:

	March 31,		December 31,		March 31,
(in thousands)	2008		2007		2007
Unsecured Senior Notes, 7.0% due 2017	$	330,000	$	330,000	$	330,000
Second Priority Senior Secured Notes, 11.5%, due 2010		—		—		2,500
Total long-term debt		330,000		330,000		332,500
Less current maturities		—		—		2,500
Total long-term debt	$	330,000	$	330,000	$	330,000

In February 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries (see Note 14). These notes and guarantees are unsecured and will rank equal in right of payment with any existing and future senior obligations of such guarantors. We recorded a $38.8 million loss on the early retirement of debt.

The Indenture governing these notes contains covenants that limit, among other things, our ability to: incur additional debt, pay dividends on common stock of Terra Industries Inc. or repurchase shares of such common stock, make certain investments, sell any of our principal production facilities or sell other assets outside the ordinary course of business, enter into transactions with affiliates, limit dividends or other payments by our restricted subsidiaries, enter into sale and leaseback transactions, engage in other businesses, sell all or substantially all of our assets or merge with or into other companies, and reduce our insurance coverage.

We are obligated to offer to repurchase these notes upon a Change of Control (as defined in the Indenture) at a cash price equal to 101% of the aggregate principal amount outstanding at that time, plus accrued interest to the date of purchase. The Indenture governing these notes contains events of default and remedies customary for a financing of this type.

In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. The revolving credit facility is secured by substantially all of our assets. Borrowing availability is generally based on 100% of eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory less outstanding letters of credit issued under the facility. These facilities include $50 million only available for the use of Terra Nitrogen Company, L.P. (TNCLP), one of our consolidated subsidiaries. Borrowings under the revolving credit facility will bear interest at a floating rate plus an applicable margin, which can be either a base rate, or, at our option, a London Interbank Offered Rate (LIBOR). At March 31, 2008, the LIBOR rate was 2.71%. The base rate is the highest of (1) Citibank, N.A.’s base rate (2) the federal funds effective rate, plus one-half percent (0.50%) per annum and (3) the base three month certificate of deposit rate, plus one-half percent (0.50%) per annum, plus an applicable margin in each case. LIBOR loans will bear interest at LIBOR plus an applicable margin. The applicable margins for base rate loans and LIBOR loans were 0.50% 1.75%, respectively, at March 31, 2008. The revolving credit facility requires an initial one-half percent (0.50%) commitment fee on the difference between committed amounts and amounts actually borrowed.

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At March 31, 2008, we had no outstanding revolving credit borrowings and $10.3 million in outstanding letters of credit. The $10.3 million in outstanding letters of credit reduced our borrowing availability to $189.7 million at March 31, 2008. The credit facilities require that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. If our borrowing availability falls below $60 million, we are required to have achieved minimum operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items of $60 million during the most recent four quarters.

10.	Pension Plans
	We maintain defined benefit and defined contribution pension plans that cover substantially all salaried and hourly employees. Benefits are based on a pay formula. The defined benefit plans’ assets consist principally of equity securities and corporate and government debt securities. We also have certain non-qualified pension plans covering executives, which are unfunded. We accrue pension costs based upon annual actuarial valuations for each plan and fund these costs in accordance with statutory requirements.
	The estimated components of net periodic pension expense follow:

	Three Months Ended
	March 31,
(in thousands)	2008			2007
Service cost	$	778		$	748
Interest cost		4,412			6,231
Expected return on plan assets		(4,516	)		(6,056	)
Amortization of prior service cost		(9	)		(9	)
Amortization of actuarial loss		468			1,409
Termination charge		—			123
Pension expense	$	1,133		$	2,446

Cash contributions to the defined benefit pension plans for the three months ended March 31, 2008 and 2007 were $0.4 million and $8.9 million, respectively.

We also sponsor defined contribution savings plans covering most full-time employees. Contributions made by participating employees are matched based on a specified percentage of employee contributions. The cost of our contributions to these plans for the three-month periods ending March 31, 2008 and 2007 totaled $1.0 million and $1.2 million, respectively.

We provide health care benefits for certain U.S. employees who retired on or before January 1, 2002. Participant contributions and co-payments are subject to escalation. The plan pays a stated percentage of most medical expenses reduced for any deductible and payments made by government programs. These costs are funded as paid.

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11. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States are recorded as an element of shareholders’ equity but are excluded from net income (loss). Our accumulated other comprehensive income (loss) is comprised of (a) adjustments that result from translation of our foreign entity financial statements from their functional currencies to United States dollars, (b) adjustments that result from translation of intercompany foreign currency transactions that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future) between entities that are consolidated in our financial statements, (c) the offset to the fair value of derivative assets and liabilities (that qualify as a cash flow hedge) recorded on the balance sheet, and (d) pension and post-retirement benefit liabilities adjustments.

The components of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2008 and 2007 follow:

	Foreign
	Currency						Pension and Post-
	Translation			Fair Value of			Retirement Benefit
(in thousands)	Adjustment			Derivatives			Liabilities			Total
Balance January 1, 2008	$	(22,364	)	$	(5,612	)	$	(17,352	)	$	(45,328	)
Change in foreign translation adjustment		(2,886	)		—			—			(2,886	)
Reclassification to earnings		—			(4,873	)		—			(4,873	)
Change in fair value of derivatives		—			27,786			—			27,786
Balance March 31, 2008	$	(25,250	)	$	17,301		$	(17,352	)	$	(25,301	)
Balance January 1, 2007	$	24,518		$	(11,836	)	$	(76,421	)	$	(63,739	)
Change in foreign translation adjustment		817			—			—			817
Reclassification to earnings		—			1,773			—			1,773
Change in fair value of derivatives		—			12,799			—			12,799
Balance March 31, 2007	$	25,335		$	2,736		$	(76,421	)	$	(48,350	)

12. Commitments and Contingencies

We are involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. Based on the facts currently available, management believes that the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operation or liquidity and that the likelihood that a loss contingency will occur in connection with these claims is remote.

We have entered into physical natural gas supply agreements through March 2009 for approximately 44.5 million MMBtu’s. As of March 31, 2008, these natural gas commitments were $1.7 million above the respective index prices.

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13. New Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R, Business Combination (SFAS 141R), which changes the way we account for business acquisitions. SFAS  141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. We are currently evaluating the future impacts and disclosures of SFAS 141R.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, (SFAS 160). SFAS 160 improves the comparability and transparency of financial statements when reporting minority interest. Entities with a noncontrolling interest will be required to clearly identify and present the ownership interest in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest will be identified and presented on the face of the consolidated statement of income. The statement offers further guidance on changes in ownership interest, deconsolidation, and required disclosures. The statement is effective for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We are currently assessing the impact SFAS 160 may have on our financial statements.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the future impacts and disclosures of SFAS 161.

14. Guarantor Subsidiaries

The consolidating statement of financial position of Terra Industries Inc. (the “Parent”), Terra Capital, Inc. (“TCAPI”), the Guarantor Subsidiaries and subsidiaries of the Parent that are not guarantors of the Unsecured Senior Notes due 2017 for March 31, 2008; December 31, 2007; and March 31, 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. Statements of operations and statements of cash flows for the three months ended March 31, 2008 and 2007 are presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The guarantees of the Guarantor Subsidiaries are full and unconditional. The Subsidiary issuer and the Guarantor Subsidiaries guarantees are joint and several with the Parent.

Guarantor subsidiaries include subsidiaries that own the Woodward, Oklahoma; Port Neal, Iowa; Yazoo City, Mississippi, and Beaumont, Texas plants; Terra Environmental Technologies as well as the corporate headquarters facility in Sioux City, Iowa. The Beaumont, Texas facility is classified as held for sale pursuant to SFAS 144. All guarantor subsidiaries are wholly owned by the Parent. All other company facilities are owned by non-guarantor subsidiaries.

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Consolidating Balance Sheet as of March 31, 2008:

						Guarantor		Non-Guarantor
(in thousands)	Parent		TCAPI			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—	$	35,231		$	310,402	$	978,875	$	(507,311	)	$	817,197
Accounts receivable, net		1		—			111,676		47,741		—			159,418
Inventories		—		—			140,864		57,856		11,517			210,237
Other current assets		17,715		38			6,115		20,903		—			44,771
Current assets held for sale – discontinued operations		—		—			45,593		—		—			45,593
Total current assets		17,716		35,269			614,650		1,105,375		(495,794	)		1,277,216
Property, plant and equipment, net		—		—			259,627		120,119		—			379,746
Equity investment – operating		—		—			10,376		135,015		—			145,391
Equity investment – nonoperating		—		—			—		185,287		—			185,287
Intangible assets, other assets and deferred plant turnaround costs		6,732		8,039			15,944		38,757		(5,191	)		64,281
Investments in and advances to (from) affiliates		742,888		376,734			1,936,618		132,417		(3,188,657	)		—
Noncurrent assets held for sale – discontinued operations		—		—			—		—		—			—
Total assets	$	767,336	$	420,042		$	2,837,215	$	1,716,970	$	(3,689,642	)	$	2,051,921
Liabilities
Accounts payable	$	1,992	$	—		$	109,614	$	49,055	$	—		$	160,661
Customer prepayments		—		—			97,678		184,719		—			282,397
Accrued and other current liabilities		21,942		3,380			29,376		13,781		—			68,479
Current liabilities held for sale – discontinued operations		—		—			16,764		—		—			16,764
Total current liabilities		23,934		3,380			253,432		247,555		—			528,301
Long-term debt		—		330,000			—		—		—			330,000
Deferred taxes		120,864		—			—		13,528		3,445			137,837
Pension and other liabilities		76,626		(170	)		11,403		1,410		497			89,766
Minority interest		—		20,941			86,388		—		—			107,329
Noncurrent liabilities held for sale – discontinued operations		—		—			—		—		—			—
Total liabilities and minority interest		221,424		354,151			351,223		262,493		3,942			1,193,233
Preferred stock		115,800		—			—		—		—			115,800

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Consolidating Balance Sheet (continued)

							Guarantor		Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Common Shareholders’ Equity
Common stock		143,964			—			73		32,458			(32,531	)		143,964
Paid-in capital		619,384			150,218			2,031,300		1,255,515			(3,437,033	)		619,384
Accumulated other comprehensive income (loss)		(18,240	)		—			—		358,349			(365,410	)		(25,301	)
Retained earnings (accumulated deficit)		(314,996	)		(84,327	)		454,619		(191,845	)		141,390			4,841
Total stockholders’ equity		430,112			65,891			2,485,992		1,454,477			(3,693,584	)		742,888
Total liabilities and stockholders’ equity	$	767,336		$	420,042		$	2,837,215	$	1,716,970		$	(3,689,642	)	$	2,051,921

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Consolidating Statement of Operations for the three months ended March 31, 2008:

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Product revenues	$	—		$	—		$	355,734		$	217,468		$	—		$	573,202
Other revenues		—			—			945			557			—			1,502
Total revenues		—			—			356,679			218,025			—			574,704
Cost and Expenses
Cost of sales		—			83			286,344			120,562			—			406,989
Selling, general and administrative expenses		509			(2,035	)		6,678			7,552			—			12,704
Equity in the (earnings) loss of subsidiaries		—			—			(13,290	)		—			—			(13,290	)
Total cost & expenses		509			(1,952	)		279,732			128,114			—			406,403
Income (loss) from operations		(509	)		1,952			76,947			89,911			—			168,301
Interest income		—			3,637			—			4,771			—			8,408
Interest expense		(465	)		(6,219	)		(2	)		(372	)		—			(7,058	)
Foreign currency gain (loss)		—			—			6			(6	)		—			—
Income (loss) before income taxes and minority interest		(974	)		(630	)		76,951			94,304			—			169,651
Income tax benefit (provision)		376			(23,481	)		(29,715	)		(6,684	)		—			(59,504	)
Minority interest		—			(3,498	)		(14,628	)		—			—			(18,126	)
Equity in subs (earnings) loss		102,055			129,664			—			9,284			(231,719	)		9,284
Income from continuing operations		101,457			102,055			32,608			96,904			(231,719	)		101,305
Income from discontinued Operations – net of tax		—			—			152			—			—			152
Net income (loss)	$	101,457		$	102,055		$	32,760		$	96,904		$	(231,719	)	$	101,457

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Consolidating Statement of Cash Flows for the three months ended March 31, 2008:

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income		101,457			102,055			32,760			96,904			(231,719	)		101,457
Income from discontinued operations		—			—			152			—			—			152
Income from continuing operations	$	101,457		$	102,055		$	32,608		$	96,904		$	(231,719	)	$	101,305
Adjustments to reconcile income from continuing operations to net cash flows from operating activities:
Depreciation and amortization		—			—			10,518			9,335			—			19,853
(Gain) loss on sale of property, plant and equipment		—			—			765			(288	)		—			477
Deferred income taxes		37,901			—			—			—			—			37,901
Minority interest in earnings		—			(463	)		18,589			—			—			18,126
Distributions less than equity earnings		(117,710	)		(10,972	)		(332	)		(71,542	)		200,224			(332	)
Equity earnings - GrowHow UK Limited		—			—			—			(9,284	)		—			(9,284	)
Non-cash gain on derivatives		(661	)		—			—			—			—			(661	)
Share-based compensation		1,264			—			—			—			—			1,264
Amortization of intangible and other assets		—			—			1,119			819			—			1,938
Change in operating assets and liabilities		(11,586	)		(5,063	)		(57,740	)		72,766			(70,427	)		(72,050	)
Net cash flows from operating activities — continuing operations		10,665			85,557			5,527			98,710			(101,922	)		98,537
Net cash flows from operating activities — discontinued operations		—			—			11,037			—			—			11,037
Net Cash Flows from Operating Activities		10,665			85,557			16,564			98,710			(101,922	)		109,574
Investing Activities
Purchase of property, plant and equipment		—			—			(5,395	)		(1,077	)		—			(6,472	)
Plant turnaround expenditures		—			—			(535	)		(92	)		—			(627	)
Distributions received from unconsolidated affiliate		—			—			6,927			—			—			6,927
Contribution settlement received from GrowHow UK Limited		—			—			—			27,890			—			27,890
Proceeds from the sale of property, plant and equipment		—			—			1,224			390			—			1,614
Net cash flows from investing activities – continuing operations		—			—			2,221			27,111			—			29,332
Net cash flows from investing activities – discontinued operations		—			—			—			—			—			—
Net Cash Flows from Investing Activities		—			—			2,221			27,111			—			29,332

25

Consolidating Statement of Cash Flows (continued)

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Financing Activities
Common stock issuances and vestings		(5,873	)		—			—			—			—			(5,873	)
Excess tax benefits from compensation plans		7,695			—			—			—			—			7,695
Preferred share dividends paid		(1,275	)		—			—			—			—			(1,275	)
Change in investments and advances from (to) affiliates		(11,212	)		(106,183	)		44,998			(53,730	)		126,127			—
Distributions to minority interests		—			—			(20,526	)		—			—			(20,526	)
Net cash flows from financing Activities – continuing Operations		(10,665	)		(106,183	)		24,472			(53,730	)		126,127			(19,979	)
Net cash flows from financing activities – discontinued operations		—			—			—			—			—			—
Net Cash Flows from Financing Activities		(10,665	)		(106,183	)		24,472			(53,730	)		126,127			(19,979	)
Effect of Exchange Rate Changes on Cash		—			—			—			32			—			32
Increase (decrease) in Cash and Cash Equivalents -		—			(20,626	)		43,257			72,123			24,205			118,959
Cash and Cash Equivalents at Beginning of Year		—			55,857			267,145			906,752			(531,516	)		698,238
Cash and Cash Equivalents at End of Year	$	—		$	35,231		$	310,402		$	978,875		$	(507,311	)	$	817,197

26

Condensed Consolidating Balance Sheet for the Year Ended December 31, 2007:

					Guarantor		Non-Guarantor
	Parent		TCAPI		Subsidiaries		Subsidiaries		Eliminations			Consolidated
Assets
Cash, cash equivalents and restricted cash	$	—	$	55,857	$	267,145	$	906,752	$	(531,516	)	$	698,238
Accounts receivable, net		1		2		98,469		72,711		—			171,183
Inventories		—		—		95,781		32,104		1,436			129,321
Other current assets		10,614		638		11,127		6,454		—			28,833
Current assets held for sale – discontinued operations		—		—		2,335		—		—			2,335
Total current assets		10,615		56,497		474,857		1,018,021		(530,080	)		1,029,910
Property, plant and equipment, net		—		—		264,198		125,530		—			389,728
Equity investments		—		—		10,488		341,498		—			351,986
Deferred plant turnaround costs, intangible and other assets		6,732		8,333		18,984		45,174		(5,549	)		73,674
Investments in and advances to (from) affiliates		620,375		365,762		1,848,352		57,752		(2,892,241	)		—
Noncurrent assets held for sale – discontinued operations		—		—		43,029		—		—			43,029
Total Assets	$	637,722	$	430,592	$	2,659,908	$	1,587,975	$	(3,427,870	)	$	1,888,327
Liabilities
Customer prepayments	$	—	$	—	$	125,036	$	174,315	$	—		$	299,351
Accounts payable		128		—		66,945		43,614		—			110,687
Accrued and other liabilities		25,715		9,169		45,508		22,263		—			102,655
Current liabilities held for sale – discontinued operations		—		—		4,993		—		—			4,993
Total current liabilities		25,843		9,169		242,482		240,192		—			517,686
Long-term debt		—		330,000		—		—		—			330,000
Deferred income taxes		86,157		—		—		10,113		3,584			99,854
Pension and other liabilities		79,650		—		11,628		2,866		—			94,144
Minority interest		—		21,404		88,325		—		—			109,729
Noncurrent liabilities held for sale – discontinued operations		—		—		739		—		—			739
Total liabilities and minority interest		191,650		360,573		343,174		253,171		3,584			1,152,152
Preferred stock		115,800		—		—		—		—			115,800

27

Condensed Consolidating Balance Sheet (continued)

							Guarantor		Non-Guarantor
	Parent			TCAPI			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Stockholders’ equity
Common stock		142,170			—			73		32,458			(32,531	)		142,170
Paid in capital		618,873			150,218			1,910,748		1,133,745			(3,194,710	)		618,874
Accumulated other comprehensive income (loss)		(22,002	)		—			—		281,850			(305,176	)		(45,328	)
Retained earnings (accumulated deficit)		(408,769	)		(80,199	)		405,913		(113,249	)		100,963			(95,341	)
Total stockholders’ equity		330,272			70,019			2,316,734		1,334,804			(3,431,454	)		620,375
Total liabilities and stockholders’ equity	$	637,722		$	430,592		$	2,659,908	$	1,587,975		$	(3,427,870	)	$	1,888,327

28

Condensed Consolidating Balance Sheet as of March 31, 2007:

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	1		$	124,896		$	—		$	108,415		$	(2	)	$	233,310
Accounts receivable, net		—			—			77,455			106,642			(1	)		184,096
Inventories		—			—			111,083			125,653			(6,085	)		230,651
Other current assets		7,460			37			11,121			8,644			(668	)		26,594
Current assets held for sale – discontinued operations		—			—			14,489			—			—			14,489
Total current assets		7,461			124,933			214,148			349,354			(6,756	)		689,140
Property, plant and equipment, net		—			34			281,782			337,736			2			619,554
Equity investments		—			—			11,544			155,202			—			166,746
Intangible assets, other assets and deferred plant turnaround costs		(1,839	)		8,851			18,797			50,464			(11,359	)		64,914
Investments in and advanced to (from) affiliates		505,261			276,800			1,675,902			394,957			(2,852,920	)		—
Noncurrent assets held for sale – discontinued operations		—			—			89,908			—			—			89,908
Total assets	$	510,883		$	410,618		$	2,292,081		$	1,287,713		$	(2,871,033	)	$	1,630,262
Liabilities
Accounts payable	$	21		$	—		$	60,451		$	70,094		$	1		$	130,567
Accrued expenses and other current liabilities		14,319			5,894			204,453			86,913			(129,179	)		182,400
Current liabilities held for sale – discontinued operations		—			—			16,654			—			—			16,654
Total current liabilities		14,340			5,894			281,558			157,007			(129,178	)		329,621
Long-term debt		—			330,000			—			—			—			330,000
Deferred taxes		(5,510	)		—			—			43,268			—			37,758
Pension and other liabilities		134,048			(171	)		(108,805	)		128,073			55,758			208,903
Minority interest		—			19,304			79,545			—			1			98,850
Noncurrent liabilities held for sale – discontinued operations		—			—			4,069			—			—			4,069
Total liabilities and minority interest		142,878			355,027			256,367			328,348			(73,419	)		1,009,201
Preferred stock		115,800			—			—			—			—			115,800
Common Shareholders’ Equity
Common stock		145,192			—			73			49,709			(49,782	)		145,192
Paid-in capital		694,621			150,218			2,035,412			1,274,009			(3,459,639	)		694,621
Accumulated other comprehensive income (loss)		(77,432	)		—			—			14,031			15,051			(48,350	)
Retained earnings (accumulated deficit)		(510,176	)		(94,627	)		229			(378,384	)		696,756			(286,202	)
Total stockholders’ equity		252,205			55,591			2,035,714			959,365			(2,797,614	)		505,261
Total liabilities and stockholders’ equity	$	510,883		$	410,618		$	2,292,081		$	1,287,713		$	(2,871,033	)	$	1,630,262

29

Consolidating Statement of Operations for the three months ended March 31, 2007:

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues
Product revenues	$	—		$	—		$	241,927		$	257,539		$	—		$	499,466
Other revenues		—			—			749			709			—			1,458
Total revenues		—			—			242,676			258,248			—			500,924
Cost and Expenses
Cost of sales		—			—			215,089			207,175			—			422,264
Selling, general and administrative expenses		531			(2,291	)		4,763			14,054			—			17,057
Equity in the (earnings) loss of subsidiaries		—			—			(5,617	)		—			—			(5,617	)
Total cost & expenses		531			(2,291	)		214,235			221,229			—			433,704
Income (loss) from operations		(531	)		2,291			28,441			37,019			—			67,220
Interest income		—			572			1,769			546			—			2,887
Interest expense		(465	)		(8,330	)		(2	)		(112	)		—			(8,909	)
Loss on debt		—			(38,662	)		—			—			—			(38,662	)
Foreign currency gain (loss)		—			—			2			(2	)		—			—
Income (loss) before income taxes and minority interest		(996	)		(44,129	)		30,210			37,451			—			22,536
Income tax benefit		505			8,895			(15,331	)		774			—			(5,157	)
Minority interest		—			(1,667	)		(6,969	)		—			—			(8,636	)
Equity in subsidiary earnings		7,701			44,602			—			—			(52,203	)		—
Income from continuing operations		7,210			7,701			7,910			38,225			(52,303	)		8,743
Income (loss) from discontinued operations — net of tax		—			—			(1,533	)		—			—			(1,533	)
Net income	$	7,210		$	7,701		$	6,377		$	38,225		$	(52,303	)	$	7,210

30

Consolidating Statement of Cash Flows for the three months ended March 31, 2007:

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income		7,210			7,701			6,377			38,225			(52,303	)		7,210
Loss from discontinued operations		—			—			(1,533	)		—			—			(1,533	)
Income from continuing operations	$	7,210		$	7,701		$	7,910		$	38,225		$	(52,303	)	$	8,743
Adjustments to reconcile net income from continuing operations to net cash flows from operating activities:
Depreciation and amortization		—			—			17,948			5,678			—			23,626
Deferred income taxes		—			—			1,017			7,273						8,290
Minority interest in earnings		—			803			7,833			—			—			8,636
Distributions in excess of (less than) equity earnings		253,116			70,678			(5,617	)		25,666			(349,460	)		(5,617	)
Non-cash (gain) loss on derivatives		—			—			1,830			(4,336	)		(326	)		(2,832	)
Share-based compensation		3,085			—			—			—			(217	)		2,868
Amortization of intangible and other assets		—			—			2,341			—			—			2,341
Non-cash loss on early retirement of debt		—			4,662			—			—			—			4,662
Change in operating assets and liabilities — continuing operations		(65,338	)		576			(6,283	)		117,646			(16,603	)		29,998
Net cash flows from operating activities — continuing operations		198,073			84,420			26,979			190,152			(418,909	)		80,715
Net cash flows from operating activities — discontinued operations		—			—			(1,127	)		—			—			(1,127	)
Net Cash Flows from Operating Activities		198,073			84,420			25,852			190,152			(418,909	)		79,588
Investing Activities
Purchase of property, plant and equipment		—			(34	)		(1,796	)		(4,940	)		34			(6,736	)
Plant turnaround expenditures		—			—			(7,511	)		(1,157	)		(174	)		(8,842	)
Net Cash Flows from Investing Activities — Continuing Operations		—			(34	)		(9,307	)		(6,097	)		(140	)		(15,578	)
Net Cash Flows from Investing Activities — Discontinued Operations		—			—			—			—			—			—
Net Cash Flows from Investing Activities		—			(34	)		(9,307	)		(6,097	)		(140	)		(15,578	)

31

Consolidating Statement of Cash Flows (continued)

							Guarantor			Non-Guarantor
(in thousands)	Parent			TCAPI			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Financing Activities
Issuance of debt		—			330,000			—			—			—			330,000
Principal payments under borrowing arrangements		—			(331,300	)		(1	)		—			2,501			(328,800	)
Payments for debt issuance costs		—			(5,429	)		—			—			—			(5,429	)
Common stock issuances and vestings		61			—			—			—			215			276
Preferred share dividends paid		(1,275	)		—			—			—			—			(1,275	)
Change in investments and advances from (to) affiliates		(196,859	)		(53,497	)		(12,070	)		(153,907	)		416,333			—
Distributions to minority interests		—			—			(4,474	)		—			—			(4,474	)
Net Cash Flows from Financing Activities — Continuing Operations		(198,073	)		(60,226	)		(16,545	)		(153,907	)		419,049			(9,702	)
Net Cash Flows from Financing Activities — Discontinued Operations		—			—			—			—			—			—
Net Cash Flows from Financing Activities		(198,073	)		(60,226	)		(16,545	)		(153,907	)		419,049			(9,702	)
Effect of Exchange Rate Changes on Cash		—			—			—			(15	)		—			(15	)
Increase (decrease) in Cash and Cash Equivalents		—			24,160			—			30,133			—			54,293
Cash and Cash Equivalents at Beginning of Year		1			100,736			—			78,282			(2	)		179,017
Cash and Cash Equivalents at End of Year	$	1		$	124,896		$	—		$	108,415		$	(2	)	$	233,310

32

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

As you read this management’s discussion and analysis of financial condition and results of operations, you should refer to our Consolidated Financial Statements and related Notes included in Item 1, Financial Statements.

Introduction

We are a leading North American producer and marketer of wholesale nitrogen products, serving agricultural and industrial markets. Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. The nitrogen products industry has periods of oversupply during industry downturns that lead to capacity shutdowns at the least cost-effective plants. These shutdowns are followed by supply shortages, which result in higher selling prices and higher industry-wide production rates during industry upturns. The higher selling prices encourage capacity additions until we again start to see an oversupply, and the cycle repeats itself.

Natural gas is the most significant raw material in the production of nitrogen products. In the 2008 first quarter, natural gas prices have experienced additional volatility and increased significantly from the December 31, 2007 forecasted prices.

The key drivers of our profitability are nitrogen products selling prices, as determined primarily by the global nitrogen demand/supply balance; and natural gas costs, in North American markets. Recent demand has been affected by the growing global population and its preference for a higher-protein diet, by low global stock-to-use ratios of grains and by the rise of corn-consuming biofuels in North America.

Imports account for over half of the total North American nitrogen supply, with levels varying among the various products. Most producers exporting nitrogen products into North America can afford to do so because they are manufacturing product with lower cost gas than that which is available to North American producers.

Our sales volumes depend primarily on our plant’s operating rates. We also purchase product from other manufacturers and importers for resale; however, historic gross margins on these volumes have not been significant. Profitability and cash flows from our nitrogen products are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting our nitrogen products results include the level of planted corn and wheat acres, transportation costs, weather conditions (particularly during planting season), grain prices and other variables described in Item 1 “Business” and Item 2 “Properties” sections of our 2007 Form 10-K filing with the Securities Exchange Commission.

33

RESULTS OF OPERATIONS

QUARTER ENDED MARCH 31, 2008 COMPARED WITH
QUARTER ENDED MARCH 31, 2007

Consolidated Results

We reported net income of $101.5 million for the 2008 first quarter compared with 2007 first quarter net income of $7.2 million. The 2007 net income includes a $38.7 million ($24.3 million, net of taxes) charge for the early retirement of debt. The net income increase is primarily due to higher sales prices as a result of increased demand for nitrogen products, specifically in the agricultural markets.

	Three-months ended March 31,
	2008				2007
	Sales		Average		Sales		Average
(quantities in thousands of tons)	Volumes		Unit Price1		Volumes		Unit Price1
Ammonia2		364	$	462		352	$	331
UAN (32% basis)3		917	$	285		940	$	184
Urea		24	$	419		32	$	298
Ammonium nitrate2		172	$	304		187	$	222

1.	After deducting outbound freight costs.
2.	2007 ammonia and ammonium nitrate sales volumes and prices have been adjusted to exclude Terra’s UK operations for comparability to 2008 volumes and pricing.
3.	The nitrogen content of UAN is 32% by weight.

Revenues for the quarter ended March 31, 2008 increased $73.8 million, or 15%, compared with the same 2007 quarter primarily due to higher sales prices for all nitrogen products, specifically UAN, partially offset by lower sales volumes. The price increase is due to improved demand for nitrogen products. The 2007 first quarter revenues included $89.9 million from the UK. The UK operations were contributed into the GrowHow UK Limited joint venture during the 2007 third quarter.

Operating income for the 2008 first quarter was $168.3 million which was $101.1 million more than the $67.2 million income in the 2007 first quarter. Higher first quarter sales prices contributed $173.5 million to the 2008 first quarter operating income. This increase was partially offset by increased costs of $82.5 million, primarily as a result of higher gas costs and increased costs relating to purchased product for resale. Increased equity earnings contributed $7.7 million to operating income. Decreased selling, general and administrative (SGA) costs contributed $4.4 million to operating income in the 2008 first quarter as compared to the 2007 first quarter. The SGA cost decreases are due to reduced share-based compensation costs of $3.2 million and reduced costs relating to the UK operations of $2.2 million; offset by higher professional services fees of $1.0 million.

Discontinued Operations

We have reported our Beaumont, Texas operations as discontinued operations for the periods ending March 31, 2008 and 2007. The Beaumont operations were included in our methanol segment in prior periods. In connection with reporting discontinued operations, we have determined that our methanol segment no longer meets the requirements of a reporting segment.

34

Minority Interest

Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2008 and 2007 amounts are directly related to TNCLP earnings and losses. During the first quarter of 2008, the cumulative shortfall of the Minimum Quarterly Distribution was satisfied which entitled us to increased income allocations as provided for in the TNCLP Partnership Agreement. The current quarter minority interest balance reflects the impact of these adjusted income allocations.

Income Taxes

Income taxes for the first quarter 2008 were recorded based on the estimated effective tax rate for the individual jurisdictions in which we operate. The estimated annual effective tax rates were 37.0% and 36.5% in the quarters ended March 31, 2008 and 2007, respectively.

35

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents, which included $282.4 million related to customer prepayments, totaled $817.2 million at March 31, 2008. Our primary uses of cash are to fund our working capital requirements, make payments on our debt and other obligations and fund plant turnarounds and capital expenditures. The principal sources of these cash outlays are cash flow from operations, cash on hand and, to the extent necessary, borrowings under available bank facilities.

Net cash provided by continuing operations in the first three months of 2008 was $98.5 million and net cash provided by discontinuing operations was $11.0 million. Cash from continuing operations was composed of $170.6 million of cash provided from operating activities, offset by $72.1 million to fund seasonal working capital requirements. The primary working capital needs were to fund $85.1 million of inventories offset by $17.0 million of customer prepayments. The increase in inventories was due to a wet spring which delayed planting, and thus delayed delivery of product.

During the first three months, we funded plant and equipment purchases of $6.5 million primarily for replacement or sustaining capital needs. Plant turnaround costs represent cash used for the periodic scheduled major maintenance of our continuous process production facilities that is performed at each plant, generally every two years. We funded $0.6 million of plant turnaround costs in the first three months of 2008. We received $27.9 million from GrowHow UK Limited for our contribution settlement from the joint venture.

In April 2006, the Board of Directors authorized us to repurchase a maximum of 10%, or 9,516,817 shares, of our then outstanding common stock on the open market, in private transactions or otherwise. We did not repurchase any shares in the first quarter of 2008. As of March 31, 2008, we have repurchased a total of 6,675,100 shares, which results in 2,841,717 shares that we are authorized to repurchase by June 30, 2008.

We paid dividends on the outstanding preferred stock of $1.3 million for the three-month periods ending March 31, 2008 and 2007.

Distributions paid to the minority TNCLP common unit holders in the first three months of 2008 and 2007 were $20.5 million and $4.5 million, respectively. TNCLP distributions are based on “Available Cash” as defined in the Partnership Agreement.

In February 2007, Terra Capital, Inc., (“TCAPI”) a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. These notes and guarantees are unsecured and will rank equal in right of payment with any future senior obligations of such guarantors.

In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. Borrowing availability under the credit facility is generally based on 100% eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. These facilities include $50 million only available for the use of TNCLP, one of our consolidated subsidiaries. At March 31, 2008, there were no outstanding revolving credit borrowings and there were $10.3 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $189.7 million under the facilities. We are required to maintain a combined minimum unused borrowing availability of $30 million. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, if our borrowing availability falls below a combined $60 million, we are required to have generated $60 million of operating cash flows, or earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters.

36

Our ability to meet credit facility covenants will depend on future market conditions, operating cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Failure to meet these covenants could result in additional costs and fees to amend the credit facility or could result in termination of the facility. Based on current market conditions for our finished products and natural gas, we anticipate that we will be able to meet our covenants through 2008. If there were to be any adverse changes in the factors discussed above, we may need a waiver of our credit facility covenants, of which, there is no assurance that we would receive such waivers.

There were no material changes outside of the ordinary course of business to our contractual obligations or off-balance sheet arrangements presented in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report on Form 10-K for the period ended December 31, 2007.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from interest rates, foreign exchange rates, natural gas prices and nitrogen prices. We manage our exposure to these and other market risks through regular operating and financing activities and through the use of derivative financial instruments. We intend to use derivative financial instruments as risk management tools and not for speculative investment purposes. Item 7A, Quantitative and Qualitative Disclosures about Market Risk, of Terra’s Annual Report on Form 10-K for the year ended December 31, 2007 provides more information as to the types of practices and instruments used to manage risk. There were no material changes in our use of financial instruments during the quarter ended March 31, 2008.

The volume of natural gas hedged varies from time to time based on management’s judgment of market conditions, particularly natural gas prices and prices for nitrogen products. Management also considers our position related to forward fixed price sales contracts in determining the level of derivatives necessary. Contracts were in place at March 31, 2008 to cover approximately 18% of our natural gas requirements for the succeeding twelve months. Our ability to manage exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by oue bank agreement covenants.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

Certain statements in this report may constitute “forward-looking” statements within the meaning of the Private Litigation Reform Act of 1995. Forward-looking statements are based upon the assumptions as to future events that may not prove to be accurate. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These include, among others, statements relating to:

• changes in financial markets,

• general economic conditions within the agricultural industry,

• competitive factors and price changes (principally, sales prices of nitrogen products and natural gas costs),

• changes in product mix,

• changes in the seasonality of demand patterns,

• changes in weather conditions,

• changes in environmental and other government regulations,

• changes in agricultural regulations, and

• other risks detailed in “Risk Factors” in our 2007 Annual Report.

Additional information as to these factors can be found in our 2007 Annual Report in the sections entitled “Business,” “Legal Proceedings,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the “Notes” to our consolidated financial statements included as part of this report.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

There were no significant changes in our risk factors during the first quarter of 2008 as compared to the risk factors identified in our 2007 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Company Purchases of Equity Securities

On April 25, 2006, the Board of Directors authorized us to repurchase a maximum of 10 percent, or 9,516,817 shares, of our then outstanding common stock. The stock buyback program has been and will be conducted on the open market, in private transactions or otherwise at such times prior to June 30, 2008, and at such prices, as determined appropriate by us. During the 2008 first quarter, we did not repurchase any shares under the stock buyback program. The remaining number of shares that we are authorized to repurchase is 2,841,717 at March 31, 2008.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

(a) Exhibits

Exhibit 10.1	Terra Industries Inc. Excess Benefit Plan, as amended and restated effective as of January 1, 2008
Exhibit 10.2	Consulting and Non-Competition Agreement between Terra Industries Inc. and Francis G. Meyer dated April 1, 2008, filed as Exhibit 10.1 to Terra Industries Inc.’s Form 8-K dated April 1, 2008, is incorporated herein by reference
Exhibit 10.3	Supplemental Indenture, dated January 9, 2008, by and among Terra Capital, Inc., Terra Industries Inc., Terra Environmental Technologies, Inc., the existing guarantors named therein and U.S. Bank National Association, as trustee filed as Exhibit 4.1 to Terra Industries Inc.’s Form 8-K dated January 9, 2008, is incorporated herein by reference.
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

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.

	TERRA INDUSTRIES INC.
Date: April 25, 2008	/s/ Daniel D. Greenwell
	Daniel D. Greenwell
	Senior Vice President and Chief Financial Officer and a duly authorized signatory

42

EXHIBIT INDEX

Exhibit 10.1	Terra Industries Inc. Excess Benefit Plan, as amended and restated effective as of January 1, 2008
Exhibit 10.2	Consulting and Non-Competition Agreement between Terra Industries Inc. and Francis G. Meyer dated April 1, 2008, filed as Exhibit 10.1 to Terra Industries Inc.’s Form 8-K dated April 1, 2008, is incorporated herein by reference
Exhibit 10.3	Supplemental Indenture, dated January 9, 2008, by and among Terra Capital, Inc., Terra Industries Inc., Terra Environmental Technologies, Inc., the existing guarantors named therein and U.S. Bank National Association, as trustee filed as Exhibit 4.1 to Terra Industries Inc.’s Form 8-K dated January 9, 2008, is incorporated herein by reference.
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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EX-10.1

Exhibit 10.1

TERRA INDUSTRIES INC.
EXCESS BENEFIT PLAN
(As Amended and Restated Effective as of January 1, 2008)

SECTION 1

General

1.1. Purpose and Effective Date. Terra Industries Inc. (the “Company”) maintains the Terra Industries Inc. Excess Benefit Plan (the “Plan”) for the purpose of providing eligible employees who participate in the Terra Industries Inc. Employees’ Retirement Plan, as amended from time to time (the “Qualified Plan”), with additional benefits not payable under the Qualified Plan solely by reason of the compensation limitation of section 401(a)(17) or the benefit limitations of section 415 of the Internal Revenue Code of 1986, as amended from time to time (the “Code”), or by reason of elective deferrals made under the Supplemental Deferred Compensation Plan. The provisions set forth herein constitute an amendment, restatement and continuation of the Plan as in effect immediately prior to January 1, 2008 (the “Effective Date”), subject to the following:

(a)

The Plan as set forth herein shall apply to benefits under the Plan, the payment of which commences on or after the Effective Date. Benefits for which payments commenced prior to the Effective Date will be determined in accordance with and be subject to the terms and conditions of the Plan as in effect prior to the Effective Date.

(b)

It is the intention that all amounts deferred under the Plan will be subject to the provisions of section 409A of the Code and applicable guidance issued thereunder (“Section 409A”), regardless of whether such amounts were deferred (within the meaning of Section 409A) on, prior to, or after January 1, 2005; provided, however, that amounts deferred as of December 31, 2004 with respect to Participants who terminated employment on or before December 31, 2004 and for whom no amounts are deferred after December 31, 2004 are not intended to be subject to the provisions of Section 409A, and such amounts shall continue to be subject to the terms and conditions of the Plan as in effect prior to January 1, 2005.

1.2. No Funding. The Plan is intended to constitute an unfunded “excess benefit plan” within the meaning of section 3(36) of the Employee Retirement Income Security Act of 1974 as amended (“ERISA”); provided, however, that, to the extent, if any, that the Plan provides benefits which cannot be provided by an excess benefit plan, the Plan shall constitute an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of section 301(a)(3) of ERISA. The amount of any benefit payable under the Plan shall be paid from the general revenues of the Company; provided, however, that the Company’s obligations under the Plan shall be reduced to the extent that any amounts due under the Plan are paid from one or more trusts, the assets of which are subject to the claims of general creditors of the Company or any affiliate thereof. Nothing in the Plan shall require the Company to establish any trust to provide benefits under the Plan, and no Participant shall have any interest in or claim to any assets of any such trust as the Company may, from time to time, establish or maintain for such purpose.

1.3. Administration. The Plan shall be administered, interpreted and construed by the Committee established to administer the Qualified Plan. All decisions and interpretations of the Committee shall be conclusive and binding on the Company and Participants and their eligible spouses, contingent annuitants and beneficiaries, and on all persons claiming under or through any of them.

1.4. Definitions. Terms used frequently with the same meaning are indicated by initial capital letters, and are defined throughout the Plan. Unless the context clearly requires otherwise, or except as otherwise provided by the Committee from time to time, any word, term or phrase used in the Plan shall have the same meaning as is assigned to it under the Qualified Plan.

1.5. Gender and Number. Where the context admits, words in one gender shall include the other gender, words in the singular shall include the plural and the plural shall include the singular.

1.6. Applicable Laws. The Plan shall be construed and administered in accordance with the laws of the State of Iowa to the extent that such laws are not preempted by the laws of the United States of America.

1.7. Claims and Review Procedures. The claims procedure applicable to claims and appeals of denied claims under the Qualified Plan shall apply to any claims for benefits under the Plan and appeals of any such denied claims.

2

SECTION 2

Participation

2.1. Participation. Subject to the terms and conditions of the Plan, each person who was a “Participant” in the Plan immediately prior to the Effective Date shall continue as a Participant in the Plan from and after the Effective Date. Subject to the terms and conditions of the Plan, an employee of an Employer shall become a “Participant” in the Plan when he has satisfied the following conditions:

(a)

he is a participant in the Qualified Plan; and

(b)

either (i) he is an officer or director of the Company or of Terra International, Inc. or the president of any other subsidiary or affiliate of the Company and his benefits under the Qualified Plan are limited by provisions of the Qualified Plan adopted pursuant to section 401(a)(17) or 415(b) of the Code (the “Code Limitations”); or (ii) he is a participant in the Terra Industries Inc. Supplemental Deferred Compensation Plan.

Each Participant shall be entitled to receive the Excess Retirement Benefit, if any, determined in accordance with Section 3 hereof and the surviving Spouse of a Participant may be entitled to a Survivor Benefit in accordance with Section 4 hereof.

2.2. Plan Not Contract of Employment. The Plan does not constitute a contract of employment, and participation in the Plan will not give any employee the right to be retained in the employ of an Employer nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan.

SECTION 3

Amount and Payment of Excess Retirement Benefit

3.1. Amount of Excess Retirement Benefit. Subject to the terms and conditions of the Plan, each Participant (other than a Participant whose benefits are determined pursuant to subsection 1.1 above in accordance with the terms and conditions of the Plan as in effect prior to the Effective Date or prior to January 1, 2005) will be entitled to an “Excess Retirement Benefit” under the Plan commencing as of his Benefit Commencement Date (as defined in subsection 3.4 below) in an amount expressed as a single life annuity equal to:

(a) the amount of the retirement benefit (expressed as a single life annuity) which the Participant would be entitled to receive under the Qualified Plan commencing on such Benefit Commencement Date (or would have been entitled to receive commencing on such date if the Participant’s benefits under the Qualified Plan had not commenced prior thereto), if:

3

(i)	the Qualified Plan benefit were determined without regard to the Code Limitations, and
(ii)	the Participant’s Average Monthly Compensation for purposes of determining the Qualified Plan benefit included amounts deferred under the Supplemental Deferred Compensation Plan;

REDUCED BY

(b) the amount of the retirement benefit (expressed as a single life annuity) which the Participant would be entitled to receive under the Qualified Plan commencing on such Benefit Commencement Date (or would have been entitled to receive commencing on such date if the Participant’s benefits under the Qualified Plan had not commenced prior thereto);

FURTHER REDUCED, FROM TIME TO TIME, BY

(c) the actuarial equivalent (using such reasonable actuarial assumptions and methods as the Committee may determine for such purposes) of any increase in the benefit to which the Participant is entitled or will become entitled under the Qualified Plan solely because of an increase in the limitation on benefits under section 415 of the Code.

3.2. Vesting. A Participant’s benefits under this Plan shall be nonforfeitable and fully vested at all times on and after the date on which the Participant is vested with respect to his benefits under the Qualified Plan; provided, however, that notwithstanding any other provision of the Plan to the contrary, the Committee, in its sole discretion, may cease any or all future payments of any benefits accrued under this Plan on or after January 1, 1989 if, prior to the date such payment is made, the Participant shall have engaged in grossly negligent, reckless or willful conduct that the Committee determines, in the reasonable exercise of its discretion, caused serious injury to the Company, a subsidiary or affiliate, including, without limitation, competition with the Company, a subsidiary or affiliate in any of the businesses in which it was engaged at any time during the Participant’s employment with the Company, a subsidiary or affiliate.

4

3.3. Election of Benefit Commencement Date. Subject to the terms of the Plan, a Participant who accrued an Excess Retirement Benefit under the Plan on or after January 1, 2005 but before December 31, 2007 may elect the time at which benefits will commence by filing an election with the Plan Administrator, no later than December 31, 2007, in a form and manner as is determined by the Company in its sole discretion; provided, however, that the earliest date that such benefits may commence shall be the first day of the seventh calendar month after the calendar month in which the Participant’s Separation from Service occurs. The term “Separation from Service” means a “separation from service” within the meaning of Section 409A. For purposes of determining the date of a Separation from Service, the employment relationship will be deemed to have ended at the time the Participant and his employer reasonably anticipate that the bona fide level of services the Participant will perform for the Company and any employer (within the meaning of Section 409A) after such date (whether as an employee or independent contractor, but not as a director) will be permanently reduced to a level that is less than 50% of the average level of bona fide services the employee performed over the immediately preceding 36-month period. Any individual who first becomes eligible to participate in the Plan on or after January 1, 2008 shall not be entitled to elect the time at which benefits will commence.

3.4. Commencement of Benefits. Subject to the terms and conditions of the Plan, payment of a Participant’s Excess Retirement Benefit shall commence on the “Benefit Commencement Date,” which, for purposes of this Plan, shall be (i) the date elected by the Participant in accordance with subsection 3.3 or (ii) if the Participant fails to timely file, or is not eligible to file, an election as to the time of payment in accordance with subsection 3.3, the later of the first day of the calendar month following the calendar month in which the Participant attains age 60 or the first day of the seventh calendar month following the calendar month in which the Participant’s Separation from Service occurs.

3.5. Form of Payment. Subject to the terms and conditions of the Plan, a Participant’s Excess Retirement Benefit will be distributed in accordance with the following:

(a)	If a Participant is not married on the Benefit Commencement Date, payment will be made in the form of a single life annuity, unless the Participant elects, in accordance with subsection 3.5(c), to have his benefit paid in another actuarially equivalent form of life annuity.
(b)	If a Participant is married on the Benefit Commencement Date, payment will be made in the form of a Qualified Joint and Survivor Annuity (with a 50% survivor benefit) which is actuarially equivalent to the Participant’s single life annuity, unless the Participant elects, in accordance with subsection 3.5(c) to have his benefit paid in another form of actuarially equivalent life annuity.
(c)	A Participant may, at any time before the date any annuity payment has been made, elect that his Excess Retirement Benefit be paid in any other form of life annuity available under the Qualified Plan that is actuarially equivalent to the Participant’s single life annuity and/or may choose a different beneficiary for such forms of payment that allow the Participant to designate a beneficiary; provided that if at the time such election is filed, (I) the Participant is married, and (II) a Qualified Joint and Survivor Annuity Form of payment is then in effect with respect to the Participant by reason of the provisions of paragraph (b) above or by reason of a previously filed election under this paragraph (c), then any change to the form of annuity, other than to an annuity that would provide a 75% or 100% survivor annuity to the Participant’s spouse, shall be subject to spousal consent.

5

Any election made, or spousal consent required, pursuant to this subsection 3.5(c) shall be made in such form and manner, and subject to such rules and limitations, as may be prescribed by the Committee from time to time. The determination of the actuarial equivalence of different forms of life annuities shall be made using such reasonable actuarial assumptions and methods as the Committee may establish from time to time for such purposes. In no event shall a Participant be entitled to change the Benefit Commencement Date, other than pursuant to an election made on or before December 31, 2007 in accordance with subsection 3.3.

3.6. Distribution of Small Amounts. Notwithstanding any provision of this Section 3 to the contrary, if the value of the Excess Retirement Benefit does not exceed the applicable dollar amount under section 402(g)(1)(B) of the Code, determined as of the Participant’s Benefit Commencement Date using reasonable actuarial assumptions and methods established by the Committee for such purposes, the Committee may, in its sole discretion, direct that such Excess Retirement Benefit be paid to the Participant in a lump sum on the date on which his annuity payments otherwise would have commenced.

3.7. Beneficiary Designation. Determination of the Participant’s beneficiary for purposes of the Plan shall be subject to the following:

(a)

To the extent that a Participant’s benefit is paid in a form that requires or allows the Participant to designate a beneficiary, the Participant may do so, subject to such terms and conditions as the Committee may, from time to time establish, by signing a form furnished by the Company for such purpose. A beneficiary designation will be effective only when a signed beneficiary designation form is filed with the Company while the Participant is alive and will cancel all beneficiary designation forms signed earlier.

(b)

If there is any question as to the status of any person as a designated beneficiary or the right of any beneficiary to receive a distribution under the Plan, the Committee may, in its sole discretion, direct payment to be made to the legal representative of the Participant’s estate.

3.8. Distributions To Persons Under Disability. In the event any person entitled to payments under the Plan is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefits to which such person is entitled under the Plan shall be paid to such conservator or other person legally charged with the care of his person or of his estate.

3.9. Nonassignability. No Participant shall have the right to assign, pledge or otherwise dispose of any benefits payable to the Participant hereunder nor shall any such Participant’s benefit be subject to garnishment, attachment, transfer by operation of law, or any legal process.

6

3.10. Legal Fees or Expenses. The Company shall reimburse the Participant for any legal fees and expenses reasonably incurred in connection with the enforcement of Participant’s rights under this Plan; provided that the Company shall not be required to reimburse for such fees or expenses unless the resolution of any enforcement action taken by the Participant is substantially in favor of the Participant, whether by adjudication, settlement or otherwise. Any amounts which the Company is obligated to reimburse pursuant to this subsection 3.10 shall be paid not later than December 31 of the calendar year in which the right to such reimbursement arises.

3.11. Reemployment. If a Participant is reemployed by the Company or an employer (within the meaning of Section 409A) after incurring a Separation from Service, any benefits accrued by the Participant prior to the initial Separation from Service shall be distributed without regard to such reemployment. Any benefit to which the Participant becomes entitled under the Plan by reason of a subsequent Separation from Service shall be actuarially adjusted, using such reasonable actuarial assumptions and methods as the Committee shall determine for such purposes, to reflect the value of payments which the Participant has received and will receive under the Plan and the Qualified Plan due to a prior Separation from Service.

SECTION 4

Survivor Benefit

4.1. Eligibility. If a Participant dies prior to his Benefit Commencement Date and would otherwise have been eligible for a benefit under the Plan, his surviving Spouse will be entitled to a Survivor Benefit. The Survivor Benefit shall be a monthly payment to the surviving Spouse:

(a)

in the case of a Participant who dies after attaining age 60 (or such other age elected by the Participant as his earliest Benefit Commencement Date pursuant to an election under subsection 3.3), commencing as of the first day of the month after the Participant’s death equal to the amount which would have been payable under the Plan as a survivor annuity under the Qualified Joint and Survivor Annuity form if such Participant had retired with an immediate Qualified Joint and Survivor Annuity under the Plan on the day before the Participant’s death (disregarding any otherwise applicable restriction to defer commencement to the first day of the seventh month after a Separation from Service); or

(b)

in the case of a Participant who dies on or before attaining age 60 (or such other age elected by the Participant as his earliest Benefit Commencement Date pursuant to an election under subsection 3.3), commencing as of the first day of the month after the date the Participant would have attained age 60 (or such other applicable age) equal to the amount which would have been payable under the Plan as a survivor annuity under the Qualified Joint and Survivor Annuity form if such Participant had terminated employment on the date of death (if he had not yet terminated employment), survived to age 60 (or such other applicable age), commenced receiving an immediate Qualified Joint and Survivor Annuity under the Plan (disregarding any otherwise applicable restriction to defer commencement to the first day of the seventh month after a Separation from Service), and died immediately thereafter;

7

provided, however, that if a Participant has elected, in accordance with subsection 3.5(c), that his Excess Retirement Benefit be paid in the form of an annuity that would provide a 75% or 100% survivor annuity to the Participant’s spouse, then the Survivor Benefit shall be based on the survivorship annuity option elected by the Participant rather than the Qualified Joint and Survivor Annuity. Provided further that, for purposes of this subsection 4.1, the amount which would have been payable under the Plan to a Participant with a deferred vested benefit under the Qualified Plan shall be calculated using the reduction factors, if any, that would be used to calculate an early retirement benefit under the Qualified Plan.

4.2. Time of Payment. Payment of the Survivor Benefit to a surviving Spouse shall commence as of the first day of the calendar month following the later of the Participant’s date of death or the date on which the Participant would have attained age 60 (or such other age elected by the Participant as his earliest Benefit Commencement Date pursuant to an election under subsection 3.3), and shall continue until and including the month in which the surviving Spouse dies.

SECTION 5

Amendment and Termination

5.1. Amendment and Termination. The Company may, at any time, amend or terminate the Plan; provided, however, that neither an amendment or termination of the Plan shall reduce or impair the interests of Participants or other persons entitled to benefits under the Plan in benefits being paid under the Plan as of the date of any such amendment or termination or in benefits to which they would be entitled under the Plan if all Participants incurred a Separation from Service as of the date of the amendment or termination. Notwithstanding the preceding sentence:

(a)	the Company may amend or terminate the Plan, at any time, to take effect retroactively or otherwise, as deemed necessary or advisable for purposes of conforming the Plan to any present or future law, regulations or rulings relating to plans of this or a similar nature;
(b)	no such amendment, modification, or termination shall be adopted or effective if it would result in accelerated recognition of income or imposition of additional tax under Section 409A.

8

EX-31.1

Exhibit 31.1

Certification

I, Michael L. Bennett, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Terra Industries Inc.;
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
c)	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
d)	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 registrant’s board of directors (or persons performing the equivalent functions):

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: April 25, 2008

/s/ MICHAEL L. BENNETT  

Michael L. Bennett 

President and Chief Executive Officer and Director
(Principal Executive Officer) 

EX-31.2

Exhibit 31.2

Certification

I, Daniel D. Greenwell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Terra Industries Inc.;
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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	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
d)	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 registrant’s board of directors (or persons performing the equivalent functions):

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: April 25, 2008

/s/ DANIEL D. GREENWELL  

Daniel D. Greenwell 

Senior Vice President and Chief Financial Officer
(Principal Financial Officer) 

EX-32

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002

In connection with the Report of Terra Industries Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that based on their best knowledge:

1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and
2)	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

/s/ MICHAEL L. BENNETT	/s/ DANIEL D. GREENWELL
Michael L. Bennett	Daniel D. Greenwell
President and Chief Executive Officer and Director (Principal Executive Officer)	Sr. Vice President and Chief Financial Officer (Principal Financial Officer)
Dated: April 25, 2008	Dated: April 25, 2008

The certification set forth above is being furnished as an exhibit solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document of the company or the certifying officers.

A signed original of this written statement required by Section 906 has been provided to the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.