<PAGE>

================================================================================

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549


                                  FORM 10-K/A
                               (Amendment No. 1)


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

For the fiscal year ended December 31, 2000      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
                               600 Fourth Street
                                 P.O. Box 6000
                               Sioux City, Iowa
                   (Address of principal executive offices)

                                  51102-6000
                                  (Zip Code)

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

  Securities registered pursuant to Section 12(b) of the Act:

                                                            Name of each
      Title of each class                           exchange on which registered
      -------------------                           ----------------------------

Common Shares, without par value                      New York Stock Exchange
                                                       Toronto Stock Exchange
10 3/4% Senior Notes Due 2003                                   N/A
10 1/2% Senior Notes Due 2005                                   N/A

  Securities registered pursuant to Section 12(g) of the Act:  None

  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 [X] No [  ]

  Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   [X]

  The aggregate market value of the Registrant's voting stock held by non-
affiliates of the Registrant, at January 31, 2001, was $120,720,480.

  The number of Common Shares, without par value, outstanding as of February 26,
2001 was 75,884,687.


================================================================================


<PAGE>

  This Amendment No. 1 amends the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000, and is being filed solely to amend Part I,
Items 1 and 2.

                                     Part I
                                     ------

Items 1 and 2.  Business and Properties.


Business Overview

     We are a leading North American and U.K. producer and marketer of nitrogen
products serving both agricultural and industrial end use markets. We are one of
the largest North American producers of ammonia, the basic building block of
nitrogen fertilizers. We upgrade a significant portion of the ammonia we produce
into higher value products, which are easier for agricultural end-users to
transport, store and apply to crops than ammonia. In addition, we are the
largest U.S. producer of methanol. We own eight manufacturing facilities in
North America and the U.K. that produce nitrogen products, two of which also
produce methanol.

     Nitrogen is both a global and local commodity: global because it is both
produced and traded in almost all regions of the world, local because local
fertilizer customers display preferences for nitrogen in one of four basic forms
based upon local conditions. The principal forms of nitrogen fertilizer products
that are traded globally are ammonia (82% nitrogen by weight) and, to a lesser
extent, urea (46% nitrogen by weight) and AN (34% nitrogen by weight). UAN is
not generally traded in international markets because of its high cost of
transportation due to high water content. Because transportation is a
significant component of a customer's total cost, a key to competitiveness in
the nitrogen business is to have the lowest delivered cost for the customer's
product of choice in the market a producer serves, while providing a reliable
source of supply on a continuous basis.

     The locations of our North American facilities provide us with a
competitive advantage in serving agricultural customers in the cornbelt and
other major agricultural areas of the United States and Canada. Our U.K.
facilities are able to competitively serve the entire British agricultural
market. Our facilities have the following production capacities:

<TABLE>
<CAPTION>
                                              Annual Capacity
                             --------------------------------------------------
Location                     Ammonia(1)  UAN(2)     AN(2)   Urea(3) Methanol(4)
--------                     ---------- --------- --------- ------- -----------
<S>                          <C>        <C>       <C>       <C>     <C>
Beaumont, Texas(5)..........   255,000        --        --      --  280,000,000
Blytheville, Arkansas(6)....   420,000     30,000       --  480,000         --
Port Neal, Iowa.............   370,000    810,000       --   50,000         --
Verdigris, Oklahoma......... 1,050,000  2,180,000       --      --          --
Woodward, Oklahoma(5).......   440,000    340,000       --   25,000  40,000,000
Courtright, Ontario.........   480,000    400,000       --  175,000         --
Severnside, U.K.............   265,000        --    500,000     --          --
Billingham, U.K.(7).........   550,000        --    500,000     --          --
                             ---------  --------- --------- ------- -----------
Total....................... 3,830,000  3,760,000 1,000,000 730,000 320,000,000
                             =========  ========= ========= ======= ===========
</TABLE>
--------
(1)  Measured in gross tons of ammonia produced; net tons available for sale
     will vary with upgrading requirements. Includes ammonia upgraded into
     other products.
(2)  Measured in tons.
(3)  Urea is sold as urea liquor from our Port Neal and Woodward facilities and
     as granular urea from our Blytheville and Courtright facilities.
     Production capacities for both forms are measured in tons of UAN in 28%
     equivalent.
(4)  Measured in gallons.
(5)  Ammonia capacity depends, in part, on the desired rate of methanol
     production at this facility.
(6)  Production is currently suspended at this facility. We are planning to
     reopen this facility on or about October 1, 2001. However, there can be no
     assurance that such reopening will occur at that time.
(7)  Our Billingham, England facility also produces merchant nitric acid; 2000
     sales were 262,000 product tons.

     The principal customers for our North American nitrogen products are
national agricultural retail chains (such as ConAgra and Cargill), farm
cooperatives, independent dealers and industrial customers (such as

<PAGE>

DuPont). Industrial customers use our products in the manufacture of chemicals
and plastics such as acrylonitrile, polyurethanes, fibers, explosives and
adhesives. Overall, agricultural customers purchased approximately 84% and
industrial customers purchased approximately 16% of our North American nitrogen
product production in 1999 and 2000. In the U.K., revenues are split
approximately evenly between agricultural and industrial customers. Our
methanol customers are primarily large domestic chemical producers. We have a
number of long-term methanol sales contracts, the most significant of which is
with DuPont, which has a major plant adjacent to our Beaumont, Texas facility.

Competitive Strengths

 Leading Market Positions

   We have leading market positions in all of our key products. In the U.S., we
are the largest producer of UAN and methanol and the second largest producer of
ammonia. In the U.K., we are the largest producer of ammonia and AN. The
following table shows our market positions in our principal products:

<TABLE>
<CAPTION>
                                 % of Total    U.S.     U.S.     U.K.     U.K.
                                 2000 Terra  Capacity  Market  Capacity  Market
Product                          Revenues(1) Position Share(2) Position Share(2)
-------                          ----------- -------- -------- -------- --------
<S>                              <C>         <C>      <C>      <C>      <C>
Ammonia.........................     22%         2      13%        1      52%
UAN.............................     30%         1      31%        *        *
AN..............................     11%         *        *        1      38%
Urea............................      7%         4      10%        *        *
Methanol........................     13%         1       8%        *        *
</TABLE>
--------
(1)  Revenues from sales of carbon dioxide and other nitrogen products, as well
     as industrial sales in the U.K., represented 17% of our total revenues for
     2000.
(2)  Based on our unit sales and based on total market consumption, including
     imports, as reported by Fertecon.
 * We do not compete in these markets.

 Strategically Located Plants with Access to Distribution Infrastructure

   A critical element of competitiveness in the North American agricultural
market is delivered cost to customers. Our plants located in the main
agricultural areas of the United States provide us with a significant freight
cost advantage over Gulf Coast producers and importers entering through Gulf
Coast ports. Four of our facilities are able to provide UAN locally by truck,
which offers a competitive advantage in serving agricultural customers due to
the high cost of transporting UAN. The location of our Port Neal, Iowa and
Courtright, Ontario plants, with low cost access to nearby corn belt markets,
allows these plants to be among the most efficient UAN production facilities in
North America in terms of delivered cost to end-users. We also have access to
an extensive distribution infrastructure that provides reliable and cost-
effective delivery of products to our customers. Our ability to serve customers
within our markets is enhanced by our access to competitive multi-modal
transportation, including rail systems (Burlington Northern, Union Pacific,
Canadian National, CSX), barge, truck and pipeline systems. In addition, we
have a terminal network in which we can store up to 500,000 tons of nitrogen
through over 60 terminals located close to our customers. This terminal network
helps ensure customers receive our products on a timely basis.

 Integrated Production of Value-Added Products

   We upgrade a significant portion of the ammonia we produce into higher value
products, such as UAN, AN and urea. In 2000, we upgraded 63% of our ammonia
production into value-added products. The demand for these value-added products
has increased largely at the expense of ammonia demand, and we expect that it
will continue to do so. Agricultural customers increasingly prefer these
products because they are easier to apply and can be mixed with other crop
production products, providing significant cost and labor savings. As a result,
these products generate higher revenues and margins than pure ammonia. By
producing our own ammonia and upgrading it internally, we are able to operate
our ammonia units at higher utilization rates

<PAGE>

throughout the year and reduce reliance on merchant ammonia sales. In addition,
because of UAN's relatively high transportation costs due to its high water
content, there is less competition from importers. Our Verdigris, Oklahoma
facility is the largest UAN production facility in the world.

 Strong Plant Operating Efficiency

   Based on a global survey of 92 ammonia plants worldwide, our five largest
North American plants (including our two plants in Verdigris, Oklahoma) ranked
in the top half of their peer group for the best calendar month performance in
net efficiency during the four-year survey period ending in December 1998. We
believe that our Port Neal, Iowa and Courtright, Ontario facilities, together
representing more than 25% of our North American capacity, are among the most
efficient ammonia plants in North America in terms of natural gas consumption
per ton of ammonia produced. We believe we have some of the most efficient UAN
plants in North America, including three of the five lowest cost plants in
terms of delivered cost to end-users. In addition, we believe we are the most
efficient producer of methanol in the United States, in large part as a result
of an ammonia production loop at our Beaumont, Texas facility, which produces
ammonia as a by-product of the methanol production process. Our Beaumont, Texas
facility is the largest methanol facility in the U.S. Our ammonia facility at
Woodward, Oklahoma also uses loop technology to produce methanol, providing us
with operational flexibility and helping us to optimize product mix at that
site. The high percentage of our sales that are made under contract also allows
us to maintain high utilization rates and enhance the efficiency of our
operations.

 Experienced Management Team and Employees

   Terra Industries' executive officers have an average of 20 years of
experience in the fertilizer industry. Michael Bennett, our President and Chief
Executive Officer, has been with the company for 28 years. Similarly, our more
than 1,200 employees have an average of over 18 years of service with us. The
extensive experience and stability of our employee base enable us to operate
our plants efficiently with a strong safety record when compared to our peers.

Company Strategies

 Enhance Competitive Position Through Continued Efficiency Improvement

   We intend to continue to improve our competitive position in the worldwide
nitrogen fertilizer industry by enhancing the operating and energy efficiency
of our plants while rigorously controlling costs. We have implemented a number
of cost-saving efficiency initiatives, such as our loop production processes at
our Beaumont, Texas and Woodward, Oklahoma plants, in order to increase the
overall efficiency and volume throughput of our plants. Since 1998, our
selling, general and administrative expenses have declined by 23%. We have
upgraded and will continue to upgrade our equipment and processes through
prudent investment and personnel training.

 Use Natural Gas Contracts to Protect Margins

   Natural gas costs in 2000 comprised approximately 49% of total costs and
expenses for our North American nitrogen products business, 23% of total costs
and expenses for our U.K. nitrogen products business and 66% of total costs and
expenses for our methanol business. It is our normal practice to effectively
fix or cap the price of a substantial portion of our natural gas requirements
through supply contracts, financial derivatives and other instruments. These
tools are used to lock in margins and protect against an adverse impact on
margins due to increases in natural gas costs. Over the past six months, we
have reduced our use of these techniques in response to declining natural gas
prices, with the expectation that we will return to our normal forward pricing
policy when circumstances dictate.

 Pursue New Market Opportunities

   We will aggressively pursue new market opportunities such as those presented
as a result of recent environmental regulations promoting the use of ammonia to
clean airborne pollutants emitted by power

<PAGE>

generating plants. According to the McIlvaine Company, a power industry
consultant, these regulations could increase the annual demand for ammonia by
up to 2 million tons, or 11% of total 2000 U.S. capacity, by 2004. We are
working actively with selected power producers to provide the ammonia, storage
facilities and handling expertise they need for these purposes. We also see
opportunities in the use of methanol as a fuel for fuel cell-powered cars.

 Maintain Leadership Position in Our Key Products

   We intend to maintain our leading market positions in our key markets by
focusing on remaining a reliable, low cost producer of our products to our
existing customers and by identifying new customers and end markets for our
products.

 Reduce Debt

   Our primary financial strategy is to use a significant portion of our cash
flow from operations to reduce indebtedness.

Nitrogen Business Segment

   We are a leading producer and marketer of nitrogen products, principally
fertilizers. We upgrade a significant portion of the ammonia that we produce
into other nitrogen products, such as urea, AN and UAN. Ammonia, urea and UAN
are the principal nitrogen products we produce and sell in North America. We
produce and sell primarily ammonia and AN in the U.K. Other important products
that we manufacture in both the U.S. and U.K. include nitric acid and carbon
dioxide. These products, along with a portion of our ammonia and urea
production, are used as industrial feedstocks and are independent of the
agricultural market.

   Although these different nitrogen products are interchangeable to some
extent, each has its own characteristics which make one product or another
preferable to the end-user. Our plants are designed to provide the products
preferred by end-users in the regions in which they are located. These
preferences vary according to the crop planted, soil and weather conditions,
regional farming practices, relative prices, and the cost and availability of
appropriate storage, handling and application equipment. Our nitrogen products
are described in greater detail below.

 Ammonia

   Ammonia is the simplest form of nitrogen fertilizer and is the feedstock for
the production of most other nitrogen fertilizers, including urea, AN and UAN.
Ammonia is also widely used in industrial applications. Ammonia is produced
when natural gas reacts with steam and air at high temperatures and pressures
in the presence of catalysts. Ammonia has a nitrogen content of 82% by weight
and is generally the least expensive form of fertilizer per pound of nitrogen.
Although generally the cheapest source of nitrogen available to agricultural
customers, ammonia can be less desirable to end-users than UAN or urea because
of the need for specialized application equipment and the lack of application
flexibility.

 Urea

   We produce urea for both the fertilizer and animal feed markets by
converting ammonia and carbon dioxide into liquid urea, which can be further
processed into a solid, granular form. Urea is also used in industrial
applications. Urea has a nitrogen content of 46% by weight, the highest level
for any solid nitrogen product. We produce both a granulated form of urea,
generally for the fertilizer market, and urea liquor (liquid) for animal feed
supplements and industrial applications.

 Ammonium Nitrate

   We produce AN at our two facilities in the U.K. AN is produced by combining
nitric acid and ammonia into a liquid form which is then converted to a solid,
largely for fertilizer applications. The nitrogen content of AN is 34% by
weight. AN is the preferred fertilizer in the British agricultural market.

<PAGE>

 Urea Ammonium Nitrate

   UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not
require refrigeration or pressurization for transportation or storage. UAN is
produced by combining liquid urea, liquid ammonium nitrate and water. The
nitrogen content of UAN is approximately 28% to 32% by weight. Because of its
high water content, UAN is relatively expensive to transport, making this
largely a regionally distributed product.

   UAN can be applied to crops directly or can be mixed with crop production
products, permitting the application of several materials simultaneously,
reducing energy and labor costs and accelerating field preparation for
planting. In addition, UAN may be applied from ordinary tanks and trucks and
can be sprayed or injected into the soil, or applied through irrigation
systems, throughout the growing season, providing significant application
flexibility. Due to its stability, UAN may be used for no-till row crops where
fertilizer is spread on the surface of the soil but may be subject to
evaporation losses.

 Manufacturing Facilities

   Our eight fertilizer manufacturing facilities are designed to operate
continuously, except for planned shutdowns (usually biennial) for maintenance
and efficiency improvements. Capacity utilization (gross tons produced divided
by capacity tons at expected operating rates and on-stream factors) of our
fertilizer manufacturing facilities was 93%, 96% and 102% in 2000, 1999 and
1998, respectively. Our capacity utilization was reduced in 2000, reflecting
several plant shutdowns due to natural gas prices increasing faster than
nitrogen prices.

   We own all of our manufacturing facilities, unless otherwise indicated
below. (See "--Methanol Business Segment--Manufacturing Facilities" for a
description of our Beaumont, Texas facility.)

   Our Verdigris, Oklahoma facility is one of the largest UAN production
facilities in North America. Located at the Verdigris, Oklahoma facility are
two ammonia plants, two nitric acid plants, two UAN plants and a port terminal.
We own the plants, while the port terminal is leased from the Tulsa-Rogers
County Port Authority. The leasehold interest on the port terminal is scheduled
to expire in April 2004, and we have an option to renew the lease for an
additional five-year term. We also have UAN upgrading capability at our
facilities in Port Neal, Iowa; Courtright, Ontario; Woodward, Oklahoma and
Blytheville, Arkansas. UAN is often the preferred fertilizer among agricultural
customers in the markets served by these facilities.

   We believe we have some of the most efficient UAN plants in North America,
including three of the five lowest cost plants in terms of delivered cost to
end-users. The location of our Port Neal, Iowa and Courtright, Ontario plants,
with low cost access to nearby corn belt markets, allows these plants to be
among the most efficient in North America as measured by delivered cost to the
end-user. Our Verdigris, Oklahoma facility is the largest UAN production
facility in the world. Because of UAN's relatively high transportation costs
due to its water content, there is less competition from importers. Four of our
facilities are able to provide UAN locally by truck which also offers a
competitive advantage in serving agricultural customers due to the high cost of
transporting UAN.

   The Blytheville, Arkansas facility consists of an ammonia plant, a granular
urea plant and a UAN plant. The ammonia plant is leased from the City of
Blytheville at a nominal annual rate. The ammonia plant lease is scheduled to
expire in November 2004, and we have an option to extend the lease for eleven
successive terms of five years each at the same rental rate. We have an
unconditional option to purchase the plant for a nominal price at the end of
the lease term (including any renewal term). The urea plant is also leased from
the City of Blytheville. The urea plant lease is scheduled to expire in
November 2005, and we have an option to extend the lease for three successive
terms of five years each at the same rental rate. We also have a similar,
unconditional option to purchase the urea plant for a nominal price.

   In the first quarter of 2000, we completed a $61.6 million capital project
to add an ammonia production loop to our Beaumont, Texas facility, which has
added 255,000 tons of annual ammonia production capacity to the existing
methanol production at that site.

<PAGE>

 Marketing and Distribution

   The principal customers for our North American manufactured nitrogen
products are independent dealers, national retail chains, cooperatives and
industrial customers. In the U.K., revenues are split approximately evenly
between agricultural and industrial customers. Overall, industrial customers
purchased approximately 16% of our nitrogen product production in each of 2000
and 1999. At December 31, 2000, we had contracted to sell approximately 50% of
our 2001 scheduled nitrogen production at prices indexed to published sources.

   As part of the sale of our farm service centers and distribution business to
the Cenex/Land O'Lakes Agronomy Company ("Cenex/Land O'Lakes") in the second
quarter of 1999, we entered into an agreement to supply Cenex/Land O'Lakes with
nitrogen fertilizer products. Under this agreement, through June 2002,
Cenex/Land O'Lakes will purchase from us approximately the quantity of product
that we supplied to both our own distribution business and to Cenex/Land
O'Lakes before the sale of the distribution business. We sold approximately 11%
and 15% of our North American production to Cenex/Land O'Lakes under this
supply agreement in 2000 and 1999, respectively.

   Under an agreement with Imperial Chemical Industries ("ICI") in connection
with our acquisition of ICI's U.K. assets, we may make payments to ICI based on
the market price obtained for AN sales by our U.K. business. Under the terms of
this agreement, we must make a payment for any year through 2002 in which the
average AN price we receive exceeds certain thresholds, up to a maximum payment
of (Pounds)58 million in the aggregate (approximately $83.5 million). In the
event we have suffered a material business interruption with respect to this
facility for 60 days or more in a year in which ICI would be entitled to a
payment above a certain amount, and this interruption is not compensated by our
insurance, we may extend to 2003 the duration of this agreement, in which case
the maximum aggregate payment will be increased to (Pounds)61 million
(approximately $87.8 million). Because of these payments, we will not benefit
fully from the U.K. market price of AN over certain thresholds during the term
of this agreement. We did not make any payments to ICI under this agreement in
1998, 1999 or 2000, and we do not anticipate making any significant payments in
2001.

   Our production facilities, combined with significant storage capacity at
over 60 locations throughout the major fertilizer consuming regions of the U.S.
and Canada, position us to respond competitively to demand in our markets, a
distinct advantage over imports, which face logistical challenges and higher
costs in transporting product to end-users in a timely fashion.

Methanol Business Segment

 Product

   We are the leading U.S. producer of methanol. Methanol is used as a
feedstock in the production of other chemical products such as formaldehyde,
acetic acid and a variety of other chemical intermediates. Another major market
for methanol is as a feedstock in the production of MTBE, an oxygenate used as
an additive in reformulated gasoline and as an octane enhancer in non-
reformulated gasoline.

 Manufacturing Facilities

   We have two U.S. facilities that produce methanol. Our Beaumont, Texas
facility is the largest methanol production plant in the U.S., with
approximately 280 million gallons of annual methanol production capacity. This
plant produced 258 million, 201 million and 208 million gallons of methanol in
1998, 1999 and 2000, respectively. Our Woodward, Oklahoma facility produced
approximately 38 million, 34 million and 36 million gallons of methanol in
1998, 1999 and 2000, respectively, and has an annual methanol production
capacity of 40 million gallons.

   We own the plant and processing equipment at the Beaumont facility. The land
is leased from E. I. DuPont de Nemours and Company ("DuPont") for a nominal
annual rate under a lease agreement which expires in 2090. Because the Beaumont
facility is entirely contained within an industrial complex owned and operated
by DuPont, we depend on DuPont for access to the facility as well as certain
essential services. Most of the finished methanol product is shipped to
customers through wharf facilities located on DuPont property. We

<PAGE>

depend on DuPont for access to the pipelines used to transport methanol and to
obtain natural gas, as well as for certain utilities, wastewater treatment
facilities and other essential services.

 Marketing and Distribution

   Our methanol customers are primarily large, domestic chemical or MTBE
producers. We have a number of long-term methanol sales contracts, the most
significant of which is with DuPont. In 2000, we sold over 57% of our
production under such contracts. At December 31, 2000, we had contracted to
sell over 72% of our 2001 scheduled production at prices indexed to published
sources. Most of these sales contracts (other than the DuPont contract noted
below) cover fixed volumes and have terms of up to three years.

   Under the DuPont contract, as amended, DuPont has agreed to purchase from us
54 million gallons of methanol each year through 2001 (representing 19% of our
Beaumont facility's annual production capacity). After this initial term, the
agreement will continue in effect until terminated by either party on two
years' notice to the other party. The price of the methanol delivered under
this contract is generally negotiated on the basis of an established index and
the previous month's price.

Nitrogen Industry Overview

 Overview

   The three major nutrients required for plant growth are phosphorous, mined
as phosphate rock, potassium, mined as potash, and nitrogen, produced from
natural gas. Phosphorus plays a key role in the photosynthesis process.
Potassium is an important regulator of plants' physiological functions.
Nitrogen, which comprised approximately 60% of worldwide fertilizer consumption
in 1999, is an essential element for most organic compounds in plants as it
promotes protein formation and is a major component of chlorophyll, which helps
to promote green healthy growth and high yields. There are no substitutes for
nitrogen fertilizers in the cultivation of high-yield crops. These three
nutrients occur naturally in the soil to a certain extent but must be replaced
as crops remove them from the soil. Nitrogen, to a greater extent than
phosphate and potash, must be reapplied each year in areas of intense
agricultural usage because of absorption by crops and its tendency to escape
from the soil by evaporation or runoff. Consequently, demand for nitrogen
fertilizer tends to be more consistent on a per acre planted basis than demand
for phosphate or potash fertilizer.

 Demand

   Global demand for fertilizers typically grows at predictable rates and tends
to correspond to growth in grain production. Global fertilizer demand is driven
in the long term primarily by population growth, increases in disposable income
and associated improvements in diet. Short-term demand depends on world
economic growth rates and factors creating temporary imbalances in demand.
These factors include weather patterns, the level of world grain stocks
relative to consumption, agricultural commodity prices, energy prices, crop
mix, fertilizer application rates, farm income and temporary disruptions in
fertilizer trade from government intervention, such as changes in the buying
patterns of China or India. According to the International Fertilizer Industry
Association ("IFA"), over the last 37 years global fertilizer demand has grown
4.0% annually with nitrogen demand growing at a faster rate of 5.4% annually.
U.S. fertilizer demand has grown 2.5% annually over the last 37 years with U.S.
nitrogen demand growing at a faster rate of 3.6% annually.

 Supply

   Increased ammonia prices in 1995 led to capacity expansion projects globally
that resulted in capacity growth that was substantially greater than demand,
causing a structural imbalance in ammonia supply and demand. In addition,
foreign government support for domestic production in India, China and the
former Soviet Union, has kept uneconomic plants running, further increasing
supply.

<PAGE>

   This new global capacity has been partially offset by permanent plant
closings in the U.S. since 1998. These U.S. plant closings represent 12.9% of
total 1998 capacity, and no new capacity is expected to come on stream in the
U.S. in the foreseeable future. The recent increase in natural gas costs in
many regions of the world has forced temporary plant closings which, in
addition to permanent plant closures, have provided support for nitrogen
prices.

   Imports account for a significant portion of U.S. nitrogen product supply.
It is estimated by Fertecon that the United States imports up to one-third of
its ammonia and urea requirements. In 2000, total imports of ammonia and urea
in the United States were approximately 5.6 million tons and 4.6 million tons,
respectively. Producers from the former Soviet Union, Canada, the Middle East,
Trinidad and Venezuela are major exporters to the U.S. These export producers
are often competitive in regions of close proximity to the point of imports,
primarily the Gulf Coast and East Coast of North America, as the relatively low
natural gas costs offset transportation costs to North America. Due to higher
freight costs and an underdeveloped distribution infrastructure, importers are
less competitive in serving the main corn-growing regions of the U.S., which
are more distant from these ports. Importers' advantage increases when natural
gas and ammonia prices are high, and decreases in an environment of low natural
gas cost and low ammonia prices.

 Outlook

   Growth in worldwide population and a reduction in the amount of arable land
will increase the global demand for fertilizers. According to a United Nations
study, worldwide population is projected to grow by approximately 1.5 billion
from 2000 to 2020. Based on an industry study, the amount of arable land is
forecast to decrease from 0.27 hectares per capita in 1990 to 0.17 hectares per
capita in 2025.

   The IFA forecasts that global fertilizer consumption will grow at a rate of
1.9% to 2.8% annually through 2004. Most of the future increase in fertilizer
demand is expected to be generated by less developed countries, particularly
countries in Southeast Asia and South America, where the agricultural industry
does not yet use fertilizer in sufficient amounts to optimize production and
where growth rates of population and gross domestic products are expected to
continue to increase.

   According to Fertecon, ammonia consumption in the U.S. will increase by 2.3%
annually from 2001 to 2005, from 19.7 million tons to 21.6 million tons. The
mix of products used, however, is expected to change. UAN demand is expected to
increase more rapidly at the expense of direct ammonia application due to its
significant application flexibility and ability to be mixed with other crop
production products, which provide significant cost and labor savings. U.S. UAN
demand increased from 9.9 million tons in 1990 to 14.6 million tons in 2000, an
increase of 48%, and is forecast to increase to 16.9 million tons in 2010,
according to Fertecon (or in 100% nitrogen equivalent metric tons, 2.5 million,
3.7 million and 4.3 million, respectively).

   A significant amount of new ammonia capacity is expected to come on stream
globally from 2001 to 2005. According to Fertecon, global ammonia capacity is
forecast to increase from 178.3 million tons to 186.9 million tons during this
period, an increase of 4.8%. However, ammonia capacity in the U.S. is forecast
to decrease from 18.2 million tons to 16.8 million tons from 2001 to 2005, a
decrease of 7.9%. The continued growth in demand for nitrogen products has
helped to stabilize global ammonia utilization rates, which averaged 82%
between 1997 and 2000. Global ammonia utilization rates are forecast to
increase from 82% in 2000 to 86% in 2005 due to increased consumption
worldwide. In the U.S., ammonia utilization rates are forecast to increase from
81% in 2001 to 89% in 2005.

   Due to the Clean Air Act of 1990, as amended, energy providers are required
to reduce or eliminate emissions of nitric oxide and sulfur dioxide ("NOX" and
"SOX", respectively). This presents a new market opportunity for ammonia, which
can be used to remove NOX and SOX from air emissions. The McIlvaine Company
estimates that the ammonia demand for this new application could increase
demand by up to 2 million tons, or 11% of total 2000 U.S. capacity, by 2004.

<PAGE>

Methanol Industry Overview

 Overview

   Methanol is a liquid made primarily from natural gas and is used as a
feedstock in the production of formaldehyde, acetic acid, MTBE, and a variety
of other chemical intermediates which form the foundation of a large number of
secondary derivatives. Formaldehyde is used to produce urea-formaldehyde and
phenol-formaldehyde resins, which are used as wood adhesives for plywood,
particleboard, oriented strand board, medium-density fiberboard and other
engineered wood products. In addition, formaldehyde is also used in the
manufacture of elastomers, paints, foams, polyurethane and automotive products.
Acetic acid is used as a chemical intermediate to produce adhesives, paper,
paints, plastics, resins, solvents, and textiles. MTBE, an oxygenate and octane
enhancer, is used to reduce hydrocarbon and carbon monoxide emissions from
motor vehicles. Chemical intermediates are used to manufacture de-icer and
windshield fluid, antifreeze, herbicides, pesticides, and poultry feed
products.

   Methanol is a typical commodity chemical and the methanol industry is
characterized by cycles of oversupply resulting in lower prices and idled
capacity, followed by periods of shortage and rapidly rising prices as demand
rises and exceeds supply until increased prices justify new plant investments
or the re-start of idled capacity. However, the expanding number of different
uses for methanol and its derivatives over the last several years has resulted
in the methanol industry becoming more complex and subject to increasingly
diverse influences on supply and demand.

 Demand

   According to an industry source, global methanol demand grew by 3.6%
annually from 1997 to 2000. According to Chemical Data Inc., U.S. methanol
demand grew by 2.4% annually during the same period. In 2000, formaldehyde,
acetic acid and chemical intermediates comprised 34%, 10% and 28% of global
demand for methanol, respectively. Due to an increasing range of end uses for
methanol, demand has tended to move with the general level of economic activity
in methanol's major markets. The significant use of methanol for the production
of chemicals used in the building products industry means that building and
construction cycles are important factors in determining demand for methanol-
based chemicals.

   MTBE comprised approximately 28% of global demand for methanol in 2000. MTBE
is considered the preferred oxygenate by the refining industry and its
production has grown rapidly. MTBE production increased from 456 million
gallons in 1989 to 1,109 million gallons in 2000. Recently, the state of
California adopted regulations that prohibit the addition of MTBE to gasoline
after 2002. California's consumption of MTBE comprises approximately 6% of U.S.
demand for methanol.

 Supply

   Over the past several years significant industry restructuring has taken
place with approximately 617 million gallons of North American methanol
capacity shut down in 1999, a further rationalization of 150 million gallons in
2000 and 455 million gallons in 2001 to date. New methanol production
facilities have generally been constructed in locations with low-cost natural
gas availability, although this advantage is offset in some instances by higher
distribution costs due to distance from major markets.

 Outlook

   According to an industry source, global methanol demand and supply are
forecast to increase by 2.8% and 2.2%, respectively, on an annual basis from
2001 to 2004 with global capacity utilization rates forecast to increase from
79% to 80% during this period. In the U.S., methanol demand and capacity are
forecast to decrease by 0.6% and 4.7%, respectively, on an annual basis with
capacity utilization rates forecast to decrease from 89% to 78% during this
period. Global demand for methanol for production of formaldehyde and acetic
acid is forecast to grow 3.4% and 3.0% annually, respectively, from 2001 to
2005. A significant factor in the

<PAGE>

declining forecast for U.S. methanol demand is the projected decrease in demand
for MTBE. According to an industry source, global methanol supply is forecast
to increase by 1.9% annually from 2001 to 2005 with global capacity utilization
rates forecast to increase from 79% to 82% during the same period.

   Principal alternatives to MTBE include ethanol, ETBE, an ethanol derivative,
and TAME, which, like MTBE, is produced from methanol. Ethanol, however, has
two principal disadvantages. First, it is more expensive than MTBE, although
this cost differential has been partially offset by a government subsidy.
Second, the volatility of ethanol-oxygenated gasoline exceeds the levels
permitted by the 1990 Clean Air Act Amendments, effectively limiting its use as
a year-round oxygenate. TAME, a methanol derivative, has a lower volatility
than MTBE and could, if widely used, reduce demand for MTBE, but requires the
same amount of methanol to produce.

   As described above, demand for methanol in the manufacture of MTBE is
forecast to decline in the U.S. due to regulations adopted in California.
Heightened public awareness regarding this issue has resulted in other state
and federal initiatives to rescind the federal oxygenate requirements for
reformulated gasoline or restrict or prohibit the use of MTBE in particular.
For example, California has requested that the U.S. Environmental Protection
Agency waive the federal oxygenated fuels requirements for gasoline sold in
California. Several bills have been introduced in Congress to accomplish
similar goals of curtailing or eliminating the oxygenated fuels requirements in
the Clean Air Act, or of curtailing MTBE use. In 1999, the U.S. Senate also
passed a non-binding resolution calling for a phase out of MTBE. In addition,
on March 20, 2000, the EPA announced its intention to phase-out the use of MTBE
under authority of the federal Toxic Substances Control Act. The EPA also
called on Congress to restrict the use of MTBE under the Clean Air Act. Any
phase-out of or prohibition against the use of MTBE in California, in other
states, or nationally may result in a significant reduction in demand for MTBE
and result in a material loss in revenues.

   However, any decrease in MTBE demand may be offset, at least in part, by an
increase in methanol demand for industrial applications and growing MTBE demand
in Europe and Asia. Methanol is also used to some extent as a direct fuel
source. The use of methanol for this purpose historically has been relatively
small and sporadic. Recently, there have been several legislative initiatives
in the U.S. relating to possible mandated use of alternative fueled or flexible
fueled vehicles in certain circumstances. Several automobile manufacturers have
developed vehicles able to operate on methanol for such purposes. It is
currently not possible to determine the extent to which these initiatives will
impact future methanol demand.

Credit

   Our credit terms are generally 15-30 days in the U.S. and 30 days in the
U.K., but may be extended for longer periods during certain sales seasons
consistent with industry practices. Bad debt writeoffs have been less than $1
million annually for each of the past three years.

Seasonality and Volatility

   The fertilizer business is seasonal, based upon the planting, growing and
harvesting cycles. Nitrogen fertilizer inventories must be accumulated to
permit uninterrupted customer deliveries, and require significant storage
capacity. This seasonality generally results in higher fertilizer prices during
peak periods, with prices normally reaching their highest point in the spring,
decreasing in the summer, and increasing again in the fall as depleted
inventories are restored.

   Nitrogen fertilizer prices can also be volatile as a result of a number of
other factors. The most important of these factors are:

 .  Weather patterns and field conditions (particularly during periods of
     high fertilizer consumption);

  .  Quantities of fertilizers imported to and exported from North America
     and imported to the U.K.;

<PAGE>

  .  Current and projected grain inventories and prices, which are heavily
     influenced by U.S. exports and worldwide grain markets; and

  .  Price fluctuations in natural gas, the principal raw material used to
     produce nitrogen fertilizer and methanol.

   Governmental policies may directly or indirectly influence the number of
acres planted, the level of grain inventories, the mix of crops planted and
crop prices.

   Price volatility in North American natural gas markets prompted industry-
wide curtailment of both nitrogen fertilizer and methanol production in 2000.
We idled our Blytheville, Arkansas plant from June through mid-August 2000 and
our Blytheville, Arkansas and Beaumont, Texas plants and parts of our
Verdigris, Oklahoma plant for the month of December 2000 due to high natural
gas costs. During 2000, we produced only 89% and 84% of our ammonia and
methanol capacity, respectively, because of plant shutdowns due to high natural
gas costs. In January 2001, due to unprecedented natural gas prices of near
$10.00/MMBtu, most of our North American production was idled. By the end of
that month as natural gas prices declined, we were able to restart production.
On June 7, 2001, we once again stopped production at our Blytheville, Arkansas
plant. We are currently planning to reopen our Blytheville, Arkansas facility
on or about October 1, 2001. However, there can be no assurance that such
reopening will occur at that time.

   While most U.S. methanol is sold pursuant to long-term contracts based on
market index pricing and fixed volumes, the spot market price of methanol can
be volatile. The industry has experienced cycles of oversupply, resulting in
depressed prices and idled capacity, followed by periods of shortages and
rapidly rising prices. From the end of 1998 through the end of 1999, methanol
sales prices were below the low end of their historic price range; however by
early 2000 prices had improved to historic levels. Future demand for methanol
will depend in part on the emerging regulatory environment with respect to
reformulated gasoline.

Raw Materials

   The principal raw material used to produce manufactured nitrogen products
and methanol is natural gas. Natural gas costs in 2000 comprised about 49% of
total costs and expenses for our North American nitrogen products business, 23%
of total costs and expenses for our U.K. nitrogen products business, and 66% of
total costs and expenses associated with our methanol business. We believe
there is a sufficient supply of natural gas for the foreseeable future and have
entered into firm contracts to minimize the risk of interruption or curtailment
of natural gas supplies during the peak-demand winter season.

   Our natural gas hedging policy generally requires us to fix or cap the price
of approximately 25% to 80% of our natural gas requirements for a rolling one-
year period, and up to 50% of our natural gas requirements for the subsequent
two-year period, provided that such arrangements would not result in costs that
would be greater than the expected selling prices for our finished products. In
response to extremely volatile natural gas costs during the last six months of
2000 and uncertainties regarding the ability of finished goods prices to
recover the increases to gas costs, the Board of Directors of Terra Industries
amended the hedging policy and eliminated the minimum hedge requirement through
the end of 2001. Capping natural gas prices is accomplished through various
supply contracts, financial derivatives and other instruments. A significant
portion of global nitrogen products and methanol production occurs at
facilities with access to fixed-priced natural gas supplies. These facilities'
natural gas costs have been and could continue to be substantially lower than
ours.

   If natural gas prices rise, we may benefit from our use of forward-pricing
techniques. Conversely, if natural gas prices fall, we may incur costs above
the then available spot market price. The settlement dates of forward-pricing
contracts coincide with gas purchase dates. Forward-pricing contracts are based
on a specified price referenced to spot market prices or appropriate NYMEX
futures contract prices.

Transportation

   We use several modes of transportation to receive materials and distribute
products to customers, including railroad cars, common carrier trucks, barges
and common carrier pipelines. We use approximately 60 liquid,

<PAGE>

dry and anhydrous ammonia fertilizer terminal storage facilities in 18 U.S.
states and one Canadian province. We also lease a methanol storage facility in
Deer Park, Texas. We transport products from this storage facility primarily by
marine vessels, rail tank cars and via pipeline to selected customers.

   Railcars are the major source of transportation at our North American
manufacturing facilities. We lease approximately 2,120 railcars. We also own 10
nitric acid railcars. In the U.K., our AN production is transported primarily
by contract carrier trucks, and ammonia production is transported primarily by
pipelines that we own.

   We transport purchased natural gas to our Woodward, Oklahoma facility via
both intrastate and interstate pipelines and to our Verdigris, Oklahoma
facility via intrastate pipeline. The intrastate pipelines serving Woodward and
Verdigris are not open-access carriers, but are nonetheless part of a
widespread regional system through which Woodward and Verdigris can receive
natural gas from any major Oklahoma source. We also have limited access to out-
of-state natural gas supplies for these facilities. Our Beaumont, Texas
facility sources natural gas via four intrastate pipelines. The Courtright,
Ontario facility sources natural gas at delivery points at Parkway and Dawn,
Ontario and a local utility. We transport purchased natural gas for both our
Port Neal, Iowa and Blytheville, Arkansas facilities via interstate, open-
access pipelines. At our Billingham and Severnside, England locations,
purchased natural gas is transported to the facilities via a nationwide, open-
access pipeline system.

Research and Development

   We do not currently have any significant, ongoing research and development
efforts.

Competition

   The industries in which we operate are highly competitive. Competition in
agricultural input markets takes place largely on the basis of price,
reliability of supply, delivery time and quality of service. Feedstock
availability to production facilities and the cost and efficiency of
production, transportation and storage facilities are also important
competitive factors. Government intervention in international trade can distort
the competitive environment. The relative cost and availability of natural gas
are also important competitive factors. Significant determinants of a plant's
competitive position are the natural gas acquisition and transportation
contracts that a plant negotiates with its major suppliers as well as proximity
to natural gas sources and/or end-users.

   Our domestic competitors in the nitrogen fertilizer markets include large
farm cooperatives or other independent fertilizer companies. In addition,
nitrogen fertilizers imported into the United States compete with domestically
produced nitrogen fertilizers, including those produced by us. Countries with
inexpensive sources of natural gas (whether as a result of government
regulation or otherwise) can produce nitrogen fertilizers at a low cost. A
substantial amount of new ammonia capacity is expected to be added abroad in
the foreseeable future. However, importers face high transportation costs,
which erode their profit margin and competitive pricing.

   In the methanol segment, we compete with a number of large integrated
petrochemical producers, many of which are better capitalized than we are. In
addition, as the production and trade in methanol have become increasingly
globalized, a number of foreign competitors produce methanol primarily for the
export market. Many of these foreign competitors have access to favorably
priced sources of natural gas and are relatively insensitive to raw material
price fluctuations. These advantages are largely offset by high production and
transportation costs. However, because of low domestic demand, these foreign
competitors aggressively pursue the U.S. and other export markets. Two new
methanol plants commenced production in 2000, including Titan Methanol in
Trinidad and NPC in Iran. Methanol prices may be adversely affected by two new
significant plants--one in Equatorial Guinea, which has recently started
production, and one in Argentina, which is expected to begin production before
the end of 2002.

<PAGE>

   Nitrogen sales are made through independent retailers, resellers, farmer co-
operatives affiliated dealer organizations and brokers. Some North American
producers are subsidiaries or divisions of energy or chemical companies while
others are owned by farmer co-operatives.

Environmental and Other Regulatory Matters

   Our operations are subject to various federal, state and local
environmental, safety and health laws and regulations, including laws relating
to air quality, hazardous and solid wastes and water quality. Our operations in
Canada are subject to various federal and provincial regulations regarding such
matters, including the Canadian Environmental Protection Act administered by
Environment Canada, and the Ontario Environmental Protection Act administered
by the Ontario Ministry of the Environment. Our U.K. operations are subject to
similar regulations under a variety of acts governing hazardous chemicals,
transportation and worker health and safety. We are also involved in the
manufacture, handling, transportation, storage and disposal of materials that
are or may be classified as hazardous or toxic by federal, state, provincial or
other regulatory agencies. We take precautions to reduce the likelihood of
accidents involving these materials. If such materials have been or are
disposed of at sites that are targeted for investigation and/or remediation by
federal or state regulatory agencies, we may be responsible under CERCLA or
analogous laws for all or part of the costs of such investigation and
remediation, and damages to natural resources.

   We have been designated as a potentially responsible party ("PRP") under
CERCLA and its state analogues with respect to various sites, including the
Pinal Creek Drainage Basin Site ("Pinal Site") in Globe/Miami, Arizona based on
our prior ownership and operation of copper mining and production facilities
there. Under such laws, all PRPs may be held jointly and severally liable for
the costs of investigation and/or remediation of an environmentally damaged
site regardless of fault or legality of original disposal. The Pinal Site is
the subject of on-going cleanup to address releases of acidic metal-bearing
solutions from former copper mining and production facilities in the Pinal
Site, being performed pursuant to a consent decree entered in 1997 among
Inspiration Consolidated Copper Company ("Inspiration"), our subsidiary, as a
former owner/operator and the two current owner/operators (collectively with
us, the "Group"), and the Arizona Department of Environmental Quality. The
parties are jointly and severally liable for the financing and performance of
the work; however, Inspiration is not actually participating in the cleanup
because it no longer owns assets at the Pinal Site. In a related matter,
residents in the area of the Pinal Site brought a class action lawsuit against
the Group seeking property damages and medical monitoring for potential
personal injuries allegedly related to exposure to contaminated groundwater.
All claims have been settled, although plaintiffs have reserved the right to
assert individually any personal injury claims. After consideration of such
factors as the number and levels of financial responsibility of other PRPs,
including ongoing litigation against other PRPs and historic insurance
carriers, and the existence of contractual indemnities, we believe that our
liability with respect to these matters will not be material. Existing
contractual indemnities may be subject to legal challenge, however, there can
be no guarantee that they will be upheld or sufficient to cover all costs, or
that material expenditures will not be incurred for these matters.

   We retained a small number (less than 10%) of our retail locations after the
sale of our distribution business in the second quarter of 1999. Some of these
locations are or are expected in the future to be the subject of environmental
clean-up activities for which we have retained liability. We do not believe
that such environmental costs and liabilities will have a material effect on
our results of operations, financial position or net cash flows.

   With respect to our Verdigris and Blytheville facilities, Freeport-McMoRan
Resource Partners, Limited Partnership (a former owner and operator of these
facilities) retained liability for certain environmental matters. With respect
to our Beaumont facility, DuPont retains responsibility for certain
environmental costs and liabilities stemming from conditions or operations to
the extent such conditions or operations existed or occurred prior to our
purchase of the facility in 1991. Likewise, with respect to our Billingham and
Severnside, England facilities the seller, ICI, indemnified us, subject to
certain conditions, for pre-December 31, 1997 environmental contamination
associated with the purchased assets. Known conditions are not expected to
result in material expenditures but discovery of unknown conditions or the
failure of prior owners and operators and indemnitors to meet their obligations
could require significant expenditures.

<PAGE>

   We may be required to install additional air and water quality control
equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors and
continuous emission monitors, at certain of our facilities in order to maintain
compliance with applicable environmental requirements. We estimate that the
cost of complying with these existing requirements in 2001 and the next two
years will be less than $10 million.

   We endeavor to comply (and have incurred substantial costs in connection
with such compliance) in all material respects with applicable environmental,
safety and health regulations. Because these regulations are expected to
continue to change and generally be more restrictive than current requirements,
the costs of compliance will likely increase. We do not expect our compliance
with such regulations to have a material adverse effect on our results of
operations, financial position or net cash flows. However, there can be no
guarantee that new regulations will not result in material costs.

Employees

   We had over 1,200 full-time employees at December 31, 2000, with only our
approximately 485 U.K. employees being covered by the equivalent of a
collective bargaining agreement.

Legal Matters

   On July 13, 2001, a British court found Terra Nitrogen (UK) Ltd. liable for
damages associated with recalls of beverages containing carbon dioxide tainted
with benzene, plus interest and attorney fees. In addition, there are three
similar cases awaiting trial and certain other beverage manufacturers have
indicated their intention to file claims for unspecified amounts. We estimate
that total claims against us from these lawsuits may be (Pounds)10 million, or
$14 million. We have established reserves in this amount to cover estimated
losses.

   We plan to appeal the British court's decision. In addition, we believe we
have recourse for these claims against both our insurer and the previous owner
of our U.K. operations. (Our insurer had previously paid, without recourse, two
recall cost settlements on our behalf, plus a court judgment rendered against
us. Nonetheless, the insurer reserved its right to deny coverage in whole or in
part for adverse judgments in the remaining cases.) We will vigorously pursue
our rights against these parties, but there will be no income recognition for
those rights until settlements are finalized.

   We are involved in various other legal actions and claims, including
environmental matters, arising from the normal course of business. While it is
not feasible to predict with certainty the final outcome of these proceedings,
we do not believe that these matters, or the U.K. benzene claims, will have a
material adverse effect on our results of operations, financial position or net
cash flows.

<PAGE>

                                   SIGNATURE

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






                                      TERRA INDUSTRIES INC.



Date:  September 26, 2001             /s/ Francis G. Meyer
                                      --------------------
                                      Francis G. Meyer
                                      Senior Vice President and Chief Financial
                                      Officer

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