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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



|For the fiscal year ended December 31,
2002 |  |  |  | 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:



|Title of each class              |  | Name of each exchange on which registered     
|-------------------------------- |  | ----------------------------------------------
|Common Shares, without par value |  | New York Stock Exchange Toronto Stock Exchange



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



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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. ̈



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



The aggregate market value of the voting and non-voting common
shares held by non-affiliates computed by reference to the price at which the common shares were last sold, or the average bid and asked price of such common shares, as of the last business day of the registrants most recently completed second
fiscal quarter was $76,846,155.36



The number of
shares of Common Shares, without par value, outstanding as of March 7, 2003 was 76,858,616.



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DOCUMENTS
INCORPORATED BY REFERENCE



Proxy Statement
for the Annual Meeting of Stockholders of Registrant to be held on May 6, 2003. Certain information therein is incorporated by reference into Part III hereof.



TABLE OF CONTENTS



|                                                              |  | PART I                                                                                         |  |   
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --
|Items 1 and 2.                                                |  | Business and properties                                                                        |  | 1 
|                                                             
|Item 3.                                                       |  | Legal matters                                                                                  |  | 13
|                                                             
|Item 4.                                                       |  | Submission of matters to a vote of security holders                                            |  | 13
|                                                             
|                                                              |  | Executive officers of Terra                                                                    |  | 14
|                                                             
|                                                              |  | PART II                                                                                        |  |   
|                                                             
|Item 5.                                                       |  | Market for Terras common equity and related stockholder matters                               |  | 15
|                                                             
|Item 6.                                                       |  | Selected financial data                                                                        |  | 15
|                                                             
|Item 7.                                                       |  | Managements discussion and analysis of financial condition and results of operations          |  | 15
|                                                             
|Item 7a.                                                      |  | Quantitative and qualitative disclosures about market risk                                     |  | 15
|                                                             
|Item 8.                                                       |  | Financial statements and supplementary data                                                    |  | 15
|                                                             
|Item 9.                                                       |  | Changes in and disagreements with accountants on accounting and financial disclosure           |  | 15
|                                                             
|                                                              |  | PART III                                                                                       |  |   
|                                                             
|Item 10.                                                      |  | Directors and executive officers of Terra                                                      |  | 16
|                                                             
|Item 11.                                                      |  | Executive compensation                                                                         |  | 16
|                                                             
|Item 12.                                                      |  | Security ownership of certain beneficial owners and management and related stockholder matters |  | 16
|                                                             
|Item 13.                                                      |  | Certain relationships and related transactions                                                 |  | 16
|                                                             
|                                                              |  | PART IV                                                                                        |  |   
|                                                             
|Item 14.                                                      |  | Controls and Procedures                                                                        |  | 16
|                                                             
|Item 15.                                                      |  | Exhibits, financial statement schedules and reports on Form 8-K                                |  | 16
|                                                             
|Signatures                                                    |  | 23                                                                                            
|                                                             
|Certifications                                                |  | 24-25                                                                                         
|                                                             
|Index to financial statement schedules, reports and consents. |  | S-1                                                                                           



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Part
I



Items 1 and 2.
    BUSINESS AND PROPERTIES.



Terra Industries Inc., a Maryland corporation, is referred to as Terra, we or our throughout this report. References to Terra also include the direct and indirect
subsidiaries of Terra Industries Inc. where required by the context. Subsidiaries not wholly-owned by Terra include a limited partnership, Terra Nitrogen Company, L.P., which, through its subsidiary, Terra Nitrogen, L.P., operates Terras
manufacturing facilities in Blytheville, Arkansas and Verdigris, Oklahoma. Terra is the sole general partner and the majority limited partner in Terra Nitrogen Company, L.P. Terras principal corporate office is located at Terra Centre, 600
Fourth Street, P.O. Box 6000, Sioux City, Iowa 51102-6000 and its telephone number is (712) 277-1340.



Terra makes available free of charge through its website, www.terraindustries.com, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Terras internet website and the
information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.



Business Overview



Terra is a leading North American and U.K. producer and marketer of nitrogen products serving both agricultural and industrial end-use
markets. Terra is 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, Terra is 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 ammonium nitrate (AN), (34% nitrogen by weight). Urea ammonium nitrate (UAN) has only recently been
traded in international markets. It is less likely to be traded because it has a high cost of transportation due to its 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 Terras North American production
facilities provide it with a competitive advantage in serving agricultural customers in the corn belt and other major agricultural areas of the United States and Canada. Terras U.K. facilities are able to serve competitively the entire British
agricultural market. Terras facilities have the following production capacities:



|                      |  | Annual Capacity(1)
|--------------------- |  | ------------------
|Location              |  | Ammonia(2)        
|Beaumont, Texas(7)    |  | 255,000           
|Blytheville, Arkansas |  | 420,000           
|Port Neal, Iowa       |  | 370,000           
|Verdigris, Oklahoma   |  | 1,050,000         
|Woodward, Oklahoma(7) |  | 440,000           
|Courtright, Ontario   |  | 480,000           
|Severnside, U.K.      |  | 265,000           
|Billingham, U.K.(8)   |  | 550,000           
|                      |  |                   
|Total                 |  | 3,830,000         
|                      |  |                   



|(1) |  | Annual capacity includes an allowance for a planned maintenance shutdown.
|--- |  | -------------------------------------------------------------------------

|(2) |  | Measured in gross tons of ammonia produced; net tons available for sale will vary with upgrading requirements.
|--- |  | --------------------------------------------------------------------------------------------------------------

|(3) |  | Measured in tons of UAN containing 28% nitrogen by weight.
|--- |  | ----------------------------------------------------------

|(4) |  | Measured in tons.
|--- |  | -----------------

|(5) |  | Urea is sold as urea liquor from our Port Neal and Woodward facilities and as granular urea from the Blytheville and Courtright facilities. Production capacities
shown are for urea sold in tons.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Measured in gallons.
|--- |  | --------------------



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|(7) |  | The Beaumont capacities represent the design capacity of the ammonia loop and revised capacity of the methanol plant following the loss of CO2feedstock due to shutdown of the DuPont ammonia plant. Plant capacity for Beaumont and Woodward depends on the product mix
(ammonia/methanol).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) |  | The Billingham, England facility also produces merchant nitric acid; 2002 sales were 278,074 product tons.
|--- |  | ----------------------------------------------------------------------------------------------------------



The principal customers for Terras North American
nitrogen products are national agricultural retail chains (such as ConAgra and Cargill), farm cooperatives, independent dealers and industrial customers (such as DuPont). Industrial customers use our products to manufacture chemicals and plastics
such as acrylonitrile, polyurethanes, fibers, explosives and adhesives. Overall, agricultural customers purchased approximately 85% and industrial customers purchased approximately 15% of Terras North American nitrogen product production in
2002. In the U.K., revenues are evenly split between agricultural and industrial customers. Terras methanol customers are primarily large domestic chemical producers. Terra has a number of long-term methanol sales contracts.



Competitive Strengths



Leading Market Positions



Terra has leading market positions in all of its 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
relative to our total revenues. The capacity positions shown are based on production capacities by product.



|Product  |  | % of Total 2002 Terra Revenues(1) |  | U.S. Capacity Position |  | U.K. Capacity Position
|-------- |  | --------------------------------- |  | ---------------------- |  | ----------------------
|Ammonia  |  | 22.7%                             |  | 2                      |  | 1                     
|UAN      |  | 29.7%                             |  | 1                      |  | *                     
|AN       |  | 11.1%                             |  | *                      |  | 1                     
|Urea     |  | 7.8%                              |  | 4                      |  | *                     
|Methanol |  | 16.3%                             |  | 1                      |  | *                     



|(1) |  | Revenues from sales of carbon dioxide and nitrogen products, as well as industrial sales in the U.K., represented 12.4% of our total revenues for 2002.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|* |  | Terra does not compete in these markets.
|- |  | ----------------------------------------



Strategically Located Plants with Access to Distribution Infrastructure



A critical competitive element in the North American agricultural market is delivered cost to customers.
Terras plants are located in the main agricultural areas of the United States. This provides Terra a significant freight cost advantage over Gulf Coast producers and imports entering through Gulf Coast ports. Four of Terras 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 Terras Port Neal, Iowa and Courtright, Ontario plants, with the ability
to service 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. Terra also has access to an extensive distribution infrastructure that
provides reliable and cost-effective delivery of products to customers. Our ability to serve customers within our markets is enhanced by our access to competitive multi-modal transportation, including rail (BNSF, Union Pacific, Canadian National,
CSX), barge, truck and pipeline systems. In addition, we have a terminal network in which we can store up to 541,000 tons of nitrogen products through over 60 terminals. This terminal network helps ensure customers receive our products on a timely
basis.



In the United Kingdom, nearly all
fertilizer is bagged and delivered directly from the manufacturers or importers sites to the farm. Terras two U.K. manufacturing facilities have an overall delivery cost advantage over the other domestic ammonium nitrate producer,
which operates only one manufacturing facility. U.K. ammonium nitrate importers use several ports of entry, many of which have a delivered cost advantage over Terra.



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Integrated Production of
Value-Added Products



Terra upgrades a
significant portion of the ammonia it produces into higher value products, such as UAN, AN and urea. In 2002, we upgraded 61% of our ammonia production into value-added products. The demand for these value-added products has increased largely at the
expense of ammonia, and we expect this trend to continue. 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 ammonia. By producing our own ammonia and upgrading it internally, we are able to operate our ammonia units at higher utilization rates throughout the year and reduce reliance on
lower priced 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. Terras Verdigris, Oklahoma facility is the second largest UAN
production facility in the world.



Strong Plant Operating
Efficiency



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. Terras Beaumont, Texas facility is the largest methanol facility in the
U.S. Terras 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. As a high percentage of our sales are made under
contract, this allows us to maintain high utilization rates and enhance the efficiency of our operations.



Terras focus on its U.K. operations has been to improve plant efficiency and reliability. We improved the Billingham ammonia
plants efficiency and capacity in late 2002 by installing a hydrogen recovery unit. Efforts to improve reliability through more focus on key processes and paying more attention to details are ongoing at both Billingham and Severnside.



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 29 years. Similarly, our more than 1,200 employees have an average of nearly 19
years of service with us. The extensive experience and stability of our employee base enables us to operate our plants efficiently with a strong safety record as compared to our peers.



Company Strategies



Enhance Competitive Position Through Continued Efficiency Improvement



Terra intends to continue to improve its competitive position in the worldwide nitrogen fertilizer industry
by enhancing the operating and energy efficiency of its 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. Our selling, general and administrative expenses per ton of product declined from $7.93 in 1998 to $4.87 in 2002. 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 2002 accounted for approximately 56% of total costs and expenses for Terras North American nitrogen products business, 29% of total costs and expenses for the U.K. nitrogen
products business and 57% of total costs and expenses for the methanol business. It is Terras normal practice to fix or cap the price of a substantial portion of its future 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.



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Pursue New Market
Opportunities



Terra 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 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 13% of total U.S. capacity, by 2005. Terra is working with selected power producers to provide the nitrogen products, storage facilities
and handling expertise they need for these purposes. Terra also sees opportunities in pursuing the use of methanol as a fuel for fuel cells.



Maintain Leadership Position in Our Key Products



Terra intends to maintain its leading market positions in its key markets by focusing on being 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



Terras primary financial strategy is to use a significant portion of its cash flow from operations to reduce debt.



Nitrogen Business Segment



Terra is 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. Terra produces and sells 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. Terras 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. Terras 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 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



Terra produces 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. Granular urea has a nitrogen content of 46% by weight, the highest level for any solid nitrogen product. Terra produces both a granulated form of urea,
generally for the fertilizer market, and urea liquor (liquid) for animal feed supplements and industrial applications.



Ammonium Nitrate



Terra produces AN at 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.



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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



Terras 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 nitrogen products manufacturing facilities was 97%, 81% and 93% in 2002, 2001 and 2000, respectively. Our capacity utilization was reduced in 2000 and 2001, reflecting several plant shutdowns due to natural gas prices increasing faster than
nitrogen prices. Capacity utilization increased in 2002 due to high production rates, good plant reliability, and reduced shutdowns for planned maintenance. The capacity utilization reflects production records set in 2002 at several sites including
Courtright for urea, Verdigris for UAN, and Billingham for nitric acid.



Terra owns all of its manufacturing facilities, unless otherwise indicated below. (See Methanol Business SegmentManufacturing Facilities for a description of our Beaumont, Texas facility.)



The 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. Terra owns 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 Terra has 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.



Terra believes it has 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. 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. Terra has 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. Terra also has a similar,
unconditional option to purchase the urea plant for a nominal price.



Marketing and Distribution



The principal customers for Terras North American manufactured nitrogen products are independent dealers, national retail chains, cooperatives and industrial customers. Overall, industrial customers purchased approximately



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15% of Terras North American nitrogen product production in 2002. At December 31, 2002, we had contracted to sell 14% of our 2003
scheduled nitrogen production at prices indexed to published sources.



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



Terra U.K. sales are divided about equally between agricultural and industrial customers. Terra engages
merchants to sell its Nitram brand bagged ammonium nitrate fertilizer directly to British farmers. Ammonium nitrates also bagged for other U.K. suppliers and sold in bulk to suppliers who blend it with potash and phosphates, bag it and distribute it
to farmers. A small ammonium nitrate quantity is exported to continental Europe.



Terra U.K.s industrial products include ammonia, nitric acid, and liquid carbon dioxide. Most industrial sales are to customers where Terra has a freight advantage.



Methanol Business Segment



Product



Terra is the leading U.S. producer of methanol. Methanol is
used as a feedstock to produce 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



Terra has two U.S. facilities that produce methanol. Our Beaumont, Texas facility is the largest methanol production plant in the U.S., with approximately 225 million gallons of annual methanol production capacity. This plant
produced 208 million, 204 million and 235 million gallons of methanol in 2000, 2001 and 2002, respectively. The Woodward, Oklahoma facility produced approximately 36 million, 31 million and 33 million gallons of methanol in 2000, 2001 and 2002,
respectively, and has an annual methanol production capacity of 40 million gallons.



Terra owns 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, Terra depends 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. Terra depends 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



Terras methanol customers are primarily large, domestic chemical or MTBE producers. We have a number of long-term methanol sales contracts. Terra sold over 68% of our production under such contracts in 2002. At December 31,
2002, we had contracted to sell over 85% of our 2003 scheduled production at prices indexed to published sources. Most of these sales contracts cover fixed volumes and have terms of up to three years. Approximately 30% of Terras total 2002
methanol sales were to MTBE producers.



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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 accounted for 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 year-by-year per-acre-planted basis than is 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
supply and 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 uneconomical plants running, further increasing supply.



This new global capacity has been partially offset by permanent plant closings in the U.S. and Europe 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 closures which, in addition to permanent plant closures, have provided support for
nitrogen prices. The European closures included upgraded nitrogen products plants and a few ammonia plants, including the 2002 fourth quarter closure of the Cork, Ireland plant, which had annual capacity of 550,000 tons.



Imports account for a significant portion of U.S. nitrogen
product supply. It is estimated by Fertecon, industry analysts, that the United States imports up to one-third of its ammonia and almost half of its urea requirements. In 2001, total imports of ammonia and urea in the United States were
approximately 6.4 million tons and 5.3 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 entry for imports, primarily the Gulf Coast and East Coast of 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 when natural gas costs and ammonia prices are low.



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.



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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 amounts sufficient 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 approximately 2% annually from 2002 to 2008, from 19.5 million tons to 21.3 million tons. The mix of nitrogen fertilizer 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 9.8 million tons in 1992 to 14.6
million tons in 2000, an increase of 48%, and is forecast to increase to 16.2 million tons in 2010, according to Fertecon.



A significant amount of new ammonia capacity is expected to come on stream globally from 2002 to 2006. According to Fertecon, global
ammonia capacity is forecast to increase from 180.3 million tons to 193.4 million tons during this period, an increase of 6.8%. However, ammonia capacity in the U.S. is forecast to decrease from 18.0 million tons to 16.6 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 81% in
2000 to 84% in 2005 due to increased consumption worldwide. North American ammonia utilization rates are forecast to increase from 77% in 2001 to 89% in 2005.



Due to the Clean Air Act of 1990, as amended, energy providers are required to reduce emissions of nitrogen oxides (NOx). This
presents a new market opportunity for ammonia, which can be used to remove NOx from air emissions. The McIlvaine Company estimates that this new application could increase ammonia demand by up to 2 million tons, or 13% of total U.S. capacity, by
2005.



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 3.5% annually from 1997 to 2001, while U.S. methanol demand grew by 1.5% annually during the same period. In 2001, formaldehyde, acetic acid and chemical intermediates composed 31%, 9% and 26% 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 accounted for approximately 27% of global demand for methanol in 2001. MTBE is considered the preferred oxygenate by the refining
industry and its production has grown rapidly. MTBE production increased from



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456 million gallons in 1989 to 3,761 million gallons in 2001. Recently, the state of California adopted regulations that prohibit the
addition of MTBE to gasoline after 2003. Californias 2001 consumption of MTBE approximated 4% of global 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, and a further rationalization of 150 million gallons in 2000 and 455 million gallons in 2001. New methanol production facilities have generally been constructed in locations with access to low-cost natural gas,
although this advantage is partially offset 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 2.4% and 4.3% annually, respectively, from 2002 to 2006 with global capacity utilization rates forecast to decrease from 84% to
78% during this period. In the U.S., methanol demand and capacity are forecast to decrease by 0.2% and 14.2% annually, respectively, with capacity utilization rates forecast to decrease from 88% to 63% during this period. Global demand for methanol
for production of formaldehyde and acetic acid is forecast to grow 3.5% and 4.3% annually, respectively, from 2001 to 2005. A significant factor in the declining forecast for U.S. methanol demand is the projected decrease in demand for MTBE.



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 methanol 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.



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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 North America and the U.K.;
| | - |  | -----------------------------------------------------------------



| |  |  | 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 spikes 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 92% of our North American 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 10, 2001, we once again stopped production at our Blytheville, Arkansas plant. We reopened our
Blytheville, Arkansas facility on September 28 and resumed full production on September 30, 2001. There were no shutdowns in 2002 driven by natural gas costs.



March 2003 natural gas future prices closed at over $9.00 per MMBtu in February 2003. As a result, we substantially reduced our North
American production rates at the end of February 2003 and could make further reductions. The timing and extent to which we will resume normal production rates will depend on declines to natural gas costs from these levels and/or increases to
nitrogen products and methanol selling prices.



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 2002 accounted
for about 56% of total costs and expenses for our North American nitrogen products business, 29% of total costs and expenses for our U.K. nitrogen products business, and 57% 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 will, as opportunities present themselves, enter into firm transportation contracts to minimize the risk of interruption or curtailment of natural gas supplies during
the peak-demand winter season.



Since 1999,
Terras natural gas hedging policy has required us to fix or cap the price of a minimum of 20% to a maximum of 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 greater than expected selling prices for our finished products. Management notifies the Board of Directors when it deviates from this policy. This policy was instituted by
Terras board of directors in February, 2002. Capping natural gas prices is accomplished through various supply contracts, financial derivatives



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and other instruments. December 31, 2002 forward positions covered 13% of our expected 2003 natural gas requirements. A significant portion
of global nitrogen products and methanol production occurs at facilities with access to low 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



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



Railcars are the major mode of
transportation at our North American manufacturing facilities. Terra leases approximately 2,100 railcars. Terra also owns 10 nitric acid railcars. In the U.K., Terras AN production is transported primarily by contract carrier trucks, and
ammonia production is transported primarily by pipelines that we own.



Terra transports purchased natural gas to our Woodward, Oklahoma facility via both intrastate and interstate pipelines and to Terras 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. Terra also has limited access to
out-of-state natural gas supplies for these facilities. Terras 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 the Billingham and Severnside, England locations, purchased natural gas is transported to
the facilities via a nationwide, open-access pipeline system.



Research and Development



We are not currently pursuing any significant, ongoing research and development efforts.



Competition



The industries in which Terra operates 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.



Terras 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 Terra. 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 higher transportation costs, which erode their profit margin and competitive pricing position.



In the methanol segment, Terra competes with a
number of large integrated petrochemical producers, many of which are better capitalized than Terra is. 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,



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because of low domestic demand, 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 additional plantsone in Equatorial Guinea, which recently started production in 2001, and one in Argentina, which began
production in 2002.



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



Terras operations are subject to various federal, state
and local environmental, health and safety laws and regulations, including laws relating to air quality, hazardous and solid wastes and water quality. Terras 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. Terras 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, Terra 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.



Terra has 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.



Terra retained a small number (less than 10%) of its retail locations after the sale of its distribution business in the second quarter of
1999. Some of these locations are now, 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.



Terra may be required to install
additional air and water quality control equipment, such as low NOx burners, scrubbers, ammonia sensors and continuous emission monitors, at certain facilities in order to maintain compliance



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with applicable environmental requirements. We estimate that the cost of additional equipment to comply with these requirements in 2003 and
the next two years will be less than $10 million.



Terra endeavors to comply in all material respects with applicable environmental, health and safety regulations and has incurred substantial costs in connection with such compliance. 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.



Revenues and Assets



Terras revenues from external customers, measure of profit and loss and total assets for the years 2000-2002 are set forth in the
Notes to the Consolidated Financial Statements. Terras revenues and assets according to geography (U.S., Canada and U.K.) are also set forth in the Notes to the Consolidated Financial Statements.



Employees



We had 1,207 full-time employees at December 31, 2002, with all 444 U.K. employees covered by a wage and
working conditions arrangement similar to a collective bargaining agreement.



Item 3.    L
EGAL MATTERS



Terra
Nitrogen (U.K.) Limited was found liable for damages associated with May 1998 recalls of carbonated beverages containing carbon dioxide tainted with benzene, plus interest and attorney fees. Appeals against those judgments were unsuccessful. Certain
other beverage manufacturers have indicated their intention to file claims for various and unspecified amounts. Management estimates total claims against Terra from these lawsuits may be £10 million, or $14 million in 2001 when Terra
established reserves to cover estimated losses.



Terras management believes it has recourse for these claims against both its insurer and the previous owner of Terras U.K. operations. Although management continues to pursue Terras rights against the insurer and
the previous owner of Terras U.K. operations, there will be no income recognition for those rights until resolutions are finalized



On January 29, 2003, a jury awarded $10.1 million to an individual whose distribution and crop consulting business was acquired by Terra
in 1997. Terra recorded the charge to discontinued operations, net of taxes of $3.5 million in 2002. Terra, which sold its distribution business in 1999, may appeal the verdict.



We are involved in various other legal actions and claims, including environmental matters, arising from the
normal course of business. While it is not possible 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.



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



No items were submitted to a vote of security holders of Terra during the fourth quarter of 2002.



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EXECUTIVE OFFICERS OF TERRA



The following paragraphs set forth the name, age and offices of each present executive officer of Terra, the period during which each executive officer has served as such and each executive officers business experience during
the past five years:



|Name and age            |  | Present positions and offices with the Company and principal occupations during the past five years                                                                                                                                                                                                                                                                                                                                                                                                
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       
|Michael L. Bennett (49) |  | President and Chief Executive Officer of Terra since April 2001; Executive Vice President and Chief Operating Officer
of Terra from February 1997 to April 2001; President and Chief Executive Officer of Terra Nitrogen Division since June 1998; President of Terra Distribution Division from November 1995 to February 1997; Senior Vice President of Terra from February
1995 to February 1997; Senior Vice President, Distribution of Terra International from October 1994 to February 1997.
|                       
|Joseph D. Giesler (44)  |  | Vice President of Industrial Sales and Operations since December 2002; Global Director Industrial Sales, September
2001 to December 2002; Director of Marketing, June 2000 to August 2001; Director of Western Division, July 1998 to May 2000; Regional Manager, February 1996 to July 1998.                                                                                                                                                                                                      
|                       
|Mark A. Kalafut (49)    |  | Vice President, General Counsel and Corporate Secretary of Terra since June 2001; Vice President and Associate General
Counsel of Terra from April 1997 through June 2001; Vice President and General Counsel of Terra International from April 1989 to April 1997.                                                                                                                                                                                                                                
|                       
|Francis G. Meyer (50)   |  | Senior Vice President and Chief Financial Officer of Terra since November 1995.                                                                                                                                                                                                                                                                                                                                                                                                                    
|                       
|W. Mark Rosenbury (55)  |  | Senior Vice President and Chief Administrative Officer of Terra since August 1999; Vice President, European Operations
of Terra and Managing Director of Terra Nitrogen U.K. from January 1998 to August 1999; Vice President, Business Development and Strategic Planning of Terra from November 1995 to January 1998; President of Terra Nitrogen Corporation from November
1994 to February 1996.                                                                                               
|                       
|Steven A. Savage (58)   |  | Senior Vice President, Manufacturing of Terra since April 2002; Senior Vice President, Manufacturing of Terra Nitrogen
Corporation since April 1995; Vice President Engineering of Terra Nitrogen Corporation from February 1990 to April 1995.                                                                                                                                                                                                                                                    
|                       
|Wynn S. Stevenson (48)  |  | Vice President, Taxes and Corporate Development of Terra since May 1998; Vice President, Taxes of Terra from April
1996 to May 1998; Director, Taxes thereof from June 1992 to April 1996.                                                                                                                                                                                                                                                                                                         



There
are no family relationships among the executive officers and directors of Terra or arrangements or understandings between any executive officer and any other person pursuant to which any executive officer was selected as such. Officers of Terra are
elected annually to serve until their respective successors are elected and qualified.



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PART II



|Item 5. |  | MARKET FOR TERRAS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
|------- |  | -----------------------------------------------------------------



Information with respect to the market for Terras common equity and related stockholder matters contained in Exhibit 13 hereto (primarily under the headings Quarterly Financial and Stock Market Data (Unaudited) and
Stockholders) is incorporated herein by reference.



|Item 6. |  | SELECTED FINANCIAL DATA.
|------- |  | ------------------------



Information with respect to selected financial data contained in Exhibit 13 hereto (primarily under the heading Financial Summary) is incorporated herein by reference.



|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



Information with respect to managements discussion and analysis of financial condition and results of operations contained in Exhibit 13 hereto (primarily under the heading Financial Review) is incorporated herein
by reference.



|Item 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------



Information with respect to quantitative and qualitative disclosures about market risk contained in Exhibit 13 hereto (primarily under the subheading Risk Management and Financial Instruments of the Financial
Review discussion) is incorporated herein by reference.



|Item 8. |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- |  | --------------------------------------------



The
consolidated financial statements, together with the notes thereto and the report of independent auditors thereon, and the information set forth under the heading Quarterly Financial and Stock Market Data (Unaudited) contained in Exhibit
13 hereto are incorporated herein by reference.



|Item 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- |  | -------------------------------------------------------------------------------------



There
has been no change in accountants, nor has there been any matter of accounting principles or practices or financial disclosure, which in either case is required to be reported pursuant to this Item 9.



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PART III



|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF TERRA.
|-------- |  | ------------------------------------------



Information with respect to directors of Terra under the caption Election of Directors in the Proxy Statement for the Annual Meeting of Stockholders of Terra to be held on May 6, 2003, is incorporated herein by reference.
Information with respect to executive officers of Terra appears under the caption Executive Officers of Terra in Part I hereof and is incorporated herein by reference.



|Item 11. |  | EXECUTIVE COMPENSATION.
|-------- |  | -----------------------



Information with respect to executive compensation under the caption Executive Compensation and Other Information in the Proxy Statement for the Annual Meeting of Stockholders of Terra to be held on May 6, 2003, is
incorporated herein by reference.



|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|-------- |  | ----------------------------------------------------------------------------------------------



Information with respect to security ownership of certain beneficial owners and management under the caption Equity Security Ownership in the Proxy Statement for the Annual Meeting of Stockholders of Terra to be held on
May 6, 2003, is incorporated herein by reference.



Equity Compensation Plan Information



|                                                           |  | (a)                                                                                         |  | (b)                                                                         |  | (c)                                                                                                                                        
|---------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding
options, warrants and rights |  | Weighted-average exercise price of outstanding
options, warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a))
|Equity compensation plans approved by security holders     |  | 1,657,000                                                                                   |  | $5.28                                                                       |  | $2,948,000                                                                                                                                 
|Equity compensation plans not approved by security holders |  | -0-                                                                                         |  | -0-                                                                         |  | -0-                                                                                                                                        
|Total                                                      |  | 1,657,000                                                                                   |  | $5.28                                                                       |  | $2,948,000                                                                                                                                 



|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|-------- |  | ----------------------------------------------



None.



PART IV



|Item 14. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------



Our
Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of 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 have
been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation.



|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
|-------- |  | ----------------------------------------------------------------



(a) Financial
Statements and Financial Statement Schedules.



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(b)    Executive Compensation Plans and Arrangements.



Exhibits 10.1.1 through 10.1.17, 10.1.19-20, 10.1.22 and 10.1.24 are incorporated herein by reference.



(c)    Reports on Form 8-K



Form 8-K dated January 31, 2002 announcing accounting change
for 2002.



Form 8-K dated June 27, 2002
announcing an amendment to its bank credit facility maturing on June 30, 2005.



(d)    Exhibit



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---

|* |  | Filed herewith.
|- |  | ---------------



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SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) 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: March 11, 2003 |  |  |  | By:                  
|                     |  |  |  |                      



Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:



|Signature                                   |  | Title                                                                                                                      
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|                                           
|*Henry R. Slack                             |  | Chairman of the Board                                                                                                      
|                                           
|/s/    Michael L. BennettMichael L. Bennett |  | Director, President and Chief Executive Officer (Principal Executive Officer)                                              
|                                           
|/s/    Francis G. MeyerFrancis G. Meyer     |  | Senior Vice President and Chief Financial Officer (Principal Financial Officer and Controller/Principal Accounting Officer)
|                                           
|*Edward G. Beimfohr                         |  | Director                                                                                                                   
|                                           
|*Edward M. Carson                           |  | Director                                                                                                                   
|                                           
|*Eric K. Diack                              |  | Director                                                                                                                   
|                                           
|*David E. Fisher                            |  | Director                                                                                                                   
|                                           
|*Martha O. Hesse                            |  | Director                                                                                                                   
|                                           
|*Burton M. Joyce                            |  | Director, Vice Chairman of the Board                                                                                       
|                                           
|*Ben L. Keisler                             |  | Director                                                                                                                   
|                                           
|*William R. Loomis, Jr.                     |  | Director                                                                                                                   
|                                           
|*John R. Norton III                         |  | Director                                                                                                                   

|                    
|--------------------
|Date: March 11, 2003
|                    





23



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CERTIFICATIONS



I, Michael L. Bennett,
President and Chief Executive Officer, certify that:



1. I have
reviewed this annual report on Form 10-K of Terra Industries Inc.;



2. Based on my knowledge, this annual 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 annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:



a) designed such disclosure controls and
procedures 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 annual report is being prepared;



b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;



5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation, 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 in
the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in
internal controls; and



b) any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|Date: |  | March 11, 2003
|----- |  | --------------



/s/    MICHAEL L. BENNETTMichael L. Bennett President and Chief Executive Officer






24



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I, Francis G. Meyer, Senior
Vice President and Chief Financial Officer, certify that:



1. I
have reviewed this annual report on Form 10-K of Terra Industries Inc.;



2. Based on my knowledge, this annual 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 annual report;



3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:



a) designed such disclosure controls and
procedures 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 annual report is being prepared;



b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;



5.
The registrants other certifying officer and I have disclosed, based on our most recent evaluation, 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 in
the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in
internal controls; and



b) any fraud, whether or
not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6. The registrants other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|Date: |  | March 11, 2003
|----- |  | --------------



/s/    FRANCIS G. MEYERFrancis G. Meyer Senior Vice President and Chief Financial Officer






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INDEX TO FINANCIAL STATEMENT SCHEDULES, REPORTS AND CONSENTS



|                                                                 |  | Page
|---------------------------------------------------------------- |  | ----
|Report of Deloitte & Touche LLP on Financial Statement Schedules |  | S-2 
|Consent of Deloitte & Touche LLP                                 |  | S-2 



Schedule No.



| |  |  |  | I  |  | Condensed Financial Information of Registrant, is included in the Terra Industries Annual Report, Footnote 21, Column
1, Parent. |  |    
| |  |  |  | -- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ---
|
| |  |  |  | II |  | Valuation and Qualifying Accounts: Years Ended December 31, 2002, 2001 and 2000                                                    |  | S-3



Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or the notes thereto.



S-1



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INDEPENDENT AUDITORS REPORT ON

FINANCIAL STATEMENT SCHEDULE



To the Board of Directors and Stockholders of Terra Industries Inc.:



We have audited the consolidated financial
statements of Terra Industries Inc. and subsidiaries as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated January 30, 2003, except for Note 24, as to which
the date is February 28, 2003. Such financial statements and report are included in the 2002 Annual Report to Stockholders of Terra Industries Inc. and are incorporated herein by reference. Our audits also included the financial statement schedule
of Terra Industries Inc. and subsidiaries listed in Item 14(a) of this Form 10-K. This financial statement schedule is the responsibility of the management of Terra Industries Inc. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



DELOITTE & TOUCHE LLP



Omaha, Nebraska

January 30, 2003, except for Note 24,

as to which the date is February 28, 2003



INDEPENDENT AUDITORS CONSENT



We consent to the incorporation by reference
in Registration Statements Nos. 333-32869, 33-46735, 33-46734 and 33-30058 of Terra Industries Inc. and subsidiaries on Forms S-8 and Registration Statements Nos. 2-90808, 2-84876 and 2-84669 of Terra Industries Inc. and subsidiaries on Form S-3 of
our reports dated January 30, 2003, except for Note 24, as to which the date is February 28, 2003, appearing in and incorporated by reference in the Annual Report on Form 10-K of Terra Industries Inc. and subsidiaries for the year ended December 31,
2002.



DELOITTE & TOUCHE LLP



Omaha, Nebraska

March 11, 2003



S-2



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SCHEDULE
II



TERRA INDUSTRIES INC.



VALUATION AND QUALIFYING ACCOUNTS

Years Ended December 31, 2002, 2001, and 2000

(in thousands)



|Description                                              |  | Balance at Beginning of Period |        | Additions Charged to Costs and Expenses |   |      | Less Write- offs, and Transfers, Net of Recoveries |  |   | Balance at End of Period
|-------------------------------------------------------- |  | ------------------------------ | ------ | --------------------------------------- | - | ---- | -------------------------------------------------- |  | - | ------------------------
|Year Ended December 31, 2002:                            |  |                                |        |                                         |   |      |                                                    |  |   |                         
|                                                        
|Allowance for Doubtful Accounts                          |  |                                |        |                                         |   |      |                                                    |  |   |                         
|Continuing operations                                    |  | $                              | 936    |                                         | $ | (445 | )                                                  |  | $ | (356                    
|Discontinued operationsIncluded in other assets         |  |                                | 4,319  |                                         |   | -0-  |                                                    |  |   | (366                    
|                                                         |  |                                |        |                                         |   |      |                                                    |  |   |                         
|                                                         |  | $                              | 5,255  |                                         | $ | (445 | )                                                  |  | $ | (722                    
|Year Ended December 31, 2001:                            |  |                                |        |                                         |   |      |                                                    |  |   |                         
|                                                        
|Allowance for Doubtful Accounts                          |  |                                |        |                                         |   |      |                                                    |  |   |                         
|Continuing operations                                    |  | $                              | 889    |                                         | $ | 7    |                                                    |  | $ | 40                      
|Discontinued operationsIncluded in other assets         |  |                                | 6,359  |                                         |   | 0    |                                                    |  |   | (2,040                  
|                                                         |  |                                |        |                                         |   |      |                                                    |  |   |                         
|                                                         |  | $                              | 7,248  |                                         | $ | 7    |                                                    |  | $ | (2,000                  
|Year Ended December 31, 2000:                            |  |                                |        |                                         |   |      |                                                    |  |   |                         
|Allowance for Doubtful Accounts                          |  |                                |        |                                         |   |      |                                                    |  |   |                         
|Continuing operations                                    |  | $                              | 491    |                                         | $ | 593  |                                                    |  | $ | (195                    
|Discontinued operationsIncluded in other current assets |  |                                | 12,533 |                                         |   | 0    |                                                    |  |   | (6,174                  
|                                                         |  |                                |        |                                         |   |      |                                                    |  |   |                         
|                                                         |  | $                              | 13,024 |                                         | $ | 593  |                                                    |  | $ | (6,369                  



S-3