<PAGE>
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                                   FORM 10-Q

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                      __________________________________

 
 
(Mark One)

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

     For the quarter ended March 31, 1997
 
                                      OR
 
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     For the transition period from ____________________ to __________________

     Commission file number 1-10877
 
                                 TERRA NITROGEN COMPANY, L.P.
                    (Exact name of registrant as specified in its charter)
 
                 Delaware                               73-1389684
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
      incorporation or organization)


                 Terra Centre
        PO Box 6000, 600 Fourth Street
                Sioux City, Iowa                         51102-6000
    (Address of principal executive office)              (Zip Code)


                        Registrant's telephone number:
                                (712) 277-1340


                       5100 East Skelly Drive, Suite 800
                             Tulsa, Oklahoma  74135
                 (Former Address, If Changed Since Last Report)


     At the close of business on May 2, 1997, there were 307,202 Senior
Preference Units outstanding and 18,501,576 Common Units outstanding.


     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.  X   Yes      No
                                          ----      ----

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                                       1


<PAGE>

                        PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                         TERRA NITROGEN COMPANY, L.P.
                          CONSOLIDATED BALANCE SHEETS
                                (In Thousands)
<TABLE>
<CAPTION>

                                                         March 31,     December 31,     March 31,
                                                           1997            1996           1996
                                                        -----------    ------------    -----------
                                                        (Unaudited)                    (Unaudited)
<S>                                                     <C>            <C>             <C>
Assets
   Current assets:
      Cash and cash equivalents                          $ 61,371        $ 46,762       $ 72,106
      Accounts receivable                                     581          11,054         23,429
      Inventory - finished products                        30,849          15,209         18,357
      Inventory - materials and supplies                   17,511          14,489         10,121
      Distribution reserve fund                                 -          18,480              -
      Prepaid expenses                                      2,723           2,353          5,458
                                                         --------        --------       --------
   Total current assets                                   113,035         108,347        129,471

   Net property, plant and equipment                      171,378         172,771        175,844

   Distribution reserve fund                                    -               -         18,480
   Other assets                                            19,387          25,550         13,256
                                                         --------        --------       --------

   Total assets                                          $303,800        $306,668       $337,051
                                                         ========        ========       ========

Liabilities and partners' capital

   Current liabilities:
      Accounts payable and accrued liabilities           $ 52,378        $ 51,730       $ 19,431
      Customer prepayments                                 11,335           5,936         25,990
      Current portion of capital lease obligations          1,036           1,162          1,525
                                                         --------        --------       --------
   Total current liabilities                               64,749          58,828         46,946

   Capital lease obligations                                2,869           3,036          3,905
   Other long-term obligations                              1,060           1,060          1,060
   Partners' capital                                      235,122         243,744        285,140
                                                         --------        --------       --------

   Total liabilities and partners' capital               $303,800        $306,668       $337,051
                                                         ========        ========       ========
</TABLE>

See accompanying notes.

                                       2
<PAGE>

                         TERRA NITROGEN COMPANY, L.P.
                       CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)
                    (In Thousands, Except Per Unit Amounts)


<TABLE>
<CAPTION>
                                            Three Months Ended
                                                 March 31,
                                         -------------------------
                                            1997           1996
                                         ----------     ----------
<S>                                      <C>            <C>
Revenues                                  $74,045        $89,304
Other income                                  134            144
                                          -------        -------
Total revenues                             74,179         89,448

Cost of goods sold                         42,509         35,242
                                          -------        -------

Gross profit                               31,670         54,206
Operating expenses                          2,970          3,035
                                          -------        -------

Operating income                           28,700         51,171

Interest expense                             (434)          (126)
Interest income                             1,526          1,953
                                          -------        -------

Net income                                $29,792        $52,998
                                          =======        =======

Net income allocable to
  limited partners' interest              $27,175        $37,198
                                          =======        =======

Net income per limited
  partnership unit                        $  1.44        $  1.98
                                          =======        =======
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                         TERRA NITROGEN COMPANY, L.P.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                (In Thousands)
<TABLE>
<CAPTION>
                                                     Three Months Ended
                                                          March 31,
                                                    --------------------
                                                      1997        1996
                                                    --------    --------
<S>                                                 <C>         <C> 
Operating activities:

  Net income                                        $ 29,792    $ 52,998
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                      2,948       2,796
    Amortization of deferred finance fees                -             9
    Changes in operating assets and liabilities:
     Receivables                                      10,473       4,997
     Inventories                                     (18,662)     (6,394)
     Prepaid expenses                                   (370)        542
     Accounts payable, accrued liabilities and
      customer prepayments                           (20,756)        416
     Other                                             6,237       1,342
                                                    --------    --------
Net cash provided by operating activities              9,662      56,706

Net cash used in investing activities:

  Capital expenditures                                (1,628)     (1,603)

Financing activities:

  Distribution reserve fund                           18,480         -
  Repayment of capital lease obligations                (293)       (272)
  Partnership distributions                          (11,612)    (54,215)
                                                    --------    --------
Net cash provided by (used in) financing activities    6,575     (54,487)
                                                    --------    --------

Net increase in cash and cash equivalents             14,609         616
Cash and cash equivalents at beginning of period      46,762      71,490
                                                    --------    --------
Cash and cash equivalents at end of period          $ 61,371    $ 72,106
                                                    ========    ========
</TABLE>


See accompanying notes.

                                       4
<PAGE>
 
                         TERRA NITROGEN COMPANY, L.P.

            Notes to Consolidated Financial Statements (Unaudited)


1.   Basis of Presentation

     The consolidated financial statements contained herein should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Terra Nitrogen Company, L.P. ("TNCLP") Annual Report on Form
10-K for the year ended December 31, 1996.  TNCLP and its operating partnership
subsidiary, Terra Nitrogen, Limited Partnership (the "Operating Partnership"),
are referred to herein, collectively, as the "Partnership".

     The accompanying unaudited consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the periods presented.  All of these adjustments
are of a normal and recurring nature.  Results for the quarter are not
necessarily indicative of future financial results of the Partnership.

     Net income per limited partnership unit is computed by dividing net income,
less a 9% and 30% share allocable to the General Partner for the three months
ended March 31, 1997 and 1996, respectively, by 18,808,778 limited partner
units.  The net income allocated to the General Partner decreased to 9% during
the three months ended March 31, 1997 due to the reduction in Available Cash
distributed to the General Partner. According to the Agreement of Limited
Partnership of TNCLP, net income is allocated to the General Partner and the
Limited Partners in each taxable year in the same proportion that Available Cash
for such taxable year was distributed to the General Partner and the Limited
Partners. Distributions of Available Cash are made 98% to the Limited Partners
and 2% to the General Partner, except that the General Partner is entitled, as
an incentive, to larger percentage interests (up to 50%) to the extent that
distributions of Available Cash exceed specified target levels.  Available Cash
for the three months ended March 31, 1997 decreased $22.8 million from the three
months ended March 31, 1996 due primarily to lower net income in 1997.

2.   Distributions to Unitholders

     The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of its Available Cash (as this and
other capitalized terms are defined in the Partnership Agreement).  In addition,
a Reserve Amount equal to $18.5 million was previously funded to support
distributions on the Senior Preference Units ("SPUs").  Since the SPUs are being
redeemed (see "Redemption of SPUs" below), the Reserve Amount is no longer
required to be maintained.

                                       5
<PAGE>
 
     The quarterly cash distributions paid to the Units and to the General
Partner applicable to 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
 
                     Senior Preference Units         Common Units            General Partner
                     ------------------------  ------------------------  ------------------------
                     Total (000s)  $ Per Unit  Total (000s)  $ Per Unit  Total (000s)  $ Per Unit
                     ------------  ----------  ------------  ----------  ------------  ----------
<S>                  <C>           <C>         <C>           <C>         <C>           <C>
1997:
   First Quarter         $ 8,250        $.605       $3,129        $.605      $   232       -
 
 
1996:
   First Quarter          26,046         1.91        9,880         1.91       18,290       -
   Second Quarter         22,227         1.63        8,948         1.73       14,904       -
   Third Quarter          33,000         2.42        7,603         1.47        9,995       -
   Fourth Quarter         24,136         1.77        9,879         1.91       18,290       -
</TABLE>

     The distribution  paid in the first quarter 1997 represented an amount
equal to the minimum quarterly distribution ("MQD") for the quarter.
Distributions of $16.6 million ($.895 per Unit) and $10.2 million were paid to
the Common Unitholders and the General Partner, respectively, on April 30, 1997,
representing the remainder of the Available Cash for the quarter ended December
31, 1996.  Nonconverting SPU holders are not entitled to participate in cash
distributions in excess of the MQD after December 31, 1996.

3.   Cash and cash equivalents

     The Partnership has a demand deposit with an affiliate that represents
excess Partnership cash deposited with Terra Capital, Inc., the parent of the
General Partner.  The deposit is due on demand and at March 31, 1997 the
interest rate was 6.3%. The amount of the demand deposit included in cash and
cash equivalents was $42.3 million at March 31, 1997.

4.   Conversion of SPUs

     Pursuant to the provisions of the Agreement of Limited Partnership of
TNCLP, the Preference Period for TNCLP ended on December 31, 1996. For a 90-day
period commencing on December 31, 1996, the holders of all SPUs had the right
to elect to convert their SPUs into Common Units on a one-for-one basis,
effective as of the Senior Conversion Date, by delivering to the General Partner
a conversion notice.  Any SPUs for which a conversion notice was not received
during such 90-day period remained SPUs. Those units that remained SPUs and did
not convert into Common Units are entitled to the MQD, but do not participate
with the Common Units in any additional distributions.

     As of March 31, 1997 (the end of the Conversion Period) holders of
13,329,162 SPUs elected to convert their units to Common Units and 307,202 units
remained SPUs.  The Common Units began trading on the New York Stock Exchange on
April 1, 1997 under the symbol TNH.

                                       6
<PAGE>
 
5.   Redemption of SPUs

     On March 21, 1997, the Partnership announced that on May 27, 1997, it would
redeem, pursuant to the terms of the Partnership Agreement, all SPUs that did
not convert to Common Units.  The redemption price is $21.50 per unit.  On May
27, 1997, the SPUs will receive the MQD of $.605 per unit for the quarter ended
March 31, 1997, in addition to the redemption price.  The SPUs are trading on
the New York Stock Exchange under the symbol TNH PRCL until redeemed.

6.   Natural gas costs

     The Partnership's natural gas procurement policy is to effectively fix or
cap the unit cost of approximately 40-80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques in an attempt to gain some protection against
natural gas price increases on the spot market. Consequently, if natural gas
prices were to increase in a future period, the Partnership may benefit from
these forward pricing techniques; however, if natural gas prices were to fall,
the Partnership may incur costs above the spot market price as a result of such
policies.

     The settlement dates for such financial instruments are scheduled to
coincide with gas purchases during future periods.  These instruments are based
on a designated price, which is referenced to market natural gas prices or
appropriate NYMEX futures contract prices.  The Partnership frequently uses
prices at the Henry Hub in Louisiana, the most common and financially liquid
location of reference for financial derivatives related to natural gas; however,
natural gas supplies for the Partnership's two production facilities are
purchased from various suppliers at locations that are different from Henry Hub.
This creates a location basis differential between the contract price and the
physical price of natural gas.  Accordingly, the use of financial derivatives
may not exactly offset the change in the price of physical gas.

     As of March 31, 1997, the Partnership had effectively fixed or capped the
price of a substantial portion of its natural gas requirements for 1997 and
1998, consistent with its policy mentioned above. Unrealized gains from forward
pricing positions totaled $9.7 million and $22.5 million as of March 31, 1997
and 1996, respectively.

     For the three months ended March 31, 1997, natural gas hedging activities
produced cost savings of $9.4 million compared with savings of $12.6 million for
the 1996 period.

7.   Hedging

     During the first quarter of 1997, the Partnership recorded hedging gains or
losses based on a pooled resources concept with Terra Capital, Inc.  During
1997, hedging gains and losses were allocated to each manufacturing plant based
on budgeted gas usage for such plant.  Prior to 1997, hedging gains and losses
were specifically identified with a particular plant based on contractual
arrangements for that plant.  The impact of this change in accounting for
hedging gains and losses did not have a material impact on the consolidated
financial position or results of operations for the quarter ended March 31,
1997.

                                       7
<PAGE>
 
8.   New accounting standards

     In June 1996, The Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which establishes accounting and reporting standards for such
transfers.  The Partnership adopted SFAS No. 125 effective January 1, 1997 and
there was no material impact on the Partnership's consolidated financial
position or results of operations.

                                       8
<PAGE>
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Results of Operations

Three months ended March 31, 1997, compared with the three months ended March
31, 1996

Volumes and prices for the three month periods ended March 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
 
                    1997                     1996
           ----------------------   ----------------------
             Sales       Average      Sales       Average
            Volumes    Unit Price    Volumes    Unit Price
           (000 tons)    ($/ton)    (000 tons)    ($/ton)
           ----------------------   ----------------------
 
<S>        <C>         <C>          <C>         <C>
Ammonia         85          207          71          194
UAN            407           90         552           97
Urea           114          173         107          208
 
</TABLE>

     Revenues for the quarter ended March 31, 1997 declined $15.3 million, or
17%, compared with the quarter ended March 31, 1996 primarily due to lower UAN
sales volumes.  UAN sales volumes decreased 26% from the 1996 quarter due to
carryover stocks at the dealer level and from wet weather in the South and
Southwest.  In addition, urea and UAN sales prices were down 17% and 6%,
respectively, while ammonia sales prices improved 6% from the prior year
quarter.

     Cost of goods sold as a percentage of revenues increased to 57% for the
1997 quarter from 39% in the 1996 period as a result of significantly higher
natural gas costs.  Cold weather during the 1997 period caused the Partnership's
natural gas costs to increase 90% over the prior year quarter.  The
Partnership's forward pricing activities produced $3.2 million more in cost
savings during the 1996 period compared with the 1997 quarter.

     Interest expense increased $308,000 over the comparable 1996 period
primarily due to the discount on accounts receivable sold under the accounts
receivable securitization facility entered into during the third quarter of
1996.

     Interest income decreased $427,000, or 22%, compared with the 1996 period
due to lower levels of cash and short term investments.

     Capital resources and liquidity

     Net cash provided by operating activities for the first three months of
1997 was $9.7 million, a decrease of $47.0 million compared with the same period
in 1996, principally due to lower net income and higher working capital
requirements. Working capital requirements increased due to higher inventory
levels as a result of lower sales volumes. Working capital was further affected
by lower trade accounts payable and customer prepayments during 1997. In
addition,

                                       9
<PAGE>
 
the inclusion of the Reserve Amount in cash and cash equivalents at March 31,
1997 had a favorable impact on cash provided by financing activities during the
1997 period.

     The Partnership's principal needs for funds are for support of its working
capital, distributions to Partners, redemption of nonconverting SPUs and capital
expenditures. The Partnership intends to fund such needs primarily from net cash
provided by operating activities.  At March 31, 1997, the Operating Partnership
also had $25 million of unused borrowing capacity under its revolving credit
facility.  The Partnership believes that such sources of funds will be adequate
to meet the Partnership's working capital needs, make quarterly distributions to
Partners, redeem the nonconverting SPUs and fund the Partnership's capital
expenditures for at least the next twelve months.

     Quarterly distributions to the Partners of TNCLP are based on Available
Cash for the quarter as defined in the Agreement of Limited Partnership of
TNCLP.  Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Available Cash for the three months ended March 31, 1997 decreased $22.8 million
compared with the three months ended March 31, 1996 due primarily to lower net
income in 1997. On April 22, 1997, the General Partner announced a cash
distribution of $18.9 million ($1.02 per Unit) to holders of the Common Units of
record as of May 5, 1997, payable on May 27, 1997, based on Available Cash for
the quarter ended March 31, 1997.  A cash distribution of $1.8 million to the
General Partner was also declared. There were no accumulated distribution
arrearages for any Units as of March 31, 1997.  The last quarterly cash
distribution of $.605 per SPU, representing the MQD, will be paid as part of the
May 27, 1997 redemption of the SPUs.

     The Available Cash for the first quarter of 1997 includes $18.5 million
from the elimination of the Reserve Amount required to support four quarters of
the MQD on the SPUs.  The Reserve Amount is no longer required after the
redemption of the SPUs.

     On April 3, 1997, the General Partner announced a cash distribution of
$16.6 million ($.895 per Unit) to holders of the Common Units of record as of
April 18, 1997, paid on April 30, 1997.  A cash distribution of $10.2 million to
the General Partner was also declared.  This distribution was the remainder of
the cash distribution announced in January, representing the balance of
Available Cash for the fourth quarter of 1996. SPUs that did not convert to
Common Units are not entitled to participate in distributions in excess of the
MQD after December 31, 1996.

     Accounts receivable declined $10.5 million from the December 31, 1996
balance due to accruals at December 31, 1996 for income on gas hedges received
in January compared with no such accruals at March 31, 1997. Accounts receivable
declined $22.8 million from the March 31, 1996 balance primarily due to the
accounts receivable securitization facility entered into in the third quarter of
1996.
 
     Finished products inventory increased $15.6 million and $12.5 million from
the December 31, 1996 and March 31, 1996 balances, respectively, primarily due
to lower than anticipated UAN sales volumes during the first quarter of 1997.

                                       10
<PAGE>
 
     Customer prepayments increased $5.4 million from the December 31, 1996
balance due to fewer customers participating in the prepay program at the end of
1996. Certain customers prepay for product during the fall and winter months to
take advantage of favorable pricing conditions.  The customers then take
delivery of the product as needed during the spring planting season.  Customer
prepayments increased during the first quarter of 1997 in anticipation of spring
planting; however, the 1997 balance was $14.7 million lower than the March 31,
1996 balance due to a higher level of carryover stocks at the dealer level at
the beginning of 1997 compared with the beginning of 1996.

Capital expenditures

     Capital expenditures totaled $1.6 million for the first three months of
1997.  In the remainder of 1997, the Partnership plans to spend approximately
$14.1 million.  Plans for 1997 include urea storage and loading improvements at
the Blytheville plant and environmental control and ammonia efficiency
improvements at the Verdigris plant.

Environmental matters

     The Partnership is subject to federal, state and local environmental,
health and safety laws and regulations, particularly relating to air and water
quality.  In the course of its ordinary operations, the Partnership has and will
generate wastes which may fall within the definition of "hazardous substances"
under federal or state laws.  The Partnership's production facilities and
storage locations require ongoing operating expenditures in order to remain in
compliance with environmental regulations. These operating costs consist largely
of such items as electrical and chemical usage, waste disposal, laboratory
analysis, fees for outside consultants and contractors, and salaries for
environmental employees.

     Based on its current knowledge, the Partnership does not expect capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow.  Based on information presently available, the Partnership does
not expect that any further material capital expenditures will be required to
comply with existing environmental regulations. Based on such regulations, the
Partnership does not believe that it will be required to make any material
environmental remediation expenditures in the foreseeable future.

                                       11
<PAGE>
 
                          Part II.  Other Information

Item 2.  Changes in Securities

     Pursuant to the provisions of the Agreement of Limited Partnership of TNCLP
and the Conversion Statement dated December 31, 1996, 13,329,162 SPUs recently
converted to Common Units on a one-for-one basis.  The Common Units were
registered under the Securities Exchange Act of 1934 pursuant to a Form 8-A
dated March 24, 1997.  Depositary receipts evidencing such Common Units were
issued subsequent to the March 31, 1997 expiration of the 90 day conversion
period.  A copy of the Conversion Statement is filed as exhibit 99.1 to this
report and the description of, among other things, the rights of holders of SPUs
and Common Units after the December 31, 1996 "Senior Conversion Date" and
expiration of the "Preference Period" is incorporated herein by reference.

Item 5.  Other Information

     Dennis B. Longmire, Chairman and Chief Executive Officer of Darling
International, Inc., was named a director of Terra Nitrogen Corporation in April
1997.

Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits:

          10.63  Amendment No. 4 dated as of March 13, 1997 to the 1995 Credit
                 Agreement, filed as Exhibit 4.7 to the Terra Industries Inc.
                 Form 10-Q for the quarter ended March 31, 1997 (File No. 1-
                 8520), is incorporated herein by reference.

          27     Financial Data Schedule. (EDGAR only)

          99.1   Conversion Statement dated December 31, 1996.

     (b)  Reports on Form 8-K:
 
          None.

                                       12
<PAGE>
 
                                   SIGNATURE


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

                                         TERRA NITROGEN COMPANY, L.P.

                                     By: TERRA NITROGEN CORPORATION
                                         as General Partner


                                     By: /s/ Erik L. Slockers
                                         ------------------------------
                                         Erik L. Slockers
                                         Vice President, Controller
                                         (Principal Accounting Officer)



Date: May 14, 1997

                                       13