<PAGE>
================================================================================

                                   FORM 10-Q
                                 UNITED STATES
                      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 June 30, 1998
 
                                      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
                                        
     At the close of business on July 31, 1998, there were 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
---            

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

<PAGE>
 
                         PART I. FINANCIAL INFORMATION
                         TERRA NITROGEN COMPANY, L.P.
                          CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
 

                                                  June 30,  December 31,  June 30,
                                                    1998        1997        1997
                                                  --------  ------------  --------
<S>                                               <C>       <C>           <C>
ASSETS

  Current assets:
     Cash and cash equivalents                    $ 44,329  $     31,268  $ 74,396
     Accounts receivable                             3,097         4,007     1,291
     Inventory--finished products                    9,494        19,241    24,039
     Inventory--materials and supplies              15,392        11,437    17,485
     Prepaid expenses and other current assets       1,530         2,311     1,890
----------------------------------------------------------------------------------
  Total current assets                              73,842        68,264   119,101

  Net property, plant and equipment                168,904       169,533   169,873

  Other assets                                      15,179        16,031    17,007
----------------------------------------------------------------------------------

  Total assets                                    $257,925  $    253,828  $305,981
==================================================================================

LIABILITIES AND PARTNER'S CAPITAL

  Current liabilities:
     Accounts payable and accrued liabilities     $ 25,895  $     26,524  $ 38,690
     Customer prepayments                              360         4,746       821
     Current portion of long-term debt and
      capital lease obligations                      1,095         1,070     1,047
----------------------------------------------------------------------------------
  Total current liabilities                         27,350        32,340    40,558

  Long-term debt and capital lease obligations       8,588         8,966     9,700
  Long-term payable to affiliates                    5,262         4,687     4,102
  Other long-term obligations                        1,060         1,060     1,060
  Partner's capital                                215,665       206,775   250,561
----------------------------------------------------------------------------------

  Total liabilities and partner's capital         $257,925  $    253,828  $305,981
==================================================================================
</TABLE>

See accompanying notes.
<PAGE>
 
                          TERRA NITROGEN COMPANY, L.P.
                       CONSOLIDATED STATEMENTS OF INCOME
                    (in thousands, except per unit amounts)
                                  (unaudited)
<TABLE>
<CAPTION>
 
                                  Three Months Ended     Six Months Ended
                                        June 30,             June 30,
                                   1998       1997       1998       1997
                                 --------   --------   --------   -------- 
<S>                              <C>        <C>        <C>        <C>
Revenues                         $100,522   $105,175   $149,021   $179,220
Other income                          309        426        726        560
--------------------------------------------------------------------------
Total revenues                    100,831    105,601    149,747    179,780
Cost of goods sold                 69,330     60,254    109,925    102,763
--------------------------------------------------------------------------
Gross profit                       31,501     45,347     39,822     77,017
Operating expenses                  3,069      3,232      5,512      6,202
--------------------------------------------------------------------------
Operating income                   28,432     42,115     34,310     70,815
Interest expense                     (734)      (584)    (1,225)    (1,018)
Interest income                       468      1,406        882      2,932
--------------------------------------------------------------------------
Net income                       $ 28,166   $ 42,937   $ 33,967   $ 72,729
==========================================================================
Net income allocable to
   limited partners' interest    $ 20,225   $ 22,911   $ 25,910   $ 50,086
==========================================================================
Net income per limited
   partnership unit              $   1.09   $   1.24   $   1.40   $   2.68
==========================================================================
</TABLE>
See accompanying notes.
<PAGE>
 
                          TERRA NITROGEN COMPANY, L.P.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)
<TABLE>
<CAPTION>
                                                                       Six Months Ended
                                                                            June 30,
                                                                     1998              1997
                                                                  ----------         ---------
<S>                                                               <C>                <C>
Operating activities:
  Net income                                                       $  33,967         $  72,729
  Adjustments to reconcile net income to net cash
    provided by operating activities:
     Depreciation and amortization                                     6,112             5,898
     Changes in operating assets and liabilities:
       Receivables                                                       910             9,763
       Inventories                                                     5,792           (11,826)
       Prepaid expenses                                                  781               463
       Accounts payable, accrued liabilities and
         customer prepayments                                         (5,015)          (14,053)
     Change in other assets                                              852             8,543
     Other                                                               577                82
----------------------------------------------------------------------------------------------
Net cash provided by operating activities                             43,976            71,599
Net cash used in investing activities:
  Capital expenditures                                                (5,485)           (3,081)
Financing activities:
  Proceeds from elimination of distribution reserve fund                 ---            18,480
  Borrowings under revolving credit agreement                            ---             7,000
  Repayment of long-term debt and capital lease obligations             (352)             (451)
  Redemption of Senior Preference Units                                  ---            (6,605)
  Partnership distributions                                          (25,078)          (59,308)
----------------------------------------------------------------------------------------------
Net cash used in financing activities                                (25,430)          (40,884)
----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                             13,061            27,634
Cash and cash equivalents at beginning of period                      31,268            46,762
----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period                          $ 44,329          $ 74,396
==============================================================================================
</TABLE>
See accompanying notes.
<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, 1997. 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 24% and 31% share allocable to the General Partner for the six months
    ended June 30, 1998 and 1997, respectively, by 18,501,576 limited partner
    units. The net income allocated to the General Partner decreased to 24%
    during the six months ended June 30, 1998 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 as
    Available Cash for such taxable year was distributed to the General Partner
    and the Limited Partners. If there is no cash distribution, net income or
    loss is allocated to the Limited Partners and the General Partner based on
    their respective ownership percentages. 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 six months ended June
    30, 1998 decreased $49.9 million from the six months ended June 30, 1997 due
    primarily to lower net income in 1998. In addition, 1997 Available Cash
    included $18.5 million from the elimination of the Reserve Amount during
    1997 (see Note 2).

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).
<PAGE>
 
   The quarterly cash distributions paid to the Units and to the General Partner
   applicable to 1998 and 1997 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>
1998:
   First Quarter                   $   --        $   --         $21,647       $1.17         $ 3,431       $ --
   Second Quarter

1997:
   First Quarter                      186          .605          27,752        1.50          10,477         --
   Second Quarter                     186          .605          18,872        1.02           1,835         --
   Third Quarter                                                 44,034        2.38          26,686         --
   Fourth Quarter                                                 5,366         .29             109         --
</TABLE>

   The distributions paid in the first and second quarters of 1997 to the
   holders of the Senior Preference Units ("SPUs") represented an amount equal
   to the minimum quarterly distribution ("MQD") for each quarter. Non-
   converting SPU holders were not entitled to participate in cash distributions
   in excess of the MQD after December 31, 1996.

   The Reserve Amount of $18.5 million (included in cash and cash equivalents at
   March 31, 1997) was distributed out of Available Cash on May 27, 1997 to
   holders of the Common Units and to the General Partner. Since the non-
   converted SPUs were redeemed on May 27, 1997, the Reserve Amount was no
   longer required to be maintained.

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 June 30, 1998 the
   interest rate was 6.9%. The amount of the demand deposit included in cash and
   cash equivalents was $44.3 million at June 30, 1998.

4. Natural gas costs

   The Partnership's natural gas procurement policy is to effectively fix or cap
   the unit cost of 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 decline,
   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
<PAGE>
 
   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. The Partnership uses basis swaps to maintain fixed prices
   for the location basis differential.

   As of June 30, 1998, the Partnership had effectively fixed or capped the
   price of a substantial portion of its natural gas requirements for 1998 and
   1999, consistent with its policy mentioned above. Unrealized gains from
   forward pricing positions totaled $19.0 million and $13.3 million as of June
   30, 1998 and 1997, respectively.

   For the six months ended June 30, 1998 and 1997, natural gas hedging
   activities produced cost savings compared with spot prices of $5.1 million
   and $11.1 million, respectively.
<PAGE>
 
        Management's Discussion and Analysis of Financial Condition and
                             Results of Operations
                                        
                             RESULTS OF OPERATIONS
                                        
                Three months ended June 30, 1998, compared with
                       three months ended June 30, 1997

                                        
Volumes and prices for the three-month periods ended June 30, 1998 and 1997 were
as follows:

<TABLE>
<CAPTION>
                                     1998                                      1997
                         ----------------------------           -----------------------------------
                            Sales           Average                 Sales               Average
                           Volumes        Unit Price               Volumes            Unit Price
                          (000 tons)        ($/ton)              (000 tons)             ($/ton)
                         ------------     -----------           -------------       ---------------
<S>                      <C>              <C>                   <C>                 <C>
Ammonia                      166              137                    169                  189
UAN                          942               64                    556                   94
Urea                         127              139                    134                  156
</TABLE>

Revenues for the quarter ended June 30, 1998 declined $4.8 million, or 5%,
compared with the same quarter in 1997 as lower nitrogen prices for all
Partnership products were mostly offset by increased UAN sales volumes. Surplus
worldwide nitrogen production continued to put pressure on prices during the
1998 quarter resulting in price reductions of 28%, 32% and 11% for ammonia, UAN
and urea, respectively, compared with the 1997 quarter.

UAN sales volumes increased 69% compared with the prior year quarter primarily
due to wet field conditions (which favor post-plant applications of UAN at the
expense of pre-plant ammonia applications) in the Midwest and lower prices
relative to other nitrogen products. Conversely, weather conditions during 1997
favored ammonia applications over UAN. Additionally during 1998, UAN sales
volumes were also impacted by customer purchase decisions which were delayed
from the first quarter to the second quarter.

Cost of goods sold as a percentage of revenues increased to 69% for the 1998
quarter from 57% in the 1997 period primarily due to the lower nitrogen selling
prices as gas costs increased slightly during the 1998 quarter compared with the
1997 quarter. The Partnership's natural gas forward pricing activities produced
$3.3 million in cost savings during the 1998 period compared with $1.7 million
in the 1997 quarter.

Interest income decreased $938,000 compared with the 1997 period due to lower
levels of cash and short term investments from lower earnings and due to the
elimination of the Reserve Amount as a result of the redemption of the non-
converted SPUs during the second quarter of 1997.
<PAGE>
 
                 Six months ended June 30, 1998, compared with
                        six months ended June 30, 1997

Volumes and prices for the six-month periods ended June 30, 1998 and 1997 were
as follows:

<TABLE>
<CAPTION>
                                     1998                                      1997
                         ----------------------------           -----------------------------------
                            Sales           Average                 Sales               Average
                           Volumes        Unit Price               Volumes            Unit Price
                          (000 tons)        ($/ton)              (000 tons)             ($/ton)
                         ------------     -----------           -------------       ---------------
<S>                      <C>              <C>                   <C>                 <C>
Ammonia                       229             138                    254                  195
UAN                         1,332              64                    963                   93
Urea                          265             123                    248                  164
</TABLE>

Revenues for the six months ended June 30, 1998 declined $30.0 million, or 17%,
compared with the 1997 period as lower nitrogen prices for all Partnership
products were partially offset by increased UAN sales volumes. Surplus worldwide
nitrogen production caused nitrogen prices to fall from prior year levels by
29%, 31% and 25% for ammonia, UAN and urea, respectively. Worldwide urea prices
have declined due to a lack of purchases by China, a major purchaser of urea in
the world markets. Increased urea production in China and other parts of the
world have led to an oversupply of nitrogen and caused prices to decline from
prior year levels.

UAN sales volumes increased 38% during the first six months of 1998 compared
with the prior year primarily due to weather conditions during 1998 which were
more conducive to UAN applications at the expense of ammonia applications.
Conversely, weather conditions during the first six months of 1997 were better
suited for ammonia applications which reduced the amount of post-plant UAN
applications. During 1998 UAN sales volumes also benefited from lower UAN prices
relative to other nitrogen prices.

Cost of goods sold as a percentage of revenues increased to 73% for the first
six months of 1998 compared with 57% for the 1997 period primarily due to the
lower nitrogen selling prices as gas costs decreased slightly during the six
months ended June 30, 1998. The Partnership's natural gas forward pricing
activities produced $5.1 million in cost savings during the 1998 period compared
with $11.1 million for the six months ended June 30, 1997.

Interest income decreased $2.1 million compared with the 1997 period due to
lower levels of cash and short term investments from lower earnings and due to
the elimination of the Reserve Amount as a result of the redemption of the non-
converted SPUs during the second quarter of 1997.
<PAGE>
 
                        Capital Resources and Liquidity
                                        
Net cash provided by operating activities for the first six months of 1998 was
$44.0 million, a decrease of $27.6 million compared with the 1997 period. The
reduction in cash provided by operating activities was principally due to lower
net income in 1998 partially offset by increased cash provided by working
capital changes. The favorable working capital changes in 1998 resulted
primarily from lower inventory levels due to the higher volume of UAN sales
during the 1998 period. The 1997 period reflected an increased use of cash from
working capital changes as a result of higher inventory levels and lower
accounts payable and accrued liabilities due to lower gas prices at June 30,
1997 compared with December 31, 1996. The increased cash usage in 1997 was
partially offset by lower accounts receivable due to accruals at December 31,
1996 for income on gas hedges received in January 1997 compared with no such
accruals at June 30, 1997.

The Partnership's principal needs for funds are for support of its working
capital, distributions to Partners, and capital expenditures. The Partnership
intends to fund such needs primarily from net cash provided by operating
activities and, to the extent permitted thereunder, from funds available under
the Operating Partnership's revolving credit facility. At June 30, 1998, the
Operating Partnership had $18 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 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.
Distributions on the Common Units are cumulative to the extent that, for any
calendar quarter, if a distribution of at least $.605 is not paid to the holders
of the Common Units, the amount of the shortfall (plus any arrearages from prior
quarters) will be paid out of Available Cash in subsequent quarters before any
incentive distributions are paid to the General Partner. During the first six
months of 1998, the Partnership paid $25.1 million in distributions to its
Partners. As of June 30, 1998, the accumulated distribution arrearage for the
Common Units was $11.2 million ($.605 per unit). This arrearage will be
satisfied in full with the August 1998 distribution.

Available Cash for the six months ended June 30, 1998 was $41.7 million, a
decrease of $49.9 million compared with the six months ended June 30, 1997 due
primarily to lower net income in 1998 and to higher Available Cash in 1997 due
to the elimination of the $18.5 million Reserve Amount.

Finished products inventory decreased $9.7 million and $14.5 million from the
December 31, 1997 and the June 30, 1997 balances, respectively, primarily due to
higher than anticipated UAN sales volumes during 1998.

Accounts payable and accrued liabilities declined $12.8 million from the June
30, 1997 balance principally due to the timing of cash transfers between the
Partnership and its affiliates.

Customer prepayments declined $4.4 million from the December 31, 1997 balance.
Certain customers prepay for product during the fall and winter months to take
advantage of generally favorable pricing conditions. The customers then take
delivery of the product as needed during the spring planting season.
<PAGE>
 
                             Capital Expenditures
                                        
Capital expenditures totaled $5.5 million for the first six months of 1998. For
the remainder of 1998, the Partnership plans to spend approximately $3 million.
Plans for 1998 include urea storage and loading improvements at the Blytheville
plant and environmental control, equipment replacement and efficiency
improvements at both plants.


                                Year 2000 Issue
                                        
The Year 2000 issue concerns computer programs that use only the last two digits
to identify the year in date fields. If not corrected, many of these computer
programs could fail or create erroneous results on or before January 1, 2000.
This issue affects virtually every company.

The Partnership has assigned dedicated resources to address its Year 2000
issues. Most, but not all, of the Partnership's management information systems
environment have been assessed for Year 2000 issues and necessary remedial
actions have been identified in these assessed areas. The impact of these
remedial actions for areas where an assessment has already been completed is not
expected to be material. Remedial actions taken to date have been completed at
minimal cost.

The Partnership plans to complete in the first quarter of 1999 an organization-
wide review of all possible computing functions, including the process control
systems and instrumentation in the manufacturing facilities. The Partnership is
also assessing Year 2000 issues in relation to its customers, suppliers and
other constituents because the actions or inactions of such third parties may
materially affect the Partnership. General contingency planning efforts have
been recently initiated for precautionary purposes.

The Partnership anticipates that it will complete all assessment, remediation,
testing and contingency planning efforts for Year 2000 issues in the third
quarter of 1999 with no material adverse consequences or material costs to the
Partnership. However, the costs or consequences of incomplete or untimely
resolution of Year 2000 issues by the Partnership or third parties could have a
material adverse affect on the Partnership.


                              Limited Call Right
                                        
If at any time not more than 25% of the Common Units are held by non-affiliates
of the General Partner, either TNCLP, the General Partner of its affiliates may
call all such outstanding units held by non-affiliated persons in accordance
with the terms of the TNCLP partnership agreement. TNCLP is required to give at
least 30 but not more than 60 days notice of its decision to purchase the
outstanding Common Units. The purchase price per unit is required to be the
greater of (1) the average of the previous twenty trading days closing prices as
of the date five days before the purchase is announced or (2) the highest price
paid by the General Partner or any of its affiliates for any unit within 90 days
preceding the date the purchase is announced.

The General Partner and its affiliates own 69.0% of the Common Units as of July
31, 1998. Under existing authorization of the board of directors of Terra
Industries, Inc., the indirect parent of the General Partner, additional Common
Units may be purchased on the open market and through privately
<PAGE>
 
negotiated transactions by affiliates of the General Partner to bring this
ownership level above 75%. Although TNCLP and its affiliates reserve the right
to consider in the future whether to acquire all of the Common Units, they do
not have any present plan or intention to do so.
<PAGE>
 
                          Part II. Other Information


Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits:

          27   Financial Data Schedule. (EDGAR only)

     (b)  Reports on Form 8-K:
 
               None.
<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:  August 12, 1998