Summary of TERRA INDUSTRIES INC

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
As you read this management's discussion and analysis of financial condition and results of operations, you should refer to our Consolidated Financial Statements and related Notes included in Item 1, Financial Statements. Introduction
We are a leading North American producer and marketer of wholesale nitrogen products, serving agricultural and industrial markets. Nitrogen products are commodity chemicals that are sold at prices reflecting global supply and demand conditions. The nitrogen products industry has periods of oversupply during industry downturns that lead to capacity shutdowns at the least cost-effective plants. These shutdowns are followed by supply shortages, which result in higher selling prices and higher industry-wide production rates during industry upturns. The higher selling prices encourage capacity additions until we again start to see an oversupply, and the cycle repeats itself.
Natural gas is the most significant raw material in the production of nitrogen products. In the 2008 second quarter, natural gas prices have increased from the year end 2007. These increases have a significant adverse impact on our cost of production.
The key drivers of our profitability are nitrogen products selling prices, as determined primarily by the global nitrogen demand/supply balance; and natural gas costs, in North American markets. Recent demand has been affected by the growing global population and its preference for a higher-protein diet and by the rise of corn-consuming biofuels in North America.
Imports account for over half of the total North American nitrogen supply, with levels varying among the various products. Most producers exporting nitrogen products into North America can afford to do so because they are manufacturing product with lower cost gas than that which is available to North American producers.
During the second quarter of 2008 China imposed significant tariffs on urea. Subsequent to this announcement, North American spot prices for nitrogen products significantly increased.
Our sales volumes depend primarily on our plant's operating rates. We also purchase product from other manufacturers and importers for resale; however, historic gross margins on these volumes have not been significant. Profitability and cash flows from our nitrogen products are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting our nitrogen products results include the level of planted corn and wheat acres, transportation costs, weather conditions (particularly during planting season), grain prices and other variables described in Item 1 "Business" and Item 2 "Properties" sections of our 2007 Form 10-K filing with the Securities Exchange Commission.

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RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2008 COMPARED WITH
QUARTER ENDED JUNE 30, 2007
Consolidated Results
We reported net income of $203.4 million for the 2008 second quarter compared
with 2007 second quarter net income of $70.7 million. The net income increase is
primarily due to higher sales prices as a result of increased demand for
nitrogen products, specifically in the agricultural markets.

                                                   Three months ended June 30,
                                               2008                           2007
                                     Sales          Average         Sales          Average
(quantities in thousands of tons)   Volumes       Unit Price1      Volumes       Unit Price1
Ammonia2                                 547     $         530          482     $         357
UAN (32% basis)3                       1,099     $         338        1,146     $         229
Urea                                      30     $         417           32     $         317
Ammonium nitrate2                        194     $         328          179     $         262

1. After deducting outbound freight costs.

2. 2007 ammonia and ammonium nitrate sales volumes and prices have been adjusted to exclude Terra's UK operations for comparability to 2008 volumes and pricing.

3. The nitrogen content of UAN is 32% by weight.

Revenues for the quarter ended June 30, 2008 increased $150.6 million, or 22%, compared with the same 2007 quarter primarily due to higher sales prices for all nitrogen products, partially offset by lower sales volumes. The price increase is due to improved demand for nitrogen products. The 2007 second quarter revenues included $121.1 million from the UK. The UK operations were contributed into the GrowHow UK Limited joint venture during the 2007 third quarter and its results are classified as non-operating equity earnings.
Operating income for the 2008 second quarter was $285.3 million which was $154.1 million more than the $131.2 million income in the 2007 second quarter. Higher second quarter sales prices contributed $254.9 million to the 2008 second quarter operating income. This increase was partially offset by increased costs of $107.8 million, primarily as a result of higher gas costs and increased costs relating to purchased product for resale. Increased equity earnings contributed $17.3 million to operating income.
Discontinued Operations
We have reported our Beaumont, Texas operations as discontinued operations for the periods ending June 30, 2008 and 2007. The Beaumont operations were included in our methanol segment in prior periods. In connection with reporting discontinued operations, we have determined that our methanol segment no longer meets the requirements of a reporting segment.

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Minority Interest
Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2008 and 2007 amounts are directly related to TNCLP earnings and losses. During the first quarter of 2008, the cumulative shortfall of the Minimum Quarterly Distribution was satisfied which entitled us to increased income allocations as provided for in the TNCLP Partnership Agreement. Our increased income allocation attributed to our General Partner interest was $13.6 million in the second quarter of 2008. The current quarter minority interest balance reflects the impact of these adjusted income allocations.
Equity Earnings of Unconsolidated Affiliates - GrowHow We recorded income of $37.6 million from our U.K. joint venture in the second quarter of 2008. The strong performance of the joint venture is due to a significant increase in price and volume due to market demand. Income Taxes
Income taxes for the 2008 second quarter were recorded based on the estimated effective tax rate for the individual jurisdictions in which Terra operates. The annual effective tax rates were 35.3% and 36.5% in the quarters ended June 30, 2008 and 2007, respectively. The 2008 rate of 35.3% was primarily due to income in foreign jurisdictions with a lower benefit rate compared to income in the United States with a higher rate.

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RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2008 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 2007
Consolidated Results
We reported net income of $304.9 million for the 2008 first six months compared
with 2007 first six months net income of $77.9 million. The 2007 net income
includes a $38.7 million ($24.3 million, net of taxes) charge for the early
retirement of debt. The net income increase is primarily due to higher sales
prices as a result of increased demand for nitrogen products, specifically in
the agricultural markets.

                                                    Six-months ended June 30,
                                               2008                           2007
                                     Sales          Average         Sales          Average
(quantities in thousands of tons)   Volumes       Unit Price1      Volumes       Unit Price1
Ammonia2                                 911     $         503          834     $         347
UAN (32% basis)3                       2,016     $         314        2,086     $         209
Urea                                      55     $         418           65     $         308
Ammonium nitrate2                        367     $         316          367     $         241

1. After deducting outbound freight costs.

2. 2007 ammonia and ammonium nitrate sales volumes and prices have been adjusted to exclude Terra's UK operations for comparability to 2008 volumes and pricing.

3. The nitrogen content of UAN is 32% by weight.

Revenues for the six months ended June 30, 2008 increased $224.3 million, or 19%, compared with the same 2007 six months primarily due to higher sales prices for all nitrogen products, partially offset by lower sales volumes. The price increase is due to improved demand for nitrogen products. The 2007 first six months revenues included $211.0 million from the UK. The UK operations were contributed into the GrowHow UK Limited joint venture during the 2007 third quarter and its results are classified as non-operating equity earnings. Operating income for the 2008 first half was $453.6 million which was $255.2 million more than the $198.4 million income in the 2007 first half. Higher first half sales prices contributed $429.5 million to the 2008 first half operating income. This increase was partially offset by increased costs of $189.7 million, primarily as a result of higher gas costs and increased costs relating to purchased product for resale. Increased equity earnings contributed $25.0 million to operating income. Cost reductions related to the UK operations for selling, general and administrative expense contributed $5.3 million. Discontinued Operations
We have reported our Beaumont, Texas operations as discontinued operations for the periods ending June 30, 2008 and 2007. The Beaumont operations were included in our methanol segment in prior periods. In connection with reporting discontinued operations, we have determined that our methanol segment no longer meets the requirements of a reporting segment. Minority Interest
Minority interest represents third-party interests in the earnings of the publicly held common units of Terra Nitrogen Company, L.P. (TNCLP). The 2008 and 2007 amounts are directly related to TNCLP earnings and losses. During the first half of 2008, the cumulative shortfall of the Minimum Quarterly Distribution was satisfied which entitled us to increased income allocations as provided for in the TNCLP Partnership Agreement. The current quarter minority interest balance reflects the impact of these adjusted income allocations. Our increased income allocation attributed to our General Partner interest was $15.6 million in the first six months of 2008.

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Equity Earnings of Unconsolidated Affiliates - GrowHow We recorded income of $46.9 million from our U.K. joint venture in the first half of 2008. The strong performance of the joint venture is due to a significant increase in price and volume due to market demand. Income Taxes
Income taxes for the first half of 2008 were recorded based on the estimated annual effective tax rate for the individual jurisdictions in which Terra operates. The annual effective tax rate were 35.9% and 36.6% in the first half ended June 30, 2008 and 2007, respectively. The decrease in the effective rate is due primarily to gains in foreign jurisdictions that have a lower effective rate than the U.S.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, which included $91.6 million related to customer prepayments, totaled $752.0 million at June 30, 2008. Our primary uses of cash are to fund our working capital requirements, make payments on our debt and other obligations and fund plant turnarounds, dividends, capital expenditures and stock repurchases. The principal sources of these cash outlays are cash flow from operations, cash on hand and, to the extent necessary, borrowings under available bank facilities.
Net cash provided by continuing operations in the first six months of 2008 was $100.9 million and net cash provided by discontinuing operations was $10.1 million. Cash from continuing operations was composed of $389.0 million of cash provided from operating activities, offset by $288.1 million to fund seasonal working capital requirements.
During the first six months, we funded plant and equipment purchases of $25.7 million primarily for replacement or sustaining capital needs. Plant turnaround costs represent cash used for the periodic scheduled major maintenance of our continuous process production facilities that is performed at each plant, generally every two years. We funded $10.2 million of plant turnaround costs in the first six months of 2008. We received $28.1 million from GrowHow UK Limited for our contribution settlement from the joint venture. In April 2008 we announced plans to expand the upgrading capacity at our Woodward, Oklahoma nitrogen manufacturing facility. We expect the project to cost approximately $180 million and to be completed by the end of 2010.
In May 2008, the Board authorized the repurchase of a maximum 12,841,717 shares, approximately 14% of our then outstanding common stock on the open market. In the second quarter of 2008, we have purchased a total of 189,150 shares, which results in 12,652,567 remaining shares we are authorized to repurchase by December 31, 2009. There were no repurchases in the 2008 first quarter. We paid dividends on the outstanding preferred stock of $2.5 million for the six-month periods ending June 30, 2008 and 2007. We paid dividends on the outstanding common stock of $9.2 million for the six-month period ending June 30, 2008. There were no common stock dividends paid in 2007. Distributions paid to the minority TNCLP common unit holders in the first six months of 2008 and 2007 were $39.9 million and $11.7 million, respectively. TNCLP distributions are based on "Available Cash" as defined in the Partnership Agreement.

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In February 2007, Terra Capital, Inc., ("TCAPI") a subsidiary of Terra Industries Inc., issued $330 million of 7.0% Senior Notes due 2017 to refinance our Senior Secured Notes due in 2008 and 2010. The notes are unconditionally guaranteed by Terra Industries Inc. and its U.S. subsidiaries. These notes and guarantees are unsecured and will rank equal in right of payment with any future senior obligations of such guarantors.
In conjunction with the bond refinancing, we amended the $200 million revolving credit facility to extend the expiration date to January 31, 2012. Borrowing availability under the credit facility is generally based on 100% eligible cash balances, 85% of eligible accounts receivable and 60% of eligible inventory, less outstanding letters of credit. These facilities include $50 million only available for the use of TNCLP, one of our consolidated subsidiaries. At June 30, 2008, there were no outstanding revolving credit borrowings and there were $6.5 million in outstanding letters of credit, resulting in remaining borrowing availability of approximately $193.5 million under the facilities. We are required to maintain a combined minimum unused borrowing availability of $30 million. The credit facility also requires that we adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. In addition, if our borrowing availability falls below a combined $60 million, we are required to have generated $60 million of operating cash flows, or earnings before interest, income taxes, depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters.
Our ability to meet credit facility covenants will depend on future market conditions, operating cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Failure to meet these covenants could result in additional costs and fees to amend the credit facility or could result in termination of the facility. Based on current market conditions for our finished products and natural gas, we anticipate that we will be able to meet our covenants through 2008. If there were to be any adverse changes in the factors discussed above, we may need a waiver of our credit facility covenants, of which, there is no assurance that we would receive such waivers.
There were no material changes outside of the ordinary course of business to our contractual obligations or off-balance sheet arrangements presented in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations of the Annual Report on Form 10-K for the period ended December 31, 2007.