Terra Industries Inc. 600 Fourth Street P.O. Box 6000 Sioux City, IA 51102-6000 Telephone: (712) 277-1340

March 22, 2007

To Our Stockholders:

We are pleased to invite you to attend the annual meeting of stockholders of Terra Industries Inc. to be held at 9:00 a.m. on Tuesday, May 8, 2007, at the Waldorf Astoria Hotel, 301 Park Avenue, New York, New York 10022.

The accompanying notice of meeting and proxy statement describe the matters to be considered and voted upon at the annual meeting. We will also report on Terra and its business, and you will have an opportunity to discuss matters of interest concerning Terra.

We hope all stockholders will be able to attend this meeting. Please check the appropriate box on your proxy card if you plan to attend.

It is important that you be represented whether or not you plan to attend the annual meeting personally. Please promptly complete, date and return your proxy card in the enclosed return envelope to ensure that your vote will be received and counted. In the alternative, you may submit your proxy by telephone or via the Internet as described in more detail in the proxy section entitled “How to Vote.”

On behalf of the board of directors and management, thank you for your support during 2006. We look forward to seeing you at the meeting.

Michael L. Bennett		Henry R. Slack
President and Chief Executive Officer		Chairman

		Terra Industries Inc. 600 Fourth Street P.O. Box 6000 Sioux City, IA 51102-6000 Telephone: (712) 277-1340

Notice of 2007 Annual Meeting of Stockholders

To the Stockholders:

The annual meeting of the stockholders of Terra Industries Inc. (“Terra”) will be held at the Waldorf Astoria Hotel, 301 Park Avenue, New York, New York 10022, on Tuesday, May 8, 2007 at 9:00 a.m. in order to:

	a.		elect two Class III directors to serve until the 2010 annual meeting of stockholders, and until their successors are elected and qualified;
	b.		consider and act upon the proposal to adopt the 2007 Omnibus Incentive Compensation Plan;
	c.		consider and act upon a proposal to ratify the Audit Committee’s selection of the firm of Deloitte & Touche LLP as Terra’s independent accountants for 2007; and
	d.		transact such other business as may properly come before the annual meeting.

Only stockholders of record of Terra’s common stock at the close of business on March 2, 2007 are entitled to notice of, and to vote at, the annual meeting.

		John W. Huey
		Vice President, General Counsel
		and Corporate Secretary

March 22, 2007

TABLE OF CONTENTS

		Page
Proxy Statement			1
Proposal 1: Election of Directors			4
Corporate Governance			6
Board of Directors and Committees			8
Executive Compensation and Other Information			12
Audit Committee Report			51
Proposal 2: Approval of 2007 Omnibus Incentive Compensation Plan			53
Proposal 3: Ratification of Selection of Independent Accountants			59
Performance Graph			60
Submission of Stockholder Proposals for 2008 Annual Meeting			62
2007 Omnibus Incentive Compensation Plan			63

Proxy Statement

General

The annual meeting of the stockholders of Terra Industries Inc. will be held at the Waldorf Astoria Hotel, 301 Park Avenue, New York, New York 10022, on Tuesday, May 8, 2007, at 9:00 a.m.

The mailing address of Terra’s principal executive offices is Terra Centre, 600 Fourth Street, P.O. Box 6000, Sioux City, Iowa 51102-6000. This proxy statement and the accompanying proxy are first being sent or given to stockholders on or about March 22, 2007.

Terra’s board of directors solicits the accompanying proxy. The stockholder may revoke it at any time before it is voted at the annual meeting by giving written notice to the Corporate Secretary. This proxy, if properly executed, duly returned and not revoked, will be voted for the election of directors, except to the extent the stockholder directs otherwise. Such proxy will also be voted on the other matters described in this proxy statement, in accordance with the instructions in the proxy. The board of directors is not aware at this date of any matter proposed to be presented at the annual meeting other than the election of directors, the 2007 Omnibus Incentive Compensation Plan and the ratification of the Audit Committee’s selection of independent accountants. The persons named in the accompanying proxy will have discretionary authority to vote on any other matter that is properly presented at the meeting, according to their best judgment. A stockholder’s presence at the annual meeting does not of itself revoke the proxy.

Securities Entitled to Vote

The only securities eligible to be voted at the annual meeting are Terra common shares. Only holders of common shares at the close of business on the record date, March 2, 2007, are entitled to vote. Each common share represents one vote, and all shares vote together as a single class. There were 92,756,438 common shares issued and outstanding on March 2, 2007.

Quorum; Vote Required

The presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting constitutes a quorum. Stockholders are entitled to one (1) vote per share.

A majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve any matter which properly comes before the meeting, except as otherwise provided by law or by Terra’s charter, and except that a plurality of all the votes cast at a meeting at which a quorum is present is sufficient to elect a director.

In the election for directors, every stockholder has the right to vote each share of stock owned by such stockholder on the record date for as many persons as there are directors to be elected. Cumulative voting is not permitted. To be elected, a director-nominee must receive a plurality of the votes cast at the meeting. Common shares of stockholders abstaining from voting but otherwise present at the meeting in person or by proxy (“abstentions”), votes withheld and broker non-votes will not be counted as votes cast for such purpose and therefore will have no effect on the results of the election.

The proposal to ratify the Audit Committee’s selection of independent accountants must receive a majority of the votes cast at the meeting. Abstentions and broker non-votes will not be counted as votes cast for such purposes and therefore will have no effect on the results of the vote.

The proposal to adopt the 2007 Omnibus Incentive Compensation Plan must receive approval by the affirmative vote of a majority of the votes cast at the meeting, provided that the total votes cast on the proposal represents over 50% in interest of all shares entitled to vote on the proposal. For purposes of the vote on this proposal, any abstention will have the effect of a vote against the proposal and broker non-votes will not be treated as votes cast for such purposes and therefore any broker non-vote will have the effect of a vote against the proposal unless the total votes cast on the proposal represent over 50% in interest of all shares entitled to vote on the proposal. If the total votes cast on the proposal represent over 50% in interest of all shares entitled to vote on the proposal, then broker non-votes will have no effect on the result of the vote.

How To Vote; Submitting Your Proxy; Revoking Your Proxy

You may vote your shares either by voting in person at the annual meeting or by submitting a completed proxy. By submitting your proxy, you are legally authorizing another person to vote your shares. The enclosed proxy designates Henry R. Slack, Michael L. Bennett and Francis G. Meyer to vote your shares in accordance with the voting instructions you indicate in your proxy.

If you submit your proxy designating Messrs. Slack, Bennett and Meyer as the individuals authorized to vote your shares, but you do not indicate how your shares are to be voted, then your shares will be voted by those individuals in accordance with the Board’s recommendations, which are described in this proxy statement. In addition, if any other matters are properly brought up at the annual meeting (other than the proposals contained in this proxy statement), then each of these individuals will have the authority to vote your shares on those matters in accordance with his discretion and judgment. The Board currently does not know of any matters to be raised at the annual meeting other than the proposals contained in this proxy statement.

You may submit your proxy either by mail, by telephone at 1-800-652-VOTE (8683) within the United States, Canada and Puerto Rico or 1-781-757-2300 outside the U.S., Canada and Puerto Rico any time on a touch-tone telephone (the numbers set forth in the accompanying proxy materials) or via the Internet at www.investorvote.com. Please let us know whether you plan to attend the annual meeting by marking the appropriate box on your proxy card or by following the instructions provided when you submit your proxy by telephone or via the Internet. In order for your proxy to be validly submitted and for your shares to be voted in accordance with your proxy, we must receive your mailed proxy by 5:00 p.m., Eastern Daylight Time, on May 7, 2007. If you submit your proxy by telephone or via the Internet, then you may submit your voting instructions up until 12:00 a.m. Eastern Daylight Time, on May 8, 2007.

Your proxy is revocable. After you have submitted your proxy, you may revoke it by mail before the annual meeting by sending a written notice to Terra’s Vice President, General Counsel and Corporate Secretary at 600 Fourth Street, P.O. Box 6000, Sioux City, IA 51102-6000. If you wish to revoke your submitted proxy card and submit new voting instructions by mail, then you must sign, date and mail a new proxy card with your new voting instructions, which we must receive by 5:00 p.m., Eastern Daylight Time, on May 7, 2007. If you submitted your proxy by telephone or via the Internet, you may revoke your submitted proxy and/or submit new voting instructions by that same method, which must be received by 12:00 a.m. Eastern Daylight Time, on May 8, 2007. You also may revoke your proxy in person and vote your shares at the annual meeting. Attending the annual meeting without taking one of the actions above will not revoke your proxy.

Your vote is very important to the Company. If you do not plan to attend the annual meeting, we encourage you to read the enclosed proxy statement and submit your completed proxy card prior to the annual meeting so that your shares will be represented and voted in accordance with your instructions.

If your shares are not registered in your name but in the “street name” of a bank, broker or other holder of record (a “nominee”), then your name will not appear in the Company’s register of stockholders. Those shares are held in your nominee’s name, on your behalf, and your nominee will be entitled to vote your shares. In order for you to attend the annual meeting, you must bring a letter or account statement showing that you beneficially own the shares held by the nominee. Note that even if you attend the annual meeting, you cannot vote the shares that are held by your nominee. Rather, you should submit your proxy, which will instruct your nominee how to vote those shares on your behalf.

Proposal 1: Election of Directors

Election of Directors

The board of directors is divided into three classes, and directors in each class serve staggered, three-year terms. The term of office of the two directors assigned to Class III expires at this meeting, and such two directors are nominated for re-election at this annual meeting to serve three-year terms until the annual meeting in 2010 and until their successors are elected and qualify. As provided by Maryland law, the terms of office of the three directors assigned to Class I continue until the annual meeting in 2008, and the terms of office of the three directors assigned to Class II continue until the annual meeting in 2009, and in each case until their successors are elected and qualify. The directors in each Class are set forth below.

To be elected, a nominee must receive a plurality of the votes cast at the meeting. Unless otherwise indicated, proxies in the accompanying form will be voted for the nominees named below or for any successor nominee designated by the Board. Such a successor nominee would be designated only in the unlikely event that a nominee named below becomes unable or unwilling to serve as a director before the election.

All of the nominees named below are incumbent directors. Set forth below opposite the name and age of each nominee for Class III director, and for the Class I and Class II directors whose terms are continuing, are his or her present positions and offices with Terra, his or her principal occupations during the past five years, and the year in which he or she was first elected a director. In September 2006, the board of directors voted to expand the size of the board from six to eight persons, and filled the vacancies by electing James R. Kroner as a Class I Director with a term expiring at the 2008 Annual Meeting and Dennis McGlone as a Class II Director with a term expiring at the 2009 Annual Meeting.

Several directors are also on the boards of directors of other companies subject to the reporting requirements of the U.S. federal securities laws. Mr. Bennett is a director of Alliant Energy and Terra Nitrogen GP Inc., the General Partner of Terra Nitrogen Company, L.P.; Mr. Fraser is a director of Forest Oil Corporation and Smith International, Inc.; Ms. Hesse is a director of AMEC plc, Pinnacle West Capital Corporation, Arizona Public Service, Enbridge Energy Partners, L.P. and Enbridge Energy Management, L.L.C.; Mr. Janson is a director of Tembec Inc., ATS Automation Tooling System and TK Shipping Corporation and Mr. Slack is a director of the First Africa Group.

Nominees for Election as Class III Director

Terms Expiring at Annual Meeting in 2010

Name and Age		Present Positions and Offices with Terra and		Year First
		Principal Occupation During the Past Five Years		Elected Director
David E. Fisher (64)		Private Investor.			1993
Dod A. Fraser (56)		President of Sackett Partners Incorporated, a consulting company, since 2000; Managing Director and Group Executive of Chase Securities Inc., a subsidiary of The Chase Manhattan Bank, from 1995 to 2000 and prior to that, General Partner of Lazard Frères & Co.			2003

Class I Directors Continuing in Office

Terms Expiring at Annual Meeting in 2008

Name and Age		Present Positions and Offices with Terra and		Year First
		Principal Occupation During the Past Five Years		Elected Director
Peter S. Janson (59)		Corporate Director; retired from AMEC Inc. (an engineering and environmental services firm) since 2002; Chairman & Chief Executive Officer of AMEC Inc. and director of AMEC plc from 2000 to 2002; President and Chief Executive Officer of Agra Inc (an engineering and environmental services firm which was sold to AMEC in 2000) from 1999 to 2000.			2005
Michael L. Bennett (53)		President and Chief Executive Officer of Terra since April 2001; Executive Vice President and Chief Operating Officer from February 1997 to April 2001.			2001
James R. Kroner (45)		Chief Financial Officer and Chief Investment Officer, Endurance Specialty Holdings Ltd., from December 2001 to December 2005; Managing Director, Fox Paine & Company from January 2000 to December 2001.			2006

Class II Directors Continuing in Office

Terms Expiring at Annual Meeting in 2009

Name and Age		Present Positions and Offices with Terra and		Year First
		Principal Occupation During the Past Five Years		Elected Director
Martha O. Hesse (64)		Private Investor. President and Chief Executive Officer of Hesse Gas Company (an energy investment company) from 1990 to 2003.			2001
Henry R. Slack (57)		Chairman of the Terra Board of Directors since April 2001; Chairman of First Africa Group since 2006; Chairman of Task (USA) Inc. (a private investment firm) from September 1999 to June 2002.			1983
Dennis McGlone (57)		President and CEO, Director of Copperweld Corp. February 2004 to October 2005; President and COO, Director from October 2002 to February 2004; Vice President Sales from July 2001 to October 2002; Vice President, Marketing and Sales of AK Steel, 1996 to March 2001.			2006

The board of directors recommends that you vote FOR the election of each of the above-named director-nominees for Class III director.

Corporate Governance

General

Terra strives to uphold the highest standards of ethical conduct, to follow corporate governance best practices, to report accurately and transparently, and to fully comply with the laws, rules and regulations that govern Terra’s business.

Terra’s board of directors currently consists of eight members. In accordance with its Corporate Governance Guidelines, Terra’s Board has affirmatively determined that David E. Fisher, Dod A. Fraser, Martha O. Hesse, Peter S. Janson, James R. Kroner, Dennis McGlone and Henry R. Slack each meet the criteria for independence required by the New York Stock Exchange (“NYSE”) listing standards. The Board’s independence determination was based on information provided by our directors and discussions among our officers and directors. The Board considered transactions, relationships and arrangements with each of the directors and director nominees and concluded that none of the non-employee directors was involved in any transactions, relationships or arrangements not otherwise disclosed that would impair his or her independence. Mr. Bennett did not meet the independence standards because he is an employee of Terra. The Nominating and Corporate Governance Committee reviews and designates director-nominees in accordance with the policies and principles of its charter and the Corporate Governance Guidelines.

Terra has structured its board of directors to provide separate positions for a non-executive chairman of the board and a chief executive officer. The Board plans to maintain these responsibilities as separate positions.

During 2006, in accordance with the Corporate Governance Guidelines, non-management directors met at regularly scheduled executive sessions of the Board without management and the independent directors met in executive session. The chairman of the board, Henry R. Slack, presided at all executive sessions of the Board, which are held at each of our Board meetings.

The Board currently has three committees—Audit, Compensation, and Nominating and Corporate Governance. A description of each committee and its function appears in the “Board of Directors and Committees” section of this proxy statement under the heading “Board Committees.” The Audit, Compensation, and Nominating and Corporate Governance Committees are each composed solely of independent directors as required by the NYSE listing standards. In addition, the members of the Audit Committee meet the criteria for independence required by the Sarbanes-Oxley Act of 2002. Each committee has its own charter setting forth the qualifications for membership and the committee’s purposes, goals and responsibilities. Each of these committees has the power to hire independent legal, financial or other advisors it deems necessary, without consulting or obtaining the advance approval of any Terra officer.

The Board has also adopted a Code of Ethics and Standards of Business Conduct, which outlines the principles, policies and laws that govern Terra’s activities and which serve as a tool for professional conduct in the workplace. The Code of Ethics and Standards of Business Conduct applies to Terra’s principal executive officer and principal financial officer and also includes all other officers, directors and employees.

It is the Board’s practice to encourage all board members to attend the Company’s annual stockholders meeting, although no written policy has been adopted in that regard. Two (2) board members attended the Company’s 2006 stockholder’s meeting held May 2, 2006, in Sioux City, Iowa.

Current versions of Terra’s Corporate Governance Guidelines, Code of Ethics and Standards of Business Conduct and committee charters, can be found in the “Investor Information” section of Terra’s website at www.terraindustries.com, and are available in print to any shareholder upon request.

Communication

Interested parties who wish to report questionable practices by Terra employees may do so by calling Terra’s toll free, anonymous hotline at 1-866-551-8010 (in the U.S. and Canada) or at 011-44-866-551-8010 (in the U.K.). Interested parties who wish to communicate any message or voice a complaint to the Board, any of its committees or the non-management directors should address their communications to: Henry R. Slack, Chairman of the Board; Terra Industries Inc.; 600 Fourth Street; Sioux City, Iowa 51101. Such communications can also be made by calling 712-277-1340 or by e-mail at boardethics@terraindustries.com.

Board of Directors and Committees

Board Committees

Audit Committee. The Audit Committee met five times in 2006 and is currently composed of Mr. Fisher (Chairman), Ms. Hesse, Mr. Janson and Mr. Kroner. The committee is composed entirely of non-employee directors, each of whom meets the “independence” requirements of the NYSE listing standards and the Sarbanes-Oxley Act of 2002. In accordance with Terra’s Audit Committee charter, all members of the committee are financially literate and the board of directors has determined that Mr. Fisher meets the requirements to be named “audit committee financial expert” as the term has been defined by the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002. The Audit Committee charter, which was amended on December 2, 2003, was reviewed at the February 27, 2007 Audit Committee meeting and is available on Terra’s website as set out in the Corporate Governance section above.

The Audit Committee reviews Terra’s procedures for reporting financial information to the public. The Audit Committee also reviews Terra’s internal audits, reports and related recommendations. Its members are directly responsible for Terra’s independent auditor and have the sole authority to appoint or replace the independent auditor. The committee reviews the scope of the annual audit. The committee also reviews related reports and recommendations and preapproves any non-audit services provided by such firm. In addition, the committee maintains, through regularly scheduled meetings, open lines of communication between the board of directors and Terra’s financial management, internal auditors and independent auditor. See the “Audit Committee Report” below.

Compensation Committee. The Compensation Committee met two times in 2006 and is currently composed of Messrs. Fraser (Chairman), Fisher, Janson and McGlone. Each of the members of the committee meets the “independence” requirements of the NYSE listing standards. The committee’s functions include recommending to the board of directors the appointment of Terra executive officers and establishing the compensation to be paid to such individuals. The committee also administers certain employee benefit plans, establishes and, in consultation with management, administers compensation guidelines and personnel policies. See the report on “Executive Compensation” below. The Compensation Committee charter was adopted on December 2, 2003, was reviewed at the February 27, 2007 Compensation Committee meeting and is available on Terra’s website as set out in the Corporate Governance section above.

Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee met two times in 2006. It is currently composed of Ms. Hesse (Chairman), Mr. Fraser and Mr. Slack. Each of the members of the committee meets the “independence” requirements of the NYSE listing standards. The committee’s functions include helping the Board fulfill its responsibilities to stockholders by shaping the Company’s corporate governance and enhancing the quality and independence of the Board nominees. In addition, the committee identifies and reviews qualifications of potential Terra director candidates, to include those recommended by stockholders, and makes recommendations to the Board for nomination or election. Nominees for director are selected on the basis of broad experience, wisdom, integrity, ability to make independent analytical inquiries, understanding of Terra’s business environment, and willingness to devote adequate time and energy to board duties. The Board considers directors of diverse backgrounds, in terms of both the individuals involved and their various experiences and areas of expertise. Each board member must ensure that future commitments (including commitments to serve on boards of other companies) do not materially interfere with the member’s service as a Terra director. The Nominating and Corporate Governance Committee charter was adopted on December 2, 2003, was reviewed at the February 14, 2006 Nominating and Corporate

Governance Committee meeting, and is available on Terra’s website as set out in the Corporate Governance section above.

The Nominating and Corporate Governance Committee charter also provides that the committee will review candidates who have been recommended by stockholders, however the committee has not adopted a specific policy regarding the consideration of such nominees. Appropriate materials describing the personal and professional background and experience of candidates recommended by stockholders should be communicated to the Board as set out in the Corporate Governance section of this proxy statement under the heading “Communication.” The committee will evaluate all such stockholder recommended candidates on the basis of the same qualities and characteristics as described in the preceding paragraph.

The board of directors establishes special Board committees from time to time, determining such committees’ specific functions as they are established. The Board and its committees occasionally take action by unanimous written consent in lieu of a meeting.

Meetings of the Board

The board of directors held four regular meetings and five special meetings in 2006. Each director attended at least 75 percent of the total meetings of the Board and of Board committees of which he or she was a member.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee is composed of the directors named as signatories to the “Compensation Committee Report” below. No director has any direct or indirect material interest in or relationship with Terra other than shareholdings as discussed below and as related to his or her position as a director, except as described under the caption “Certain Relationships and Related Transactions.” During 2006, no officer or other employee of Terra served on the board of directors of any other entity, where any officer or director of such entity also served on Terra’s Board.

Equity Security Ownership

Principal stockholders. The following table shows the ownership of Terra securities as of February 14, 2007 by the only persons known to Terra to beneficially own more than five percent of any class of Terra voting securities. The information in this table is based on information reported to the Securities and Exchange Commission (“SEC”) by or on behalf of such persons:

Name and address of		Title of				Percentage
beneficial owner		class		Amount and nature of beneficial ownership1/		of class
Tontine Capital Partners L.P. 2/ 55 Railroad Avenue Greenwich, CT 06830		Common Shares		9,452,600 shared voting and investment power			10.14	%
Anchorage Capital Master Offshore, Ltd. 3/ c/o Anchorage Advisors, L.L.C. New York, NY 10012		Common Shares		7,929,900 sole voting and investment power			8.6	%
Dimensional Fund Advisors L.P. 4/ 1299 Ocean Avenue, 11th Floor Santa Monica, CA 90401		Common Shares		7,275,713 sole voting and investment power			7.86	%
The Goldman Sachs Group Inc. 85 Broad Street New York, NY 10004		Common Shares		6,081,863 shared voting and investment power			6.6	%
Dawson-Herman Capital Management, Inc. 5/ 354 Perquot Avenue P.O. Box 760 Southport, CT 06890-2558		Common Shares		5,411,400 sole voting and investment power			5.84	%
Whippoorwill Associates, Incorporated 6/ 11 Martine Avenue White Plains, NY 10606		Common Shares		4,829,630 shared voting and investment power			5.04	%

Directors and Officers. The following table shows, as of February 14, 2007, the number of Terra common shares owned by (1) each director; (2) Terra’s chief executive officer (who is also a director); (3) the five other most highly-compensated executive officers; and (4) all directors and executive officers as a group.

		Number of Common Shares
Name		Beneficially Owned 1/
D.E. Fisher			62,800
D.A. Fraser			40,000
M.O. Hesse			51,128
P.S. Janson			30,000
J.R. Kroner			10,000
D. McGlone			10,000
H.R. Slack			112,250
M.L. Bennett			824,919
F.G. Meyer			444,117
J.D. Giesler			180,909
R.S. Sanders Jr.			155,959
P. Thompson			130,842
M.A. Kalafut			0
Directors and all executive officers as a group (17 persons)			2,240,139

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires Terra’s executive officers, directors and beneficial owners of more than 10 percent of Terra’s common shares to file initial reports of beneficial ownership and reports of changes in beneficial ownership of the shares with the SEC and the NYSE. Executive officers and directors are required by SEC regulations to furnish Terra with copies of all Section 16(a) reports they file. All persons who were Terra executive officers, directors and beneficial owners of more than 10 percent of Terra’s common shares at any time during 2006 filed all reports required under Section 16(a) during and with respect to 2006 in a timely manner, except David E. Fisher and Joseph D. Giesler, who each filed one Form 4 late. This conclusion is based solely on a review of the copies of such filings furnished to Terra and of written representations from Terra’s executive officers and directors.

Executive Compensation and Other Information

Compensation Discussion and Analysis

I. Background

As a producer and marketer of nitrogen products for agricultural and industrial markets, Terra’s operating results are affected by the volatile nature of the nitrogen products industry. During recent years, there has been substantial consolidation among North American industry participants as various companies have been acquired, filed for bankruptcy or closed facilities. Meanwhile, global capacity has increased as new facilities have been built outside North America in regions with advantaged gas supplies. For additional details regarding the cyclical nature of the nitrogen products industry and the Company’s performance in light of these conditions, see the Management’s Discussion and Analysis of Financial Conditions and Results of Operations in our 2006 annual report.

We expect these industry trends to continue and have designed our executive compensation program to reflect these fundamental factors. In this regard, in 2005, the Compensation Committee of our Board initiated a thorough review of our executive compensation program with a goal of attracting, retaining and rewarding talented executives and encouraging them to contribute to our success even in times of uncertainty.

The Compensation Committee engaged Towers Perrin to provide data about compensation practices at comparable companies and to assist the Compensation Committee in designing an effective compensation program for Terra’s executive officers that would provide an appropriate combination of guaranteed and performance-based compensation in light of Terra’s volatile business environment.

II. Philosophy of Executive Compensation

The Compensation Committee’s primary objectives in designing our current executive compensation program are to (i) provide competitive incentive rewards for the achievement of specific annual goals by the Company; (ii) minimize fixed costs during cyclical downturns; and (iii) provide incentives to manage our North American asset base as well as new investments to earn returns in excess of our cost of capital over the long term.

Our compensation program is comprised of three primary components: base salary, annual cash incentive awards and long-term incentive awards. On a total compensation basis, the combination of base salaries, annual cash incentive awards and long-term incentives is intended to provide our executive officers with above-average compensation for above-average individual and Company performance and below-average compensation for below-average performance. The principal performance objective for measuring above-average Company performance is generating returns on capital that meet or exceed the Company’s cost of capital. This approach is intended to encourage and reward strong performance and the creation of stockholder value.

Further, as the long-term incentive awards are paid in restricted shares and performance shares, the program provides our executive officers with an appropriate level of overall ownership interest in the Company and further aligns their interests with those of our stockholders.

As a result of a review of our compensation programs in 2005, the Compensation Committee adopted the following philosophy of compensation with respect to each of the three elements of our executive compensation program:

Base Salary:		Although base salaries should be competitive in the industry, they should be targeted at the low end of the spectrum in order to limit fixed cash costs during cyclical downturns.
Annual Incentives:		Annual incentives should be paid in cash and should provide the opportunity during periods of average and cyclically robust performance for management to earn competitive total cash compensation through a combination of salary and annual incentive payments.
Long-Term Incentives:		Long-term incentives should be paid in restricted shares and performance shares in order to align the interests of our executive officers with those of our stockholders. While a portion could be subject to time-based vesting in order to promote retention, for the most senior officers, a significant portion should be performance share grants that would not vest unless the Company met specified performance goals and would vest at above-target levels in the case of superior Company performance. In particular, the vesting criteria for the performance share grants should have significant upside potential tied to the ability of our senior officers to successfully manage our existing asset base and invest in new assets to generate returns in excess of capital.

At its July, 2005 meeting, based on the philosophy outlined above, the Compensation Committee recommended and our Board approved our 2006 executive compensation program, which remains in effect. In implementing the compensation program for 2006, the Compensation Committee reviewed studies conducted by Towers Perrin which compared our compensation to that of companies that are similar to us in revenue, market capitalization or industry profile. For 2006, the survey comparison group, which included approximately 400 companies, was a combination of “general industry” and “chemical industry” companies. The comparison group was adjusted to focus on companies with revenue similar to Terra’s. For 2007, in addition to the comparison group, we also included data on the compensation paid to the chief executive officers, chief financial officers and chief legal officers of virtually all the companies included in the Performance Chart that appears on page 60.

III. 2006 Executive Compensation Program

Our Compensation Committee developed a 2006 executive compensation program which provided for the following:

A. Base Salaries

For 2006, our executive officers received base salaries at approximately the 25th percentile of the comparison group of companies. The Compensation Committee determined that base salaries should be targeted around that level in order to control ongoing costs in light of the volatile nature of the nitrogen products industry. The Compensation Committee also took into account internal equity considerations when setting base salary levels. The Summary Compensation Table below details the annual base salaries paid in 2006 to each of our named executive officers. Base salary increases for our named executive officers were implemented in 2006 in order to allow base salary levels to remain around the 25th percentile of companies in the comparison group.

B. Annual Incentive Compensation

Our annual incentive program for officers and key employees provides for cash incentive awards to be paid from an overall pool of available funds. In 2006, each participant in our annual incentive program had the opportunity to earn a target annual incentive award ranging from 15% to 60% of the participant’s

base salary, with the exception of Mr. Bennett, whose target was 115% of base salary. The narrative following the Summary Compensation Table and Grant of Plan-Based Awards Table on page 24 sets forth the 2006 target award amount for each of our named executive officers. The aggregate amount of the incentive pool was targeted at $2.4 million, which is the sum of the target annual incentive awards for each participant in the program. Of the total target incentive pool, approximately $1.2 million was attributable to the aggregate target annual incentive awards for our named executive officers. The actual size of the incentive pool was based on Company performance and, in general, the pool would have been funded only if the Company met certain performance thresholds based on net income. However, our Board retains the discretion to make funds available for annual incentive awards to reward exceptional individual performance even if threshold performance measures are not met.

During the first quarter of 2006, the Compensation Committee approved the 2006 target annual incentive awards for each of our executive officers and the performance goals that would determine the level of funding of the incentive pool based on a review of the 2006 budget and the income required to generate an acceptable return on capital, with the objective of providing our executive officers with the opportunity to earn a level of payout under the 2006 incentive program that would allow total target cash compensation to be at approximately the 50th percentile for the comparison group of companies, should the performance goals be met.

For 2006, Terra was required to achieve a threshold level of at least $30 million in net income in order for the incentive pool to be funded. An amount equal to 50% of the target incentive pool would have been funded if Terra had achieved $30 million in net income, plus an additional 1% of the target amount would have been funded for each additional $0.5 million in net income, up to a maximum amount equal to 200% of the target amount. Under this formula, if Terra had achieved $55 million in net income, the incentive pool would have been funded at 100% of the target amount, and at $105 million in net income, the incentive pool would have been funded at the maximum level of 200% of the target amount. The Compensation Committee determined that $55 million in net income was an appropriate target for 100% funding of the incentive pool given the Company’s profit plan and invested capital at the beginning of the year.

The calculation of net income for purposes of this program may exclude one-time effects of major capital decisions and other unusual items, such as gains/losses on early retirement of debt, gains/losses on sales of significant assets, impairment losses and revisions to income tax reserves, as well as other items at the discretion of the Compensation Committee. For 2006, there were no exceptional exclusions from the calculation of net income.

Individual performance rating is also factored into each participant’s final annual incentive award, which may be greater or less than the portion of the incentive pool that would otherwise have been allocated to the participant based on the participant’s target annual incentive award. At the end of each year, Mr. Bennett determines for each participant other than himself the extent to which such participant’s individual goals have been achieved. Our Board evaluates Mr. Bennett’s performance at the end of each year and determines the extent to which he has met his performance goals. Based on this review, each participant is assigned a level of individual achievement that will then determine the extent to which that individual becomes entitled to payment of a portion of the incentive pool.

In 2006, Terra’s net income was $4.2 million, and therefore, the incentive pool was not funded. Accordingly, none of our executive officers received an annual incentive award for 2006. In the case of the named executive officers, this result is reflected in the Summary Compensation Table at page 22 below.

C. Long-Term Incentives

In 2002, our stockholders authorized 3.5 million shares for issuance under the Terra Industries Inc. Stock Incentive Plan of 2002, which we refer to as the 2002 Plan. The 2002 Plan allows the Company to grant stock options, stock appreciation rights (SARs), restricted shares, performance shares, phantom shares, performance units, and cash awards. The Compensation Committee has discretion to choose any combination of awards that it considers to be most effective.

In accordance with the philosophy of tying long-term incentive awards to Company performance, the Compensation Committee has designed our long-term incentive program to accomplish the following objectives: (1) reward achievement of return on capital employed targets on a cumulative basis over a three-year period; (2) provide more substantial incentives for achieving returns above the cost of capital; and (3) assist with attraction and retention of executives. Together with base salary and annual cash incentive awards, long-term incentive awards are intended to provide the opportunity for our executive officers to achieve total compensation at approximately the 50th percentile if target levels of performance are met.

2006 Long-Term Incentive Grants

Each year, the Compensation Committee sets an annual target award for each executive officer who participates in our long-term incentive plan. For 2006, in the case of executive officers other than Mr. Bennett, target grants ranged from 100% to 140% of annual base salary. Mr. Bennett’s target grant was set at 300% of his annual base salary. The Compensation Committee determined that these target levels were appropriate for 2006 based on market data with respect to the comparison group of companies and the objective of setting total compensation to allow our executive officers to achieve total compensation at approximately the 50th percentile if target levels of performance are met. The value of the target long-term incentive awards for 2006 for each of the named executive officers is set forth in the narrative following the Summary Compensation Table on page 22.

The Compensation Committee determined that in the case of executive officers other than Mr. Bennett, 50% of the value of the 2006 long-term incentive grant should be subject to time-based vesting criteria to ensure executive retention during a period of financial downturn, while the remaining 50% should be performance share grants linked to the financial performance of the Company. Mr. Kalafut only received the performance share portion of his grant for 2006, because at the time restricted shares were granted, his retirement was already anticipated. The Compensation Committee determined that the majority of the value of Mr. Bennett’s grant should be subject to performance-based vesting criteria in order to reflect that Mr. Bennett has additional responsibilities and a greater ability to influence Company performance, and therefore, his award should have more upside and downside potential than the awards granted to our other executive officers. As such, Mr. Bennett received one-third of his grant in restricted shares and two-thirds in performance share grants.

The performance share grants for 2006 were approved by the Compensation Committee on February 14, 2006 and were made on February 17, 2006, and the restricted share grants for 2006 were approved by the Compensation Committee on July 25, 2006 and were made August 1, 2006. In all cases, the number of shares subject to the grant was calculated by dividing the target dollar value of the award by the average of the Company’s closing stock price during the twenty trading days prior to the date that the awards were approved by the Compensation Committee. The average stock price was rounded to the nearest fifty cents, and the target number of shares was rounded to the nearest 100 shares, except that in the case of awards granted to Mr. Bennett, the target number of shares was rounded to the nearest 1,000 shares.

In accordance with applicable disclosure rules, the Summary Compensation Table reflects the amounts recognized by the Company as an accounting expense for 2006 in connection with restricted shares and

performance share awards granted in 2006 and in prior years. These values were not, however, considered by the Company or the Compensation Committee when determining the long-term incentive award grants for 2006. Instead, the Compensation Committee considered the fair market value of the shares on the grant date of these awards and, in the case of performance share awards, the value of potential payouts based on achievement of the performance targets described below. The full grant date fair market values are set forth in the Grants of Plan-Based Awards Table on page 24.

The restricted shares are subject to cliff vesting with 100% of the award vesting on the third anniversary of the grant date, assuming that the participant is still employed by the Company. Except in the case of death, total disability or other special circumstances identified by the Compensation Committee, the restricted shares will be forfeited if employment terminates for any reason prior to vesting, except that vesting will accelerate in full in the event of a change in control of the Company. In the event of termination of employment due to death, the vesting of restricted shares will accelerate in full. In the event of termination due to total disability, restricted shares will continue to vest following termination.

Performance share grants are also subject to 100% cliff vesting on the third anniversary of the grant date, based on achievement of performance goals and assuming that the participant is still employed by the Company. Upon vesting of a performance share grant, the holder will be entitled to receive a number of shares ranging from 0% to 200% of the target number of shares subject to the award, based on achievement of performance goals.

For purposes of the 2006 performance share grants, the number of shares that will be paid will depend on Terra’s annualized average return on capital employed (ROCE) over the three-year performance period. ROCE is defined as average annual income from operations reduced by 35% for normal income tax expense divided by average capital employed. Average capital employed means common and preferred stockholders’ equity plus short and long-term debt, deferred income taxes and minority interest, less cash. The Company uses ROCE as its performance metric because ROCE is a critical indicator of good operating and investment decisions by management, is an important measurement for judging success of the Company’s strategic initiatives, and is a critical metric for investors.

The performance share grant payouts for the 2006 grant cycle (with a performance period ending in 2008) will be determined based on the following measures:

	•		If Terra’s annualized average ROCE for the period is less than 4%, no shares will be delivered.
	•		If Terra’s annualized average ROCE for the period is between 4% and 9%, 1% of the target number of shares will be paid for each 0.05% by which annualized average ROCE exceeds 4%. Thus, if annualized average ROCE is equal to 9%, 100% of the target number of shares will be delivered.
	•		If Terra’s annualized average ROCE for the period exceeds 9%, an additional 1% of the target number of shares will be paid for each 0.025% by which annualized average ROCE exceeds 9%, up to a maximum of 200% of the target number of shares.

These ROCE performance targets were determined based on calculations of the Company’s historic ROCE, as well as projected ROCE, and the Company’s goals for future performance. Actual ROCE was approximately 7.3% for 2005 and 4.9% for 2006.

The calculation of income from operations for purposes of this program may exclude one-time effects of major capital decisions and other unusual items, such as gains/losses on sales of significant assets and

impairment losses, as well as other items at the discretion of the Compensation Committee. For 2005 and 2006, there were no exceptional exclusions.

Except in the case of death, total disability or other special circumstances identified by the Compensation Committee, the performance share grants will be forfeited if employment terminates for any reason prior to vesting, except that in the event of a change in control of the Company, vesting of the performance share awards will immediately accelerate and the holder will be entitled to the greater of the target number of shares subject to the award and a number based on actual Company performance prior to the change in control. In the event of termination of employment due to death, the holder will become entitled to a number of performance shares based on actual performance prior to death. In the event of termination of employment due to total disability, performance shares will continue to vest following termination based on achievement of performance goals.

Pre-2006 Long-Term Incentive Grants

Time-based restricted shares granted in 2003 became vested in 2006. Time-based restricted shares granted in 2004 and 2005 remained unvested in 2006. Restricted shares granted in 2004 will vest in 2007, and restricted shares granted in 2005 will vest in 2008. The Company utilized performance share grants for the first time in 2005. These grants, which were made on July 29, 2005, are subject to a three-year performance period beginning on January 1, 2005. The vesting date for these grants is December 31, 2007. At December 31, 2006, the annualized average ROCE for the 2005-2007 performance period was 5.9%. If it remains at that level until December 31, 2007, payment under the performance shares grants would be made at 39% of the target number of shares subject to the grants.

Proposed Terra Industries Inc. 2007 Omnibus Incentive Compensation Plan

In order for the Company to have sufficient shares to make future long-term incentive awards, our Board has adopted, subject to the approval of our stockholders, the Terra Industries Inc. 2007 Omnibus Incentive Compensation Plan, which we refer to as the 2007 Plan. Like the 2002 Plan, if adopted, the 2007 Plan would provide for the grant of awards with respect to 3.5 million shares in the form of stock options, SARs, restricted shares, performance shares, phantom shares, performance units, and cash awards. A description of the 2007 Plan is set forth under the heading “Proposal for the Approval of the Terra Industries Inc. 2007 Omnibus Incentive Compensation Plan” beginning at page 53.

D. Severance

Employment Severance Agreements

In order to promote additional stability and ensure retention at the senior executive level, on October 5, 2006, the Company entered into employment severance agreements with each of our executive officers. The executive officers were previously parties to executive retention agreements with the Company, which provided for severance and other benefits in the event of a termination of employment following a change in control of the Company. The new employment severance agreements supersede and replace the executive retention agreements and provide for severance and other benefits in the event of a qualifying termination of employment under circumstances that are both related to and unrelated to a change in control. The decision of the Compensation Committee and the Board to enter into new employment severance agreements was based in part on their desire to establish uniform severance arrangements for officers that leave the Company and provide change in control protections that reflect current market practices.

In entering into the agreements, the Company recognized the importance of providing the executive officers with reasonable protection against the risks of termination of employment in both the change in

control and non-change in control contexts. The Compensation Committee further recognized that in the event of a potential change in control of the Company, there could be a substantial delay between the announcement and the closing of the transaction, during which time it would be essential for senior executives to remain focused and avoid the distractions that often result from the uncertainty of a potential change in control. Accordingly, the Compensation Committee determined that the executive officers should be entitled to an enhanced severance benefit if employment were terminated during the two-year period following a change in control.

The Compensation Committee determined payout levels under the employment severance agreements based on information that Towers Perrin provided regarding current market practices relating to executive severance. All employment severance agreements with our executive officers are identical except that Mr. Bennett’s agreement provides for an initial term of five years rather than three, and the approval of three-quarters of our Board is required in order to terminate Mr. Bennett for “cause”. Our Compensation Committee considered these distinctions appropriate in order to reflect Mr. Bennett’s unique role within our Company. For a description of the material terms of the agreements with each of our named executive officers, see the narrative following the Summary Compensation Table beginning on page 22. For a description and quantification of the payments and benefits that may be provided to the named executive officers under the agreements, see “Other Post-Employment Benefits” beginning on page 38.

No payments pursuant to the employment severance agreements (other than gross-up payments in respect of taxes that are triggered by Section 280G of the Internal Revenue Code) will be made unless the employment of the covered executive has been terminated without “cause” or for “good reason” and the executive has signed a release of claims in favor of the Company. Prior to a change in control, the events that could give rise to “good reason” are very limited in order to preserve the Company’s flexibility to make changes to its business. Following a change in control, the definition of “good reason” is much broader in order to provide the executive officers with additional certainty and protection.

Named Executive Officer Retired During 2006

On October 6, 2006, Mr. Kalafut, who was our Vice President, General Counsel and Corporate Secretary, retired from the Company. For purposes of his employment severance agreement, Mr. Kalafut’s retirement was treated as a termination without “cause” and therefore, Mr. Kalafut became entitled to severance and other separation benefits pursuant to his employment severance agreement, including a lump-sum cash payment equal 1.5 times the sum of his annual base salary at termination and his target annual incentive award for 2006 (which amount will be paid on the six-month anniversary of his termination) and continued health and welfare benefits for a period of two years following termination. In addition, Mr. Kalafut agreed to amend his employment severance agreement to provide that, in order to ensure a smooth transition to a new General Counsel, he would provide up to 50 days of consulting services to the Company during the one-year period following termination. In consideration for agreeing to provide these services, Mr. Kalafut became entitled to an amount equal to one-half of his annual base salary at the time of termination, in addition to the payments and other benefits provided for in his employment severance agreement.

E. Defined Benefit Pension Plans

The Company maintains the Terra Industries Inc. Employees’ Retirement Plan, which is a tax-qualified defined benefit pension plan maintained for the benefit of all U.S. employees hired before July 1, 2003, including each of our named executive officers, other than Mr. Thompson, who was a participant in the Terra Nitrogen (UK) Ltd. Pension Scheme prior to the date on which it was frozen. Benefits under the plan are based on an employee’s pay during the highest 60 consecutive months of pensionable service.

On January 1, 1992, the Company adopted a nonqualified excess benefit pension plan, which we refer to as the SERP. The Compensation Committee and the Board established the SERP so that certain management and highly compensated employees would not be ineligible for the benefits that would have been provided to them under the Company’s tax-qualified defined benefit pension plan but for the limits imposed by the Internal Revenue Code and the Employee Retirement Income Security Act. The SERP is an unfunded plan. Participants in the SERP have the status of unsecured creditors of the Company. As of December 31, 2006, the only named executive officers who had accrued benefits under the SERP were Messrs. Bennett, Meyer, Giesler and Sanders.

Mr. Thompson participates in the Terra Nitrogen (UK) Ltd. Pension Scheme, which is a pension plan maintained for the benefit of employees in the United Kingdom. On June 30, 2003, the defined benefit portion of the plan was frozen with respect to all future accruals, and all pension benefits under the plan began to accrue on a defined contribution plan basis.

For a description of the benefits accrued by each of our named executive officers under our defined benefit pension plans as of December 31, 2006, see the Pension Benefits table on page 33.

F. Defined Contribution Plans

The Company maintains a 401(k) plan, which is a tax-qualified defined contribution plan maintained for the benefit of all U.S. employees, including our named executive officers. The 401(k) plan permits employees to contribute a portion of their pay to the plan on a pre-tax basis. The Company also provides for a Company matching contribution as well as a direct Company contribution in the case of employees who are not eligible to participate in the Terra Industries Inc. Employees’ Retirement Plan. The amount of the Company’s 2006 contribution to the 401(k) on behalf of each of our named executive officers is set forth in the explanation of the All Other Compensation column of the Summary Compensation Table.

The Company established a nonqualified Supplemental Deferred Compensation Plan on December 20, 1993. Due to the substantial restrictions imposed by Section 409A of the Internal Revenue Code, which was adopted pursuant to the American Jobs Creation Act of 2004, on December 31, 2004, the Company froze the plan with respect to future deferrals. In general, the plan allowed participants to defer certain portions of annual base salary and annual cash incentive awards and to determine how to invest amounts deferred pursuant to the plan. The plan is unfunded. Participants in the plan have the status of unsecured creditors of the Company. As of December 31, 2006, the only named executive officers with an outstanding balance in the plan were Messrs. Giesler and Sanders.

G. Employee Welfare and Fringe Benefit Plans

Our named executive officers are eligible to participate in the Company’s welfare and fringe benefit plans on the same basis as all other full-time Company employees. These benefits include the Company’s medical, dental and vision plans, life insurance, short-term and long-term disability plans, business travel accident insurance, tuition reimbursement, healthcare spending accounts, and dependent care spending accounts. In addition, due to limitations on the level of base salary covered by the Company’s primary long-term disability policy and in order to provide executive officers with long-term disability coverage equal to 60% of base salary (which is the rate of coverage provided to all U.S. employees), the Company maintains supplemental long-term disability policies.

H. Perquisites

The named executive officers are provided Company-paid memberships in a local country club of their choice. Any costs associated with this perquisite (including taxes) are covered by the Company. This perquisite is provided in order to allow the executives to entertain business associates of the Company,

such as partners in joint ventures, customers and suppliers. The named executive officers are also permitted to use the club amenities for personal and family activities.

IV. Other Matters

A. Stock Ownership/Retention Guidelines

The Compensation Committee reviewed market data assembled by Towers Perrin to arrive at a recommendation with respect to stock ownership by executive officers of the Company. Effective August 1, 2005, the Board implemented Share Ownership/Retention Guidelines. The purpose of the guidelines is to encourage our executive officers to own and retain Company shares, thereby aligning their interests with those of Terra’s other stockholders. Although these guidelines are not mandatory, executive officers are strongly encouraged to follow them. However, special circumstances may require an executive officer to depart from the guidelines on occasion. The Board encourages executive officers to exceed the guidelines over time. In general, the guidelines provide for ownership as a multiple of annual base salary, with higher-level executives expected to maintain stock ownership at a higher multiple of base salary. Current ownership guidelines are as follows:

Chief Executive Officer		4 times annual base salary
Senior Vice Presidents		3 times annual base salary
Vice Presidents		1 times annual base salary

Fifty percent of unvested restricted shares will count toward the ownership guidelines prior to vesting. After satisfying the ownership guidelines described above, the executive officers are asked to hold an additional 50% of any shares awarded to them under our long-term incentive programs (including restricted shares and performance share grants) for a minimum of 12 months following vesting.

As of December 31, 2006, both Mr. Bennett’s share ownership and Mr. Meyer’s share ownership exceeded seven times their respective annual base salaries. The other named executive officers also exceeded their respective guideline multiples as of December 31, 2006.

B. Indemnity Agreements

Terra’s charter and bylaws provide indemnification for its officers and directors to the maximum extent permitted by law. In general, the Company will pay the costs of legal defense, settlements or judgments on behalf of the officer or director relating to actions taken in the course of employment or service with Terra, as long as conduct meets applicable standards. Effective July 27, 2006, Terra entered into Indemnity Agreements with the executive officers and directors, including the named executive officers. The agreements provide the maximum indemnity available under Maryland General Corporate Law, which is substantially the same as that provided under our charter and bylaws, and provide for certain procedural requirements in order to obtain indemnification, the timing of required determinations, indemnification payments, advancement of expenses, and the rights of officers and directors in the event the Company fails to provide indemnification or to advance expenses.

C. Role of Executive Officers in Determining Compensation

Executive officers who are directly involved in the executive compensation program include Mr. Bennett and Mr. Ewing, who is our Vice President, Investor Relations and Human Resources. Mr. Bennett is excluded from discussions and decisions regarding his own compensation. Mr. Ewing manages the administrative aspects of the Company’s relationship with its compensation consultant, as well as the calculation and presentation to the Compensation Committee of proposed executive annual salaries, annual cash incentive awards, and long-term incentive awards. Mr. Ewing corresponds frequently both

telephonically and via email with Mr. Fraser, the Chairman of our Compensation Committee. Mr. Ewing also communicates frequently with Mr. Bennett in all matters relating to executive compensation, other than those matters that relate to Mr. Bennett’s own compensation. Mr. Ewing also occasionally relies on Mr. Meyer, our Senior Vice President and Chief Financial Officer, to calculate and review the Company’s net income and return on capital employed (ROCE), which are the relevant performance measures under our annual incentive program and our long-term incentive program, respectively. Mr. Huey, Vice President, General Counsel and Corporate Secretary, is engaged with respect to legal and Securities and Exchange Commission (SEC) issues relating to executive compensation, including reporting and disclosure issues.

Pursuant to its charter, the Compensation Committee is required to meet at least twice annually but will meet more frequently to the extent necessary. In 2006, the Compensation Committee met twice. Generally, executive officers who attend the meetings are Mr. Bennett, Mr. Ewing, and Mr. Huey, who acts as secretary of the meeting. After an update and general overview, Mr. Bennett and Mr. Ewing present the recommendations for any changes to compensation of our executive officers, except that no recommendations are made with respect to Mr. Bennett. Final decisions are made by the Compensation Committee in executive session, excluding all members of management. Decisions regarding Mr. Bennett are then communicated by Messrs. Slack and Fraser to Mr. Bennett and subsequently to Mr. Ewing. Mr. Ewing is responsible for implementing all approved changes. Decisions regarding the other executive officers are communicated by Mr. Bennett to Mr. Ewing.

Compensation Committee Report

We have reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, we recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K and this proxy statement on Schedule 14A.

Members of the Compensation Committee
of the Board of Directors

		Dod A. Fraser, Chairman
		David E. Fisher
		Peter S. Janson
		Dennis McGlone

Executive Compensation

SUMMARY COMPENSATION TABLE

The following table summarizes the compensation of each of our named executive officers for the fiscal year ended December 31, 2006. The named executive officers are the Company’s Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers ranked by their total compensation in the table below. In addition, one additional officer whose employment ended in 2006 is included because his compensation for 2006 exceeded that of other named executive officers.

																												Change in
																												Pension Value
																												& Non-
																								Non-Equity				qualified
																								Incentive				Deferred
																Stock				Option				Plan				Compensation				All Other
Name & Principal								Salary				Bonus				Awards				Awards				Compensation				Earnings				Compensation
Position			Year					($)(1)				($)				($)(2)				($)(2)				($)(3)				($)(4)				($)(5)					Total ($)
M. Bennett, President & CEO				2006				$	492,308			$	—			$	1,147,153			$	—			$	—			$	80,572			$	22,421				$	1,742,453
F. Meyer, SVP & CFO				2006				$	332,615			$	—			$	432,857			$	—			$	—			$	34,424			$	26,733				$	826,630
J. Giesler, SVP Commercial Operations				2006				$	222,615			$	—			$	295,988			$	—			$	—			$	31,718			$	24,248				$	574,570
R. Sanders, VP Manufacturing				2006				$	197,692			$	—			$	233,094			$	—			$	—			$	20,077			$	23,540				$	474,403
P. Thompson, VP Sales & Marketing				2006				$	216,769			$	—			$	243,673			$	—			$	—			$	67,169			$	25,940				$	553,551
M. Kalafut, Former VP, General Counsel & Corporate Secretary				2006				$	170,654			$	—			$	148,844			$	—			$	—			$	17,382			$	676,637				$	1,013,517

ALL OTHER COMPENSATION TABLE

The following table describes each component of the All Other Compensation column in the Summary Compensation Table.

											Registrant
							Payments /				Contributions
			Perquisites & Other				Accruals on				to Defined								Tax
			Personal				Termination				Contribution				Insurance				Reimbursements
Name			Benefits(1)				Plans(2)				Plans(3)				Premiums(4)				(5)					Total
M. Bennett, President & CEO			$	5,377			$	—			$	11,746			$	1,221			$	4,077				$	22,421
F. Meyer, SVP & CFO			$	5,557			$	—			$	16,442			$	780			$	3,954				$	26,733
J. Giesler, SVP Commercial Operations			$	5,404			$	—			$	15,142			$	311			$	3,391				$	24,248
R. Sanders, VP Manufacturing			$	6,468			$	—			$	13,191			$	266			$	3,615				$	23,540
P. Thompson, VP Sales & Marketing			$	5,684			$	—			$	17,714			$	460			$	2,082				$	25,940
M. Kalafut, Former VP, General Counsel & Corporate Secretary			$	4,620			$	654,423			$	13,619			$	371			$	3,604				$	676,637

GRANTS OF PLAN-BASED AWARDS IN 2006

The following table provides information on restricted shares and performance share awards granted in 2006 to each of our named executive officers. The amount of these awards that was expensed in 2006 is shown in the Summary Compensation Table on page 22.

																																						All Other
																																						Stock				All Other
																																						Awards:				Option					Exercise
																																						Number				Awards:					or Base									Grant Date
																																						of Shares				Number of					Price of									Fair Value
												Estimated Future Payouts Under																										of Stock				Securities					Option				Market					of Stock &
												Non-Equity Incentive Plan													Estimated Future Payouts Under													or Units				Underlying					Awards				Price on					Option
												Awards(3)													Equity Incentive Plan Awards(4)													(#)(5)				Options (#)					($ / Sh)				Grant Date					Awards(6)
			Grant				Date of					Threshold				Target				Maximum					Threshold				Target
Name			Date(1)				Action(2)					($)				($)				($)					(#)				(#)				Maximum (#)
M. Bennett, President & CEO			01-Aug-06				25-Jul-06																																77,000				—				NA				$	7.04				$	542,080
			17-Feb-06				14-Feb-06																			—				154,000				308,000																	$	6.39				$	984,060
			14-Feb-06					—					287,500				575,000				1,150,000																																			NA
F. Meyer, SVP & CFO			01-Aug-06				25-Jul-06																																32,100				—				NA				$	7.04				$	225,984
			17-Feb-06				14-Feb-06																			—				32,100				64,200																	$	6.39				$	205,119
			14-Feb-06					—					100,200				200,400				400,800																																			NA
J. Giesler, SVP Commercial Operations			01-Aug-06				25-Jul-06																																24,100				—				NA				$	7.04				$	169,664
			17-Feb-06				14-Feb-06																			—				24,100				48,200																	$	6.39				$	153,999
			14-Feb-06					—					67,200				134,400				268,800																																			NA
R. Sanders, VP Manufacturing			01-Aug-06				25-Jul-06																																20,000				—				NA				$	7.04				$	140,800
			17-Feb-06				14-Feb-06																			—				20,000				40,000																	$	6.39				$	127,800
			14-Feb-06					—					50,000				100,000				200,000																																			NA
P. Thompson, VP Sales & Marketing			01-Aug-06				25-Jul-06																																20,100				—				NA				$	7.04				$	141,504
			17-Feb-06				14-Feb-06																			—				20,100				40,200																	$	6.39				$	128,439
			14-Feb-06					—					54,500				109,000				218,000																																			NA
M. Kalafut, Former VP, General Counsel & Corporate Secretary			01-Aug-06				25-Jul-06																																—				—				NA									$	—
			17-Feb-06				14-Feb-06																			—				20,000				40,000																	$	6.39				$	127,800
			14-Feb-06					—					54,500				109,000				218,000																																			NA

The following is a description of material factors necessary to understand the information disclosed in the Summary Compensation Table and the Grants of Plan-Based Awards Table. This description is intended to supplement the information discussed in the Compensation Discussion and Analysis.

Employment Severance Agreements

Background

On October 5, 2006, the Company entered into an employment severance agreement with each of our named executive officers. The named executive officers were previously parties to executive retention agreements with the Company, which provided for severance and other benefits in the event of a termination of employment following a change in control. The new employment severance agreements supersede and replace the executive retention agreements and provide for severance and other benefits in the event of a termination of employment under circumstances that are both related to and unrelated to a change in control.

Term

Each employment severance agreement has a three-year term, with the exception of the agreement with Mr. Bennett, which has a five-year term. The term may be extended for additional one-year periods in the Board’s sole discretion. The employment severance agreements may not be terminated during the two-year period following a change in control of the Company without the executive’s consent.

Severance and Post-Termination Benefits

The employment severance agreements provide that the executives will be entitled to certain compensation and benefits upon a qualifying termination of employment. The extent and nature of the compensation and benefits are identified and quantified in the disclosure entitled “Post-Employment Payments”, which appears on page 38 of this proxy statement.

Excise Tax Gross-Up

The employment severance agreements provide that the executives will be entitled to a gross-up payment to make the executives whole for any excise taxes imposed as a result of Section 280G of the Internal Revenue Code. Entitlement to a gross-up payment is not contingent on an executive’s termination of employment. The estimated amount of the excise tax gross-up for each named executive officer is quantified in the disclosure entitled “Post-Employment Payments”, which appears on page 38 of this proxy statement.

Restrictive Covenants

The employment severance agreements contain restrictive covenants that apply following termination of a named executive officer’s employment with the Company and are described in the disclosure entitled “Post-Employment Payments”, which appears on page 38 of this proxy statement.

Amendment to Mr. Kalafut’s Employment Severance Agreement

On October 6, 2006, Mr. Kalafut retired from the Company. For purposes of his employment severance agreement, Mr. Kalafut’s retirement was treated as a termination without “cause” and therefore, Mr. Kalafut became entitled to severance and other separation benefits pursuant to his employment severance agreement, as described under the disclosure entitled “Post-Employment Payments” which appears on page 38 of this proxy statement. In addition, Mr. Kalafut agreed to amend his employment severance agreement to provide that, in order to ensure a smooth transition to a new General Counsel, he would provide up to 50 days of consulting services to the Company during the one-year period following termination. In consideration for agreeing to provide these services, Mr. Kalafut became entitled to an amount equal to one-half of his annual base salary at the time of termination, in addition to the payments

and other benefits provided for in his employment severance agreement. The amount of these payments and benefits is set forth in the explanation of the All Other Compensation column of the Summary Compensation Table. The cash payments will be made to him on April 6, 2007, which is the six-month anniversary of the date his employment terminated.

Annual Incentive Compensation

2006 Officer and Key Employee Incentive Plan

The Company maintains an annual incentive program in which our officers and other key employees selected by Mr. Bennett are entitled to participate. As described in the Compensation Discussion and Analysis, the annual incentive program provides participants, including the named executive officers, the opportunity to earn annual cash incentive awards based upon the achievement of certain performance goals. Awards are paid from a pool established by the Compensation Committee. Funding of the pool for 2006 was based on performance targets relating to net income. A description of performance target levels and corresponding funding levels is set forth in the Compensation Discussion and Analysis.

Each named executive officer’s threshold, target and maximum incentive award amounts are disclosed in the Grants of Plan-Based Awards table. Annual incentive payments may be increased or decreased based on individual performance. Payment of an annual incentive award is made as soon as practicable following the Company’s determination whether and to what extent performance goals have been satisfied, subject to approval by the Compensation Committee. Generally, in order to be entitled to receive an annual incentive award payment, an employee must be employed during the applicable fiscal year and until the date of payment.

For 2006, our Compensation Committee set the following target annual incentive award amounts for the named executive officers:

	•		Mr. Bennett’s target annual incentive award was equal to 115% of base salary;
	•		The target annual incentive award for Messrs. Meyer and Giesler was equal to 60% of base salary; and
	•		The target annual incentive award for Messrs. Thompson, Sanders and Kalafut was equal to 50% of base salary.

In 2006, the Company did not achieve the threshold level of performance under the annual incentive program, and therefore, the incentive pool was not funded. Accordingly, none of our executive officers received an annual incentive award for 2006. This result is reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table.

Long-Term Incentive Awards

The Company maintains the Terra Industries Inc. Stock Incentive Plan of 2002, which we refer to as the 2002 Plan, under which the Compensation Committee may grant to the named executive officers, as well as other eligible employees, stock options, stock appreciation rights, restricted shares, performance shares and other forms of stock-based compensation.

2006 Long-Term Incentive Grants

For 2006, the Compensation Committee decided to grant each of our named executive officers (other than Mr. Kalafut) an award based on a combination of restricted shares and performance shares. Each named executive officer’s target grant was determined as a percentage of base salary. For 2006, our

Compensation Committee set the following target long-term incentive award values for the named executive officers:

	§		Mr. Bennett’s target long-term incentive award was equal to 300% of base salary;
	§		Mr. Giesler’s target long-term incentive award was equal to 140% of base salary;
	§		Mr. Sanders’ target long-term incentive award was equal to 130% of base salary;
	§		Mr. Meyer’s target long-term incentive award was equal to 125% of base salary; and
	§		The target long-term incentive award for Messrs. Thompson and Kalafut was equal to 120% of base salary.

With the exception of Mr. Bennett, all executive officers were expected to receive one half of their grants in the form of restricted shares and the other half in the form of performance share grants. Mr. Kalafut only received the performance share portion of his grant for 2006, because at the time that restricted shares were granted, his retirement was already anticipated. Mr. Bennett received one-third of his grant in restricted shares and two-thirds in performance share grants. In all cases, the number of shares subject to the grant was calculated by dividing the target dollar value of the award by the average of the Company’s closing stock price during the twenty trading days prior to the date that the awards were approved by the Compensation Committee. The average stock price was rounded to the nearest fifty cents, and the target number of shares was rounded to the nearest 100 shares, except that in the case of awards granted to Mr. Bennett, the target number of shares was rounded to the nearest 1,000 shares.

The number of shares of Company common stock subject to each grant and the grant date fair value of these awards is reflected in the Grants of Plan-Based Awards table. The accounting cost associated with outstanding equity grants is reflected in the Summary Compensation Table.

§

Restricted share grants. The Company granted restricted shares to each of our named executive officers, other than Mr. Kalafut, on August 1, 2006. The principal terms and conditions of these grants are described below.

	–		Vesting. Each restricted share grant is subject to cliff vesting with respect to 100% of the restricted shares subject to the award on the third anniversary of the grant date. However, in the event of a change in control of the Company (within the meaning of the restricted share award agreements) or termination of employment due to death, all restricted             shares will become immediately vested. In the event of termination of employment due to total disability, restricted shares will continue to vest following termination. The Compensation Committee has the authority to extend or accelerate the vesting period at any time, in its discretion.
	–		Forfeiture. Upon an executive’s termination of employment for any reason other than death, total disability or such other circumstances as determined by the Compensation Committee in its sole discretion, any unvested restricted shares held by the executive will be immediately forfeited and terminated.
	–		Voting and Dividend Rights. Holders of restricted shares are entitled to all rights of a stockholder of the Company, including the right to vote and receive dividends with respect to the restricted shares. However, if any distribution is made to stockholders of the Company other than a cash dividend, then any securities or other property received by other stockholders will be subject to the same restrictions applicable to the restricted shares.

§

Performance share grants. The Company granted performance shares to each of our named executive officers on February 17, 2006. The principal terms and conditions of these grants are described below.

	–		Vesting. Each performance share grant is subject to cliff vesting with respect to all shares subject to the award on the third anniversary of the grant date, based on achievement of the performance goals, as described in the Compensation Discussion and Analysis. Upon vesting, a holder will become entitled to receive a number of shares ranging from 0% to 200% of the target number of shares subject to the award, based on achievement of performance goals. In the event of a change in control of the Company (within the meaning of the performance share award agreements), vesting of performance share awards will immediately accelerate and the holder will be entitled to the greater of the target number of shares subject to the award and a number based on actual Company performance prior to the change in control. In the event of termination of employment due to death, the holder will become entitled to a number of performance shares based on actual performance prior to death. In the event of termination of employment due to total disability, performance shares will continue to vest following termination based on achievement of performance goals. In special circumstances, as determined by the Compensation Committee, the Compensation Committee may extend the period for earning all or a portion of a holder’s performance shares.
	–		Forfeiture. Upon an executive’s termination of employment for any reason other than death, total disability or such other circumstances as determined by the Compensation Committee in its sole discretion, any unvested performance shares held by the executive will be immediately forfeited and terminated.

Pre-2006 Long-Term Incentive Grants

In accordance with applicable disclosure rules, the Stock Awards column of the Summary Compensation Table reflects the amounts recognized by the Company as an accounting expense for 2006 in connection with restricted shares and performance share awards granted in 2006 and in prior years. An expense was recognized in 2006 for prior-year awards granted in 2003, 2004 and 2005. The Company granted time-based restricted shares in 2003, 2004 and 2005 on terms and conditions that are substantially the same as the grants made in 2006 and described above. The Company also made performance share grants in 2005. These grants, which were made on July 29, 2005, are subject to a three-year performance period that ends on December 31, 2007.

Retirement Benefits

Defined Benefit Pension Plans

The Company maintains a U.S. tax-qualified defined benefit plan, an excess benefit plan, which we refer to as the SERP, and a U.K. defined benefit plan, each of which covers certain named executive officers. For a description of the material terms of these plans and the present value of each named executive officer’s accumulated benefits under these plans as of December 31, 2006, see the Pension Benefit Table and accompanying disclosure, beginning on page 33.

Defined Contribution Plans

The Company maintains a 401(k) plan, which is a tax-qualified defined contribution plan maintained for the benefit of all U.S. employees, including each of our named executive officers. The 401(k) plan permits employees to contribute a portion of eligible pay to the plan on a pre-tax basis. During 2006, the Company matched 100% of the first 3% of eligible compensation that an employee contributed to the 401(k) plan and 60% of the next 3% of pay contributed. In addition, in the case of employees hired after June 30, 2003 and who are therefore ineligible to participate in the U.S. tax-qualified defined benefit plan, the Company made an additional non-elective contribution for 2006 equal to 3.2% of eligible compensation. The amount of the Company’s 2006 contribution to the 401(k) on behalf of each of our named executive officers is set forth in the explanation of the All Other Compensation column of the Summary Compensation Table.

OUTSTANDING EQUITY AWARDS AT 2006 FISCAL YEAR-END

Option Awards

The following table provides information on the holdings of stock option and stock awards by each of our named executive officers as of December 31, 2006.

			Option Awards																					Stock Awards
																																				Equity
																																				Incentive
																																Equity				Plan Awards:
											Equity Incentive																					Incentive Plan				Market or
											Plan Awards:																					Awards:				Payout Value
			Number of				Number of				Number of																					Number of				of Unearned
			Securities				Securities				Securities													Number of				Market Value				Unearned				Shares, Units
			Underlying				Underlying				Underlying													Shares or Units				of Shares or				Shares, Units				or Other
			Unexercised				Unexercised				Unexercised				Option									of Stock That				Units of Stock				or Other Rights				Rights That
			Options (#)				Options (#) Un-				Unearned				Exercise				Option Expiration					Have Not Vested				That Have Not				That Have Not				Have Not
Name			Exercisable				exercisable				Options (#)				Price ($)				Date					(#)				Vested ($)(1)				Vested (#)				Vested ($)(1)
M. Bennett,				136,000				—				—			$	3.88			03-Aug-09
President & CEO																									80,000	(2)		$	958,400
																									54,000	(3)		$	646,920
																									77,000	(4)		$	922,460
																																	49,140	(5)		$	588,697
																																	15,400	(6)		$	184,492
F. Meyer,				100,000				—				—			$	3.88			03-Aug-09
SVP & CFO																									60,000	(2)		$	718,800
																									32,500	(3)		$	389,350
																									32,100	(4)		$	384,558
																																	12,675	(5)		$	151,847
																																	3,210	(6)		$	38,456
J. Giesler,				3,600				—				—			$	12.13			15-Dec-07
SVP Commercial																									30,000	(2)		$	359,400
Operations																									25,000	(3)		$	299,500
																									24,100	(4)		$	288,718
																																	9,750	(5)		$	116,805
																																	2,410	(6)		$	28,872
R. Sanders, VP				3,600				—				—			$	12.13			15-Dec-07
Manufacturing																									25,000	(2)		$	299,500
																									18,500	(3)		$	221,630
																									20,000	(4)		$	239,600
																																	7,215	(5)		$	86,436
																																	2,000	(6)		$	23,960
P. Thompson, VP				10,000				—				—			$	3.88			17-Sep-09
Sales & Marketing																									30,000	(2)		$	359,400
																									18,500	(3)		$	221,630
																									20,100	(4)		$	240,798
																																	7,215	(5)		$	86,436
																																	2,010	(6)		$	24,080
M. Kalafut, Former				—				—				—				—				—
VP, General																									—				—
Counsel																																	—
& Corporate																									80,000	(2)		$	958,400
Secretary																									54,000	(3)		$	646,920
																									77,000	(4)		$	922,460

See footnotes on following page.

(1)		Based on a year-end closing price of $11.98 per share.
(2)		Restricted shares will time-vest on July 30, 2007 or earlier upon a change-in-control.
(3)		Restricted shares will time-vest on July 30, 2008 or earlier upon a change-in-control.
(4)		Restricted shares will time-vest on August 3, 2009 or earlier upon a change-in-control.
(5)		This performance plan cycle will end December 31, 2007. The actual number of shares paid out subsequent to that time will depend on actual performance versus targets over the performance period, except that in the event of a change in control, performance shares will be paid out immediately at the higher of target or actual performance level for the quarters completed prior to the change in control. The threshold award is zero; therefore, the number of shares and market value shown in the Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested column and the Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested column are based on performance through December 31, 2006 (39% of target) for the 2005 performance plan grant.
(6)		This performance plan cycle will end December 31, 2008. The actual number of shares paid out subsequent to that time will depend on actual performance versus targets over the performance period, except that in the event of a change in control, performance shares will be paid out immediately at the higher of target or actual performance level for the quarters completed prior to the change in control. The threshold award is zero; therefore, the number of shares and market value shown in the Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested column and the Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested column are based on performance through December 31, 2006 (10% of target) for the 2006 performance plan grant.

OPTION EXERCISES AND STOCK VESTED

The following table provides information, for each of our named executive officers, on the number of restricted shares that became vested in 2006 and the value realized before payment of any applicable withholding taxes and broker commissions.

			Option Awards									Stock Awards
			Number of
			Shares									Number of Shares
			Acquired on				Value Realized					Acquired on Vesting				Value Realized
Name			Exercise (#)				on Exercise ($)					(#)(1)				on Vesting ($)(2)
M. Bennett, President & CEO				—				—					100,000				718,000
F. Meyer, SVP & CFO				—				—					60,000				430,800
J. Giesler, SVP Commercial Operations				—				—					35,000				251,300
R. Sanders, VP Manufacturing				—				—					35,000				251,300
P. Thompson, VP Sales & Marketing				—				—					35,000				251,300
M. Kalafut, Former VP, General Counsel & Corporate Secretary				—				—					50,000				359,000

PENSION BENEFITS IN FISCAL YEAR 2006

     The following table sets forth information on the pension benefits for each of our named executive officers as of December 31, 2006.

									Present Value
					Number of				of				Payments
					Years Credited				Accumulated				During Last
Name			Plan Name		Service (#)(1)				Benefit ($)(2)				Fiscal Year ($)
M. Bennett,			Terra Industries Inc.			34			$	514,068			$	—
President & CEO			Employees’ Retirement
			Plan
			Terra Industries Inc.			34			$	577,263			$	—
			Excess Benefit Plan
			Terra Industries Inc.			25			$	403,643			$	—
F. Meyer, SVP &			Employees’ Retirement
CFO			Plan
			Terra Industries Inc.			25			$	235,515			$	—
			Excess Benefit Plan
J. Giesler, SVP			Terra Industries Inc.			25			$	162,917			$	—
Commercial			Employees’ Retirement
Operations			Plan
			Terra Industries Inc.			25			$	4,401			$	—
			Excess Benefit Plan
			Terra Industries Inc.			13			$	116,549			$	—
R. Sanders, VP			Employees’ Retirement
Manufacturing			Plan
			Terra Industries Inc.			13			$	6,048			$	—
			Excess Benefit Plan
P. Thompson, VP			Terra Nitrogen (UK)			28			$	936,943			$	—
Sales & Marketing			Ltd. Pension Scheme
M. Kalafut, Former VP, General			Terra Industries Inc.			18			$	248,266			$	—
Counsel &			Employees’ Retirement
Corporate Secretary			Plan
			Terra Industries Inc.			18			$	—			$	—
			Excess Benefit Plan