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

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q
                                        

          [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

                        SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
                                        
                                  -------------

                         COMMISSION FILE NUMBER 1-9678

                                ------------- 

                             ARCO CHEMICAL COMPANY
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


                                --------------

               DELAWARE                           51-0104393
     (STATE OR OTHER JURISDICTION OF     (I.R.S. EMPLOYER IDENTIFICATION NO.)
      INCORPORATION OR ORGANIZATION)

         3801 WEST CHESTER PIKE                       
      NEWTOWN SQUARE, PENNSYLVANIA                  19073-2387
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)           (ZIP CODE)

                                 -------------
                           
                                 (610) 359-2000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                                 -------------

                                 NOT APPLICABLE
     (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
                                 LAST REPORT)

                                 -------------


   INDICATE BY X WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE
FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE
PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.
YES  x    NO 
   -----     ----- 

   NUMBER OF SHARES OF COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AS OF MARCH
31, 1997: 96,869,370.


===============================================================================
<PAGE>
 
               PART I.  FINANCIAL INFORMATION                    
                                                                 
       ITEM 1.  ARCO CHEMICAL COMPANY AND SUBSIDIARIES           
        CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)            
                                                                 
              CONSOLIDATED STATEMENTS OF INCOME                  
        (Millions of Dollars, Except Per Share Data)             

<TABLE>
<CAPTION>
 
 
                                       Three Months Ended
                                           March 31,
                                       ------------------
                                           1997     1996
                                          ------    -----
<S>                                    <C>         <C> 
Sales and other operating revenues        $1,029    $ 982
Costs and other operating expenses           844      730
                                          ------    -----
    Gross profit                             185      252
Selling, general and administrative
  expenses                                    68       63
Research and development                      21       18
                                          ------    -----
    Operating income                          96      171
Interest expense                             (22)     (22)
Other (expense) income, net                   (1)       9
                                          ------    -----
    Income before income taxes                73      158
Provision for income taxes                    25       52
                                          ------    -----
    Net income                            $   48    $ 106 
                                          ======    =====
    Earnings per common share               $.50    $1.10 
                                          ======    =====
    Cash dividends paid per common
      share                                 $.70    $ .70
                                          ======    =====
</TABLE>


                   See accompanying notes.

<PAGE>
 
                             ARCO CHEMICAL COMPANY
                          CONSOLIDATED BALANCE SHEETS
                             (Millions of Dollars)
<TABLE>
<CAPTION>
                                               March 31,  December 31,    
                                                 1997         1996        
                                               ---------  ------------    
<S>                                            <C>        <C>             
                    ASSETS                                                
                                                                          
 Current assets:                                                          
   Cash and cash equivalents                      $   54        $   70    
   Accounts receivable                               649           629    
   Inventories                                       534           536    
   Prepaid expenses and other current assets          47            37    
                                                  ------        ------    
    Total current assets                           1,284         1,272    
Investments and long-term receivables                 69            71    
Property, plant and equipment, net                 2,570         2,622    
Deferred charges and other assets (net of                                 
  accumulated amortization of $321 in 1997                                
  and $312 in 1996)                                  440           429    
                                                  ------        ------     
    Total assets                                  $4,363        $4,394    
                                                  ======        ======     

                      LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
    Notes payable                                 $  172        $  150 
    Long-term debt due within one year                24            25 
    Accounts payable                                 332           349 
    Taxes payable                                     34            19 
    Other accrued liabilities                        235           229 
                                                  ------        ------ 
        Total current liabilities                    797           772 
                                                  ------        ------ 
Long-term debt                                       828           844 
Other liabilities and deferred credits               179           171 
Deferred income taxes                                387           408 
Minority interest                                    213           185 
                                                                       
Stockholders' equity:                                                  
    Common stock                                     100           100 
    Additional paid-in capital                       876           875 
    Retained earnings                              1,043         1,062 
    Foreign currency translation                      24            64 
    Treasury stock, at cost                          (84)          (87)
                                                  ------        ------ 
        Total stockholders' equity                 1,959         2,014 
                                                  ------        ------ 
                                                                       
        Total liabilities and stockholders' 
          equity                                  $4,363        $4,394   
                                                  ======        ======    
</TABLE>

                            See accompanying notes.

                                     - 2 -

<PAGE>
 
                             ARCO CHEMICAL COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)

<TABLE>
<CAPTION>
                                                      Three Months Ended
                                                           March 31,
                                                         --------------
<S>                                                      <C>     <C>
 
                                                          1997    1996
                                                         -----   -----
 
 Cash flows from operating activities
     Net income                                          $  48   $ 106
     Adjustments to reconcile net income
       to net cash provided by operating
       activities:
         Depreciation and amortization                      57      54
         Changes in working capital accounts               (37)     41
         Other                                              (2)      5
                                                         -----   -----
 
     Net cash provided by operating activities              66     206
                                                         -----   -----
 
 Cash flows from investment activities
     Purchases of short-term investments                     -     (89)
     Capital expenditures                                  (60)    (40)
     Proceeds from asset sales                              20      21
     Other                                                   5      (1)
                                                         -----   -----
 
     Net cash used in investment activities                (35)   (109)
                                                         -----   -----
 
 Cash flows from financing activities
     Dividends paid                                        (68)    (68)
     Repayment of long-term debt                          (158)      -
     Proceeds from issuance of long-term debt              158       -
     Net proceeds from notes payable                        21       -
     Other                                                   4       6
                                                         -----   -----
 
     Net cash used in financing activities                 (43)    (62)
                                                         -----   -----
 
 Effect of exchange rate changes on cash                    (4)     (2)
                                                         -----   -----
 
 Net (decrease) increase in cash and cash equivalents      (16)     33
 
 Cash and cash equivalents at beginning of year             70     235
                                                         -----   -----
 
 Cash and cash equivalents at end of period              $  54   $ 268
                                                         =====   =====
</TABLE>



                            See accompanying notes.

                                     - 3 -
<PAGE>
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
                                        

 NOTE A.  BASIS OF PRESENTATION

   The foregoing financial information is unaudited and has been prepared from
 the records of ARCO Chemical Company (the Company).  In the opinion of
 management, the financial information reflects all adjustments (consisting only
 of items of a normal recurring nature) necessary for a fair statement of
 financial position and results of operations in conformity with generally
 accepted accounting principles.  Certain amounts in 1996 have been reclassified
 for comparative purposes.  These interim financial statements should be read in
 conjunction with the consolidated financial statements for the year ended
 December 31, 1996.


 NOTE B.  GEOGRAPHIC INFORMATION

         The Company is an international manufacturer of intermediate chemicals
 and specialty chemical products which it principally markets to other
 industrial concerns.  The Company operates in one industry segment.  The
 geographic distribution of the Company's markets is indicated by the table
 below.  Total revenues are summarized geographically by destination (customer
 location) and by origin (point of sale); intercompany sales between geographic
 areas are excluded.

<TABLE>
<CAPTION>
                                Three Months Ended
                                     March 31,
                                ------------------
                                   1997       1996
                                  ------      ----

                               (Millions of Dollars)
<S>                               <C>       <C> 
 Total revenues (by destination)           
  United States                   $  531      $516
  Europe                             264       281
  Other foreign                      234       185
                                  ------      ----
   Total                          $1,029      $982
                                  ======      ====
                                           
Total revenues (by origin)                 
  United States                   $  639      $561
  Europe                             292       337
  Other foreign                       98        84
                                  ------      ----
   Total                          $1,029      $982
                                  ======      ====
                                           
Pretax earnings                            
  United States                   $   91      $142
  Europe                               2        40
  Other foreign                        2        (2)
  Interest expense                   (22)      (22)
                                  ------      ----
   Total                          $   73      $158
                                  ======      ====
</TABLE>

 Included in pretax earnings are royalty charges made to foreign operations for
 the use of Company technology.

                                     - 4 -

<PAGE>
 
NOTE C.  INVENTORIES

   Inventories at March 31, 1997 and December 31, 1996 comprised the following
categories:
<TABLE>
<CAPTION>
 
                          1997   1996
                          -----  -----
<S>                       <C>    <C>
 
                  (Millions of Dollars)
 
Finished goods            $ 404  $ 392
Work-in-process              33     38
Raw materials                52     62
Materials and supplies       45     44
                          -----  -----
 
 Total                    $ 534  $ 536
                          =====  =====
 
</TABLE>

NOTE D.  PROPERTY, PLANT AND EQUIPMENT, NET

   Property, plant and equipment, at cost, and related accumulated depreciation
at March 31, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
 
                                    1997    1996
                                   ------  ------
<S>                                <C>     <C>
 
                             (Millions of Dollars)
 
Property, plant and equipment      $4,102  $4,152
Less:  accumulated depreciation     1,532   1,530
                                   ------  ------
 
 Total                             $2,570  $2,622
                                   ======  ======
</TABLE>

NOTE E.  CONTINGENCIES

   The Company and its subsidiaries are involved in a number of lawsuits, all of
which have arisen in the ordinary course of the Company's business. The Company
is unable to predict the outcome of these matters, but does not believe, based
upon currently available facts, that the ultimate resolution of such matters
will have a material adverse effect on the consolidated financial statements of
the Company.

   The Company is subject to other loss contingencies pursuant to federal,
state, local, and foreign environmental laws and regulations. These
contingencies include possible obligations to remove or mitigate the effects on
the environment of the past disposal or release of certain chemical substances
at various sites (remediation costs). The Company continues to evaluate the
amount of these remediation costs and periodically adjusts its reserve for
remediation costs and its estimate of additional environmental loss
contingencies based on progress made in determining the magnitude, method and
timing of the remedial actions that may be required by government authorities
and an evaluation of the Company's potential liability in relation to the
liability and financial resources of any other potentially responsible parties.



                                     - 5 -
<PAGE>
 
   At March 31, 1997, the Company's environmental reserve totaled $51 million,
 which reflected the Company's latest assessment of potential future remediation
 costs associated with existing sites.  A significant portion of the reserve is
 related to the Beaver Valley plant site, located in Monaca, Pennsylvania.  The
 reserve gives recognition to a work plan, between the Company and the
 Pennsylvania Department of Environmental Protection (PADEP), for testing, risk
 assessment, remedial process design and remediation of conditions at the Beaver
 Valley plant.  The reserve also reflects an agreement between the Company and
 another responsible party whereby that party has agreed to pay for
 approximately 50 percent of the costs associated with the Beaver Valley plant
 work plan.  The Company sold the Beaver Valley plant assets to NOVA Chemicals
 Inc. (NOVA) as of September 30, 1996, but currently retains ownership of the
 land at the Beaver Valley plant site, substantial portions of which are being
 leased to NOVA.  The Company has retained responsibility for certain
 remediation of the land at the Beaver Valley plant site under the work plan and
 for certain additional remediation that may be required by PADEP pursuant to
 the Pennsylvania Land Recycling and Environmental Remediation Standards Act.

   The remainder of the reserve is related to four other plant sites and one
 federal Superfund site for amounts ranging from $2 million to $16 million per
 site.  The Company is involved in administrative proceedings or lawsuits
 relating to eight other Superfund sites.  However, the Company estimates, based
 on currently available information, that potential loss contingencies
 associated with these sites, individually and in the aggregate, are not
 significant. Substantially all amounts reserved are expected to be paid out
 over the next five to ten years.

   The Company relies upon remedial investigation/feasibility studies (RI/FS) at
 each site as a basis for estimating remediation costs at the site.  The Company
 has completed RI/FS or preliminary assessments at most of its sites. However,
 selection of the remediation method and the cleanup standard to be applied are,
 in most cases, subject to approval by the appropriate government authority.
 Accordingly, the Company may have possible loss contingencies in excess of the
 amounts reserved to the extent the scope of remediation required, the final
 remediation method selected and the cleanup standard applied vary from the
 assumptions used in estimating the reserve.  The Company estimates that the
 upper range of these possible loss contingencies should not exceed the amount
 accrued by more than $65 million.

   The extent of loss related to environmental matters ultimately depends upon a
 number of factors, including technological developments, changes in
 environmental laws, the number and ability to pay of other parties involved at
 a particular site and the Company's potential involvement in additional
 environmental assessments and cleanups.  Based upon currently known facts,
 management believes that any remediation costs the Company may incur in excess
 of the amounts reserved or disclosed above would not have a material adverse
 impact on the Company's consolidated financial statements.



                                     - 6 -
<PAGE>
 
   The Company and the other principal responsible party (PRP) at the Beaver
 Valley site have reached an agreement with the U.S. government whereby the
 government will pay 28.5 percent of the costs incurred by the Company and the
 other PRP for remediation of substantial portions of the Beaver Valley site.

   The Company and the Atlantic Richfield Company (ARCO) are parties to an
 agreement whereby the Company has indemnified ARCO against certain claims or
 liabilities that ARCO may incur relating to ARCO's former ownership and
 operation of the oxygenates and polystyrenics businesses of the Company,
 including liabilities under laws relating to the protection of the environment
 and the workplace and liabilities arising out of certain litigation.  ARCO has
 indemnified the Company with respect to claims or liabilities and other matters
 of litigation not related to the assets or businesses reflected in the
 consolidated financial statements.  ARCO has also indemnified the Company for
 certain federal, foreign, state, and local taxes that might be assessed upon
 audit of the operations of the Company included in its consolidated financial
 statements for periods prior to the July 1, 1987 formation of the Company.


 NOTE F.  EARNINGS PER COMMON SHARE

           Earnings per common share for the three months ended March 31, 1997
 and 1996 are computed based on 96.8 million and 96.5 million weighted average
 shares outstanding, respectively.  The dilutive effect of stock options was not
 material.

           In February 1997, the Financial Accounting Standards Board issued
 Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
 Share," establishing standards for computing and presenting earnings per share
 (EPS). SFAS No. 128 is effective for financial statements issued for periods
 ending after December 15, 1997 and requires restatement of all prior-period EPS
 data presented. Earlier application is not permitted.  The implementation of
 SFAS No. 128 is not expected to have a material effect on the reported EPS of
 the Company.



                                     - 7 -
<PAGE>
 
 NOTE G.  SUPPLEMENTAL CASH FLOW INFORMATION

   Following is supplemental cash flow information for the three months ended
 March 31, 1997 and 1996:
<TABLE>
<CAPTION>
 
                                                            1997    1996
                                                           ------  ------
<S>                                                        <C>     <C>
 
                                                       (Millions of Dollars)
 
Changes in working capital-increase (decrease) to cash:
 
 Accounts receivable                                       $ (48)  $  33
 Inventories                                                  (6)    (11)
 Prepaid expense and other current assets                    (11)    (15)
 Accounts payable                                              1      22
 Taxes payable                                                16      32
 Other accrued liabilities                                    11     (20)
                                                           -----   -----
 Changes in working capital accounts                       $ (37)  $  41
                                                           =====   =====
 
Short-term investments:
 
 Gross proceeds from maturities                            $   -   $  25
 Gross purchases                                               -    (114)
                                                           -----   -----
 Net purchases                                             $   -   $ (89)
                                                           =====   =====
 
Notes payable:

 Gross proceeds from issuances                             $ 455   $   -
 Gross repayments                                           (434)      -
                                                           -----   -----
 Net repayments                                            $  21   $   -
                                                           =====   =====

Cash paid during the period for:
 
 Interest (net of amount capitalized)                      $  17   $  16
                                                           =====   =====
 
 Income taxes                                              $   -   $  11
                                                           =====   =====
</TABLE>

                                     - 8 -
<PAGE>
 
                ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


                                    OVERVIEW

    The Company manufactures and markets intermediate chemicals and specialty
 products, operating in a single industry segment.  It conducts business
 primarily in the Americas, Europe, and the Asia Pacific region.
 
    Each of the Company's two principal manufacturing processes yields its key
 product, propylene oxide (PO), and one of two co-products, styrene monomer (SM)
 or tertiary butyl alcohol (TBA).  The Company also manufactures numerous
 derivatives of PO and TBA.  Among these are polyols, a key derivative of PO,
 and methyl tertiary butyl ether (MTBE), a principal derivative of TBA.  MTBE is
 used in oxygenated fuels and as an octane additive.  The Company also
 manufactures and markets toluene diisocyanate (TDI) and aliphatic diisocyanate
 (ADI).  TDI and polyols are combined in the manufacture of polyurethanes.

    Net income for the first quarter 1997 was $48 million compared with $106
 million in the first quarter 1996.  The $58 million decline was primarily due
 to lower margins for most products.  First quarter 1997 margins were lower due
 to the combined effect of higher worldwide feedstock costs and generally lower
 sales prices.


                             RESULTS OF OPERATIONS

 Product Volumes

   Sales and other operating revenues include the sales and processing volumes
 of the Company's core products and co-products for the first quarter 1997 and
 1996 as set forth below.  Core products include PO, PO derivatives, TDI and
 ADI.
<TABLE>
<CAPTION>
 
                                  1997   1996
                                  -----  ----
<S>                               <C>    <C>
                                   (Millions)
 
Core products (pounds)            1,002   895
Co-products:
 SM and derivatives (pounds)        708   659
 TBA and derivatives (gallons)      260   275
</TABLE>

 The reported SM volumes include quantities processed for PO/SM II equity
 partners (SM equity volumes) under long-term processing arrangements. The SM
 equity volumes were 200 million and 198 million pounds in the 1997 and 1996
 quarters, respectively. The 1996 data includes sales volumes for SM
 derivatives, which the Company stopped manufacturing and selling when it sold
 its plastics business on September 30, 1996.

                                     - 9 -

<PAGE>
 
 REVENUES

         Revenues of $1,029 million in the first quarter 1997 increased five
 percent compared to revenues of $982 million in the first quarter 1996,
 reflecting higher net volumes partly offset by lower average sales prices.

         Volumes for core products increased 12 percent in the first quarter
 1997 versus the prior year period.  The increase reflected higher TDI/ADI
 volumes due to the Olin acquisition and the increased availability of TDI from
 a plant in France.  The French plant was under repair and operated at
 restricted rates in the 1996 period.  Core product sales also reflected higher
 volumes for PO derivatives. SM volumes increased seven percent primarily due to
 increased SM sales to export markets.  The loss of SM derivatives volumes
 through the sale of the plastics business was substantially offset by increased
 sales of SM to the buyer of the plastics business.  TBA and derivative volumes
 decreased five percent, mainly due to a weaker MTBE market in the first quarter
 1997.

   Average sales prices were generally lower in 1997.  Contributing to the
 weakness in 1997 prices were expiration of the Company's long-term MTBE
 contracts, concerns over SM capacity additions in Asia, a weak economy in
 Europe, and the effect of a stronger U.S. dollar.


 GROSS PROFIT

         Gross profit of $185 million in the first quarter 1997 decreased $67
 million from $252 million in the 1996 first quarter, reflecting lower margins
 for most products.  Gross profit was 18.0 percent of sales in the first quarter
 1997 compared to 25.7 percent in the 1996 period.  The decline in gross profit
 margins was due to the combined effect of higher feedstock costs and generally
 lower sales prices in the first quarter 1997 versus the 1996 period.


 OTHER

         Other expense of $1 million in 1997 compared to income of $9 million in
 1996.  The $10 million decrease is primarily due to higher foreign exchange
 losses related to the stronger U.S. dollar and lower interest income as a
 result of lower levels of cash and cash equivalents in the 1997 period.

         The Company expects its 1997 effective tax rate to be 34.0 percent
 compared to a 33.0 percent effective tax rate used in the first quarter 1996
 and a final 1996 effective tax rate of 28.5 percent.  The final 1996 rate
 reflected utilization of capital loss carryforwards and the utilization of
 foreign tax credits pursuant to the tax sharing agreement with ARCO.



                                     - 10 -
<PAGE>
 
                              FINANCIAL CONDITION


 LIQUIDITY AND CAPITAL RESOURCES

         As of March 31, 1997, the company had $54 million in cash and cash
 equivalents compared with $70 million at December 31, 1996. The Consolidated
 Statement of Cash Flows for the quarter ended March 31, 1997 shows that net
 cash flows provided by operating activities were $66 million, whereas net cash
 flows used by investment and financing activities were $35 million and $43
 million, respectively.

         Investment activities for the first quarter 1997 included capital
 expenditures of $60 million.  The Company's 1997 budget for plant and equipment
 is $453 million and is part of a five-year, $2.6 billion program primarily
 devoted to capacity expansion and growth.   Minority interest includes equity
 contributions designated for specific capital projects.  At March 31, 1997, the
 unexpended amounts were classified as long-term other assets in the balance
 sheet.

         Financing activities for the first quarter 1997 included the
 refinancing of two Dutch bank loans with a combined principal of 300 million
 Dutch guilders ($158 million) and due in 1997 with one loan due in 2002.  The
 Company paid dividends of $.70 per share, totaling $68 million.  On April 17,
 1997, the Board of Directors declared a dividend of $.70 per share on the
 Company's common stock, payable June 6, 1997.

         During the first quarter 1997, the Company revised its hedging strategy
 with respect to capital commitments related to construction of the new PO/SM
 plant in Rotterdam, the Netherlands.  To take advantage of the strong U.S.
 dollar, the Company effectively terminated forward contracts in the notional
 amount of $127 million and entered into purchased option contracts for
 approximately the same notional amount.  Gains on the purchased options will be
 deferred and offset against the plant's construction costs.  There were no
 deferred hedging gains as of March 31, 1997.

         The Company maintains a credit agreement under which it can borrow
 amounts up to $300 million.  At March 31, 1997, the Company had no outstanding
 borrowing against the credit agreement, which is used to back up the Company's
 commercial paper borrowing.

         It is expected that future cash requirements for capital expenditures,
 dividends and debt repayments will be met by cash generated from operating
 activities and additional borrowing.


 STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

         In February 1997, the Financial Accounting Standards Board issued
 Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
 Share," establishing standards for computing and presenting earnings per share
 (EPS). SFAS No. 128 is effective for financial statements issued for periods
 ending after December 15, 1997 and requires restatement of all prior-period EPS
 data presented. Earlier application is not permitted.  The implementation of
 SFAS No. 128 is not expected to have a material effect on the reported EPS of
 the Company.


                                     - 11 -
<PAGE>
 
                          PART II.  OTHER INFORMATION



 ITEM 1. LEGAL PROCEEDINGS

         Reference is made to the disclosure on page 10 of the Company's 1996
 Annual Report on Form 10-K regarding other litigation.

         On October 15, 1996, the Company commenced an arbitration proceeding in
 the International Chamber of Commerce Court of Arbitration in Paris, France
 against Repsol, S.A. (Repsol), Repsol Quimica, S.A. (Quimica) and Repsol
 Petroleo, S.A. (Petroleo). The dispute concerns technology for the production
 of PO and SM licensed to Quimica by the Company under agreements entered into
 in conjunction with the dissolution in 1986 of a Spanish joint venture called
 Montoro. The Company seeks in the arbitration to enforce the Company's rights
 under the 1986 agreements and to protect the licensed technology by requiring
 Quimica to reach agreement with the Company upon commercial terms before using
 the licensed technology in connection with an expansion of its existing plant
 or the construction of a second plant. Subsequently, pursuant to an agreement
 among the parties, Repsol was permitted to withdraw as a party to the
 arbitration. On October 15, 1996, the Company also formally notified the
 European Commission (Commission) of the 1986 agreements, because Quimica and
 its affiliates take the position that those agreements are not enforceable
 under European law. Quimica and Petroleo concurrently filed a complaint with
 the Commission in which they seek to have the 1986 agreements declared to be
 contrary to Articles 85 and 86 of the Treaty of Rome and therefore
 unenforceable. They also filed a complaint with the Spanish Bureau for the
 Defense of Competition (Bureau) seeking relief under Spanish competition law.

         On March 21, 1997, the Bureau issued a "Statement of Facts," which is a
 preliminary document in which the Bureau indicates that it has tentatively
 found a violation of Spanish competition law and intends to refer the matter to
 the Spanish Competition Court.  Spanish procedure allows a party an opportunity
 to persuade the Bureau to the contrary prior to such referral.  The Bureau's
 Statement of Facts indicates that the Bureau believes that provisions of the
 agreements signed in 1986, which the Company is attempting to enforce in the
 arbitration, are contrary to Spanish competition law and therefore
 unenforceable. The Company filed a response with the Bureau on April 18, 1997
 arguing that the provisions are both valid and enforceable.

         On April 17, 1997, the Company received a Statement of Objections of
 the Commission, which is a preliminary document indicating the views of the
 Commission and allowing a party an opportunity to respond.  The Commission's
 Statement of Objections takes the position that key provisions of the 1986
 agreements, which the Company is seeking to enforce in its arbitration
 proceedings with Quimica, are contrary to European competition law, and
 indicates the Commission's intention to seek an order against both the Company
 and Quimica finding those clauses invalid and imposing unspecified fines.  The
 Company has the right to respond in writing to the Commission's Statement of
 Objections by June 12, 1997 and to request an oral hearing to present its
 arguments.  The Company believes that the provisions in question are consistent
 with European law and are valid and enforceable and intends to so respond to
 the Commission.


                                     - 12 -
<PAGE>
 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 (a)  Exhibits:

      10.1 Amendment No. 2 to the ARCO Chemical Company Key Management Deferral
           Plan, effective as of January 1, 1997.

      10.2 Amendment No. 2 to the ARCO Chemical Company Deferral Plan for
           Outside Directors, effective as of January 1, 1997.

      27   Financial Data Schedule for the three months ended March 31, 1997.

 (b)  Reports on Form 8-K:

      None



                                   -     13 -
<PAGE>
 
                                   SIGNATURE

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



                                         ARCO CHEMICAL COMPANY
                                             (Registrant)


                                         /s/ Van Billet
                                         -----------------------------     
                                         (Signature)

                                         Van Billet
                                          Vice President
                                          and Controller
                                            (Duly Authorized Officer and
                                            Chief Accounting Officer)
 


 Dated:  April 30, 1997



                                    - 14 -
<PAGE>
 
                                 EXHIBIT INDEX


 
 Exhibit
 Number                    Description
 -------                   -----------


  10.1      Amendment No. 2 to the ARCO Chemical Company Key Management Deferral
            Plan, effective as of January 1, 1997.

  10.2      Amendment No. 2 to the ARCO Chemical Company Deferral Plan for
            Outside Directors, effective as of January 1, 1997.

  27        Financial Data Schedule for the three months
            ended March 31, 1997.