<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 September 30, 1996
                                        

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

                         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 check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes  X  No 
    ---    ---   

   Number of shares of Common Stock, $1.00 par value, outstanding as of
September 30, 1996: 96,766,964.
<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  Nine Months Ended
                                          September 30,     September 30,
                                      ------------------  -----------------   
                                        1996       1995      1996     1995
                                        ----       -----    ------   ------
<S>                                    <C>      <C>        <C>       <C> 
Sales and other operating revenues     $1,035      $ 999    $2,976   $3,289
Costs and other operating expenses        800        729     2,273    2,395
                                       ------      -----    ------   ------
    Gross profit                          235        270       703      894

Selling, general and administrative
  expenses                                 67         70       200      203
Research and development                   22         20        61       58
                                       ------      -----    ------   ------
    Operating income                      146        180       442      633

Interest expense                          (22)       (23)      (65)     (67)
Other income, net                           8          4        26       20
                                       ------      -----    ------   ------
    Income before income taxes            132        161       403      586

Provision for income taxes                 35         44       119      193
                                       ------      -----    ------   ------

    Net income                         $   97      $ 117    $  284   $  393
                                       ======      =====    ======   ======

    Earnings per common share           $1.00      $1.21     $2.94   $ 4.08
                                       ======      =====    ======   ======
    Cash dividends paid per common
      share                              $.70       $.70     $2.10   $ 1.95
                                       ======      =====    ======   ======
</TABLE>

                            See accompanying notes.
<PAGE>
 
                             ARCO CHEMICAL COMPANY
                          CONSOLIDATED BALANCE SHEETS
                             (Millions of Dollars)


<TABLE>
<CAPTION>
                                             September 30,  December 31,
                                                 1996          1995
                                                 ----          ----
                    ASSETS

<S>                                              <C>          <C>   
Current assets:                                                     
    Cash and cash equivalents                    $  362       $  235
    Short-term investments                            -           25
    Accounts receivable                             560          631
    Receivable from sale of assets                  160            -
    Inventories                                     444          472
    Prepaid expenses and other current assets        42           19
                                                 ------       ------
        Total current assets                      1,568        1,382
                                                                    
Investments and long-term receivables                75           90
Property, plant and equipment, net                2,167        2,293
Deferred charges and other assets (net of                           
  accumulated amortization of $303 in 1996                          
  and $285 in 1995)                                 410          370
                                                 ------       ------
        Total assets                             $4,220       $4,135
                                                 ======       ====== 
 
                      LIABILITIES AND STOCKHOLDERS' EQUITY
 

Current liabilities:                                                
                                                                    
    Long-term debt due within one year           $   25       $   25
    Accounts payable                                271          253
    Taxes payable                                    96           94
    Other accrued liabilities                       213          217
                                                 ------       ------
        Total current liabilities                   605          589
                                                 ------       ------
Long-term debt                                      855          887
Other liabilities and deferred credits              173          158
Deferred income taxes                               380          409
Minority interest                                   184          123
                                                                    
Stockholders' equity:                                               
    Common stock                                    100          100
    Additional paid-in capital                      874          869
    Retained earnings                             1,065          985
    Foreign currency translation                     70          110
    Treasury stock, at cost                         (86)         (95)
                                                 ------       ------
        Total stockholders' equity                2,023        1,969
                                                 ------       ------
                                                                    
        Total liabilities and stockholders'                         
          equity                                 $4,220       $4,135
                                                 ======       ====== 
</TABLE>

                            See accompanying notes.

                                     - 2 -
<PAGE>
 
                             ARCO CHEMICAL COMPANY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Millions of Dollars)
<TABLE>
<CAPTION>
 
 
                                                             Nine Months Ended
                                                               September 30,
                                                            -------------------
 
                                                                1996      1995
                                                               -----     -----
<S>                                                         <C>          <C> 
 Cash flows from operating activities
     Net income                                                $ 284     $ 393
     Adjustments to reconcile net income
       to net cash provided by operating
       activities:
         Depreciation and amortization                           165       176
         Net change in accounts receivable, inventories,
           accounts and other payables                            46      (127)
         Provision for environmental liabilities                   4        12
         Other                                                   (60)      (26)
                                                               -----     -----
 
     Net cash provided by operating activities                   439       428
                                                               -----     -----
 
 Cash flows from investment activities
     Capital expenditures                                       (158)     (132)
     Increase in deferred charges                                 (6)      (82)
     Proceeds from (purchase of) short-term investments           25       (30)
     Other                                                        37         4
                                                               -----     -----
 
     Net cash used in investment activities                     (102)     (240)
                                                               -----     -----
 
 Cash flows from financing activities
     Dividends paid                                             (203)     (188)
     Repayment of long-term debt                                 (17)      (15)
     Other                                                        13        (7)
                                                               -----     -----
 
     Net cash used in financing activities                      (207)     (210)
                                                               -----     -----
 
 Effect of exchange rate changes on cash                          (3)        -
                                                               -----     -----
 
 Net increase (decrease) in cash and cash equivalents            127       (22)
 
 Cash and cash equivalents at beginning of period                235       144
                                                               -----     -----
 
 Cash and cash equivalents at end of period                    $ 362     $ 122
                                                               =====     =====
 
</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 1995 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, 1995.


 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 Nine Months Ended
                                     September 30,      September 30,
                                   -----------------  ------------------
                                     1996      1995       1996     1995
                                     ----      ----       ----     ----

                                             (Millions of Dollars)
<S>                                <C>      <C>       <C>        <C> 
Total revenues (by destination)
 United States                     $  563     $ 495     $1,580   $1,673
 Europe                               266       302        812      897
 Other foreign                        206       202        584      719
                                   ------     -----     ------   ------
 
  Total                            $1,035     $ 999     $2,976   $3,289
                                   ======     =====     ======   ======
 
Total revenues (by origin)
 United States                     $  629     $ 558     $1,759   $1,952
 Europe                               313       368        961    1,099
 Other foreign                         93        73        256      238
                                   ------     -----     ------   ------
 
  Total                            $1,035     $ 999     $2,976   $3,289
                                   ======     =====     ======   ======
                                                   
Pretax earnings
 United States                     $  122     $ 185     $  376   $  614
 Europe                                28         6         89       30
 Other foreign                          6        10         (4)      27
 Interest expense                     (22)      (23)       (65)     (67)
 Eliminations                          (2)      (17)         7      (18)
                                   ------     -----     ------   ------
 
  Total                            $  132     $ 161     $  403   $  586
                                   ======     =====     ======   ======
</TABLE>

   Included in pretax earnings are royalty charges made to foreign operations
 for the use of Company technology.  Eliminations principally include
 intercompany profit.


                                     - 4 -
<PAGE>
 
 NOTE C.  Inventories

   Inventories at September 30, 1996 and December 31, 1995 comprised the
 following categories:
<TABLE>
<CAPTION>
 
                                        1996             1995      
                                        ----             ----
                             
                                        (Millions of Dollars)
<S>                                     <C>             <C>  
Finished goods                          $ 313           $ 338
Work-in-process                            30              38
Raw materials                              62              51
Materials and supplies                     39              45
                                        -----           -----
                                                     
 Total                                  $ 444           $ 472
                                        =====           =====
</TABLE>

 NOTE D.  Property, Plant and Equipment, Net

   Property, plant and equipment, at cost, and related accumulated depreciation
 at September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
                                        1996             1995
                                        ----             ----
                               
                                        (Millions of Dollars)
                               
<S>                                     <C>            <C> 
Property, plant and equipment           $3,666         $3,812
Less:  accumulated depreciation          1,499          1,519
                                        ------         ------
                                                      
 Total                                  $2,167         $2,293
                                        ======         ======
</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 September 30, 1996, the Company's environmental reserve totaled $56
 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, formerly owned by the Company,
 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 site. 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, see Note H, 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 nine 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 that 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.

   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 (see next page)


                                     - 6 -
<PAGE>
 
 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- and nine-month periods ended
 September 30, 1996 are computed based on 96,721,243 and 96,630,871 weighted
 average number of shares outstanding, respectively. Earnings per common share
 for the three- and nine-month periods ended September 30, 1995 are computed
 based on 96,340,677 and 96,243,844 weighted average number of shares
 outstanding, respectively. The effect of stock options issued under the 1987
 Executive Long-Term Incentive Plan and the 1990 Long-Term Incentive Plan on the
 computation of primary and fully diluted earnings per common share was not
 material.


 NOTE G.  Supplemental Cash Flow Information

   Following is supplemental cash flow information for the nine months ended
 September 30, 1996 and 1995:
<TABLE>
<CAPTION>
                                          1996    1995
                                         ------  ------

                                     (Millions of Dollars)
<S>                                      <C>     <C>
Short-term investments:
 
 Gross proceeds from maturities          $ 139   $   -
 Gross purchases                          (114)    (30)
                                         -----   -----
 Net proceeds (purchases)                $  25   $ (30)
                                         =====   =====
 
Cash paid during the period for:
 
 Interest (net of amount capitalized)    $  66   $  60
                                         =====   =====
 
 Income taxes                            $ 129   $ 171
                                         =====   =====
 
Noncash investing activities:
 
 Noncash aspects of asset sale
  Net assets sold                        $ 160   $   -
  Receivable from the sale of assets      (160)      -
</TABLE>

 The assets and liabilities sold to NOVA have been removed from the Company's
 September 30, 1996 balance sheet and a corresponding receivable from the sale
 of assets has been recorded.  Cash proceeds from the sale were received on
 October 1, 1996.  See Note H.


                                     - 7 -
<PAGE>
 
 NOTE H. Asset Sale

   On September 30, 1996, the Company sold its plastics business to NOVA. The
 sale price was approximately $160 million. As part of the transaction, the
 Company entered into a long-term sales agreement to supply NOVA with
 approximately 400 million pounds per year of styrene monomer, a principal raw
 material in plastics production. Neither the plastics' results of operations
 nor the sale of the plastics business were material to the Company's
 consolidated results of operations.


 NOTE I. Subsequent Event

   On October 9, 1996, the Company signed an agreement to purchase Olin
 Corporation's (Olin) toluene diisocyanate (TDI) and aliphatic diisocyanate
 (ADI) businesses for approximately $565 million. The agreement includes Olin's
 TDI and ADI production facilities at Lake Charles, Louisiana, and certain
 related assets, including patents and process technologies. Subject to
 regulatory approval, the transaction is expected to close in late 1996 or early
 1997.



                                     - 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
 chemical products, operating in a single industry segment.  It conducts
 business primarily in the Western Hemisphere, Europe, and the Asia Pacific
 region.

   The Company's two principal manufacturing processes both yield its key
 product, propylene oxide (PO), and either one of two co-products, styrene
 monomer (SM) or tertiary butyl alcohol (TBA).  The Company also manufactures
 numerous derivatives of these products, including methyl tertiary butyl ether
 (MTBE), the principal derivative of TBA used as an oxygenate and an octane
 component in gasoline, and polyols, a key derivative of PO.  The Company also
 sells toluene diisocyanate (TDI) obtained under long-term supply agreements
 with a third party. TDI and polyols are combined to manufacture polyurethanes.

   On September 30, 1996, the Company completed the sale of its plastics
 business to NOVA Chemicals, Inc. (NOVA) for approximately $160 million.  This
 transaction is reflected in the third quarter 1996 financial statements.

   On October 9, 1996, the Company signed an agreement to purchase Olin
 Corporation's (Olin) TDI and aliphatic diisocyanate (ADI) businesses for
 approximately $565 million. Subject to regulatory approval, the transaction is
 expected to close in late 1996 or early 1997.


                             RESULTS OF OPERATIONS

 Product Volumes

         Sales and other operating revenues include the sales and processing
 volumes of PO, SM, TBA and their derivatives for the periods indicated below.
 With the sale of the plastics business, the Company has sold its SM derivative
 capacity but will continue to produce SM.
<TABLE>
<CAPTION>
 
 
                               Three Months           Nine Months
                                   Ended                Ended
                               September 30,         September 30,
                              ---------------        -------------

                              1996       1995       1996       1995
                              ----       ----       ----       ----

                                           (Millions)

<S>                          <C>        <C>       <C>        <C> 
 PO and derivatives
  (pounds)                     846        811      2,493      2,601
 Co-products:                                            
  SM and derivatives                                     
   (pounds)                    730        616      2,080      1,965
  TBA and derivatives                                    
   (gallons)                   303        272        835        862
</TABLE>


                                     - 9 -
<PAGE>
 
 Third Quarter 1996 versus Third Quarter 1995

 Net Income

          Net income for the third quarter 1996 was $97 million compared with
 $117 million in the third quarter 1995.  The decrease in third quarter 1996 net
 income was primarily attributable to significantly lower SM margins and, to a
 lesser extent, lower PO derivatives margins.  The lower margins were partly
 offset by the benefit of higher volumes for most products.


 Revenues

         Revenues of $1,035 million in the third quarter 1996 increased four
 percent from $999 million in the third quarter 1995, reflecting higher product
 volumes for most products offset by lower sales prices for SM and PO
 derivatives. SM volumes increased 19 percent primarily due to higher
 contractual offtakes by SM equity partners and higher exports.  MTBE volumes
 increased 11 percent, reflecting higher U. S. demand as many customers
 replenished low MTBE inventories. PO and derivative volumes increased four
 percent due to customer inventory building in anticipation of PO derivative
 price increases and modest improvement in European and Asian demand.

         The benefit from the higher sales volumes was offset by lower prices
 for SM and PO derivatives.  SM prices were substantially lower versus the prior
 year period due to increased industry supply.  PO derivative prices were lower
 as a result of increased price competition.


 Gross Profit

         Gross profit was $235 million, or 22.7 percent of sales, in the third
 quarter 1996, a decrease of $35 million from $270 million, or 27.0 percent of
 sales, in the third quarter 1995.  The gross profit decrease was primarily
 attributable to significantly lower SM margins and, to a lesser extent, lower
 PO derivative margins.  SM margins were significantly lower as SM prices
 decreased substantially.  PO derivative margins declined primarily as a result
 of lower selling prices.

         The 1996 and 1995 third quarters include pretax charges of $4 million
 and $12 million, respectively, for estimated future environmental clean-up
 costs. These charges do not reflect any potential benefit from insurance
 proceeds.

         The Company is party to a number of multi-year, fixed-margin MTBE toll-
 based sales contracts covering a substantial portion of the Company's U.S.-
 based MTBE volume.  These contracts have had the effect of reducing the
 exposure of the MTBE business to market cycles.  A significant number of these
 contracts will terminate in late 1996 through early 1997.  The Company is in
 the process of negotiating new contracts.  In view of the current market
 conditions, however, it is anticipated that the pricing in the new contracts
 may not provide margins that are as favorable as those provided in the
 contracts that are currently in effect.


                                     - 10 -
<PAGE>
 
 Other

         The Company revised its 1996 estimated effective income tax rate from
 31.0 percent to 29.6 percent primarily due to the utilization of prior year
 capital loss carryforwards.  The update resulted in a 26.5 percent effective 
 income tax rate for the third quarter 1996, which was comparable to the 27.3
 percent effective rate for the third quarter 1995.


 Nine Months Ended September 30, 1996 versus Nine Months Ended September 30,
 1995

 Net Income

         Net income for the first nine months 1996 was $284 million compared
 with $393 million in the first nine months 1995.  The decrease was primarily
 due to lower 1996 SM margins.  For the first nine months 1996, PO and
 derivative margins were higher than the 1995 period; however, this benefit was
 substantially offset by the combined effect of lower PO and derivatives volumes
 and lower MTBE margins.


 Revenues

         Revenues decreased 10 percent to $2,976 million in the first nine
 months 1996 from $3,289 million in the first nine months 1995, primarily
 reflecting lower SM prices and, to a lesser extent, lower volumes for PO and
 derivatives.  SM prices decreased significantly in comparison to the first nine
 months 1995 due to increased industry supply.

         Volumes for PO and derivatives and TBA and derivatives decreased four
 percent and three percent, respectively.  The decrease in PO and derivatives
 volumes reflected weaker demand and increased industry capacity, and resulted
 in lower production levels of co-product TBA.  Excluding offtakes by SM equity
 partners, SM and derivatives volumes showed a slight decrease.


 Gross Profit

         Gross profit decreased $191 million to $703 million, or 23.6 percent of
 sales, in the first nine months 1996 from $894 million, or 27.2 percent of
 sales, in the first nine months 1995.  The gross profit decrease was primarily
 attributable to significantly lower SM margins.  Higher PO and derivative
 margins were substantially offset by the effect of lower PO and derivative
 volumes and lower MTBE margins.

         SM margins were significantly lower as prices decreased substantially
 more than raw material costs.  PO and derivative margins for the first nine
 months 1996 increased versus the 1995 period primarily due to lower raw
 material costs; however, margins declined toward the end of the 1996 period due
 to lower PO derivative prices.  MTBE margins decreased due to lower selling
 prices and higher raw material costs.


                                     - 11 -
<PAGE>
 
 Other

         The Company estimates its effective income tax rate for 1996 at 29.6
 percent.  The final 1995 effective income tax rate was 32.8 percent.  The
 decrease in the 1996 estimated effective tax rate versus 1995 is primarily
 attributable to increased utilization of foreign tax credits and utilization of
 capital loss carryforwards.


                              FINANCIAL CONDITION

 Liquidity and Capital Resources

         As of September 30, 1996, the Company had $362 million in cash and cash
 equivalents and short-term investments compared with $260 million at December
 31, 1995. The Consolidated Statement of Cash Flows for the quarter ended
 September 30, 1996 shows that net cash flows provided by operating activities
 were $439 million, whereas net cash flows used by investment and financing
 activities were $102 million and $207 million, respectively.

         On October 9, 1996, the Company signed an agreement to purchase Olin's
 TDI and ADI businesses for approximately $565 million.  The agreement includes
 Olin's TDI and ADI production facilities at Lake Charles, Louisiana, and
 certain related assets, including patent and process technologies.  Subject to
 regulatory approval, the transaction is expected to close in late 1996 or early
 1997.  The Company will finance the acquisition through a combination of cash
 on hand and short- and long-term borrowing.

         On October 4, 1996, the Company announced the start of engineering on a
 250 million pound-per-year butanediol (BDO) plant to be built in Rotterdam, the
 Netherlands, by the year 2001, and plans to expand existing BDO capacity in
 Channelview, Texas, from 75 million to 120 million pounds per year in late
 1997.

         On September 30, 1996, the Company sold its plastics business to NOVA.
 The sale proceeds were approximately $160 million.  As part of the transaction,
 the Company entered into a long-term sales agreement to supply NOVA with
 approximately 400 million pounds per year of styrene monomer, a principal raw
 material in plastics production. Neither the plastics' results of operations
 nor the sale of the plastics business were material to the Company's
 consolidated results of operations.

         In connection with the sale of the plastics business, the Company
 implemented a stock repurchase program for up to 320,000 shares of the
 Company's common stock held in certain employee benefit plans by former
 employees associated with the plastics business.

         On April 12, 1996, the Board of Directors gave final approval for the
 expansion of the PO/SM complex in Channelview, Texas, and the construction of a
 new world-scale PO/SM plant in Rotterdam, the Netherlands. The Channelview
 PO/SM expansion will add annual PO and SM capacity of 110 million and 248
 million pounds, respectively, in early 1998. The new PO/SM plant will be
 completed in the fourth quarter 1999, adding annual PO and SM capacity of 625
 million and 1,400 million pounds, respectively, upon start up.

                                    - 12 -
<PAGE>
 
      Investment activities for the first nine months 1996 included capital
 expenditures of $158 million, which included initial spending for the above-
 mentioned PO/SM projects as well as low-cost capacity increases and
 environmental, health and safety projects. Minority interest includes equity
 contributions designated for specific capital projects. At September 30, 1996,
 the unexpended amounts were classified as long-term other assets in the balance
 sheet.

         The Company paid dividends of $.70 per share, totalling $68 million, in
 the third quarter 1996. On October 17, 1996, the Board of Directors declared a
 dividend of $.70 per share on the Company's common stock, payable December 6,
 1996.

         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 October 1995, the Financial Accounting Standards Board issued
 Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
 Stock-Based Compensation."  SFAS No. 123 requires companies to adopt its
 provisions for fiscal years beginning after December 15, 1995.  SFAS No. 123
 encourages a fair value-based method of accounting for employee stock options
 or similar equity instruments, but allows continued use of the intrinsic value-
 based method of accounting prescribed by Accounting Principles Board (APB) No.
 25, "Accounting for Stock Issued to Employees."  Companies electing to continue
 to use APB No. 25 must make pro forma disclosures of net income and earnings
 per share as if the fair value-based method of accounting had been applied.
 The Company will continue to follow the provisions of APB No. 25 and,
 accordingly, will make the pro forma disclosures required by SFAS No. 123, if
 material, in its financial statements for the year ended December 31, 1996.


                                     - 13 -
<PAGE>
 
                          PART II.  OTHER INFORMATION


 Item 1. Legal Proceedings

         Reference is made to the disclosure on page 8 of the Company's 1995
 Form 10-K Report regarding other Superfund sites.  The Company is currently
 involved in administrative proceedings or lawsuits relating to nine other
 sites.

         Reference is made to the disclosure on page 9 of the Company's 1995
 Form 10-K Report regarding the Monaca, Pennsylvania (Beaver Valley) plant,
 formerly owned by the Company. Certain organic waste material is contained in
 the soil and ground water at the site of the Beaver Valley plant. In 1994, the
 Company entered into a Consent Order and Agreement (the Consent Agreement) with
 the Pennsylvania Department of Environmental Protection (PADEP) pursuant to
 which the Company and PADEP agreed upon a work plan for testing and remedial
 process design with regard to the conditions at the Beaver Valley site. Under
 the terms of the Consent Agreement, the Company paid civil penalties totalling
 $363,000 in 1994 and $63,000 in 1995. Under the terms of the Consent Agreement,
 the Company must pay an additional penalty of $63,000 each year until the
 commencement of active remediation at the Beaver Valley site, after which the
 amount of such annual penalty shall be reduced based on the extent of
 remediation commenced at the site. The Company sold the Beaver Valley plant
 assets to NOVA Chemicals Inc. (NOVA) as of September 30, 1996, but currently
 retains ownership of the Beaver Valley land, substantial portions of which are
 being leased to NOVA. NOVA will assume ownership of such portions of the Beaver
 Valley land after the occurrence of certain defined events. The Company has
 retained responsibility for the work plan and for certain additional
 remediation of the Beaver Valley land that may be required by PADEP pursuant to
 the Pennsylvania Land Recycling and Environmental Remediation Standards Act.
 The Company has an agreement with Beazer East, Inc., the successor to Koppers
 Inc. (the previous owner of the Beaver Valley plant and site), whereby Beazer
 East, Inc. agreed to pay for approximately 50 percent of the cost of the
 remediation.

         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) and Repsol Quimica, S.A. (Quimica). The dispute
 concerns technology licensed to Quimica for the production of PO and SM under
 agreements entered into in 1986 when Repsol bought the Company's half 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
 technology licensed to Quimica. On October 15, 1996, the Company also formally
 notified the European Commission of the 1986 agreements, because Repsol has
 taken the position that those agreements are not enforceable under European
 law. Quimica and another Repsol subsidiary concurrently filed a complaint with
 the European Commission in which Quimica seeks to have the 1986 agreements
 declared to be contrary to Articles 85 and 86 of the Treaty of Rome and
 therefore unenforceable. The Company believes that Quimica's complaint is not
 well founded and that the 1986 agreements are valid and enforceable.

                                    - 14 -
<PAGE>
 
 Item 6. Exhibits and Reports on Form 8-K

 (a)  Exhibits:

      27  Financial Data Schedule for the nine months ended September 30, 1996.

 (b)  Reports on Form 8-K:

      None



                                     - 15 -
<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/ John A. Shaw                  
                                         ----------------------------
                                                 (Signature)


                                         John A. Shaw
                                         Vice President
                                         and Controller
                                         (Duly Authorized Officer and
                                         Chief Accounting Officer)
 


 Dated: October 31, 1996



                                     - 16 -
<PAGE>
 
                                 EXHIBIT INDEX


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


    27            Financial Data Schedule for the nine months
                  ended September 30, 1996