I just bought a Honeywell Chronotherm III. Model Number on the box is
T8601C.

Here is a link for the instuctions that came with it:

http://hbctechlit.honeywell.com/tech...0s/69-0533.pdf

I'm a little confused on how to hook this up, although I think it should be
easy.

I have an old Lennox mercury switched thermostat. There are four wires
coming from the wall, red, white, blue green.

Those are connected to the terminals on the old thermostat as follows:
Red-"R"
White-"W"
Green-"G"
Blue -"Y"

I tried hooking up this new (Digital) one with the same color to letter
arrangement. The thermostat showed "AC" on the readout next to the time.
The manual indicates it will do this ( and not operate the hear or air)
until it gets power from the 24VAC system (It has battery back up, which is
how the LCD display works).

My house is Electric cooling, gas heat.

So, either I do not have 24VAC, or I hooked it up wrong. Any ideas?

Thanks for help,

Kevin