================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           --------------------------

                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934.

FOR THE YEAR ENDED DECEMBER 31, 1996.            COMMISSION FILE NUMBER 333-1087

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

                       VALLEY FORGE LIFE INSURANCE COMPANY

             (Exact name of registrant as specified in its charter)


         Pennsylvania                                        23-6200031
 (State or other jurisdiction of                         (I.R.S. Employer
 incorporation or organization)                         Identification No.)

           CNA Plaza
        Chicago, Illinois                                    60685
(Address of principal executive offices)                    (Zip Code)

                                 (312) 822-5000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

        Securities registered pursuant to Section 12(b) of the Act: None
        Securities registered pursuant to Section 12(g) of the Act: None

    Indicate by check mark if disclosure of delinquent  filers  pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  form  10-K or any
amendment to this Form 10-K. [ x ]

    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  periods  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

    As of  March  3,  1997,  50,000  shares  of  Common  Stock  (all  held by an
affiliate,  Continental Assurance Company) were outstanding.  There is no market
value for any such shares. See ITEM 5 of this Form 10-K.

     THE REGISTRANT  MEETS THE CONDITIONS SET FORTH IN GENERAL  INSTRUCTION J(1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
================================================================================
<PAGE>
                      VALLEY FORGE LIFE INSURANCE COMPANY

                             FORM 10-K ANNUAL REPORT

                      FOR THE YEAR ENDED DECEMBER 31, 1996

  Item                                                                     Page
 Number                               PART I                              Number
--------                                                                  ------
   1           Business...............................................       3

   2           Properties.............................................       6

   3           Legal Proceedings......................................       6

   4           Submission of Matters to a Vote of Security Holders....       6

                                     PART II

   5           Market for the Registrant's Common Stock and
                 Related Stockholder Matters..........................       9

   6           Selected Financial Data................................       9

   7           Management's Discussion and Analysis of Financial
                 Condition and Results of Operations..................      10

   8           Financial Statements and Supplementary Data............      17

   9           Changes in and Disagreements with Accountants
                 on Accounting and Financial Disclosure...............      39

                                    PART III

   10          Directors and Executive Officers of the Registrant.....      39

   11          Executive Compensation.................................      39

   12          Security Ownership of Certain Beneficial Owners
                 and Management.......................................      39

   13          Certain Relationships and Related Transactions.........      39

                                     PART IV

   14          Financial Statements, Schedules, Exhibits
                 and Reports on Form 8-K..............................      40

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

    Valley  Forge  Life   Insurance   Company   ("VFL"  or  "the  Company")  was
incorporated  under the laws of the  Commonwealth  of  Pennsylvania on August 9,
1956 and began  its  operations  on  December  1,  1956.  VFL is a  wholly-owned
subsidiary  of  Continental  Assurance  Company  (Assurance).   Assurance  is  a
wholly-owned  subsidiary of Continental  Casualty  Company  (Casualty)  which is
wholly-owned  by  CNA  Financial   Corporation  (CNA).  Loews  Corporation  owns
approximately 84% of the outstanding common stock of CNA.

    Effective  December 31, 1985,  pursuant to a Reinsurance  Pooling Agreement,
VFL began ceding all of its business to its parent, Assurance. This business is
then pooled with the business of Assurance,  excluding Assurance's participating
contracts and separate accounts, and 10% of the combined net pool is retroceded
to VFL. This  agreement was amended  effective  July 1, 1996, for the purpose of
also excluding the separate accounts of VFL.

     VFL  sells a  variety  of  individual  and group  insurance  products.  The
individual  insurance  products consist  primarily of term,  universal life, and
life  insurance  policies and individual  annuities.  Group  insurance  products
include  life,  accident and health,  consisting  primarily of major medical and
hospitalization and pension products.

     Products  developed in 1996  included a portfolio of variable  products and
new  universal  life products  which are expected to be marketed in 1997.  These
products  offer  investors  the  option of  allocating  payments  to one or more
variable accounts or to a guaranteed income account or both.  Payments allocated
to the variable accounts will be invested in corresponding investment portfolios
where the investment  risk is borne by the investor while payments  allocated to
the guaranteed  income account will earn a minimum  guaranteed  rate of interest
for a  specified  period  of time for  annuity  contracts  and one year for life
products.

COMPETITION

    VFL is  engaged in a business  that is highly  competitive  due to the large
number of stock and mutual life insurance companies and other entities marketing
insurance  products.  The combined  operations of VFL and Assurance  compete for
both  producers and customers and Assurance and VFL must  continuously  allocate
resources  to refine and improve  insurance  products  and  services.  There are
approximately 1,770 companies selling life insurance (including health insurance
and pension  products) in the United States.  The combined  companies of VFL and
Assurance rank as the twenty-second largest life insurance organization based on
1995 consolidated net written premiums.

                                       3
<PAGE>
REGULATION

    VFL is subject to the laws of the  Commonwealth  of  Pennsylvania  governing
insurance  companies and to the  regulations of the  Pennsylvania  Department of
Insurance (the "Insurance  Department").  Regulation by the Insurance Department
includes  periodic  examination  to  determine,   among  other  items,  contract
liabilities and reserves so that the Insurance Department may certify that these
items  are  correct.  VFL's  books and  accounts  are  subject  to review by the
Insurance Department at all times.

    In addition,  VFL is subject to regulation  under the insurance  laws of all
jurisdictions  in  which it  operates.  The  laws of the  various  jurisdictions
establish  supervisory agencies with broad administrative powers with respect to
various  matters,  including  licensing to transact  business,  overseeing trade
practices,  licensing agents,  approving  contract forms,  establishing  reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for  accumulation  of surrender  values,  prescribing the form and
content of required financial  statements and regulating the type and amounts of
investments permitted.

    Further, many states regulate affiliated groups of insurers, such as VFL and
its affiliates,  under insurance holding company  legislation.  Under such laws,
inter-company   transfers  of  assets  and  dividend   payments  from  insurance
subsidiaries  may be subject to prior notice or approval,  depending on the size
of the transfer payments in relation to the financial positions of the companies
involved.

    Under insurance  guaranty fund laws in most states,  insurers doing business
therein can be assessed as a result of the  insolvencies of other insurers.  The
assessments  are  based on  formulas,  subject  to  prescribed  limits,  and are
intended to fund the benefits and continuation of coverage for  policyholders of
the insolvent  insurers.  Most of these laws provide that an  assessment  may be
excused or deferred if it would threaten an insurer's own solvency.

    Although the Federal  government  generally  does not directly  regulate the
business of insurance,  Federal initiatives often have an impact on the business
in a variety of ways.  Certain insurance  products of VFL are subject to various
Federal  securities  laws and  regulations.  In  addition,  current and proposed
Federal measures that may  significantly  affect the insurance  business include
regulation of insurance company solvency,  employee benefit regulation,  removal
of barriers  preventing banks from engaging in the insurance  business,  tax law
changes  affecting the taxation of insurance  companies and the tax treatment of
insurance  products  and its  impact on the  relative  desirability  of  various
personal investment vehicles.

     After  failing  to enact the  massive  health  reform  introduced  in 1994,
Congress  passed  a  health  insurance  reform  bill in  August  of 1996 and the
President signed it into law (P.L. 104-191) on August 21, 1996. The new law does
little for Americans without health insurance but it will protect those who have
health  insurance  from  losing it. The 105th  Congress  is expected to consider
additional  incremental  health care  reform as it  attempts to provide  greater
access and affordability to Americans. Among the bills that have been introduced
this year are measures  that would allow small  businesses  to band  together to
form  association  health  plans  to buy  insurance;  bar  the  use  of  clauses
restricting what doctors can tell patients about treatment options;  restructure
the Medicare  program;  subsidize health insurance for uninsured  children;  and
limit or prohibit  underwriting on the basis of genetic  information.  We cannot
predict  if any of these  proposals  will be enacted or the extent to which they
may affect the insurance industry.

                                       4
<PAGE>
REGULATION - (CONTINUED)

    In recent  years  increased  scrutiny of state  regulated  insurer  solvency
requirements  by certain members of the U.S.  Congress  resulted in the National
Association  of  Insurance  Commissioners  (NAIC)  developing  industry  minimum
Risk-Based Capital (RBC) requirements, establishing a formal state accreditation
process designed to more closely regulate for solvency, minimizing the diversity
of approved  statutory  accounting and actuarial  practices,  and increasing the
annual statutory statement disclosure requirements.

    The RBC  formulas  are  designed to identify an  insurer's  minimum  capital
requirements  based upon the inherent  risks (e.g.,  asset  default,  credit and
underwriting)   of  its   operations.   In  addition  to  the  minimum   capital
requirements, the RBC formula and related regulations identify various levels of
capital adequacy and corresponding  actions that the state insurance departments
should initiate. The level of capital adequacy below which insurance departments
would take action is defined as the Company  Action  Level.  As of December  31,
1996, VFL has capital in excess of the Company Action Level.



CERTAIN AGREEMENTS

    VFL is party to the Intercompany  Pooling  Agreement with Assurance which is
discussed above and in the Notes to VFL's Financial  Statements included herein.
In addition,  VFL is party to the CNA  Intercompany  Expense  Agreement  whereby
expenses  incurred  by CNA and each of its  subsidiaries  are  allocated  to the
appropriate company. All acquisition and underwriting  expenses allocated to VFL
are further subject to the Intercompany  Pooling Agreement,  so that acquisition
and  underwriting  expenses  recognized  by VFL  approximate  ten percent of the
combined  acquisition  and  underwriting  expenses  of VFL  and  Assurance.  For
information   regarding  expenses  pursuant  to  the  CNA  Intercompany  Expense
Agreement see Note 8 of the Notes to Financial Statements.



REINSURANCE

    Information as to VFL's  reinsurance  business is set forth in Note 7 of the
Financial Statements.



EMPLOYEE RELATIONS

    At  December  31,  1996,  VFL had no  employees  as it has  contracted  with
Casualty for services provided by Casualty  employees.  Casualty has experienced
satisfactory  labor  relations  and has  never had work  stoppages  due to labor
disputes.


BUSINESS SEGMENTS

    Information  as to VFL's  business  segments  is set forth in Note 10 of the
Financial Statements.



INVESTMENTS

    Information as to VFL's  investments is set forth in Note 2 of the Financial
Statements.


                                       5
<PAGE>
ITEM 2.  PROPERTIES

    VFL does not own or directly lease any office space. VFL reimburses Casualty
for its proportionate share of office facilities.



ITEM 3.  LEGAL PROCEEDINGS

    Reference is hereby made to Note 9 of the Notes to Financial Statements.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   Omitted pursuant to General Instruction J(2) (c) of Form 10-K.



                                       6
<PAGE>
               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



                            POSITION AND
                          OFFICES HELD WITH
                             REGISTRANT                  PRINCIPAL OCCUPATION
          NAME                                 AGE      DURING PAST FIVE YEARS


  Dennis H. Chookaszian  Chairman of the       53    Chairman of the Board and
                         Board and Chief             Chief Executive Officer of
                         Executive Officer,          the CNA Insurance Companies
                         CNA Insurance               since September 1992. Prior
                         Companies and               thereto,  Mr. Chookaszian
                         Director                    was President and Chief
                                                     Operating Officer of the
                                                     CNA Insurance Companies.
                                                     Mr. Chookaszian has served
                                                     as a Director of the
                                                     Registrant since April
                                                     1978.

  Philip L. Engel        President, Director   56    President of the CNA
                                                     Insurance Companies since
                                                     September 1992. Prior
                                                     thereto, Mr. Engel was
                                                     Executive Vice President of
                                                     the CNA Insurance
                                                     Companies.  Mr. Engel has
                                                     served as a Director of
                                                     Registrant since September
                                                     1992.

  William J. Adamson,    Senior Vice           44    Senior Vice President of
  Jr.                    President                   the CNA Insurance Companies
                                                     since November 1995;
                                                     Group Vice President of the
                                                     CNA Insurance  Companies
                                                     from    April   1993
                                                     through October 1995. Prior
                                                     thereto, Mr. Adamson was
                                                     Vice President of the CNA
                                                     Insurance  Companies
                                                     from May 1987 through April
                                                     1993.

  James P. Flood         Senior Vice           46    Senior Vice President of
                         President                   the CNA Insurance Companies
                                                     since May 1995; Senior Vice
                                                     President of The
                                                     Continental Insurance
                                                     Company from October 1992
                                                     through May 1995.  Prior
                                                     thereto, Mr. Flood was Vice
                                                     President of The
                                                     Continental Insurance
                                                     Company from August 1991
                                                     through May 1995.


<PAGE>

  Michael C. Garner      Senior Vice           44    Senior Vice President of
                         President, Director         the CNA Insurance Companies
                                                     since September 1993. Prior
                                                     thereto, Mr. Garner was a
                                                     partner of Coopers and
                                                     Lybrand LLP.  Mr. Garner
                                                     has served as a Director of
                                                     the Registrant since
                                                     October 1996.

  Bernard L.             Senior Vice           50    Senior Vice President of
  Hengesbaugh            President                   the CNA Insurance Companies
                                                     since November 1990.

  Peter E. Jokiel        Senior Vice           49    Senior Vice President and
                         President, Chief            Chief Financial Officer
                         Financial Officer,          since November 1990.  Mr.
                         Director                    Jokiel has served as a
                                                     Director of the Registrant
                                                     since July 1992.

  Jonathan D. Kantor     Senior Vice           41    Group Vice President of the
                         President*                  CNA Insurance Companies
                                                     since April 1994.  Prior
                                                     thereto, partner at the law
                                                     firm of Shea & Gould. **

  Donald M. Lowry        Senior Vice           67    Senior Vice President,
                         President,                  Secretary and General
                         Secretary, General          Counsel since August 1992.
                         Counsel                     Prior thereto, Mr. Lowry
                                                     was Senior Vice President
                                                     and General Counsel of the
                                                     CNA Insurance Companies.

  Patricia L. Kubera     Group Vice            41    Group Vice President and
                         President,                  Controller of the CNA
                         Controller,                 Insurance Companies since
                         Director                    January 1993.Prior thereto,
                                                     Ms. Kubera was Assistant
                                                     Vice President of the CNA
                                                     Insurance Companies.  Ms.
                                                     Kubera has served as a
                                                     Director of the Registrant
                                                     since November 1994.

  Carolyn L. Murphy      Senior Vice           52    Senior Vice President of
                         President                   the CNA Insurance Companies
                                                     since November 1990.

  William H. Sharkey,    Senior Vice           48    Senior Vice President of
  Jr.                    President, Director         the CNA Insurance Companies
                                                     since January 1994.  Prior
                                                     thereto, Mr. Sharkey was
                                                     Senior Vice President of
                                                     Cigna Healthcare from
                                                     October 1991 through
                                                     February 1994.  Mr. Sharkey
                                                     has served as a Director of
                                                     the Registrant since
                                                     November 1994.

                                       7
<PAGE>

         DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED




                           POSITION AND
                           OFFICES HELD
                          WITH REGISTRANT               PRINCIPAL OCCUPATION
          NAME                               AGE       DURING PAST FIVE YEARS

  Adrian M. Tocklin      Senior Vice         45    Senior Vice President of the
                         President                 CNA Insurance Companies since
                                                   May 1995; President of The
                                                   Continental Insurance Company
                                                   from June 1994 through May
                                                   1995; Executive Vice
                                                   President of  The Continental
                                                   Insurance Company from August
                                                   1991 through June 1994.
                                                   Prior thereto, Ms. Tocklin
                                                   was Senior Vice President of
                                                   The Continental Insurance
                                                   Company.

  Jae L. Wittlich        Senior Vice         54    Senior Vice President of the
                         President                 CNA Insurance Companies since
                                                   November 1990.

  David W. Wroe          Senior Vice         50    Senior Vice President of the
                         President                 CNA Insurance Companies since
                                                   June 1996.  Prior thereto,
                                                   Mr. Wroe was President of
                                                   Agency Management Systems
                                                   from  August  1991 through
                                                   June 1996.

Officers  are  elected and hold office  until their  successors  are elected and
qualified, and are subject to removal by the Board of Directors.

*Mr.  Kantor will succeed Donald Lowry as Senior Vice  President,  Secretary and
General  Counsel of the CNA Insurance  Companies  effective April 1, 1997.

**Shea & Gould declared bankruptcy in 1995.



                                       8
<PAGE>


                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
         STOCKHOLDER MATTERS

(a)      There is no established public trading market for VFL's common stock.

(b)      CAC owns all of the common stock of VFL.

(c) VFL has declared no cash dividends on its common stock in 1995, 1996 or 1997
through the date of filing this Form 10-K.



ITEM 6.  SELECTED FINANCIAL DATA

    OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (A) OF FORM 10-K.

                                       9
<PAGE>
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS


    Valley Forge Life Insurance  Company (VFL) is a  wholly-owned  subsidiary of
Continental   Assurance  Company   (Assurance).   Assurance  is  a  wholly-owned
subsidiary of Continental  Casualty Company  (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.

     The operations,  assets and  liabilities of VFL and its parent,  Assurance,
are managed,  to a large extent,  on a combined  basis.  Effective  December 31,
1985, pursuant to a Reinsurance  Pooling Agreement,  VFL began ceding all of its
business  to its  parent,  Assurance.  This  business  is then  pooled  with the
business  of  Assurance,   excluding  Assurance's  participating  contracts  and
separate  accounts,  and 10% of the combined net pool is retroceded to VFL. This
agreement was amended  effective July 1, 1996, for the purpose of also excluding
the separate accounts of VFL.

    VFL  sells a  variety  of  individual  and  group  insurance  products.  The
individual  insurance  products consist  primarily of term,  universal life, and
life  insurance  policies and individual  annuities.  Group  insurance  products
include  life,  accident and health,  consisting  primarily of major medical and
hospitalization  and pension products.

     Products  developed in 1996  included a portfolio of variable  products and
new  universal  life products  which are expected to be marketed in 1997.  These
products will offer  investors the option of allocating  payments to one or more
variable accounts or to a guaranteed income account or both.  Payments allocated
to the variable accounts will be invested in corresponding investment portfolios
where the investment  risk is borne by the investor while payments  allocated to
the guaranteed  income account will earn a minimum  guaranteed  rate of interest
for a  specified  period  of time for  annuity  contracts  and one year for life
products.


                                       10
<PAGE>
RESULTS OF OPERATIONS:

    The following table summarizes key components of VFL's operating results for
each of the last three years.
<TABLE>
<CAPTION>
Year Ended December 31                                1996            1995           1994
----------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
  (excluding realized investment gains/losses):
Revenues:
<S>                                                <C>             <C>             <C>
     Individual premium                            $    52,572     $    48,368     $   37,691
     Group premium                                     272,914         248,285        225,289
----------------------------------------------------------------------------------------------
        Total premiums                                 325,486         296,653        262,980
----------------------------------------------------------------------------------------------
Net investment income                                   29,312          31,494         22,759
Other                                                    8,217           4,818          4,789
----------------------------------------------------------------------------------------------
        Total revenues                                 363,015         332,965        290,528
Total benefits and expenses                            342,039         312,038        274,439
----------------------------------------------------------------------------------------------
     Operating income before income tax                 20,976          20,927         16,089
Income tax expense                                      (7,358)         (7,376)        (5,681)
----------------------------------------------------------------------------------------------
     Net operating income
     (excluding realized investment gains/losses)  $    13,618     $    13,551     $   10,408
==============================================================================================
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
     Individual                                    $     8,209     $     5,597     $    3,119
     Group                                               5,409           7,954          7,289
----------------------------------------------------------------------------------------------
        Net operating income                            13,618          13,551         10,408
     Net realized investment gains (losses)              3,101           8,959         (2,926)
----------------------------------------------------------------------------------------------
     Net income                                    $    16,719     $    22,510     $    7,482
==============================================================================================
</TABLE>

     VFL's revenues,  excluding net realized  investment  gains/losses,  were up
9.0% to $363.0  million for 1996 as  compared to $333.0  million for 1995 and up
25.0% from  $290.5  million for 1994.  Premiums  for 1996 were up 9.7% to $325.5
million as compared to $296.7  million for 1995 and up 23.8% from 1994  premiums
of $263.0 million.  The largest portion of this increase was due to the increase
in group  premiums,  reflecting  the  growth  in the  Federal  Employees  Health
Benefits Program.  Individual premium increased primarily due to increased sales
of VFL's Viaterm life product that was first introduced in late 1994.

    VFL's  investment  income  increased  from  $22.8  million  in 1994 to $31.5
million in 1995 and decreased to $29.3 million in 1996.  The decrease in 1996 is
mainly  due to the  negative  cash  flow  experienced  in  1996  resulting  in a
reduction in the total investment portfolio.

    VFL's net operating  income excluding net realized  investment  gains/losses
was $13.6 million for 1996, compared to $13.6 million and $10.4 million for 1995
and 1994, respectively.

    Net realized investment gains, net of tax, amounted to $3.1 million in 1996,
compared  to $9.0  million  in 1995 and  losses  of $2.9  million  in 1994.  Net
realized  investment  gains for 1996 were  primarily  realized on sales of fixed
maturities.

                                       11
<PAGE>
FINANCIAL CONDITION:

    Assets  totaled  $1,947  million at December 31, 1996,  an increase of 18.6%
over 1995 and 34.6% over 1994.  VFL's cash and  invested  assets of $452 million
decreased by $53 million,  or 10.5%,  over the 1995 level of $505  million,  and
increased $12 million over the 1994 level of $440 million.

    VFL's  stockholder's  equity was approximately  $200 million at December 31,
1996,  compared to $195  million and $156 million at December 31, 1995 and 1994,
respectively.  The increase in stockholder's equity in 1996 is due to net income
of $16.7 million offset by a $12.6 million decrease in net unrealized investment
gains.  The increase in  stockholder's  equity in 1995 was  primarily due to net
income of $22.5  million  which was  partially  offset  by $4.5  million  of net
unrealized investment losses.

--------------------------------------------------------------------------------
                               Statutory                      Stockholder's
                                Surplus         Assets *         Equity *
--------------------------------------------------------------------------------
(In thousands of dollars)

December 31, 1996              $ 124,324      $ 1,947,296      $ 199,540
December 31, 1995                129,912        1,641,438        195,472
December 31, 1994                122,267        1,447,122        156,196
December 31, 1993                117,650        1,258,039        153,249
December 31, 1992                115,660        1,122,762        144,873
--------------------------------------------------------------------------------
* In accordance with generally accepted accounting principles

INVESTMENTS:

    The following table summarizes VFL's  investments shown at cost or amortized
cost for each of the last two years.

<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
-----------------------------------------------------------------------------------------------
December 31                                         1996        %               1995        %
-----------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturites:
       <S>                                     <C>           <C>            <C>            <C>
        U.S. Treasuries and
          government agencies                   $ 117,213      27.5%       $   186,083    42.1%
        Asset backed                              113,376      26.6             84,785    19.2
        Other debt securities                      90,843      21.4             76,533    17.4
-----------------------------------------------------------------------------------------------
        Total fixed maturites                     321,432      75.5            347,401    78.7
Common stocks                                       1,073       0.3              1,074     0.2
Policy loans                                       60,267      14.2             56,008    12.7
Short-term investments                             42,757      10.0             37,184     8.4
-----------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                   $ 425,529     100.0%       $   441,667   100.0%
===============================================================================================
INVESTMENTS AT CARRYING VALUE*                  $ 427,049                  $   462,650
===============================================================================================
* As reported in the Balance Sheet
</TABLE>


                                       12
<PAGE>
INVESTMENTS - (CONTINUED):

    As mentioned previously,  the operations,  assets and liabilities of VFL and
Assurance are, to a large extent,  managed on a combined  basis.  The investment
portfolio is managed to maximize  after-tax  investment  return while minimizing
credit risks with investments concentrated in high quality securities to support
its insurance underwriting operations.  The investment portfolios segregated for
the purpose of supporting policy  liabilities for universal life,  annuities and
other interest sensitive products are held by Assurance.

     VFL has the  capacity to hold its fixed  maturity  portfolio  to  maturity.
However,  securities may be sold as part of VFL's asset/liability  strategies or
to take  advantage of investment  opportunities  generated by changing  interest
rates, tax and credit considerations, or other similar factors. Accordingly, the
fixed maturity  securities are classified as  available-for-sale.  See Note 2 of
the Financial Statements for further information.

    The investment portfolio consists primarily of high quality marketable fixed
maturities,  approximately  98% of which are rated as  investment  grade at both
December 31, 1996 and 1995.

    The  following  table  summarizes  the ratings of VFL's fixed  maturity debt
portfolio at carrying value (market):
--------------------------------------------------------------------------------
December 31                              1996       %          1995      %
--------------------------------------------------------------------------------
(In thousands of dollars)

U.S. government and
 affiliated securities                 $115,926    36.1%     $280,057   76.2%
Other AAA rated                         127,910    39.8        22,007    6.0
AA and A rated                           33,913    10.6        39,337   10.7
BBB rated                                38,272    11.9        18,124    4.9
Below investment grade                    5,045     1.6         8,237    2.2
--------------------------------------------------------------------------------
     Total                             $321,066     100%     $367,762    100 %
================================================================================

    Included in VFL's fixed  maturity  securities at December 31, 1996, are $113
million of  asset-backed  securities,  consisting  of  approximately  5% in U.S.
government  agency  issued  pass-through  certificates,  89%  in  collateralized
mortgage obligations (CMOs), and 6% in corporate asset-backed  obligations.  The
majority of CMOs held are U.S.  government  agency  issues,  which are  actively
traded in liquid markets and are priced by broker-dealers.

    VFL  limits  the  risks  associated  with  interest  rate  fluctuations  and
prepayments by concentrating its CMO investments in planned amortization classes
with relatively  short principal  repayment  windows.  At December 31, 1996, the
fair  value  of  asset-backed   securities  was  below  the  amortized  cost  by
approximately  $.1 million compared with unrealized gains of approximately  $2.5
million at December  31,  1995.  VFL has not  invested in  derivative  financial
instruments,    including   complex   mortgage   derivatives   without   readily
ascertainable  market  prices,  during the last three years nor does it have any
investments in mortgage loans or real estate.


                                       13
<PAGE>
INVESTMENTS - (CONTINUED):

    VFL's  investments in fixed maturities are carried at a fair value of $321.1
million at December 31, 1996, compared with $367.8 million at December 31, 1995.
At  December  31,  1996,  net  unrealized  losses on fixed  maturity  securities
amounted to approximately  $.4 million.  This compares with net unrealized gains
of approximately  $20.4 million at December 31, 1995. The gross unrealized gains
and losses for the fixed  maturity  securities  portfolio  at December 31, 1996,
were $3.2 million and $3.6 million, respectively,  compared to $20.4 million and
$25  thousand,  respectively,  at December  31,  1995.  Such  fluctuations  from
year-to-year are primarily due to changes in interest rates.

    VFL's  investments in equity  securities are carried at a fair value of $3.0
million at December 31, 1996,  compared  with $1.7 million at December 31, 1995.
At December 31, 1996,  net  unrealized  gains on equity  securities  amounted to
approximately  $1.9  million.   This  compares  with  net  unrealized  gains  of
approximately  $.6 million at December 31, 1995. There were no unrealized losses
on equity securities for the years ended December 31, 1996 and 1995.


LIQUIDITY AND CAPITAL RESOURCES:

    The liquidity requirements of VFL have been met primarily by funds generated
from  operations.  VFL's principal  operating cash flow sources are premiums and
investment income. The primary operating cash flow uses are payments for claims,
policy benefits and operating expenses.

     For the year ended December 31, 1996, VFL's operating  activities generated
net negative cash flows of approximately $43 million, compared with net positive
cash flows of $21 million in 1995 and $75 million in 1994. The  deterioration in
cash flow in 1996 was caused by the significant acquisition and other first-year
expenses  related to the large  volume of new  business,  as well as the delayed
settlement of receivables from an affiliate.  VFL believes that future liquidity
needs will be met primarily by cash  generated from  operations.  Net cash flows
from operations are invested in marketable securities.

    VFL's insurance  ratings are pooled ratings with Assurance.  The table below
reflects ratings for VFL/Assurance as of December 31, 1996:


      |--------------------------------------------------------------|
      |              A.M Best    Standard & Poor's    Duff & Phelps  |
      |--------------------------------------------------------------|
      |                                                              |
      |   RATING         A              AA                 AA        |
      |--------------------------------------------------------------|


                                       14
<PAGE>
ACCOUNTING STANDARDS:

Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of

    In March 1995,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed Of".
This Statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable  intangibles,  and goodwill related to those assets
to be held and used for long-lived assets and certain  identifiable  intangibles
to be disposed of. This statement  requires that  long-lived  assets and certain
identifiable  intangibles  to be held and used by the  entity  be  reviewed  for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.  This Statement is effective
for 1996 financial statements.  This Statement did not have a significant impact
on VFL.

Accounting for Stock-Based Compensation

    In October  1995,  the FASB issued  SFAS 123,  "Accounting  for  Stock-Based
Compensation".  This Statement  establishes  financial  accounting and reporting
standards for stock-based employee  compensation plans. The requirements of this
Statement is effective  for 1996  financial  statements.  This  Statement had no
impact on VFL or CNA as the Companies have no compensation which qualifies.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities

    In June 1996,  the FASB  issued  SFAS 125,  "Accounting  for  Transfers  and
Servicing  of  Financial  Assets  and  Extinguishments  of  Liabilities".   This
Statement provides  standards for  distinguishing  transfers of financial assets
that are sales from  transfers that are secured  borrowings.  This Statement has
been  amended and is now  effective  for  transfers  and  servicing of financial
assets and  extinguishment  of liabilities  occurring after December 31, 1996 or
1997,  depending  on the type of  transaction.  This  Statement  will not have a
significant impact on VFL.

Accounting Disclosure Rules and Practices

    In January 1997, the Securities and Exchange  Commission approved amendments
to Regulation S-X,  Regulation S-K, Regulation S-B, and various forms to clarify
and expand existing disclosure requirements with respect to derivative financial
instruments and derivative  commodity  instruments.  The new rules would require
enhanced descriptions in the footnotes to the financial statements of accounting
policies  for  derivative   financial   instruments  and  derivative   commodity
instruments. They would also require disclosure outside the financial statements
of  qualitative  and  quantitative  information  about  market  risk  related to
derivative financial instruments,  other financial  instruments,  and derivative
commodity  instruments.  The  requirement of these  amendments are effective for
1997 financial  statements.  These amendments will not have a significant impact
on VFL.


                                       15
<PAGE>
FORWARD-LOOKING STATEMENTS:

    When included in this report, the words "expects," "intends," "anticipates,"
"estimates," and analogous expressions are intended to identify  forward-looking
statements.  Such  statements  inherently  are subject to a variety of risks and
uncertainties  that could cause actual results to differ  materially  from those
projected.  Such risks and uncertainties include, among others, general economic
and business  conditions,  competition,  changes in financial  markets  (credit,
currency,  commodities  and stocks)  changes in foreign,  political,  social and
economic  conditions,  regulatory  initiatives and compliance with  governmental
regulations,  judicial decisions and rulings, and various other matters, many of
which are beyond VFL's control.  These forward-looking  statements speak only as
of  the  date  of  this  Report.  VFL  expressly  disclaims  any  obligation  or
undertaking to release publicly any updates or revisions to any  forward-looking
statement  contained  herein to reflect  any change in VFL's  expectations  with
regard thereto or any change in events, conditions or circumstances on which any
statement is based.



                                       16
<PAGE>
ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report..................................................18
Balance Sheet, December 31, 1996 and 1995.....................................19
Statement of Operations, three years ended December 31, 1996..................20
Statement of Stockholder's Equity, three years ended December 31, 1996........21
Statement of Cash Flows, three years ended December 31, 1996..................22
Notes to Financial Statements.................................................23



                                       17
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholder
Valley Forge Life Insurance Company

    We have  audited  the  accompanying  balance  sheets  of Valley  Forge  Life
Insurance Company (a wholly-owned  subsidiary of Continental  Assurance Company,
which  is  a  wholly-owned   subsidiary  of  Continental   Casualty  Company,  a
wholly-owned  subsidiary  of CNA  Financial  Corporation,  an affiliate of Loews
Corporation)  as of December  31, 1996 and 1995 and the  related  statements  of
operations,  stockholder's  equity and cash flows for each of the three years in
the period  ended  December  31, 1996.  Our audits also  included the  financial
statement  schedules listed in the Index at Item 14. These financial  statements
and  financial  statement  schedules  are the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and financial statement schedules based on our audits.

    We conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

    In our opinion,  such financial  statements  present fairly, in all material
respects,  the financial  position of Valley Forge Life Insurance  Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1996 in conformity
with  generally  accepted  accounting  principles.  Also,  in our opinion,  such
financial  statement  schedules,  when  considered  in  relation  to  the  basic
financial  statements taken as a whole,  present fairly in all material respects
the information set forth therein.


S/DELOITTE & TOUCHE LLP

Deloitte & Touche LLP
Chicago, Illinois
February 12, 1997


                                       18
<PAGE>
<TABLE>
<CAPTION>
                                         VALLEY FORGE LIFE INSURANCE COMPANY

                                                    BALANCE SHEET

------------------------------------------------------------------------------------------------------
December 31                                                               1996              1995
------------------------------------------------------------------------------------------------------
(In thousands of dollars
Assets:
   Investments-Note 2:
     <S>                                                              <C>                 <C>
     Fixed maturites available-for-sale (cost: $321,432 and $347,401)   $   321,066       $   367,762
     Equity securities available-for-sale (cost: $1,073 and $1,074)           2,959             1,696
     Policy loans                                                            60,267            56,008
     Short-term investments                                                  42,757            37,184
------------------------------------------------------------------------------------------------------
          TOTAL INVESTMENTS                                                 427,049           462,650
------------------------------------------------------------------------------------------------------
   Cash                                                                      24,759            42,103
   Insurance receivables:
     Reinsurance receivables-Note 7                                       1,320,583         1,073,481
     Premium and other insurance receivables                                 27,884             2,566
     Less allowance for doubtful accounts                                      (378)             (175)
   Deferred acquisition costs                                                74,589            50,600
   Accrued investment income                                                  4,945             4,687
   Federal income taxes recoverable-Note 6                                        -               575
   Deferred income taxes-Note 6                                                 312                 -
   Due from affiliates                                                       67,499             4,936
   Other assets                                                                  54                15
------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                  $ 1,947,296       $ 1,641,438
======================================================================================================

Liabilities and Stockholder's Equity:
Liabilities:
   Insurance reserves-Note 7:
     Future policy benefits                                             $ 1,621,504       $ 1,334,393
     Claims                                                                  60,568            59,423
     Policyholders' funds                                                    38,145            34,574
   Federal income taxes payable-Note 6                                        3,824                 -
   Deferred income taxes-Note 6                                                   -             3,191
   Other liabilities                                                         23,715            14,385
------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES                                               1,747,756         1,445,966
------------------------------------------------------------------------------------------------------
Stockholder's Equity-Note 3:
    Common stock ($50 par value; Authorized-200,000 shares;
       Issued-50,000 shares)                                                  2,500             2,500
    Additional paid-in capital                                               39,150            39,150
    Retained earnings                                                       156,900           140,181
    Net unrealized investment gains-Note 2                                      990            13,641
------------------------------------------------------------------------------------------------------
          TOTAL STOCKHOLDER'S EQUITY                                        199,540           195,472
------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                    $ 1,947,296       $ 1,641,438
======================================================================================================

                              See accompanying Notes to Financial Statements.
</TABLE>
                                       19
<PAGE>
<TABLE>
<CAPTION>
                                    VALLEY FORGE LIFE INSURANCE COMPANY

                                          STATEMENT OF OPERATIONS

-------------------------------------------------------------------------------------------------
Year Ended December 31                                           1996         1995          1994
-------------------------------------------------------------------------------------------------
(In thousands of dollars)

Revenues:
<S>                                                         <C>          <C>           <C>
   Premiums-Note 7                                          $ 325,486    $ 296,653     $ 262,980
   Net investment income-Note 2                                29,312       31,494        22,759
   Realized investment gains (losses)-Note 2                    4,771       13,783        (4,502)
   Other                                                        8,217        4,818         4,789
-------------------------------------------------------------------------------------------------
                                                              367,786      346,748       286,026
-------------------------------------------------------------------------------------------------

Benefits and expenses:
   Insurance claims and policyholders' benefits-Note 7        304,840      270,936       237,334
   Amortization of deferred acquisition costs                   1,177        6,066         4,874
   Other operating expenses-Note 8                             36,022       35,036        32,231
-------------------------------------------------------------------------------------------------
                                                              342,039      312,038       274,439
-------------------------------------------------------------------------------------------------
     Income before income tax                                  25,747       34,710        11,587
Income tax expense-Note 6                                       9,028       12,200         4,105
-------------------------------------------------------------------------------------------------
     NET INCOME                                             $  16,719    $  22,510     $   7,482
=================================================================================================

                                  See accompanying Notes to Financial Statements.
</TABLE>
                                       20
<PAGE>


<TABLE>
<CAPTION>

                                       VALLEY FORGE LIFE INSURANCE COMPANY

                                        STATEMENT OF STOCKHOLDER'S EQUITY

-------------------------------------------------------------------------------------------------
                                                                          Net
                                              Additional               Unrealized
                                     Common    Paid-in     Retained    Investment
                                     Stock     Capital     Earnings   Gains (Losses)   Total
-------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                <C>        <C>          <C>         <C>          <C>
Balance, December 31, 1993          $2,500     $39,100      $110,189    $  1,410     $153,249
   Net income                            -           -         7,482          -         7,482
   Change in net unrealized gains/
        (losses)-Note 2                  -           -             -      (4,535)      (4,535)
-------------------------------------------------------------------------------------------------
Balance, December 31, 1994           2,500      39,150       117,671      (3,125)     156,196
   Net income                            -           -        22,510          -        22,510
   Change in net unrealized gains/
        (losses)-Note 2                  -           -             -      16,766       16,766
-------------------------------------------------------------------------------------------------
Balance, December 31, 1995           2,500      39,150       140,181      13,641      195,472
   Net income                            -           -        16,719          -        16,719
   Change in net unrealized gains/
        (losses)-Note 2                  -           -             -     (12,651)     (12,651)
-------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996          $2,500     $39,150      $156,900    $    990     $199,540
=================================================================================================

                 See accompanying Notes to Financial Statements.

</TABLE>
                                       21
<PAGE>
<TABLE>
<CAPTION>
                                VALLEY FORGE LIFE INSURANCE COMPANY

                                      STATEMENT OF CASH FLOWS

----------------------------------------------------------------------------------------------------
Year Ended December 31                                             1996          1995          1994
----------------------------------------------------------------------------------------------------
(In thousands of dollars)

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                          <C>            <C>          <C>
   Net income                                                $   16,719     $   22,510   $    7,482
                                                            ----------------------------------------
   Adjustments  to  reconcile  net  income  to net
          cash  flows  from  operating activities:
     Pre-tax realized investment (gains) losses                  (4,771)       (13,783)       4,502
     Amortization of bond discount                               (4,922)        (3,921)        (886)
     Changes in:
        Insurance receivables                                  (272,218)      (121,933)    (119,090)
        Deferred acquisition costs                              (23,989)        (9,267)      (1,112)
        Accrued investment income                                  (258)            69       (1,606)
        Federal income taxes recoverable                          4,399            (28)      (1,356)
        Deferred income taxes                                     3,309            453         (172)
        Insurance reserves                                      291,826        196,478      144,704
        Due from affiliates                                     (62,563)       (55,308)      37,119
        Other, net                                                9,293          5,730        5,130
----------------------------------------------------------------------------------------------------
            Total adjustments                                   (59,894)        (1,510)      67,233
----------------------------------------------------------------------------------------------------
            NET CASH FLOWS FROM OPERATING ACTIVITIES            (43,175)        21,000       74,715
----------------------------------------------------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturuties                               (535,263)      (361,579)    (863,023)
   Proceeds from fixed maturities:
     Sales                                                      530,828        336,731      408,505
     Maturities, calls and redemptions                           36,726         51,046      189,355
   Purchases of equity securities                                  (728)             -          (93)
   Proceeds from sale of equity securities                        1,306              -            -
   Change in short-term investments                              (2,851)         1,901      196,581
   Change in policy loans                                        (4,259)        (9,007)      (6,058)
   Other, net                                                        72             85           24
----------------------------------------------------------------------------------------------------
          NET CASH FLOWS FROM INVESTING ACTIVITIES               25,831         19,177      (74,709)
----------------------------------------------------------------------------------------------------
          NET CASH FLOWS                                        (17,344)        40,177            6
Cash at beginning of year                                        42,103          1,926        1,920
----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR                                          $   24,759     $   42,103   $     1,926
====================================================================================================
Supplemental disclosures of cash flow information:
   Cash paid:
        Federal income taxes                                 $    1,965     $    6,531   $    5,426
====================================================================================================

                 See accompanying Notes to Financial Statements.

</TABLE>
                                       22
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                          NOTES TO FINANCIAL STATEMENTS


NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

    Valley Forge Life Insurance  Company (VFL) is a  wholly-owned  subsidiary of
Continental   Assurance  Company   (Assurance).   Assurance  is  a  wholly-owned
subsidiary of Continental  Casualty Company  (Casualty) which is wholly-owned by
CNA Financial Corporation (CNA). Loews Corporation owns approximately 84% of the
outstanding common stock of CNA.

     VFL  sells a  variety  of  individual  and group  insurance  products.  The
individual  insurance  products consist  primarily of term,  universal life, and
life  insurance  policies and individual  annuities.  Group  insurance  products
include  life,  accident and health,  consisting  primarily of major medical and
hospitalization and pension products.

     Effective December 31, 1985,  pursuant to a Reinsurance  Pooling Agreement,
VFL began ceding all of its business to its parent,  Assurance. This business is
then pooled with the business of Assurance,  excluding Assurance's participating
contracts and separate accounts,  and 10% of the combined net pool is retroceded
to VFL. This  agreement was amended  effective  July 1, 1996, for the purpose of
also excluding the separate accounts of VFL.

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted accounting  principles (GAAP) requires management to make estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results could differ from those  estimates.  Certain
amounts  applicable  to  prior  years  have  been  reclassified  to  conform  to
classifications followed in 1996.


INSURANCE

    Premium  revenue-Revenues  on universal life type contracts are comprised of
contract  charges  and fees  which  are  recognized  over the  coverage  period.
Accident and health insurance  premiums are earned ratably over the terms of the
policies  after  provision for estimated  adjustments on  retrospectively  rated
policies and deductions for ceded insurance.  Other life insurance  premiums are
recognized as revenue when due, after deductions for ceded insurance.

    Claim reserves-Claim  reserves include provisions for reported claims in the
course  of  settlement  and  estimates  of  unreported  losses  based  upon past
experience.


                                       23
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 1. - (CONTINUED):

    Future policy  benefit  reserves-Reserves  for  traditional  life  insurance
products are  computed  based upon net level  premium  methods  using  actuarial
assumptions  as  to  interest  rates,  mortality,  morbidity,   withdrawals  and
expenses.  Actuarial  assumptions  include a margin for  adverse  deviation  and
generally vary by plan, age at issue and policy  duration.  Interest rates range
from 3% to 11%, and mortality,  morbidity and withdrawal assumptions reflect VFL
and  industry  experience  prevailing  at the time of issue.  Expense  estimates
include the  estimated  effects of  inflation  and  expenses  beyond the premium
paying period.  Reserves for universal life-type contracts are established using
the retrospective  deposit method.  Under this method,  liabilities are equal to
the account balances that accrue to the benefit of the  policyholders.  Interest
crediting  rates ranged from 5.6% to 6.6% for the three years ended December 31,
1996.

    Reinsurance-In  addition to the pooling  agreement with Assurance,  VFL also
assumes and cedes  insurance  with other  insurers and reinsurers and members of
various   reinsurance   pools  and   associations.   VFL  utilizes   reinsurance
arrangements to limit its maximum loss, provide greater  diversification of risk
and minimize  exposures on larger risks. The reinsurance  coverages are tailored
to the specific risk  characteristics  of each product line with VFL's  retained
amount  varying by type of coverage.  Amounts  recoverable  from  reinsurers are
estimated in a manner consistent with the claim liability.

    Deferred acquisition  costs-Costs of acquiring insurance business which vary
with and are primarily  related to the production of such business are deferred.
Such costs  include  commissions,  premium  taxes and certain  underwriting  and
policy issuance costs.  Acquisition costs are capitalized and amortized based on
assumptions  consistent with those used for computing  policy benefit  reserves.
Acquisition  costs on ordinary life  business are  amortized  over their assumed
premium  paying  periods.  Universal  life and  annuity  acquisition  costs  are
amortized in proportion to the present value of the estimated gross profits over
the products' assumed durations,  which are regularly  evaluated and adjusted as
appropriate.  Based on 1996 evaluations,  the assumed interest rate spreads were
adjusted,  the effect of which was to reduce  amortization by  approximately  $3
million.

INVESTMENTS

     Valuation  of  investments-VFL  classifies  its fixed  maturity  securities
(bonds  and  redeemable   preferred   stocks)  and  its  equity   securities  as
available-for-sale,  and as such, they are carried at fair value.  The amortized
cost of fixed maturity  securities is adjusted for  amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included
in investment income.

    Policy loans are carried at unpaid balances.  Short-term investments,  which
have an original  maturity of one year or less,  are carried at  amortized  cost
which  approximates  market  value.  VFL has no real estate,  mortgage  loans or
investments in derivative securities.


                                       24
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 1. - (CONTINUED):

    Investment gains and losses-All securities  transactions are recorded on the
trade date.  Realized investment gains and losses are determined on the basis of
the cost of the specific securities sold. Unrealized investment gains and losses
on fixed maturity and equity  securities are reflected as part of  stockholder's
equity, net of applicable deferred income taxes and participating policyholders'
interest.  Investments  are written down to estimated fair values and losses are
charged  to  income  when a  decline  in value is  considered  to be other  than
temporary.

    Securities sold under  repurchase  agreements-VFL  has a securities  lending
program where securities are loaned to third parties,  primarily major brokerage
firms. Borrowers of these securities must maintain a deposit of 100% of the fair
value of the  securities if the collateral is cash, or 102% if the collateral is
securities.  Cash  deposits  from  these  transactions  have  been  invested  in
short-term  investments  (primarily  commercial paper). VFL continues to receive
the  interest  on  the  loaned  debt   securities,   as  beneficial  owner  and,
accordingly,   the  loaned  debt  securities  are  included  in  fixed  maturity
securities. The liabilities for securities sold subject to repurchase agreements
are recorded at the  contractual  repurchase  amounts.  VFL had no securities on
loan at December 31, 1996 or 1995.

INCOME TAXES

    The provision  for income taxes  includes  deferred  taxes,  resulting  from
temporary  differences  between the financial  statement and tax return bases of
assets and liabilities  under the liability method.  Such temporary  differences
primarily relate to insurance reserves,  investment valuation  differences,  net
unrealized investment gains/losses and deferred acquisition costs.


                                       25
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 2. INVESTMENTS:

<TABLE>
<CAPTION>
NET INVESTMENT INCOME
-----------------------------------------------------------------------------------------------------
Year Ended December 31                                                 1996        1995         1994
-----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
   Bonds:
<S>                                                                <C>          <C>         <C>
     Taxable                                                       $ 21,597     $ 21,576    $ 16,568
     Tax exempt                                                          12           23          23
Equity securities                                                        59           64          64
Policy loans                                                          3,669        3,925       2,979
Short-term investments                                                4,197        6,037       3,658
Security repurchase transactions                                          -          135          63
Other                                                                     -            2        (381)
-----------------------------------------------------------------------------------------------------
                                                                     29,534       31,762      22,974
Investment expense                                                      222          268         215
-----------------------------------------------------------------------------------------------------
      NET INVESTMENT INCOME                                        $ 29,312     $ 31,494    $ 22,759
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
----------------------------------------------------------------------------------------------------
Year Ended December 31                                                 1996        1995        1994
----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Realized investment gains (losses):
<S>                                                                <C>          <C>         <C>
   Fixed maturities                                                $  4,123     $ 13,674    $ (4,306)
   Equity securities                                                    578            -           -
   Other                                                                 70          109        (196)
                                                                  ----------------------------------
                                                                      4,771       13,783      (4,502)
Income tax (expense) benefit                                         (1,670)      (4,824)      1,576
----------------------------------------------------------------------------------------------------
        Net realized investment gains (losses)                        3,101        8,959      (2,926)
----------------------------------------------------------------------------------------------------
Change in net unrealized investment gains (losses):
   Fixed maturities                                                 (20,726)      25,405      (6,892)
   Equity securities                                                  1,263          389         (85)
                                                                  ----------------------------------
                                                                    (19,463)      25,794      (6,977)
Income tax (expense) benefit                                          6,812       (9,028)      2,442
----------------------------------------------------------------------------------------------------
        Change in net unrealized investment gains (losses)          (12,651)      16,766      (4,535)
----------------------------------------------------------------------------------------------------
      NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES)        $ (9,550)    $ 25,725    $ (7,461)
====================================================================================================
</TABLE>

                                       26
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


NOTE 2. - (CONTINUED):

<TABLE>
<CAPTION>
SUMMARY OF GROSS REALIZED INVESTMENT GAINS (LOSSES)
FOR FIXED MATURITIES AND EQUITY SECURITIES
-------------------------------------------------------------------------------------------------------

                                     1996                     1995                      1994
                           ----------------------------------------------------------------------------
                              FIXED       EQUITY        Fixed       Equity       Fixed       Equity
Year Ended December 31      MATURITIES  SECURITIES   Maturities   Securities   Maturities  Securities
-------------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                         <C>         <C>         <C>             <C>        <C>
Proceeds from sales         $530,828    $ 1,306     $ 336,731       $  -       $  408,505      -
=======================================================================================================

Gross realized gains        $ 7,927     $   578        18,185          -       $    1,559      -
Gross realized losses        (3,804)          -        (4,511)         -           (5,865)     -
-------------------------------------------------------------------------------------------------------
     NET REALIZED GAINS
        (LOSSES) ON SALES   $ 4,123     $   578     $  13,674       $  -       $   (4,306)     -
=======================================================================================================
</TABLE>

<TABLE>
<CAPTION>
ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY
--------------------------------------------------------------------------------------------------------------
                                                         1996                                 1995
                                          -----------------------------------   ------------------------------
December 31                                 GAINS      LOSSES        NET          Gains      Losses     Net
--------------------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                        <C>         <C>         <C>         <C>        <C>        <C>
Fixed maturities                           $   3,226   $ (3,592)   $  (366)    $  20,386  $   (25)   $ 20,361
Equity securities                              1,886          -      1,886           622        -         622
                                          --------------------------------------------------------------------
                                           $   5,112   $ (3,592)     1,520     $  21,008  $   (25)     20,983
                                          ======================                =====================
Deferred income tax expense                                           (530)                            (7,342)
--------------------------------------------------------------------------------------------------------------
     NET UNREALIZED INVESTMENT GAINS                               $   990                           $ 13,641
==============================================================================================================
</TABLE>
                                       27
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 2. -(CONTINUED):
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
------------------------------------------------------------------------------------------------
                                                            GROSS         GROSS
                                            AMORTIZED    UNREALIZED     UNREALIZED       MARKET
December 31, 1996                             COST          GAINS         LOSSES          VALUE
------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                           <C>          <C>          <C>         <C>
United States Treasury securities and
     obligations of government agencies     $  117,213      $    141     $ 2,486     $  114,868
Asset-backed securities                        113,376           641         767        113,251
States, municipalities and tax exempt
     political subdivisions                         30             -           -             30
Corporate securities                            55,196           988         335         55,849
Other debt securities                           35,617         1,456           4         37,068
------------------------------------------------------------------------------------------------
     Total fixed maturities                    321,432         3,226       3,592        321,066
Equity securities                                1,073         1,886           -          2,959
------------------------------------------------------------------------------------------------
     TOTAL                                  $  322,505      $  5,112     $ 3,592     $  324,025
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED MATURITIES
AND EQUITY SECURITIES AVAILABLE FOR SALE
-------------------------------------------------------------------------------------------------
                                                             Gross         Gross
                                             Amortized    Unrealized     Unrealized       Market
December 31, 1995                              Cost          Gains         Losses          Value
-------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                           <C>          <C>          <C>         <C>
United States Treasury securities and
     obligations of government agencies     $  186,083      $ 12,526     $     1     $  198,608
Asset-backed securities                         84,785         2,545           8         87,322
States, municipalities and tax exempt
     political subdivisions                        279            14           -            293
Corporate securities                            50,523         2,508           6         53,025
Other debt securities                           25,731         2,793          10         28,514
-------------------------------------------------------------------------------------------------
     Total fixed maturities                    347,401        20,386          25        367,762
Equity securities                                1,074           622           -          1,696
-------------------------------------------------------------------------------------------------
     Total                                  $  348,475      $ 21,008     $    25     $  369,458
=================================================================================================
</TABLE>
                                       28
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 2. - (CONTINUED):

<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------------
                                                       1996                             1995
                                            --------------------------    ----------------------
                                              AMORTIZED       MARKET        Amortized    Market
December 31                                      COST          VALUE          Cost        Value
------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                          <C>           <C>             <C>         <C>
Due in one year or less                      $     3,299   $    3,305      $   7,470   $   7,666
Due after one year through five years            118,507      116,223        135,160     136,297
Due after five years through ten years            47,998       48,866         35,869      37,538
Due after ten years                               38,252       39,421         84,117      98,939
Asset-backed securities not due at a single
     maturity date                               113,376      113,251         84,785      87,322
------------------------------------------------------------------------------------------------
     TOTAL                                   $   321,432   $  321,066      $ 347,401   $ 367,762
================================================================================================
</TABLE>

    Actual maturities may differ from contractual  maturities because securities
may be called or prepaid with or without call or prepayment penalties.

     There are no  investments  (other  than  equity  securities)  that have not
produced  income for the years ended  December  31, 1996 and 1995.  There are no
investments  in a single  issuer,  other  than the U.S.  government,  that  when
aggregated exceed 10% of stockholder's equity.


NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS:

    Fair values are  required to be  disclosed  for all  financial  instruments,
whether or not recognized in the balance  sheet,  for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values  may be based  on  estimates  using  present  value  or  other  valuation
techniques. These techniques are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. Potential taxes
and other  transaction  costs have not been considered in estimating fair value.
The estimates  presented herein are subjective in nature and are not necessarily
indicative of the amounts VFL could realize in the current market exchange.  Any
difference would not be expected to be material.

    All nonfinancial instruments such as deferred acquisition costs, reinsurance
receivables,  deferred  income taxes and insurance  reserves,  are excluded from
fair value  disclosure.  Thus, the total fair value amounts cannot be aggregated
to determine the underlying economic value of VFL.

    The carrying  amounts  reported in the balance sheet  approximate fair value
for cash,  short-term  investments,  premium  and other  insurance  receivables,
accrued  investment  income,  and  certain  other  assets and other  liabilities
because of their short-term nature. Accordingly, these financial instruments are
not listed in the table below.

                                       29
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


NOTE 3. - (CONTINUED):

    The  carrying  amounts and  estimated  fair values of VFL's other  financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                    1996                        1995
                                          ---------------------------------------------------
                                            CARRYING     ESTIMATED     Carrying     Estimated
December 31                                  AMOUNT      FAIR VALUE     Amount     Fair Value
---------------------------------------------------------------------------------------------
(In thousands of dollars)

FINANCIAL ASSETS
   Investments:
<S>                        <C>             <C>           <C>          <C>          <C>
     Fixed maturities-Note 2               $ 321,066     $ 321,066    $ 367,762    $ 367,762
     Equity securities-Note 2                  2,959         2,959        1,696        1,696
     Policy loans                             60,267        56,169       56,008       52,648
FINANCIAL LIABILITIES
   Premium deposits and annuity contracts    167,049       153,676       68,578       64,565
=============================================================================================
</TABLE>
    The following  methods and  assumptions  were used by VFL in estimating  its
fair value amounts for financial instruments:

           Fixed maturity  securities and equity  securities are based on quoted
         market prices,  where  available.  For securities not actively  traded,
         fair  values are  estimated  using  values  obtained  from  independent
         pricing services or quoted market prices of comparable instruments.

           The fair values for policy loans are estimated using  discounted cash
         flow analyses at interest rates currently  offered for similar loans to
         borrowers  with   comparable   credit   ratings.   Loans  with  similar
         characteristics are aggregated for purposes of the calculations.

           Premium  deposits  and  annuity  contracts  are valued  based on cash
         surrender values and the outstanding fund balances.


NOTE 4.  STATUTORY CAPITAL AND SURPLUS:

    Statutory  capital  and  surplus  and net income for VFL are  determined  in
accordance with accounting  practices  prescribed by the Pennsylvania  Insurance
Department. Prescribed statutory accounting practices are set forth in a variety
of publications of the National  Association of Insurance  Commissioners as well
as  state  laws,  regulations,  and  general  administrative  rules.  VFL has no
material permitted  accounting  practices.  VFL had a statutory net loss of $2.7
million, compared with net income of $8.9 million and $5.2 million for the years
ended December 31, 1996, 1995 and 1994, respectively. The statutory net loss for
1996 is primarily  due to the increase in sales of  individual  life and annuity
products.  Costs  related to these sales are charged  immediately  to income for
statutory  reporting  purposes;  under  GAAP,  such  costs are  capitalized  and
amortized to income over the duration of these

                                       30
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 4. - (CONTINUED):

contracts.  Statutory  capital and surplus for VFL was $124.3 million and $129.9
million at December 31, 1996 and 1995, respectively.

    The payment of dividends by VFL to Assurance  without prior  approval of the
Pennsylvania  Insurance Department is limited to formula amounts. As of December
31,  1996,  approximately  $12.4  million  was not  subject  to prior  Insurance
Department approval.



NOTE 5. BENEFIT PLANS:

PENSION PLAN

     VFL has no  employees  as it has  contracted  with  Casualty  for  services
provided by Casualty employees. As Casualty is a wholly-owned subsidiary of CNA,
all  Casualty  employees  are  covered  by CNA's  Benefit  Plans.  The plans are
discussed below.

    CNA  has  several  noncontributory  pension  plans  covering  all  full-time
employees age 21 or over who have completed at least one year of service. VFL is
included in the CNA Employees' Retirement Plan. Plan benefits are based on years
of credited  service and the  employee's  highest  sixty  consecutive  months of
compensation.

    CNA's funding policy is to make  contributions in accordance with applicable
governmental  regulatory  requirements.  The  assets  of the plan  are  invested
primarily  in  U.S.  government   securities  with  the  balance  in  short-term
investments, common stocks and other fixed income securities.

    Effective  January 1, 1996, the retirement  plans redefined  compensation to
include base pay, overtime and bonuses. This amendment generated an unrecognized
prior service cost of $20.2 million for CNA.

    The funded status is determined  using  assumptions  at the end of the year.
Pension cost is determined using assumptions at the beginning of the year.

     Net periodic  pension cost allocated to VFL was $3.6 million,  $1.7 million
and $1.1  million  for the  years  ended  December  31,  1996,  1995  and  1994,
respectively.

                                       31
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED):

    The  following  table  sets  forth the  Plans'  funded  status  and  amounts
recognized in CNA's consolidated financial statements at December 31, 1996, 1995
and 1994.

<TABLE>
<CAPTION>
ACCUMULATED BENEFIT OBLIGATION
-------------------------------------------------------------------------------------------------------------------
December 31                                                   1996*                   1995*                1994
-------------------------------------------------------------------------------------------------------------------
                                                      OVERFUNDED UNDERFUNDED   Overfunded  Underfunded   Overfunded
                                                        PLANS      PLANS         Plans       Plans         Plans
-------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Actuarial present value of accumulated plan benefits:
<S>                                                    <C>      <C>            <C>         <C>          <C>
   Vested                                              $517,221 $ 622,548      $ 491,052   $ 646,017    $  376,377
   Nonvested                                             37,718    32,369         28,346      14,126        39,152
-------------------------------------------------------------------------------------------------------------------
     ACCUMULATED BENEFIT OBLIGATION                    $554,939 $ 654,917      $ 519,398   $ 660,143    $  415,529
===================================================================================================================
* The 1996 and 1995 data includes The Continental  Corporation  Retirement Plans which are underfunded.

NET PENSION ASSET (LIABILITY)
------------------------------------------------------------------------------------------------------------------
December 31                                                       1996*               1995*               1994
------------------------------------------------------------------------------------------------------------------
                                                     OVERFUNDED  UNDERFUNDED  Overfunded Underfunded   Overfunded
                                                         PLANS      PLANS       Plans      Plans         Plans
------------------------------------------------------------------------------------------------------------------
Projected benefit obligation                           $777,755 $ 788,333    $ 769,999   $ 809,308    $  651,418
Plan assets at fair value                               701,854   503,623      629,673     496,264       495,492
-------------------------------------------------------------------------------------------------------------------
     Plan assets less than projected benefit obligation (75,901) (284,710)    (140,326)   (313,044)     (155,926)
Unrecognized net asset at January 1, 1986,
    being recognized over 12 years                       (7,099)        -      (12,176)          -       (17,253)
Unrecognized prior service costs                         19,077    77,747       21,445     104,042        20,773
Unrecognized net loss                                   122,173   (11,793)     164,585      13,508       174,039
-------------------------------------------------------------------------------------------------------------------
     NET PENSION ASSET (LIABILITY)                     $ 58,250 $(218,756)   $  33,528   $(195,494)   $   21,633
===================================================================================================================
* The 1996 and 1995 data includes The Continental  Corporation  Retirement Plans which are underfunded.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NET PERIODIC PENSION COST
---------------------------------------------------------------------------------------------------------------
December 31                                                 1996*                      1995*           1994
---------------------------------------------------------------------------------------------------------------
                                                  OVERFUNDED UNDERFUNDED    Overfunded  Underfunded  Overfunded
                                                    PLANS       PLANS         Plans       Plans        Plans
---------------------------------------------------------------------------------------------------------------
Net periodic pension cost:
<S>                                              <C>         <C>         <C>         <C>          <C>
   Service cost-benefits attributed to employee
     service during the year                      $ 36,489   $18,825      $  32,118   $   11,596   $   32,354
Interest cost on projected benefit obligation       53,549    56,771         51,056       32,760       44,666
---------------------------------------------------------------------------------------------------------------
Actual return on plan assets                       (31,106)  (29,013)      (115,363)     (43,432)      11,579
Net amortization and deferral                      (16,059)   (5,982)        72,415       19,547      (43,265)
---------------------------------------------------------------------------------------------------------------
     NET PERIODIC PENSION COST                    $ 42,873   $40,601      $  40,226   $   20,471   $   45,334
===============================================================================================================
*The 1996 and 1995 data includes The Continental Corporation Retirement Plans which are underfunded.
</TABLE>
<TABLE>
<CAPTION>
Actuarial assumptions are set forth in the following table.

ASSUMPTIONS
----------------------------------------------------------------------------------------------------------------

December 31                                             1996             1995             1994           1993
----------------------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>             <C>              <C>
Discount rate                                           7.50%            7.25%           8.50%            7.25%
Rate of increase in compensation levels*                2.75             2.75            4.00             4.50
Expected long-term rate of return on plan assets   7.75-8.50        7.50-8.50            8.75             7.50
----------------------------------------------------------------------------------------------------------------
* Excludes age/service related merit and productivity increases.
</TABLE>
                                       32
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED):

POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

    CNA provides certain health and dental care benefits for eligible  retirees,
through age 64, and provides life insurance and reimbursement of Medicare Part B
premiums for all eligible retired persons.  CNA funds benefit costs  principally
on the basis of current benefit payments.

     Net periodic postretirement benefit cost allocated to VFL was $1.3 million,
$.7 million and $.6 million for the years  ended  December  31,  1996,  1995 and
1994, respectively.

    The following table sets forth the amounts  recognized in CNA's consolidated
financial statements at December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
-------------------------------------------------------------------------------------------------------------
December 31                                                               1996*          1995*       1994
-------------------------------------------------------------------------------------------------------------
(In thousands of dollars)

Accumulated postretirement benefit obligation:
<S>                                                                      <C>           <C>          <C>
   Retirees                                                              $171,950      $185,507     $ 27,088
   Fully eligible, active plan participants                                89,009        59,173       53,684
   Other active plan paticipants                                           88,191        62,540       41,106
-------------------------------------------------------------------------------------------------------------
     Total accumulated postretirement benefit obligation                  349,150       307,220      121,878
Unrecognized prior service cost                                               (70)            -      (11,177)
Unrecognized net gain (loss)                                              (12,215)        7,380       19,702
-------------------------------------------------------------------------------------------------------------
     ACCRUED POSTRETIREMENT BENEFIT COST                                 $336,865      $314,600     $130,403
=============================================================================================================
* The 1996 and 1995 data includes  postretirement  benefit  obligations  for The Continental Corporation retirees.

NET PERIODIC POSTRETIREMENT BENEFIT COST
--------------------------------------------------------------------------------------------------------------
December 31                                                                 1996*        1995*           1994
--------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost:
   Service cost/benefits attributed to employee service
     during the year                                                     $ 11,935      $  5,969     $  8,603
   Interest cost on accumulated post retirement benefit obligation         24,146        17,506       10,342
   Amortization                                                               374          (941)         655
--------------------------------------------------------------------------------------------------------------
     NET PERIODIC POSTRETIREMENT BENEFIT COST                            $ 36,455      $ 22,534     $ 19,600
==============================================================================================================
* The 1996 and 1995 data includes  postretirement  benefit  obligations  for The Continental Corporation retirees.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ASSUMPTIONS
-------------------------------------------------------------------------------------------------------------

December 31                                                                  1996          1995         1994
-------------------------------------------------------------------------------------------------------------
Assumptions used in determining net periodic benefit cost:
<S>                                                                         <C>            <C>           <C>
   Discount rate                                                            7.25%          8.50%         7.25%
Assumptions used in determining the projected benefit
     obligation (liability):
Discount rate                                                               7.50%          7.25%         8.50%
--------------------------------------------------------------------------------------------------------------
</TABLE>

                                       33
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY


                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED):

    The assumed  health care cost trend rate used in measuring  the  accumulated
postretirement  benefit obligation was 12% in 1996,  declining 1% per year to an
ultimate rate of 5% in 2002.  The health care cost trend rate  assumption  has a
significant  effect on the amount of the benefit  obligation  and periodic  cost
reported.  An increase in the assumed  health care cost trend rate of 1% in each
year would  increase the  accumulated  postretirement  benefit  obligation as of
December 31, 1996 by $24.2 million and the aggregate net periodic postretirement
benefit cost for 1996 by $3.1 million.

SAVINGS PLAN

     VFL is included in the CNA Employees'  Savings Plan which is a contributory
plan that allows  employees to make regular  contributions  of up to 6% of their
salary.  CNA  contributes  an additional  amount equal to 70% of the  employee's
regular contribution.  Employees may also make an additional  contribution of up
to 10% of their salaries for which there is no additional  contribution  by CNA.
CNA  contributions  allocated  to and  expensed by VFL for the Savings Plan were
$1.0 million, $.7 million and $.5 million for the years ended December 31, 1996,
1995 and 1994, respectively.

NOTE 6.  INCOME TAXES:

    VFL  is  taxed  under  the  provisions  of the  Internal  Revenue  Code,  as
applicable  to life  insurance  companies,  and is included in the  consolidated
Federal  income  tax  return  with CNA and its  eligible  subsidiaries  (CNA Tax
Group),  which in turn is  consolidated  in the Loews Federal income tax return.
The Federal  income tax  provision  of VFL is computed as if VFL were filing its
own separate return.

    VFL  maintains  a  special  tax   memorandum   account   designated  as  the
"Shareholder's Surplus Account".  Dividends from this account may be distributed
to the  shareholder  without  resulting in any  additional  tax. At December 31,
1996, the amount in the Shareholder's Surplus Account was $100 million.  Another
tax memorandum account, defined as the "Policyholders' Surplus Account," totaled
$5 million at  December  31,  1996.  No further  additions  to this  account are
allowed.  Amounts accumulated in the Policyholders'  Surplus Account are subject
to income tax if distributed to the shareholder. VFL has not provided for such a
tax as VFL has no plans for such a distribution.

    Deferred  income taxes reflect the net tax effects of temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes and the amounts used for income tax purposes. Significant components of
VFL's  deferred tax assets and  liabilities as of December 31, 1996 and 1995 are
shown in the table below.

                                       34
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 6. - (CONTINUED):

COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
------------------------------------------------------------------------------
December 31                                         1996              1995
------------------------------------------------------------------------------
(In thousands of dollars)

Insurance reserves                             $   17,166         $  15,900
Deferred acquisition costs                        (22,078)          (14,382)
Investment valuation                                5,411             2,518
Net unrealized gains                                 (530)           (7,342)
Receivables                                          (646)              661
Other, net                                            989              (546)
------------------------------------------------------------------------------
     TOTAL DEFERRED TAX ASSETS (LIABILITIES)   $      312         $  (3,191)
==============================================================================

    At December 31, 1996, gross deferred tax assets and liabilities  amounted to
$24.9 million and $24.6  million,  respectively.  Gross  deferred tax assets and
liabilities,  at December 31, 1995, amounted to $20.1 million and $23.3 million,
respectively.

    VFL has not  established  a  valuation  reserve at  December  31, 1996 as it
believes  that all  deferred  tax  assets  are fully  realizable.  VFL has had a
history of  profitability  and anticipates  future taxable income  sufficient to
support its  deferred  tax  balances at December  31,  1996,  including  but not
limited to the reversal of existing temporary differences and the implementation
of tax planning strategies, if needed.


    Significant components of VFL's income tax provision are as follows:

PROVISION FOR INCOME TAX
------------------------------------------------------------------------------
Year Ended December 31                         1996        1995          1994
------------------------------------------------------------------------------
(In thousands of dollars)

Current tax (expense) benefit on:
   Ordinary income                          $ (2,217)   $ (7,417)    $ (5,603)
   Realized investment gains (losses)         (3,502)     (4,330)       1,326
------------------------------------------------------------------------------
     Total current tax expense                (5,719)    (11,747)      (4,277)
------------------------------------------------------------------------------
Deferred tax (expense) benefit on:
   Ordinary income (loss)                     (5,141)         41          (78)
   Realized investment gains (losses)          1,832        (494)         250
------------------------------------------------------------------------------
     Total deferred tax (expense) benefit     (3,309)       (453)         172
------------------------------------------------------------------------------
     TOTAL INCOME TAX EXPENSE               $ (9,028)   $(12,200)    $ (4,105)
==============================================================================

                                       35
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 6. - (CONTINUED):

    A  reconciliation  of the  expected  income  tax  resulting  from the use of
statutory tax rates to the effective income tax expense follows:

<TABLE>
<CAPTION>
RECONCILIATION OF EXPECTED AND EFFECTIVE TAXES
--------------------------------------------------------------------------------------------------------------
                                                                % OF                 % of                % of
                                                               PRETAX               Pretax              Pretax
Year Ended December 31                                1996     INCOME      1995     Income      1994    Income
--------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                 <C>        <C>         <C>     <C>       <C>       <C>
Expected tax expense on ordinary income
   at statutory rates                              $ (7,341)   (35.0)% $  (7,325)  (35.0)%  $ (5,623)  (35.0)%
State income taxes                                      (54)    (0.3)       (51)    (0.2)        (43)   (0.3)
Other items, net                                         37      0.2          -        -         (15)   (0.1)
--------------------------------------------------------------------------------------------------------------
   Income tax expense on ordinary income             (7,358)   (35.1)    (7,376)   (35.2)     (5,681)  (35.4)
   Income tax (expense) benefit on realized
     investment gains/losses at statutory rates      (1,670)   (35.0)%    (4,824)  (35.0)%     1,576   (35.0)%
--------------------------------------------------------------------------------------------------------------
     INCOME TAX EXPENSE                            $ (9,028)   (35.1)%  $(12,200)  (35.1)%  $ (4,105)  (35.4)%
==============================================================================================================
</TABLE>

<PAGE>
NOTE 7. REINSURANCE:

    The effects of  reinsurance  on premium  revenues are shown in the following
schedule:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
                                                       Premiums                  Assumed/Net
                          ------------------------------------------------------
Year Ended December 31       Direct        Assumed          Ceded         Net        %
--------------------------------------------------------------------------------------------
(In thousands of dollars)
1996
<S>                        <C>           <C>           <C>           <C>             <C>
   Life                    $ 422,700     $  72,718    $  424,907     $  70,511       103 %
   Accident and Health         1,080       254,975         1,080       254,975       100
--------------------------------------------------------------------------------------------
     TOTAL PREMIUMS        $ 423,780     $ 327,693    $  425,987     $ 325,486       101 %
============================================================================================
1995
   Life                    $ 316,011     $  75,053     $ 316,577     $  74,487       101 %
   Accident and Health           422       222,166           422       222,166       100
--------------------------------------------------------------------------------------------
     Total premiums        $ 316,433     $ 297,219     $ 316,999     $ 296,653       100 %
============================================================================================
1994
   Life                    $ 187,834     $  49,998     $ 189,163     $  48,669       103 %
   Accident and Health           468       214,311           468       214,311       100
--------------------------------------------------------------------------------------------
     Total premiums        $ 188,302     $ 264,309     $ 189,631     $ 262,980       101 %
============================================================================================
</TABLE>
    In the table  above,  the  majority  of Life  premium  revenue  is from long
duration  type  contracts,  while the  Accident  and Health  premium  revenue is
generally short duration.

                                       36
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 7. - (CONTINUED):

    Transactions with Assurance,  as part of the pooling agreement (see Note 1),
are  reflected  in the above table.  Premium  revenues  ceded to  non-affiliated
companies were $43.0 million,  $9.9 million and $7.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively.  Additionally,  insurance claims
and policyholders'  benefits recoveries from non-affiliated  companies were $7.0
million,  $6.1 million and $3.0  million for the years ended  December 31, 1996,
1995 and 1994, respectively.

    The ceding of insurance does not discharge primary liability of the original
insurer.  VFL's placement of reinsurance  with  non-affiliated  carriers entails
careful  review of the nature of the contract and a thorough  assessment  of the
reinsurers' credit quality and claim settlement performance.

     Reinsurance  receivables  reflected on the balance  sheet are  recoverables
from  reinsurers  related to insurance  reserves.  Balances  due from  Assurance
pursuant to the pooling  agreement  comprise most of these  balances  which were
approximately  $1.3  billion  and $1.1  billion at  December  31, 1996 and 1995,
respectively.

    The impact of reinsurance,  including  transactions with Assurance,  on life
insurance in force is shown in the following schedule:

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

                                     Life Insurance in Force         Assumed/Net
                           ----------------------------------------
                             Direct    Assumed     Ceded      Net         %
--------------------------------------------------------------------------------
(In thousands of dollars)

December 31, 1996          $ 108,126  $ 22,085  $ 109,873  $ 20,338    108.6%
December 31, 1995             57,138    16,996     58,442    15,692    108.3
December 31, 1994             22,933    13,215     24,112    12,036    109.8
================================================================================

NOTE 8. RELATED PARTIES:

    As discussed in Note 1, VFL is party to a pooling agreement with its parent,
Assurance.  In addition,  VFL is party to the CNA Intercompany Expense Agreement
whereby  expenses  incurred by CNA and each of its subsidiaries are allocated to
the appropriate company. All acquisition and underwriting  expenses allocated to
VFL  are  further  subject  to  the  Intercompany  Pooling  Agreement,  so  that
acquisition and underwriting  expenses recognized by VFL approximate ten percent
of the combined  acquisition  and  underwriting  expenses of VFL and  Assurance.
Pursuant to the  foregoing  agreements,  VFL recorded  amortization  of deferred
acquisition costs and other operating expenses totaling $37 million, $41 million
and $37 million for 1996, 1995 and 1994,  respectively.  Expenses of VFL exclude
$12.3  million,  $5.5  million and $4.1  million of general  and  administrative
expenses  incurred by VFL and allocated to CNA for the years ended  December 31,
1996, 1995 and 1994, respectively. VFL had a $67.5 million affiliated receivable
at December 31, 1996 and a $4.9 million  affiliated  receivable  at December 31,
1995 for net cash  settlements  due  from  Assurance  in the  normal  course  of
operations related to pooling and general expense  reimbursements.  There are no
interest charges on intercompany receivables and payables.

                                       37
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED


NOTE 9. LEGAL:

    VFL is party to litigation  arising in the ordinary course of business.  The
outcome of this  litigation  will not, in the opinion of management,  materially
affect the results of operations or equity of VFL.


NOTE 10. BUSINESS SEGMENTS:

-----------------------------------------------------------------------------
Year Ended December 31                     1996         1995           1994
-----------------------------------------------------------------------------
(In thousands of dollars)

REVENUES
  Individual                         $    70,208   $   69,577    $    52,812
  Group                                  292,807      263,388        237,716
  Realized gains (losses)                  4,771       13,783         (4,502)
-----------------------------------------------------------------------------
    Total                            $   367,786   $  346,748    $   286,026
=============================================================================

INCOME BEFORE INCOME TAX
  Individual                         $    12,752   $    8,611    $     4,794
  Group                                    8,224       12,316         11,295
  Realized gains (losses)                  4,771       13,783         (4,502)
-----------------------------------------------------------------------------
    Total                            $    25,747   $   34,710    $    11,587
=============================================================================

NET INCOME
  Individual                         $     8,209   $    5,597    $     3,119
  Group                                    5,409        7,954          7,289
  Realized gains (losses)                  3,101        8,959         (2,926)
-----------------------------------------------------------------------------
    Total                            $    16,719   $   22,510    $     7,482
=============================================================================

ASSETS
  Individual                         $   665,000   $  786,918    $   686,754
  Group                                1,282,296      854,520        760,368
-----------------------------------------------------------------------------
    Total                            $ 1,947,296   $1,641,438    $ 1,447,122
=============================================================================

    Assets and  investment  income are allocated to business  segments  based on
cash flows after  attribution of separately  identifiable  assets.  Income taxes
have been allocated on the basis of taxable  operating  income of the respective
segments.

    Group revenues include $210.1 million, $187.0 million and $179.4 million for
the years ended December 31, 1996, 1995 and 1994, respectively,  under contracts
covering U.S. government employees and their dependents.

                                       38
<PAGE>
ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

              None.


                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.


ITEM 11.      EXECUTIVE COMPENSATION

OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.



ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

OMITTED PURSUANT TO GENERAL INSTRUCTION J (2) (C) OF FORM 10-K.

                                       39
<PAGE>
                                    PART IV

ITEM 14.      FINANCIAL STATEMENTS, SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K

(A) (1)       FINANCIAL STATEMENTS.

              A listing of all financial statements filed as part of this Annual
              Report on Form 10-K is included on page 17 in ITEM 8.

(A) (2)       FINANCIAL STATEMENT SCHEDULES.                                PAGE
              -----------------------------                                 ----
              Schedule III  Supplementary Insurance Information.............  43
              Schedule V    Valuation and Qualifying Accounts and Reserves..  44

              Other  schedules are omitted  because of the absence of conditions
              under which they are required or because the required information
              is provided in the Financial Statements or notes thereto.

(A) (3)       EXHIBITS.

3 (i)          Articles of Incorporation are incorporated herein by reference
               to  exhibit  number 6 to the Form  N-4EL  Registration  Statement
               filed with the Securities and Exchange Commission on February 20,
               1996 (File No. 333-1087).

3 (ii)         Bylaws are  incorporated  herein by reference to exhibit  number
               6 to  the  Form  N-4EL  Registration  Statement  filed  with  the
               Securities and Exchange Commission on February 20, 1996 (File No.
               333-1087).

4  (a)         Form  of  Flexible  Premium   Deferred   Variable  Annuity
               Contract is incorporated  herein by reference to exhibit number 4
               to  the  Form  N-4EL   Registration   Statement  filed  with  the
               Securities and Exchange Commission on February 20, 1996 (File No.
               333-1087).

4 (b)          Form of Qualified Plan Endorsement to Flexible  Premium Deferred
               Variable Annuity Contract is incorporated  herein by reference to
               exhibit number 4 to the Form N-4EL  Registration  Statement filed
               with the Securities and Exchange  Commission on February 20, 1996
               (File No. 333-1087).

4 (c)          Form of IRA  Endorsement to Flexible  Premium  Deferred  Variable
               Annuity  Contract is incorporated  herein by reference to exhibit
               number 4 to the Form N-4EL Registration  Statement filed with the
               Securities and Exchange Commission on February 20, 1996 (File No.
               333-1087).

4 (d)          Form of  Nursing  Home  Confinement,  Terminal Medical Condition,
               Total   Disability   Endorsement  to  Flexible  Premium  Deferred
               Variable Annuity Contract is incorporated  herein by reference to
               exhibit number 4 to the Form N-4EL  Registration  Statement filed
               with the Securities and Exchange  Commission on February 20, 1996
               (File No. 333-1087).

4 (e)          Policy Application is incorporated herein by reference to exhibit
               number 5 to the Form N-4EL Registration  Statement filed with the
               Securities and Exchange Commission on February 20, 1996 (File No.
               333-1087).

4 (f)          Form of Single Premium Deferred Modified Guaranteed Annuity
               Certificate is incorporated herein by reference to exhibit number
               4  to  the  Form  S-1  Registration   Statement  filed  with  the
               Securities  and Exchange  Commission  on March 29, 1996 (File No.
               333-2093).
                                       40
<PAGE>
(A) (3)       EXHIBITS - (CONTINUED):

4 (g)          Form of Index Rider to Single Premium Deferred Modified
               Guaranteed   Annuity   Certificate  is  incorporated   herein  by
               reference  to  exhibit  number  4 to the  Form  S-1  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               March 29, 1996 (File No. 333-2093).

4 (h)          Form  of  Qualified  Plan  Rider  to  Single  Premium  Deferred
               Modified Guaranteed Annuity Certificate is incorporated herein by
               reference  to  exhibit  number  4 to the  Form  S-1  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               March 29, 1996 (File No. 333-2093).

4 (i)          Form of Individual  Retirement  Annuity Rider to Single  Premium
               Deferred Modified  Guaranteed Annuity Certificate is incorporated
               herein  by  reference  to  exhibit  number  4  to  the  Form  S-1
               Registration  Statement  filed with the  Securities  and Exchange
               Commission on March 29, 1996 (File No. 333-2093).

4 (j)          Form of  Nursing  Home  Confinement/Terminal  Medical  Condition
               Rider to Single  Premium  Deferred  Modified  Guaranteed  Annuity
               Certificate is incorporated herein by reference to exhibit number
               4  to  the  Form  S-1  Registration   Statement  filed  with  the
               Securities  and Exchange  Commission  on March 29, 1996 (File No.
               333-2093).

4 (k)          Form of Group  Contract  and  Individual  Certificate  to  Single
               Premium  Deferred  Modified  Guaranteed  Annuity  Certificate  is
               incorporated  herein by reference to exhibit  number 4 filed with
               Pre-Effective  Amendment  No.  1 to  the  Form  S-1  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               October 17, 1996 (File No. 333-2093).

4 (l)          Specimen of Individual  Flexible Premium Variable and Fixed Life
               Insurance  Policy  is  incorporated  herein by  reference  to the
               initial filing of the Form S-6 Registration  Statement filed with
               the  Securities  and Exchange  Commission on March 25, 1996 (File
               No. 333-01949).

4 (m)          Form of Waiver of Monthly  Deduction Rider to Individual Flexible
               Premium  Variable and Fixed Life Insurance Policy is incorporated
               herein  by  reference  to the  initial  filing  of the  Form  S-6
               Registration  Statement  filed with the  Securities  and Exchange
               Commission on March 25, 1996 (File No. 333-01949).

4 (n)          Form of Term  Insurance on Spouse  Rider to  Individual  Flexible
               Premium  Variable and Fixed Life Insurance Policy is incorporated
               herein  by  reference  to the  initial  filing  of the  Form  S-6
               Registration  Statement  filed with the  Securities  and Exchange
               Commission on March 25, 1996 (File No. 333-01949).

4 (o)          Form of Term  Insurance on Children Rider to Individual  Flexible
               Premium  Variable and Fixed Life Insurance Policy is incorporated
               herein  by  reference  to the  initial  filing  of the  Form  S-6
               Registration  Statement  filed with the  Securities  and Exchange
               Commission on March 25, 1996 (File No. 333-01949).
<PAGE>


10 (a)         Form of Participation Agreement between the Company and Insurance
               Series is incorporated herein by reference to exhibit number 8 to
               the Form N-4EL/A Registration Statement filed with the Securities
               and Exchange Commission on August 30, 1996 (File No. 333-1087).

10 (b)         Form  of  Participation  Agreement  between  the  Company  and
               Variable  Insurance  Products  Fund  is  incorporated  herein  by
               reference to exhibit  number 8 to the Form  N-4EL/A  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               August 30, 1996 (File No. 333-1087).


                                       41
<PAGE>
(A) (3)       EXHIBITS - (CONTINUED)

10 (c)         Form of  Participation  Agreement  between  the  Company  and The
               Alger  American  Fund is  incorporated  herein  by  reference  to
               exhibit number 8 to the Form N-4EL/A Registration Statement filed
               with the  Securities  and Exchange  Commission on August 30, 1996
               (File No. 333-1087).

10 (d)         Form of  Participation  Agreement  between the  Company and MFS
               Variable  Insurance Trust is incorporated  herein by reference to
               exhibit number 8 to the Form N-4EL/A Registration Statement filed
               with the  Securities  and Exchange  Commission on August 30, 1996
               (File No. 333-1087).

10 (e)         Form of Participation Agreement between the Company and SoGen
               Variable  Funds,  Inc. is  incorporated  herein by  reference  to
               exhibit number 8 to the Form N-4EL/A Registration Statement filed
               with the  Securities  and Exchange  Commission on August 30, 1996
               (File No. 333-1087).

10 (f)         Form of Participation Agreement between the Company and Van Eck
               Worldwide  Insurance Trust is incorporated herein by reference to
               exhibit number 8 to the Form N-4EL/A Registration Statement filed
               with the  Securities  and Exchange  Commission on August 30, 1996
               (File No. 333-1087).

10 (g)         CNA Inter-Company  Expense Agreement is incorporated  herein by
               reference  to exhibit  number 10G to the Form S-1/A  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               September 3, 1996 (File No. 333-1083).

10 (h)         Amendment to the CNA  Inter-Company  Expense  Agreement is
               incorporated  herein by  reference  to exhibit  number 10H to the
               Form S-1/A  Registration  Statement filed with the Securities and
               Exchange Commission on September 3, 1996 (File No. 333-1083).

10 (i)         Reinsurance  Pooling  Agreement is  incorporated  herein by
               reference  to exhibit  number 10I to the Form S-1/A  Registration
               Statement  filed with the Securities  and Exchange  Commission on
               September 3, 1996 (File No. 333-1083).

10 (j)         Amendment to the Reinsurance  Pooling Agreement is incorporated
               herein by  reference  to  exhibit  number  10J to the Form  S-1/A
               Registration  Statement  filed with the  Securities  and Exchange
               Commission on September 3, 1996 (File No. 333-1083).

27             Financial Data Schedule


 (B)          REPORTS ON FORM 8-K.

              No reports on Form 8-K were filed during the fourth quarter
              of 1996.

                                       42
<PAGE>
<TABLE>
<CAPTION>



                                                                       SCHEDULE III
                       VALLEY FORGE LIFE INSURANCE COMPANY
                       SUPPLEMENTARY INSURANCE INFORMATION

------------------------------ ------------------------------------------------------
                                                  GROSS INSURANCE RESERVES
                                             ----------------------------------------



                                               CLAIM
                                DEFERRED        AND         FUTURE           POLICY-
                               ACQUISITION     CLAIM        POLICY           HOLDERS'
(In thousands of dollars)         COSTS       EXPENSE      BENEFITS           FUNDS
-------------------------------------------------------------------------------------
DECEMBER 31, 1996
<S>                              <C>          <C>          <C>            <C>
     Individual............      $71,268.6    $10,411.5    $277,943.4     $    548.0
     Group.................        3,320.1     50,156.3      32,020.3       37,596.9
                                 ---------    ---------    ----------     ----------
       Total...............      $74,588.7    $60,567.8    $309,963.7     $ 38,144.9
                                 =========    =========    ==========     ==========

DECEMBER 31, 1995
     Individual............      $50,420.8    $14,118.6    $242,076.0     $    676.4
     Group.................          178.8     45,304.8      24,524.2       33,897.9
                                  --------    ---------    ----------      ---------
       Total...............      $50,599.6    $59,423.4    $266,600.2     $ 34,574.3
                                  ========    =========     =========      =========

DECEMBER 31, 1994
     Individual............      $41,025.0    $12,721.6     $214,144.2    $   699.0
     Group.................          308.4     42,914.7       15,557.9     29,897.4
                                  --------    ---------     ----------    ---------
       Total...............      $41,333.4    $55,636.3     $229,702.1    $30,596.4
                                  ========    =========     ==========    =========
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                      SCHEDULE III - CONTINUED
---------------------------------------------------------------------------------------------------

                                                                        AMORTIZATION
                                                          INSURANCE          OF
                                   NET          NET       CLAIMS AND     DEFERRED        OTHER
                                 PREMIUM    INVESTMENT   POLICYHOLDERS' ACQUISITION    OPERATING
                                 REVENUE      INCOME       BENEFITS        COSTS        EXPENSES
(In thousands of dollars)       ----------- ------------ ------------- -------------- -------------
------------------------------
DECEMBER 31, 1996
<S>                             <C>           <C>           <C>            <C>          <C>
     Individual............     $ 49,226.4    $13,123.6     $ 84,559.1     $1,124.7     $42,834.7
     Group.................      276,260.0     16,188.6      220,280.8         52.4      (6,812.1)
                                 ---------    ---------      ---------     ---------    ---------
       Total...............     $325,486.4    $29,312.2     $304,839.9     $1,177.1     $36,022.6
                                 =========    =========      =========     =========    =========
DECEMBER 31, 1995
     Individual............     $ 49,435.0    $18,918.0     $ 60,208.5     $6,044.9     $44,419.0
     Group.................      247,218.0     12,576.3      210,727.7         21.2      (9,383.1)
                                 ---------     --------      ---------     ----------   ---------
       Total...............     $296,653.0    $31,494.3     $270,936.2     $6,066.1     $35,035.9
                                 =========    =========      =========     =========    =========

DECEMBER 31, 1994
     Individual............     $ 37,708.7     $13,323.2    $ 22,621.0     $4,837.9     $12,353.4
     Group.................      225,270.8       9,435.4     214,712.9         36.6      19,877.6
                                 ---------     ---------     ---------     --------     ---------
       Total...............     $262,979.5     $22,758.6    $237,333.9     $4,874.5     $32,231.0
                                 =========    =========      =========     ========     =========
</TABLE>


                                       43
<PAGE>
<TABLE>
<CAPTION>
                                                                                                     SCHEDULE V
                                          VALLEY FORGE LIFE INSURANCE COMPANY
                                      VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

----------------------------------------------------------------------------------------------------------------
                                                       BALANCE                                          BALANCE
                                                          AT      CHARGED TO  CHARGED TO                  AT
                                                      BEGINNING    COSTS AND     OTHER                  END OF
(In thousands of dollars)                             OF PERIOD    EXPENSES     AMOUNTS   DEDUCTIONS    PERIOD
----------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Deducted from assets:
     Allowance for doubtful accounts:
<S>                                                   <C>          <C>         <C>         <C>         <C>
       Insurance receivables.......................   $  175.2     $  211.7    $    -      $    9.1    $  377.8
                                                       =======      =======     =======     =======     =======
YEAR ENDED DECEMBER 31, 1995
Deducted from assets:
     Allowance for doubtful accounts:
       Insurance receivables.......................   $    -       $  228.7    $    -      $   53.5    $  175.2
                                                       =======      =======     =======     =======     =======
YEAR ENDED DECEMBER 31, 1994
Deducted from assets:
     Allowance for doubtful accounts:
       Insurance receivables.......................   $    -       $  (13.4)   $    -      $  (13.4)   $    -
                                                       =======      ========    =======     ========    =======
----------------------------------------------------------------------------------------------------------------
</TABLE>
                                       44
<PAGE>


 SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) 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.

                       Valley Forge Life Insurance Company


                     By       S/DENNIS H. CHOOKASZIAN
                       -------------------------------------------
                                Dennis H. Chookaszian
                                Chairman of the Board and
                                Chief Executive Officer

                     By       S/PETER E. JOKIEL
                       --------------------------------------------
                                Peter E. Jokiel
                                Director, Senior Vice President
                                and Chief Financial Officer


Date:         March 28, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the  following  persons on behalf of the  registrant in
the capacities indicated on the 28th day of March, 1997.

     SIGNATURE                                       TITLE


S/DENNIS H. CHOOKASZIAN                                Chairman of the Board and
------------------------                               Chief Executive Officer
Dennis H. Chookaszian

S/PHILIP L. ENGEL                                      Director
------------------------
Philip L. Engel

S/MICHAEL C. GARNER                                    Director
------------------------
Michael C. Garner

S/PETER E. JOKIEL                                     Chief Financial Officer
------------------------                              and Director
Peter E. Jokiel

S/PATRICIA L. KUBERA                                   Director
------------------------
Patricia L. Kubera

S/WILLIAM H. SHARKEY, JR.                              Director
-------------------------
William H. Sharkey, Jr.

                                       45