<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                       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, 1997            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 27, 1998, 50,000 shares of Common Stock (all held by the parent,
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 I (1)
(A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM 10-K WITH THE REDUCED
DISCLOSURE FORMAT.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                  Page 1 of 47
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                             FORM 10-K ANNUAL REPORT

                      FOR THE YEAR ENDED DECEMBER 31, 1997

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

    2   Properties.....................................................    5

    3   Legal Proceedings..............................................    5

    4   Submission of Matters to a Vote of Security Holders............    5

                                 PART II
    5   Market for Registrant's Common Stock and
          Related Stockholder Matters..................................    7

    6   Selected Financial Data........................................    7

    7   Management's Discussion and Analysis of Financial Condition and
          Results of Operations........................................    8

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

    9   Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure......................   40

                                 PART III
    10  Directors and Executive Officers of the Registrant.............   40

    11  Executive Compensation.........................................   40

    12  Security Ownership of Certain Beneficial Owners and Management.   40

    13  Certain Relationships and Related Transactions.................   40

                                 PART IV
    14  Financial Statements, Schedules, Exhibits
           and Reports on Form 8-K.....................................   41




                                       2
<PAGE>

                                     PART I

ITEM 1.  BUSINESS

    Valley Forge Life Insurance Company (VFL) 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
(CNAF). Loews Corporation owns approximately 84% of the outstanding common stock
of CNAF.

   VFL  sells a  variety  of  individual  and  group  insurance  products.  The
individual  insurance  products  consist  primarily of term and  universal  life
insurance  policies and individual  annuities.  Group insurance products include
life, pension and accident and health, consisting primarily of major medical and
hospitalization.  A new portfolio of variable  products,  including  annuity and
universal   life   products,   was  marketed  in  1997.   These  products  offer
policyholders 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  are  invested  in  corresponding   investment   portfolios  where  the
investment  risk is borne by the  policyholder  while payments  allocated to the
guaranteed  income  account  earn a minimum  guaranteed  rate of interest  for a
specified period of time for annuity contracts and one year for life products.

    The operations, assets and liabilities of VFL and its parent, Assurance, are
managed,  to a large  extent,  on a combined  basis.  Pursuant to a  Reinsurance
Pooling  Agreement,  amended  July  1,  1996,  VFL  cedes  all of its  business,
excluding its separate account business, to its parent, Assurance. This business
is then  pooled with the  business  of  Assurance,  which  excludes  Assurance's
participating  contracts and separate account business,  and 10% of the combined
pool is assumed by VFL.

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.  VFL also faces competition from financial institutions that
market mutual funds as an alternative for investors.  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  1,700 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 1996 consolidated net written premiums.

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


                                       3
<PAGE>
REGULATION - (CONTINUED)

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.

    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 regulate for solvency  more  closely,  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,
1997, VFL has capital in excess of the Company Action Level.


                                       4
<PAGE>

CERTAIN AGREEMENTS

   VFL is party to the Reinsurance  Pooling  Agreement with Assurance which was
previously  mentioned  and is also  discussed  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 CNAF and each of its subsidiaries
are allocated to the  appropriate  company.  All  acquisition  and  underwriting
expenses  allocated  to VFL  are  further  subject  to the  Reinsurance  Pooling
Agreement  with  Assurance,   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,  1997,  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.

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 I (2) (c) of Form 10-K.




                                       5
<PAGE>

               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


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


Dennis H.   Chairman of the   54    Chairman of the Board and Chief  Executive
Chookaszian Board and Chief         Officer of CNA since September 1992. Prior
            Executive Officer       thereto, Mr. Chookaszian  was President
                                    and Chief  Operating  Officer  of  CNA. Mr.
                                    Chookaszian  has  served as a Director of
                                    the Registrant since April 1978.

Philip L.   President and     57    President of  CNA  since  September 1992.
Engel       Director                Prior thereto,  Mr. Engel was Executive Vice
                                    President of CNA.   Mr.  Engel  has  served
                                    as  a  Director  of Registrant since
                                    September 1992.

Michael C.  Senior  Vice      45    Senior  Vice  President  of  CNA since
Garner      President and           September 1993. Prior  thereto, Mr. Garner
            Director                was a  partner  of  Coopers & Lybrand LLP.
                                    Mr. Garner has served as a Director of the
                                    Registrant since October 1996.

Bernard L.  Executive Vice    51    Executive   Vice   President  and  Chief
Hengesbaugh President and           Operating Officer of CNA since February
            Chief Operating         1998. Prior thereto, Mr.  Hengesbaugh  was
            Officer                 Senior Vice  President  of CNA  since
                                    November 1990.

Peter E.    Senior Vice and   50    Senior Vice President of CNA since November
Jokiel      President               1990. Chief Financial  Officer of CNA from
                                    November 1990 through  October  1997.  Mr.
                                    Jokiel  served  as  a  Director of the
                                    Registrant from July 1992  through October
                                    1997.

Jonathan D. Senior Vice       42    Senior Vice President and General  Counsel
Kantor      President,              of CNA since  April  1997.  Group  Vice
            Secretary, General      President of  CNA since April 1994. Prior
            Counsel and             thereto, Mr. Kantor was a partner  at the
            Director                law firm  of  Shea &  Gould.*  Mr. Kantor
                                    has served as a  Director  of the Registrant
                                    since April 1997.

Patricia L. Group Vice        42    Group Vice  President and Controller of CNA
Kubera      President,              since January  1993.  Prior   thereto, Ms.
            Controller and          Kubera was Assistant Vice President of CNA.
            Director                Ms.  Kubera has served  as a Director of
                                    the  Registrant since November 1994.


W. James    Senior Vice       59    Senior Vice  President and Chief Financial
MacGinnitie President, Chief         Officer of CNA since October  1997.  From
            Financial   Officer     1994 through 1997, Mr.  MacGinnitie  was a
            and  Director           partner  at  Ernst & Young. Prior thereto,
                                    with Mr. MacGinnitie was a principal
                                    Tillinghast.   Mr.   MacGinnitie  has
                                    served  as  a Director of the Registrant
                                    since October 1997.


William H.  Senior Vice   49        Senior Vice President of CNA since January
Sharkey,Jr. President and           1994. Prior   thereto, Mr.   Sharkey   was
            Director                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.


Officers  are  elected and hold office  until their  successors  are elected and
qualified, and are subject to removal by the Board of Directors.
*Shea & Gould declared bankruptcy in 1995.


                                       6
<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)      Assurance owns all of the common stock of VFL.

(c)      VFL has declared no cash dividends on its common stock in 1996, 1997
         or 1998 through the date of filing this Form 10-K.



ITEM 6.  SELECTED FINANCIAL DATA

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




                                       7
<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  (CNAF).  Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.

    VFL  sells a  variety  of  individual  and  group  insurance  products.  The
individual  insurance  products consist primarily of  term and  universal  life
insurance  policies and individual  annuities.  Group insurance products include
life,   accident  and  health,   consisting   primarily  of  major  medical  and
hospitalization  and pension  products.  A new  portfolio of variable  products,
including  annuity and  universal  life  products  was  marketed in 1997.  These
products offer  policyholders  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 are invested in  corresponding  investment  portfolios
where the investment risk is borne by the policyholder  while payments allocated
to the guaranteed income account earn a minimum  guaranteed rate of interest for
a specified period of time for annuity contracts and one year for life products.

    The operations, assets and liabilities of VFL and its parent, Assurance, are
managed,  to a large  extent,  on a combined  basis.  Pursuant to a  Reinsurance
Pooling  Agreement,  amended  July  1,  1996,  VFL  cedes  all of its  business,
excluding its separate account business, to its parent, Assurance. This business
is then  pooled with the  business  of  Assurance,  which  excludes  Assurance's
participating  contracts and separate account business,  and 10% of the combined
pool is assumed by VFL.





                                       8
<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                                      1997            1996            1995
-----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Operating Revenues (excluding realized investment gains/losses):
Revenues:
<S>                                                         <C>            <C>             <C>
     Group premium                                           $273,939       $272,914        $248,285
     Individual premium                                        58,233         52,572          48,368
                                                             --------       --------        --------
        Total premiums                                        332,172        325,486         296,653
                                                             --------       --------        --------
     Net investment income                                     29,913         29,312          31,494
     Other                                                      6,872          8,217           4,818
                                                             --------       --------        --------
        Total revenues                                        368,957        363,015         332,965
Benefits and expenses                                         352,530        342,039         312,038
                                                             --------       --------        --------
     Operating income before income tax                        16,427         20,976          20,927
Income tax expense                                             (5,827)        (7,358)         (7,376)
                                                             --------       --------        --------
        Net operating income
        (excluding realized investment gains/losses)         $ 10,600       $ 13,618        $ 13,551
                                                             ========       ========        ========
Supplemental Financial Data:
Net operating income:
     Group                                                   $  4,255       $  5,409        $  7,954
     Individual                                                 6,345          8,209           5,597
                                                             --------       --------        --------
        Net operating income                                   10,600         13,618          13,551
     Net realized investment gains                              2,730          3,101           8,959
-----------------------------------------------------------------------------------------------------
        NET INCOME                                           $ 13,330       $ 16,719        $ 22,510
=====================================================================================================
</TABLE>

    VFL's revenues,  excluding net realized investment  gains/losses,  increased
1.6% to $369.0  million for 1997 as  compared to $363.0  million for 1996 and up
10.8% from $333.0  million for 1995.  Premiums for 1997 increased 2.1% to $332.2
million as compared to $325.5  million for 1996 and up 12.0% from 1995  premiums
of $296.7  million.  This increase is primarily  due to the continued  growth in
individual  sales of ViaTerm,  a term life insurance  product,  of $5.5 million.
Group premiums were up slightly for 1997 to $273.9 million as compared to $272.9
million for 1996. Increases in group accident and health premiums were offset by
decreases in group annuities and reinsurance premiums.

    VFL's  investment  income  increased  from  $29.3  million  in 1996 to $29.9
million in 1997.  Both years were lower than 1995's  investment  income of $31.5
million.  The increase in 1997 can be attributed to a larger asset base of VFL's
investment  portfolio,  offset  by a  slightly  lower  average  yield  on  VFL's
portfolio in 1997,  as compared to 1996.  The decrease in 1996 was mainly due to
negative  cash flow  experienced  in 1996  resulting in a reduction in the total
investment portfolio.


                                       9
<PAGE>
FINANCIAL CONDITION

    Assets totaled  $2,368.4  million at December 31, 1997, an increase of 19.6%
over 1996. VFL's cash and invested assets of $570.5 million  increased by $118.7
million, or 26.3%, over the 1996 level of $451.8 million.

    VFL's stockholder's equity was $216.3 million at December 31, 1997, compared
to  approximately  $199.5  million and $195.5  million at December  31, 1996 and
1995,  respectively.  The increase in stockholder's equity in 1997 is due to net
income of $13.3 million and a $3.4 million increase in net unrealized investment
gains.  The increase in  stockholder's  equity in 1996 was  primarily due to net
income of $16.7  million  offset by $12.7  million  decrease  in net  unrealized
investment gains.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                  STOCKHOLDER'S
                                                  ASSETS             EQUITY
--------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                           <C>                 <C>
December 31, 1997                              $2,368,426            $216,260
December 31, 1996                               1,980,802             199,540
December 31, 1995                               1,641,438             195,472
December 31, 1994                               1,447,122             156,196
December 31, 1993                               1,258,039             153,249
--------------------------------------------------------------------------------
</TABLE>

INVESTMENTS

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

<TABLE>
<CAPTION>
DISTRIBUTION OF INVESTMENTS
-----------------------------------------------------------------------------------
December 31                                1997        %         1996         %
-----------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
  U.S. Treasury Securities and
<S>                                     <C>          <C>       <C>          <C>
    obligations of government agencies   $299,066     55.4%     $117,213     27.5%
  Asset backed securities                  68,612     12.7       113,376     26.6
  Other debt securities                    98,589     18.3        90,843     21.4
                                         --------    ------     --------    ------
    Total fixed maturities                466,267     86.4       321,432     75.5
Common stocks                                 981      0.2         1,073      0.3
Policy loans                               66,971     12.4        60,267     14.2
Other invested assets                         579      0.1           -        -
Short-term investments                      4,597      0.9        42,757     10.0
-----------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST            $539,395    100.0%     $425,529    100.0%
===================================================================================
INVESTMENTS AT CARRYING VALUE*           $545,968               $427,049
===================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>

                                       10
<PAGE>

INVESTMENTS - (CONTINUED)

    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  insurance
underwriting  operations.  The  investment  portfolios  are  segregated  for the
purpose of supporting policy liabilities for universal life, annuities and other
interest sensitive products.

    VFL's  investments in fixed maturities are carried at a fair value of $471.7
million at December 31, 1997, compared with $321.1 million at December 31, 1996.
At December 31,  1997,  net  unrealized  gains on fixed  maturities  amounted to
approximately  $5.4  million.  This  compares  with  net  unrealized  losses  of
approximately  $.4 million at December 31, 1996. The gross  unrealized gains and
losses for the fixed maturities portfolio at December 31, 1997 were $6.2 million
and $.8  million,  respectively,  compared  to $3.2  million  and $3.6  million,
respectively,  at December 31, 1996. 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 $2.3
million at December 31, 1997,  compared  with $3.0 million at December 31, 1996.
At December 31, 1997,  net  unrealized  gains on equity  securities  amounted to
approximately  $1.3  million.   This  compares  with  net  unrealized  gains  of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities as of December 31, 1997 and 1996.

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

    The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------
December 31                                            1997        %            1996          %
------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                 <C>          <C>          <C>           <C>
U.S. government and affiliated securities            $300,676     63.8%        $115,926      36.1%
Other AAA rated                                        75,531     16.0          127,910      39.8
AA and A rated                                         61,404     13.0           33,913      10.6
BBB rated                                              27,292      5.8           38,272      11.9
Below investment grade                                  6,804      1.4            5,045       1.6
------------------------------------------------------------------------------------------------------
     TOTAL                                           $471,707    100.0%        $321,066     100.0%
======================================================================================================
</TABLE>


                                       11
<PAGE>
INVESTMENTS - (CONTINUED)

    Included in VFL's fixed  maturities at December 31, 1997,  are $68.7 million
of asset-backed securities,  consisting of approximately 65.0% in collateralized
mortgage obligations (CMOs), 28.2% in corporate asset-backed  obligations,  6.4%
in  corporate  mortgage-backed   pass-through  certificates  and  0.4%  in  U.S.
government  and agency issued  pass-through  certificates.  The majority of CMOs
held are actively traded in liquid markets and are priced by broker-dealers.

    CMOs are  subject  to  prepayment  risk that  tends to vary with  changes in
interest  rates.  During  periods of declining  interest  rates,  CMOs generally
prepay  faster as the  underlying  mortgages  are prepaid and  refinanced by the
borrowers  in order to take  advantage of the lower  rates.  Conversely,  during
periods of rising interest rates, prepayments are generally slow. 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,  1997,  net
unrealized  gains on CMOs amounted to approximately  $.1 million,  compared with
unrealized  losses of approximately $.1 million at December 31, 1996. VFL avoids
investments in complex mortgage derivatives and does not have any investments in
mortgage loans or real estate.

    VFL invests from time to time in certain  derivative  financial  instruments
primarily  to reduce its  exposure  to market  risk.  See Notes 1 and 3 of VFL's
Financial Statements for further information regarding derivatives.

    High yield  securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management,  are
below investment grade (below BBB). High yield  securities  generally  involve a
greater  degree of risk than that of investment  grade  securities.  Returns are
expected to compensate  for the added risk.  The risk is also  considered in the
interest  rate  assumptions  in  the  underlying   insurance   products.   VFL's
concentration in high yield bonds was  approximately  0.3% of total assets as of
December 31, 1997 and 1996.

RISKS AND UNCERTAINTIES

    The following  section  discusses  risks and  uncertainties  to which VFL is
subject.

Credit Risk

    Credit risk arises from the potential inability of counterparties to perform
on an obligation in accordance with the terms of the contract. VFL is exposed to
credit  risk  in  its  capacity  as  counterparty  in  financial  and  insurance
contracts,  reinsurance arrangements and as a holder of securities.  VFL accepts
risk  whenever a  counterparty  is obligated to perform  under a contract.  As a
holder  of  securities,  VFL is  exposed  to  default  by the  issuer  or to the
possibility of market price  deterioration.  As a purchaser of reinsurance,  VFL
has exposure  that a reinsurer  may not be able to reimburse VFL under the terms
of the reinsurance  agreement.  VFL has  established  policies and procedures to
manage  credit  risk,  including  collateral  requirements  and master  "netting
arrangements."



                                       12
<PAGE>

RISK AND UNCERTAINTIES - (CONTINUED)

Legal/Regulatory Risk

    Legal/regulatory  risk is the risk that  changes in the legal or  regulatory
environment  in  which  VFL  operates  will  create   additional   expenses  not
anticipated  by VFL in pricing its  products.  Regulatory  initiatives,  tax law
changes, new legal theories or insurance company insolvencies,  through guaranty
fund  assessments  may  create  costs for the  insurer  beyond  those  currently
recorded in the financial statements. VFL mitigates this risk by offering a wide
range of products and by operating  throughout the United States,  thus reducing
its exposure to any single product or region, and also by employing underwriting
practices which identify and minimize the adverse impact of this risk.

Impact of Year 2000 on VFL

    The  widespread  use of  computer  programs,  both in the United  States and
internationally,  that rely on two digit date fields to perform computations and
decision  making  functions  may cause  computer  systems  to  malfunction  when
processing  information  involving dates after the year 1999. Such  malfunctions
could  lead  to  business  delays  and  disruptions.  VFL is in the  process  of
replacing many of its legacy systems and is upgrading its systems to accommodate
business for the year 2000 and beyond.  VFL  believes  that it is on schedule to
resolve  the year 2000  issue in a timely  manner.  VFL's  cost to  upgrade  and
replace its systems will be included as part of the total cost  incurred by CNAF
to replace  and  upgrade  its  systems.  Based upon  current  assessments,  CNAF
estimates its incremental  cost will be approximately  $50 million.  VFL will be
allocated its  proportionate  share of this cost upon completion of the upgrade;
however, a reasonable estimate of this cost is not currently  available.  Due to
the  interdependent  nature of computer systems,  VFL may be adversely  impacted
depending upon whether it or other entities not affiliated with VFL (vendors and
business partners) address this issue successfully. To mitigate this impact, VFL
is communicating  with its vendors and business  partners to coordinate the year
2000  conversion.  At this time,  management is unable to determine  whether the
adverse impact, if any, in connection with the foregoing  circumstances would be
material to VFL.

LIQUIDITY AND CAPITAL RESOURCES

    The  liquidity  requirements  of VFL have been met by funds  generated  from
operating,  investing and financing  activities.  VFL's principal operating cash
flow sources are premiums,  investment income, receipts for investment contracts
sold and sales and maturities of  investments.  The primary  operating cash flow
uses are payments for claims, policy benefits,  payments on matured policyholder
contracts and operating expenses.

    For the year ended December 31, 1997, VFL's operating  activities  generated
net positive cash flows of $20.5 million,  compared with net negative cash flows
of $136.8 million in 1996 and $18.9 million in 1995. The net positive cash flows
from  operations  in 1997 are due, in large part,  to the  settlement of certain
receivables  from  affiliates and higher  revenues  generated by the increase in
premium volume. The deterioration in cash flow in 1996 was caused by significant
acquisition  and other  first-year  expenses  related to the large volume of new
business generated by VFL, as well as the delayed settlement of receivables from
affiliates.
                                       13
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)

    VFL  believes  that future  liquidity  needs will be met  primarily  by cash
generated from operations. Net cash flows from operations are primarily invested
in marketable  securities.  Investment  strategies  employed by VFL consider the
cash flow requirements of the insurance  products sold and the tax attributes of
the various types of marketable investments.

    VFL's insurance  ratings are pooled ratings with Assurance.  The table below
reflects insurance ratings for VFL/Assurance as of December 31, 1997:


      --------|--------------------|-------------------------------------|
      |       | Financial Strength |          Claims Paying Ability      |
      |       |--------------------|--------------------|----------------|
      |       |     A.M Best       |  Standard & Poor's |  Duff & Phelps |
      |-------|--------------------|--------------------|----------------|
      |                                                                  |
      | RATING        A                    AA-                   AA      |
      |------------------------------------------------------------------|



ACCOUNTING STANDARDS

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

    In June  1996,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards  (SFAS) No. 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 is not expected to
have a significant impact on VFL.

Reporting Comprehensive Income

    In June  1997,  the FASB  issued  SFAS  No.  130,  "Reporting  Comprehensive
Income,"  which  establishes  accounting  standards for reporting and display of
comprehensive income and its components (revenues,  expenses,  gains and losses)
in a full set of general-purpose  financial statements.  This Statement requires
that an enterprise  (a) classify  items of other  comprehensive  income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive  income separately from retained  earnings and additional  paid-in
capital in the  equity  section  of a  statement  of  financial  position.  This
Statement is effective for fiscal years  beginning after December 15, 1997. This
Statement  is  not  expected  to  result  in  a  significant   change  in  VFL's
disclosures.



                                       14
<PAGE>

ACCOUNTING STANDARDS - (CONTINUED)

Disclosures about Segments of an Enterprise and Related Information

    In June 1997, the FASB issued SFAS No. 131,  "Disclosures  about Segments of
an Enterprise and Related  Information," which establishes standards for the way
that public business  enterprises report information about operating segments in
interim and annual  financial  statements.  It requires  that those  enterprises
report a measure of segment profit or loss, certain specific revenue and expense
items and segment assets, and that the enterprises  reconcile the total of those
amounts  to  the  general-purpose  financial  statements.  It  also  establishes
standards for related disclosures about products and services,  geographic areas
and major  customers.  This Statement is effective for financial  statements for
periods  beginning  after  December 15, 1997.  VFL is currently  evaluating  the
effect of this Statement on its business segment disclosure.

Accounting by Insurance and Other Enterprises for Insurance-Related Assessments

    In December 1997, the American  Institute of Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  Statement of Position (SOP)
97-3,  "Accounting  by Insurance  and Other  Enterprises  for  Insurance-Related
Assessments," which provides guidance on accounting by entities that are subject
to   insurance-related   assessments.   It  requires  that  entities   recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable  assessment  will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial  statements;  and the amount
of the  assessment  can be  reasonably  estimated.  This  SOP is  effective  for
financial  statements for fiscal years beginning after December 15, 1998. VFL is
currently   evaluating   the  effects  of  this  SOP  on  its   accounting   for
insurance-related assessments.

Employers' Disclosures about Pensions and Other Postretirement Benefits

    In February  1998,  the FASB issued  SFAS No. 132,  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits," which standardizes disclosure
requirements  for  pension  and  other  postretirement  benefits  to the  extent
practicable,  and  requires  additional  information  on changes in the  benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis.  The Statement  also suggests  combined  formats for  presentation  of
pension and other  postretirement  benefit  disclosures.  The Statement  changes
disclosure only and does not address measurement or recognition. It is effective
for fiscal  years  beginning  after  December 15,  1997.  VFL has no  employees,
however,  expenses  are  allocated  to VFL for  services  provided  by  Casualty
employees.  VFL is  currently  evaluating  the effects of this  Statement on its
benefit plan disclosures.





                                       15
<PAGE>

ACCOUNTING STANDARDS - (CONTINUED)

FORWARD-LOOKING STATEMENTS

    When included in management's  discussion and analysis, 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.  See discussions  elsewhere in
this report on how these risks may affect VFL. 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, 1997 and 1996....................................19
Statement of Operations, three years ended December 31, 1997.................20
Statement of Stockholder's Equity, three years ended December 31, 1997.......21
Statement of Cash Flows, three years ended December 31, 1997.................22
Notes to Financial Statements................................................23


                                       17
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
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, 1997 and 1996,  and the related  statements  of
operations,  stockholder's  equity and cash flows for each of the three years in
the period  ended  December  31, 1997.  Our audits also  included the  financial
statement schedules listed in 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1997 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 18, 1998


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

                                  BALANCE SHEET
-----------------------------------------------------------------------------------------------------------
December 31                                                                     1997              1996
-----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
 ASSETS:
   Investments:
<S>                                                                         <C>               <C>
     Fixed maturities available-for-sale (cost: $466,267 and $321,432)       $  471,707        $  321,066
     Equity securities available-for-sale (cost: $981 and $1,073)                 2,260             2,959
     Policy loans                                                                66,971            60,267
     Other invested assets                                                          433               -
     Short-term investments                                                       4,597            42,757
                                                                              ---------         ---------
          TOTAL INVESTMENTS                                                     545,968           427,049
   Cash                                                                          24,565            24,759
   Receivables:
     Reinsurance receivables                                                  1,586,471         1,320,583
     Premium and other insurance receivables                                     65,196            61,390
     Less allowance for doubtful accounts                                          (285)             (378)
   Deferred acquisition costs                                                    95,354            74,589
   Accrued investment income                                                      5,245             4,945
   Receivables for securities sold                                                  744               -
   Deferred income taxes                                                            -                 312
   Due from affiliates                                                           35,999            67,499
   Other                                                                            228                54
   Separate Account business                                                      8,941               -
-----------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                       $2,368,426        $1,980,802
===========================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                                  $1,906,899        $1,621,504
     Claims                                                                      81,242            60,568
     Policyholders' funds                                                        39,928            38,145
   Payables for securities purchased                                                497               -
   Federal income taxes payable                                                   5,975             3,824
   Deferred income taxes                                                          4,098               -
   Commissions and other payables                                                19,787            22,004
   Other                                                                         84,799            35,217
   Separate Account business                                                      8,941               -
                                                                             ----------        ----------
          TOTAL LIABILITIES                                                   2,152,166         1,781,262
                                                                             ----------        ----------
Commitments and contingent liabilities-Note 7 and 9
Stockholder's Equity
   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                                                            170,230           156,900
   Net unrealized investment gains                                                4,380               990
                                                                             ----------        ----------
          TOTAL STOCKHOLDER'S EQUITY                                            216,260           199,540
-----------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                         $2,368,426        $1,980,802
===========================================================================================================
<FN>
                 See accompanying Notes to Financial Statements.
</FN>
</TABLE>
                                       19
<PAGE>
<TABLE>
<CAPTION>

                     VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF OPERATIONS

----------------------------------------------------------------------------------------------------------------
Year Ended December 31                                                 1997            1996           1995
----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S>                                                                <C>             <C>             <C>
   Premiums                                                         $332,172        $325,486        $296,653
   Net investment income                                              29,913          29,312          31,494
   Realized investment gains                                           4,200           4,771          13,783
   Other                                                               6,872           8,217           4,818
                                                                    --------        --------        --------
                                                                     373,157         367,786         346,748
                                                                    --------        --------        --------
Benefits and expenses:
   Insurance claims and policyholders' benefits                      307,207         304,840         270,936
   Amortization of deferred acquisition costs                         11,818           1,177           6,066
   Other operating expenses                                           33,505          36,022          35,036
                                                                    --------        --------        --------
                                                                     352,530         342,039         312,038
                                                                    --------        --------        --------
     Income before income tax                                         20,627          25,747          34,710
Income tax expense                                                     7,297           9,028          12,200
----------------------------------------------------------------------------------------------------------------
     NET INCOME                                                     $ 13,330        $ 16,719        $ 22,510
================================================================================================================
<FN>

                 See accompanying Notes to Financial Statements.
</FN>
</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, January 1, 1995              $2,500   $39,150    $117,671     $(3,125)     $156,196
   Net income                             -         -       22,510          -         22,510
   Change in net unrealized gains/
        (losses)                          -         -           -       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)                          -         -           -      (12,651)      (12,651)
-----------------------------------------------------------------------------------------------
Balance, December 31, 1996             2,500    39,150     156,900         990       199,540
   Net income                             -         -       13,330          -         13,330
   Change in net unrealized gains/
        (losses)                          -         -           -        3,390         3,390
-----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997            $2,500   $39,150    $170,230     $ 4,380      $216,260
===============================================================================================
<FN>

                 See accompanying Notes to Financial Statements.
</FN>
</TABLE>
                                       21
<PAGE>
<TABLE>
<CAPTION>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF CASH FLOWS
-------------------------------------------------------------------------------------------------------------------
Year Ended December 31                                                         1997         1996          1995
-------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                         <C>           <C>          <C>
   Net income                                                                $ 13,330      $ 16,719     $ 22,510
                                                                             --------      --------     --------
   Adjustments  to  reconcile  net  income  to net  cash  flows
        from  operating activities:
     Net realized investment gains, pre-tax                                    (4,200)       (4,771)     (13,783)
     Amortization of bond discount                                             (2,438)       (4,922)      (3,921)
     Changes in:
        Insurance receivables, net                                           (269,787)     (254,549)    (151,415)
        Deferred acquisition costs                                            (20,765)      (23,989)      (9,267)
        Accrued investment income                                                (300)         (258)          69
        Due from affiliates                                                    31,500       (62,563)     (55,308)
        Federal income taxes                                                    2,151         4,399          (28)
        Deferred income taxes                                                   2,581         3,309          453
        Insurance reserves                                                    221,252       198,239      156,530
        Commissions and other payables                                         (2,217)        9,368        5,594
        Other, net                                                             49,429       (17,744)      29,619
                                                                            ---------      --------    ---------
            Total adjustments                                                   7,206      (153,481)     (41,457)
                                                                            ---------      --------    ---------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                           20,536      (136,762)     (18,947)
                                                                            ---------      --------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                             (464,361)     (535,263)    (361,579)
   Proceeds from fixed maturities:
     Sales                                                                    278,459       530,828      336,731
     Maturities, calls and redemptions                                         45,442        36,726       51,046
   Purchases of equity securities                                              (1,334)         (728)          -
   Proceeds from sales of equity securities                                     2,447         1,306           -
   Change in short-term investments                                            39,301        (2,851)       1,901
   Change in policy loans                                                      (6,704)       (4,259)      (9,007)
   Change in other invested assets                                               (580)           -            -
   Other, net                                                                      -             72           85
                                                                            ---------      --------    ---------
            NET CASH FLOWS FROM INVESTING ACTIVITIES                         (107,330)       25,831       19,177
                                                                            ---------      --------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES
   Receipts for investment contracts credited to policyholder
        account balances                                                      111,478        98,091       40,398
   Return of policyholder account balances in investment contracts            (24,878)       (4,504)        (451)
                                                                            ---------       --------    --------
            NET CASH FLOWS FROM FINANCING ACTIVITIES                           86,600        93,587       39,947
                                                                             ---------       --------    --------
            NET CASH FLOWS                                                       (194)      (17,344)      40,177
Cash at beginning of period                                                    24,759        42,103        1,926
-------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                        $ 24,565      $ 24,759     $ 42,103
===================================================================================================================
Supplemental disclosures of cash flow information:
        Federal income taxes paid                                            $  2,488      $  1,965     $  6,531
===================================================================================================================
<FN>
                 See accompanying Notes to Financial Statements.
</FN>
</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  (CNAF).  Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.

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

    The operations, assets and liabilities of VFL and its parent, Assurance, are
managed,  to a large  extent,  on a combined  basis.  Pursuant to a  Reinsurance
Pooling  Agreement,  amended  July  1,  1996,  VFL  cedes  all of its  business,
excluding its separate account business, to its parent, Assurance. This business
is then  pooled with the  business  of  Assurance,  which  excludes  Assurance's
participating  contracts and separate account business,  and 10% of the combined
pool is assumed by VFL.

    The accompanying  financial statements have been prepared in conformity with
generally accepted accounting  principles (GAAP).  Certain amounts applicable to
prior years have been  reclassified  to conform to  classifications  followed in
1997.

    The  preparation  of financial  statements in conformity  with 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.


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.




                                       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  (whole and term life  products) are computed  based upon the net level
premium  method 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  assumptions  include the  estimated  effects of inflation  and expenses
beyond the premium paying period. Reserves for universal life-type contracts are
equal to the account  balances that accrue to the benefit of the  policyholders.
Interest  crediting  rates  ranged  from 4.9% to 7.3% for the three  years ended
December 31, 1997.

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

    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.  VFL's  reinsurance  includes  quota share,
yearly  renewable  term  and  facultative  programs.  Amounts  recoverable  from
reinsurers are estimated in a manner consistent with the claim liability.

    Deferred  acquisition  costs- Life  acquisition  costs are  capitalized  and
amortized based on assumptions  consistent with those used for computing  policy
benefit  reserves.  Acquisition costs on traditional 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 $3.0 million for the year ended December 31, 1996.

INVESTMENTS

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




                                       24
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 1. - (CONTINUED)

    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 or mortgage loans.

    VFL  accounts for its  derivative  securities  under the fair value  method.
Under this method the  derivative  securities  are recorded at fair value at the
reporting date with changes in fair value reflected in realized investment gains
and losses.  VFL's  derivatives  are made up of interest rate caps and purchased
options and are classified as other invested assets.

    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 maturities and equity securities are reflected as part of stockholder's
equity, net of applicable deferred income taxes. 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  in which  securities  are  loaned  to third  parties,  primarily  major
brokerage  firms.  Borrowers of these  securities  must deposit 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  are 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  within fixed  maturities.  The  liabilities  for
securities  sold  subject  to  repurchase   agreements  are  recorded  at  their
contractual  repurchase  amounts.  VFL had no securities on loan at December 31,
1997 or 1996.

    Separate  Account   business-  VFL  writes  certain  annuity  contracts  and
universal  life  policies.  The  supporting  assets  and  liabilities  of  these
contracts  and  policies  are legally  segregated  and  reflected  as assets and
liabilities  of  Separate  Account  business.  Substantially  all  assets of the
Separate  Account   business  are  carried  at  fair  value.   Separate  account
liabilities are principally  obligations due to contractholders  and are carried
at contract values.

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.  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                                     1997             1996          1995
-----------------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturities:
<S>                                                     <C>              <C>           <C>
     Taxable bonds                                       $20,669          $21,597       $21,576
     Tax exempt bonds                                          1               12            23
Equity securities                                             72               59            64
Policy loans                                               4,264            3,669         3,925
Short-term investments                                     4,885            4,197         6,037
Security repurchase transactions                             -                -             135
Other                                                        200              -               2
                                                         -------         --------       -------
                                                          30,091           29,534        31,762
Investment expense                                           178              222           268
------------------------------------------------------------------------------------------------------
          NET INVESTMENT INCOME                          $29,913          $29,312       $31,494
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF INVESTMENT GAINS (LOSSES)
------------------------------------------------------------------------------------------------------
Year Ended December 31                                     1997            1996            1995
------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Realized investment gains (losses):
<S>                                                        <C>           <C>             <C>
   Fixed maturities                                         $3,333        $ 4,123         $13,674
   Equity securities                                         1,021            578             -
   Other                                                      (154)            70             109
                                                           -------        -------         -------
                                                             4,200          4,771          13,783
Income tax expense                                          (1,470)        (1,670)         (4,824)
                                                           -------        -------         -------
        Net realized investment gains                        2,730          3,101           8,959
                                                           -------        -------         -------
Change in net unrealized investment gains (losses):
   Fixed maturities                                          5,806        (20,726)         25,405
   Equity securities                                          (607)         1,263             389
   Other, principally Separate Account business                 20            -               -
                                                           -------        -------         -------
                                                             5,219        (19,463)         25,794
Income tax (expense) benefit                                (1,829)         6,812          (9,028)
                                                           -------        -------         -------
      Change in net unrealized investment gains (losses)     3,390        (12,651)         16,766
------------------------------------------------------------------------------------------------------
      NET REALIZED AND UNREALIZED INVESTMENT GAINS (LOSSES) $6,120        $(9,550)        $25,725
======================================================================================================
</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
------------------------------------------------------------------------------------------------------------
                                    1997                         1996                       1995
                          ----------------------------------------------------------------------------------
                            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>           <C>
Proceeds from sales         $278,459      $2,447        $530,828      $1,306       $336,731      $   -
                            ========      ======        ========      ======       ========      =======

Gross realized gains        $  4,793      $1,113        $  7,927      $  578       $ 18,185          -
Gross realized losses         (1,460)        (92)         (3,804)        -           (4,511)         -
------------------------------------------------------------------------------------------------------------
     NET REALIZED GAINS
        ON SALES            $  3,333      $1,021        $  4,123      $  578       $ 13,674      $   -
============================================================================================================

</TABLE>
<TABLE>
<CAPTION>

ANALYSIS OF NET UNREALIZED INVESTMENT GAINS (LOSSES)
INCLUDED IN STOCKHOLDER'S EQUITY
--------------------------------------------------------------------------------------------------------------------
                                                             1997                               1996
                                                 -----------------------------   -----------------------------------
December 31                                        GAINS    LOSSES       NET         Gains     Losses       Net
--------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                              <C>        <C>        <C>         <C>       <C>         <C>
Fixed maturities                                  $6,227     $(787)    $5,440       $3,226   $(3,592)     $ (366)
Equity securities                                  1,279        -       1,279        1,886       -         1,886
Other, principally Separate Account business          20        -          20          -         -           -
                                                 -------------------   ------       ------------------    ------
                                                  $7,526     $(787)     6,739       $5,112   $(3,592)      1,520
                                                 ===================                ==================
Deferred income tax expense                                            (2,359)                              (530)
--------------------------------------------------------------------------------------------------------------------
     NET UNREALIZED INVESTMENT GAINS                                   $4,380                             $  990
====================================================================================================================
</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, 1997                                           COST          GAINS         LOSSES       VALUE
--------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
United States Treasury securities and obligations of
<S>                                                       <C>            <C>            <C>        <C>
     government agencies                                   $299,066       $2,073         $ 711      $300,428
Asset-backed securities                                      68,612          147            74        68,685
Corporate securities                                         72,431        2,384             2        74,813
Other debt securities                                        26,158        1,623            -         27,781
                                                           --------       ------         -----      --------
     Total fixed maturities                                 466,267        6,227           787       471,707
Equity securities                                               981        1,279            -          2,260
--------------------------------------------------------------------------------------------------------------
     TOTAL                                                 $467,248       $7,506         $ 787      $473,967
==============================================================================================================
December 31, 1996
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 political subdivisions-tax-exempt     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
==============================================================================================================
<CAPTION>

SUMMARY OF INVESTMENTS IN FIXED
MATURITIES BY CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------------------------
                                                              1997                         1996
                                                   --------------------------     ----------------------
                                                    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                            $  2,249        $  2,255        $  3,299      $  3,305
Due after one year through five years               302,053         301,749         118,507       116,223
Due after five years through ten years               54,663          56,502          47,998        48,866
Due after ten years                                  38,690          42,516          38,252        39,421
Asset-backed securities not due at a single
     maturity date                                   68,612          68,685         113,376       113,251
------------------------------------------------------------------------------------------------------------
     TOTAL                                         $466,267        $471,707        $321,432      $321,066
============================================================================================================
</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, 1997 and 1996.  There are no
investments  in a single  issuer,  other  than the U.S.  government,  that  when
aggregated exceed 10% of stockholder's equity.


                                       28
<PAGE>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

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 a 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,  receivables  for  securities  sold,  payables  for
securities  purchased and certain other assets and other liabilities  because of
their short-term  nature.   Accordingly, these  financial  instruments are  not
listed in the table below.

    The  carrying  amounts and  estimated  fair values of VFL's other  financial
instrument assets and liabilities are listed below:
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------
                                                           1997                            1996
                                              -----------------------------------------------------------
                                                 CARRYING       ESTIMATED         Carrying    Estimated
December 31                                       AMOUNT        FAIR VALUE         Amount     Fair Value
-------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
FINANCIAL ASSETS
   Investments:
<S>                                              <C>            <C>             <C>           <C>
     Fixed maturities                             $471,707       $471,707        $321,066      $321,066
     Equity securities                               2,260          2,260           2,959         2,959
     Policy loans                                   66,971         63,756          60,267        56,169
     Other invested assets                             433            433              -             -
   Separate Account business:
     Fixed maturities                                3,198          3,198              -             -
     Equity securities                               5,233          5,233              -             -
     Other                                             305            305              -             -
FINANCIAL LIABILITIES
   Premium deposits and annuity contracts          266,093        247,567         167,049       153,676
=============================================================================================================

</TABLE>
                                       29
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 3. - (CONTINUED)

    The following  methods and  assumptions  were used by VFL in estimating  the
fair value amounts for financial instruments:
           Fixed  maturities  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,  costs to  settle,  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.

           Valuation  techniques  to  determine  fair  value of  other  Separate
         Account  business  assets  consist of discounted  cash flows and quoted
         market prices of (a) the investments or (b) comparable instruments. The
         fair value of other Separate Account business liabilities  approximates
         their carrying value.

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

    VFL invests from time to time in certain  derivative  financial  instruments
primarily to reduce its exposure to market risk. Financial  instruments used for
such purposes may include interest rate caps, put and call options,  commitments
to purchase  securities,  futures and  forwards.  VFL also uses  derivatives  to
mitigate  the risk  associated  with  certain  guaranteed  annuity  contracts by
purchasing  certain options in a notional amount equal to the original  customer
deposit.  VFL  generally  does not hold or issue these  instruments  for trading
purposes.

    Derivative  financial  instruments  consist  of  interest  rate  caps in the
general account and purchased  options in the Separate  Accounts at December 31,
1997.  The  gross  notional  principal  or  contractual  amounts  of  derivative
financial  instruments  in the general  account at December 31, 1997 totaled $50
million.  The gross  notional  principal or  contractual  amounts of  derivative
financial  instruments in the Separate Accounts totaled $1.5 million at December
31, 1997. VFL had no derivative  financial  instrument  holdings at December 31,
1996.  The contract or notional  amounts are used to  calculate  the exchange of
contractual  payments  under the agreements  and are not  representative  of the
potential for gain or loss on these agreements.

    The  fair  values  associated  with  derivative  financial  instruments  are
generally  affected by interest rates,  equity stock prices and foreign exchange
rates.  The credit  exposure  associated  with these  instruments  is  generally
limited to the unrealized  fair value of the instruments and will vary based the
credit  worthiness  of the  counterparties.  The risk of default  depends on the
creditworthiness of the counterparty to the instrument.  Although VFL is exposed
to the  aforementioned  credit risk, it does not expect any counterparty to fail
to perform as contracted based on the  creditworthiness  of the  counterparties.
Due to the nature of the derivative securities, VFL does not require collateral.

                                       30
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 3. - (CONTINUED)

    The fair value of derivatives  generally reflects the estimated amounts that
VFL would  receive or pay upon  termination  of the  contracts at the  reporting
date. Dealer quotes are available for  substantially  all of VFL's  derivatives.
For  securities  not actively  traded,  fair values are  estimated  using values
obtained from independent  pricing  services,  costs to settle, or quoted market
prices  of  comparable  instruments.  The  fair  value of  derivative  financial
instruments  in the general  account and Separate  Accounts at December 31, 1997
totaled  $.4 million  and $.3  million,  respectively.  Net  realized  losses on
derivative financial instruments held in the general account totaled $.1 million
for the year ended December 31, 1997,  while net realized  losses on derivatives
in the Separate Accounts were negligible for the same period.

    Options are contracts that grant the purchaser,  for a premium payment,  the
right, but not the obligation, to either purchase or sell a financial instrument
at a specified price within a specified period of time.

    An interest  rate cap  consists  of a  guarantee  given by the issuer to the
purchaser in exchange for the payment of a premium.  This guarantee  states that
if  interest  rates  rise above a  specified  rate,  the issuer  will pay to the
purchaser the difference  between the then current market rate and the specified
rate on the notional  principal  amount.  The notional  principal  amount is not
actually borrowed or repaid.


NOTE 4.  STATUTORY CAPITAL AND SURPLUS:

    Statutory  capital  and  surplus  and net income for VFL are  determined  in
accordance with accounting practices prescribed or permitted 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 statutory net losses of $1.0
million and $2.7 million for the years ended December 31, 1997 and 1996, and net
income of $8.9 million for the year ended  December 31, 1995.  The statutory net
losses  for 1997 and 1996  were  primarily  due to the  immediate  expensing  of
acquisition costs which were substantial as a result of the increase in sales of
individual life and annuity products. Under GAAP, such costs are capitalized and
amortized to income over the duration of these contracts.  Statutory capital and
surplus for VFL was $125.3  million and $124.3  million at December 31, 1997 and
1996, 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, 1997 and 1996, approximately $12.5 million and $12.4 million,  respectively,
was not subject to prior Insurance Department approval.

                                       31

<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. BENEFIT PLANS:

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

PENSION PLAN
    CNAF has noncontributory  pension plans covering all full-time employees age
21 or over who have completed at least one year of service. Casualty is included
in the CNA Employees'  Retirement Plan and VFL is allocated their  proportionate
share of these  expenses.  While  the  benefits  for the  plans  vary,  they are
generally  based on years of credited  service and the employee's  highest sixty
consecutive months of compensation.

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

    The funded status is determined  using  assumptions  at the end of the year.
Underfunded plans are those plans for which the accumulated  benefit  obligation
is in excess of plan  assets.  Overfunded  plans are those  plans for which plan
assets exceed the accumulated  benefit  obligations.  Pension cost is determined
using assumptions at the beginning of the year.

    The net pension  cost  allocated  to VFL was $4.0  million,  $3.6  million
and $1.7 million for the years ended December 31, 1997, 1996 and 1995,
respectively.

    The  following  table  sets  forth the  plans'  funded  status  and  amounts
recognized  in CNAF's  consolidated  financial  statements at December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>

ACCUMULATED BENEFIT OBLIGATION
----------------------------------------------------------------------------------------------------------------
                                               1997                  1996                       1995
                                            -----------    -------------------------  -------------------------
                                            UNDERFUNDED    Overfunded  Underfunded    Overfunded   Underfunded
 December 31                                   PLANS          Plans        Plans         Plans         Plans
----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Actuarial present value of accumulated
     plan benefits:
<S>                                        <C>             <C>         <C>           <C>          <C>
   Vested                                   $1,339,708      $517,221    $622,548      $491,052     $646,017
   Nonvested                                    76,992        37,718      32,369        28,346       14,126
-----------------------------------------------------------------------------------------------------------------
     ACCUMULATED BENEFIT OBLIGATION         $1,416,700      $554,939    $654,917      $519,398     $660,143
=================================================================================================================
</TABLE>
                                       32
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED)
<TABLE>
<CAPTION>
NET PENSION ASSET (LIABILITY)
------------------------------------------------------------------------------------------------------------------
                                                   1997                1996                       1995
                                                -----------   ------------------------  ------------------------
                                                UNDERFUNDED   Overfunded   Underfunded  Overfunded   Underfunded
December 31                                        PLANS         Plans         Plans         Plans        Plans
------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                            <C>           <C>          <C>            <C>          <C>
Projected benefit obligation                    $1,779,799    $777,755     $788,333       $769,999     $809,308
Plan assets at fair value                        1,312,592     701,854      503,623        629,673      496,264
                                                ----------    --------     --------       --------     --------
     Plan assets less than projected benefit
           obligation                             (467,207)    (75,901)    (284,710)      (140,326)    (313,044)
Unrecognized net asset at January 1, 1986,
    being recognized over 12 years                  (2,124)     (7,099)         -          (12,176)         -
Unrecognized prior service costs                    88,006      19,077       77,747         21,445      104,042
Unrecognized net gain (loss)                       218,204     122,173      (11,793)       164,585       13,508
-------------------------------------------------------------------------------------------------------------------
    NET PENSION (LIABILITY) ASSET               $ (163,121)     58,250    $(218,756)      $ 33,528    $(195,494)
===================================================================================================================
<CAPTION>
NET PERIODIC PENSION COST
--------------------------------------------------------------------------------------------------------------------
                                                 1997                1996                          1995
                                             -----------    -------------------------  ---------------------------
                                             UNDERFUNDED    Overfunded   Underfunded    Overfunded   Underfunded
 December 31                                    PLANS         Plans        Plans           Plans        Plans
--------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net periodic pension cost:
   Service cost-benefits attributed to
<S>                                          <C>             <C>          <C>            <C>          <C>
        employee service during the year      $ 54,321        $36,489      $18,825       $ 32,118      $11,596
   Interest cost on projected
        benefit obligation                     118,668         53,549       56,771         51,056       32,760
   Actual return on plan assets               (102,950)       (31,106)     (29,013)      (115,363)     (43,432)
   Net amortization and deferral                17,370        (16,059)      (5,982)        72,415       19,547
--------------------------------------------------------------------------------------------------------------------
     NET PERIODIC PENSION COST                $ 87,409        $42,873      $40,601       $ 40,226      $20,471
====================================================================================================================
</TABLE>
Actuarial assumptions are set forth in the following table:
<TABLE>
<CAPTION>
ASSUMPTIONS
-----------------------------------------------------------------------------------------------------
December 31                                          1997         1996          1995         1994
-----------------------------------------------------------------------------------------------------
<S>                                                 <C>     <C>            <C>              <C>
Discount rate                                        7.25%        7.50%          7.25%       8.50%
Rate of increase in compensation levels*             2.75         2.75           2.75        4.00
Expected long-term rate of return on plan assets     7.50    7.75-8.50      7.50-8.50        8.75
-----------------------------------------------------------------------------------------------------
<FN>
* Excludes age/service related merit and productivity increases.
</FN>
</TABLE>


POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

    CNAF 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.  CNAF funds benefit costs principally
on the basis of current benefit payments.

    The net  postretirement  benefit cost  allocated to VFL was $2.1 million,
$1.3 million and $.7 million for the years ended December 31, 1997, 1996 and
1995, respectively.
                                       33
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED)
    The following table sets forth the amounts recognized in CNAF's consolidated
financial statements at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
ACCRUED POSTRETIREMENT BENEFIT COST
-------------------------------------------------------------------------------------------------
December 31                                                  1997          1996          1995
-------------------------------------------------------------------------------------------------
(In thousands of dollars)
Accumulated postretirement benefit obligation:
<S>                                                       <C>           <C>           <C>
   Retirees                                                $201,985      $171,950      $185,507
   Fully eligible, active plan participants                  72,818        89,009        59,173
   Other active plan participants                            87,207        88,191        62,540
                                                           --------      --------      --------
     Total accumulated postretirement benefit obligation    362,010       349,150       307,220
Plan assets at fair value                                      (509)          -             -
Unrecognized prior service cost                                (203)          (70)          -
Unrecognized net (loss) gain                                 (8,197)      (12,215)        7,380
--------------------------------------------------------------------------------------------------
     ACCRUED POSTRETIREMENT BENEFIT COST                   $353,101      $336,865      $314,600
==================================================================================================
NET PERIODIC POSTRETIREMENT BENEFIT COST
----------------------------------------------------------------------------------------------------------
Year Ended December 31                                                    1997      1996         1995*
----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net periodic postretirement benefit cost:
   Service cost/benefits attributed to employee service
<S>                                                                    <C>         <C>          <C>
     during the year                                                    $10,156     $11,935      $ 5,969
   Interest cost on accumulated post retirement benefit obligation       25,135      24,146       17,506
   Expected return on assets                                                (25)        -            -
   Amortization                                                            (322)        374         (941)
----------------------------------------------------------------------------------------------------------
     NET PERIODIC POSTRETIREMENT BENEFIT COST                           $34,944     $36,455      $22,534
==========================================================================================================
<FN>
* The 1995 data includes for The Continental  Corporation  Retirement Plans from acquisition date.
</FN>
<CAPTION>
ASSUMPTIONS
------------------------------------------------------------------------------------------
December 31                                                    1997      1996      1995
------------------------------------------------------------------------------------------
Discount rate:
<S>                                                           <C>       <C>       <C>
Assumptions used in determining net periodic benefit cost      7.50%     7.25%     8.50%
Assumptions used in determining the projected benefit
     obligation (liability)                                    7.25%     7.50%     7.25%
------------------------------------------------------------------------------------------
</TABLE>
    The assumed  health care cost trend rate used in measuring  the  accumulated
postretirement  benefit obligation was 9% in 1997, declining 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 CNAF's accumulated postretirement benefit obligation as of December 31,
1997 by $23.9 million and the aggregate net periodic postretirement benefit cost
for 1997 by $2.9 million.
                                       34
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 5. - (CONTINUED)

SAVINGS PLAN

   Casualty  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.  VFL is allocated its proportionate  share of CNA Employees'
Savings Plan expenses. CNAF 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 CNAF. CNAF  contributions  allocated to and expensed by VFL for
the Savings  Plan were $.2  million,  $1.0 million and $.7 million for the years
ended December 31, 1997, 1996 and 1995, 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 CNAF and its  eligible  subsidiaries  (CNA Tax
Group),  which in turn is included in the consolidated Federal income tax return
of Loews and its eligible subsidiaries.  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. The amount in the
Shareholder's  Surplus Account was $121.8 million and $100.0 million at December
31, 1997 and 1996, respectively.  Another tax memorandum account, defined as the
"Policyholders' Surplus Account," totaled $5.4 million at both December 31, 1997
and 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 stockholder. VFL has not provided for such a tax as VFL has no plans for
such a distribution.

    Significant  components  of VFL's  deferred  tax assets and  liabilities
as of December  31, 1997 and 1996 are shown in the table below:



COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
---------------------------------------------------------------------------
December 31                                       1997          1996
---------------------------------------------------------------------------
(In thousands of dollars)
Insurance reserves                               $24,961       $17,166
Deferred acquisition costs                       (33,374)      (22,078)
Investment valuation                               6,129         5,411
Net unrealized gains                              (2,359)         (530)
Receivables                                       (2,486)         (646)
Other, net                                         3,031           989
---------------------------------------------------------------------------
     NET DEFERRED TAX (LIABILITIES) ASSETS       $(4,098)      $   312
===========================================================================
                                       35
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 6. - (CONTINUED)


    At December 31, 1997, gross deferred tax assets and liabilities  amounted to
$35.1 million and $39.2  million,  respectively.  Gross  deferred tax assets and
liabilities,  at December 31, 1996, amounted to $24.9 million and $24.6 million,
respectively.  VFL has not established a valuation  reserve at December 31, 1996
as it believes that all deferred tax assets are fully realizable.

    The components of income tax expense are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Year Ended December 31               1997        1996         1995
---------------------------------------------------------------------------
(In thousands of dollars)
<S>                                  <C>       <C>          <C>
Current tax expense                   $4,716    $5,719       $11,747
Deferred tax expense                   2,581     3,309           453
===========================================================================
     TOTAL INCOME TAX EXPENSE         $7,297    $9,028       $12,200
===========================================================================
</TABLE>

     The components of total income tax expense are allocated  between operating
income and realized  capital  gains and losses in the  following  table.

------------------------------------------------------------------------
Year Ended December 31                1997         1996         1995
------------------------------------------------------------------------
(In thousands of dollars)
Income tax expense on:

   Operating income                   $5,827      $7,358      $ 7,376
   Realized investment gains           1,470       1,670        4,824
========================================================================
     TOTAL INCOME TAX EXPENSE         $7,297      $9,028      $12,200
========================================================================

    A  reconciliation  of the statutory  federal income tax rate on income is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                                                      % OF                    % of                   % of
                                                     PRETAX                  Pretax                  Pretax
Year Ended December 31                   1997        INCOME       1996       Income      1995        Income
------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                    <C>           <C>        <C>          <C>       <C>           <C>
Income taxes at statutory rates         $7,219        35.0       $9,011       35.0     $12,149        35.0
Other                                       78         0.4           17        0.1          51         0.2
------------------------------------------------------------------------------------------------------------
     INCOME TAX AT EFFECTIVE RATES      $7,297        35.4       $9,028       35.1     $12,200        35.2
============================================================================================================
</TABLE>
                                       36
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 7. REINSURANCE:

    The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough  assessment of the reinsurers'  credit
quality and claim  settlement  performance.  Further,  for carriers that are not
authorized  reinsurers  in VFL's state of  domicile,  VFL  receives  collateral,
primarily  in the  form of bank  letters  of  credit.  Such  collateral  totaled
approximately $0.1 million at both December 31, 1997 and 1996.

    In the table  below,  the  majority  of life  premium  revenue  is from long
duration  type  contracts,  while the  majority  of accident  and health  earned
premiums  are from short  duration  contracts.  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)
1997
<S>                           <C>          <C>         <C>          <C>           <C>
   Life                        $564,891     $ 81,502    $567,217     $ 79,176      103%
   Accident and Health            2,776      252,996       2,776      252,996      100
                               --------     --------    --------     --------      ----
     TOTAL PREMIUMS            $567,667     $334,498    $569,993     $332,172      101%
                               ========     ========    ========     ========      ====
1996
   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%
===========================================================================================
</TABLE>

    Transactions with Assurance,  as part of the pooling agreement  described in
Note  1,  are  reflected  in  the  above  table.   Premium   revenues  ceded  to
non-affiliated companies were $116.2 million, $43.0 million and $9.9 million for
the years ended December 31, 1997,  1996 and 1995,  respectively.  Additionally,
insurance  claims and  policyholder  benefits are net of reinsurance  recoveries
from  non-affiliated  companies of $77.8 million,  $7.0 million and $6.1 million
for the years ended December 31, 1997, 1996 and 1995, respectively.

    Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers   related  to  insurance   reserves.   These   balances,  which  were
approximately  $1.6  billion  and $1.3  billion at  December  31, 1997 and 1996,
respectively,  are  principally  due from  Assurance  pursuant  the  Reinsurance
Pooling Agreement

                                       37
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONTINUED

NOTE 7. - (CONTINUED)


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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------

                                       Life Insurance in Force               Assumed/Net
                       -----------------------------------------------------
                          Direct     Assumed        Ceded          Net            %
----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                    <C>           <C>          <C>           <C>            <C>
DECEMBER 31, 1997       $166,308      $25,557      $168,353      $23,512        108.7%
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
===============================================================================================

</TABLE>



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 CNAF and each of its subsidiaries are allocated to
the appropriate company. All acquisition and underwriting  expenses allocated to
VFL are further subject to the Reinsurance Pooling Agreement with Assurance,  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 $45.3 million,
$37.2 million and $41.1 million for 1997, 1996 and 1995, respectively.  Expenses
of VFL exclude  $9.9  million,  $12.3  million  and $5.5  million of general and
administrative  expenses  incurred  by VFL and  allocated  to CNAF for the years
ended December 31, 1997,  1996 and 1995,  respectively.  VFL had a $36.0 million
and  $67.5  million  affiliated  receivable  at  December  31,  1997  and  1996,
respectively,  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 or payables.

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.


                                       38
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                    NOTES TO FINANCIAL STATEMENTS - CONCLUDED

NOTE 10. BUSINESS SEGMENTS:



--------------------------------------------------------------------------------
Year Ended December 31                  1997              1996          1995
--------------------------------------------------------------------------------
(In thousands of dollars)

REVENUES
  Individual                         $   72,204       $   70,208      $   69,577
  Group                                 296,753          292,807         263,388
  Realized gains                          4,200            4,771          13,783
                                     ----------       ----------      ----------
    Total                            $  373,157       $  367,786      $  346,748
                                     ==========       ==========      ==========
INCOME BEFORE INCOME TAX
  Individual                         $    9,952       $   12,752      $    8,611
  Group                                   6,475            8,224          12,316
  Realized gains                          4,200            4,771          13,783
                                     ----------       ----------      ----------
    Total                            $   20,627       $   25,747      $   34,710
                                     ==========       ==========      ==========
NET INCOME
  Individual                         $    6,345       $    8,209      $    5,597
  Group                                   4,255            5,409           7,954
  Realized gains                          2,730            3,101           8,959
                                     ----------       ----------      ----------
    Total                            $   13,330       $   16,719      $   22,510
                                     ==========       ==========      ==========
ASSETS
  Individual                         $1,824,854       $1,522,900      $1,360,942
  Group                                 543,572          457,902         280,496
--------------------------------------------------------------------------------
    TOTAL                            $2,368,426       $1,980,802      $1,641,438
================================================================================



    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
insurance segments.

         Group  revenues  include  $211.5  million,  $210.1  million  and $187.0
million for the years ended  December  31,  1997,  1996 and 1995,  respectively,
under contracts covering U.S. government employees and their dependents (FEHBP).




                                       39
<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

SEE PAGE 6 FOR LIST OF DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.


ITEM 11.      EXECUTIVE COMPENSATION

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


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

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



ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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




                                       40
<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.............44
              Schedule V    Valuation and Qualifying Accounts and Reserves..45

              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).
                                       41
<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).

10 (a)        Form of Participation Agreement between VFL 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  VFL 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).


                                       42
<PAGE>

(A) (3)       EXHIBITS - (CONTINUED)

10 (c)        Form of Participation  Agreement  between VFL 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 VFL 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 VFL 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 VFL 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
              1997.

                                       43
<PAGE>
                                                                   SCHEDULE III
                       VALLEY FORGE LIFE INSURANCE COMPANY
                       SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                  GROSS INSURANCE RESERVES
                                                  ------------------------
                                                CLAIM
                                DEFERRED         AND           FUTURE         POLICY-         NET             NET
                              ACQUISITION       CLAIM          POLICY        HOLDERS'       PREMIUM       INVESTMENT
(In thousands of dollars)        COSTS         EXPENSE        BENEFITS         FUNDS        REVENUE         INCOME
--------------------------------------------------------------------------------------------------------------------------
December 31, 1997
<S>                           <C>           <C>             <C>            <C>           <C>             <C>
       Individual........      $90,862.6     $27,391.0      $1,856,175.5    $   570.2     $ 58,232.9      $11,349.2
       Group.............        4,491.3      53,850.5          50,723.9     39,358.1      273,939.3       18,563.9
                               =========     =========      ============    =========     ==========      =========
                   Total        95,353.9      81,241.5       1,906,899.4     39,928.3      332,172.2       29,913.1
                               ==========    =========      ============    =========     ==========      ==========
December 31, 1996
       Individual........      $71,268.6     $10,411.5      $1,580,738.3    $   548.0     $ 49,226.4      $13,123.6
       Group.............        3,320.1      50,156.3          40,765.6     37,596.9      276,260.0       16,188.6
                               =========     =========      ============    =========     ==========      =========
                   Total        74,588.7      60,567.8       1,621,503.9     38,144.9      325,486.4       29,312.2
                               ==========    =========      ============    =========     ==========      =========
December 31, 1995
       Individual........      $50,420.8     $14,118.6      $1,297,743.3    $   676.4     $ 49,435.0      $18,918.0
       Group.............          178.8      45,304.8          36,649.8     33,897.9      247,218.0       12,576.3
                               =========     =========      ============    =========     ==========      =========
                   Total        50,599.6      59,423.4       1,334,393.1     34,574.3      296,653.0       31,494.3
                               =========     =========      ============    =========     ==========      =========
<CAPTION>
 ----------------------------------------------------------------------------------------
                                                  GROSS INSURANCE RESERVES
                                                  ------------------------
                                                           AMORTIZATION
                                          INSURANCE             OF
                                          CLAIMS AND         DEFERRED          OTHER
                                        POLICYHOLDERS'      ACQUISITION      OPERATING
(In thousands of dollars)                  BENEFITS            COSTS         EXPENSES
----------------------------------------------------------------------------------------
December 31, 1997
<S>                                    <C>                 <C>             <C>
       Individual.......                $106,720.7          $11,922.6       $ 6,190.5
       Group............                 200,486.7             (104.8)       27,314.9
                                        ==========          =========       =========
                   Total                 307,207.4           11,817.8        33,505.4
                                        ==========          =========       =========
December 31, 1996
       Individual........               $ 84,559.1          $ 1,124.7       $ 9,158.9
       Group.............                220,280.8               52.4        26,863.7
                                        ==========          =========       =========
                    Total                304,839.9            1,177.1        36,022.6
                                        ==========          =========       =========
December 31, 1995
       Individual.........              $ 60,208.5          $ 6,044.9       $11,563.1
       Group..............               210,727.7               21.2        23,472.8
                                        ==========          =========       =========
                     Total               270,936.2            6,066.1        35,035.9
                                        ==========          =========       =========
</TABLE>
                                       44
<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, 1997 Deducted from assets:
     Allowance for doubtful accounts:
<S>                                                      <C>          <C>          <C>          <C>        <C>
       Insurance receivables.......................       $377.8       $245.6       $    -       $338.7     $284.7
                                                           =====        =====        =======      =====      =====
YEAR ENDED DECEMBER 31, 1996 Deducted from assets:
     Allowance for doubtful accounts:
       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
                                                          ======       ======        =======      =====      =====
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       45
<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/W. JAMES MACGINNITIE
                                            -----------------------
                                            W. James MacGinnitie
                                            Director, Senior Vice President
                                            and Chief Financial Officer


Date:         March 28, 1998

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, 1998.

     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/JONATHAN D. KANTOR                                 Director
---------------------
Jonathan D. Kantor

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

/S/W. JAMES MACGINNITIE                               Chief Financial Officer
-----------------------                               and Director
W. James MacGinnitie

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



                                       46