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

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


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

                                    FORM 10-Q

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

For the Quarterly Period Ended March 31,1997    Commission File Number 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)



         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
                                             --   -- 

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

              Class                                  Outstanding at May 1, 1997
 --------------------------------                    --------------------------
  Common Stock, Par value $50.00                              50,000

         The registrant  meets the  conditions set forth in General  Instruction
H(1) (a) and (b) of Form 10-Q and is  therefore  filing  this Form 10-Q with the
reduced disclosure format.


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


                                  Page 1 of 17
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                                      INDEX


PART I.   FINANCIAL INFORMATION                                         PAGE NO.
------    ---------------------                                         -------

CONDENSED FINANCIAL STATEMENTS:

   BALANCE SHEET
     MARCH 31, 1997 (Unaudited) AND DECEMBER 31, 1996..................       3

   STATEMENT OF OPERATIONS (Unaudited)
     FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................       4

   STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
     FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................       5

   STATEMENT OF CASH FLOWS (Unaudited)
     FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996................       6

   NOTES TO CONDENSED FINANCIAL
     STATEMENTS (Unaudited) MARCH 31, 1997..................... .......       7

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
     AND RESULTS OF OPERATIONS.........................................       9


PART II.  OTHER INFORMATION
-------   -----------------

ITEM 6.         EXHIBITS AND REPORTS ON FORM 8-K.......................      15

SIGNATURES.............................................................      16

EXHIBIT 27      FINANCIAL DATA SCHEDULE................................      17









                                       2
<PAGE>
<TABLE>
<CAPTION>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                                  BALANCE SHEET

------------------------------------------------------------------------------------------------------
                                                                             MARCH 31      DECEMBER 31
                                                                               1997             1996
                                                                           (Unaudited)
------------------------------------------------------------------------------------------------------
(In thousands of dollars) 
ASSETS:
   Investments:
<S>                                                                        <C>            <C>           
     Fixed maturities available-for-sale (cost: $312,538 and $321,432)      $  304,363      $  321,066
     Equity securities available-for-sale (cost: $1,073 and $1,073)              3,186           2,959
     Policy loans                                                               62,288          60,267
     Short-term investments                                                    113,057          42,757
                                                                             ---------      ----------
          Total investments                                                    482,894         427,049
   Cash                                                                          1,746          24,759
   Insurance receivables:
     Reinsurance receivables                                                 1,390,300       1,320,583
     Premium and other insurance receivables                                    52,702          27,884
     Less allowance for doubtful accounts                                         (377)           (378)
   Deferred acquisition costs                                                   80,972          74,589
   Accrued investment income                                                     6,677           4,945
   Receivables for securities sold                                               9,997             -
   Deferred income taxes                                                         1,301             312
   Due from affiliates                                                          26,603          67,499
   Other assets                                                                    907              54
   Separate account business                                                       908             -
------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                      $2,054,630      $1,947,296
======================================================================================================

LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                                 $1,698,521      $1,621,504
     Claims                                                                     72,186          60,568
     Policyholders' funds                                                       34,807          38,145
   Payables for securities purchased                                             9,969             -
   Federal income taxes payable                                                  3,571           3,824
   Other liabilities                                                            37,395          23,715
   Separate account business                                                       908             -
                                                                            ----------      ----------
          TOTAL LIABILITIES                                                  1,857,357       1,747,756
                                                                            ----------      ----------
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                                                           159,562         156,900
   Net unrealized investment gains/(losses)                                     (3,939)            990
                                                                             ----------      ---------
          TOTAL STOCKHOLDER'S EQUITY                                           197,273         199,540
------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                        $2,054,630      $1,947,296
======================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       3
<PAGE>
<TABLE>
<CAPTION>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF OPERATIONS
                                   (Unaudited)

-------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31                                               1997            1996
-------------------------------------------------------------------------------------------------
(In thousands of dollars)

Revenues:
<S>                                                                    <C>              <C>      
   Premiums                                                             $86,083          $77,283
   Net investment income                                                  7,305            7,260
   Realized investment gains                                                 29            4,995
   Other                                                                  1,275            1,250
                                                                        -------          -------
                                                                         94,692           90,788
                                                                        -------          -------

Benefits and expenses:
   Insurance claims and policyholders' benefits                          81,756           71,017
   Amortization of deferred acquisition costs                             1,531              213
   Other operating expenses                                               7,279            9,826
                                                                        -------          -------
                                                                         90,566           81,056
                                                                        -------          -------
     Income before income tax                                             4,126            9,732
Income tax expense                                                        1,464            3,433
-------------------------------------------------------------------------------------------------
     NET INCOME                                                         $ 2,662          $ 6,299
=================================================================================================

<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>



                                       4
<PAGE>
<TABLE>
<CAPTION>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                        STATEMENT OF STOCKHOLDER'S EQUITY
                                   (Unaudited)

---------------------------------------------------------------------------------------------
                                                                           NET
                                              ADDITIONAL               UNREALIZED
THREE MONTHS ENDED                   COMMON    PAID-IN     RETAINED    INVESTMENT
MARCH 31, 1997 AND 1996              STOCK     CAPITAL     EARNINGS   GAINS (LOSSES)   TOTAL
---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                <C>       <C>          <C>        <C>            <C>       
BALANCE, DECEMBER 31, 1995          $2,500      $39,150    $140,181      $13,641     $195,472
   Net income                           -            -        6,299           -         6,299
   Change in net unrealized gains/
        (losses)                        -            -           -       (14,864)     (14,864)
----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1996             $2,500      $39,150    $146,480      $(1,223)    $186,907
==============================================================================================

BALANCE, DECEMBER 31, 1996          $2,500      $39,150    $156,900      $   990     $199,540
   Net income                           -            -        2,662           -         2,662
   Change in net unrealized gains/
        (losses)                        -            -           -        (4,929)      (4,929)
----------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1997             $2,500      $39,150    $159,562      $(3,939)    $197,273
==============================================================================================
<FN>

      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>


                                       5
<PAGE>

<TABLE>
<CAPTION>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF CASH FLOWS
                                   (Unaudited)

-------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31                                                  1997         1996
-------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                                                      <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                              $ 2,662     $  6,299
                                                                          ---------     --------
   Adjustments  to  reconcile  net  income  to net  cash  flows  from  
          operating activities:
   Net realized investment gains, pre-tax                                      (29)      (4,995)
   Amortization of bond discount                                            (1,178)       2,207)
   Changes in:
        Insurance receivables, net                                         (94,536)    (109,781)
        Deferred acquisition costs                                          (6,383)      (5,219)
        Accrued investment income                                           (1,732)      (2,584)
        Federal income taxes payable                                          (253)       5,422
        Deferred income taxes                                                1,665         (839)
        Insurance reserves                                                  85,297       91,995
        Due from affiliates                                                 40,896       34,521
        Other, net                                                          12,828          756
                                                                         ----------    ---------
            Total adjustments                                               36,575        7,069
                                                                         ----------    ---------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                        39,237       13,368
                                                                         ----------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                           (36,839)    (266,312)
   Proceeds from fixed maturities:
     Sales                                                                  39,435      294,103
     Maturities, calls and redemptions                                       6,636           -
   Change in short-term investments                                        (69,461)     (30,832)
   Change in policy loans                                                   (2,021)      (2,444)
                                                                         ----------    ---------
          NET CASH FLOWS FROM INVESTING ACTIVITIES                         (62,250)      (5,485)
                                                                         ----------    ---------
          Net cash flows                                                   (23,013)       7,883
Cash at beginning of period                                                 24,759       42,103
------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                      $ 1,746     $ 49,986
================================================================================================
Supplemental disclosures of cash flow information:
   Cash received:
        Federal income taxes                                               $    -      $  1,178
================================================================================================
<FN>

      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       6
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

               NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

                                 MARCH 31, 1997


NOTE 1. BASIS OF PRESENTATION:

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

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

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

    The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction  with the financial  statements and notes thereto included in the
Company's  Form  10-K for the year  ended  December  31,  1996,  filed  with the
Commission on March 31, 1997, and the information shown below.

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted accounting  principles (GAAP) requires management to make estimates and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results could differ from those  estimates.  Certain
amounts  applicable  to  prior  years  have  been  reclassified  to  conform  to
classifications  followed in 1997. In the opinion of the  Company's  management,
these  statements  include  all  adjustments,  consisting  of  normal  recurring
accruals,  which  are  necessary  for the  fair  presentation  of the  financial
position,  results of operations  and cash flows in the  accompanying  condensed
financial statements.
                                     7




<PAGE>
                      VALLEY FORGE LIFE INSURANCE COMPANY

         NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) - concluded


NOTE 2. REINSURANCE:

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

 <TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                            PREMIUMS                     ASSUMED/NET
                                        -----------------------------------------------
THREE MONTHS ENDED MARCH 31               DIRECT      ASSUMED      CEDED         NET           %
-----------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S>                                     <C>          <C>          <C>          <C>      <C>
   Life                                  $127,691      $21,951     $128,736     $20,906       105 %
   Accident and Health                        705       65,177          705      65,177       100
-----------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                      $128,396      $87,128     $129,441     $86,083       101 %
=====================================================================================================
1996
   Life                                  $119,094      $15,403     $119,072     $15,425       100 %
   Accident and Health                        135       61,858          135      61,858       100
-----------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                      $119,229      $77,261     $119,207     $77,283       100 %
=====================================================================================================
</TABLE>

    In the table  above,  the  majority  of Life  premium  revenue  is from long
duration  type  contracts,  while the  Accident  and Health  premium  revenue is
generally short duration.

    Transactions with Assurance,  as part of the pooling agreement (see Note 1),
are  reflected  in the above table.  Premium  revenues  ceded to  non-affiliated
companies were $20.2 million for the first quarter in 1997, and $2.8 million for
the first  quarter in 1996,  respectively.  Additionally,  insurance  claims and
policyholders' benefits recoveries from non-affiliated companies were immaterial
for the period  ended March 31, 1997 and $8.2 million for the period ended March
31, 1996.

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

    Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers related to insurance  reserves.  Balances due from Assurance pursuant
to the pooling  agreement  comprise  approximately 99% of these balances at both
March 31, 1997 and 1996.

NOTE 3. LEGAL PROCEEDINGS:

    VFL is party to litigation 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.


                                       8

                                       

<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

The following  discussion and analysis  should be read in  conjunction  with the
condensed  financial  statements  and notes thereto found on pages 3 to 8, which
contain  additional  information  helpful in  evaluating  operating  results and
financial condition.

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

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

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




                                        9
<PAGE>

                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

RESULTS OF OPERATIONS:


    The following table summarizes key components of VFL's operating results for
the three months ended March 31, 1997 and 1996.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31                                              1997          1996
-----------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
  (excluding realized investment gains/losses):
Revenues:
<S>                                                                   <C>             <C>     
     Individual premium                                                $15,609         $11,132
     Group premium                                                      70,474          66,151
                                                                      --------         -------
        Total premiums                                                  86,083          77,283
     Net investment income                                               7,305           7,260
     Other                                                               1,275           1,250
                                                                      --------         -------
        Total revenues                                                  94,663          85,793
Total benefits and expenses                                             90,566          81,056
                                                                      --------        --------
     Operating income before income tax                                  4,097           4,737
Income tax expense                                                      (1,454)         (1,686)
                                                                      --------        --------
        Net operating income
        (excluding realized investment gains/losses)                   $ 2,643         $ 3,051
                                                                      ========        ========
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
     Individual                                                        $ 1,591         $ 1,368
     Group                                                               1,052           1,683
                                                                      --------         -------
        Net operating income                                             2,643           3,051
     Net realized investment gains                                          19           3,248
                                                                      --------         -------
        Net income                                                     $ 2,662         $ 6,299
===============================================================================================


</TABLE>
                     
    VFL's revenues,  excluding net realized investment  gains/losses,  increased
10% to $94.7  million  for the first  three  months of 1997,  compared  to $85.8
million  for the same  period  in 1996.  Premiums  for 1997 were up 11% to $86.1
million,  compared  to $77.3  million for 1996.  For the first  quarter of 1997,
individual premiums increased by 40% to $15.6 million, compared to $11.1 million
for the same period in 1996.  This increase is primarily due to increased  sales
of annuities  and the Viaterm  life  product of $2.4  million and $1.4  million,
respectively.  Group  premiums  were up 7% to $70.5  million for the first three
months of 1997,  compared to $66.2 for the same period for 1996,  reflecting the
growth in Group Markets and the Federal Employees Health Benefits  Program.  The
increase in group  premiums for the first quarter of 1997 was tempered by a drop
in group annuity premium of $2.7 million.

                                       10

<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

    VFL's  investment  income was $7.3  million for the three months ended March
31, 1997 and 1996. VFL's net operating income excluding net realized  investment
gains/losses  was $2.6 million,  compared to $3.1  million,  for the first three
months of 1997 and 1996, respectively.  Net operating income, excluding realized
investment  gains/losses,  for the first three months of 1997 was less than that
for the same period for 1996,  in spite of increased  revenues.  This was due to
group health losses resulting from unfavorable morbidity experience.

    Net realized investment gains, net of tax, for the first quarter of 1997 
were $19 thousand, compared to net realized investment gains for the first 
quarter of 1996 of $3.2 million.

FINANCIAL CONDITION:

    Assets  increased  approximately  $107.3  million to $2,054.6  million as of
March 31, 1997.  VFL's cash and invested assets  increased by $32.8 million from
December 31, 1996 to $484.6 million.

    During the first three months of 1997, VFL's stockholder's  equity decreased
by $2.2 million to approximately  $197.3 million.  The decrease in stockholder's
equity in 1997 is due to net income of  approximately  $2.7 million being offset
by approximately $4.9 million in net unrealized investment losses.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                                            MARCH 31       DECEMBER 31
                                                                                1997             1996
----------------------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                                                         <C>             <C>         
Assets                                                                       $2,054,630       $1,947,296
Stockholder's Equity                                                            197,273          199,540
Net Unrealized Investment Gains/(Losses) Included in Stockholder's Equity        (3,939)             990
----------------------------------------------------------------------------------------------------------
</TABLE>









                                       11
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued

INVESTMENTS:

    The following table summarizes VFL's  investments shown at cost or amortized
cost at March 31, 1997 and December 31, 1996.
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS                   MARCH 31               DECEMBER 31
                                                1997          %           1996        %
-------------------------------------------------------------------------------------------
(In thousands of dollars) 
Fixed maturity securities:
<S>                                          <C>            <C>     <C>             <C> 
        U.S. Treasury securities and  
         obligations of government agencies   $129,699       26.5%      $117,213     27.5%
        Asset backed securities                 95,751       19.6        113,376     26.6
        Other debt securities                   87,088       17.8         90,843     21.4
-------------------------------------------------------------------------------------------
          Total fixed maturity securities      312,538       63.9        321,432     75.5
Common stocks                                    1,073        0.2          1,073      0.3
Policy loans                                    62,288       12.7         60,267     14.2
Short-term investments                         113,057       23.2         42,757     10.0
-------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                 $488,956      100.0%      $425,529    100.0%
===========================================================================================
INVESTMENTS AT CARRYING VALUE*                $482,894                  $427,049
===========================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
    As mentioned previously,  the operations,  assets and liabilities of VFL and
Assurance are, to a large extent,  managed on a combined  basis.  The investment
portfolio is managed to maximize  after-tax  investment  return while minimizing
credit risks with investments concentrated in high quality securities to support
VFL's insurance  underwriting  operations.  The investment portfolios segregated
for the purpose of supporting policy  liabilities for universal life,  annuities
and other interest sensitive products are held by Assurance.

    VFL has the  capacity  to hold its fixed  maturity  portfolio  to  maturity.
However,  securities may be sold as part of VFL's asset/liability  strategies or
to take  advantage of investment  opportunities  generated by changing  interest
rates, tax and credit considerations or other similar factors.

    The investment portfolio consists primarily of high quality marketable fixed
maturities,  approximately 97% and 98% of which are rated as investment grade at
March 31, 1997 and December 31, 1996, respectively.


                                       12
<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - continued


    The  following  table  summarizes  the ratings of VFL's fixed  maturity debt
portfolio at carrying value (market).

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                                                 MARCH 31        %     DECEMBER 31        %
                                                   1997                    1996
-----------------------------------------------------------------------------------------------
(In thousands of dollars)

<S>                                            <C>             <C>    <C>             <C> 
U.S. government and affiliated securities       $126,299        41.5%   $115,926       36.1%
Other AAA rated                                  105,298        34.6     127,910       39.8
AA and A rated                                    28,332         9.3      33,913       10.6
BBB rated                                         36,397        12.0      38,272       11.9
Below investment grade                             8,037         2.6       5,045        1.6
-----------------------------------------------------------------------------------------------
     TOTAL                                      $304,363       100.0%   $321,066      100.0%
===============================================================================================
</TABLE>

    Included  in VFL's  fixed  maturity  securities  at March 31, 1997 are $93.2
million of  asset-backed  securities,  consisting  of  approximately  5% in U.S.
government  agency  issued  pass-through  certificates,  92%  in  collateralized
mortgage obligations (CMOs) and 3% in corporate  asset-backed  obligations.  The
majority of CMOs held are U.S.  government  agency  issues,  which are  actively
traded in liquid markets and are priced by broker-dealers.

    VFL  limits  the  risks  associated  with  interest  rate  fluctuations  and
prepayments by concentrating its CMO investments in planned amortization classes
with  relatively  short  principal   repayment   windows.   The  fair  value  of
asset-backed  securities was less than the amortized cost by approximately  $2.5
million and $0.1 million at March 31, 1997 and December 31, 1996,  respectively.
VFL has not invested in derivative  financial  instruments  nor does it have any
investments in mortgage loans or real estate.

    At March  31,  1997,  net  unrealized  losses on fixed  maturity  securities
amounted to approximately $8.2 million. This compares with net unrealized losses
of  approximately  $0.4 million at December 31, 1996. The gross unrealized gains
and losses for the fixed maturity  securities  portfolio at March 31, 1997, were
$1.4 million and $9.6 million,  respectively,  compared to $3.2 million and $3.6
million,  respectively,  at December 31, 1996. The increase in unrealized losses
is  attributable,  in large part,  to increases in interest  rates which have an
adverse affect on bond prices.

    VFL's  investments in equity  securities are carried at a fair value of $3.2
million and $3.0 million at March 31, 1997 and December 31, 1996,  respectively.
At March 31,  1997,  net  unrealized  gains on  equity  securities  amounted  to
approximately  $2.1  million.   This  compares  with  net  unrealized  gains  of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities at March 31, 1997 and December 31, 1996.





                                       13
<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - concluded

LIQUIDITY AND CAPITAL RESOURCES:

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

    For the quarter ended March 31, 1997, VFL's operating  activities  generated
net  positive  cash flows of  approximately  $39.2  million,  compared  with net
positive cash flows of $13.4 million for the same period in 1996.  Positive cash
flows in 1997 are primarily the result of the settlement of certain  receivables
from affiliates and higher revenues generated by the increase in premium volume.
VFL believes that future liquidity needs will be met primarily by cash generated
from  operations.  Net cash flows from  operations  are  invested in  marketable
securities.

ACCOUNTING STANDARDS:

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

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













                                       14
<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY

                            PART II OTHER INFORMATION






ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS:

                  Description of Exhibit
                                            Exhibit                    Page
                                             Number                   Number


(27)  Financial Data Schedule                 27                        17

(b)  REPORTS ON FORM 8-K:
         There were no reports on Form 8-K for the three  months ended 
March 31, 1997.


















                                       15
<PAGE>
                                                     
                       VALLEY FORGE LIFE INSURANCE COMPANY

                      PART II OTHER INFORMATION - concluded




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


Date:         May 15, 1997



















                                       16