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

--------------------------------------------------------------------------------
                       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, 1998   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, 1998
  ------------------------------                  --------------------------
  Common Stock, Par value $50.00                           50,000

         THE REGISTRANT  MEETS THE  CONDITIONS SET FORTH IN GENERAL  INSTRUCTION
I(1) (A) AND (B) OF FORM 10-Q AND IS  THEREFORE  FILING  THIS FORM 10-Q WITH THE
REDUCED DISCLOSURE FORMAT.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
                                  Page 1 of 19
<PAGE>

                       VALLEY FORGE LIFE INSURANCE COMPANY
                                      INDEX
          



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

CONDENSED FINANCIAL STATEMENTS:

   BALANCE SHEET
            MARCH 31, 1998 (Unaudited) AND DECEMBER 31, 1997..........     3

   STATEMENT OF OPERATIONS (Unaudited)
            FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........     4

   STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
            FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........     5

   STATEMENT OF CASH FLOWS (Unaudited)
            FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997........     6

   NOTES TO CONDENSED FINANCIAL
            STATEMENTS (Unaudited) MARCH 31, 1998.....................     7

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS.......................    10


PART II.  OTHER INFORMATION
-------   -----------------
ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K..........................    17

SIGNATURES  ..........................................................    18

EXHIBIT 27  FINANCIAL DATA SCHEDULE...................................    19





                                       2

<PAGE>
<TABLE>
<CAPTION>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                                  BALANCE SHEET
------------------------------------------------------------------------------------------------------
                                                                         MARCH 31         DECEMBER 31
                                                                           1998              1997
                                                                       (Unaudited)
------------------------------------------------------------------------------------------------------
(In thousands of dollars) 
ASSETS:
   Investments:
<S>                                                                    <C>              <C>              
     Fixed maturities available-for-sale (cost: $473,493 and $466,267)  $  478,275       $  471,707
     Equity securities available-for-sale (cost: $981 and $981)              2,515            2,260
     Policy loans                                                           68,808           66,971
     Other invested assets                                                     180              433
     Short-term investments                                                 38,891            4,597
                                                                         ---------       ----------
          TOTAL INVESTMENTS                                                588,669          545,968
   Cash                                                                      4,328           24,565
   Receivables:
     Reinsurance                                                         1,876,871        1,586,471
     Premium and other insurance                                            71,681           65,196
     Less allowance for doubtful accounts                                     (208)            (285)
   Deferred acquisition costs                                               99,264           95,354
   Accrued investment income                                                 9,531            5,245
   Receivables for securities sold                                           1,970              744
   Due from affiliates                                                          -            35,999
   Other                                                                     1,055              228
   Separate Account business                                                22,907            8,941
----------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                  $2,676,068       $2,368,426
====================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                             $2,203,067       $1,906,899
     Claims                                                                 92,743           81,242
     Policyholders' funds                                                   39,868           39,928
   Payables for securities purchased                                         3,259              497
   Federal income taxes payable                                              9,657            5,975
   Deferred income taxes                                                     2,418            4,098
   Due to affiliates                                                         3,117               -
   Commissions and other payables                                           30,213           19,787
   Other                                                                    49,037           84,799
   Separate Account business                                                22,907            8,941
                                                                        ----------       ----------
          TOTAL LIABILITIES                                              2,456,286        2,152,166
                                                                        ----------       ----------
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                                                       174,149          170,230
   Accumulated other comprehensive income                                    3,983            4,380
                                                                        ----------       ----------
          TOTAL STOCKHOLDER'S EQUITY                                       219,782          216,260
----------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                    $2,676,068       $2,368,426
====================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
                                       3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF OPERATIONS
                                   (Unaudited)

--------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31                                     1998          1997
--------------------------------------------------------------------------------------
(In thousands of dollars)
 Revenues:
<S>                                                          <C>           <C>    
   Premiums                                                   $81,555       $86,083
   Net investment income                                        8,591         7,305
   Realized investment gains                                    1,993            29
   Other                                                        1,561         1,275
                                                              -------       -------
                                                               93,700        94,692
                                                              -------       -------
Benefits and expenses:
   Insurance claims and policyholders' benefits                75,153        81,756
   Amortization of deferred acquisition costs                   2,552         1,531
   Other operating expenses                                     9,858         7,279
                                                              -------       -------
                                                               87,563        90,566
                                                              -------       -------
     Income before income tax                                   6,137         4,126
Income tax expense                                              2,218         1,464
--------------------------------------------------------------------------------------
     NET INCOME                                               $ 3,919       $ 2,662
======================================================================================
<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)

------------------------------------------------------------------------------------------------------------------
                                                                                        Accumulated
                                                    Additional  Comprehensive              Other        Total
Three Months Ended                           Common  Paid-in       Income     Retained Comprehensive Stockholder's
March 31, 1998 and 1997                      Stock   Capital       (Loss)     Earnings Income (Loss)    Equity
------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                         <C>      <C>        <C>          <C>          <C>        <C>     
Balance, January 1, 1997                     $2,500   $39,150                 $156,900     $  990     $199,540
Comprehensive income:
   Net income                                    -        -        $2,662        2,662        -          2,662
Other comprehensive income (loss):
   Unrealized investment losses net of
      reclassification adjustment and taxes      -        -        (4,929)         -       (4,929)      (4,929)
                                                                   -------
   Total comprehensive income                                     $(2,267)
                                                                   =======

--------------------------------------------------------------                ------------------------------------
Balance, March 31, 1997                     $2,500   $39,150                  $159,562    $(3,939)    $197,273
==============================================================                ====================================

Balance, December 31, 1997                  $2,500   $39,150                  $170,230     $4,380     $216,260
Comprehensive income:
   Net income                                  -          -       $3,919         3,919        -          3,919
Other comprehensive income (loss):
   Unrealized investment losses net of
      reclassification adjustment and taxes    -          -         (397)          -        (397)         (397)
                                                                  -------
   Total comprehensive income                                     $3,522
                                                                  =======

--------------------------------------------------------------                -----------------------------------
Balance, March 31, 1998                     $2,500   $39,150                  $174,149     $3,983     $219,782
==============================================================                ===================================
<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                                                             1998               1997
-----------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>                <C>     
   Net income                                                                        $  3,919           $  2,662
                                                                                     --------           --------
   Adjustments  to  reconcile  net  income  to net  cash  flows  from  operating
          activities:
     Net realized investment gains, pre-tax                                            (1,993)               (29)
     Amortization of bond discount                                                       (160)            (1,178)
     Changes in:
        Insurance receivables, net                                                   (296,962)           (94,536)
        Deferred acquisition costs                                                     (4,036)            (6,383)
        Accrued investment income                                                      (4,286)            (1,732)
        Due from affiliates                                                            39,116             40,896
        Federal income taxes                                                            3,682              2,437
        Deferred income taxes                                                          (1,534)             1,665
        Insurance reserves                                                            299,265             57,931
        Commissions and other payables                                                 10,426              6,298
        Other, net                                                                    (36,604)             6,530
                                                                                      --------         ---------
            Total adjustments                                                           6,914             11,899
                                                                                      --------         ---------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                                   10,833             14,561
                                                                                      --------         ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                                     (124,149)           (36,839)
   Proceeds from fixed maturities: 
     Sales                                                                             95,940             39,435
     Maturities, calls and redemptions                                                 24,926              6,636
   Change in short-term investments                                                   (34,294)           (69,461)
   Change in policy loans                                                              (1,837)            (2,021)
                                                                                      --------         ---------
           NET CASH FLOWS FROM INVESTING ACTIVITIES                                   (39,414)           (62,250)
                                                                                      --------         ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Receipts from investment contracts credited to policyholder account balances        13,813             27,366
   Return of policyholder account balances on investment contracts                     (5,469)            (2,690)
                                                                                      --------          ---------
           NET CASH FLOWS FROM FINANCING ACTIVITIES                                     8,344             24,676
                                                                                      --------          ---------
           NET CASH FLOWS                                                             (20,237)           (23,013)
Cash at beginning of period                                                            24,565             24,759
---------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                                $  4,328          $   1,746
=====================================================================================================================
Supplemental disclosures of cash flow information:
        Federal income taxes paid                                                    $     -           $      -
=====================================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       6
<PAGE>

                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                 MARCH 31, 1998
                                   (Unaudited)
                                                    

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  (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,  universal  life,
annuity,  variable annuity and variable universal life. Group insurance products
include  life,  accident and health  consisting  primarily of major  medical and
hospitalization,  variable  annuities and pension  products,  such as guaranteed
investment contracts and annuities.

    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, 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 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 VFL's
Form 10-K for the year ended  December 31, 1997,  filed with the  Securities and
Exchange Commission on March 31, 1998.

    The  accompanying  condensed  financial  statements  have been  prepared  in
conformity  with  generally  accepted  accounting  principles.  Certain  amounts
applicable to prior years have been  reclassified to conform to  classifications
followed in 1998.

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  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.  In the
opinion  of  VFL'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 - CONTINUED
NOTE 2. REINSURANCE:
    VFL 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, to provide greater  diversification  of
risk and to 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 future policy benefits
reserves.

    The ceding of  insurance  does not  discharge  the 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.

    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 is from short duration contracts. 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)
1998
<S>                                <C>          <C>            <C>            <C>             <C>  
   Life                             $165,569      $21,371        $165,791       $21,149         101%
   Accident and Health                   749       60,406             749        60,406         100
------------------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                 $166,318      $81,777        $166,540       $81,555         100%
============================================================================================================
1997
   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%
============================================================================================================
</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 $45.2 million for the first quarter in 1998, and
$20.2  million  for the  first  quarter  in  1997,  respectively.  Additionally,
insurance claims and  policyholders' benefits are net of reinsurance  recoveries
from  non-affiliated  companies of $34.1  million for the first quarter of 1998,
and $0 million for the same period in 1997.

    Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers   related  to  insurance   reserves.   These  balances,   which  were
approximately  $1.9  billion  and $1.4  billion  at  March  31,  1998 and  1997,
respectively,  are  principally  due from  Assurance  pursuant  the  Reinsurance
Pooling Agreement.

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
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED

NOTE 4. OTHER COMPREHENSIVE INCOME:

   VFL adopted Statement of Financial  Accounting  Standards No. 130, "Reporting
Comprehensive  Income," which established standards for reporting and display of
comprehensive   income  and  its   components  in  the   financial   statements.
Comprehensive  income is  comprised  of all  changes  to  stockholder's  equity,
including net income,  except those changes resulting from investments by owners
and distributions to owners. The change in the components of other comprehensive
income (loss) are reported net of income tax as shown below:
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------------
PERIOD ENDED MARCH 31, 1998                                               PRE-TAX   TAX (EXPENSE)     NET
                                                                           AMOUNT      BENEFIT      AMOUNT
--------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investment securities:
<S>                                                                       <C>        <C>             <C>   
   Net unrealized holding gains (losses) arising during the period         $1,856     $ (650)         $1,206
   Reclassification adjustment for (gains) losses
      included in net income                                               (2,466)       863          (1,603)
==============================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                           $ (610)    $  213          $ (397)
==============================================================================================================

--------------------------------------------------------------------------------------------------------------
PERIOD ENDED MARCH 31, 1997                                               PRE-TAX    TAX (EXPENSE)     NET
                                                                           AMOUNT       BENEFIT      AMOUNT
--------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Net unrealized gains (losses) on investment securities:
   Net unrealized holding gains (losses) arising during the period        $(6,634)    $2,322         $(4,312)
   Reclassification adjustment for (gains) losses
      included in net income                                                 (949)       332            (617)
==============================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                          $(7,583)    $2,654         $(4,929)
==============================================================================================================
</TABLE>



                                       9
<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 9, which
contain  additional  information  helpful in  evaluating  operating  results and
financial condition.

    VFL  sells a  variety  of  individual  and  group  insurance  products.  The
individual  insurance  products  consist  primarily  of  term,  universal  life,
annuity,  variable annuity and variable universal life. Group insurance products
include  life,  accident and health  consisting  primarily of major  medical and
hospitalization,  variable  annuities and pension  products,  such as guaranteed
investment contracts and annuities.

    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, 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.






                                       10
<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, 1998 and 1997.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31                                         1998                1997
------------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY (excluding realized investment gains/losses):
Revenues:
<S>                                                                <C>              <C>     
     Individual premium                                             $16,451           $15,609
     Group premium                                                   65,104            70,474
                                                                    -------         ---------
        Total premiums                                               81,555            86,083
     Net investment income                                            8,591             7,305
     Other                                                            1,561             1,275
                                                                    -------         ---------
        Total revenues                                               91,707            94,663
Benefits and expenses                                                87,563            90,566
                                                                    -------         ---------
     Operating income before income tax                               4,144             4,097
Income tax expense                                                   (1,520)           (1,454)
                                                                    -------         ---------
        Net operating income
        (excluding realized investment gains/losses)                $ 2,624           $ 2,643
                                                                    =======         =========
SUPPLEMENTAL FINANCIAL DATA:
Net operating income:
     Individual                                                     $ 1,942           $ 1,591
     Group                                                              682             1,052
                                                                    -------         ---------
        Net operating income                                          2,624             2,643
     Net realized investment gains                                    1,295                19
                                                                    -------         ---------
=================================================================================================
        NET INCOME                                                  $ 3,919           $ 2,662
=================================================================================================
</TABLE>
     VFL's revenues,  excluding net realized investment gains/losses, were $91.7
million for the first three  months of 1998,  compared to $94.7  million for the
same period in 1997.  Premiums  were $81.6  million for the three  months  ended
March 31, 1998,  compared to $86.1 million for the same period in 1997.  For the
three  month  period  of  1998,  individual  premiums  increased  by 5% to $16.5
million, compared to $15.6 million for the same period in 1997. This increase is
primarily due to a slight  increase in sales of ViaTerm,  a term life  insurance
product.  Individual  annuity premiums continue to decrease as marketing efforts
have shifted to more profitable products.  Group premiums were $65.1 million for
the first three months of 1998, compared to $70.5 million for the same period in
1997.  Decreases  primarily in group health premiums and Federal Employee Health
Benefit Plan (FEHBP) premiums  contributed to the change in group premiums.  The
decrease  in FEHBP  premiums  is due to  improved  claim  experience  upon which
premiums  are based  during the first three  months of 1998,  as compared to the
same period in 1997.

    VFL's  investment  income for the three months ended March 31, 1998 was $8.6
million, an approximate increase of $1.3 million or 18% from the same period for
1997 when investment income was $7.3 million.  The increase is attributable to a
larger asset base of VFL's  investment  portfolio  generated from increased cash
flows from premium  growth in 1997.  The increase was offset by a slightly lower
average yield on VFL's portfolio during 1998, as compared to 1997. 
                                       11
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS -CONTINUED

    Higher  losses in group  business  during the first three  months of 1998 as
compared to the same period in 1997 offset the increase in net investment income
and led to relatively no change in pre-tax  operating  income  between the first
quarter of 1998 and the same period for 1997.

FINANCIAL CONDITION:

    Assets  increased  approximately  $307.6  million from  December 31, 1997 to
$2,676.1  million as of March 31, 1998. VFL's cash and invested assets increased
by $22.5 million from December 31, 1997 to $593.0 million.

    During the first three months of 1998, VFL's stockholder's  equity increased
by $3.5  million,  or 2%, to  approximately  $219.8  million.  The  increase  in
stockholder's  equity in 1998 is due to net income of approximately $3.9 million
and  approximately  $0.4 million of losses in  accumulated  other  comprehensive
income.
   
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                                            MARCH 31      DECEMBER 31
                                                                                1998           1997
--------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                                         <C>            <C>        
Assets                                                                       $2,676,068     $2,368,426
Stockholder's Equity                                                            219,782        216,260
Accumulated Other Comprehensive Income (Included in Stockholder's Equity)         3,983          4,380
--------------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS:
    The following table summarizes VFL's  investments shown at cost or amortized
cost and carrying value at March 31, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS                       MARCH 31                DECEMBER 31
                                                    1998          %           1997         %
---------------------------------------------------------------------------------------------------
(In thousands of dollars) 
Fixed maturity securities:
        U.S. Treasury Securities and
<S>                                              <C>           <C>        <C>           <C>  
         obligations of government agencies       $309,332      53.1%      $299,066      55.4%
        Asset backed securities                     66,893      11.5         68,612      12.7
        Corporate debt securities                   73,121      12.6         51,355       9.5
        Other debt securities                       24,147       4.1         47,234       8.8
---------------------------------------------------------------------------------------------------
          Total fixed maturity securities          473,493      81.3        466,267      86.4
Common stocks                                          981       0.2            981       0.2
Policy loans                                        68,808      11.8         66,971      12.4
Other invested assets                                  545       0.1            579       0.1
Short-term investments                              38,891       6.6          4,597       0.9
---------------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                     $582,718     100.0%      $539,395     100.0%
===================================================================================================
INVESTMENTS AT CARRYING VALUE*                    $588,669                 $545,968
===================================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
                                       12
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS -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 maturity  securities are carried at a fair value
of $478.3  million at March 31, 1998,  compared with $471.7  million at December
31, 1997. At March 31, 1998, net unrealized  gains on fixed maturity  securities
amounted to approximately $4.8 million.  This compares with net unrealized gains
of  approximately  $5.4 million at December 31, 1997. The gross unrealized gains
and  losses  for the fixed  maturities  portfolio  at March  31,  1998 were $6.1
million  and $1.3  million,  respectively,  compared  to $6.2  million  and $0.8
million, respectively, at December 31, 1997.

    VFL's  investments in equity  securities are carried at a fair value of $2.5
million and $2.3 million at March 31, 1998 and December 31, 1997,  respectively.
At  March  31,  1998,   unrealized  gains  on  equity  securities   amounted  to
approximately $1.5 million. This compares with unrealized gains of approximately
$1.3  million at December 31, 1997.  There were no  unrealized  losses on equity
securities at March 31, 1998 and December 31, 1997.

    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 maturity securities are classified as available-for-sale.

    The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                              MARCH 31          %         DECEMBER 31       %
                                                1998                          1997
-------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                         <C>              <C>          <C>            <C> 
U.S. government and affiliated securities    $310,141         64.8%        $300,676       63.8%
Other AAA rated                                73,807         15.4           75,531       16.0
AA and A rated                                 66,274         13.9           61,404       13.0
BBB rated                                      24,927          5.2           27,292        5.8
Below investment grade                          3,126          0.7            6,804        1.4
-------------------------------------------------------------------------------------------------
     TOTAL                                   $478,275        100.0%        $471,707      100.0%
=================================================================================================
</TABLE>

    Included  in VFL's  fixed  maturity  securities  at March 31, 1998 are $67.5
million  of  asset-backed  securities,  consisting  of  approximately  43.5%  in
corporate  mortgage-backed  pass-through  certificates,  34.0% in collateralized
mortgage  obligations (CMOs),  22.1% in corporate  asset-backed  obligations and
0.4% in U.S. government agency issued pass-through certificates. The majority of
CMOs held are U.S. government agency issues, which are actively traded in liquid
markets and are priced by broker-dealers.

                                       13

<PAGE>

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


    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.  The fair value of asset-backed
securities  was more than the amortized cost by $0.6 million and $0.1 million at
March 31, 1998 and December 31, 1997,  respectively.  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 derivative financial  instruments primarily
to reduce its exposure to market risk. 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's
derivatives  are classified as other invested  assets and 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 March 31,
1998.  The  gross  notional  or  contractual  amounts  of  derivative  financial
instruments in the general  account totaled $50.0 million at both March 31, 1998
and December 31, 1997.  The gross notional  principal or contractual  amounts of
derivative  financial  instruments in the Separate Accounts totaled $1.6 million
and $1.5 million at March 31, 1998 and December 31, 1997, respectively. The fair
value of derivative  financial  instruments in the general  account and Separate
Accounts at March 31, 1998 totaled $0.2 million and $0.4 million,  respectively.
The fair value of derivative  financial  instruments in the general  account and
Separate  Accounts at December 31, 1997  totaled $0.4 million and $0.3  million,
respectively.  Net realized losses on derivative  financial  instruments held in
the general  account  totaled  $0.2 million for the period ended March 31, 1998,
while net realized  gains/losses on derivatives in the Separate Accounts were $0
million for the same period. There were no investments in derivative  securities
at March 31, 1997.
    
    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  0.1% and 0.3% of total
assets as of March 31, 1998 and December 31, 1997, respectively.


                                       14

<PAGE>

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


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  beginning in 1999.  Such  malfunctions
could  lead to  business  delays  and  disruptions.  All  subsidiaries  of CNAF,
including VFL, utilize the same systems in conducting day-to-day operations. 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 will be able 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 its current
assessment,  CNAF  estimates  that the total cost to  replace  and  upgrade  its
systems to accommodate  year 2000  processing will be  approximately  $60 to $70
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,  CNAF is communicating  with its vendors
and  business  partners  to  coordinate  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 primarily by funds generated
from operating,  investing and financing  activities.  VFL's principal cash flow
sources are premiums,  investment income, receipts for investment contracts sold
and sales and maturities of investment.  The primary cash flow uses are payments
for claims,  policy  benefits,  payments on matured  policyholder  contracts and
operating expenses.

    For the three  months of 1998,  VFL's  operating  activities  generated  net
positive cash flows of approximately  $10.8 million,  compared with net positive
cash flows of $14.6 million for the same period in 1997.

    Management  believes  that future  liquidity  needs will be met primarily by
cash generated  from  operations.  Net cash flows from  operations are generally
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.


                                       15
<PAGE>

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

Accounting Standards:

    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. This Statement need not be applied to
interim  financial  statements  in the  initial  year of its  application.  This
Statement will redefine VFL's business segment disclosure.

    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.

    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.

    In March 1998,  the  American  Institute of  Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  Statement of Position (SOP)
98-1,  "Accounting for the Costs of Computer Software  Developed or Obtained for
Internal  Use,"  which  provides  guidance on  accounting  for costs of computer
software  developed or obtained for  internal  use and for  determining  whether
computer  software is for internal  use. For purposes of this SOP,  internal-use
software is software acquired,  internally  developed or modified solely to meet
the entity's  internal  needs for which no  substantive  plan exists or is being
developed to market the software externally during the software's development or
modification.  Accounting treatment for costs associated with software developed
or obtained for internal  use, as defined by this SOP, is based upon a number of
factors,  including the point in time during the project that costs are incurred
as well as the types of costs  incurred.  This SOP is  effective  for  financial
statements for fiscal years  beginning after December 15, 1998. VFL is currently
evaluating the effects of this SOP.

                                       16
<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                     19



(b)  REPORTS ON FORM 8-K:

         There were no reports on Form 8-K for the three  months ended 
March 31,1998.






                                       17

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


Date:         May 15, 1998






                                       18