<PAGE>   1
================================================================================
                       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 JUNE 30, 2001     COMMISSION FILE NUMBER 333-1083

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

                       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 AUGUST 1, 2001
------------------------------                     -----------------------------
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>   2

<TABLE>
<CAPTION>
                                                                                    PAGE NO.
                                                                                    --------
<S>                                                                                 <C>
PART I.   FINANCIAL INFORMATION

CONDENSED FINANCIAL STATEMENTS:

         STATEMENTS OF OPERATIONS (Unaudited)
                  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000 .........   3

         BALANCE SHEETS
                  JUNE 30, 2001 (Unaudited) AND DECEMBER 31, 2000 ...................   4

         STATEMENTS OF CASH FLOWS (Unaudited)
                  FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 ...................   5

         NOTES TO CONDENSED FINANCIAL
                  STATEMENTS (Unaudited) JUNE 30, 2001 ..............................   6

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS................................  14


PART II.  OTHER INFORMATION..........................................................  18

SIGNATURES ..........................................................................  18
</TABLE>


                                        2
<PAGE>   3



                       VALLEY FORGE LIFE INSURANCE COMPANY
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                       THREE MONTHS                    SIX MONTHS
                                                                -------------------------     -----------------------------
PERIOD ENDED JUNE 30,                                               2001           2000           2001            2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>            <C>               <C>
(In thousands of dollars)
Revenues:
   Net earned premiums                                            $11,645        $ 77,036       $ 22,355          $ 154,216
   Net investment income                                           12,105          11,047         24,585             22,134
   Realized investment gains (losses)                               1,913         (1,111)          7,700            (4,236)
   Other                                                            1,139           1,887          5,811              4,402
                                                                  -------        --------       --------          ---------
       Total revenues                                              26,802          88,859         60,451            176,516
                                                                  -------        --------       --------          ---------
Benefits and expenses:
   Insurance claims, policyholders' benefits and other
     operating expenses                                            16,666          76,983         31,572            155,461
   Amortization of deferred acquisition costs                       1,169           4,289          5,453              7,112
                                                                  -------        --------       --------          ---------
       Total benefits and expenses                                 17,835          81,272         37,025            162,573
                                                                  -------        --------       --------          ---------
     Income before income tax expense                               8,967           7,587         23,426             13,943
Income tax expense                                                  3,175           2,993          8,264              4,951
----------------------------------------------------------------------------------------------------------------------------
     NET INCOME                                                   $ 5,792        $  4,594       $ 15,162           $  8,992
============================================================================================================================
</TABLE>

        The accompanying Notes are an integral part of these Condensed Financial
Statements (Unaudited).


                                        3
<PAGE>   4
                       VALLEY FORGE LIFE INSURANCE COMPANY
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------
                                                                                     (UNAUDITED)
                                                                                       JUNE 30,    DECEMBER 31,
                                                                                         2001          2000
---------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>              <C>
(In thousands of dollars, except share data)
ASSETS
   Investments:
     Fixed maturities securities available-for-sale (cost: $519,130 and $556,302)   $   520,670    $   557,866
     Equity securities available-for-sale (cost: $14,187 and $9,994)                     15,050         10,215
     Policy loans                                                                        99,231         98,178
     Other invested assets                                                                  132             87
     Short-term investments                                                              42,419         62,429
                                                                                    -----------    -----------
          TOTAL INVESTMENTS                                                             677,502        728,775
   Cash                                                                                  12,294          9,319
   Receivables:
     Reinsurance receivables ($2,176,740 and $2,128,409 from Assurance)               2,909,136      2,770,755
     Premium and other insurance receivables                                             25,789         67,163
     Allowance for doubtful accounts                                                        (84)           (28)
   Deferred acquisition costs                                                           127,579        126,352
   Accrued investment income                                                             12,174         12,551
   Receivable for securities sold                                                         1,820             --
   Other assets                                                                           7,000          6,280
   Separate Account business                                                            578,251        532,017
---------------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                              $ 4,351,461    $ 4,253,184
---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
   Insurance reserves:
     Future policy benefits                                                         $ 3,159,729    $ 3,038,477
     Claims and claim expense                                                           111,671        110,418
     Policyholders' funds                                                                36,388         40,338
   Payable for securities purchased                                                         881             --
   Federal income taxes payable (to Assurance)                                           17,082          9,536
   Deferred income taxes                                                                 10,613          9,040
   Due to affiliates                                                                     23,087         84,042
   Other liabilities                                                                    114,185        144,888
   Separate Account business                                                            578,251        532,017
---------------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES                                                           4,051,887      3,968,756
---------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 7)
Stockholder's Equity:
   Common stock ($50 par value; Authorized 200,000 shares;
       Issued 50,000 shares)                                                              2,500          2,500
   Additional paid-in capital                                                            69,150         69,150
   Retained earnings                                                                    226,549        211,388
   Accumulated other comprehensive income (loss)                                          1,375          1,390
---------------------------------------------------------------------------------------------------------------
          TOTAL STOCKHOLDER'S EQUITY                                                    299,574        284,428
---------------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                $ 4,351,461    $ 4,253,184
===============================================================================================================
</TABLE>


         The accompanying Notes are an integral part of these Condensed
                       Financial Statements (Unaudited).


                                       4


<PAGE>   5



                       VALLEY FORGE LIFE INSURANCE COMPANY
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,                                                          2001          2000
---------------------------------------------------------------------------------------------------------
<S>                                                                            <C>              <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                                    $  15,162    $   8,992
   Adjustments to reconcile net income to net cash provided by
     operating activities:

     Net realized investment (gains) losses, pre-tax                                (7,700)       4,236
     Amortization of bond discount                                                  (1,333)      (1,367)
     Changes in:
        Insurance receivables                                                      (96,951)    (169,527)
        Deferred acquisition costs                                                  (1,583)      (8,968)
        Accrued investment income                                                      377        1,532
        Federal income taxes payable                                                 7,546        2,392
        Insurance reserves                                                         131,243      161,462
        Deferred income taxes                                                        1,573        2,108
        Due from affiliates                                                        (60,955)      28,403
        Other                                                                      (31,659)     (36,370)
                                                                                 ---------    ---------
         Total adjustments                                                         (59,442)     (16,099)
                                                                                 ---------    ---------
         NET CASH FLOWS USED BY OPERATING ACTIVITIES                               (44,280)      (7,107)
                                                                                 ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of fixed maturity securities                                          (646,750)    (221,514)
   Proceeds from fixed maturity securities:
     Sales                                                                         419,444      230,844
     Maturities, calls and redemption                                              271,541       50,752
   Purchase of equity securities                                                    (4,193)        --
   Change in policy loans                                                           (1,053)      (2,728)
   Change in short-term investments                                                 21,000      (15,737)
   Change in other invested assets                                                     (45)        (109)
                                                                                 ---------    ---------
         NET CASH FLOWS FROM INVESTING ACTIVITIES                                   59,944       41,508
                                                                                 ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Receipts from investment contracts credited to policyholder account balances       4,535        6,226
    Return of policyholder account balances on investment contracts                (17,224)     (22,818)
                                                                                 ---------    ---------
         NET CASH FLOWS USED BY FINANCING ACTIVITIES                               (12,689)     (16,592)
                                                                                 ---------    ---------
         NET CHANGE IN CASH                                                          2,975       17,809
Cash at beginning of the period                                                      9,319        3,529
---------------------------------------------------------------------------------------------------------
CASH AT END OF THE PERIOD                                                        $  12,294    $  21,338
=========================================================================================================
Supplemental disclosures of cash flow information:
   Federal income taxes paid                                                          --           --
   Interest expense                                                                   --           --
=========================================================================================================
</TABLE>


         The accompanying Notes are an integral part of these Condensed
                       Financial Statements (Unaudited).



                                       5
<PAGE>   6
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                            JUNE 30, 2001 (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). As of June 30, 2001, Loews Corporation owned
approximately 87% of the outstanding common stock of CNAF.

         VFL markets and underwrites insurance products designed to satisfy the
life insurance, health insurance and retirement needs of individuals and groups.
Products available in individual policy form include annuities as well as term
and universal life insurance. Products available in group policy form include
life insurance, pension products and accident and health insurance. VFL also
markets a portfolio of variable Separate Account products, consisting primarily
of annuity and universal life products. These products offer policyholders the
option of allocating payments to one or more variable investment portfolios or
to a guaranteed income account or both. Cash receipts and deposits received for
the variable Separate Accounts are invested in investment portfolios, as
allocated by the contractholders, where the investment risk is borne by the
contractholder. Cash receipts and deposits received for these products that are
allocated to the guaranteed income account earn a minimum guaranteed rate of
interest for a specified period of time.

         The operations and liabilities of VFL and its parent, Assurance, are
managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its Separate Account business,
to its parent, Assurance. This ceded 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 then assumed by VFL.

         The accompanying condensed financial statements are unaudited and have
been prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP). Certain financial information that is normally
included in annual financial statements, including financial statement
footnotes, prepared in accordance with GAAP, but that is not required for
interim reporting purposes, has been condensed or omitted. These statements
should be read in conjunction with the financial statements and notes thereto
included in VFL's Form 10-K filed with the Securities and Exchange Commission
for the year ended December 31, 2000. In the opinion of management, these
statements include all adjustments (consisting of normal recurring accruals)
that are necessary for the fair presentation of the interim financial
statements. The operating results for the interim periods are not necessarily
indicative of the results to be expected for the full year. Certain amounts
applicable to prior periods have been reclassified to conform to classifications
followed in 2001.

         The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

         In the first quarter of 2001, VFL adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities (collectively referred to as SFAS
133). VFL's initial adoption of SFAS 133 did not have a significant impact on
the equity or the results of operations of VFL. VFL already carries its
investment and investment-related derivatives at fair value and the resulting
changes in fair value are recognized through realized gains and losses. See Note
3 for a complete discussion of VFL's adoption of these accounting
pronouncements.



                                       6
<PAGE>   7


                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED

NOTE 1. -(CONTINUED)

         On January 1, 2001, VFL adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which VFL's
insurance subsidiaries conduct business required adoption of Codification (with
certain modifications) for the preparation of statutory-basis financial
statements effective January 1, 2001. VFL's adoption of Codification, as
modified, resulted in a increase in statutory capital and surplus as of June 30,
2001 of approximately $2.4 million, which primarily relates to deferred tax
assets, partially offset by insurance-related assessments and pension-related
liabilities.

         On April 1, 2001 the Company adopted Emerging Issues Task Force (EITF)
Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 establishes how a transferor that retains an interest in securitized
financial assets or an enterprise that purchases a beneficial interest in
securitized financial assets should account for interest income and impairment.
This issue did not have a significant impact on the results of operations or
equity of the Company.

         VFL accounts for derivatives and hedging in accordance with SFAS 133. A
derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument, index or rate, has a notional amount, and can be net
settled. Examples of derivatives include, but are not limited to, the following
types of investments: interest rate swaps, interest rate caps and floors, put
and call options, warrants, swaptions, futures, forwards and commitments to
purchase securities and combinations of the foregoing. Derivatives embedded
within non-derivative instruments (such as call options embedded in convertible
bonds) must be split from the host instrument and accounted for under SFAS 133
when the embedded derivative is not clearly and closely related to the host
instrument. In addition, non-investment instruments, including certain types of
insurance contracts that have historically not been considered derivatives can
be derivatives or contain embedded derivatives under SFAS 133.

         SFAS 133 requires that all derivatives be recorded in the balance sheet
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon. The methods are discussed in Note 3 included herein.

NOTE 2.  REINSURANCE

         The ceding of insurance does not discharge VFL of its primary liability
to its policyholders. Therefore, a credit exposure exists with respect to
reinsurance ceded to the extent that any reinsurer is unable to meet the
obligations assumed under reinsurance agreements. 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. 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.



                                       7
<PAGE>   8

                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED

NOTE 2. - (CONTINUED)

         In the table below, the majority of life premium revenue is from long
duration type contracts, while the majority of accident and health insurance
premiums are from short duration contracts. The effects of reinsurance on
premium revenues are shown in the following table:



<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                     PREMIUMS
                                            -----------------------------------------------------------  ASSUMED/
SIX MONTHS ENDED JUNE 30,                       DIRECT         ASSUMED         CEDED          NET          NET %
--------------------------------------------------------------------------------------------------------------------
<S>                                              <C>            <C>           <C>             <C>         <C>
(In thousands of dollars)
   2001
            Life                                  $ 334,635       $ 57,642     $ 370,586       $ 21,691    266%
            Accident and Health                       6,021            664         6,021            664    100%
--------------------------------------------------------------------------------------------------------------------
                Total Premiums                    $ 340,656      $  58,306     $ 376,607       $ 22,355    261%
--------------------------------------------------------------------------------------------------------------------
   2000
            Life                                  $ 369,306      $  57,032     $ 387,616       $ 38,722    147%
            Accident and Health                       4,374        115,494         4,374        115,494    100%
--------------------------------------------------------------------------------------------------------------------
                Total Premiums                    $ 373,680      $ 172,526     $ 391,990       $154,216    112%
--------------------------------------------------------------------------------------------------------------------
</TABLE>


         Transactions with Assurance, as part of the Reinsurance Pooling
Agreement described in Note 1, are reflected in the above table. Premium
revenues ceded to non-affiliated companies were $243.0 million for the six
months ended June 30, 2001, and $225.9 million for the same period in 2000.
Additionally, benefits and expenses for insurance claims and policyholder
benefits are net of reinsurance recoveries from non-affiliated companies of
$159.5 million and $150.1 million for the six months ended June 30, 2001 and
2000 respectively.

         Reinsurance receivables reflected on the balance sheets are amounts
recoverable from reinsurers who have assumed a portion of VFL's insurance
reserves. These balances are principally due from Assurance pursuant to the
Reinsurance Pooling Agreement.


NOTE 3.  DERIVATIVES

         As discussed in Note 1, effective in 2001, VFL accounts for derivatives
and hedging in accordance with SFAS 133. A derivative is typically defined as an
instrument whose value is "derived" from an underlying instrument, index or
rate, has a notional amount, and can be net settled. Examples of derivatives
include, but are not limited to, the following types of investments: interest
rate swaps, interest rate caps and floors, put and call options, warrants,
swaptions, futures, forwards and commitments to purchase securities and
combinations of the foregoing. Derivatives embedded within non-derivative
instruments (such as call options embedded in convertible bonds) must be split
from the host instrument and accounted for under SFAS 133 when the embedded
derivative is not clearly and closely related to the host instrument. In
addition, non-investment instruments, including certain types of insurance
contracts that have historically not been considered derivatives can be
derivatives or contain embedded derivatives under SFAS 133.

         SFAS 133 requires that all derivatives be recorded in the balance sheet
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge of exposures to changes in fair value, cash flows or
foreign currency exchange rates. The accounting for changes in the fair value of
a derivative depends on the intended use of the derivative and the nature of any
hedge designation thereon. VFL's accounting for changes in the fair value of
general account derivatives is as follows:



                                       8
<PAGE>   9
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                      JUNE 30, 2001 (UNAUDITED)-CONTINUED


NOTE 3.  (CONTINUED)

<TABLE>
<CAPTION>
NATURE OF HEDGE DESIGNATION                     DERIVATIVE'S CHANGE IN FAIR VALUE REFLECTED IN:
-------------------------------------------     ------------------------------------------------
<S>                                             <C>
No hedge designation                            Realized investment gains.

Fair value                                      Realized investment gains, along with the
                                                change in fair value of the hedged asset or
                                                liability.

Cash flow                                       Other comprehensive income, with subsequent
                                                reclassification to earnings when the hedged
                                                transaction, asset or liability impacts earnings.

Foreign currency                                Consistent with fair value or cash flows above,
                                                depending on the nature of the hedging relationship.
</TABLE>


         Changes in the fair value of derivatives held in the separate accounts
are reflected in separate account earnings. Because separate account investments
are generally carried at fair value with changes therein reflected in separate
account earnings, hedge accounting is generally not applicable to separate
account derivatives.

USE OF DERIVATIVES

         VFL uses investment derivatives in the normal course of business,
primarily to reduce its exposure to market risk (principally interest rate risk,
equity stock price risk and foreign currency risk) stemming from various assets
and liabilities. VFL's principal objective under such market risk strategies is
to achieve the desired reduction in economic risk, even if the position will not
receive hedge accounting treatment. VFL may also use derivatives for purposes of
income enhancement, primarily via the sale of covered call options.

         VFL's use of derivatives is limited by statutes and regulations
promulgated by the various regulatory bodies to which it is subject, and by its
own derivative policy. The derivative policy has limits on which personnel are
authorized to initiate derivative transactions. The policy prohibits the use of
derivatives with maturity greater than eighteen months, unless the derivative is
matched with assets or liabilities having a longer maturity. The policy
prohibits the use of derivatives containing greater than one-to-one leverage
with respect to changes in the underlying price, rate or index. Also, the policy
prohibits the use of borrowed funds, including funds obtained through repurchase
transactions, to engage in derivative transactions.

         Credit exposure associated with non-performance by the counterparties
to derivative instruments is generally limited to the gross fair value of the
asset related to the instruments recognized in the condensed balance sheets. VFL
mitigates the risk of non-performance by using multiple counterparties and by
monitoring their creditworthiness. VFL generally requires collateral from its
derivative investment counterparties depending on the amount of the exposure and
the credit rating of the counterparty.

Risk Management Strategies Regarding Market Risk

         VFL has exposure to economic losses due to interest rate risk arising
from changes in the level of, or volatility of, interest rates. VFL attempts to
mitigate its exposure to interest rate risk through active portfolio management,
which includes rebalancing its existing portfolios or assets and liabilities, as
well as changing the characteristics of investments to be purchased or sold in
the future. In addition, various derivative financial instruments are used to
modify the interest rate risk exposures of certain assets and liabilities. These
strategies include the use of interest rate swaps, interest rate caps and
floors, options, futures, forwards, and commitments to purchase securities.
These instruments are generally used to lock in interest rates or unrealized
gains, to shorten or lengthen durations of fixed maturity securities or
investment contracts, or to hedge (on an economic basis) interest rate risks
associated with investments, variable rate debt and life insurance liabilities.



                                       9
<PAGE>   10
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED


NOTE 3. - (CONTINUED)

         As of the adoption date and June 30, 2001, none of VFL's holdings of
these types of instruments have been designated as hedges of specific assets or
liabilities, and therefore do not currently qualify for hedge accounting under
GAAP.

         VFL is exposed to equity price risk as a result of its investment in
equity securities and equity derivatives. Equity price risk results from changes
in the level or volatility of equity prices, which affect the value of equity
securities, or instruments which derive their value from such securities. VFL
attempts to mitigate its exposure to such risks by limiting its investment in
any one security or index. VFL may also manage this risk by utilizing
instruments such as options, swaps, futures and collars to protect appreciation
in securities held.

         Foreign exchange rate risk arises from the possibility that changes in
foreign currency exchange rates will impact the value of financial instruments
denominated in a foreign currency. VFL's foreign transactions are primarily
denominated in Canadian Dollars. VFL manages this risk via asset/liability
matching and through the use of foreign currency futures and/or forwards.

VFL's derivative holdings of approximately $132,284 consist of interest rate
caps as of June 30, 2001.

NOTE 4. COMPREHENSIVE INCOME

         Comprehensive income is comprised of all changes to stockholder's
equity, including net income, except those changes resulting from investments
and distributions to, the stockholder. The components of comprehensive income
are shown below.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                        THREE MONTHS              SIX MONTHS
                                                                    ---------------------   ---------------------
PERIOD ENDED JUNE 30,                                                  2001       2000        2001        2000
-----------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>         <C>         <C>
(In thousands of dollars)
Net income                                                          $  5,792    $  4,594    $ 15,162    $  8,992
Other comprehensive income:
   Change in unrealized gains (losses) on general account
      investments
      Holding (losses) gains arising during the period                (8,143)     (2,394)      1,277      (1,363)
      Less: Unrealized (losses) gains at beginning of period
              included in realized gains (losses) during
              the period                                              (1,981)     (3,364)        660      (6,929)
                                                                    --------    --------    --------    --------
   Net change in unrealized (losses) gains on general account
      investments                                                     (6,162)        970         617       5,566
   Net change in unrealized gains (losses) on separate
      accounts and other                                                  18          86        (641)     (2,303)
                                                                    --------    --------    --------    --------
   Other comprehensive (loss) income before income tax                (6,144)      1,056         (24)      3,263
Deferred income taxes related to other comprehensive
      income                                                           2,150        (322)          8      (1,094)
                                                                    --------    --------    --------    --------
   Other comprehensive (loss) income, net of tax                      (3,994)        734         (16)      2,169
-----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME                                          $  1,798    $  5,328    $ 15,146    $ 11,161
=================================================================================================================
</TABLE>


NOTE 5.  BUSINESS SEGMENTS

         VFL operates in one reportable segment, the business of which is to
market and underwrite insurance products designed to satisfy the life, health
and retirement needs of individuals and groups. VFL products are distributed
primarily in the United States. Premium revenues earned outside the United
States are not significant.


                                       10
<PAGE>   11
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED

NOTE 5. - (CONTINUED)

         The operations and liabilities of VFL and its parent, Assurance, are
managed on a combined basis. Pursuant to a Reinsurance Pooling Agreement, as
amended, VFL cedes all of its business, excluding its Separate Account business,
to Assurance which is then pooled with the business of Assurance, excluding
Assurance's participating contracts and Separate Account business, and 10% of
the combined pool is then assumed by VFL.

The following presents premiums by product group for the period ended June 30,
2001 and 2000.


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                        THREE MONTHS                          SIX MONTHS
                                                  --------------------------           -------------------------
JUNE 30,                                            2001             2000                2001             2000
-----------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>                 <C>              <C>
(In thousands of dollars)
Life                                              $  11,346        $ 19,879            $ 21,691         $ 38,722
Accident and Health                                     299          57,157                 664          115,494
-----------------------------------------------------------------------------------------------------------------
   TOTAL                                          $  11,645        $ 77,036            $ 22,355         $154,216
=================================================================================================================
</TABLE>


         Through August 31, 2000, Assurance provided health insurance benefits
to postal and other federal employees under the Federal Employees Health Benefit
Plan (FEHBP). Premiums under this contract between Assurance and FEHBP totaled
$1.0 billion for the period ended June 30, 2000, and the portion of these
premiums assumed by VFL under the Reinsurance Pooling Agreement totaled $101.0
million for the period ended June 30, 2000. Effective September 1, 2000, the
FEHBP business was transferred to another insurance entity owned by CNA. All the
assets and liabilities of this business were transferred through a novation
agreement and VFL was relieved of any ongoing direct or contingent liability
with respect to this business. See Note 6 to the Condensed Financial Statements,
included herein.


NOTE 6.  OTHER EVENTS

INDIVIDUAL LIFE REINSURANCE TRANSACTION

         Effective December 31, 2000, CNA completed a transaction with Munich
American Reassurance Company (MARC), whereby MARC acquired CNA's individual life
reinsurance business (Life Re) via a reinsurance agreement. CNA will continue to
accept and retrocede business on existing Life Re contracts until such time that
CNA and MARC are able to execute novations of each of Life Re's assumed and
retro-ceded reinsurance contracts.

         MARC assumed approximately $294 million of liabilities (primarily
future policy benefits and claim reserves) and approximately $209 million in
assets (primarily uncollected premium and deferred policy acquisition costs from
Assurance). A portion of the Life Re business is conducted through VFL as part
of the Reinsurance Pooling Agreement. VFL's share of the net gain from the
reinsurance transaction, which is subject to certain post-closing adjustments,
has been recorded as deferred revenue and will be recognized in income over the
next 9 to 15 months as Life Re's assumed contracts are novated to MARC.

FEDERAL EMPLOYEE HEALTH BENEFIT PLAN (FEHBP)

         The Federal Employee Health Benefit Plan (FEHBP) business formerly
written by Assurance and assumed by VFL as part of the Reinsurance Pooling
Agreement was transferred to another insurance entity owned by CNA effective
September 1, 2000. All assets and liabilities of this business were transferred
through a novation agreement, and VFL was relieved of any ongoing direct or
contingent liability with respect to this business.



                                       11
<PAGE>   12
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED


NOTE 6. - (CONTINUED)

GROUP ACCIDENT & HEALTH TRANSACTION

         VFL and Assurance along with Casualty (collectively, the "Insurers")
have entered into an indemnity reinsurance agreement (the "Agreement") with CNA
Group Life Assurance Company ("CNAGLAC"), a newly formed and wholly-owned
subsidiary of Casualty whereby most of the existing group life and health
insurance business (excluding the FEHBP business which was transferred to
another insurance subsidiary of CNA via a novation agreement as discussed in
Note 5, and some runoff group and life insurance lines of business that will
remain with the Insurers) of the Insurers will be transferred to CNAGLAC via a
reinsurance agreement, effective January 1, 2001. The purpose of this
transaction, along with the FEHBP transaction that was completed on September 1,
2000, is to move, over time, substantially all of the group life and health
insurance business from VFL and Assurance to other insurance subsidiaries of
CNAF. When CNAGLAC obtains the appropriate licenses to write group life and
health insurance business, CNAGLAC will replace the group life and health
insurance in force contracts of the Insurers, excluding the FEHBP business, with
equivalent contracts issued directly by CNAGLAC.

         The following table summarizes VFL's earned premiums, income (loss)
before income tax and total assets for FEHBP, Life Re and the Group Accident &
Health business.


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                   THREE MONTHS                             SIX MONTHS
                                             -----------------------------         -------------------------------
  PERIOD ENDED JUNE 30,                       2001               2000                2001               2000
------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>                   <C>              <C>
  (In thousands of dollars)
  FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:
     Earned premiums                            $  --            $ 48,864              $  --            $ 100,078
     Income (loss) before income tax               (4)                570                 (7)                 927

  LIFE RE:
     Earned premiums                            $ (66)           $  5,577              $   23           $  10,572
     Income before income tax                     (90)                609                (27)               1,599

  GROUP ACCIDENT AND HEALTH:
     Earned premiums                            $   45           $ 12,378              $   45           $  24,309
     Income before income tax                    1,011                987                 196               1,284
------------------------------------------------------------------------------------------------------------------
                                                                                   JUNE 30,          DECEMBER 31,
  AS OF                                                                              2001               2000
------------------------------------------------------------------------------------------------------------------
  (In thousands of dollars)
  TOTAL ASSETS:
  Federal Employee Health Benefit Plan (FEHBP)*                                       $ --               $  --
  Life Re                                                                              39,366              33,641
  Group Accident and Health                                                            60,215              56,851
==================================================================================================================
</TABLE>

* FEHBP business transferred September 1, 2000.




                                       12
<PAGE>   13
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                       JUNE 30, 2001 (UNAUDITED)-CONTINUED

NOTE 6. - (CONTINUED)

REMAINING BUSINESS RESULTS

         The transfer or sale of the three business lines to other entities had
a significant impact on the financial statements of VFL. The following schedule
highlights the remaining VFL business in a pro-forma format for year 2001 and
2000.


<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                         THREE MONTHS              SIX MONTHS
PRO-FORMA FOR JUNE 30,                                                 2001        2000         2001         2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>           <C>        <C>          <C>
(In thousands of dollars)
Operating Revenues (excluding realized investment gains (losses))
     Net earned premiums                                             $  11,666     $ 10,217    $ 22,287     $ 19,257
     Net investment income                                              11,980        9,799      24,291       19,710
     Other                                                               1,357        1,851       5,700        4,326
                                                                    -------------------------------------------------
        Total operating revenues                                        25,183       21,867      52,278       43,293
Benefits and expenses                                                   19,046       15,335      36,714       28,924
                                                                    -------------------------------------------------
    Operating income (loss) before income tax expense                    6,137        6,532      15,564       14,369
Income tax expense                                                      (2,187)      (2,669)     (5,490)      (4,981)
                                                                    -------------------------------------------------
    Net operating income before realized investment gains (losses)       3,950        3,863      10,074        9,388
     Realized investment gains (losses), net of tax                      1,174         (274)      4,644       (2,454)
---------------------------------------------------------------------------------------------------------------------
        NET INCOME - REMAINING BUSINESS UNITS                        $   5,124     $  3,589    $ 14,718     $  6,934
---------------------------------------------------------------------------------------------------------------------
</TABLE>

NOTE 7.  LEGAL PROCEEDINGS

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


                                       13
<PAGE>   14
     The following discussion and analysis should be read in conjunction with
the condensed financial statements (unaudited) and notes thereto found on pages
3 to 13, which contain additional information helpful in evaluating operating
results and financial condition.

     VFL, along with its parent, Assurance, markets and underwrites products
designed to satisfy the life insurance, health insurance and retirement needs of
individuals and groups. The individual products consist primarily of term and
universal life insurance policies and individual annuities. Group products
include life insurance, pension products and accident and health insurance,
consisting primarily of major medical and hospitalization insurance. VFL and
Assurance also market a portfolio of variable Separate Account products,
consisting primarily of annuity and universal life products. These variable
Separate Account products offer contractholders the option of allocating
payments to one or more variable Separate Accounts or to a guaranteed income
account or both. Cash receipts and deposits received for the variable Separate
Accounts are invested in investment portfolios, as allocated by the
contractholder, where the investment risk is borne by the contractholder. Cash
receipts and deposits received for these products that are allocated to the
guaranteed income account earn a minimum guaranteed rate of interest for a
specified period of time for annuity contracts and one year for life products.

RESULTS OF OPERATIONS

     The following table summarizes key components of VFL's operating results
for the three and six months ended June 30, 2001 and 2000.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                            THREE MONTHS            SIX MONTHS
PERIOD ENDED JUNE 30,                                                     2001          2000      2001       2000
---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars) Revenues:
<S>                                                                      <C>          <C>       <C>         <C>
   Net earned premiums                                                   $ 11,645     $77,036   $ 22,355    $154,216
   Net investment income                                                   12,105      11,047     24,585      22,134
   Other                                                                    1,139       1,887      5,811       4,402
                                                                         --------------------------------------------
        Total operating revenues                                           24,889      89,970     52,751     180,752
Benefits and expenses                                                      17,835      81,272     37,025     162,573
                                                                         --------------------------------------------
  Operating income before income tax expense                                7,054       8,698     15,726      18,179
Income tax expense                                                         (2,506)     (3,530)    (5,569)     (6,434)
                                                                         --------------------------------------------
     Net operating income before realized investment gains (losses)         4,548       5,168     10,157      11,745
     Net realized investment gains (losses), net of tax                     1,244        (574)     5,005      (2,753)
---------------------------------------------------------------------------------------------------------------------
     NET INCOME                                                          $  5,792     $ 4,594   $ 15,162    $  8,992
=====================================================================================================================
</TABLE>

     Operating income for the three and six months ended June 30, 2001 decreased
by $1.6 million and $2.4 million, respectively. These decreases were primarily
the result of decreases in operating revenues of $65.0 million and $131.9
million for the three and six months ended June 30, 2001, respectively, which
were only partially offset by decreases in benefits and expenses of $63.4
million and $125.6 million for each of the corresponding periods. The changes in
revenues and expenses were due to the impact of the business transferred, as
discussed below, as well as the results of the remaining businesses which are
further discussed in the sections that follow.

     As discussed in Note 6 to the Condensed Financial Statements, effective
December 31, 2000, CNA completed a transaction with Munich American Reassurance
Company (MARC), whereby MARC acquired CNA's individual life reinsurance business
(Life Re) via a reinsurance agreement. CNA will continue to accept and retrocede
business on existing Life Re contracts until such time that CNA and MARC are
able to execute novations of each of Life Re's assumed and retro-ceded
reinsurance contracts. A portion of the Life Re business is conducted through
VFL as part of the Reinsurance Pooling Agreement.


<PAGE>   15
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED
                                  JUNE 30, 2001

RESULTS OF OPERATIONS - (CONTINUED)

     The Federal Employee Health Benefit Plan (FEHBP) business formerly written
by Assurance and assumed by VFL as part of the Reinsurance Pooling Agreement was
transferred to another insurance entity owned by CNA effective September 1,
2000. All assets and liabilities of this business were transferred through a
novation agreement, and VFL was relieved of any ongoing direct or contingent
liability with respect to this business.

     VFL and Assurance along with Casualty (collectively, the "Insurers") have
entered into an indemnity reinsurance agreement (the "Agreement") with CNA Group
Life Assurance Company ("CNAGLAC"), a newly formed and wholly-owned subsidiary
of Casualty whereby most of the existing group life and health insurance
business (excluding the FEHBP business which was transferred to another
insurance subsidiary of CNA via a novation agreement as discussed in Note 5 to
the Condensed Financial Statements, and some runoff group and life insurance
lines of business that will remain with the Insurers) of the Insurers will be
transferred to CNAGLAC via a reinsurance agreement, effective January 1, 2001.

     The following table summarizes VFL's earned premiums and income (loss)
before income tax for FEHBP, Life Re and the Group Accident & Health business.


<TABLE>
<CAPTION>
  ----------------------------------------------------------------------------------------------------------------
                                                      THREE MONTHS                            SIX MONTHS
                                                      ------------                            ----------
  PERIOD ENDED JUNE 30,                          2001              2000                 2001              2000
  ----------------------------------------------------------------------------------------------------------------
  (In thousands of dollars)
  <S>                                          <C>               <C>                   <C>              <C>
  FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:
     Earned premiums                           $     -           $ 48,864              $    -           $ 100,078
     Income (loss) before income tax                (4)               570                  (7)                927

  LIFE RE:
     Earned premiums                           $   (66)          $  5,577              $   23           $  10,572
     Income before income tax                      (90)               609                 (27)              1,599

  GROUP ACCIDENT AND HEALTH:
     Earned premiums                           $    45           $ 12,378              $   45           $  24,309
     Income before income tax                    1,011                987                 196               1,284

  ================================================================================================================
</TABLE>

As a result of the impact that the foregoing transactions had on the results of
operations of VFL, the following analyzes the results of operations of the
remaining businesses. The following schedule highlights the results of
operations for VFL on a pro forma basis for three and six months ended June 30,
2001 and 2000 and the following discussions and analysis are based on the pro
forma results of operations.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                         THREE MONTHS              SIX MONTHS
PRO FORMA FOR JUNE 30,                                                 2001        2000         2001         2000
---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                                   <C>           <C>        <C>          <C>
Operating Revenues (excluding realized investment gains (losses))
     Net earned premiums                                              $ 11,666      $10,217    $ 22,287     $ 19,257
     Net investment income                                              11,980        9,799      24,291       19,710
     Other                                                               1,537        1,851       5,700        4,326
                                                                    -------------------------------------------------
        Total operating revenues                                        25,183       21,867      52,278       43,293
Benefits and expenses                                                   19,046       15,335      36,714       28,924
                                                                    -------------------------------------------------
    Operating income (loss) before income tax expense                    6,137        6,532      15,564       14,369
Income tax expense                                                      (2,187)      (2,669)     (5,490)      (4,981)
                                                                    -------------------------------------------------
    Net operating income before realized investment gains (losses)       3,950        3,863      10,074        9,388
     Realized investment gains (losses), net of tax                      1,174         (274)      4,644       (2,454)
---------------------------------------------------------------------------------------------------------------------
        NET INCOME - REMAINING BUSINESS UNITS                         $  5,124      $ 3,589    $ 14,718     $  6,934
---------------------------------------------------------------------------------------------------------------------
</TABLE>



<PAGE>   16

                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED
                                  JUNE 30, 2001

RESULTS OF OPERATIONS - (CONTINUED)

     For the second quarter of 2001, operating income, before income tax expense
and realized investment results, decreased 6.0% or $0.4 million from the same
quarter in 2000. This was principally the result of an increase in net earned
premiums of approximately $1.5 million or 14% and an increase in net investment
income of $2.2 million or 22%, which was more than offset by increased benefits
and expenses of $3.7 million, or approximately 24%, and a decrease in other
revenues of $0.3 million or 17%.

     The increase in net earned premiums was primarily attributable to increased
sales of term insurance products. VFL's increase in net investment income for
the three months ended June 30, 2001 as compared to the comparable period in
2000 was due to a higher average investment portfolio balance during the period,
and a higher average yield rate, primarily in fixed maturity securities and
short-term investments. The increase in the yield was due primarily to the
change in the composition of invested securities to relatively higher yield
investment categories. The average yield for the three months ended June 30,
2001 was approximately 6.9% as compared to 6.2% for the comparable period in
2000. The increase in benefits and expenses was primarily due to increased
mortality losses on term and universal life products, partially offset by ceding
commissions received on the transfer of the various business described in Note 6
to the Condensed Financial Statements. The decrease in other revenues was due
primarily to a decrease in income from separate accounts.

     For the six months ended June 30, 2001, operating income, before income tax
expense and realized investment results, increased $1.2 million or 8% from the
comparable period in 2000. This was the result of an increase in net earned
premiums of approximately $3.0 million or 16%, increased net investment income
of $4.6 million or 23%, and an increase in other revenues of $1.4 million or
32%, which were partially offset by increased benefits and expenses of $7.8
million or 27%.

     The increase in net earned premiums was primarily attributable to increased
sales of term insurance products. VFL's increase in net investment income for
the six months ended June 30, 2001 as compared to the comparable period in 2000
was due to a higher average investment portfolio balance during the period, and
a higher average yield rate, primarily in fixed maturity securities and
short-term investments. The increase in the yield was due primarily to the
change in the composition of invested securities to relatively higher yield
investment categories. The average yield for the six months ended June 30, 2001
was approximately 7.0% as compared to 6.3% for the comparable period in 2000.
The increase in benefits and expenses was primarily due to increased mortality
losses on term and universal life products, partially offset by ceding
commissions received on the transfer of the various business described in Note 6
to the Condensed Financial Statements. The increase in other revenues for the
six months ended June 30, 2001 as compared to the comparable period in 2000 was
due primarily to an increase in income from separate accounts as the result of
increased service charges earned on policyholder accounts and increased
surrender charges for interest sensitive products in the first quarter of 2001.
Realized investment gains, net of taxes, increased $1.4 million for the core
business for the second quarter and $7.1 million for the six months ended June
30, 2001 from the same period of 2000. The gains resulted from fixed equity
securities, mostly in other corporate bond investments.

ACCOUNTING PRONOUNCEMENTS

     VFL has adopted SFAS 133 effective January 1, 2001. The transition
adjustments resulting from adoption must be reported in net income or other
comprehensive income, as appropriate, as the cumulative effect of a change in
accounting principle. Adoption of SFAS 133 did not have a significant impact on
the equity or results of operations of VFL. VFL already carries its investments
and investment-related derivatives at fair value and the resulting changes in
fair values are recognized through realized gains and losses. See Note 3 for a
complete discussion of VFL's adoption of these accounting pronouncements.



<PAGE>   17


                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED
                                  JUNE 30, 2001

     On April 1, 2001 the Company adopted Emerging Issues Task Force (EITF)
Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets (EITF 99-20). EITF
99-20 establishes how a transferor that retains an interest in securitized
financial assets or an enterprise that purchases a beneficial interest in
securitized financial assets should account for interest income and impairment.
This issue did not have a significant impact on the results of operations or
equity of the Company.

CODIFICATION
     On January 1, 2001, the Company (VFL) adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which VFL conducts
business required adoption of Codification for the preparation of
statutory-basis financial statements effective January 1, 2001. The Company's
adoption of Codification resulted in an increase in statutory capital and
surplus upon adoption of approximately $2.4 million, which primarily relates to
deferred tax assets, partially offset by insurance-related assessments and
pension-related liabilities.

FORWARD LOOKING STATEMENTS
The statements contained in this management discussion and analysis that are not
historical facts are forward-looking statements. When included in the
management's discussion and analysis, the words "believes," "expects,"
"intends," "anticipates," "estimates" and analogous expressions are intended to
identify forward-looking statements. Such statements inherently are subject to a
variety of risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties include, among
others, the impact of competitive products, policies and pricing; product and
policy demand and market responses; development of claims and claim trends and
the effect on loss reserves; the performance of reinsurance companies under
reinsurance contracts with the Company; general economic and business
conditions; changes in financial markets (interest rate, credit, currency,
commodities and stocks); changes in foreign, political, social and economic
conditions; regulatory initiatives and compliance with governmental regulations;
judicial decisions and rulings; the effect on the Company of changes in rating
agency policies and practices; the results of financing efforts; changes in the
Company's composition of operating segments; the actual closing of contemplated
transactions; and agreements and various other matters and risks (many of which
are beyond the Company's control) detailed in the Company's SEC filings. These
forward-looking statements speak only as of the filing date of this document.
The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based.

<PAGE>   18
                       VALLEY FORGE LIFE INSURANCE COMPANY
                                  JUNE 30, 2001
                            PART II OTHER INFORMATION



ITEM 1.  LEGAL PROCEEDINGS
         Information as to VFL's legal proceedings is set forth in PART I,
         Note 7 on Page 13, included herein

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
         Omitted pursuant to General Instruction H (2) (b) of Form 10-Q.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         Omitted pursuant to General Instruction H (2) (b) of Form 10-Q.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
         Omitted pursuant to General Instruction H (2) (b) of Form 10-Q.

ITEM 5.  OTHER INFORMATION
         None

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) EXHIBITS:  NONE


         (b) REPORTS ON FORM 8-K:

         There were no reports on Form 8-K for the six months ended June 30,
         2001.



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 duly authorized.

Valley Forge Life Insurance Company






By  ROBERT V. DEUTSCH
   -------------------
Robert V. Deutsch
Director, Executive Vice President
And Chief Financial Officer

Date: August 14, 2001



                                       18