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

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

                       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, 1997    Commission File Number 333-1087

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

                       VALLEY FORGE LIFE INSURANCE COMPANY

             (Exact name of registrant as specified in its charter)


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

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


                                 (312) 822-5000
              (Registrant's telephone number, including area code)



         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during the  preceding  12 months  (or for such  shorter  periods  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes x No _

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

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

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


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

--------------------------------------------------------------------------------
                                  Page 1 of 18

<PAGE>


                      VALLEY FORGE LIFE INSURANCE COMPANY

                                      INDEX


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

CONDENSED FINANCIAL STATEMENTS:

  BALANCE SHEET
   JUNE 30, 1997 (Unaudited) AND DECEMBER 31, 1996......................   3

  CONDENSED STATEMENT OF OPERATIONS (Unaudited)
   FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996............   4

  STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
   FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996......................   5

  STATEMENT OF CASH FLOWS (Unaudited)
   FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996......................   6

  NOTES TO CONDENSED FINANCIAL
   STATEMENTS (Unaudited) JUNE 30, 1997.................................   7

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


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

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K............................  16

SIGNATURES..............................................................  17

EXHIBIT 27  FINANCIAL DATA SCHEDULE.....................................  18



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

                                  BALANCE SHEET
-----------------------------------------------------------------------------------------------------------
                                                                               JUNE 30         DECEMBER 31
                                                                                 1997              1996
                                                                             (Unaudited)
-----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
   Investments:
<S>                                                                          <C>               <C>
     Fixed maturities available-for-sale (cost: $318,411 and $321,432)        $  317,352        $  321,066
     Equity securities available-for-sale (cost: $981 and $1,073)                  3,206             2,959
     Policy loans                                                                 65,169            60,267
     Short-term investments                                                      151,179            42,757
                                                                              ----------        ----------
          Total investments                                                      536,906           427,049
   Cash                                                                            5,122            24,759
   Insurance receivables:
     Reinsurance receivables                                                   1,441,019         1,320,583
     Premium and other insurance receivables                                      15,298            27,884
     Less allowance for doubtful accounts                                           (372)             (378)
   Deferred acquisition costs                                                     87,115            74,589
   Accrued investment income                                                       4,462             4,945
   Receivables for securities sold                                                   350               -
   Deferred income taxes                                                             -                 312
   Due from affiliates                                                            20,632            67,499
   Other assets                                                                    1,359                54
   Separate Account business                                                       1,612               -
-----------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                        $2,113,503        $1,947,296
===========================================================================================================

LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                                   $1,757,140        $1,621,504
     Claims                                                                       73,132            60,568
     Policyholders' funds                                                         34,933            38,145
   Payables for securities purchased                                               9,320               -
   Federal income taxes payable                                                    4,747             3,824
   Deferred income taxes                                                           1,195               -
   Other liabilities                                                              27,378            23,715
   Separate Account business                                                       1,612               -
                                                                              ----------        ----------
          TOTAL LIABILITIES                                                    1,909,457         1,747,756
                                                                              ----------        ----------
Stockholder's Equity:
   Common stock ($50 par value; Authorized-200,000 shares;
       Issued-50,000 shares)                                                       2,500             2,500
   Additional paid-in capital                                                     39,150            39,150
   Retained earnings                                                             161,636           156,900
   Net unrealized investment gains                                                   760               990
                                                                              ----------        ----------
          TOTAL STOCKHOLDER'S EQUITY                                             204,046           199,540
-----------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                          $2,113,503        $1,947,296
===========================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       3
<PAGE>
<TABLE>
<CAPTION>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                        CONDENSED STATEMENT OF OPERATIONS
                                   (Unaudited)

--------------------------------------------------------------------------------------------------------
                                                            SECOND QUARTER             SIX MONTHS
PERIOD ENDED JUNE 30                                      1997         1996         1997         1996
--------------------------------------------------------------------------------------------------------
(In thousands of dollars)

Revenues:
<S>                                                     <C>         <C>          <C>         <C>
   Premiums                                              $78,692     $82,938      $164,775    $160,221
   Net investment income                                   7,956       6,109        15,261      13,369
   Realized investment gains (losses)                       (162)     (1,250)         (133)      3,745
   Other                                                   1,476       1,249         2,751       2,499
                                                         -------     -------      --------    --------
                                                          87,962      89,046       182,654     179,834
                                                         -------     -------      --------    --------

Benefits and expenses:
   Insurance claims and policyholders' benefits           73,080      76,246       154,836     147,263
   Amortization of deferred acquisition costs and
   other operating expenses                               11,624      10,074        20,434      20,113
                                                         -------     -------      --------    --------
                                                          84,704      86,320       175,270     167,376
                                                         -------     -------      --------    --------
     Income before income tax                              3,258       2,726         7,384      12,458
Income tax expense                                         1,184         933         2,648       4,366
--------------------------------------------------------------------------------------------------------
     NET INCOME                                          $ 2,074     $ 1,793      $  4,736    $  8,092
========================================================================================================
<FN>

      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       4
<PAGE>

 <TABLE>
<CAPTION>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                        STATEMENT OF STOCKHOLDER'S EQUITY
                                   (Unaudited)

----------------------------------------------------------------------------------------------
                                                                           NET
                                              ADDITIONAL               UNREALIZED
SIX  MONTHS ENDED                    COMMON    PAID-IN     RETAINED    INVESTMENT
JUNE 30, 1997 AND 1996               STOCK     CAPITAL     EARNINGS   GAINS (LOSSES)   TOTAL
----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                <C>       <C>         <C>            <C>          <C>
Balance, December 31, 1995          $2,500    $39,150     $140,181       $13,641      $195,472
   Net income                          -          -          8,092           -           8,092
   Change in net unrealized gains/
        (losses)                       -          -            -         (15,626)      (15,626)
-----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996              $2,500    $39,150     $148,273       $(1,985)     $187,938
===============================================================================================

Balance, December 31, 1996          $2,500    $39,150     $156,900       $   990      $199,540
   Net income                          -          -          4,736           -           4,736
   Change in net unrealized gains/
        (losses)                       -          -            -            (230)         (230)
-----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997              $2,500    $39,150     $161,636       $   760      $204,046
===============================================================================================
<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)
-----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30                                                            1997          1996
-----------------------------------------------------------------------------------------------------------
(In thousands of dollars)

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                             <C>            <C>
   Net income                                                                    $  4,736       $  8,092
                                                                                 --------       --------
   Adjustments  to  reconcile  net  income  to net  cash  flows  from  operating
          activities:
   Net realized investment (gains) losses, pre-tax                                    133         (3,745)
   Amortization of bond discount                                                   (3,073)        (2,017)
   Changes in:
        Insurance receivables, net                                               (107,856)      (140,642)
        Deferred acquisition costs                                                (12,526)       (11,451)
        Accrued investment income                                                     483            651
        Federal income taxes payable                                                  923         (3,127)
        Deferred income taxes                                                       1,631          1,650
        Insurance reserves                                                        144,988        137,211
        Due from affiliates                                                        46,867         67,102
        Other, net                                                                  2,358          2,730
                                                                                 --------       --------
            Total adjustments                                                      73,928         48,362
                                                                                 --------       --------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                               78,664         56,454
                                                                                 --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                                 (142,791)      (301,008)
   Proceeds from fixed maturities:
     Sales                                                                        135,382        346,192
     Maturities, calls and redemptions                                             12,735         18,134
   Change in short-term investments                                               (98,725)      (153,644)
   Change in policy loans                                                          (4,902)        (3,971)
                                                                                 --------       --------
          NET CASH FLOWS FROM INVESTING ACTIVITIES                                (98,301)       (94,297)
                                                                                 --------       --------
          NET CASH FLOWS                                                          (19,637)       (37,843)
Cash at beginning of period                                                        24,759         42,103
----------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                            $  5,122       $  4,260
==========================================================================================================
Supplemental disclosures of cash flow information: Cash (paid) received:
        Federal income taxes                                                     $    506       $ (7,216)
==========================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       6
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                  JUNE 30, 1997
                                   (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 (CNA). Loews Corporation owns approximately 84% of
the outstanding common stock of CNA.

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

    Pursuant to a Reinsurance  Pooling Agreement,  amended July 1, 1996, VFL has
ceded all of its  business,  excluding  its  separate  accounts,  to its parent,
Assurance.  This business is then pooled with the business of  Assurance,  which
excludes Assurance's  participating  contracts and separate accounts, and 10% of
the combined net pool is retroceded to VFL.

    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, 1996,  filed with the  Commission  on
March 31, 1997, and the information shown below.

    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 1997.

    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.

NOTE 2. REINSURANCE:

    VFL assumes and cedes  insurance  with other  insurers and  reinsurers.  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.


                                      7
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED

   The ceding of insurance does not discharge primary liability of the original
insurer. VFL places reinsurance with other carriers only after careful review of
the nature of the contract and a thorough  assessment of the reinsurers'  credit
quality and claim  settlement  performance.  Further,  for carriers that are not
authorized  reinsurers  in its  states of  domicile,  VFL  receives  collateral,
primarily in the form of bank letters of credit.

    The effects of  reinsurance  on premium  revenues are shown in the following
schedule:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                                 PREMIUMS                   ASSUMED/NET
                                        ---------------------------------------------------
SIX MONTHS ENDED JUNE 30                    DIRECT        ASSUMED        CEDED       NET          %
---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S>                                      <C>           <C>            <C>          <C>           <C>
   Life                                   $ 267,120     $ 40,342       $268,265     $ 39,197      103%
   Accident and Health                        1,271      125,578          1,271      125,578      100
---------------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                       $ 268,391     $165,920       $269,536     $164,775      101%
=========================================================================================================
1996
   Life                                  $  246,899     $ 36,649       $247,692     $ 35,856      102%
   Accident and Health                          399      124,365            399      124,365      100
---------------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                      $  247,298     $161,014       $248,091     $160,221      100%
=========================================================================================================
</TABLE>
    In the table  above,  the  majority  of life  premium  revenue  is from long
duration type contracts,  while the accident and health premiums earned are from
short duration contracts.

    Transactions with Assurance,  as part of the pooling agreement (see Note 1),
are  reflected  in the above table.  Premium  revenues  ceded to  non-affiliated
companies  were $47.8  million for the six month  period ended June 30, 1997 and
$10.5 million for the same period in 1996.  Additionally,  insurance  claims and
policyholders'  benefits  recoveries  from  non-affiliated  companies  were $1.5
million for the period ended June 30, 1997 and $4.7 million for the period ended
June 30, 1996.

    Reinsurance receivables reflected on the balance sheet are recoverables from
reinsurers related to insurance  reserves.  Balances due from Assurance pursuant
to the pooling  agreement  comprise  approximately 99% of these balances at both
June 30, 1997 and 1996.

NOTE 3. LEGAL PROCEEDINGS:

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

                                       8
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

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

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

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

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


                                        9
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED

RESULTS OF OPERATIONS:

    The following table summarizes key components of VFL's operating results for
the six months and quarters ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------
                                                       SECOND QUARTER            SIX MONTHS
PERIOD ENDED JUNE 30                                  1997        1996         1997       1996
---------------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
  (excluding realized investment gains/losses):
Revenues:
<S>                                                 <C>         <C>         <C>         <C>
     Individual premium                              $13,671     $15,680     $ 29,280    $ 26,812
     Group premium                                    65,021      67,258      135,495     133,409
                                                     -------     -------     --------    --------
        Total premiums                                78,692      82,938      164,775     160,221
     Net investment income                             7,956       6,109       15,261      13,369
     Other                                             1,476       1,249        2,751       2,499
                                                     -------     -------     --------    --------
        Total revenues                                88,124      90,296      182,787     176,089
Total benefits and expenses                           84,704      86,320      175,270     167,376
                                                     -------     -------     --------    --------
     Operating income before income tax                3,420       3,976        7,517       8,713
Income tax expense                                    (1,214)     (1,369)      (2,668)     (3,055)
                                                     -------     -------     --------    --------
        Net operating income                           2,206       2,607        4,849       5,658
     Net realized investment gains (losses)             (132)       (814)        (113)      2,434
                                                     -------     -------     --------    --------
        Net income                                   $ 2,074     $ 1,793     $  4,736    $  8,092
==================================================================================================
</TABLE>

    VFL's revenues, excluding net realized investment gains/losses, increased 4%
to $182.8 million for the first six months of 1997,  from $176.1 million for the
same period in 1996.  Premiums were $164.8 million for the six months ended June
30, 1997,  compared to $160.2  million for the same period in 1996.  For the six
month period of 1997,  individual  premiums  increased  by 9% to $29.3  million,
compared  to  $26.8  million  for the same  period  in 1996.  This  increase  is
primarily  due to the  continued  growth  in sales  of the  Viaterm  product  of
approximately $2.7 million.  Group premiums were up 2% to $135.5 million for the
first six months of 1997,  compared  to $133.4  million  for the same period for
1996. The growth is due, in part, to a $3.7 million  increase in premiums in the
Federal Employees Health Benefits Program,  due to strong enrollment through the
first six months of 1997. Also contributing to the growth in group premiums is a
$1.1 million increase in Disability and Accident premium.  The increase in group
premiums is offset by a drop in group reinsurance premium of $2.8 million.

    Premiums  for the second  quarter  ended June 30,  1997 were $78.7  million,
compared  to $82.9  million  for the same  period in 1996.  Individual  premiums
decreased  by 12% to $13.7  million for the three  months  ended June 30,  1997,
compared to $15.7  million  for the same  period in 1996.  The growth in Viaterm
sales were more than offset by a reduction in sales of individual  annuities for
the second  quarter of 1997.  For the three months  ended June 30,  1997,  group
premium  decreased 3% to $65.0 million from $67.3 million for the same period in
1996.  The  primary  reasons  for this  decrease  were a decline in annuity  and
reinsurance businesses.
                                       10
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED

    VFL's  investment  income for the six months  ended June 30,  1997 was $15.3
million, a $1.9 million or 14% increase from the same period a year earlier when
investment income was $13.4 million.  The increase can be attributed to a larger
asset base generated from  increased  operating cash flows.  VFL's net operating
income,  excluding net realized  investment  gains/losses,  was $4.8 million and
$2.2 million for the six and three  months  ended June 30,  1997,  respectively,
compared to $5.7  million and $2.6  million  for the same  periods in 1996.  Net
operating income, excluding realized investment gains/losses,  for the first six
months  of 1997 was less  than that for the same  period  for 1996,  in spite of
increased  revenues.   This  is  due  to  group  health  losses  resulting  from
unfavorable morbidity experience in 1997.

   Net realized  investment  losses,  net of tax,  were $113  thousand and $132
thousand  for the six and  three  months  ended  June  30,  1997,  respectively,
compared to net  realized  investment  gains of $2.4  million  and net  realized
investment  losses of $814  thousand for the same periods last year.  Net income
for the six and three  months  ended  June 30,  1997 was $4.7  million  and $2.1
million,  respectively,  compared to $8.1  million and $1.8 million for the same
periods in 1996.

 
FINANCIAL CONDITION:

    Assets  increased  approximately  $166.2  million from  December 31, 1996 to
$2,113.5  million as of June 30, 1997.  VFL's cash and invested assets increased
by $90.2 million from December 31, 1996 to $542.0 million.

    During the first six months of 1997, VFL's stockholder's equity increased by
$4.5  million,  or  2%,  to  approximately   $204.0  million.  The  increase  in
stockholder's  equity in 1997 is due to net income of approximately $4.7 million
being offset by approximately $0.2 million in net unrealized investment losses.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                                     JUNE 30       DECEMBER 31
                                                                         1997            1996
--------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                                  <C>           <C>
Assets                                                                $2,113,503    $1,947,296
Stockholder's equity                                                     204,046       199,540
Net unrealized investment gains included in stockholder's equity             760           990
--------------------------------------------------------------------------------------------------

</TABLE>

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

INVESTMENTS:

    The following table summarizes VFL's  investments shown at cost or amortized
cost at June 30, 1997 and December 31, 1996.

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS                    JUNE 30                DECEMBER 31
                                                1997          %           1996       %
--------------------------------------------------------------------------------------------
(In thousands of dollars)
Fixed maturity securities:
<S>                                           <C>          <C>         <C>        <C>
        U.S. Treasury securities and
         obligations of government agencies   $119,267       22.3%      $117,213    27.5%
        Asset backed securities                104,779       19.6        113,376    26.6
        Other debt securities                   94,365       17.6         90,843    21.4
--------------------------------------------------------------------------------------------
          Total fixed maturity securities      318,411       59.5        321,432    75.5
Common stocks                                      981        0.2          1,073     0.3
Policy loans                                    65,169       12.2         60,267    14.2
Short-term investments                         151,179       28.1         42,757    10.0
--------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                 $535,740      100.0%      $425,529   100.0%
============================================================================================
INVESTMENTS AT CARRYING VALUE*                $536,906                  $427,049
============================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>

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

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


                                       12
<PAGE>



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


    The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market).
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                 JUNE 30         %     DECEMBER 31     %
                                                  1997                     1996
----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                            <C>           <C>       <C>         <C>
U.S. government and affiliated securities       $116,631       36.8%    $115,926     36.1%
Other AAA rated                                  111,358       35.1      127,910     39.8
AA and A rated                                    40,047       12.6       33,913     10.6
BBB rated                                         29,265        9.2       38,272     11.9
Below investment grade                            20,051        6.3        5,045      1.6
----------------------------------------------------------------------------------------------
     TOTAL                                      $317,352      100.0%    $321,066    100.0%
==============================================================================================
</TABLE>
    Included  in VFL's  fixed  maturity  securities  at June 30, 1997 are $104.7
million of  asset-backed  securities,  consisting  of  approximately  5% in U.S.
government  agency  issued  pass-through  certificates,  93%  in  collateralized
mortgage obligations (CMOs) and 2% in corporate  asset-backed  obligations.  The
majority of CMOs held are U.S.  government  agency  issues,  which are  actively
traded in liquid markets and are priced by broker-dealers.

    VFL  limits  the  risks  associated  with  interest  rate  fluctuations  and
prepayments by concentrating its CMO investments in planned amortization classes
with  relatively  short  principal   repayment   windows.   The  fair  value  of
asset-backed  securities  was less than the amortized  cost by $117 thousand and
$125  thousand at June 30, 1997 and December 31, 1996, respectively. VFL has not
invested in derivative  financial  instruments  nor does it have any investments
in mortgage loans or real estate.

    At June  30,  1997,  net  unrealized  losses  on fixed  maturity  securities
amounted to approximately $1.1 million. This compares with net unrealized losses
of approximately  $365 thousand at December 31, 1996. The gross unrealized gains
and losses for the fixed maturity  securities  portfolio at June 30, 1997,  were
$2.6 million and $3.7 million,  respectively,  compared to $3.2 million and $3.6
million, respectively, at December 31, 1996.

    VFL's  investments in equity  securities are carried at a fair value of $3.2
million and $3.0 million at June 30, 1997 and  December 31, 1996,  respectively.
At June  30,  1997,  net  unrealized  gains on  equity  securities  amounted  to
approximately  $2.2  million.   This  compares  with  net  unrealized  gains  of
approximately $1.9 million at December 31, 1996. There were no unrealized losses
on equity securities at June 30, 1997 and December 31, 1996.

                                       13
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS - CONTINUED

LIQUIDITY AND CAPITAL RESOURCES:

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

    For the first six months of 1997, VFL's operating  activities  generated net
positive cash flows of approximately  $78.7 million,  compared with net positive
cash flows of $56.5 million for the same period in 1996.  Positive cash flows in
1997 are primarily  the result of the  settlement  of certain  receivables  from
affiliates and higher revenues  generated by the increase in premium volume. VFL
believes that future  liquidity  needs will be met  primarily by cash  generated
from  operations.  Net cash flows from  operations  are  invested in  marketable
securities.

ACCOUNTING STANDARDS:

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

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

    In June 1997, the FASB issued SFAS 130,  "Reporting  Comprehensive  Income,"
which   establishes   accounting   standards   for   reporting  and  display  of
comprehensive income and its components (revenues,  expenses, gains, and losses)
in a full set of general-purpose  financial statements.  This Statement requires
that an enterprise  (a) classify  items of other  comprehensive  income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive  income separately from retained  earnings and additional  paid-in
capital in the  equity  section  of a  statement  of  financial  position.  This
Statement is effective for fiscal years  beginning after December 15, 1997. This
Statement  is  not  expected  to  result  in  a  significant   change  on  VFL's
disclosures.



                                       14
<PAGE>



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


    In June 1997,  the FASB issued SFAS 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 will redefine VFL's
business segment disclosure.

                                       15
<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                      18

(b)  REPORTS ON FORM 8-K:
         There were no reports on Form 8-K for the three months ended
            June 30,1997.


                                       16
<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/PATRICIA L. KUBERA
                                                  --------------------
                                                  Patricia L. Kubera
                                                  Director, Group Vice President
                                                  and Controller
                                                  (Principal Accounting Officer)

Date:         August 14, 1997








                                      17