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


                       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 September 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 November 1, 1997
  ------------------------------              -------------------------------
  Common Stock, Par value $50.00                           50,000

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


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

--------------------------------------------------------------------------------
                                  Page 1 of 17
<PAGE>
                      VALLEY FORGE LIFE INSURANCE COMPANY

                                     INDEX

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

CONDENSED FINANCIAL STATEMENTS:

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

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

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

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

   NOTES TO CONDENSED FINANCIAL
    STATEMENTS (Unaudited) SEPTEMBER 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......................    15


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


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

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

                                  BALANCE SHEET

-------------------------------------------------------------------------------------------------
                                                                       September 30   December 31
                                                                          1997            1996
                                                                       (Unaudited)
-------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
   Investments:
<S>                                                                   <C>            <C>
     Fixed maturities available-for-sale (cost: $287,174 and $321,432) $  290,133     $  321,066
     Equity securities available-for-sale (cost: $981 and $1,073)           2,451          2,959
     Policy loans                                                          65,866         60,267
     Short-term investments                                                24,410         42,757
                                                                        ----------     ----------
          Total investments                                               382,860        427,049
   Cash                                                                     5,483         24,759
   Insurance receivables:
     Reinsurance receivables                                            1,476,633      1,320,583
     Premium and other insurance receivables                               50,680         27,884
     Less allowance for doubtful accounts                                    (357)          (378)
   Deferred acquisition costs                                              93,764         74,589
   Accrued investment income                                                6,337          4,945
   Deferred income taxes                                                      -              312
   Due from affiliates                                                    157,883         67,499
   Other assets                                                             2,923             54
   Separate Account business                                                4,058            -
-------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                 $2,180,264     $1,947,296
=================================================================================================

LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                            $1,803,766     $1,621,504
     Claims                                                                83,772         60,568
     Policyholders' funds                                                  35,414         38,145
   Federal income taxes payable                                             5,961          3,824
   Deferred income taxes                                                    3,835            -
   Other liabilities                                                       33,437         23,715
   Separate Account business                                                4,058            -
                                                                       -----------    -----------
          TOTAL LIABILITIES                                             1,970,243      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                                                      165,490        156,900
   Net unrealized investment gains                                          2,881            990
                                                                       -----------    -----------
          TOTAL STOCKHOLDER'S EQUITY                                      210,021        199,540
-------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                   $2,180,264     $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)

------------------------------------------------------------------------------------------
                                                   Third Quarter           Nine Months
PERIOD ENDED SEPTEMBER 30                         1997       1996       1997       1996
------------------------------------------------------------------------------------------
(In thousands of dollars)
Revenues:
<S>                                              <C>       <C>       <C>        <C>
   Premiums                                       $82,622   $82,417   $247,397   $242,638
   Net investment income                            7,676     8,283     22,937     21,652
   Realized investment gains (losses)               1,282      (621)     1,149      3,124
   Other                                            2,151     1,900      4,902      4,399
                                                  --------  --------  ---------  ---------
                                                   93,731    91,979    276,385    271,813
                                                  --------  --------  ---------  ---------

Benefits and expenses:
   Insurance claims and policyholders' benefits    78,528    76,985    233,364    224,248
   Amortization of deferred acquisition costs and
    other operating expenses                        9,161    10,091     29,595     30,204
                                                  --------  --------  ---------  ---------
                                                   87,689    87,076    262,959    254,452
                                                  --------  --------  ---------  ---------
     Income before income tax                       6,042     4,903     13,426     17,361
Income tax expense                                  2,188     1,757      4,836      6,123
------------------------------------------------------------------------------------------
     NET INCOME                                   $ 3,854   $ 3,146   $  8,590   $ 11,238
==========================================================================================
<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
NINE MONTHS ENDED                    COMMON    PAID-IN    RETAINED     INVESTMENT
SEPTEMBER 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                            -         -        11,238          -        11,238
   Change in net unrealized gains/
        (losses)                         -         -           -        (15,561)    (15,561)
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1996           $2,500   $39,150    $151,419      $(1,920)   $191,149
=============================================================================================

Balance, December 31, 1996            $2,500   $39,150    $156,900      $   990    $199,540
   Net income                            -         -         8,590          -         8,590
   Change in net unrealized gains/
       (losses)                          -         -           -          1,891       1,891
---------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997           $2,500   $39,150    $165,490      $ 2,881    $210,021
=============================================================================================
<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)

-------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30                                                    1997          1996
-------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                           <C>            <C>
   Net income                                                                  $  8,590       $ 11,238
                                                                                -------       --------
   Adjustments to reconcile net income to net cash flows from
          operating activities:
   Net realized investment gains, pre-tax                                        (1,149)        (3,124)
   Amortization of bond discount                                                 (4,676)        (3,880)
   Changes in:
        Insurance receivables, net                                             (178,867)      (186,324)
        Deferred acquisition costs                                              (19,175)       (16,405)
        Accrued investment income                                                (1,392)        (2,698)
        Federal income taxes payable                                              2,137         (1,239)
        Deferred income taxes                                                     3,129          4,320
        Insurance reserves                                                      127,464         77,467
        Due from affiliates                                                     (90,384)        41,521
        Other, net                                                                6,852          6,305
                                                                               --------      ---------
            Total adjustments                                                  (156,061)       (84,057)
                                                                               --------      ---------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                           (147,471)       (72,819)
                                                                               ---------     ----------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                               (170,107)      (476,469)
   Proceeds from fixed maturities:
     Sales                                                                      186,958        450,490
     Maturities, calls and redemptions                                           19,659         35,618
   Proceeds from sale of equity maturities                                          -               23
   Change in short-term investments                                              22,013        (41,768)
   Change in policy loans                                                        (5,599)        (5,272)
                                                                               ---------     ----------
          NET CASH FLOWS FROM INVESTING ACTIVITIES                               52,924        (37,378)
                                                                               ---------     ----------

CASH FLOWS FROM FINANCING ACTIVITIES
   Receipts for investment contracts credited to policyholder account balances   84,121         71,268
   Return of policyholder account balances in investment contracts               (8,850)        (2,395)
                                                                               ---------     ----------
          NET CASH FLOWS FROM FINANCING ACTIVITIES                               75,271         68,873
                                                                               ---------     ----------
          NET CASH FLOWS                                                        (19,276)       (41,324)
Cash at beginning of period                                                      24,759         42,103
--------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                          $  5,483        $   779
========================================================================================================
Supplemental disclosures of cash flow information:
        Cash received (paid) for federal income taxes                          $    506       $ (3,229)
========================================================================================================
<FN>
      See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                       6
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                               SEPTEMBER 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 cedes
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.

    In   mid-October,   VFL  purchased   investments  in  derivative   financial
instruments  with a notional  value of  approximately  $50.0  million and a book
value  of  approximately  $0.6  million.  These  instruments  are in the form of
interest  rate caps to offset the  effects of a  potential  increase in interest
rates.

    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  Securities and
Exchange 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.

                                       7
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY

               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED

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.

    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
                                        ----------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30            DIRECT    ASSUMED        CEDED        NET         %
---------------------------------------------------------------------------------------------------
(In thousands of dollars)
1997
<S>                                     <C>        <C>          <C>         <C>          <C>
   Life                                  $411,979   $ 59,680     $413,443    $ 58,216     103%
   Accident and Health                      1,908    189,181        1,908     189,181     100
---------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                      $413,887   $248,861     $415,351    $247,397     101%
===================================================================================================
1996
   Life                                  $300,096   $ 53,296     $300,371    $ 53,021     101%
   Accident and Health                        664    189,617          664     189,617     100
---------------------------------------------------------------------------------------------------
     TOTAL PREMIUMS                      $300,760   $242,913     $301,035    $242,638     100%
===================================================================================================
</TABLE>
    In the table  above,  the  majority  of life  premium  revenue  is from long
duration type contracts,  while the accident and health earned premiums 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 $77.7 million for the nine month period ended  September 30, 1997
and $25.0 million for the same period in 1996.  Additionally,  insurance  claims
and policyholders' benefits recoveries from non-affiliated  companies were $10.6
million for the period ended  September 30, 1997 and $6.2 million for the period
ended September 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
September 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  cedes  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 guaranteed  minimum 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 nine months and quarters ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
                                                            THIRD QUARTER             NINE MONTHS
PERIOD ENDED SEPTEMBER 30                                1997         1996         1997          1996
--------------------------------------------------------------------------------------------------------
(In thousands of dollars)
RESULTS OF OPERATIONS
Revenues:
<S>                                                   <C>          <C>          <C>          <C>
     Group premium                                     $68,551      $69,240      $204,046     $202,649
     Individual premium                                 14,071       13,177        43,351       39,989
                                                       -------      -------      --------     --------
        Total premiums                                  82,622       82,417       247,397      242,638
     Net investment income                               7,676        8,283        22,937       21,652
     Other                                               2,151        1,900         4,902        4,399
                                                       -------      -------      --------     --------
        Total revenues                                  92,449       92,600       275,236      268,689
Benefits and expenses                                   87,689       87,076       262,959      254,452
                                                       -------      -------      --------     --------
     Operating income before income tax                  4,760        5,524        12,277       14,237
Income tax expense                                       1,766        1,974         4,434        5,029
                                                       -------      -------      --------     --------
        Net operating income                             2,994        3,550         7,843        9,208
Net realized investment gains (losses)                     860         (404)          747        2,030
                                                       -------      -------      --------     --------
        Net income                                     $ 3,854      $ 3,146      $  8,590     $ 11,238
========================================================================================================
</TABLE>

    VFL's revenues, excluding net realized investment gains/losses, increased 2%
to $275.2 million for the first nine months of 1997, from $268.7 million for the
same  period in 1996.  Premiums  were $247.4  million for the nine months  ended
September 30, 1997,  compared to $242.6 million for the same period in 1996. For
the nine month  period of 1997,  individual  premiums  increased  by 8% to $43.4
million, compared to $40.0 million for the same period in 1996. This increase is
primarily  due to the  continued  growth  in sales  of the  Viaterm  product  of
approximately $4.6 million.  Group premiums were up 1% to $204.0 million for the
first nine  months of 1997,  compared  to $202.6  million for the same period in
1996.  The growth is due, in part,  to a $2.2 million  increase in premiums in a
U.S.  Government  employees  accident  and  health  program  and a $4.4  million
increase in group medical  premiums.  Also  contributing to the growth is a $1.5
million  increase in  disability  and  accident  premium.  The increase in group
premiums is offset by a drop in group reinsurance premium of $6.7 million.

    Premiums for the third quarter ended  September 30, 1997 were $82.6 million,
compared  to $82.4  million  for the same  period in 1996.  Individual  premiums
increased by 7% to $14.1 million for the three months ended  September 30, 1997,
compared to $13.2  million  for the same  period in 1996.  The growth in Viaterm
sales accounts for most of this change. For the three months ended September 30,
1997,  group  premium  decreased 1% to $68.6  million from $69.2 million for the
same  period in 1996.  The  primary  reason for this  decrease  was a decline in
reinsurance business.


                                       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 nine months ended  September  30, 1997 was
$22.9  million,  an  approximate  increase  of $1.2  million or 6% from the same
period a year earlier when investment income was $21.7 million. The increase can
be attributed to slightly  higher yields in VFL's  investment  portfolio for the
first  nine  months  of 1997.  Investment  income  for the  three  months  ended
September  30,  1997 was $7.7  million,  down 7% from $8.3  million for the same
period in 1996.  This  decline is mainly due to a decrease  in  holdings  within
VFL's investment portfolio during the third quarter, in spite of slightly higher
yields.   VFL's  net  operating  income,   excluding  net  realized   investment
gains/losses,  was $7.8  million and $3.0  million for the nine and three months
ended  September  30,  1997,  respectively,  compared  to $9.2  million and $3.6
million for the same periods in 1996.

    Net  realized  investment  gains,  net of tax,  were $747  thousand and $860
thousand for the nine and three months ended  September 30, 1997,  respectively,
compared to net  realized  investment  gains of $2.0  million  and net  realized
investment  losses of $404  thousand for the same periods last year.  Net income
for the nine and three months ended September 30, 1997 was $8.6 million and $3.9
million,  respectively,  compared to $11.2 million and $3.1 million for the same
periods in 1996.

FINANCIAL CONDITION:

    Assets  increased  approximately  $233.0  million from  December 31, 1996 to
$2,180.3  million as of  September  30,  1997.  VFL's cash and  invested  assets
decreased by $63.5 million from December 31, 1996 to $388.3 million.

    During the first nine months of 1997, VFL's  stockholder's  equity increased
by $10.5  million,  or 5%, to  approximately  $210.0  million.  The  increase in
stockholder's  equity in 1997 is due to net income of approximately $8.6 million
and approximately $1.9 million in net unrealized investment gains.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
FINANCIAL POSITION                                               SEPTEMBER 30   DECEMBER 31
                                                                     1997          1996
---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                              <C>          <C>
Assets                                                            $2,180,264   $1,947,296
Stockholder's equity                                                 210,021      199,540
Net unrealized investment gains included in stockholder's equity       2,881          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 September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS                  SEPTEMBER 30               DECEMBER 31
                                                 1997           %          1996        %
--------------------------------------------------------------------------------------------
(In thousands of dollars) 
<S>                                           <C>             <C>       <C>          <C>
Fixed maturities:
       U.S. Treasury securities and
         obligations of government agencies    $100,431        26.5%     $117,213     27.5%
       Asset backed securities                   93,319        24.7       113,376     26.6
       Other debt securities                     93,424        24.7        90,843     21.4
--------------------------------------------------------------------------------------------
          Total fixed maturities                287,174        75.9       321,432     75.5
Common stocks                                       981         0.3         1,073      0.3
Policy loans                                     65,866        17.4        60,267     14.2
Short-term investments                           24,410         6.4        42,757     10.0
--------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                  $378,431       100.0%     $425,529    100.0%
============================================================================================
INVESTMENTS AT CARRYING VALUE*                 $382,860                  $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 maturities 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>
----------------------------------------------------------------------------------------
                                            SEPTEMBER 30      %     DECEMBER 31     %
                                                1997                    1996
----------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                          <C>            <C>     <C>          <C>
U.S. government and affiliated securities     $101,329       34.9%   $115,926     36.1%
Other AAA rated                                 98,124       33.8     127,910     39.8
AA and A rated                                  40,589       14.0      33,913     10.6
BBB rated                                       30,432       10.5      38,272     11.9
Below investment grade                          19,659        6.8       5,045      1.6
-----------------------------------------------------------------------------------------
     TOTAL                                    $290,133      100.0%   $321,066    100.0%
=========================================================================================
</TABLE>
    Included in VFL's fixed  maturities  at September 30, 1997 are $93.9 million
of asset-backed  securities,  consisting of approximately 10% in U.S. government
agency  issued  pass-through   certificates,   88%  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 more than the  amortized  cost by $628 thousand at
September 30, 1997. The fair value of asset-backed  securities was less than the
amortized cost by $125 thousand at December 31, 1996.

    At September 30, 1997, net unrealized gains on fixed maturities  amounted to
approximately  $3.0  million.  This  compares  with  net  unrealized  losses  of
approximately $365 thousand at December 31, 1996. The gross unrealized gains and
losses for the fixed  maturities  portfolio  at September  30,  1997,  were $4.3
million  and $1.3  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 $2.5
million  and  $3.0  million  at  September  30,  1997  and  December  31,  1996,
respectively.  At September 30, 1997, net unrealized gains on equity  securities
amounted to approximately $1.5 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 September 30, 1997 and December 31, 1996.

    VFL does not have any  investments in real estate or direct  mortgage loans.
In mid-October,  VFL purchased  investments in derivative financial  instruments
with a  notional  value  of  approximately  $50.0  million  and a book  value of
approximately  $0.6 million.  These instruments are in the form of interest rate
caps to offset the effects of a potential increase in interest rates.
  
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.

                                       13
<PAGE>

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

    For the first nine months of 1997, VFL's operating  activities generated net
negative cash flows of approximately $147.5 million,  compared with net negative
cash flows of $72.8 million for the same period in 1996.  Negative cash flows in
1997 are  primarily  the  result of an  increase  in  affiliate  receivable  and
insurance receivable balances.  VFL believes that future liquidity needs will be
met primarily by cash generated from operations.  Net cash flows from operations
are generally invested in marketable securities.

ACCOUNTING STANDARDS:

    In June  1996,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial  Accounting  Standards  (SFAS) No. 125,  "Accounting  for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This  Statement  provides  standards for  distinguishing  transfers of financial
assets that are sales from transfers that are secured borrowings. This Statement
has been amended and is now  effective  for transfers and servicing of financial
assets and  extinguishment  of liabilities  occurring after December 31, 1996 or
1997,  depending on the type of  transaction.  This Statement is not expected to
have a significant impact on VFL.

    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 require enhanced
descriptions in the footnotes to the financial statements of accounting policies
for derivative financial instruments and derivative commodity instruments.  They
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.
These  amendments are effective for year end 1997 financial  statements and will
not have a significant impact on VFL.

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

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


                                       14
<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY

                            PART II OTHER INFORMATION







ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS:

                  Description of Exhibit

                                           Exhibit                  Page
                                            Number                 Number
                                           -------                 ------
(27)  Financial Data Schedule                 27                     17




(b)  REPORTS ON FORM 8-K:

       There were no reports on Form 8-K for the three months ended
         September 30, 1997.



                                       15
<PAGE>



                       VALLEY FORGE LIFE INSURANCE COMPANY

                      PART II OTHER INFORMATION - CONCLUDED





SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           Valley Forge Life Insurance Company



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


Date:         November 14, 1997



                                       16