<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.

<TABLE>
<S>                                                         <C>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001           COMMISSION FILE NUMBER 333-1083
</TABLE>

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

                       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 5, 2001
      -----------------------                  -------------------------------
      Common Stock, Par value $50.00                     50,000



THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H (1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED
DISCLOSURE FORMAT.

--------------------------------------------------------------------------------
================================================================================

                                  Page 1 of 18


<PAGE>


PART I.   FINANCIAL INFORMATION  (UNAUDITED)                            PAGE NO.
------    ---------------------                                         -------

CONDENSED FINANCIAL STATEMENTS:

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

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

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

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

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

PART II.  OTHER INFORMATION.............................................. 18
--------  -----------------
SIGNATURES
 ......................................................................... 18





                                       2
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                       CONDENSED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                                                           THREE MONTHS                         NINE MONTHS
                                                                           ------------                         -----------
PERIOD ENDED SEPTEMBER 30                                            2001               2000              2001              2000
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>               <C>               <C>
(In thousands of dollars)
Revenues:
   Net earned premiums                                             $  12,886          $  67,535         $  35,241         $ 221,751
   Net investment income                                              12,275             11,309            36,860            33,443
   Realized investment gains (losses)                                  4,155                 87            11,855            (4,149)
   Other                                                                 678              1,512             6,489             5,914
                                                                   ---------          ---------         ---------         ---------
       Total revenues                                                 29,994             80,443            90,445           256,959
                                                                   ---------          ---------         ---------         ---------
Benefits and expenses:
   Insurance claims and policyholders' benefits                       21,500             61,939            53,140           205,446
   Other operating expenses                                            1,207              6,552             1,139            18,506
   Amortization of deferred acquisition costs                          1,087              3,563             6,540            10,675
                                                                   ---------          ---------         ---------         ---------
       Total benefits and expenses                                    23,794             72,054            60,819           234,627
                                                                   ---------          ---------         ---------         ---------
   Income before income tax expense                                    6,200              8,389            29,626            22,332
Income tax expense                                                     2,228              2,987            10,492             7,938
---------------------------------------------------------------    ----------------------------------------------------------------
     NET INCOME                                                    $   3,972          $   5,402         $  19,134         $  14,394
===============================================================    ================================================================
</TABLE>


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


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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                                          SEPTEMBER 30,       DECEMBER 31,
                                                                                             2001                 2000
                                                                                          (UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>                  <C>
(In thousands of dollars, except share data)
  ASSETS
     Investments:
       Fixed maturities securities available-for-sale (cost: $509,663 and                $   506,129          $   557,866
         $556,302)
       Equity securities available-for-sale (cost: $14,187 and $9,994 )                       14,871               10,215
       Policy loans                                                                           99,637               98,178
       Other invested assets                                                                      67                   87
       Short-term investments                                                                 39,806               62,429
                                                                                         ------------         ------------
            TOTAL INVESTMENTS                                                                660,510              728,775
     Cash                                                                                     26,551                9,319
     Receivables:
       Reinsurance ($2,150,750 and $2,128,409 from Assurance)                              3,008,063            2,770,755
       Premium and other insurance                                                            27,785               67,163
       Allowance for doubtful accounts                                                          (122)                 (28)
     Deferred acquisition costs                                                              124,870              126,352
     Accrued investment income                                                                12,758               12,551
     Receivable for securities sold                                                           14,976                    -
     Due from affiliates                                                                      19,330                    -
     Other assets                                                                              8,114                6,280
     Separate Account business                                                               552,841              532,017
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL ASSETS                                                                 $ 4,455,676          $ 4,253,184
  -------------------------------------------------------------------------------------------------------------------------
   LIABILITIES AND STOCKHOLDER'S EQUITY
   Liabilities:
     Insurance reserves:
       Future policy benefits                                                            $ 3,195,833          $ 3,038,477
       Claims and claim expense                                                              186,809              110,418
       Policyholders' funds                                                                   34,366               40,338
     Payable for securities purchased                                                         16,131                    -
     Federal income taxes payable (to Assurance)                                              21,728                9,536
     Deferred income taxes                                                                     5,102                9,040
     Due to affiliates                                                                             -               84,042
     Other liabilities                                                                       143,368              144,888
     Separate Account business                                                               552,841              532,017
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL LIABILITIES                                                              4,156,178            3,968,756
  -------------------------------------------------------------------------------------------------------------------------
  Commitments and contingent liabilities (Note 7)
  Stockholder's Equity:
     Common stock ($50 par value; authorized 200,000 shares;
         issued 50,000 shares)                                                                 2,500                2,500
     Additional paid-in capital                                                               69,150               69,150
     Retained earnings                                                                       230,521              211,388
     Accumulated other comprehensive (loss) income                                            (2,673)               1,390
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL STOCKHOLDER'S EQUITY                                                       299,498              284,428
  -------------------------------------------------------------------------------------------------------------------------
            TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                                   $ 4,455,676          $ 4,253,184
  -------------------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       4
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                       CONDENSED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,                                                       2001           2000
-------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>            <C>
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                                                       $  19,134      $  14,394
   Adjustments to reconcile net income to net cash
   provided by operating activities:
    Net realized investment losses, pre-tax                                           (11,855)         4,149
    Amortization of bond discount                                                      (1,894)        (2,650)
    Changes in:
       Receivables, net                                                              (197,836)      (208,034)
       Deferred acquisition costs                                                        (214)       (12,389)
       Accrued investment income                                                         (207)         1,095
       Federal income taxes payable                                                    12,192          5,409
       Insurance reserves                                                             244,813        220,240
       Deferred income tax provision                                                   (3,938)         3,998
       Due (to) from affiliates                                                      (103,372)        43,033
       Other liabilities and other                                                     (1,072)        31,586
                                                                                    ---------      ---------
          Total adjustments                                                           (63,383)        86,437
                                                                                    ---------      ---------
          NET CASH FLOWS FROM OPERATING ACTIVITIES                                    (44,249)       100,831
                                                                                    ---------      ---------
CASH FLOWS USED BY INVESTING ACTIVITIES:
    Purchase of fixed maturity securities                                            (770,071)      (479,527)
    Proceeds from fixed maturity securities
        Sales                                                                         542,539        474,167
        Maturities, calls and redemptions                                             287,729         52,524
    Purchase of equity securities                                                      (4,194)        (9,994)
    Change in policy loans                                                             (1,459)        (4,506)
    Change in short-term investments                                                   23,955        (95,548)
    Change in other invested assets                                                        20           (107)
                                                                                    ---------      ---------
          NET CASH FLOWS FROM INVESTING ACTIVITIES                                     78,519        (62,991)
                                                                                    ---------      ---------
CASH FLOWS USED BY FINANCING ACTIVITIES:
    Receipts for investment contracts credited to policyholder account balances         6,627          7,569
    Return of policyholder account balances on investment contracts                   (23,665)       (36,096)
                                                                                    ---------      ---------
          NET CASH FLOWS USED IN FINANCING ACTIVITIES                                 (17,038)       (28,527)
                                                                                    ---------      ---------
          NET CASH FLOWS                                                               17,232          9,313
Cash at beginning of period                                                             9,319          3,529
-------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                               $  26,551      $  12,842
=============================================================================================================
Supplemental disclosures of cash flow information:
   Federal income tax refunds received                                              $       -      $  (1,924)
   Interest paid                                                                    $       -      $       -
=============================================================================================================
</Table>

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



                                       5
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                         SEPTEMBER 30, 2001 (UNAUDITED)



NOTE 1.  BASIS OF PRESENTATION

     Valley Forge Life Insurance Company (VFL) is a wholly owned subsidiary of
Continental Assurance Company (Assurance). Assurance is a wholly owned
subsidiary of Continental Casualty Company (Casualty) which is wholly owned by
CNA Financial Corporation (CNAF). As of September 30, 2001, Loews Corporation
owned approximately 89% of the outstanding common stock of CNAF.

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

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

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

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

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


                                       6
<PAGE>

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

NOTE 1. - (CONTINUED)

     On January 1, 2001, VFL adopted the Codification of Statutory Accounting
Principles (Codification) for preparing its statutory-basis financial
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which VFL's
insurance subsidiaries conduct business required adoption of Codification (with
certain modifications) for the preparation of statutory-basis financial
statements effective January 1, 2001. VFL's adoption of Codification, as
modified, resulted in a increase in statutory capital and surplus as of January
1, 2001 of approximately $2.8 million, which primarily related to deferred tax
assets, partially offset by insurance-related assessments and pension-related
liabilities.

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

     In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes FASB
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
provisions of this statement are effective for VFL beginning January 1, 2002.
VFL is in the process of quantifying the impact this new standard will have on
its operations and financial position.

NOTE 2.  REINSURANCE

     The ceding of insurance does not discharge VFL of its primary liability to
its policyholders. Therefore, a credit exposure exists with respect to
reinsurance ceded to the extent that any reinsurer is unable to meet the
obligations assumed under reinsurance agreements. VFL places reinsurance with
other carriers only after careful review of the nature of the contract and a
thorough assessment of the reinsurers' credit quality and claim settlement
performance. For carriers that are not authorized reinsurers in VFL's state of
domicile, VFL receives collateral, primarily in the form of bank letters of
credit.



                                       7
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                    SEPTEMBER 30, 2001 (UNAUDITED)-CONTINUED

NOTE 2. - (CONTINUED)

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

<TABLE>
<CAPTION>
    --------------------------------------------------------------------------------------------------------------------
                                                                         PREMIUMS
                                                  --------------------------------------------------------  ASSUMED/
    NINE MONTHS ENDED SEPTEMBER 30,                   DIRECT         ASSUMED         CEDED          NET       NET %
    --------------------------------------------------------------------------------------------------------------------
    (In thousands of dollars)
    <S>                                              <C>            <C>            <C>           <C>           <C>
       2001
               LIFE                                  $ 507,708      $  70,385      $ 544,550     $  33,543     210%
               ACCIDENT AND HEALTH                       9,341          1,698          9,341         1,698     100%
    --------------------------------------------------------------------------------------------------------------------
                    TOTAL PREMIUMS                   $ 517,049      $  72,083      $ 553,891     $  35,241     204%
    --------------------------------------------------------------------------------------------------------------------
       2000
               Life                                  $ 546,498      $  88,848      $ 575,053     $  60,293     147%
               Accident and Health                       6,862        161,458          6,862       161,458     100%
    --------------------------------------------------------------------------------------------------------------------
                    Total Premiums                   $ 553,360      $ 250,306      $ 581,915     $ 221,751     113%
    --------------------------------------------------------------------------------------------------------------------
</TABLE>


     Transactions with Assurance, as part of the Reinsurance Pooling Agreement
described in Note 1, are reflected in the above table. Premium revenues ceded to
non-affiliated companies were $367.7 million for the nine months ended September
30, 2001, and $344.5 million for the same period in 2000. Additionally, benefits
and expenses for insurance claims and policyholder benefits are net of
reinsurance recoveries of $548.6 million and $485.0 million for the nine months
ended September 30, 2001 and 2000, of which $278.2 million and $242.1 million
where from non-affiliated companies.

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

NOTE 3. DERIVATIVES

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

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



                                       8
<PAGE>


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

NOTE 3. (CONTINUED)

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

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

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

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

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

USE OF DERIVATIVES

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

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

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

Risk Management Strategies Regarding Market Risk

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


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

NOTE 3. - (CONTINUED)

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

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

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

     VFL's derivative holdings of approximately $67,444 consist of interest rate
caps as of September 30, 2001.

NOTE 4. COMPREHENSIVE INCOME

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                  THREE MONTHS              NINE MONTHS
                                                                              ---------------------     --------------------
PERIOD ENDED SEPTEMBER 30,                                                     2001         2000         2001        2000
----------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                                           <C>          <C>          <C>         <C>
Net income                                                                    $ 3,972      $ 5,402      $19,134     $14,394
Other comprehensive income:
   Change in unrealized gains (losses) on general account investments:
      Holding (losses) gains arising during the period                         (4,516)       4,278       (3,239)      2,915
      Less: Unrealized gains (losses)  at beginning of period
                included in realized gains (losses) during the period             738       (2,156)       1,398      (9,085)
                                                                              --------     --------     --------    --------
   Net change in unrealized (losses) gains on general account
      investments                                                              (5,254)       6,434       (4,637)     12,000
   Net change in unrealized (losses) gains on separate accounts and
      other                                                                      (974)       1,276       (1,615)     (1,027)
                                                                              --------     --------     --------    --------
   Other comprehensive (loss) income before income tax                         (6,228)       7,710       (6,252)     10,973
Deferred income tax expense (benefit) related to other comprehensive
      income                                                                    2,180       (2,747)       2,189      (3,841)
                                                                              --------     --------     --------    --------
   Other comprehensive (loss) income, net of tax                               (4,048)       4,963       (4,063)      7,132
----------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME                                                    $  (76)      $10,365      $15,071     $21,526
============================================================================================================================
</TABLE>


NOTE 5.  BUSINESS SEGMENTS

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


                                       10
<PAGE>

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

NOTE 5. -  (CONTINUED)

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

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


<TABLE>
<CAPTION>
       -------------------------------------------------------------------------------------------------------------
                                                           THREE MONTHS                        NINE MONTHS
                                                           ------------                        -----------
     SEPTEMBER 30,                                     2001            2000                2001             2000
     --------------------------------------------------------------------------------------------------------------
     (In thousands of dollars)
     <S>                                             <C>             <C>                 <C>              <C>
     Life                                            $ 11,852        $ 21,571            $ 33,543         $ 60,293
     Accident and Health                                1,034          45,964               1,698          161,458
     --------------------------------------------------------------------------------------------------------------
               TOTAL                                 $ 12,886        $ 67,535            $ 35,241         $221,751
     ==============================================================================================================
</TABLE>


     Through August 31, 2000, Assurance provided health insurance benefits to
postal and other federal employees under the Federal Employees Health Benefit
Plan (FEHBP). Premiums under this contract between Assurance and FEHBP totaled
$1.5 billion for the nine month period ended September 30, 2000, and the portion
of these premiums assumed by VFL under the Reinsurance Pooling Agreement totaled
$153.9 million for the nine month period ended September 30, 2000. Effective
September 1, 2000, the FEHBP business was transferred to another insurance
entity owned by CNA. All the assets and liabilities of this business were
transferred through a novation agreement and VFL was relieved of any ongoing
direct or contingent liability with respect to this business. See Note 6 to the
Condensed Financial Statements, included herein.

NOTE 6. OTHER EVENTS

INDIVIDUAL LIFE REINSURANCE TRANSACTION

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

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

FEDERAL EMPLOYEE HEALTH BENEFIT PLAN (FEHBP)

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




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

NOTE 6.  (CONTINUED)

GROUP ACCIDENT & HEALTH TRANSACTION

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

     The following table summarizes VFL's earned premiums, income (loss) before
income tax and total assets for FEHBP, Life Re and the Group Accident & Health
business.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30, 2000                   THREE MONTHS            NINE MONTHS
----------------------------------------------------------------------------------------------
<S>                                                 <C>                   <C>
(In thousands of dollars)
FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:
   Earned premiums                                  $ 37,605              $137,683
   Income (loss) before income tax                       437                 1,364

LIFE RE:
   Earned premiums                                  $  6,662              $ 17,234
   Income before income tax                              667                 2,266

GROUP ACCIDENT AND HEALTH:
   Earned premiums                                  $ 12,716              $ 37,025
   Income before income tax                              477                 1,761
-------------------------------------------------------------------------------------------
                                                                            DECEMBER 31,
AS OF:                                                                         2000
-----------------------------------------------------------------------------------------

(In thousands of dollars)
TOTAL ASSETS:
Federal Employee Health Benefit Plan (FEHBP)*                                 $   --
Life Re                                                                       33,641
Group Accident and Health                                                     56,851
=====================================================================================
</TABLE>

    * FEHBP business transferred September 1, 2000.

                                       12
<PAGE>





                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                             (UNAUDITED) -CONTINUED

                               SEPTEMBER 30, 2001


NOTE 6. (CONTINUED)


RESULTS OF OPERATIONS FOR THE REMAINING BUSINESS (ON A PRO FORMA BASIS)

         The transfer or sale of the three business lines to other entities had
a significant impact on the results of operations of VFL. The following schedule
highlights the results of operations for VFL on a pro forma basis for three and
nine months ended September 30, 2001 and 2000.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS                  NINE MONTHS
PRO FORMA FOR PERIOD ENDED SEPTEMBER 30,                               2001           2000           2001          2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>            <C>         <C>

(In thousands of dollars)
Operating revenues (excluding realized investment gains (losses))
     Net earned premiums                                               $ 12,850      $ 10,552       $ 35,137     $ 29,809
     Net investment income                                               12,484         9,803         36,775       29,513
     Other                                                                  780         1,517          6,480        5,843
                                                                    ------------------------------------------------------
        Total operating revenues                                         26,114        21,872         78,392       65,165
Benefits and expenses                                                    23,657        15,152         60,371       44,076
                                                                    ------------------------------------------------------
    Operating income before income tax expense                            2,457         6,720         18,021       21,089
Income tax expense                                                        (919)       (2,738)        (6,409)      (7,719)
                                                                    ------------------------------------------------------
    Net operating income before realized investment gains (losses)        1,538         3,982         11,612       13,370
Realized investment gains (losses), net of tax                            2,970         (424)          7,614      (2,878)
--------------------------------------------------------------------------------------------------------------------------
        PRO FORMA NET INCOME - REMAINING BUSINESS UNITS                 $ 4,508       $ 3,558       $ 19,226      $10,492
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

World Trade Center (WTC) Catastrophe

         The WTC impact on the third quarter was estimated, for pre-tax, at $7.5
million, gross of reinsurance and $2.2 million net of reinsurance. The after tax
estimated impact is $4.9 million, gross of reinsurance and $1.4 million net of
reinsurance. These estimates are subject to considerable uncertainty. Subsequent
developments on claims arising out of the WTC catastrophe could result in an
increase in the total estimated claims, which could be material to the results
of operations.

NOTE 7.  LEGAL PROCEEDINGS

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

                                       13
<PAGE>


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

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

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


RESULTS OF OPERATIONS

         The following table summarizes key components of VFL's operating
results for the three and nine months ended September 30, 2001 and 2000.
<TABLE>
<CAPTION>

   ----------------------------------------------------------------------------------------------------------------------------
                                                                               THREE MONTHS                NINE MONTHS
   PERIOD ENDED SEPTEMBER 30,                                                  2001          2000         2001          2000
   ----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>           <C>       <C>            <C>

   (In thousands of dollars)
      Revenues
      Net earned premiums                                                     $12,886       $67,535    $ 35,241       $221,751
      Net investment income                                                    12,275        11,309      36,860         33,443
      Other                                                                       678         1,512       6,489          5,914
                                                                       --------------------------------------------------------
           Total operating revenues                                            25,839        80,356      78,590        261,108
   Benefits and expenses                                                       23,794        72,054      60,819        234,627
                                                                       --------------------------------------------------------
     Operating income before income tax expense                                 2,045         8,302      17,771         26,481
   Income tax expense                                                           (774)       (2,956)     (6,343)        (9,390)
                                                                       --------------------------------------------------------
        Net operating income before realized investment gains (losses)          1,271         5,346      11,428         17,091
        Net realized investment gains (losses), net of tax                      2,701            56       7,706        (2,697)
   ----------------------------------------------------------------------------------------------------------------------------
        NET INCOME                                                            $ 3,972       $ 5,402    $ 19,134        $14,394
   ============================================================================================================================
</TABLE>

         Operating income before income tax expense for the three and nine
  months ended September 30, 2001 decreased by $6.3 million and $8.7 million,
  respectively. These decreases were primarily the result of decreases in
  operating revenues of $54.5 million and $182.5 million for the three and nine
  months ended September 30, 2001, respectively, which were only partially
  offset by decreases in benefits and expenses of $48.3 million and $173.8
  million for each of the corresponding periods. The changes in revenues and
  expenses were due to the impact of the business transferred, as discussed
  below, as well as the results of the remaining businesses which are further
  discussed in the sections that follow.

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

                                       14
<PAGE>


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

RESULTS OF OPERATIONS - (CONTINUED)

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

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

         The following table summarizes VFL's earned premiums and income (loss)
  before income tax for FEHBP, Life Re and the Group Accident and Health
  business.
<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------------------------------
                                                           THREE MONTHS                          NINE MONTHS
     PERIOD ENDED SEPTEMBER 30, 2000
     ---------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                                 <C>
        (In thousands of dollars)
        FEDERAL EMPLOYEE HEALTH BENEFIT PLAN:
           Earned premiums                                    $ 37,605                             $ 137,683
           Income (loss) before income tax                         437                                 1,364

        LIFE RE:
           Earned premiums                                      $6,662                              $ 17,234
           Income before income tax                                668                                 2,267

        GROUP ACCIDENT AND HEALTH:
           Earned premiums                                    $ 12,716                              $ 37,025
           Income before income tax                                477                                 1,761
---------------------------------------------------------------------------------------------------------------------
</TABLE>

         As a result of the impact that the foregoing transactions had on the
results of operations of VFL, the following analyzes the results of operations
of the remaining businesses. The following schedule highlights the results of
operations for VFL on a pro forma basis for three and six months ended September
30, 2001 and 2000 and the following discussions and analysis are based on the
pro forma results of operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS                  NINE MONTHS
PRO FORMA FOR PERIOD ENDED SEPTEMBER 30,                               2001           2000            2001         2000
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>            <C>             <C>         <C>
(In thousands of dollars)
Operating Revenues (excluding realized investment gains (losses))
     Net earned premiums                                               $ 12,850      $ 10,552       $ 35,137     $ 29,809
     Net investment income                                               12,484         9,803         36,775       29,513
     Other                                                                  780         1,517          6,480        5,843
                                                                    ------------------------------------------------------
        Total operating revenues                                         26,114        21,872         78,392       65,165
Benefits and expenses                                                    23,657        15,152         60,371       44,076
                                                                    ------------------------------------------------------
    Operating income (loss) before income tax expense                     2,457         6,720         18,021       21,089
Income tax expense                                                        (919)       (2,738)        (6,409)      (7,719)
                                                                    ------------------------------------------------------
    Net operating income before realized investment gains (losses)        1,538         3,982         11,612       13,370
     Realized investment gains (losses), net of tax                       2,970         (424)          7,614      (2,878)
--------------------------------------------------------------------------------------------------------------------------
        PRO FORMA NET INCOME - REMAINING BUSINESS UNITS                 $ 4,508       $ 3,558       $ 19,226      $10,492
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

RESULTS OF OPERATIONS - (CONTINUED)

         For the third quarter of 2001, operating income, before income tax
expense and realized investment results, decreased 75% or $6.3 million from the
same quarter in 2000. The transfer of three businesses accounts for
approximately $2.0 million of this decrease for the third quarter of 2001. The
remaining change, which is in the core business, was principally the result of
an increase in net earned premiums of approximately $2.3 million or 22% and an
increase in net investment income of $2.7 million or 27%, which was more than
offset by increased benefits and expenses of $8.5 million, or approximately 56%,
and a decrease in other revenues of $0.7 million or 49%.

         The increase in net earned premiums was primarily attributable to the
increase in renewal premium revenue from growing in-force term business.
VFL's increase in net investment income for the three months ended September 30,
2001 as compared to the comparable period in 2000 was due to a higher average
yield rate, primarily in fixed maturity securities and short-term investments.
The increase in the yield was due primarily to the change in the composition of
invested securities to relatively higher yield investment categories. The
increase in benefits and expenses was mainly due to the impact of the WTC
catastrophe and higher mortality experience in the term and Universal Life
business. The WTC impact on the third quarter insurance claims expense was
estimated at $7.5 million, gross of reinsurance and $2.2 million net of
reinsurance. These expense increases were only partially offset by ceding
commissions received on the transfer of the various businesses described in Note
6 to the Condensed Financial Statements. The decrease in other revenues was due
primarily to a decrease in income from the Separate Accounts.

         For the nine months ended September 30, 2001, operating income, before
income tax expense and realized investment results, decreased $8.7 million or
33% from the comparable period in 2000. The transfer of three businesses
accounts for $5.6 million of the decrease. The remaining decrease, which is the
core business, was the result of an increase in net earned premiums of
approximately $5.3 million or 18%, increased net investment income of $7.3
million or 25%, and an increase in other revenues of $0.6 million or 11%, which
were more than offset by increased benefits and expenses of $16.3 million or
37%.

         The increase in net earned premiums was primarily attributable to the
increase in renewal premium revenue from growing in-force term business. VFL's
increase in net investment income for the nine months ended September 30, 2001
as compared to the comparable period in 2000 was due to a higher average yield
rate, primarily in fixed maturity securities and short-term investments. The
increase in the yield was due primarily to the change in the composition of
invested securities to relatively higher yield investment categories. The
average yield for the nine months ended September 30, 2001 was approximately
7.4% as compared to 7.1% for the comparable period in 2000. The increase in
benefits and expenses was mainly due to the combination of factors. The impact
of the WTC catastrophe, and higher mortality experience in the term and
Universal Life business. These expense increases were only partially offset by
ceding commissions received on the transfer of the various businesses described
in Note 6 to the Condensed Financial Statements. The increase in other revenues
for the nine months ended September 30, 2001 as compared to the comparable
period in 2000 was due primarily to an increase in income from separate accounts
as the result of increased service charges earned on policyholder accounts and
increased surrender charges for interest sensitive products in the first quarter
of 2001.

         Realized investment gains, net of taxes, increased $2.6 million for the
core business for the third quarter and $10.4 million for the nine months ended
September 30, 2001 from the same period of 2000.

                                       16
<PAGE>


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

ACCOUNTING PRONOUNCEMENTS

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


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


      In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). SFAS 144 addresses accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes FASB
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
provisions of this statement are effective for VFL beginning January 1, 2002.
VFL is in the process of quantifying the impact this new standard will have on
its operations and financial position.

CODIFICATION

      On January 1, 2001, the Company adopted the Codification of Statutory
Accounting Principles (Codification) for preparing its statutory-basis financial
statements. Codification, which is intended to standardize regulatory accounting
and reporting to state insurance departments, was effective January 1, 2001.
However, statutory accounting principles will continue to be established by
individual state laws and permitted practices. The states in which VFL conducts
business required adoption of Codification for the preparation of
statutory-basis financial statements effective January 1, 2001. The Company's
adoption of Codification resulted in an increase in statutory capital and
surplus upon adoption of approximately $2.8 million as of January 1, 2001, which
primarily relates to deferred tax assets, partially offset by insurance-related
assessments and pension-related liabilities.


FORWARD LOOKING STATEMENTS

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

                                       17
<PAGE>


                       VALLEY FORGE LIFE INSURANCE COMPANY
                               SEPTEMBER 30, 2001
                            PART II OTHER INFORMATION



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

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

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

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

ITEM 5. OTHER INFORMATION
         None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a) EXHIBITS:      None.


         (b) REPORTS ON FORM 8-K:
         There were no reports on Form 8-K for the nine months ended September
         30, 2001.



SIGNATURES

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

Valley Forge Life Insurance Company






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

Date: November 14, 2001



                                       18