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

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


                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                           --------------------------

                                   FORM 10-Q

                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998    COMMISSION FILE NUMBER 333-1087

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

                       VALLEY FORGE LIFE INSURANCE COMPANY

             (Exact name of registrant as specified in its charter)


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

        CNA PLAZA
    CHICAGO, ILLINOIS                                      60685
  (Address of principal executive offices)               (Zip Code)

                                 (312) 822-5000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)



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

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

           CLASS                                 OUTSTANDING AT AUGUST 1, 1998
 ------------------------------                  -----------------------------
 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 20
<PAGE>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                                      INDEX



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


CONDENSED FINANCIAL STATEMENTS:

         BALANCE SHEET
            JUNE 30, 1998 (Unaudited) AND DECEMBER 31, 1997................    3

         STATEMENT OF OPERATIONS (Unaudited)
            FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997......    4

         STATEMENT OF STOCKHOLDER'S EQUITY (Unaudited)
            FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997................    5

         STATEMENT OF CASH FLOWS (Unaudited)
            FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997................    6

         NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
            JUNE 30,1998...................................................    7

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


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

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K..............................    18

SIGNATURES................................................................    19

EXHIBIT 27  FINANCIAL DATA SCHEDULE.......................................    20


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

                                  BALANCE SHEET

---------------------------------------------------------------------------------------------------------
                                                                              JUNE 30       DECEMBER 31
                                                                                1998           1997
                                                                            (Unaudited)
---------------------------------------------------------------------------------------------------------
(In thousands of dollars)
ASSETS:
<S>                                                                         <C>            <C>   
   Investments:
     Fixed maturities available-for-sale (cost: $456,676 and $466,267)        $  465,068    $  471,707
     Equity securities available-for-sale (cost: $981 and $981)                    2,508         2,260
     Policy loans                                                                 70,300        66,971
     Other invested assets                                                            89           433
     Short-term investments                                                       35,477         4,597
                                                                              ----------    ----------
          TOTAL INVESTMENTS                                                      573,442       545,968
   Cash                                                                            1,435        24,565
   Receivables:
     Reinsurance                                                               2,079,060     1,586,471
     Premium and other insurance                                                  63,949        65,196
     Less allowance for doubtful accounts                                            (34)         (285)
   Deferred acquisition costs                                                    102,326        95,354
   Accrued investment income                                                       5,759         5,245
   Receivables for securities sold                                                24,664           744
   Due from affiliates                                                             6,433        35,999
   Other                                                                           3,295           228
   Separate Account business                                                      42,724         8,941
---------------------------------------------------------------------------------------------------------
          TOTAL ASSETS                                                        $2,903,053    $2,368,426
=========================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Liabilities:
   Insurance reserves:
     Future policy benefits                                                   $2,383,397    $1,906,899
     Claims                                                                      105,447        81,242
     Policyholders' funds                                                         41,631        39,928
   Payables for securities purchased                                              21,168           497
   Federal income taxes payable                                                    6,077         5,975
   Deferred income taxes                                                           8,815         4,098
   Commissions and other payables                                                 47,828        19,787
   Other                                                                          20,719        84,799
   Separate Account business                                                      42,724         8,941
                                                                              ----------    ----------
          TOTAL LIABILITIES                                                    2,677,806     2,152,166
                                                                              ----------    ----------
Stockholder's Equity
   Common stock ($50 par value; Authorized-200,000 shares;
       Issued-50,000 shares)                                                       2,500         2,500
   Additional paid-in capital                                                     39,150        39,150
   Retained earnings                                                             178,429       170,230
   Accumulated other comprehensive income                                          5,168         4,380
                                                                              ----------    ----------
          TOTAL STOCKHOLDER'S EQUITY                                             225,247       216,260
---------------------------------------------------------------------------------------------------------
          TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY                          $2,903,053    $2,368,426
=========================================================================================================
<FN>
                   See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                      (3)

<PAGE>

<TABLE>
<CAPTION>

                       VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF OPERATIONS
                                   (Unaudited)

----------------------------------------------------------------------------------------------------
                                                       THREE MONTHS              SIX MONTHS
PERIOD ENDED JUNE 30                                 1998       1997           1998      1997
----------------------------------------------------------------------------------------------------
(In thousands of dollars) 
Revenues:
<S>                                               <C>        <C>           <C>         <C>     
   Premiums                                        $73,025    $78,692       $154,580    $164,775
   Net investment income                             9,032      7,956         17,623      15,261
   Realized investment gains (losses)                1,520       (162)         3,513        (133)
   Other                                             2,595      1,476          4,156       2,751
                                                   -------    -------       --------    --------
                                                    86,172     87,962        179,872     182,654
                                                   -------    -------       --------    --------
Benefits and expenses:
   Insurance claims and policyholders' benefits     70,228     73,080        145,381     154,836
   Amortization of deferred acquisition costs        2,615      1,289          5,167       2,820
   Other operating expenses                          6,713     10,335         16,571      17,614
                                                   -------    -------       --------    --------
                                                    79,556     84,704        167,119     175,270
                                                   -------    -------       --------    --------
     Income before income tax                        6,616      3,258         12,753       7,384
Income tax expense                                   2,336      1,184          4,554       2,648
----------------------------------------------------------------------------------------------------
     NET INCOME                                    $ 4,280    $ 2,074       $  8,199    $  4,736
====================================================================================================
<FN>

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

                                      (4)
<PAGE>
<TABLE>
<CAPTION>
             
                       VALLEY FORGE LIFE INSURANCE COMPANY

                        STATEMENT OF STOCKHOLDER'S EQUITY
                                   (Unaudited)

-----------------------------------------------------------------------------------------------------------------------
                                                                                           Accumulated
                                                       Additional Comprehensive               Other        Total
                                              Common    Paid-in       Income     Retained Comprehensive Stockholder's
                                               Stock    Capital       (Loss)     Earnings Income (Loss)   Equity
-----------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>              <C>                          <C>      <C>                      <C>           <C>        <C>     
Balance, January 1, 1997                       $2,500   $39,150                  $156,900      $990       $199,540
Comprehensive income:
   Net income                                     -         -        $4,736         4,736        -           4,736
Other comprehensive income (loss):
   Unrealized investment losses net of
      reclassification adjustment and taxes       -         -          (230)          -        (230)          (230)
                                                                     ------
   Total comprehensive income                                        $4,506
                                                                     ======

----------------------------------------------------------------                 --------------------------------------
BALANCE, JUNE 30, 1997                        $2,500   $39,150                   $161,636      $760       $204,046
================================================================                 ======================================

Balance, January 1, 1998                      $2,500   $39,150                   $170,230    $4,380       $216,260
Comprehensive income:
   Net income                                    -         -        $8,199          8,199       -            8,199
Other comprehensive income (loss):
   Unrealized investment gains net of
      reclassification adjustment and taxes      -         -           788            -         788            788
                                                                    ------
   Total comprehensive income                                       $8,987
                                                                    ======

-----------------------------------------------------------------                ---------------------------------------
BALANCE, JUNE 30, 1998                       $2,500    $39,150                   $178,429    $5,168        $225,247
=================================================================                =======================================
<FN>

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



                                      (5)
<PAGE>
<TABLE>
<CAPTION>
                      VALLEY FORGE LIFE INSURANCE COMPANY

                             STATEMENT OF CASH FLOWS
                                   (Unaudited)

---------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30                                                               1998               1997
---------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>                <C>     
   Net income                                                                        $  8,199           $  4,736
                                                                                     --------           --------
   Adjustments  to  reconcile  net  income  to net  cash  flows  from  operating
          activities:
     Net realized investment (gains) losses, pre-tax                                   (3,513)               133
     Amortization of bond discount                                                     (1,955)            (3,073)
     Changes in:
        Insurance receivables, net                                                   (491,676)          (107,856)
        Deferred acquisition costs                                                     (8,873)           (12,526)
        Accrued investment income                                                        (514)               483
        Due from affiliates                                                            29,566             46,867
        Federal income taxes                                                              102                923
        Deferred income taxes                                                           4,292              1,631
        Insurance reserves                                                            495,132             91,292
        Commissions and other payables                                                 28,041              3,774
        Other, net                                                                    (67,150)            (1,416)
                                                                                    ---------          ---------
            Total adjustments                                                         (16,548)            20,232
                                                                                    ---------          ---------
            NET CASH FLOWS FROM OPERATING ACTIVITIES                                   (8,349)            24,968
                                                                                    ---------          ---------

CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of fixed maturities                                                     (190,742)          (142,791)
   Proceeds from fixed maturities:
     Sales                                                                            173,683            135,382
     Maturities, calls and redemptions                                                 28,186             12,735
   Change in short-term investments                                                   (29,854)           (98,725)
   Change in policy loans                                                              (3,329)            (4,902)
                                                                                    ---------          ---------
           NET CASH FLOWS FROM INVESTING ACTIVITIES                                   (22,056)           (98,301)
                                                                                    ---------          ---------

CASH FLOWS FROM FINANCING ACTIVITIES
   Receipts from investment contracts credited to policyholder account balances        27,111             59,158
   Return of policyholder account balances on investment contracts                    (19,836)            (5,462)
                                                                                    ---------          ---------
           NET CASH FLOWS FROM FINANCING ACTIVITIES                                     7,275             53,696
                                                                                    ---------          ---------
           NET CASH FLOWS                                                             (23,130)           (19,637)
Cash at beginning of period                                                            24,565             24,759
---------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD                                                                $  1,435           $  5,122
=====================================================================================================================
Supplemental disclosures of cash flow information:
        Federal income taxes received                                                $    -             $    506
=====================================================================================================================
<FN>
                              See accompanying Notes to Condensed Financial Statements (Unaudited).
</FN>
</TABLE>
                                      (6)
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

                                  JUNE 30, 1998
                                   (Unaudited)
                                                      
NOTE 1. BASIS OF PRESENTATION:

    Valley Forge Life Insurance  Company (VFL) is a  wholly-owned  subsidiary of
Continental   Assurance  Company   (Assurance).   Assurance  is  a  wholly-owned
subsidiary of Continental  Casualty Company  (Casualty) which is wholly-owned by
CNA Financial  Corporation  (CNAF).  Loews Corporation owns approximately 84% of
the outstanding common stock of CNAF.

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

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

    The operating results for the interim periods are not necessarily indicative
of the results to be expected for the full year. These statements should be read
in conjunction with the financial statements and notes thereto included in VFL's
Form 10-K for the year ended  December 31, 1997,  filed with the  Securities and
Exchange Commission on March 31, 1998.

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

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting  period.  Actual  results  could differ from those  estimates.  In the
opinion  of  VFL's  management,   these  statements   include  all  adjustments,
consisting  of  normal  recurring  accruals,  which are  necessary  for the fair
presentation of the financial position,  results of operations and cash flows in
the accompanying condensed financial statements.

                                      (7)

<PAGE>

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

NOTE 2. REINSURANCE:

    VFL assumes and cedes  insurance  with other  insurers  and  reinsurers  and
members of various reinsurance pools and associations.  VFL utilizes reinsurance
arrangements  to limit its maximum loss, to provide greater  diversification  of
risk and to minimize  exposures on larger risks.  The reinsurance  coverages are
tailored to the specific  risk  characteristics  of each product line with VFL's
retained amount varying by type of coverage.  VFL's  reinsurance  includes quota
share, yearly renewable term and facultative programs.  Amounts recoverable from
reinsurers are estimated in a manner  consistent with the future policy benefits
reserves.

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

    In the table  below,  the  majority  of life  premium  revenue  is from long
duration  type  contracts,  while the  majority  of accident  and health  earned
premiums is from short duration contracts. The effects of reinsurance on premium
revenues are shown in the following schedule:
<TABLE>
-----------------------------------------------------------------------------------------------
                                                   PREMIUMS                        ASSUMED/NET
                             ---------------------------------------------------
SIX MONTHS ENDED JUNE 30        DIRECT       ASSUMED       CEDED        NET             %
-----------------------------------------------------------------------------------------------
(In thousands of dollars)
1998
<S>                           <C>          <C>          <C>          <C>              <C>  
   Life                        $319,982     $ 41,293     $322,973     $ 38,302         108%
   Accident and Health            1,827      116,278        1,827      116,278         100
---------------------------------------------------------------------------------------------
     TOTAL PREMIUMS            $321,809     $157,571     $324,800     $154,580         102%
=============================================================================================
1997
   Life                        $267,120     $ 40,342     $268,265     $ 39,197         103%
   Accident and Health            1,271      125,578        1,271      125,578         100
---------------------------------------------------------------------------------------------
     TOTAL PREMIUMS            $268,391     $165,920     $269,536     $164,775         101%
=============================================================================================
</TABLE>
    Transactions with Assurance,  as part of the pooling agreement  described in
Note  1,  are  reflected  in  the  above  table.   Premium   revenues  ceded  to
non-affiliated companies were $111.0 million for the six month period ended June
30,  1998  and  $47.8  million  for  the  same  period  in  1997,  respectively.
Additionally,   insurance  claims  and   policyholders'   benefits  are  net  of
reinsurance  recoveries from  non-affiliated  companies of $77.5 million for the
period ended June 30, 1998, and $1.5 million for the same period in 1997.

    Reinsurance  receivables  reflected on the balance sheet are from reinsurers
related to insurance  reserves.  These balances,  which were  approximately $2.1
billion  and  $1.4  billion  at  June  30,  1998  and  1997,  respectively,  are
principally due from Assurance pursuant the Reinsurance Pooling Agreement.

NOTE 3. LEGAL PROCEEDINGS:

   VFL is party to litigation in the ordinary course of business. The outcome of
this  litigation will not, in the opinion of management,  materially  affect the
results of operations or equity of VFL.
                                      (8)
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
               NOTES TO CONDENSED FINANCIAL STATEMENTS - CONCLUDED

NOTE 4. ACCUMULATED OTHER COMPREHENSIVE INCOME:

   Comprehensive  income is  comprised of all changes to  stockholder's  equity,
including net income,  except those changes resulting from investments by owners
and  distributions to owners.  The change in the components of accumulated other
comprehensive income (loss) are reported net of income tax as shown below:
<TABLE>
-----------------------------------------------------------------------------------------------------------------
                                                                          PRE-TAX     TAX (EXPENSE)       NET
THREE MONTHS ENDED JUNE 30                                                 AMOUNT        BENEFIT        AMOUNT
-----------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
1998
Net unrealized gains (losses) on investment securities:
<S>                                                                     <C>            <C>            <C>     
   Net unrealized holding gains (losses) arising during the period       $(3,606)       $1,263         $(2,343)
   Reclassification adjustment for (gains) losses
      included in net income                                               5,428        (1,900)          3,528
=================================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                          $1,822        $ (637)         $1,185
=================================================================================================================
1997
Net unrealized gains (losses) on investment securities:
   Net unrealized holding gains (losses) arising during the period        $5,158       $(1,805)         $3,353
   Reclassification adjustment for (gains) losses
      included in net income                                               2,071          (725)          1,346
=================================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                          $7,229       $(2,530)         $4,699
=================================================================================================================

------------------------------------------------------------------------------------------------------------------
                                                                          PRE-TAX     TAX (EXPENSE)        NET
SIX MONTHS ENDED JUNE 30                                                   AMOUNT        BENEFIT         AMOUNT
------------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
1998
Net unrealized gains (losses) on investment securities:
   Net unrealized holding gains (losses) arising during the period       $(1,750)       $  613         $(1,137)
   Reclassification adjustment for (gains) losses 
      included in net income                                               2,962        (1,037)          1,925
==================================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                          $1,212        $ (424)        $   788
==================================================================================================================
1997
Net unrealized gains (losses) on investment securities:
   Net unrealized holding gains (losses) arising during the period       $(1,476)       $  517         $  (959)
   Reclassification adjustment for (gains) losses
      included in net income                                               1,122          (393)            729
==================================================================================================================
TOTAL OTHER COMPREHENSIVE INCOME                                         $  (354)       $  124         $  (230)
==================================================================================================================
</TABLE>

                                      (9)


<PAGE>

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

The following  discussion and analysis  should be read in  conjunction  with the
condensed  financial  statements  and notes thereto found on pages 3 to 9, which
contain  additional  information  helpful in  evaluating  operating  results and
financial condition.

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

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




                                      (10)

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

RESULTS OF OPERATIONS:


    The following table summarizes key components of VFL's operating results for
the three and six months ended June 30, 1998 and 1997.
<TABLE>
---------------------------------------------------------------------------------------------
                                                        THREE MONTHS          SIX MONTHS
PERIOD ENDED JUNE 30                                 1998       1997         1998     1997
---------------------------------------------------------------------------------------------
(In thousands of dollars)
OPERATING SUMMARY
    (excluding realized investment gains/losses):
Revenues:
<S>                                                <C>        <C>        <C>       <C>   
     Individual premium                             $10,476    $13,671    $ 26,927  $ 29,280
     Group premium                                   62,549     65,021     127,653   135,495
                                                    -------    -------    --------   -------
        Total premiums                               73,025     78,692     154,580   164,775
     Net investment income                            9,032      7,956      17,623    15,261
     Other                                            2,595      1,476       4,156     2,751
                                                    -------    -------     -------   -------
        Total revenues                               84,652     88,124     176,359   182,787
Benefits and expenses                                79,556     84,704     167,119   175,270
                                                    -------    -------     -------   -------
     Operating income before income tax               5,096      3,420       9,240     7,517
Income tax expense                                   (1,805)    (1,214)     (3,325)   (2,668)
                                                    -------    -------     -------   -------
        Net operating income                          3,291      2,206       5,915     4,849
     Net realized investment gains (losses)             989       (132)      2,284     (113)
============================================================================================
        NET INCOME                                  $ 4,280     $2,074     $ 8,199   $ 4,736
============================================================================================
</TABLE>
    VFL's revenues, excluding net realized investment gains/losses,  were $176.4
million  for the first six months of 1998,  compared  to $182.8  million for the
same period in 1997.  Premiums were $154.6 million for the six months ended June
30, 1998,  compared to $164.8  million for the same period in 1997.  For the six
month period of 1998,  individual  premiums  decreased by 8.0% to $26.9 million,
compared  to  $29.3  million  for the same  period  in 1997.  This  decrease  is
due in part to  a  decline in  individual  annuity  premiums as CNA's  marketing
efforts have shifted to more profitable  products.   Group premiums were $127.7
million for the first six months of  1998,  compared  to  $135.5 million for the
same period in 1997.   The decrease in group  premiums is primarily due to lower
Federal  Employee Health Benefit Plan (FEHBP) premiums and a reduction in group 
health premiums.   The decrease in FEHBP premiums is a result of improved  claim
experience  upon  which  the premiums are based and continues the trend from the
first quarter of this year.

    Premiums  for the three  months  ended  June 30,  1998 were  $73.0  million,
compared  to $78.7  million  for the same  period in 1997.  Individual  premiums
decreased  by 23.4% to $10.5  million for the three  months ended June 30, 1998,
compared  to $13.7  million for the same  period in 1997.  For the three  months
ended June 30, 1998, group premium decreased to $62.5 million from $65.0 million
for the same period in 1997.  The  decrease in net premiums for the three months
ended June 30, 1998  were  primarily  due  to  lower  premiums  for  individual 
annuity and FEHBP business, respectively.
                                      (11)
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS -CONTINUED

    VFL's  investment  income for the six months  ended June 30,  1998 was $17.6
million,  an approximate  increase of $2.3 million or 15.5% from the same period
for 1997 when investment income was $15.3 million.  The increase is attributable
to a larger asset base of VFL's  investment  portfolio  generated from increased
cash flows from premium growth in 1997.  Investment income was  $9.0 million and
$8.0 million for the three months ended June 30, 1998 and 1997, respectively.

    Benefits  and  expenses  were $167.1  million for the six month period ended
June 30, 1998,  as compared to $175.3  million for the same period in 1997.  The
decrease  in  benefits  and  expenses  was more than  offset by the  decrease in
premiums,  as noted  above.  The  increase in pre-tax  operating  income of $1.7
million  to $9.2  million  for the six  month  period  ended  June  30,  1998 is
primarily due to higher net investment  income as compared to the same period in
1997.  

    Realized  investment  gains, net of tax, for the first six months ended June
30, 1998 were $2.3 million,  compared to net realized  investment losses for the
same period in 1997 of $0.1 million.  Realized investment gains, net of tax, for
the three months ended June 30, 1998 were $1.0 million, compared to net realized
investment losses of $0.1 million for the same period in 1997.   The increase in
realized  gains is  the  result of  VFL taking  advantage  of  favorable  market
conditions.

FINANCIAL CONDITION:

    Assets  increased  approximately  $534.6  million from  December 31, 1997 to
$2,903.1  million as of June 30, 1998.  VFL's cash and invested assets increased
by approximately $4.3 million from December 31, 1997 to $574.9 million.

    During the first six months of 1998, VFL's stockholder's equity increased by
$9.0  million,  or 4.2%,  to  approximately  $225.2  million.  The  increase  in
stockholder's  equity in 1998 is due to net income of approximately $8.2 million
and  approximately  $0.8  million of gains in  accumulated  other  comprehensive
income.   Accumulated  other  comprehensive  income  is  comprised primarily of 
unrealized gains and losses.  

<TABLE>
----------------------------------------------------------------------------------------------------------
FINANCIAL POSITION                                                            JUNE 30        DECEMBER 31
                                                                                1998            1997
----------------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                                                          <C>            <C>        
Assets                                                                        $2,903,053     $2,368,426
Stockholder's Equity                                                             225,247        216,260
Accumulated Other Comprehensive Income (Included in Stockholder's Equity)          5,168          4,380
---------------------------------------------------------------------------------------------------------
</TABLE>

                                      (12)

<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 and carrying value at June 30, 1998 and December 31, 1997:
<TABLE>
-------------------------------------------------------------------------------------------------
DISTRIBUTION OF INVESTMENTS                     JUNE 30                   DECEMBER 31
                                                  1998         %             1997          %
-------------------------------------------------------------------------------------------------
(In thousands of dollars) 
Fixed maturity securities:
        U.S. Treasury Securities and
<S>                                            <C>           <C>          <C>            <C>  
         obligations of government agencies     $292,328      51.8%        $299,066       55.4%
        Asset backed securities                   76,512      13.6           68,612       12.7
        Corporate debt securities                 63,777      11.3           51,355        9.5
        Other debt securities                     24,059       4.3           47,234        8.8
-------------------------------------------------------------------------------------------------
          Total fixed maturity securities        456,676      81.0          466,267       86.4
Common stocks                                        981       0.2              981        0.2
Policy loans                                      70,300      12.5           66,971       12.4
Other invested assets                                524       0.1              579        0.1
Short-term investments                            35,477       6.2            4,597        0.9
-------------------------------------------------------------------------------------------------
INVESTMENTS AT AMORTIZED COST                   $563,958     100.0%        $539,395      100.0%
=================================================================================================
INVESTMENTS AT CARRYING VALUE*                  $573,442                   $545,968
=================================================================================================
<FN>
* As reported in the Balance Sheet
</FN>
</TABLE>
    The operations,  assets and liabilities of VFL and Assurance are, to a large
extent,  managed on a combined  basis.  The  investment  portfolio is managed to
maximize  after-tax  investment  return,  while  minimizing  credit risks,  with
investments  concentrated  in  high  quality  securities  to  support  insurance
underwriting  operations.  The  investment  portfolios  are  segregated  for the
purpose of supporting policy liabilities for universal life, annuities and other
interest sensitive products.

    VFL's  investments in fixed maturity  securities are carried at a fair value
of $465.1 million at June 30, 1998, compared with $471.7 million at December 31,
1997.  At June 30,  1998,  net  unrealized  gains on fixed  maturity  securities
amounted to approximately $8.4 million.  This compares with net unrealized gains
of  approximately  $5.4 million at December 31, 1997. The gross unrealized gains
and losses for the fixed maturities portfolio at June 30, 1998 were $8.9 million
and $0.5  million,  respectively,  compared to $6.2  million  and $0.8  million,
respectively, at December 31, 1997.

    VFL's  investments in equity  securities are carried at a fair value of $2.5
million and $2.3 million at June 30, 1998 and  December 31, 1997,  respectively.
At  June  30,  1998,   unrealized  gains  on  equity   securities   amounted  to
approximately $1.5 million. This compares with unrealized gains of approximately
$1.3  million at December 31, 1997.  There were no  unrealized  losses on equity
securities at June 30, 1998 and December 31, 1997.

                                      (13)

<PAGE>

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

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

    The following table summarizes the ratings of VFL's fixed maturity portfolio
at carrying value (market):

<TABLE>
-------------------------------------------------------------------------------------------
                                            JUNE 30       %        DECEMBER 31        %
                                             1998                      1997
-------------------------------------------------------------------------------------------
(In thousands of dollars)
<S>                                        <C>           <C>       <C>            <C>  
U.S. government and affiliated securities   $296,686      63.8%     $300,676       63.8%
Other AAA rated                               91,273      19.6        75,531       16.0
AA and A rated                                53,070      11.4        61,404       13.0
BBB rated                                     24,039       5.2        27,292        5.8
Below investment grade                            -         -          6,804        1.4
-------------------------------------------------------------------------------------------
     TOTAL                                  $465,068     100.0%     $471,707      100.0%
===========================================================================================
</TABLE>

    Included  in VFL's  fixed  maturity  securities  at June 30,  1998 are $77.5
million  of  asset-backed  securities,  consisting  of  approximately  51.4%  in
collateralized  mortgage obligations (CMOs), 40.2% in corporate  mortgage-backed
pass-through  certificates,  8.1% in corporate asset-backed obligations and 0.3%
in U.S. government agency issued pass-through certificates. The majority of CMOs
held are U.S.  government  agency  issues,  which are actively  traded in liquid
markets and are priced by broker-dealers.

    CMOs are  subject  to  prepayment  risk that  tends to vary with  changes in
interest  rates.  During  periods of declining  interest  rates,  CMOs generally
prepay  faster as the  underlying  mortgages  are prepaid and  refinanced by the
borrowers  in order to take  advantage of the lower  rates.  Conversely,  during
periods of rising interest rates, prepayments are generally slow. VFL limits the
risks   associated   with  interest  rate   fluctuations   and   prepayments  by
concentrating  its  CMO  investments  in  planned   amortization   classes  with
relatively  short principal  repayment  windows.  The fair value of asset-backed
securities  was more than the amortized cost by $0.9 million and $0.1 million at
June 30, 1998 and December 31, 1997,  respectively.  VFL avoids  investments  in
complex mortgage derivatives and does not have any investments in mortgage loans
or real estate.

    VFL invests from time to time in derivative financial  instruments primarily
to reduce its exposure to market risk. VFL also uses derivatives to mitigate the
risk associated with certain  guaranteed annuity contracts by purchasing certain
options in a notional  amount  equal to the  original  customer  deposit.  VFL's
derivatives  are classified as other invested  assets and VFL generally does not
hold or issue these instruments for trading purposes.

    Derivative  financial  instruments  consist  of  interest  rate  caps in the
general account and purchased options in the Separate Accounts at June 30, 1998.
The gross notional or contractual amounts of derivative financial instruments in
the general account totaled $50.0 million at both June 30, 1998 and December 31,
1997.  The  gross  notional  principal  or  contractual  amounts  of  derivative
financial  instruments  in the Separate  Accounts  totaled $1.6 million and $1.5
million at June 30, 1998 and December 31, 1997, respectively.
                                      (14)
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS -CONTINUED


    The fair value of derivative  financial  instruments in the general  account
and Separate  Accounts at June 30, 1998  totaled $0.1 million and $0.4  million,
respectively.  The fair value of derivative financial instruments in the general
account and Separate Accounts at December 31, 1997 totaled $0.4 million and $0.3
million,  respectively.  Net realized losses on derivative financial instruments
held in the general  account  totaled $0.3 million for the period ended June 30,
1998,  while net realized  gains/losses on derivatives in the Separate  Accounts
were $0 million for the same period.  There were no  investments  in  derivative
securities at June 30, 1997.

    High yield  securities are bonds rated below investment grade by bond rating
agencies, and other unrated securities which, in the opinion of management,  are
below investment grade (below BBB). High yield  securities  generally  involve a
greater  degree of risk than that of investment  grade  securities.  Returns are
expected to compensate  for the added risk.  The risk is also  considered in the
interest  rate  assumptions  in  the  underlying   insurance   products.   VFL's
concentration in high yield bonds was  approximately  0.3% of total assets as of
December 31, 1997. At June 30, 1998, VFL did not hold any high yield bonds.

IMPACT OF YEAR 2000 ON VFL:

    The  widespread  use of  computer  programs,  both in the United  States and
internationally,  that rely on two digit date fields to perform computations and
decision  making  functions  may cause  computer  systems  to  malfunction  when
processing  information  involving dates  beginning in 1999.  Such  malfunctions
could  lead to  business  delays  and  disruptions.  All  subsidiaries  of CNAF,
including VFL, utilize the same systems in conducting day-to-day operations. VFL
is in the process of renovating or replacing  many of its legacy  systems and is
upgrading its systems to accommodate  business for the year 2000 and beyond.  In
addition,  VFL is  checking  embedded  systems in  computer  hardware  and other
infrastructure  such as elevators,  heating and ventilating systems and security
systems.  VFL believes  that it will be able to resolve the year 2000 issue in a
timely manner. VFL's cost to upgrade and replace its systems will be included as
part of the total cost  incurred by CNAF to replace  and  upgrade  its  systems.
Based upon its current assessment, CNAF estimates that the total cost to replace
and  upgrade  its  systems  to  accommodate   year  2000   processing   will  be
approximately $60 to $70 million.  VFL will be allocated its proportionate share
of this cost upon completion of the upgrade;  however, a reasonable  estimate of
this  cost is not  currently  available.  Due to the  interdependent  nature  of
computer  systems,  VFL may be adversely  impacted  depending upon whether it or
other entities not affiliated with VFL (vendors and business  partners)  address
this issue successfully. To mitigate this impact, CNAF is communicating with its
vendors and business partners to coordinate year 2000 conversion.  At this time,
management  is unable to  determine  whether  the  adverse  impact,  if any,  in
connection with the foregoing circumstances would be material to VFL.

LIQUIDITY AND CAPITAL RESOURCES:

    VFL's principal cash flow sources are premiums,  investment income, receipts
for  investment  contracts  sold and sales and  maturities  of  investment.  The
primary  cash flow uses are payments for claims,  policy  benefits,  payments on
matured policyholder contracts and operating expenses.

    For the six  months  of  1998,  VFL's  operating  activities  generated  net
negative  cash flows of $8.3  million,  compared with net positive cash flows of
$25.0 million for the same period in 1997.
                                      (15)
<PAGE>
                       VALLEY FORGE LIFE INSURANCE COMPANY
           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                      AND RESULTS OF OPERATIONS -CONTINUED


    Management  believes  that future  liquidity  needs will be met primarily by
cash generated  from  operations.  Net cash flows from  operations are generally
invested  in  marketable  securities.  Investment  strategies  employed  by  VFL
consider the cash flow  requirements of the insurance  products sold and the tax
attributes of the various types of marketable investments.

ACCOUNTING STANDARDS:

    In June  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Statement of Financial Accounting  Standards (SFAS) No. 131,  "Disclosures about
Segments of an Enterprise and Related  Information," which establishes standards
for the way that public business  enterprises report information about operating
segments  in interim and annual  financial  statements.  It requires  that those
enterprises report a measure of segment profit or loss, certain specific revenue
and expense items and segment  assets,  and that the  enterprises  reconcile the
total of those  amounts to the  general-purpose  financial  statements.  It also
establishes  standards  for related  disclosures  about  products and  services,
geographic areas and major customers.  This Statement is effective for financial
statements for periods  beginning  after December 15, 1997.  This Statement need
not be  applied to  interim  financial  statements  in the  initial  year of its
application. This Statement will redefine VFL's business segment disclosure.

    In December 1997, the American  Institute of Certified  Public  Accountants'
Accounting  Standards  Executive  Committee  issued  Statement of Position (SOP)
97-3,  "Accounting  by Insurance  and Other  Enterprises  for  Insurance-Related
Assessments," which provides guidance on accounting by entities that are subject
to   insurance-related   assessments.   It  requires  that  entities   recognize
liabilities for insurance-related assessments when all of the following criteria
have been met: an assessment has been imposed or a probable  assessment  will be
imposed; the event obligating an entity to pay an imposed or probable assessment
has occurred on or before the date of the financial  statements;  and the amount
of the  assessment  can be  reasonably  estimated.  This  SOP is  effective  for
financial  statements for fiscal years beginning after December 15, 1998. VFL is
currently   evaluating   the  effects  of  this  SOP  on  its   accounting   for
insurance-related assessments.

    In February  1998,  the FASB issued  SFAS No. 132,  "Employers'  Disclosures
about Pensions and Other Postretirement Benefits," which standardizes disclosure
requirements  for  pension  and  other  postretirement  benefits  to the  extent
practicable,  and  requires  additional  information  on changes in the  benefit
obligations  and fair  values  of plan  assets  that will  facilitate  financial
analysis.  The Statement  also suggests  combined  formats for  presentation  of
pension and other  postretirement  benefit  disclosures.  The Statement  changes
disclosure only and does not address measurement or recognition. It is effective
for fiscal  years  beginning  after  December 15,  1997.  VFL has no  employees,
however,  expenses  are  allocated  to VFL for  services  provided  by  Casualty
employees.  VFL is  currently  evaluating  the effects of this  Statement on its
benefit plan disclosures.

                                      (16)

<PAGE>

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

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

   In June 1998,  the FASB  issued  SFAS No.  133,  "Accounting  for  Derivative
Instruments  and  Hedging  Activities,"  which  establishes  standards  for  the
accounting and reporting for derivative  instruments and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized   firm   commitment,   an   available-for-sale   security,   or   a
foreign-currency-denominated  forecasted transaction. The accounting for changes
in the fair value of a derivative  depends on the intended use of the derivative
and the  resulting  designation.  This  Statement  is  effective  for all fiscal
quarters  of fiscal  years  beginning  after  June 15,  1999.  VFL is  currently
evaluating  the effects of this  Statement on its  accounting  and reporting for
derivatives and hedges.

FORWARD-LOOKING STATEMENTS

    When included in management's  discussion and analysis, the words "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,  general  economic  and  business  conditions,  competition,  changes in
financial markets (credit, currency, commodities and stocks) changes in foreign,
political, social and economic conditions, regulatory initiatives and compliance
with governmental regulations, judicial decisions and rulings, and various other
matters,  many of which are beyond VFL's control.  See discussions  elsewhere in
this report on how these risks may affect VFL. These forward-looking  statements
speak only as of the date of this Report. VFL 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 VFL'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

                            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           20




(b)  REPORTS ON FORM 8-K:

         There were no reports on Form 8-K for the three  months  ended June 30,
1998.



                                      (18)
<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:         August 14, 1998



                                      (19)