ThZeal - The Zeal

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-22077

Prospector Funds, Inc.

(Exact name of registrant as specified in charter)

370 Church St., Guilford, CT 06437

(Address of principal executive offices) (Zip code)

Prospector Partners Asset Management, LLC, 370 Church St., Guilford, CT 06437

(Name and address of agent for service)

(203) 458-1500

Registrant's telephone number, including area code

Date of fiscal year end: December 31, 2008

Date of reporting period: June 30, 2008

Item 1. Report to Stockholders.

Edifice Wrecks – a plagiarized pun perhaps, but oh so perfect a phrase. Bear Stearns is gone and it’s a good bet that other financial institutions may follow. Gargantuan write-offs, $400 billion so far, have rocked Citigroup, UBS, AIG, Lehman, Merrill and numerous others. Most if not all of these companies should survive, but with new management teams and less hubris. Quick, decisive and unprecedented action by the Fed and other regulators seems to have prevented the crisis from becoming a full-blown panic, but at what long-term cost? The money created likely won’t help the twin budget and trade deficits nor strengthen the dollar. Then there’s increased moral hazard that comes from bailing out the leaky ships.

Beyond short-term trading issues, psychological and otherwise, there is the critical question of permanent loss. Forced selling of positions below cost – whether infamous subprime and related structured product paper or leveraged buyout loan paper – is only part of the equation. Debt money was readily available and cheap … it was hard to resist the lure of excessive leverage. Now, as losses are realized or as positions are marked down that same leverage must be unwound. Often, enterprise survival has required raising equity at fire sale prices, permanently impairing existing shareholders. Add in the fact financials were bid to a robust 22% of the S&P 500, and you have got serious risk. The Fed’s proactive response to the situation and the industry’s generally honest financial reporting (so far no Enrons) are only a minimal offset. Regardless, a final summing up won’t be possible for some time.

This bear market’s decline probably won’t warrant mention alongside the South Sea Bubble of 1720, the Rich Man’s Panic of 1907, the Crash of 1929, or perhaps even the Tech Wreck of 2000. However, it is unique. Yesteryear’s great crashes coincided with some benefit to society – the creation of paper money, the post quake reconstruction of San Francisco, the invention of the automobile and the radio, or the Internet’s flowering. Unhappily, the current bear market appears to display no such obvious redeeming qualities. This bear broke up a raucous party featuring rampant speculation and over-consumption; it also endangered the very institutions our political establishment uses to manage the domestic economy. Large banks, brokerage houses, and Government Sponsored Enterprises (GSEs) have been put at risk. Rating agencies long considered sacrosanct are tainted. Hope you enjoyed the binge…it seems the bill has arrived.

With the S&P 500 down nearly 12% in the first half of 2008, ending June 30th, we are pleased with our slightly positive fund performance for the same period. It’s one thing to try to swim upstream; it’s more difficult to proceed against an overpowering current. How did we do it? Most importantly, we underweighted the financial sector and had zero exposure to its big disasters --- no big money center or investment banks, and no credit enhancers. In fact, only three financials, Berkshire Hathaway, Cincinnati Financial and Charter Financial made our “Hall of Shame” as biggest detractors from six month performance. These three were down 15%, 34% and 33% respectively.

Our “Hall of Fame” was dominated by energy holdings. Six of the top ten positive contributors to portfolio performance were oil and gas producers. Most of these were small holdings and achieved their impact through outstanding appreciation. With hindsight we should have owned bigger positions, but a possible crude oil price decline has made us cautious. Recently, we have been swapping our energy winners for group laggards while modestly trimming aggregate exposure.

Beyond a near market weighting in energy, several other portfolio positioning aspects deserve mention. Specifically, Mirant continues as our largest holding. It and Calpine comprise our key electric power investments and represent about 11 percent of our assets. We continue to think potential demand/price increases and capital management opportunities make these outstanding investments.

Four gold mining securities represent an unusually large 9 percent of the portfolio. In aggregate, these have been profitable holdings, but disappointing given gold’s appreciation. Beyond catch-up, gold mines appear attractive (at least for “gold bugs”) as to their doomsday perception of being “safe havens” and for their historical tendency to rise at least modestly in both bear markets and inflationary periods.

Health care/pharmaceuticals continue to make up about 10 percent of the portfolio. These enterprises’ business models have been resistant to economic downturns. The likely recession, along with the new Presidential regime’s possible policy shifts, should soon prove or disprove our positioning. Convertibles, with their inherent downside protection, remain our preferred approach to investing in this group.

We grudgingly take solace with our modest negative fund performance in the first half of 2008, ending June 30th, as the Russell 2000 and the Russell Midcap indices, our benchmarks, fared considerably worse. The Prospector Opportunity Fund outperformed despite being overweighted in financials, by far the worst performing sector of the market. Importantly we achieved this by avoiding the highly leveraged credit sensitive institutions such as banks, brokers, and financial guarantors who have been hit particularly hard. In fact, only one financial service company, Invesco – the investment management company, made our list of five largest detractors from performance. We like to own overcapitalized financial institutions with straightforward business models that sell at discounts to tangible book value. Property & casualty companies such as Axis Capital and The Hanover Group, and Banks such as Oritani Financial and Fox Chase Bancorp fit the bill.

The greatest contributors to Prospector Opportunity Fund performance in the first half of 2008 were energy companies such as Encore Acquisition, Cimarex Energy, Hugoton Royalty Trust, and San Juan Basin Royalty Trust. The portfolio has a roughly 10% weighting in these types of energy securities.

Another major industry bet in the portfolio is the utility sector. Key names are Unisource and Sierra Pacific. Since World War II, U.S. electricity demand has moved steadily upward; the few annual declines caused by recessions and abnormal weather have been modest.

It’s a lot easier to find similarities between today and a past period -- “analogy forecasting” rather than build an outlook from scratch. So…we think the environment similar to the late 1970’s. High energy and commodity prices generally, subpar economic growth, and the hangover of a correcting overvalued stock market – it looks very familiar. Anticipate, in a word: stagflation. Unfortunately it’s difficult to see how Fund Shareholders will be advantaged by this forecast; too many others have the same conclusion. What should work, however, is the basic blocking and tackling that our organization brings to bear analyzing individual securities.

A hallmark of the steady growth Greenspan years was an almost continuous series of industry corrections, largely isolated from one another. Today’s bank problem is unlikely to fit this pattern. This industry has a special role in our economic system. Money is ubiquitous; even if a corporation is self financed (and many aren’t) it’s a cinch that plenty of customers or suppliers will be hamstrung by tight/expensive financing. From our experience with

Pain, of course, often means lower stock prices. But how much lower? Markets anticipate and with the broad averages already down 20% from recent highs we suspect moderate buying may be more sensible than selling. We continue to do just that. Our philosophy, process and focus have always led us to attractive value situations that should in turn generate solid performance.

Mutual fund investing involves risk. Principal loss is possible. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. The Funds invest in foreign securities which involve greater volatility and political, economic and currency risks and differences in accounting methods. The Funds invest in smaller and mid-cap companies, which involve additional risks such as limited liquidity and greater volatility. The Funds may hold restricted securities purchased through private placements. Such securities can be difficult to sell without experiencing delays or additional costs. Derivatives involve risks different from, and in certain cases, greater than the risks presented by more traditional investments. These risks are fully disclosed in the prospectus.

The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. The Russell 2000 Index consists of the smallest 2,000 companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as ranked by market capitalization. The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap Index represents approximately 31% of the total market capitalization of the Russell 1000 companies. You cannot invest directly in an index.

The chart assumes an initial investment of $10,000. Performance reflects waivers of fee and operating expenses in effect. In the absence of such waivers, total return would be reduced. Past performance is not predictive of future performance. Investment return and principal value will fluctuate, so that your shares, when redeemed maybe worth more or less than their original cost. Performance assumes the reinvestment of capital gains and income distributions. The performance does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares.

As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, which may include but are not limited to, redemption fees, wire transfer fees, maintenance fee (IRA accounts), and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service fees; and other Fund expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The Example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (January 1, 2008 – June 30, 2008).

The first line of the table below provides information about actual account values and actual expenses. Although the Fund charges no sales load or transaction fees, you will be assessed fees for outgoing wire transfers, returned checks and stop payment orders at prevailing rates charged by U.S. Bancorp Fund Services, LLC, the Fund’s transfer agent. The example below includes, but is not limited to, management fees, shareholder servicing fees and other Fund expenses. However, the example below does not include portfolio trading commissions and related expenses, interest expense and other extraordinary expenses as determined under generally accepted accounting principles. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

			Expenses Paid
	Beginning Account	Ending Account	During Period(1)
	Value (01/01/08)	Value (06/30/08)	(01/01/08 to 06/30/08)
Capital Appreciation Actual(2)	$1,000.00	$1,010.00	$7.50
Capital Appreciation Hypothetical
(5% return before expenses)	1,000.00	1,017.40	7.52
Opportunity Actual(2)	1,000.00	983.30	7.40
Opportunity Hypothetical
(5% return before expenses)	1,000.00	1,017.40	7.52

(1)

Expenses are equal to the fund’s annualized expense ratio for the most recent six-month period of 1.50% and 1.50% for Capital Appreciation Fund and Opportunity Fund, respectively, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year/366 (to reflect the one-half year period).

TOP 10 HOLDINGS (% OF NET ASSETS)
AS OF JUNE 30, 2008(1)(3)
Capital Appreciation Fund
Mirant		7.6%
E.I. Du Pont de Nemours		3.9%
Medtronic, 1.500%, 04/15/2011		3.6%
Calpine		3.4%
Barrick Gold		3.1%
Post Properties		3.0%
Newmont Mining		2.8%
Amgen, 0.125%, 02/01/2011		2.5%
Petro - Canada		2.3%
Berkshire Hathaway, Class B		2.1%
(1)	Fund holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security.
(2)	Sector allocation includes all investment types.
(3)	AIM Short-Term Treasury Portfolio excluded from top 10 holdings.

TOP 10 HOLDINGS (% OF NET ASSETS)
AS OF JUNE 30, 2008(1)(3)
Opportunity Fund
UST		2.5%
Newmont Mining		2.5%
Mirant		2.3%
Unisource Energy		2.2%
Hugoton Royalty Trust		2.2%
Calpine		2.1%
Cimarex Energy		2.1%
CMS Energy		1.9%
Sierra Pacific Resources		1.8%
Lancashire Holdings		1.8%
(1)	Fund holdings and sector allocations are subject to change at any time and are not recommendations to buy or sell any security.
(2)	Sector allocation includes all investment types.
(3)	AIM Short-Term Treasury Portfolio excluded from top 10 holdings.

Description	Shares		Value
COMMON STOCKS – 65.3%
Banks – 1.6%
Capitol Federal Financial		2,500	$	94,025
Charter Financial		2,800		67,200
Fox Chase Bancorp*		200		2,052
Investors Bancorp*		2,000		26,120
Oritani Financial*		1,200		19,200
Rockville Financial		1,500		18,840
Roma Financial		1,400		18,340
Wauwatosa Holdings*		3,200		33,984
				279,761
Chemicals – 4.0%
E.I. Du Pont de Nemours		15,700		673,373
Solutia*		100		1,282
				674,655
Consumer Discretionary – 4.7%
E.W. Scripps, Class A		2,500		103,850
Fortune Brands		1,500		93,615
H&R Block		10,400		222,560
Meredith		9,400		265,926
New York Times, Class A		5,300		81,567
Walt Disney		1,100		34,320
				801,838
Consumer Staples – 2.6%
Coca-Cola		2,200		114,356
Coca-Cola Enterprises		1,400		24,220
Hershey		1,800		59,004
SUPERVALU		500		15,445
Tootsie Roll Industries		7,505		188,601
Viterra*		3,000		41,188
				442,814
Energy – 12.1%
Chevron		300		29,739
Cimarex Energy		4,800		334,416
Clayton Williams Energy*		400		43,980
ConocoPhillips		700		66,073
El Paso		2,800		60,872
Encore Acquisition*		2,200		165,418

Description	Shares		Value
COMMON STOCKS – 65.3% (CONTINUED)
Energy – 12.1% (Continued)
Hess		2,800	$	353,332
Marathon Oil		2,400		124,488
McMoRan Exploration*		500		13,760
Nexen		900		35,775
Parker Drilling*		9,500		95,095
Petro – Canada		7,000		390,250
Plains Exploration & Production*		2,635		192,276
Talisman Energy		7,500		165,975
				2,071,449
Healthcare – 1.3%
Pfizer		12,700		221,869
Industrials – 0.3%
Tyco International		1,200		48,048
Information Technology – 2.5%
Automatic Data Processing		5,000		209,500
Xerox		15,500		210,180
				419,680
Insurance – 5.2%
Berkshire Hathaway, Class B*		90		361,080
Cincinnati Financial		3,000		76,200
Employers Holdings		4,400		91,080
Loews		2,600		121,940
Marsh & McLennan		1,300		34,515
Max Capital Group		1,000		21,330
Platinum Underwriters Holdings		1,200		39,132
State Auto Financial		6,300		150,759
				896,036
Metals & Mining – 9.4%
Alcoa		6,500		231,530
Barrick Gold		11,800		536,900
Commercial Metals		100		3,770
Gold Fields – ADR		20,900		264,385
Newmont Mining		9,300		485,088
Norsk Hydro – ADR		3,500		51,125
Northgate Minerals*		15,000		41,250
				1,614,048

Description	Shares		Value
COMMON STOCKS – 65.3% (CONTINUED)
Paper & Forest Products – 2.7%
Domtar*		25,300	$	137,885
Fraser Papers*		2,500		4,707
Graphic Packaging*		12,900		26,058
International Paper		2,000		46,600
MeadWestvaco		600		14,304
Neenah Paper		2,900		48,459
TimberWest Forest		13,000		175,297
				453,310
Real Estate – 3.3%
Post Properties		17,300		514,675
Thomas Properties Group		5,400		53,136
				567,811
Utilities – 15.6%
Calpine*		25,488		575,009
Calpine – Escrow Shares*		600,000		153,000
El Paso Electric*		3,000		59,400
Mirant*		33,000		1,291,950
MMC Energy*		3,000		6,720
NorthWestern		3,000		76,260
Sierra Pacific Resources		13,000		165,230
Unisource Energy		11,100		344,211
				2,671,780
Total Common Stocks
(Cost $11,289,721)				11,163,099

	Par
CONVERTIBLE CORPORATE BONDS – 20.9%
AMR, 4.500%, 02/15/2024	$	75,000		55,781
Amdocs, 0.500%, 03/15/2024		250,000		245,000
Amgen, 0.125%, 02/01/2011		475,000		431,062
Anglogold Ashanti, 2.375%, 02/27/2009		300,000		294,600
Archer Daniels, 0.875%, 02/15/2014		150,000		150,937
Carnival, 0.500%, 04/29/2033		125,000		79,375
CMS Energy, 2.875%, 12/01/2024		25,000		29,469
Conseco, 3.500%, 09/30/2035		100,000		81,000
Dominion Resources, Series C, 2.125%, 12/15/2023		25,000		32,062

Description	Par		Value
CONVERTIBLE CORPORATE BONDS – 20.9% (Continued)
Eastman Kodak, 3.375%, 10/15/2033	$	275,000	$	259,187
Electronic Data Systems, 3.875%, 07/15/2023		175,000		174,563
ERP Operating, 3.850%, 08/15/2026		150,000		141,900
JetBlue Airways, 3.750%, 03/15/2035		50,000		31,750
Medtronic, 1.500%, 04/15/2011		575,000		610,938
Millipore, 3.750%, 06/01/2026		125,000		125,781
NovaGold Resources, 5.500%, 05/01/2015		50,000		49,938
Prudential Financial, 0.386%, 12/12/2036 (a)		75,000		73,050
St Jude Medical, 1.220%, 12/15/2008		175,000		173,250
UAL, 5.000%, 02/01/2021		125,000		55,938
Unisource Energy, 4.500%, 03/01/2035		100,000		96,875
Wyeth, 3.581%, 01/15/2024 (a)		350,000		357,420
YRC Worldwide, 3.375%, 11/25/2023		25,000		18,250
Total Convertible Corporate Bonds
(Cost $3,688,904)				3,568,126

	Shares
CONVERTIBLE PREFERRED STOCK – 0.0%
Energy – 0.0%
El Paso Energy Capital Trust
(Cost $8,244)		200		8,200

SHORT-TERM INVESTMENT – 12.0%
AIM Short-Term Treasury Portfolio
(Cost $2,054,249)		2,054,249		2,054,249
Total Investments – 98.2%
(Cost $17,041,118)				16,793,674
Other Assets and Liabilities, Net – 1.8%				304,816
Total Net Assets – 100.0%			$	17,098,490

Description	Shares		Value
COMMON STOCKS – 81.2%
Banks – 9.2%
Abington Bancorp		11,300	$	103,056
Brooklyn Federal Bancorp		6,600		79,530
Charter Financial		1,040		24,960
Chicopee Bancorp*		4,100		52,685
Comerica		200		5,126
Danvers Bancorp*		6,000		66,000
ESSA Bancorp		4,100		51,332
Fox Chase Bancorp*		10,000		102,600
Hampden Bancorp		4,300		43,086
Oritani Financial*		7,100		113,600
PacWest Bancorp		1,800		26,784
Roma Financial		5,200		68,120
State Bancorp		2,600		32,500
UnionBanCal		1,800		72,756
United Financial Bancorp		2,100		23,457
ViewPoint Financial Group		1,000		14,720
Westfield Financial		7,100		64,255
				944,567
Consumer Discretionary – 3.7%
AFC Enterprises*		9,400		75,106
American Eagle Outfitters		1,400		19,082
Gentex		7,000		101,080
M.D.C. Holdings		1,000		39,060
Mohawk Industries*		1,700		108,970
NVR*		75		37,506
				380,804
Consumer Staples – 9.1%
Church & Dwight		3,050		171,867
Hansen Natural*		2,300		66,286
Heineken Holding		3,300		151,403
Hershey		4,860		159,311
Tootsie Roll Industries		1,636		41,113
UST		4,800		262,128
Viterra*		6,600		90,615
				942,723

Description	Shares		Value
COMMON STOCKS – 81.2% (CONTINUED)
Diversified Financials – 4.0%
Affiliated Managers Group*		500	$	45,030
AmeriCredit*		2,900		24,998
Cowen Group*		4,300		33,196
Fifth Street Finance*		3,500		36,015
Invesco		6,800		163,064
Jefferies Group		2,200		37,004
Leucadia National		1,500		70,410
				409,717
Energy – 9.8%
Cimarex Energy		3,100		215,977
Encore Acquisition*		2,300		172,937
Hugoton Royalty Trust		6,100		225,700
Parker Drilling*		5,200		52,052
San Juan Basin Royalty Trust		3,700		171,162
Talisman Energy		7,600		168,188
				1,006,016
Healthcare – 2.2%
CIGNA		4,000		141,560
WellCare Health Plans*		2,400		86,760
				228,320
Industrials – 2.6%
Armstrong World Industries		1,600		46,752
Ceradyne*		1,100		37,730
School Specialty*		2,300		68,379
Toro		3,300		109,791
				262,652
Information Technology – 7.4%
CACI International*		3,440		157,449
NCR*		1,100		27,720
NetApp*		4,100		88,806
Novellus Systems*		4,400		93,236
SAIC*		8,600		178,966
Symantec*		5,600		108,360
Zebra Technologies*		3,400		110,976
				765,513

Description	Shares		Value
COMMON STOCKS – 81.2% (CONTINUED)
Insurance – 11.8%
AON		1,200	$	55,128
Arch Capital Group*		900		59,688
Arthur J. Gallagher & Company		1,400		33,740
Assurant		1,200		79,152
Axis Capital Holdings		3,500		104,335
Cincinnati Financial		1,600		40,640
FBL Financial Group, Class A		2,700		53,676
Hanover Insurance Group		2,400		102,000
Investors Title		600		29,184
Lancashire Holdings		29,800		181,038
Max Capital Group		1,800		38,394
Platinum Underwriters Holdings		2,800		91,308
Progressive		2,800		52,416
Selective Insurance Group		1,700		31,892
Validus Holdings		1,500		31,875
W.R. Berkley		1,300		31,408
Wesco Financial Group		227		86,714
Zenith National Insurance		3,200		112,512
				1,215,100
Materials – 0.7%
Pactiv*		3,600		76,428
Metals & Mining – 3.6%
IAMGOLD		11,600		70,180
Kinross Gold		1,800		42,498
Newmont Mining		4,900		255,584
				368,262
Paper & Forest Products – 1.2%
Domtar*		9,100		49,595
Neenah Paper		800		13,368
Timberwest Forest		4,700		63,376
				126,339
Real Estate – 2.2%
Post Properties		3,400		101,150
Thomas Properties Group		13,100		128,904
				230,054

Description	Shares		Value
COMMON STOCKS – 81.2% (CONTINUED)
Utilities – 13.7%
American Water Works*		3,600	$	79,848
Calpine*		9,778		220,591
Calpine, Escrow Shares*		125,000		31,875
CMS Energy		12,800		190,720
DPL		2,200		58,036
Dynegy*		2,300		19,665
Mirant*		6,100		238,815
NorthWestern		6,100		155,062
Sierra Pacific Resources		15,000		190,650
Unisource Energy		7,400		229,474
				1,414,736
Total Common Stocks
(Cost $8,695,926)				8,371,231

Short-Term Investment – 18.8%
AIM Short-Term Treasury Portfolio
(Cost $1,933,436)		1,933,436		1,933,436
Total Investments – 100.0%
(Cost $10,629,362)				10,304,667
Other Assets and Liabilities, Net – 0.0%				2,365
Total Net Assets – 100.0%			$	10,307,032

	Capital Appreciation Fund			Opportunity Fund
ASSETS:
Investments, at market value
(Cost $17,041,118 and $10,629,362 respectively)	$	16,793,674		$	10,304,667
Cash		56			168
Receivable for investment securities sold		—			6,940
Receivable for dividends and interest		45,290			12,672
Receivable for capital shares sold		401,696			175,823
Receivable for adviser reimbursements		26,179			24,673
Offering costs		21,440			21,440
Prepaid expenses and other assets		9,765			9,765
Total assets		17,298,100			10,556,148

LIABILITIES:
Payable for investment securities purchased		98,953			153,745
Payable for capital shares redeemed		39			—
Payable to adviser		35,942			31,349
Accrued distribution fees		7,723			4,286
Accrued expenses and other liabilities		56,953			59,736
Total liabilities		199,610			249,116

NET ASSETS	$	17,098,490		$	10,307,032

COMPOSITION OF NET ASSETS:
Portfolio capital	$	17,147,028		$	10,606,581
Undistributed net investment income		18,207			26,794
Accumulated net realized gain (loss) on investments		180,748			(1,633	)
Net unrealized depreciation of investments		(247,493	)		(324,710	)
Total net assets	$	17,098,490		$	10,307,032

CAPITAL STOCK, $0.0001 par value
Authorized		500,000,000			500,000,000
Issued and outstanding		1,133,141			700,712

NET ASSET VALUE, REDEMPTION PRICE,
AND OFFERING PRICE PER SHARE	$	15.09		$	14.71

	Capital Appreciation Fund			Opportunity Fund
INVESTMENT INCOME:
Interest income	$	27,957		$	8,437
Dividend income		71,801			68,601
Less: Foreign taxes withheld		(1,735	)		(745	)
Total investment income		98,023			76,293

EXPENSES:
Investment advisory fees		58,531			36,299
Offering costs		42,580			42,580
Directors’ fees		28,803			21,714
Administration fees		21,637			21,542
Fund accounting fees		18,601			18,003
Legal fees		14,196			10,650
Transfer agent fees		14,110			12,556
Distribution fees		13,303			8,250
Audit fees		12,510			12,510
Other expenses		6,755			6,944
Registration fees		6,050			6,036
Custodian fees		5,244			5,536
Postage and printing fees		2,768			2,107
Total expenses		245,088			204,727
Less: Fee waivers and expense reimbursements		(165,272	)		(155,228	)
Total net expenses		79,816			49,499
NET INVESTMENT INCOME		18,207			26,794

REALIZED AND UNREALIZED GAINS (LOSSES):
Net realized gain on investments		159,718			14,709
Net change in unrealized depreciation of investments		(183,000	)		(290,436	)
Net loss on investments		(23,282	)		(275,727	)

NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS	$	(5,075	)	$	(248,933	)

	Capital Appreciation Fund
				For the period
	Six Months Ended			September 28, 2007(1)
	June 30, 2008			to
	(Unaudited)			December 31, 2007
OPERATIONS:
Net investment income	$	18,207		$	6,348
Net realized gain (loss) on investments		159,718			21,504
Net change in unrealized depreciation on investments		(183,000	)		(64,493	)
Net decrease resulting from operations		(5,075	)		(36,641	)

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold		9,054,792			8,155,359
Proceeds from reinvestment of distributions		—			6,376
Payments for shares redeemed		(119,224	)		(285	)
Net increase from capital share transactions		8,935,568			8,161,450

DISTRIBUTIONS PAID FROM:
Net investment income		—			(6,822	)
Net realized gains		—			—
Total distributions to shareholders		—			(6,822	)

TOTAL INCREASE IN NET ASSETS		8,930,493			8,117,987

NET ASSETS:
Beginning of period		8,167,997			50,010
End of period (including undistributed net investment
income of $18,207 and $26,794, respectively)	$	17,098,490		$	8,167,997

TRANSACTIONS IN SHARES:
Shares sold		594,307			542,839
Shares issued in reinvestment of distributions		—			426
Shares redeemed		(7,747	)		(18	)
Net increase		586,560			543,247

	Opportunity Fund
				For the period
	Six Months Ended			September 28, 2007(1)
	June 30, 2008			to
	(Unaudited)			December 31, 2007
OPERATIONS:
Net investment income	$	26,794		$	8,817
Net realized gain (loss) on investments		14,709			(5,978	)
Net change in unrealized depreciation on investments		(290,436	)		(34,274	)
Net decrease resulting from operations		(248,933	)		(31,435	)

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold		4,672,818			5,877,349
Proceeds from reinvestment of distributions		—			20,839
Payments for shares redeemed		(12,584	)		(195	)
Net increase from capital share transactions		4,660,234			5,897,993

DISTRIBUTIONS PAID FROM:
Net investment income		—			(9,168	)
Net realized gains		—			(11,669	)
Total distributions to shareholders		—			(20,837	)

TOTAL INCREASE IN NET ASSETS		4,411,301			5,845,721

NET ASSETS:
Beginning of period		5,895,731			50,010
End of period (including undistributed net investment
income of $18,207 and $26,794, respectively)	$	10,307,032		$	5,895,731

TRANSACTIONS IN SHARES:
Shares sold		307,343			389,481
Shares issued in reinvestment of distributions		—			1,392
Shares redeemed		(825	)		(13	)
Net increase		306,518			390,860

	Capital Appreciation Fund
	Six Months Ended			September 28, 2007(1)
	June 30, 2008			through
	(Unaudited)			December 31, 2007
For a Fund share outstanding throughout the period

NET ASSET VALUE:
Beginning of period	$	14.94		$	15.00

OPERATIONS:
Net investment income		0.02			0.01
Net realized and unrealized gain (loss) on investments		0.13			(0.06	)
Total from operations		0.15			(0.05	)

LESS DISTRIBUTIONS:
From net investment income		—			(0.01	)
From net realized gains		—			—
Total distributions		—			(0.01	)

NET ASSET VALUE:
End of period	$	15.09		$	14.94

TOTAL RETURN		1.00	%(2)		(0.32	)%(2)

SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (in thousands)	$	17,098		$	8,168
Ratio of expenses to average net assets:
Before expense reimbursement		4.61	%(3)		11.28	%(3)
After expense reimbursement		1.50	%(3)		1.50	%(3)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement		(2.77	)%(3)		(9.38	)%(3)
After expense reimbursement		0.34	%(3)		0.40	%(3)
Portfolio turnover rate		6	%(2)		5	%(2)

	Opportunity Fund
	Six Months Ended			September 28, 2007(1)
	June 30, 2008			through
	(Unaudited)			December 31, 2007
For a Fund share outstanding throughout the period

NET ASSET VALUE:
Beginning of period	$	14.96		$	15.00

OPERATIONS:
Net investment income		0.04			0.02
Net realized and unrealized loss on investments		(0.29	)		(0.01	)
Total from operations		(0.25	)		0.01

LESS DISTRIBUTIONS:
From net investment income		—			(0.02	)
From net realized gains		—			(0.03	)
Total distributions		—			(0.05	)

NET ASSET VALUE:
End of period	$	14.71		$	14.96

TOTAL RETURN		(1.67	)%(2)		0.11	%(2)

SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period (in thousands)	$	10,307		$	5,896
Ratio of expenses to average net assets:
Before expense reimbursement		6.20	%(3)		14.50	%(3)
After expense reimbursement		1.50	%(3)		1.50	%(3)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement		(3.89	)%(3)		(12.27	)%(3)
After expense reimbursement		0.81	%(3)		0.73	%(3)
Portfolio turnover rate		21	%(2)		18	%(2)

Prospector Funds, Inc. (the “Corporation”) was organized as a Maryland corporation on June 6, 2007 and is registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as an open-end diversified management investment company. The Corporation issues its shares in series, each series representing a distinct portfolio with its own investment objectives and policies. There are two series presently authorized, the Prospector Capital Appreciation Fund and the Prospector Opportunity Fund (individually a “Fund” and collectively the “Funds”). The Funds commenced operations on September 28, 2007.

Security Valuation – Portfolio securities which are traded on an exchange are valued at the last sales price reported by the exchange on which the securities are primarily traded on the day of valuation. If there are no sales on a given day for securities traded on an exchange or for securities not traded or dealt on any securities exchange for which over-the-counter market quotations are readily available, the latest bid quotation will be used. Debt securities with remaining maturities of 60 days or less may be valued on an amortized cost basis, which involves valuing an instrument at its cost and thereafter assuming a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating rates on the market value of the instrument. Any securities or other assets for which market quotations are not readily available are valued at fair value as determined in good faith by Prospector Partners Asset Management, LLC (the “Adviser” or “Investment Manager”) pursuant to procedures established under the general supervision and responsibility of the Funds’ Board of Directors.

	Capital Appreciation Fund				Opportunity Fund
			Other				Other
	Investments		Financial		Investments		Financial
Description	in Securities		Instruments*		in Securities		Instruments*
Level 1 – Quoted prices	$	13,072,548	$	—	$	10,272,792	$	—
Level 2 – Other significant observable inputs		3,568,126		—		—		—
Level 3 – Significant unobservable inputs		153,000		—		31,875		—
Total	$	16,793,674	$	—	$	10,304,667	$	—

	Capital		Opportunity
	Appreciation Fund		Fund
	Investments		Investments
	in Securities		in Securities
Balance as of 12/31/2007	$	—	$	—
Accrued discounts/ premiums		—		—
Realized gain (loss)		—		—
Change in net unrealized appreciation (depreciation)		44,718		14,258
Net purchases (sales)		—		—
Transfers in and/or out of Level 3		108,282		17,617
Balance as of 06/30/2008	$	153,000	$	31,875

Distributions to Shareholders – Dividends from net investment income and distributions of net realized capital gains, if any, will be declared and paid at least annually. The character of distributions made during the period from net investment income or net realized gains may differ from the characterization for federal income tax purposes due to differences in the recognition of income, expense and gain items for financial statement and tax purposes. All short-term capital gains are included in ordinary income for tax purposes.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Federal Income Taxes – The Funds intend to meet the requirements of subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all net taxable investment income and net realized gains to shareholders in a manner which results in no tax cost to the Funds. Therefore, no federal income or excise tax provision is required. The Funds recognize uncertain tax positions consistent with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” As of June 30, 2008, there were no such uncertainties recognized in the accompanying financial statements.

Foreign Currency Translation – The books and records relating to the Funds’ non-U.S. dollar denominated investments are maintained in U.S. dollars on the following bases: (1) market value of investment securities, assets, and liabilities are translated at the current rate of exchange; and (2) purchases and sales of investment securities, income, and expenses are translated at the relevant rates of exchange prevailing on the respective dates of such transactions. The Funds do not isolate the portion of gains and losses on investments in equity securities that is due to changes in the foreign exchange rates from that which is due to changes in market prices of equity securities. The Funds report certain foreign currency-related transactions as components of realized gains for financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.

Other – Investment and shareholder transactions are recorded on the trade date. Each Fund determines the gain or loss realized from the investment transactions on the basis of identified cost. Dividend income is recognized on the ex-dividend date. Interest income, including amortization of bond premium and discount, is recognized on an accrual basis.

						Purchases			Sales
Capital Appreciation Fund						$	8,148,067		$	571,535
Opportunity Fund							4,701,762			1,279,704
There were no purchases or sales of long-term U.S. Government securities.

The aggregate gross unrealized appreciation and depreciation of securities held by the Funds and the total cost of securities for federal income tax purposes at June 30, 2008, were as follows:

	Aggregate		Aggregate						Federal
	Gross		Gross						Income
	Appreciation		Depreciation			Net			Tax Cost
Capital Appreciation Fund	$	783,885	$	(1,031,329	)	$	(247,444	)	$	17,041,118
Opportunity Fund		485,956		(810,651	)		(324,695	)		10,629,362

At December 31, 2007, the Funds’ most recently completed fiscal year-end, components of accumulated earnings (deficit) on a tax-basis were as follows:

	Undistributed		Other						Total
	Ordinary		Accumulated			Unrealized			Accumulated
	Income		Losses			Depreciation			Earnings (Deficit)
Capital Appreciation Fund	$	21,080	$	—		$	(64,543	)	$	(43,463	)
Opportunity Fund		—		(15,648	)		(34,968	)		(50,616	)

The Funds have entered into an Investment Advisory Agreement with the Adviser, with whom certain directors and officers of the Corporation are affiliated, to furnish investment advisory services to the Funds. Pursuant to this Agreement, the Adviser is entitled to receive a fee, calculated daily and payable monthly, at the annual rate of 1.10% as applied to each Fund’s daily net assets.

The Adviser has contractually agreed to waive, through September 28, 2010 its management fee and/or reimburse each Fund’s other expenses to the extent necessary to ensure that each Fund’s operating expenses do not exceed 1.50% of its average daily net assets. Any such waiver or reimbursement may be subject to later adjustment to allow the Adviser to recoup amounts waived or reimbursed to the extent actual fees and expenses for a fiscal year are less than the respective expense cap limitations, provided, however, that the Adviser shall only be entitled to recoup such amounts for a period of three years from the date such amount was waived or reimbursed. Waived/reimbursed fees and expenses subject to potential recovery by year of expiration are as follows:

As of June 30, 2008, it was possible, but not probable, those amounts would be recovered by the Adviser. At the end of each fiscal year in the future, the Funds will continue to assess the potential recovery of waived/reimbursed fees and expenses for financial reporting purposes.

Quasar Distributors, LLC (“Quasar”), a subsidiary of U.S. Bancorp, serves as distributor of the Funds’ shares pursuant to a Distribution Agreement with the Corporation. Each Fund’s shares are sold on a no-load basis and, therefore, Quasar receives no sales commission or sales load for providing services to the Funds. The Corporation has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the “12b-1 Plan”), which authorizes the Corporation to reimburse Quasar and certain financial intermediaries who assist in distributing each Fund’s shares or who provide shareholder services to Fund shareholders a distribution and/or shareholder servicing fee of up to 0.25% of each Fund’s average daily net assets (computed on an annual basis). All or a portion of the fee may be used by the Funds or Quasar to pay the Fund’s distribution fees and costs of printing reports and prospectuses for potential investors and the costs of other distribution and shareholder services expenses. During the six months ended June 30, 2008, the Capital Appreciation Fund and Opportunity Fund incurred expenses of $13,303 and $8,250, respectively, pursuant to the 12b-1 Plan.

The Funds enter into contracts that contain a variety of indemnifications. The Funds’ maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.

In March 2008, the FASB issued Statement on Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires enhanced disclosures about Funds’ derivative and hedging activities. Funds are required to provide enhanced disclosures about (a) how and why the Funds use derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect the Funds’ financial position, financial performance, and cash flows. FAS 161 is effective for financial statements issued for financial statements issued for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. The Funds do not expect FAS 161 to have a material impact on their financial statements.

The Funds file complete schedules of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q, which is available on the SEC’s website at www.sec.gov. The Funds’ Form N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. For information on the Public Reference Room call 1-800-SEC-0330. In addition, the Funds’ Form N-Q is available without charge upon request by calling 1-877-PFI-STOCK or 1-877-734-7862.

A description of the Funds’ Proxy Voting Policies and Procedures is available without charge, upon request, by calling 1-877-PFI-STOCK or 1-877-734-7862. Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12 month period ended June 30, is available (1) without charge, upon request, by calling 1-877-PFI-STOCK or 1-877-734-7862, or (2) on the SEC’s website at www.sec.gov.

(a)

The Registrant’s President and Treasurer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider.

(b)

There were no significant changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.

Rates of Return (%)
		Since Inception(1) to
		June 30, 2008
Capital Appreciation Fund		0.68%
S&P 500 Index(2)		-15.10%

Rates of Return (%)
		Since Inception(1) to
		June 30, 2008
Opportunity Fund		-1.57%
Russell 2000 Index(2)		-14.43%
Russell Midcap Index(3)		-11.08%

	Ordinary		Long Term
	Income		Capital Gains		Total
Capital Appreciation Fund	$	6,822	$	—	$	6,822
Opportunity Fund		20,837		—		20,837

	12/31/2011		12/31/2010
Capital Appreciation Fund	$	165,272	$	156,132
Opportunity Fund		155,228		156,522


John D. Gillespie	Richard P. Howard	Kevin R. O’Brien