UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Item 1.  Report of Shareholders.

A SINGLE INVESTMENT…

A DIVERSIFIED CORE PORTFOLIO

A single fund that offers:

·    A diversified, multi-managed portfolio of growth and value stocks

·             Exposure to many of the industries that make the U.S. economy one of the world’s most dynamic

·    Access to institutional quality investment managers

·    Objective and ongoing manager evaluation

·    Active portfolio rebalancing

·    A quarterly fixed distribution policy

·             Actively managed, exchange traded fund listed on the New York Stock Exchange (ticker symbol: USA)

LIBERTY ALL-STAR® EQUITY FUND

The views expressed in the President’s Letter, Unique Fund Attributes, Fund President Q&A and Manager Roundtable reflects the views of the respective parties. These views are not guarantees of future per formance and involve certain risks, uncertainties and assumptions that are difficult to predict, so actual outcomes and results may differ significantly from the views expressed. These views are subject to change at any time based upon economic, market or other conditions, and the respective parties disclaim any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for the Fund are based on numerous factors, may not be relied on as an indication of trading intent. References to specific company securities should not be construed as a recommendation or investment advice.

Contents

1      President’s Letter

4      Unique Fund Attributes

6      Multi-Management Has Produced More Consistent Returns

7      Investment Managers/Portfolio Characteristics

8      Fund President Q&A

9      Manager Roundtable

15    Table of Distributions and Rights Offerings

16    Top 20 Holdings and Economic Sectors

17    Major Stock Changes in the Fourth Quarter

18    Schedule of Investments

25    Statement of Assets and Liabilities

26    Statement of Operations

27    Statements of Changes in Net Assets

28    Financial Highlights

29    Notes to Financial Statements

33    Report of Independent Registered Public Accounting Firm

34    Automatic Dividend Reinvestment and Cash Purchase Plan

35    Tax Information

36    Trustees and Officers

39    Privacy Policy

40    Description of Lipper Benchmark and the S&P 500 Index

Inside Back Cover: Fund Information

LIBERTY ALL-STAR® EQUITY FUND

PRESIDENT’S LETTER

January 2009

Fellow Shareholders:

What began as a problem isolated to subprime mortgages in the U.S. in 2007 led to the bursting of a credit bubble of historic proportions and ultimately to a severe global recession. As credit conditions deteriorated the stock market began discounting the magnitude of these events and 2008 went down in history as one of the worst years on record for equity investors since the 1930s. During this period, other problems embedded in our financial system emerged to compound the difficulties, including excessive leverage and rampant use of derivative securities with little or no transparency. As confidence waned the financial crisis spread to main street, creating a negative feedback loop that—taken together—created what we now recognize as the perfect storm.

In terms of actual outcomes, the year ended with a decline of 37.0 percent in the S&P 500 Index. While the loss through the first nine months of the year was severe, the fourth quarter was especially damaging, as the S&P 500 declined 21.9 percent. The rout in the fourth quarter was fueled by hedge and mutual fund redemptions, which contributed to broad declines across all economic sectors and asset classes. It was one of those periods that offered no shelter, as commodities, corporate bonds and international securities all sold off sharply. In fact, ironically with respect to stocks, their decline was likely exacerbated by their liquidity—in an environment in which the credit markets froze, indiscriminate selling of stocks became one of the few ways to reduce leverage.

For the year, Liberty All-Star Equity Fund declined 42.3 percent with shares valued at net asset value (NAV), -41.2 percent with shares valued at NAV with dividends reinvested and -44.0 percent with shares valued at market price with dividends reinvested. The Fund’s comparable returns for the fourth quarter were -23.9 percent, -23.5 percent and -20.2 percent, respectively. Over the course of the year, the discount at which Fund shares traded relative to their underlying NAV ranged from 6.2 percent to 26.7 percent, the latter figure reached during the fourth quarter. These data and other performance measures are included in the table on page 3.

Fund performance trailed the S&P 500 Index for the fourth quarter and the year. Much of the underperformance can be attributed to an overweight to financial and information technology stocks together with an underweight to the relatively stronger consumer staples sector. With regard to financial stocks, one can debate exposure to this poor performing sector. But, it is difficult to suggest that the managers should have foreseen not only the severity of the decline, but also the government’s arbitrary response. In a span of less than a year, we witnessed the collapse of Bear Stearns and Lehman Brothers, the largest bank failure in U.S. history (Washington Mutual), the takeover of Merrill Lynch and Wachovia, the collapse of the world’s largest insurer (AIG) and the preemptive government rescue of Fannie Mae and Freddie Mac. Envisioning such a chain of events a year or so ago would not only have been met with skepticism, but also would have conjured an investment environment that few, if any, portfolio managers would ever have contemplated.

Stepping back, there are a few additional thoughts I would like to share with you. First, as you know, the Fund is actively managed by five portfolio managers (three value managers and two growth managers). During extreme periods—marked by euphoria when stocks are

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soaring and by fear when they are in free-fall—it can be challenging for active managers to outpace passive indices like the S&P 500. However, when stocks do get sold off aggressively, as they have been recently, it can create a window of opportunity. Indeed, as a group the Fund’s managers have seen the universe of attractive investment opportunities expand dramatically. Also, it has always been the Fund’s strategy to stay essentially fully invested and not attempt to time the market. Our shareholders have invested in a core equity holding, and as such they expect us to maintain equity market exposure. Moreover, as we have said on numerous occasions, consistently timing moves into and out of stocks is a very difficult long-term proposition.

Finally, there is the discount, which widened dramatically during the year and weighed on the Fund’s market price performance. As the discount is a subject that bears discussion in greater detail, please let me refer you to the Q&A on page 8 in which I review it and related topics from a longer-term perspective. I would also like to invite shareholders to read this year’s Manager Roundtable, which begins on page 9. After such a trying year, I believe it is worthwhile hearing directly from investment managers who are recognized leaders in their industry and to gain insights from their perspective.

Let me close by saying that, as always, we will do our upmost to ensure that the Fund remains a long-term investment vehicle in which shareholders can maintain trust and confidence. In this environment, however, there is a larger point to be made, and that is about maintaining trust and confidence in the economy and financial markets. To be certain, challenges await. There are no easy fixes. We must have the will to meet these challenges as this nation has done during past financial crises. I, for one, believe this nation and its people will ultimately prevail and that brighter days lie ahead.

Sincerely,

William R. Parmentier, Jr.

President

Liberty All-Star Equity Fund

ANNUAL REPORT  DECEMBER 31, 2008

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FUND STATISTICS AND SHORT-TERM PERFORMANCE

PERIODS ENDING DECEMBER 31, 2008

FUND STATISTICS:

PERFORMANCE:

* Percentile ranks calculated using the Fund’s NAV Reinvested results within the Lipper Large-Cap Core Open-end Mutual Fund Universe.

Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are total returns, which include dividends, after deducting Fund expenses. The Fund’s performance is calculated assuming that a shareholder exercised all primary rights in the Fund’s rights offerings. Figures shown for the unmanaged S&P 500 Index are total returns, including income. A description of the Lipper benchmark and the S&P 500 Index can be found on page 40.

Past performance cannot predict future results. Performance will fluctuate with market conditions. Current performance may be lower or higher than the performance data shown. Performance information does not reflect the deduction of taxes that shareholders would pay on Fund distributions or the sale of Fund shares. An investment in the Fund involves risk, including loss of principal.

Shares of closed-end funds frequently trade at a discount to net asset value. The price of the Fund’s shares is determined by a number of factors, several of which are beyond the control of the Fund. Therefore, the Fund cannot predict whether its shares will trade at, below or above net asset value.

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LIBERTY ALL-STAR® EQUITY FUND

UNIQUE FUND ATTRIBUTES

Unique Attributes of Liberty All-Star Equity Fund

Several attributes help to make the Fund a core equity holding for investors seeking diversification, income and the potential for long-term appreciation.

Multi-management for Individual Investors

Liberty All-Star Equity Fund is multi-managed, an investment discipline that is followed by large institutional investors to diversify their portfolios. In 1986, Liberty All-Star Equity Fund became the first closed-end fund to bring multi-management to individual investors.

Real-time Trading and Liquidity

The Fund has a fixed number of shares that trade on the New York Stock Exchange and other exchanges. Share pricing is continuous—not just end-of-day, as it is with open-end mutual funds. In addition, Fund shares offer immediate liquidity and there are no annual sales fees.

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Access to Institutional Managers

The Fund’s investment managers invest primarily for pension funds, endowments, foundations and other institutions. Because institutional managers are closely monitored by their clients, they tend to be more disciplined and consistent in their investment process.

Monitoring and Rebalancing

ALPS Advisors continuously monitors these investment managers to ensure that they are performing as expected and adhering to their style and strategy. Periodic rebalancing maintains the Fund’s structural integrity which is a well-recognized investment discipline.

Alignment and Objectivity

Alignment with shareholders’ best interests and objective decision-making help to ensure that the Fund is managed openly and equitably. In addition, the Fund is governed by a Board of Trustees that is elected by and responsible to shareholders.

Distribution Policy

Since 1988, the Fund has followed a policy of paying annual distributions on its shares at a rate of 10 percent of the Fund’s net asset value (paid quarterly at 2.5 percent per quarter), providing a systematic mechanism for distributing funds to shareholders.

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LIBERTY ALL-STAR® EQUITY FUND

MULTI-MANAGEMENT HAS PRODUCED MORE CONSISTENT RETURNS

The narrative on the preceding two pages is intended to focus on the unique attributes of the Fund. The chart below demonstrates the long-term outcome of these attributes, particularly the Fund’s multi-management structure. Most mutual funds are run by a single portfolio manager or an internal team of managers pursuing a particular investment style, whether it’s growth or value. But styles go in and out of favor. A style that outperforms on a relative basis one year may disappoint the next, leading to higher volatility.

As discussed in our “Unique Fund Attributes” feature, ALPS utilizes multi-management, that is, combining managers who practice different investment styles to reduce volatility while producing competitive returns.

All-Star’s long-term track record provides clear testimony to the value of the multi-management strategy. The chart below demonstrates that for the trailing 20-year period ending December 31, 2008, the Fund has achieved better-than-average returns and better-than-average consistency compared with peer funds in the Lipper Large-Cap Core universe.

Each dot represents the precise 20-year return and consistency record ending December 31, 2008, of each fund in the universe of 50 open-end Large-Cap Core equity mutual funds (as classified by Lipper, Inc.) that has a 20-year history.

Consistency is measured by the volatility of “non-market” monthly returns, calculated by subtracting the return of the S&P 500 Index from each mutual fund’s return. The lower the volatility, the higher the consistency of results compared with the stock market.

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LIBERTY ALL-STAR® EQUITY FUND

INVESTMENT MANAGERS/PORTFOLIO CHARACTERISTICS

THE FUND’S ASSETS ARE APPROXIMATELY EQUALLY DISTRIBUTED AMONG THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:

MANAGERS’ DIFFERING INVESTMENT STRATEGIES ARE REFLECTED IN PORTFOLIO CHARACTERISTICS

The portfolio characteristics table below is a regular feature of the Fund’s shareholder reports. It serves as a useful tool for understanding the value of a multi-managed portfolio. The characteristics are different for each of the Fund’s five investment managers. These differences are a reflection of the fact that each pursues a different investment style. The shaded column highlights the characteristics of the Fund as a whole, while the final column shows portfolio characteristics for the S&P 500 Index.

PORTFOLIO CHARACTERISTICS

* Certain holdings are held by more than one manager.

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LIBERTY ALL-STAR® EQUITY FUND

FUND PRESIDENT Q&A

The following are questions that shareholders have often asked—for instance, about the discount to net asset value at which Fund shares were priced throughout 2008. In the following, Fund President William R. Parmentier, Jr., discusses the discount and other matters.

The discount to NAV at which shares of Liberty All-Star Equity Fund trade in the open market widened considerably in 2008 and peaked during the fourth quarter. Can you explain why and when discounts widen? What makes them narrow? How about when shares sell at a premium to NAV, which has happened to Fund shares from time to time? Why and when does this occur?

There are many variables that influence whether the shares of closed-end funds are priced at a premium or a discount to their underlying net asset value. Two thousand eight was an extreme example where closed-end fund discounts widened dramatically. In early 2000 Fund shares traded at a discount in excess of 20 percent, which, interestingly enough, was a period when the markets were quite euphoric, just in advance of the bursting of the tech bubble. In 2008, the discount widened in a market that declined 37.0 percent (as measured by the S&P 500 Index), so we had the reverse of 2000.

What these markets had in common is two things: 1) they were emotionally driven markets; and 2) they were narrowly focused. In other words, the discount does relate to investor sentiment. Addressing the first point, in early 2000 the market was euphoric, while in the fourth quarter of 2008 the market was in panic and stocks were being sold indiscriminately. They were polar opposites, but both were extremes of investor sentiment. As to the narrowing of the market in 1999 and early 2000, investors increasingly focused on large cap technology stocks. In 2006, 2007 and into early 2008 investors focused on commodity stocks—energy, materials, industrial and precious metals, and agricultural commodities. Once again, you began to see investors flocking to a more narrow group of stocks.

But, situations change and discounts can become premiums. For instance, at March 31, 2000, Fund shares sold at a 22.7 percent discount to NAV. A year later they sold at a premium. During this period, the market broadened out and while the cap-weighted S&P 500 Index returned -1.1 percent annually from 2000 to 2005, Liberty All-Star Equity Fund returned +2.7 annually over the same period.

Actively managed funds—such as Liberty All-Star Equity Fund—seek to add value over passive indices through time. But certain market conditions can make it difficult for active managers to achieve this goal. For instance, in times when markets are extremely euphoric or, the reverse, extremely fearful, active managers typically lag benchmarks. Can you explain why this happens?

As discussed in the first question, it can be challenging for active managers to outperform indexes when the market is narrowly focused. In 2007 and 2008, the average stock in the S&P 500 Index actually underperformed the capitalization weighted S&P 500 Index, similar to what happened in 1998 and 1999. As the market narrows, fewer and fewer stocks outperform. Since our managers don’t limit themselves to investing in a subset of the market—like technology stocks in 2000 or commodities in 2006-08—the narrow focus is a challenge for a diversified fund. In other words, it becomes increasingly more difficult for active managers who are picking from a more broad universe of stocks to outperform during those periods.

Remember, as well, that in the September-December period last year absolutely nothing worked. Not only that, some stock valuations got to levels that can only be described as irrational in the wake of forced selling. An example was forced hedge fund liquidations where stocks had liquidity that more esoteric investments did not. For active managers, it’s the worst possible climate because intrinsic value didn’t provide a floor for many stocks, but conversely, presents a unique opportunity for future outsized gains.

Why do the Fund’s managers stay fully invested? Recently, the only thing that has “worked” has been cash. Wouldn’t it be better to go to a higher cash allocation and ride out the storm?

Simply stated, Liberty All-Star Equity Fund is an equity investment. We don’t make tactical asset allocation decisions—such as going between stocks, bonds and cash—because that is not the Fund’s investment objective. That has nothing to do with being a multi-managed, core equity holding. So, it is the investor who decides that he or she wants equity exposure through a well-diversified, high quality fund, such as Liberty All-Star Equity Fund. In addition, we feel the multi-management model has worked well over time and through most market conditions, save the extreme circumstances that we have seen from time to time. Our managers will raise some cash, but it’s not for market timing purposes. It’s just cash that they hold for short periods of time when they get out of certain stocks and get into others where they see more attractive opportunities.

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LIBERTY ALL-STAR® EQUITY FUND

MANAGER ROUNDTABLE

In a painful year, the managers adhered to their disciplines and remain confident in the future for quality companies

With daily media headlines and a litany of data to remind them, investors are all too well aware of what a poor year 2008 was in global financial markets. Indeed, most have felt the sting directly in their own portfolios. Yet, reason and rational thinking continue to prevail, as evidenced in the thoughts shared by the Fund’s five investment managers in this year’s Manager Roundtable. Through a year marked by fear and, occasionally, outright panic, they have maintained their investment disciplines and processes, while responding to constantly changing conditions—but not reacting to them. There is no changing the harsh reality of what has happened. But, looking back stocks usually bottom before the economy has begun to rebound from recession. And, looking ahead the managers see: First, opportunity in quality value and growth stocks that in some instances are priced at historically low levels; and, second, a growing recognition that past imbalances favoring consumption and spending over production and saving need to be reversed. ALPS Advisors served as moderator of the Roundtable. Given the exceptional nature of 2008, William R. Parmentier, Jr., President of Liberty All-Star Equity Fund, joins the Roundtable this year. The participating investment managers and their styles are:

CHASE INVESTMENT COUNSEL CORPORATION
Portfolio Manager/David Scott, CFA, CIC

Senior Vice President and Chief Investment Officer Investment Style/Growth – Chase is a growth manager that has a valuation orientation to its investment process, seeking to invest in quality growth stocks that demonstrate consistent earnings growth but whose shares are reasonably priced.

MATRIX ASSET ADVISORS, INC.

Portfolio Manager/David A. Katz, CFA

President and Chief Executive Officer

Investment Style/Value – Matrix follows an opportunistic value-oriented investment philosophy. Matrix believes that value can be found in all sectors of the economy, and thus looks for investment opportunities beyond traditional value industries.

PZENA INVESTMENT MANAGEMENT, LLC

Portfolio Manager/Antonio DeSpirito, III

Principal and Portfolio Manager

Investment Style/Value – Pzena uses fundamental research and a disciplined process to identify good companies with a sustainable business advantage that the firm believes are undervalued on the basis of current price to an estimated normal level of earnings.

SCHNEIDER CAPITAL MANAGEMENT CORPORATION
Portfolio Manager/Arnold C. Schneider, III, CFA

President and Chief Investment Officer

Investment Style/Value – The firm practices a disciplined, fundamental approach to add value over time. Research focuses on uncovering new ideas and owning undervalued stocks before they experience a rebound in earnings and come to the attention of other investors.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Manager/Craig C. Blum, CFA

Managing Director

Investment Style/Growth – TCW invests in companies that have superior sales growth, leading and/or rising market shares, and high and/or rising profit margins. TCW’s concentrated growth equity strategy seeks companies with distinct advantages in their business model.

Since all the bad news of 2008 has been well documented, is there anything positive to take away as we start 2009? Let’s ask our two growth managers, Craig Blum and David Scott, to lead off.

BLUM (TCW – GROWTH): The strongest component of the bull argument from here is valuations. An historically severe contraction in profits for 2009 seems almost assured, but we’ve already paid for that in price action for 2008. What is required in this analysis, however, is a lower bound to employment, and we have not seen that yet. Additionally, we have regime change in Washington and the massive economic stimulus that is likely to follow. While policy stimulus might ultimately result in other challenges in the future, it is helping to put a floor under the U.S. banking system. Credit spreads have shown modest improvement, but this is primarily the result of government buying.

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): The importance of using a disciplined stock selection process was emphatically demonstrated in 2008. Chase Investment Counsel believes that our process helped

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us to make timely sales and, as importantly, kept us from re-entering stocks when many issues looked superficially inexpensive, but still had considerable downside risk. Finally, as we have seen in many previous stock market cycles, patience was once again rewarded. Managers who violated their processes in an effort to capture high risk returns in 2006 and 2007 were punished severely in 2008.

“The importance of using a disciplined stock selection process was emphatically demonstrated in 2008.”

David Scott,

Chase Investment Counsel (Growth)

Let’s turn to the value managers and ask about their views. David Katz, lead off, please.

KATZ (MATRIX ASSET ADVISORS – VALUE): Yes, one is a slight improvement in the overall credit picture, which is reducing concerns about the viability of the financial system, a huge concern in 2008. Another is the reality that a historic amount of pain has already been endured, not only in 2008 but also for the past 10 years. This could set the stage for a recovery of the market in 2009, as the recession eventually subsides and valuations are seen to be compelling. Furthermore, valuations are in the bottom decile of their historic levels. Finally, stocks typically start to rise mid-way through a recession and we should be at that point in the early part of 2009.

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): Clearly, the experience of the past year has been painful. But resulting from that pain is a highly compelling level of valuations for the market in general and value stocks in particular. We have not seen this deep a discount to fair value for equities in the almost 30-year period for which we have analyzed the data. Risk premiums are also at an extreme—a clear sign of risk aversion. The good news is that the expected return on equities going forward is also at a peak, and there is now a broad range of value investment opportunities across multiple sectors, giving us a diverse portfolio of extremely attractive investments with strong balance sheets and solid business franchises.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): Although the economy and corporate profits face continued weakness in 2009, the equity and bond markets have probably already discounted most, if not all, of the bad news. Rampant pessimism, low investor expectations and vastly discounted stock prices might have set up investors for satisfactory long-term equity returns in the future—returns that are built on a more reasonable expectation for future earnings growth.

Bill Parmentier, what are your observations from the Fund’s perspective?

PARMENTIER (LIBERTY ALL-STAR EQUITY FUND): One positive sign going into 2009 is that closed-end fund discounts are narrowing. They’re not where we’d like them to be, but they’re not 20 plus percent anymore. We are also starting to see some narrowing of credit spreads, which could be the early signs of a thaw in credit markets that essentially froze in October and November. In sum, these are early signs that the monetary easing, and stimulus efforts by governments and central bankers around the globe are finally having some impact. This is not to say that we are out of the woods, but we are heading in the right direction. After a difficult period, investors likely want to see a quicker turnaround, but patience is still required.

As the market declines deepened, particularly in the second half, what did you do—consistent with your style and strategy—to minimize the damage or defensively position portfolios that you manage? Let’s stay with the value managers and Arnie Schneider.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): Our deep-value investment style limits our ability to flee to the highest quality stocks in the defensive-oriented consumer staples, health care and utilities sectors. However, we did migrate, where possible, into stronger companies within our favored industries. Later in the year we also found some new investment opportunities that should work even without a strong upturn in the economy.

How about Matrix and Pzena?

KATZ (MATRIX ASSET ADVISORS – VALUE): We paid particularly close attention to the ability of our holdings to navigate through a perilous period, focusing on financial strength. We also very critically examined existing positions that had held up in the market far better than similarly-situated peers. Our concern here was that a similar fate might befall these holdings. These two reviews resulted in our selling a number of our positions and redeploying the proceeds into strong companies whose valuations had become more compelling as a result of the market sell-off.

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): Consistent with our strategy and discipline, we focused on downside protection by stress-testing our holdings to make sure they could survive extreme economic scenarios. Companies with strong balance sheets

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often are able to take advantage of a downturn by buying quality assets at distressed prices. Just in the last several months a number of our portfolio companies have improved their long-term prospects through industry consolidation. We also owned a number of businesses— health care comes to mind—considered less sensitive to an economic downturn that would provide fresh powder to take advantage of new opportunities as they arose.

How about the growth managers? What did you do as market conditions worsened over the year?

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): In order to minimize damage we became much more selective in our portfolio choices and concentrated assets in fewer stocks. Consistent with past cycles these stocks tended to be larger higher quality “mega-caps” such as McDonald’s and Wal-Mart. We increased the position sizes to the high end of our allowable ranges and therefore did not have to hold less attractive stocks just to remain invested. We maintained high quality, low volatility and strong defensive characteristics while holding to our process during this difficult period.

BLUM (TCW – GROWTH): Beginning early in 2008, we moved to a significant overweight position in health care, specifically biotechnology and specialty pharma names. We believe this area provides attractive and sustainable growth that is more insulated from the economic cycle. Our biotech companies also enjoy long patent lives and are more profitable than typical drug businesses. Our underweight position in energy also helped results for calendar 2008.

A related question: Given the extreme nature of the market decline, did you change anything in your investment process, do any added research, overlay another hurdle, etc.? Let’s hear from the value managers and then the growth managers.

KATZ (MATRIX ASSET ADVISORS – VALUE): While our process did not change, as mentioned previously, we were considerably more critical as to everything we own or were contemplating buying, especially financial stocks. Furthermore, we have tried not only to be cautious but also opportunistic by asking whether a given holding— or any potential holding that we are reviewing—might be particularly attractive in an ensuing market recovery.

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): Our investment process remained the same—buy good businesses undergoing stress where we saw a sustainable business franchise with long-term staying power. Unfortunately, extreme emotion during the financial crisis resulted in negative business outcomes for a number of financial companies—including some of our holdings—that required us to give greater weight to the impact of emotion on the ultimate investment outcome in our decision-making process.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): Although we constantly innovate, in 2008 we added an additional layer of analysis for stocks within our highest risk ranking. When it became clearer during the year that a firm’s long-term earnings power was taking a back seat to near-term concerns over funding, liquidity and capital adequacy, we sharpened our focus on these issues as we evaluated new investment opportunities.

BLUM (TCW – GROWTH): While always trying to improve everything that we do, 2008 provided an opportunity to reassess each holding’s competitive position and long-term outlook. We placed even more emphasis on balance sheet strength, profitability and market share capture.

“…the distinction between growth and value has become clearer since the beginning of 2008.”

Arnie Schneider,

Schneider Capital Management (Value)

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): We did not change our process. However, given the unprecedented rise in volatility and the rapidly changing fundamental outlook caused by the speed of the unfolding financial crisis, we felt it was imperative to respond quickly to negative developments and thus portfolio turnover did rise.

Have the extreme selling and volatility scrambled the classic definitions of growth and value stocks? That is, is everything a value stock right now given current valuations?

BLUM (TCW – GROWTH): Arguably, this is true. Value and growth indices generally performed in-line with one another during 2008, but many growth companies have not sacrificed long-term earnings power. High-quality growth companies now trade at multiples more commonly associated with value companies. I think the important distinction remains the long-term revenue growth, margin expansion and cash flow growth available to a company. The long-term winners will continue to shine across these metrics.

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): We believe the answer is no. First, the indexes separate growth stocks from value stocks based on variables such as historical earnings, growth rates or projected growth rates of the companies, and price to book value ratios.

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The various services divide the entire universe by ranking the highest growers and highest price to book value stocks and placing them in the growth indexes and placing the lower tier in the value indexes. Different services vary, but about one-half fall into each category. Therefore, the absolute levels don’t force all issues into one style index. Furthermore, if we broaden the definition to include growth companies and value companies, without question both categories still exist today even at these lower prices. One example of a growth stock is Gilead Sciences. While we believe it offers good value we would definitely not categorize it as a value stock.

“If one believes in the continuing viability of the American economy…then this could be an incredible time to be in the stock market.”

David Katz,

Matrix Asset Advisers (Value)

How do the value managers view the growth/value relationship in the wake of the 2008 market? Arnie Schneider, what do you see?

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): On the contrary, the distinction between growth and value has become clearer since the beginning of 2008. Valuation spreads, or the difference between the average and the cheapest stocks in the market, substantially widened last fall after being unusually compressed for several years. The traditional measures of “cheapness,” or value, suggest that classic value stocks are selling at a steep discount relative to their historical norms.

Interesting point of view. What about Pzena and Matrix?

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): We have never assigned a traditional growth or value tag to stocks—we are always valuation-driven, and our portfolio has always reflected the sectors undergoing the greatest stress or being most out of favor. Even in the current environment, there is a valuation difference between the cheapest stocks and those that are more expensive—and those spreads are near all-time highs. There is a range of sectors represented in our portfolio, as both stress and opportunities are widespread.

KATZ (MATRIX ASSET ADVISORS – VALUE): Not everything is a value stock, but a great many growth stocks are significantly undervalued right now. That might be somewhat semantic, but it really means that both growth and value stocks are trading at historically low valuation metrics on both an absolute and relative basis. We believe that some of the greatest opportunities today are to be found in high quality growth stocks because in many cases they are trading at valuations typically associated with deep value stocks. This means that they should have more upside potential as they return to more normative valuation levels.

At the Fund level, value and growth come together. So, what do you think about this question, Bill Parmentier?

PARMENTIER (LIBERTY ALL-STAR EQUITY FUND): In the long term, the styles will remain separate and distinct. But in the shorter term, there has been some scrambling based on value and growth index composition. An example is commodity and energy stocks that were traditionally value plays finding their way into growth indices. But in the longer term there will always be managers who look for attractively priced stocks based on normalized earnings, good dividends, favorable price to book ratios and so forth, while other managers will favor faster growth rates, newer business models, technological innovation and competitive advantages in rapidly growing markets.

Interesting set of responses. Let us ask a question from the investor’s perspective. As investors’ portfolios have taken a substantial hit, there is some skepticism about diversification, long-term horizon, the outlook for equities and other foundational thoughts. What would you say to investors as they look ahead? Let’s ask the growth managers to start.

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): First, we are moving through a period of substantial change. The consumer debt cycle that has powered many parts of our domestic economy for the last several years has peaked and a retrenchment has begun. Second, this new environment will breed both winners and losers in the stock market. It is imperative to pick companies carefully during this period. Third, we believe it is important to use a disciplined process that has demonstrated the ability to realize value during times of significant change in the past. Importantly, because the macroeconomic changes are likely to be sweeping and very difficult to analyze and time, focus should be on choosing individual stocks and not broad themes. Fourth, this disciplined process should consider both fundamental and technical research inputs even as we focus on the growth segment of the market to ensure that reasonable values are in place. Fifth, we believe the process we use at Chase Investment Counsel meets these criteria.

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BLUM (TCW – GROWTH): Excluding dividends and adjusted for inflation, U.S. public equity returns appear lacking over the past 10 years. These returns reflect an economy built not on savings and production, but rather one built on borrowing and consumption. Equity market returns should improve as financial realities force a correction to this imbalance. In fact, this structural rebalancing of asset prices, risk and reward is a necessary and welcome, although painful, ingredient of any market recovery. Importantly, given the forward-looking nature of equity markets, we believe stock prices will bottom long before it becomes obvious that the economy has improved.

“…the long-term perspective is difficult to take, requires patience and commitment, and doesn’t sound good until you’re proven right.”

Antonio DeSpirito,

Pzena Investment Management (Value)

Sound thoughts. How about the value managers? David Katz, will you start?

KATZ (MATRIX ASSET ADVISORS – VALUE): We would advise investors that the recovery of their declines could be far quicker than many right now believe. Our view is fairly simple and straightforward: If one believes in the continuing viability of the American economy and in the ability of various stimuli to re-energize it, then this could be an incredible time to be in the stock market. Historically, horrific periods like 2008 have been followed by equally powerful rallies. Finally, we believe that the highly disappointing most recent 10-year period in the market has set the stage for what should be an upward regression to better long-term returns going forward.

What thoughts would Pzena and Schneider Capital share?

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): It always feels most difficult when valuations are at an extreme low and we’re coming off a rough period. Opportunity, however, is rarely obvious and it’s rarely embedded in the short term. The trouble is, the long-term perspective is difficult to take, requires patience and commitment, and doesn’t sound good until you’re proven right. It’s at the peak of pessimism where we get to buy companies for a fraction of their fair values. Once this recession passes, like all others preceding it, high quality companies that survive the downturn due to their financial and operational strength will likely emerge stronger and more profitable. We believe the prospective returns to a disciplined value investment approach look as positive as they have in a number of years.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): Investors should not abandon a strategy of broad asset diversification. The events of 2008 truly tested this advice as it appeared that every asset except Treasuries fell in unison. Over time, we believe returns will be less correlated than they were during last year’s unprecedented financial crisis.

How about the Fund’s thoughts?

PARMENTIER (LIBERTY ALL-STAR EQUITY FUND):  Human psychology being what it is, frequently when investors feel that there’s the least risk in markets, that’s when there can be the most risk. And when investors feel that there’s the most risk in the markets, like today, historically it has proven to be the moment when investors should not give up on the fundamental precepts of investing.

“…investors [are returning] to the fundamental reason for investing, and that is owning quality companies with good long-term fundamentals.”

William Parmentier,

Liberty All-Star Equity Fund

Coming off the worst decade for stocks since the 1930s, the tendency is to write-off the ability of stocks to outperform most asset classes over long periods of time. But, if you put the period into perspective, there have also been long periods when stocks have provided excellent returns. Beginning in 1982—with the exception of the 1987 crash—stocks did very well. Unfortunately it ended with the tech bubble before Y2K and the tragic events of 9/11. In hindsight credit became too cheap for too long, which led to excess leverage and speculation. Now, I believe, we are seeing a lot of the excesses purged from the system and over the long term that may be beneficial as investors return to the fundamental reason for investing, and that is owning quality companies with good long term fundamentals.

To close, let us note that most of the All-Star managers take a bottom-up approach. But with macroeconomic factors (GDP, unemployment, earnings, etc.) at such extremes, they can’t be ignored. how are you working the national (and global) economic picture into your decision-making? David Katz, your thoughts, please.

KATZ (MATRIX ASSET ADVISORS – VALUE): Even bottom-up managers such as ourselves consider macro factors insofar as they would impact a particular company we are considering. In the current environment, that ties into our concerns about a company’s durability during hard times but also those areas of the economy and the

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market that are likely to be in the vanguard of recovery. Economic sectors that have been hardest hit may or may not be the leaders of a recovery. But there is also the question of how soon they will respond. We are particularly interested in companies that we believe will be earlier stage recovery investments, as well as companies that will be prime beneficiaries of a recovery. While we have been cognizant of defensive strength during the past year, we think the higher priority in 2009 will be to identify the potentially strongest-recovering companies.

What about Schneider capital and Pzena? you take a bottom-up approach.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT – VALUE): A high degree of uncertainty surrounds the prospects for global GDP growth in 2009 and, to a lesser extent, 2010. The U.S. recession could be the worst in decades, credit markets are still under pressure and consumers need to rebuild their savings after an astonishing decline in net worth. However, as we look ahead and anticipate the eventual upturn, our stock selection criteria will remain consistent as we identify undervalued companies that can weather the stresses that carried over into the current year and produce a strong earnings recovery in the future.

DESPIRITO (PZENA INVESTMENT MANAGEMENT – VALUE): We always build our portfolios based on bottom- up company analysis. That being said, we stress-test all our companies for a severe recession scenario so we can have a high degree of confidence that they will be around to benefit from the upturn when it occurs and are able to take advantage of consolidation opportunities among smaller/weaker players. We also stress-test for an environment where credit is severely restricted, seeking to understand what these companies would look like if they have to de-leverage and raise equity at low prices—e.g., how much dilution will equity investors endure in an extreme scenario?

The growth managers: How do you balance bottom-up and top-down?

BLUM (TCW – GROWTH): We agree that there are macroeconomic trends that all investors simply must have an opinion on. The U.S., the U.K. the Euro zone and Japan have all moved into recession simultaneously. This has not occurred since the Second World War. Employment trends are deteriorating rapidly. Entire industries are being redefined. With this in mind, our charter remains the same

…identify and own longterm earnings growth that is attractively priced. We continue to focus on high quality growth companies that are improving their competitive positions and increasing future earnings power. When we survey the portfolio and observe our portfolio companies’ fundamentals relative to others, we are struck by the positive trends we see in revenue growth, market share capture and long-term competitive strength. Current valuations do not reflect these attributes. While fully acknowledging the extreme macroeconomic headwinds facing all investors, we remain confident that our portfolio company fundamentals will drive future value and ultimately deliver superior results over the long term.

“...our charter remains the same... identify and own long-term earnings growth that is attractively priced.”

Craig Blum,

TCW (Growth)

SCOTT (CHASE INVESTMENT COUNSEL – GROWTH): Even though we take a bottom-up approach to selecting stocks, macroeconomics has always played a role in our process. We start our process by identifying attractive companies based on individual characteristics. Once the in-depth research begins, all aspects regarding the company are considered. For example, we did not purchase McDonald’s in 2008 because of the federal stimulus program. However, once we identified the company as attractive based on its strong fundamental and technical profile, our analyst noted that the company would benefit from individuals receiving rebate checks. If a rebate program occurs once again in 2009, some retailers and restaurants, such as McDonald’s, could benefit further. This will likely be the case once again in 2009. The key is we began with our analysis focused on the individual company and not macroeconomic issues.

Many thanks for your thoughts and comments. we hope next year’s roundtable takes place in a much more positive environment.

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LIBERTY ALL-STAR® EQUITY FUND

TABLE OF DISTRIBUTIONS AND RIGHTS OFFERINGS

DISTRIBUTION POLICY

Liberty All-Star Equity Fund’s current policy, in effect since 1988, is to pay distributions on its shares totaling approximately 10 percent of its net asset value per year, payable in four quarterly installments of 2.5 percent of the Fund’s net asset value at the close of the New York Stock Exchange on the Friday prior to each quarterly declaration date. The fixed distributions are not related to the amount of the Fund’s net investment income or net realized capital gains or losses and may be taxed as ordinary income up to the amount of the Fund’s current and accumulated earnings and profits. If, for any calendar year, the total distributions made under the 10 percent pay-out policy exceed the Fund’s net investment income and net realized capital gains, the excess will generally be treated as a non-taxable return of capital, reducing the shareholder’s adjusted basis in his or her shares. If the Fund’s net investment income and net realized capital gains for any year exceed the amount distributed under the 10 percent pay-out policy, the Fund may, in its discretion, retain and not distribute net realized capital gains and pay income tax thereon to the extent of such excess. The Fund retained such excess gains in 1993, 1996 and 1997.

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LIBERTY ALL-STAR® EQUITY FUND

TOP 20 HOLDINGS AND ECONOMIC SECTORS
December 31, 2008

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LIBERTY ALL-STAR® EQUITY FUND

MAJOR STOCK CHANGES IN THE FOURTH QUARTER

The following are the major ($5.0 million or more) stock changes - both purchases and sales - that were made in the Fund’s portfolio during the fourth quarter of 2008.

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LIBERTY ALL-STAR® EQUITY FUND

SCHEDULE OF INVESTMENTS

as of December 31, 2008

See Notes to Schedule of Investments and Financial Statements

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See Notes to Schedule of Investments and Financial Statements

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See Notes to Schedule of Investments and Financial Statements

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