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

LIBERTY ALL-STAR^® EQUITY FUND

Period Ending June 30, 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 return for the unmanaged S&P 500 Index includes dividends. A description of the Lipper benchmark and the S&P 500 Index can be found on page 32.

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.

Fellow Shareholders:

The second quarter got off to a promising start, as broad market indices posted gains in April and May after declining for five straight months from November through March. June, however, proved to be a different story, as it dashed investors’ hopes and led most equity indices to post double-digit declines for the first half of 2008. As shareholders may have read already, it was the worst June for the Dow Jones Industrial Average since the Great Depression. Looking at more recent history, it was the third straight quarterly decline for the S&P 500 Index, and the worst second quarter since 2002.

In the second quarter, the woes that have plagued stock markets since the latter half of 2007 continued – with a vengeance. Oil and other commodity prices soared to record levels. The housing market remained in the doldrums. Unemployment ticked upward and consumer sentiment fell to its lowest level since 1980. And the credit crisis, with all its far-reaching implications, seemed to raise new doubts about the stability of financial institutions large and small. In fact, financials were the poorest performing sector, as banks and other financial institutions took write-downs and reported disappointing earnings. With vehicle sales falling dramatically, Gen- eral Motors Corp. lost 40 percent of its value during the quarter. Twenty-two of 30 Dow Industrial stocks closed the quarter in the red.

Volatility moderated somewhat over the quarter, but it would be hard to convince many investors of that. As measured by the Volatility Index (VIX), volatility was 108 percent higher in the first quarter of 2008 than in the year-earlier period. The VIX declined in the second quarter – but was still 51 percent higher on average than it was in the second quarter of 2007.

At June 30, the S&P 500 Index had fallen 2.7 percent for the quarter and 11.9 percent for the first half. The Nasdaq Composite Index actually rose 0.8 percent, but was off 13.2 percent for the half. The Lipper Large-Cap Core Mutual Fund Average, the primary benchmark for Liberty All-Star Equity Fund, lost 1.6 percent for the quarter and 11.5 percent for the half.

Turning to the Fund itself, the net asset value (NAV) declined 3.4 percent for the second quarter and was off 3.0 percent with shares valued at NAV with dividends reinvested. Shares valued at market price with dividends reinvested showed a 5.4 percent decline. For the first half, the same measures, respectively, were -13.2 percent, -12.6 percent and -11.7 percent. Though poor in absolute terms, that final figure – the year to date market price return – was slightly ahead of the S&P 500 Index and marginally behind the Lipper benchmark.

For the quarter and the half, the greatest detractor for the Fund was its allocation to financial stocks, where it is overweighted relative to the S&P 500 Index. Two of the Fund’s five managers often take contrarian points of view, whereby they focus on stocks with extremely negative investor sentiment. These managers view the pessimism surrounding financials – as well as other out of favor sectors – as an opportunity, even though the news and current environment

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would dictate otherwise. In many respects, the current situation is not unlike 1990-91 when money center banks – for example, Citigroup, Inc. – were extremely out of favor and was the last time these managers saw as compelling values in financial stocks as they see today.

In the current environment, there are few satisfied investors. Count us among them. We are not satisfied with the Fund’s recent performance – as distinct from its much better long-term performance – but we feel it would be a mistake if skilled, seasoned managers were to deviate from their investment disciplines. Frequently, times of financial turmoil – and, perhaps, irrational behavior – create opportunities for these value managers. We would point out that there are contrarian indicators that signal a possible reversal of the present trend. One is more than $3.5 trillion in money market funds, indicating not only the current fear, but also the potential liquidity that could be committed to equities. Another is net outflows from equity mutual funds for 14 straight months, indicating how low investor sentiment is. We’re not suggesting an immediate turnaround, but we are saying things are rarely as bad (or as good) as they seem. Emotion leads markets to overreact during both extremes.

We recommend that shareholders read this quarter’s investment manager interview with Craig Blum, CFA, of TCW, one of the Fund’s two growth style managers. He has interesting comments on two powerful growth opportunities – mobile computing and biotech – as well as some reflections on the current market environment and how he is navigating it during this difficult period.

We will continue to monitor the Fund and the broader markets and act in accord with our objective of consistent long-term returns for shareholders. Liberty All-Star Equity Fund remains a quality investment in which shareholders can be confident.

Sincerely,

William R. Parmentier, Jr.

President

Liberty All-Star Equity Fund

The views expressed in the President’s letter and the Manager Interview reflect the views of the President and Manager, respectively, as of July 2008 and may not reflect their views on the date this report is first published or anytime thereafter. These views are not guarantees of future performance 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.

SECOND QUARTER REPORT  JUNE 30, 2008

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*                The Fund’s net investment income and net realized capital gains exceeded the amount to be distributed under the Fund’s 10 percent distribution policy. In each case, the Fund elected to pay taxes on the undistributed income and passed through a proportionate tax credit to shareholders.

**         The number of shares offered was increased by an additional 25% to cover a portion of the over-subscription requests.

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.

DIVIDEND REINVESTMENT PLAN - Through the Fund’s Automatic Dividend Reinvestment and Cash Purchase Plan, the Fund’s shareholders have the opportunity to have their dividends automatically reinvested in additional shares of the Fund. Participants are kept apprised of the status of their account through quarterly statements.

For complete information and enrollment forms, please call Investor Assistance toll-free at 1-800-LIB-FUND (1-800-542-3863) weekdays between 9 AM and 5 PM Eastern Time. If your shares are held for you by a broker, bank or other nominee, you should contact the institution holding your shares if you wish to participate in the Plan.

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*                Because the Fund is actively managed, there can be no guarantee that the Fund will continue to hold securities of the indicated issuers and sectors in the future.

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The following are the major ($6.0 million or more) stock changes - both purchases and sales - that were made in the Fund’s portfolio during the second quarter of 2008.

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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 re- ports. 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

AS OF JUNE 30, 2008

* Certain holdings are held by more than one manager.

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LIBERTY ALL-STAR^® EQUITY FUND

MANAGER INTERVIEW

Craig C. Blum, CFA

TCW Investment

Management Company

High quality, fast growing companies: There are very few of them, so TCW runs a concentrated portfolio

TCW Investment Management Company is one of All-Star’s five investment management firms. TCW is a growth manager, seeking to invest 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 leading companies with distinct advantages in their business model and an inherent edge over competitors. Research plays a critical role in the selection process, and the investment horizon is long term. The portion of the Liberty All-Star Equity Fund portfolio that is allocated to TCW is man- aged by Managing Director, Craig C. Blum, CFA. The Fund’s Investment Adviser, ALPS Advisers, Inc., moderated the interview.

How, in general, are companies in the portion of the Liberty All-Star Equity Fund that you manage performing in this difficult economic environment?

They’re performing quite well, actually. There has been no departure in our philosophy, which is based on high quality growth, concentrated positions and a long-term orientation. But, turnover year to date is about 35 percent, and that’s higher than normal. Earlier in the year, I felt that some selective pruning was in order, and that accounts for the higher turnover.

More specifically to your question, portfolio companies are generally meeting expectations. Our largest holding is QUALCOMM, and it is doing well as a supplier of 3G technology, which, as you know, is the third generation of mobile phone standards. It enables network operators to offer users a wider range of advanced services while achieving greater network capacity. Salesforce.com – the leader in on-demand customer relationship management – and some of our health care holdings are also doing well. In the first quarter, over 75 percent of our companies met or exceeded expectations and I expect the same sort of ratio in the second quarter. I believe that certain long-term secular trends can overwhelm cyclical headwinds, and we have tried to populate the portfolio with companies that are positioned to benefit from these trends. Everyone has an opinion on the macro environment, but what our research department is really good at is company-specific fundamentals and finding the most compelling growth opportunities longer term.

“ … certain long-term secular trends can over- whelm cyclical head- winds, and we have tried to populate the portfolio with companies that are positioned to benefit from these trends.”

When you talk about long-term secular trends, what would be an example?

One would be smartphones, such as the BlackBerry devices. Overall, we believe smartphones are the largest unit growth opportunity in the history of consumer electronics. I know that’s a bold statement, but the cell phone industry sells 1.3 billion handsets every year. The

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smartphone segment of the market is still very small, but it’s growing very rapidly – about 50 percent a year. So, even growing at 50 percent a year for three years, smartphones would still represent less than 10 percent of the market. If you look at Apple’s iPhone, it’s less than 1 percent of the market. Research In Motion, which makes the BlackBerry, is about 1 percent of the market. So, these are small market share stories but the growth rate is very high. QUALCOMM is a beneficiary, too. Its technology powers these new 3G devices. More recently, we added Marvell to the portfolio because it is another electronics company that is levered to the smartphone industry.

Another theme that I would highlight within health care is biotech/biopharma. There are great growth stories and the companies in the industry aren’t too closely correlated to GDP growth, which is a plus if the economy re- mains weak for several quarters. Companies such as Genzyme, Genentech, Cephalon and Gilead Sciences should do quite well. Gilead Sciences, which is new to the portfolio, dominates the market for frontline therapy for HIV. It’s an uncomfortable subject, but the fact is HIV-AIDS infection rates continue to grow around the world.

You invest in quality growth companies. What is your definition of “quality growth?”

It’s first defined by a big revenue opportunity, because if you want to be a growth business and if you’re like us and you want to own the stock for several years, you better have a big revenue opportunity facing you. If it’s too small, you’re going to penetrate the opportunity too quickly. It’s also defined by competitive advantages inherent in the business that we can see and even measure.

Advantages have to be real and sustainable, they can’t just be stories. And then, quality is al- ways verified. It’s always validated when the company can capture share profitably year after year. In other words, we don’t want to own a company that is cutting price and destroying margins just to get market share. We want high or even rising margins and market share capture. So, that’s how we define it: big revenue opportunity, competitive advantages that are real and sustainable, and numbers generated by the company that confirm to us that it is a quality business. Now, there aren’t many companies that can do this. The universe is probably 50 to 100 companies.

“[We define quality growth as] big revenue opportunity, competitive advantages that are real and sustainable, and numbers generated by the company that confirm to us that it is a quality business.”

And, that’s one reason for the concentrated portfolio?

That’s right. We have high standards that not many companies meet. Naturally, there are fewer of these companies, so it’s difficult to find them.

What is a stock in the portion of the Liberty All-Star Equity Fund portfolio that you man- age that you feel has been treated unfairly by investors … in other words, a quality company whose performance is lagging its strong underlying fundamentals.

I would say Amazon. It was a great stock in 2007 when investors recognized all the value creation that has been going on for

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years. This year it has underperformed and is well off its highs. Investors seem to be concerned about valuation, but I believe they don’t realize that the potential margins in this business are much higher in the future than they are today. Management has been spending aggressively to continue to grow the business and to differentiate Amazon, and they’re doing it successfully. Amazon is growing its third-party business in Europe and in the U.S., and it’s entering new product categories, such as jewelry, apparel and even wine. The company is doing lots of exciting things, but that’s keeping margins artificially low – in the 5 percent range. We think that longer term this is a double-digit pre-tax margin retail business. Amazon could push a button, stop spending and margins would go to double digits right away, but we don’t want the company to do that. We want management to continue to use the strong cash flow to innovate, differentiate and grow the business. Plus, the opportunity is just so huge. Amazon may be 1 percent or 1.5 percent of retail. If it got to be 10 or 12 per- cent of retail it would become a Wal-Mart. Finally, it’s running uncontested with its type of retail model. No one talks about this, but there’s no one else that has Amazon’s infra- structure. They’re it. For everyone else, it’s too late to try to replicate what Amazon has done. That’s driving the third-party opportunity, in which other retailers who can’t compete simply list their products for sale on Amazon and share the profits.

When we get into these difficult markets, do you do anything differently? Obviously, you are going to adhere to your style and strategy. We mean, for instance, trading, or doubling up on due diligence, monitoring portfolio companies more closely.

In this kind of environment, the easy answer is that we do even more work and we’re more diligent and we check and double check and even triple check. But, I would say that the more insightful answer would be that your margin of safety has to be larger and you’ve almost got to expect that management isn’t going to have all the answers in an environment with so many surprises. So, we stress test our models even more to see how they respond in a wide variety of scenarios. And we are very careful about picking our entry points, i.e., the price we pay for a stock. This matters a lot in the kind of high volatility environment that we have. That doesn’t mean we’re trading or trying to outsmart the market. It just means we’re being patient and waiting for the optimal moment to buy. If the stock rolls over and drops 20 percent but we still believe in it, we’ve got to be ready to buy more because that’s our opportunity. That’s what we get paid to do: Deliver our best thinking and our best ideas every day.

“In this kind of [difficult] environment, the easy answer is that we do even more work and we’re more diligent … but the more insightful answer would be that your margin of safety has to be larger …”

Many thanks for a good interview.

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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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