A SINGLE INVESTMENT...

A DIVERSIFIED CORE PORTFOLIO

A single fund that offers:

LIBERTY ALL-STAR^® EQUITY FUND

The views expressed in the President’s Letter, Unique Fund Attributes and Manager Roundtable reflect the current views of the respective parties. 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.

Contents

The stock market was essentially unchanged over the span of 12 months in 2011, but that doesn’t mean it was a smooth ride. Quite the contrary, the market fluctuated wildly during a year in which investors seemed to develop a split personality--optimistic one day, fearful the next. In an attempt to explain the volatility, the media even coined the term “risk-on/risk-off,” as if repeated changes in direction could be likened to the flip of a switch.

The greatest volatility came during the second half of the year. The S&P 500^® Index moved up or down by 1 percent or more on 22 percent of the trading days during the first half. That rate more than doubled in the second half, rising to 57 percent of trading days, approaching the 69 percent of trading days with similar moves in the first quarter of 2009. That period marked the capitulation phase of the market decline triggered by the most severe financial crisis since the Great Depression.

When the dust finally settled, the S&P 500^® Index gained 2.11 percent for the year. The first and fourth quarters of the year were positive, as they returned 5.92 percent and 11.82 percent, respectively. However, the second quarter was flat (+0.10 percent) and the third quarter was very poor, as the index declined 13.87 percent.

Behind the uneven performance of the stock market and its extreme volatility was a mix of factors. On the positive side, corporate earnings were strong, balance sheets continued to recover nicely and managements did a good job of managing costs. The offsets to good corporate performance were an anemic housing and job market. But it was macro concerns on both sides of the Atlantic that created the turmoil, as investors lost confidence in governments’ ability to deal with fiscal crises. In the U.S., concerns were driven by the size of the federal budget deficit and the political infighting that prevented Washington from coming up with any meaningful solution. The federal debt, just $1 trillion in 1981, skyrocketed 15-fold by 2011. It didn’t help when rating agency, Standard & Poor’s downgraded U.S. debt from AAA to AA+. It was the first-ever downgrade of

U.S. debt. Sovereign debt woes plagued the European Union as well. Greece, a relatively small economy, was at the eye of the storm, but the real worry was that debt problems could result in defaults in Italy, Ireland, Spain or Portugal--and could even lead to the demise of the euro. Not even a core euro-zone economy like France was immune to the concerns. Like their counterparts in Washington, Europe’s leaders have proved ineffectual in dealing with the problem.

For the year, Liberty All-Star Equity Fund declined 6.73 percent with shares valued at net asset value (NAV), 5.84 percent with shares valued at NAV with dividends reinvested and 8.09 percent with shares valued at market price (with dividends reinvested). It was a disappointing year, as all three measures of return considerably lagged the -0.65 percent return of the Lipper Large-Cap Core Mutual Fund Average, the Fund’s primary benchmark, as well as the S&P 500^® Index.

The Fund’s underperformance can be attributed largely to the third quarter of 2011. Through the first half of the year, the Fund outperformed both the Lipper benchmark and the S&P 500^® Index on a market price basis (with dividends reinvested). At June 30, 2011, the Fund had returned 8.66 percent on a market price basis versus 5.19 percent for the Lipper average and 6.02 percent for the S&P 500^® Index. But, in the third quarter, the Fund declined 18.96 percent with shares valued at NAV; 18.80 percent with shares valued at NAV with dividends reinvested; and 19.29 percent with shares valued at market price (with dividends reinvested). Although Fund returns were more competitive in the fourth quarter, the worst of the damage had been done.

We are disappointed that a poor quarter had such a negative impact on relative long-term performance. As recently as June 30, the Fund’s NAV reinvested return had outperformed the Lipper benchmark for the trailing one, three, five, 10 and 20 years, as well as since inception, which was 24 1/2 years as of that date. Even after the poor 2011, returns over the trailing three year period rank the Fund in the 26th percentile of its Lipper universe.

Looking beneath the numbers, most actively managed funds did poorly in the highly volatile environment that existed in 2011. This observation is borne out by the fact that 77 percent of the funds in the Lipper Large-Cap Core universe underperformed the S&P 500^® Index last year. Further, our managers are going to remain true to their style and strategy, as we want them to. So, for example, while investors were rushing into defensive sectors (consumer staples, healthcare, utilities) in 2011, our managers did not abandon their principles for potential short-term refuge. And our value managers, representing 60 percent of the Fund, were hurt the most due to their focus on economically sensitive stocks, as investors shunned them over fears of fallout from the euro zone. On the subject of diversification, while it can help long term, it can hurt short term when investors panic and concentrate on the most defensive sectors of the market. It is also the Fund’s policy to stay essentially fully invested and not attempt to “hide” in cash during market sell-offs, such as last year’s third quarter.

Turning to specific sector allocations, the Fund was underweight in the three best performing S&P sectors, which were, in order of return, utilities, consumer staples and healthcare, and was overweight to the poorest performing S&P sector, financials. The Fund was also overweight in information technology and energy, but hurt more by poor stock selection than sector allocation.

For most of the year, the discount at which Fund shares traded relative to their underlying NAV narrowed, although it widened in the fourth quarter. For the year, the discount ranged from 7.2 percent to 16.8 percent compared with 10.4 percent to 17.6 percent in 2010.

Fund distributions totaled $0.34 per share in 2011, up from $0.31 in 2010. As shareholders may recall, the Fund’s distribution policy has been in place since 1988 and is a major component of the Fund’s total return. Since the Fund’s first calendar year of operations in

1987, the Fund has paid distributions of $23.60 per share. We would emphasize that shareholders need to include these distributions when determining the return on their investment in the Fund.

Once again, in this annual report we offer a question and answer session with the Fund’s five investment managers. We believe you will find the comments of these leading investors to be both interesting and insightful. As we have also done in recent annual reports, we once again offer a brief summary of the Fund’s attributes on pages 4 and 5. I urge you to revisit these attributes, as they help to make the Fund a unique and attractive investment vehicle.

In closing, while we are disappointed with the Fund’s performance during the second half of 2011, in this highly volatile environment markets rise and fall in ever more compressed and unpredictable timeframes. As cited earlier, as of June 30, 2011 the Fund was ahead of its primary benchmark for all short- and long-term periods. That was due in part to the managers remaining focused on their respective styles and the opportunities that became available during the market declines. And although 2008, much like 2011, was a disappointing year in relative terms, the Fund was positioned to fully exploit those opportunities and it outperformed 90 percent of its peers in the Lipper Large-Cap Core universe during calendar years 2009 and 2010.

We thank you for your ongoing support of the Fund. Please remain assured that we at Liberty All-Star Equity Fund will continue to monitor markets and our managers closely, and will keep the best long-term interests of shareholders first and foremost in all that we do.

Sincerely,

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star^® Equity Fund

Investment Manager Roundtable

The Fund’s five investment managers summarize their strategy, look back at 2011 and identify stocks that exemplify their investment approach

Liberty All-Star Equity Fund’s five investment managers represent long experience, deep knowledge, a proven track record and, given that they represent both growth and value styles of investing, a broad point of view on the stock market and equity investing generally. Thus, once again, we are grateful to be able to call upon this resource to provide Fund shareholders with commentary and insight. The Fund’s Investment Advisor, ALPS Advisors, Inc., serves as moderator of the roundtable. Participating investment management firms, the portfolio manager for each, and their respective styles and strategies are:

CORNERSTONE CAPITAL MANAGEMENT, INC.

Portfolio Manager/Thomas G. Kamp, CFA

President and Chief Investment Officer

Investment Style/Growth – Cornerstone evaluates stocks that its research identifies as offering underappreciated opportunities for growth as defined by one or more of their metrics. Stock selection is further based on the fundamentals of revenue, earnings, cash flow, and management depth and credibility.

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.

With all five managers contributing to the roundtable, it’s a good opportunity for shareholders to compare the various approaches to portfolio management that each of you represent. Can you summarize your investment style, strategy and process, as well as any factors that are distinct to your firm? Tom Kamp and Craig Blum, let’s hear from the growth managers to start.

Cornerstone’s strategy seeks long-term growth of capital for its clients through the opportunistic selection of stocks expected to appreciate at a faster rate than the benchmark. These stocks are evaluated based on a variety of key factors where our research identifies the perception gap. Stock selection is further based on the fundamentals of revenue, earnings, cash flow, and management depth and credibility. Sector allocation is a by-product of individual stock selection. Stocks will generally be selected from those that are primarily traded on U.S. exchanges or markets. The objective of the strategy is to generate alpha over the long term by purchasing high growth companies where our research has identified one or more perception gaps.

Blum (TCW – Growth): We are a quality-focused, concentrated, large-cap growth manager. In our view, four attributes set the strategy apart from many others. First, our definition of quality is unique in that we focus squarely on large and attractive end markets that face each company and then combine that with research around business model advantage. Second, we own a concentrated portfolio of approximately 25 to 35 stocks, allowing us to focus our efforts strictly on our best ideas. Third, we embrace a long-term orientation, which typically translates into a holding period of between three and five years. This enables the strategy to remain invested in the most attractive opportunities given our belief that the best businesses tend to repeat their successes for long time periods. Finally, we employ what we refer to as a “light macro overlay” that aligns our current portfolio construction with our current macro view. The team’s investment process is a proprietary, fundamental, bottom-up approach designed to identify attractive opportunities and then move those names through an exhaustive, fundamental research process. Our focus is on evaluating and modeling industry dynamics, modeling company-specific fundamentals, conducting competitor analysis, identifying sustainable competitive advantages, meeting with and evaluating management, and performing all related valuation work.

Thank you both. Let’s turn to the value managers and ask Tony DeSpirito to begin.

DeSpirito (Pzena – Value): We are old-fashioned value investors. Some people would use the term “deep value.” We think of it in a fairly straightforward way: We’re trying to find good companies when their share prices get depressed relative to the ability of the underlying business to generate earnings and cash flow over the long term. We approach these businesses with a fairly healthy dose of realism; that is, you don’t get to buy the best businesses with the fastest growth rates and the wonderful management teams and all of the characteristics that everybody wants for the simple reason that they don’t sell for a low price. Many times, however, there are good businesses that do get marked down, generally because something has gone wrong. Our whole philosophy is to try and identify those companies and then make the judgment as to which ones are really good businesses where the problems are only temporary.

There are a few things that we feel differentiate us from other firms. First, we have an unwavering commitment to our investment approach, which provides assurance that we are constructing deep value portfolios true to our investment philosophy. We also have a long-term orientation - three to five years - which reflects our “buy the business” perspective. This gives us the ability to make judgments about deeply undervalued businesses

where the market is obsessed with short-term problems and we see long-term potential. Lastly, we have a systematic approach to handling negative information, which enables us to differentiate between companies that we believe are facing temporary setbacks versus a permanent change in our investment thesis. This has proven to be a significant advantage over our history, and reflects our commitment to deep fundamental research.

Thank you. Let’s hear from Matrix and Schneider to round out our first discussion point.

Katz (Matrix – Value): Since its founding 25 years ago, Matrix has maintained a disciplined relative value investment style that focuses on investing in successful businesses that are trading at compelling valuations. We use the term relative value because our goal is not to identify the statistically cheapest companies, as a deep value investor might, but rather the optimal combination of business strength/success with attractive valuations based on an assessment of a company’s key fundamentals. Simply stated, our goal is to invest in undervalued companies that have meaningful upside potential. We implement this goal through two sequential steps. The first employs rigorous quantitative screening models designed to provide an intrinsic business value for a company. This quantitative screening process reduces an initial universe of 1500 candidates to 75-100 statistically attractive candidates. We will then undertake detailed qualitative research on the remaining candidates, focusing on financial statements, as well as diverse factors such as management’s assessments of the state of the business, assessments by competitors and analysts, trading activity by insiders, and the potential for a catalyst to create greater value. Typically, we own 35 to 40 stocks at any given time. We will sell a stock when its price rises to meet our intrinsic valuation for the company. Conversely, if the company’s intrinsic valuation declines we will also sell a stock. On occasion we will sell a stock if we believe a comparable company offers a more compelling risk/reward profile.

their underlying business value. In practice, this has produced an investment discipline focused on timely investments in cyclical industries and discovering individual companies going through meaningful change. The strategy often targets companies under temporary duress where we have identified a path leading to recovery.

Please summarize what produced the best results for you in 2011 and what, in retrospect, didn’t play out the way you thought. We’ll stay with the value managers and ask Arnie Schneider to begin.

Schneider (Schneider Capital Management – Value):

EQT Corporation, an integrated energy company engaged in finding and developing natural gas in Appalachia, was a strong performer. Given its peer-leading cost structure and substantial resource potential in Marcellus shale gas, the stock was cheap relative to its asset values as the market focused only on its modest current production. The market also ignored future opportunities in its less well-known acreage in West Virginia.

Coal stocks had a rough year. Prices for metallurgical coal, which is used in the production of steel, slipped a bit more than we expected due to the sharp global slowdown. In contrast, global thermal coal (used in power generation) dynamics continue to improve. Inventories are in decline and U.S. exports are up substantially. Our investment is intentionally oriented toward companies more exposed to thermal coal. The coal companies in the portfolio present a very favorable risk/reward profile.

Let’s hear from Matrix and Pzena.

Katz (Matrix – Value): Our best results in 2011 largely tracked the most successful areas of the overall market: more defensive sectors such as consumer staples, led by CVS, Coca-Cola and Procter & Gamble, and healthcare with companies like Bristol-Myers and Covidien. While these areas and stocks were positive contributors to the portfolio, their gains were not enough to offset the areas that didn’t work. Our significant detractors were financial stocks, where macroeconomic and global concerns more than overshadowed significantly improved company fundamentals. These laggards included JP Morgan, MetLife and Wells Fargo. Other detractors were economically sensitive stocks such as Alcoa, Carnival, Monster Worldwide and Staples. Because of their ongoing business success, we believe that many of our laggards in 2011 will be among portfolio leaders in the upcoming year.

DeSpirito (Pzena – Value): Two thousand eleven was a year dominated by macro events, with eurozone sovereign debt and banking issues, along with the U.S.

debt ceiling standoff, taking center stage. At mid-year, investor sentiment shifted from cautious optimism for a sustained recovery to fear and uncertainty about the future. In this environment, sectors that investors perceived to be “safe” (utilities, consumer staples and healthcare) did well, as investors fled cyclical sectors in search of stable earnings and dividends. We had little exposure to consumer staples and utilities, which were expensive, and this hurt our performance. Our healthcare holdings, however, did well, and we sold most of them during the year to fund purchases of deeply discounted, yet high quality, cyclical businesses. As a result, the portfolio is dominated by industry leaders with strong balance sheets and high cash flow generation that are trading at extraordinarily attractive valuations.

Growth style managers, how do you reflect on 2011?

Blum (TCW – Growth): From a portfolio attribution perspective, our information technology holdings

assisted minimally invasive surgery, was our single best performing name, with performance driven by procedure growth, profitability and innovation that continued to exceed expectations.

One of our disappointments was mainly isolated to poor sentiment and industry dynamics that continue to pressure C.H. Robinson. Third-party logistics provider C.H. Robinson struggled throughout the year with anemic growth in freight volumes combined with a reduced ability to raise prices. While it was a disappointment for the year, we still believe the company to be meaningfully underpriced longer term and we are maintaining our current exposure.

Kamp (Cornerstone – Growth): We began the year with a bullish outlook and generated strong returns in the cyclical stocks of the energy, industrial and technology sectors. Our stock selection in the technology, healthcare and industrial sectors was particularly strong. Part of our success early in the year came from one of our energy holdings, Petrohawk Energy Corp., which was acquired by BHP Billiton Ltd. for a 65 percent premium. We were

long-term holders of Petrohawk and one of its largest institutional shareholders premised on the value of its assets in some of the most prolific natural gas locations in the country.

The market began to roll over in late July, accelerating to the downside until October 3, driven by the combined fears of the European sovereign debt crisis and a potential hard landing in China, post the rapid infrastructure spending boom and property speculation of the last three years. Unfortunately, we began to increase our aggressiveness too early in the third quarter, detracting from absolute and relative performance. By maintaining our investment discipline and exposures, however, we generated strong returns from October 4 onward, led by the energy and industrial sectors and to a lesser extent the consumer staples and materials sectors.

What is a stock in the portion of the All-Star Equity Fund portfolio that you manage that is a long-term holding that reflects your style and strategy as summarized in the first question? And what is a recent addition to your portion of the portfolio about which you are optimistic, and why?

Kamp (Cornerstone – Growth): In the financial sector, we continue to own only one name, Goldman Sachs, but we have owned it since we started managing this portfolio. In a recent meeting with Goldman’s senior management, we learned that the firm’s investment banking pipeline is quite robust. Management teams, however, have slowed their deal

regulations. We initiated new positions in Exxon Mobil, Hess Corp. and Schlumberger Ltd. These moves de-risked the portfolio somewhat for what may be a bumpy ride ahead while maintaining exposure to oil commodity prices at a time of tight capacity and rising tensions in the Middle East.

Blum (TCW – Growth): Precision Castparts Corp. (PCP) remains a relatively long-term holding for the portfolio. PCP manufactures specialized metal components and engineered composite products for the global aerospace, infrastructure and power markets. We believe a multi-year cycle has developed, defined by increasing demand for lighter, stronger, cleaner and more energy efficient materials to be used across a wide variety of industrial end

markets. PCP is thus benefiting from rising demand for its high strength-to-weight ratio products that are forged and cast with proprietary materials and technology. In particular, we believe the commercial aerospace market represents a significant long-term opportunity for the company as high-margin composite products continue to increase as a share of total aircraft content. Additionally, the company is nicely leveraged to emerging market infrastructure growth and is a best-of-breed operator with industry leading margins and returns on capital.

A recent addition to the portfolio is VMware. VMware is the dominant provider of server virtualization software and virtualization-based cloud infrastructure solutions. We believe the financial and operational benefits of server virtualization will continue to drive penetration of workloads in the enterprise, with VMware being the primary beneficiary. Increased virtualization penetration is also driving an increased need for management and automation software, another significant opportunity that VMware is well positioned to exploit. The company has also amassed a portfolio of technologies, including desktop virtualization, cloud-based applications and cloud-related development platforms, that is expanding its addressable market. In our opinion, the current valuation does not adequately reflect these growth opportunities.

DeSpirito (Pzena – Value): Hewlett-Packard, the world’s largest information technology company, is a great example of a business that we have owned since mid-2010 and that offers long-term opportunity at a very attractive valuation. Despite market fears, our research indicates that H-P continues to maintain its number one or number two positions in virtually all their business segments, which are technology services, printing, PCs, servers and storage. Also, the company is solidly profitable and has a strong balance sheet. The company trades at only 6.3x current earnings and 5.3x our estimate of normal earnings. This is the second time we have owned H-P, and it is one of the largest holdings in our portfolio.

Staples, the world’s largest office supplies company, is a new addition that became cheap during 2011 as investors worried about its outlook in light of an uncertain economy. Despite its sensitivity to white collar employment, Staples has significant scale and geographic advantages over its competitors, enabling it to post solid profits and capture market share while the competition retrenches. Staples is well positioned for an eventual normalization in employment and business formation, and trades at 10.1x current earnings estimates and 6.3x our estimate of normal earnings. Staples is also one of our larger holdings.

Schneider (Schneider Capital Management – Value):

Boeing is a long-term holding. We purchased Boeing in anticipation of an upturn in the commercial aerospace business after a period of extreme stress in the industry. The recovery has partially occurred, but Boeing also benefits from several new product cycles, the secular growth in international air travel and stumbles by their competition. Boeing is changing the face of commercial aircraft with the 787, and we expect a substantial increase in cash flow and profit margins as the company boosts production rates.

During the year we increased our exposure to the property/ casualty insurance segment through the purchase of ACE Limited. Given the pressure from low returns in the industry, pricing trends are clearly improving and should lead to growth in revenues, margins, earnings and return on equity. Stock valuations for the group are at the low end of the historical range, which we believe provides an attractive entry point.

Katz (Matrix – Value): American Express (AXP) exemplifies our focus on strong fundamental business attributes, while sizing the implications of possible headline risk.AXP is a

stock during this period of uncertainty, confident that the company would manage its business well during this period. The company did, in fact, manage very adroitly through their credit exposures. As management produced very favorable results, the stock has moved to much higher valuations, providing us with a gain on our investment.

A recent addition to our portfolio has a similar profile, Charles Schwab, the leading discount brokerage firm. In some respects our process in identifying Schwab mirrored that of American Express: a great business in an out-of-favor sector was not necessarily subject to the same pressures and problems as its financial sector peers, yet valued as if it were. We have followed Schwab closely over the years. The business is well run and not beset

with huge structural or financial issues. Importantly, Schwab has a history of being a fast-recovery stock when the market believes that overall economic conditions are improving. We were able to buy Schwab at approximately 12x normalized earnings and believe that it could be a strong contributor to 2012 performance.

Great insights from experienced investment managers and we thank you all. It should be an interesting year ahead. We’ll check in again next year.