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

Data Through June 30, 2007

Fund Statistics

Performance

*   Percentile ranks calculated using the Fund’s NAV Reinvested results within the Lipper Large-Cap Core Openend 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 28.

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.

LIBERTY ALL-STAR^® EQUITY FUND

PRESIDENT’S LETTER

July 2007

Fellow Shareholders:

After a flat first quarter, the stock market advanced in the second quarter and recaptured the momentum that it showed throughout the second half of 2006. The widely followed S&P 500 Index gained 6.3 percent for the quarter, while the growth-oriented NASDAQ Composite Index advanced an even stronger 7.7 percent. The S&P 500 set a new record high during the quarter, finally breaking its previous record – set in March 2000 – on May 30. The quarter played out as a classic example of a strong stock market “climbing a wall of worry.”

Certainly, there was plenty to worry about, most of it emanating from higher interest rates. Much of the fallout was related to subprime loans. As interest rates rose, many adjustable rate mortgages were reset to higher rates, raising payments for borrowers and thus increasing the likelihood that defaults would rise. If severe enough, the problem was viewed as one that could spill over to the broader economy. Indeed, in June foreclosures ran 87 percent above the rate of June 2006.

Those rising interest rates were a source of concern to financial markets, as well. Rates on the benchmark 10-year Treasury hit a five-year intraday high of 5.3 percent in June. The Federal Reserve left its key Fed funds rate unchanged at 5.25 percent at its June meeting, but the Federal Open Market Committee is still concerned about potential inflationary pressures, and appears ready to raise short-term interest rates if that were to occur. There were also fears that rising rates might undercut the record-setting pace of merger and acquisition activity as plentiful liquidity has encouraged acquirers – particularly private equity firms – to leverage their deals.

Liberty All-Star Equity Fund posted a strong quarter, comfortably outperforming its comparable benchmarks. The Fund rose 8.6 percent with shares valued at net asset value (NAV) and 8.7 percent with shares valued at NAV with dividends reinvested. In terms of the Fund’s market price return, it rose 8.4 percent for the quarter. The Fund’s quarterly performance ranked it in the 8th percentile of the Lipper Large-Cap Core Mutual Fund Average, meaning that it outperformed 92 percent of peer funds in that universe.

Year to date through June 30, shares valued at NAV are ahead 9.2 percent, and 9.3 percent with shares valued at NAV with dividends reinvested. In terms of the Fund’s market price return year to date, it is ahead 14.1 percent. In terms of peer ranking year to date, the Fund’s NAV with dividends reinvested return is in the 11th percentile (ahead of 89 percent of funds with similar investment style).

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Looking more closely, over the quarter stocks in the Russell 3000 Growth Index outperformed stocks in the Russell 3000 Value Index by the widest margin since the first quarter of 2003. As shareholders know, 40 percent of the Fund’s assets are allocated to growth style managers. Value style stocks have consistently outperformed growth stocks for many years, so it is good to see better balance returning to the market. In fact, with all the risks in the market – as described earlier in this letter – we are seeing investors emphasize not just growth but quality growth, which plays to the Fund’s emphasis on quality.

Our interview this quarter is with one of our value style managers, David Katz, CFA, President and Chief Investment Officer of Matrix Asset Advisors. Mentioning the performance relationship between value and growth stocks, Matrix’ relative value strategy enables the firm to invest beyond traditional value industries. To see how, I urge you to read the interview that begins on page 7.

We are encouraged that the stock market posted a solid second quarter. And we are most pleased that the Fund’s results have more than kept pace. In a stock market facing so many cross currents, we believe – as we have said in the past – that the best path forward is to pursue the Fund’s investment objectives and consistently adhere to its investment strategy and process.

Sincerely,

William R. Parmentier, Jr.

President and Chief Executive Officer

Liberty All-Star Equity Fund

The views express in the President’s letter and the Manager Interview reflect the views of the President and Manager, respectively, as of July 2007 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.

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LIBERTY ALL-STAR^® EQUITY FUND

TABLE OF DISTRIBUTIONS & RIGHTS OFFERINGS

*          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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LIBERTY ALL-STAR^® EQUITY FUND

TOP 20 HOLDINGS & ECONOMIC SECTORS

as of June 30, 2007 (Unaudited)

*          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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LIBERTY ALL-STAR^® EQUITY FUND

MAJOR STOCK CHANGES IN THE SECOND QUARTER

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 2007.

* Adjusted for spin-off from Tyco International, Ltd.

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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

* Certain holdings are held by more than one manager.

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LIBERTY ALL-STAR^® EQUITY FUND

MANAGER INTERVIEW

Matrix constructs portfolios with an optimal balance of diversification and concentration

Matrix Asset Advisors, Inc. employs 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. The firm follows a systematic and rigorous investment process – using both quantitative and qualitative analysis – and adheres to a strict sell discipline. We recently had the opportunity to interview the firm’s President and Chief Investment Officer, David A. Katz. The Fund’s Investment Adviser, ALPS Advisers, Inc., moderated the interview.

What’s your take on the first half of the year? After a flattish first quarter (+0.6 percent for the S&P 500), the market posted a strong second quarter (+6.3 percent including a new record high for the same S&P 500).

Most of the year has played out as we thought it would. The overall equity environment is favorable, we think valuations are pretty reasonable, the economy continues to muddle along, and although there’s a question about what the Federal Reserve will do in the upcoming months and quarters, we think the vast majority of the interest rate increase cycle is behind us. All of that, coupled with a great deal of liquidity in the market and a high level of merger and acquisition activity, has given the market a positive bias.

“… because value has done so well in the last half-dozen years and because growth has done so poorly, a lot of growth stocks started to meet our valuation criteria.”

The one thing that has not happened that we thought would occur is a continuation of mega-cap companies recapturing some of their lost luster. Our very strong sense is that this is a speed bump rather than a change in direction. Mega-caps were strong in the second half of 2006 and that made ‘06 the first year in a long time that the large caps and mega-caps were either on a par with the small and mid-sized companies or actually a little ahead. While the underlying environment and the outlook for the group have gotten a lot better in the first six months of this year, mega-cap stocks haven’t kept pace and wound up lagging the small and mid-sized capitalization range of the market.

Growth outperformed value this quarter. Matrix is not exactly a traditional value manager, so whichever style is in favor may not make much of a difference to you. Is that true?

Actually, we are very well positioned for growth coming back into favor. We are a value manager, we look at the world through value glasses and we always pay attention to fundamentals and what a business is worth. Traditionally, we are helped by a value market. That said, however, because

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value has done so well in the last half-dozen years and because growth has done so poorly, a lot of growth stocks started to meet our valuation criteria. So, if you look at our portfolio today, we are very heavily weighted toward the fallen growth angels of the past. These are wonderful businesses with great records that in 1999 were selling at 35 to 40 times earnings. Today, they’re selling at about 13 to 15 times earnings. So, our sense going into the year was that growth would start to do better on both an absolute and relative basis. You’re seeing the very early signs of that and that plays very well to the portfolio’s positioning.

“… from an economic standpoint, the U.S. is slowing while international markets are showing economic strength. That makes mega-cap multinational companies good places to invest.”

You mentioned the fallen angels when we spoke for the annual report roundtable. So, it seems you are still finding some of your more attractive opportunities among those stocks.

Basically, we think that the fallen angels and the mega-cap growth companies are doing very well on the business front, yet the majority of these stocks have not done anything. So, the fact that they’ve had a mediocre first six months of the year just gives us even greater confidence in the outlook for the balance of the year and into next. Companies like American International Group, Citigroup, Wal-Mart, and Comcast are great businesses with very strong fundamentals whose stocks haven’t done anything. In addition, if you look at where we are from an economic standpoint, the U.S. is slowing while international markets are showing economic strength. That makes mega-cap multinational companies good places to invest.

To what extent do you factor in macro or top-down considerations into your investment process, or is it solely a fundamentally-driven, bottom-up process?

We are a bottom-up, fundamental manager. The first step in our investment process is quantitative analysis that whittles a universe of 1,500 companies down to 100 or so attractive businesses. Then, we turn to qualitative and fundamental analysis to evaluate that group stock by stock. One facet of our fundamental analysis is a catalyst assessment in which we take into consideration any macro factors that may enter in. But macro factors don’t drive the investment decision. So, for example, when we talk about the mega-cap companies we believe that they’ve become timelier because their fundamentals are more attractive at the same time you’ve got a slowdown in the fundamentals of mid-sized companies. That makes mega-caps more compelling on a relative basis.

Your portfolios are usually fairly concentrated both in number of holdings and in sector exposure. Is that a reflection of conviction, a better way to add value or to avoid looking like an index?

We’re great believers that you get your best investment returns by having a focused portfolio – diversified, yet focused on your best ideas. The optimal portfolio diversification that we found, in terms of risk and return, comes from having 30 to 40 stocks. That way, you’re diversifying your risk from any

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given name, but you really can focus on the stocks that you like best. So, it really is a stock picker’s portfolio. We invest our own money right in our portfolio as we’re all clients of the firm. We happen to believe that if most money managers have their druthers they would prefer to invest in a 30- to 45-stock portfolio. But, many are constrained simply because their firms are too big and they’ve got to buy 100 to 200 stocks simply to put all that money to work.

“We’re great believers that you get your best investment returns by having a focused portfolio – diversified, yet focused on your best ideas.”

What’s a recent addition to the portion of the Liberty All-Star equity Fund that you manage ... and what’s a recent liquidation from the portfolio?

We recently added Covidien, Ltd. To the portfolio in a fairly meaningful way. The company is a spin-out from Tyco International, Ltd., which split into three pieces: Covidien, Tyco Electronics and Tyco International, Ltd. We like all of the pieces but we like Covidien best based on today’s valuation.

Covidien is one of the nation’s largest medical products companies, providing instruments, pharmaceuticals and imaging solutions. Generally, we think that the split will allow management to run the business in a much more efficient, shareholder-oriented manner. As a part of Tyco, the business had underperformed in terms of earnings and margins. Now, being a more focused company will allow management to get its act together. The compelling part of the investment case is that medical instrument companies consistently sell north of three and one-half times sales and Covidien is priced at about two times sales. So our strong sense is that as an independent company Covidien will come up and match industry valuations or will be acquired by a strategic partner. So, we look at it as a win/win.

That leads into our sale. The last time we spoke for a quarterly report interview we singled out Medimmune as a stock we liked. We thought it was a good business as an independent company, but also felt it made a great deal of sense to be owned by a larger player in the drug group. And in this last quarter Medimmune agreed to be acquired by another large healthcare company, AstraZeneca. Medimmune was one of our largest positions, and our original per-share cost was in the mid-20s. AstraZeneca paid $58 a share for the company and we sold into that strength.

Many thanks for the comments.

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LIBERTY ALL-STAR^® EQUITY FUND

SCHEDULE OF INVESTMENTS

as of June 30, 2007 (unaudited)

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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See Notes to Schedule of Investments and Financial Statements

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