UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507.

Item 1. Reports to Stockholders.

LIBERTY ALL-STAR^® EQUITY FUND

2005 ANNUAL REPORT

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 the world’s most dynamic

•                  Access to institutional quality investment managers

•                  Objective and ongoing manager evaluation

•                  Active portfolio rebalancing

•                  A quarterly fixed distribution policy

•                  The power of more than $1.3 billion in assets

•                  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, Editorial Feature and the 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.

President’s Letter

I am pleased to be writing to you in the year in which we mark the twentieth anniversary of Liberty All-Star Equity Fund. Perhaps nothing else so succinctly captures the vision of this Fund than its ticker symbol: USA. In a single investment, shareholders are exposed to the industries that make the U.S. economy the world’s most dynamic. Nearly 20 years ago, the Fund was established as a diversified, multi-managed, domestic equity fund combining three value and two growth style managers. Attesting to the soundness of its underlying principles, the Fund today is structured just as it was when its underwriting was completed on October 31, 1986. More importantly, the Fund’s net asset value (NAV) based results rank in the top 20 percent of peer funds in the Lipper Large-Cap Core universe for the past 19 years.

Market dynamics in 2005

I will say more about the Fund from a long-term perspective shortly. First, however, let’s look at 2005, starting with a question: What do -2.1 percent, -0.8 percent, 3.6 percent and 2.1 percent mean to investors? Answer: a year that moved sideways. Those are the sequential quarterly returns of the S&P 500 Index for 2005. Together, they resulted in a 4.9 percent annual gain for this widely watched market barometer.

Underscoring the point, another widely followed index, the Dow Jones Industrial Average, gained a modest 1.7 percent. Volatility was absent, too. The S&P 500 moved up or down 2 percent or more on 52 trading days in 2002. In 2004 and 2005, there wasn’t a single trading day when a 2 percent move occurred.

The story of 2005 was one of sustained corporate earnings performance – at this writing, U.S. corporations are on track to report their tenth straight quarter of double-digit earnings gains – being offset by factors that are now all too familiar: rising short-term interest rates, significantly higher energy prices, worries over a softening in the red-hot U.S. housing market and the global geopolitical situation, chiefly the war in Iraq. In addition, there was a sufficient supply of random events to keep investors unsettled. Hurricanes Katrina and Rita (with Wilma as an exclamation mark) head the list. Terrorist bombings hit London in July. As the year wound down, several G-7 countries, including the U.S., were in a standoff with Iran over that country’s nuclear ambitions.

Among investment themes in the U.S., value stocks topped growth stocks for the sixth straight year, although the gap between the two narrowed to less than 2 percent (based on the Russell 3000 Growth and Value indices). Reversing a trend of recent years, large cap stocks (as represented by the Russell 1000 Index) outperformed small cap stocks (the Russell 2000 Index). Energy companies were stellar performers, as were gold and commodity-related issues.

Fund’s NAV outpaces primary benchmark

Turning to the Fund, for the fourth quarter and the calendar year, NAV returns outpaced the S&P 500 and the Fund’s primary benchmark, the Lipper Large-Cap Core Mutual Fund Average. However, the Fund experienced weak market price performance, despite the aforementioned solid NAV results. Although NAV and market price returns can diverge from time to time, it was particularly acute during the fourth quarter. Specifically, during December the Fund’s discount widened from 0.9 percent to 6.4 percent, which created the divergence in those two performance measures. Finally, we believe that the decline in shares valued at market price during the fourth quarter reflected forces in the financial markets and not issues specific to the Fund.

It’s hard to find a truly satisfactory answer for the fourth quarter action, but it was a common characteristic among many closed-end funds, where discounts widened in general. In fact, many closed-end equity funds were at double-digit

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discounts by year-end. One factor may have been the greater number of new closed-end funds that came to market in 2005. Also, tax selling could have contributed, which is not unusual toward year-end. The following table highlights Fund and relevant market performance for the fourth quarter and full year.

In all of our reports, we have continually stressed long-term performance over short-term performance, and that seems to be especially appropriate in our twentieth anniversary report. The following table summarizes long-term performance for key periods:

Figures shown for the Fund and the Lipper Large-Cap Core Mutual Fund Average are total returns, which include dividends, after deducting Fund expenses. 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 47.

Past performance cannot predict future results. Performance will fluctuate with changes in market conditions. Current performance may be lower or higher than the performance data shown. Performance information shown 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.

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Officers of Liberty All-Star Equity Fund: Mark T. Haley, CFA, Vice President – Investments, left; and William R. Parmentier, Jr., President and Chief Executive Officer, right.

I would like to make two comments about these longer-term results. First, note how closely NAV and market-based returns have tracked for the trailing 3-, 5-, 10-, 15- and 19-year periods. Second, and more importantly, is what a strong and consistent performer the Fund has been compared with its peers in the Lipper Large-Cap Core Mutual Fund universe. The Fund has outperformed more than 75 percent of Lipper peer funds for all of the time periods highlighted in the table.

In closing, I would like to draw your attention to two features in this annual report. One is our traditional manager roundtable, which begins on page 13. It’s your chance to hear from the Fund’s five investment managers, who are established thought leaders in the investment field, so I urge you to read it. Immediately following this letter, our editorial section provides an historical perspective on the Fund. One key point to keep in mind as you read this section is that certain investment concepts that are widely practiced today were innovations that the Fund brought to investors nearly 20 years ago. We are especially pleased to be able to share with you some thoughts from the Fund’s founder and its first President and CEO, Dick Roberts.

As always, it is our great pleasure and privilege to guide Liberty All-Star Equity Fund, to team with fine investment managers and to serve the best long-term interests of shareholders. Be assured that we remain dedicated to those propositions as we move into the future. We are grateful for your ongoing support of the Fund and will do all in our power to maintain your trust and confidence.

Sincerely,

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1986–2006

1986: Investment innovation then

2006: A core equity holding now

USA

Nearly two decades ago, Liberty All-Star Equity Fund (ticker symbol: USA) combined several desirable attributes in a single investment vehicle designed to capture the power of the world’s largest economy and the dynamics of its equity market. By adhering to the Fund’s founding principles over the years, the Fund’s Investment Advisor has proven the thinking behind the founding vision—even in the face of events and trends that no one could have foreseen when the initial public offering of 51 million shares was completed on October 31, 1986.

When it was established, the Fund brought together four key innovations to individual investors in a single investment vehicle:

• Multi-management

• Real-time trading

• Access to institutional quality managers

• Ongoing monitoring and periodic rebalancing

Today, these innovations have helped to make Liberty All-Star Equity Fund a core equity holding for investors seeking total investment return, comprised of long-term capital appreciation and current income, in a diversified portfolio of equity securities.

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The founder reflects

RICHARD I. ROBERTS WAS INSTRUMENTAL IN THE FOUNDING OF LIBERTY ALL-STAR EQUITY FUND AND SERVED FOR 10 YEARS AS PRESIDENT AND CHIEF EXECUTIVE OFFICER OF LIBERTY ASSET MANAGEMENT COMPANY, NOW KNOWN AS BANC OF AMERICA INVESTMENT ADVISORS, INC. (“BAIA”). HERE, MR. ROBERTS REFLECTS ON THE FOUNDING OF THE FUND.

What were the driving factors behind the Fund’s founding?

I had been developing the concept due to two factors: First, in the bull market of the early 1980s, large pension and endowment funds were retaining disciplined investment management firms specializing in either growth or value style investing. Second, these institutional investors were using various forms of multi-management – including the blending of value and growth styles – to capture better risk-adjusted returns. I felt that multi-management, institutional quality managers and style diversification could be made available to individual investors. Having observed the market as we had for many years, we knew that it ran in cycles and that neither growth managers nor value managers had consistently good performance through each cycle. By carefully blending the two styles we felt we could achieve better and more consistent long-term performance. Strategic rebalancing of assets and periodically replacing managers, when warranted, were two other factors that were important to consistent long-term performance.

How did you settle on three value managers and two growth managers?

That was a key decision. We did extensive historical modeling to determine how to best blend the two styles to achieve long-term core investment success. At the time no one had done it, so we had to demonstrate to ourselves that it would work. In doing so, we showed that three value and two growth managers was the optimum combination, as long as we attentively monitored their activities.

What’s the key to the Fund’s long-term performance?

We got off to a great start because we had terrific people. The long-term key, however, has been and continues to be adherence to the Fund’s disciplined investment process. Most funds don’t adapt well to change. But key design characteristics of the Fund – growth and value, multiple managers, timely rebalancing and objective decision-making by the Fund Advisor – all tend to anticipate change. Thus, the Fund is able to benefit from both the inevitable change in equity market leadership and the dynamic forces impacting the investment management industry.

Finally, it’s very gratifying to see the Fund’s original concept justified by its consistent, above-average investment performance over these past 20 years. Due credit should go to all involved in this achievement.

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Multi-management for individual investors

The original 1986 prospectus of the Liberty All-Star Equity Fund stated that “The multi-manager concept is based on two primary premises: (1) the utilization of multiple investment management organizations each employing a different style and strategy will result in more consistent and less volatile performance over changing market cycles than the use of a single investment style and strategy; and, (2) consistent performance at a given annual rate of return over time produces a higher rate of return for the long term than more volatile performance having the same average annual rate of return.” When the Fund was launched in 1986, it became the first publicly traded, multi-managed fund. Nearly 20 years later, multi-management has gained increasingly broad acceptance – for individual investors as well as institutional accounts. In fact, attesting to the soundness of the Fund’s original structure, it remains the same today as it was at its founding, having proven itself over time and through widely varying conditions in domestic equity markets.

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Real-time trading and liquidity

In the mid-1990s, investors were given the opportunity to invest in a new type of security called exchange-traded funds, or ETFs. Similar to index funds, ETFs typically invest in companies that are included in a selected market index or industry group in an attempt to track the index or industry they are replicating, and they can be bought and sold just like stocks. ETFs have grown enormously in popularity and are generally regarded as one of the most significant investment innovations of the past decade. Investors should not forget, however, that Liberty All-Star Equity Fund was launched several years before the advent of ETFs. Further, the Fund preceded ETFs with key features that investors find attractive: the trading of shares on a stock exchange (the New York Stock Exchange in the case of the Fund) and the continuous pricing of shares (as opposed to once a day with open-end mutual funds). The biggest difference between the Fund and most ETFs is that the Fund is actively managed by the Fund Advisor and its five investment managers instead of attempting to track an index or industry.

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Access to institutional managers

One of the goals that the founders established for Liberty All-Star Equity Fund was making institutional quality investment management firms accessible to individual investors. The first five investment managers hired by the Fund – as today, three value managers and two growth managers – were all institutional-based firms. That is, they invested money for pension funds, endowments, foundations and other institutions, but typically not for individual investors because they were either closed or required minimum investment amounts that were well beyond the reach of all but a few very wealthy individuals or families. Today, BAIA continues to select investment management firms for the Fund after an extensive review of their background and track record, including the firm’s investment philosophy, process, people and performance. To do this, BAIA calls on the expertise of its professional staff, state-of-the-art analytical tools and years of experience in the investment field. Similarly, BAIA’s continuous monitoring ensures that managers meet expectations once they have been retained.

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Monitoring and rebalancing

The Fund’s first semi-annual report (August 1987) stated that “By periodically taking excess assets from the better performing managers and reemploying them among the other managers so that all are again equal, Liberty is taking from today’s winning managers and giving to tomorrow’s. Rebalancing also allows All-Star to realize gains in rising markets and to buy better relative values.” Because the Fund’s investment managers will produce differing results over time, the intended composition of the portfolio can become unbalanced. When this happens, the Fund Manager “locks in” profits by taking assets from the outperforming managers and giving them to those who have lagged and who may become tomorrow’s outperformers. Today, rebalancing is a topic that has received its fair share of attention – but is all too often overlooked by individuals. On a continuous basis, the Fund Manager also monitors the investment managers’ performance relative to their peers, adherence to their style and strategy, and other factors, such as the soundness of the firm and stability of the management team. When warranted, BAIA will recommend to the Fund’s Board of Trustees that an investment manager be replaced, an action that has taken place 13 times throughout the Fund’s history.

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Multi-Management Has Produced More Consistent Returns

The narrative on the preceding six pages is intended to focus on the history and 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 “1986–2006” feature, BAIA 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 since All-Star’s first full calendar year of operation 19 years ago, 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 19-year return and consistency record ending December 31, 2005, of each fund in the universe of 51 open-end Large-Cap Core equity mutual funds (as classified by Lipper, Inc.) that has a 19-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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Investment Managers/Portfolio Characteristics

THE FUND’S ASSETS ARE APPROXIMATELY EQUALLY DISTRIBUTED AMONG

THREE VALUE MANAGERS AND TWO GROWTH MANAGERS:

MANAGERS’ DIFFERING INVESTMENT STYLES 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.

INVESTMENT STYLE SPECTRUM

PORTFOLIO CHARACTERISTICS

AS OF DECEMBER 31, 2005

(UNAUDITED)

*Certain holdings are held by more than one manager.

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Manager Roundtable

Market forces may ebb and flow, but one thing remains fixed: the managers’ focus on selecting stocks

THE DOMESTIC EQUITY MARKET WAS COMPARATIVELY QUIET IN 2005, AT LEAST IN TERMS OF ANNUAL RETURNS. NOTABLE EXCEPTIONS INCLUDED STRONG PERFORMANCES FROM THE ENERGY AND UTILITIES SECTORS, WHILE MID-CAP STOCKS TOPPED THEIR SMALL AND LARGE CAP BRETHREN. LAGGARDS INCLUDED CONSUMER DISCRETIONARY, TELECOMMUNICATIONS AND TECHNOLOGY STOCKS. VALUE ONCE AGAIN OUTPERFORMED GROWTH. UNDERNEATH THE CALM SURFACE, HOWEVER, STRONG CURRENTS WERE AT WORK, AS THEY USUALLY ARE, AND THE YEAR HELD ITS SHARE OF SURPRISES. INVESTORS ARE NOW LOOKING AT 2006 TO DIVINE THE COURSE OF MARKETS AND SEPARATE THE WINNERS AND LOSERS.

Continuing a tradition, the Fund’s Investment Advisor, Banc of America Investment Advisors (BAIA), recently had the opportunity to moderate another annual roundtable with the Fund’s five investment managers. From their respective points of views, the managers briefly look back at 2005, but chiefly focus on current trends and the overall investment environment before concluding with comments on a stock they have added recently to the portion of the Liberty All-Star Equity Fund portfolio that they manage. The participating investment managers and their styles are:

MASTRAPASQUA ASSET MANAGEMENT, INC.

Portfolio Manager/Frank Mastrapasqua, Ph.D.,
Chairman and Chief Executive Officer

Investment Style/Growth – Mastrapasqua uses proprietary screens, in-house research and direct contact with managements to select growth companies with compelling valuations. Mastrapasqua focuses on companies with proven competitive advantage and profitability records. A proprietary risk-adjusted price-to-earnings ratio is computed and compared to an independently derived long-term earnings growth rate. Companies selected for investment have projected growth rates that exceed the risk-adjusted price-to-earnings ratio.

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. The firm employs a systematic and rigorous investment process—using both quantitative and qualitative analysis—and adheres to a strict sell discipline.

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 that the firm believes are undervalued on the basis of current price to an estimated normal level of earnings. Companies in the portfolio have a sustainable business advantage and a sound business plan to restore earnings to normal.

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 in the belief that the broader market is slow to react to change, particularly where out-of-favor stocks are concerned. Owning these stocks before they experience a rebound in earnings and come to the attention of other investors creates the opportunity for price appreciation before fundamentals warrant the stock be sold.

TCW INVESTMENT MANAGEMENT COMPANY

Portfolio Managers/Craig C. Blum, CFA, Managing Director, and Stephen A. Burlingame, 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 leading companies with distinct advantages in their business model and an inherent edge over their competitors. Research plays a critical role in the selection process, and the investment horizon is long term.

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In a nutshell, the story of 2005 seems to be generally good corporate earnings being offset by rising interest rates and significantly higher energy costs, ultimately leading to a modest gain for the overall market. Do you agree or do you have another point of view? Do you have any nuances to add to this story? Let’s start with the value managers. Arnie Schneider, perhaps you could lead off.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): We agree that corporate profit growth exhibited broad-based strength in 2005. However, the stock market is a forward-looking mechanism, and we think that one additional reason for 2005’s modest returns is that investors are skeptical regarding the prospect for future earnings growth given that corporate profit margins are at historically high levels.

OK. Let’s hear from Matrix and Pzena.

KATZ (MATRIX ASSET ADVISORS - VALUE): We do agree that on a broad brush depiction this captures much of the dynamic tension in the market in 2005. The nuances are the sustainability of these factors, and what might happen as these factors recede in importance. For example, we believe that strong corporate earnings are more secular, while the rising interest rates and energy costs are more finite in nature. The key going forward is to focus on those attractive earnings in light of relatively stable interest rates and energy costs.

“...it appears that earnings gains will be closer to 28 percent. As a result, it may be more appropriate to characterize the 2005 earnings performance of our portfolio as ‘strong’ as opposed to ‘good.’”

Frank Mastrapasqua,

Mastrapasqua Asset Management (Growth)

DESPIRITO (PZENA INVESTMENT MANAGEMENT - VALUE): Yes, corporate earnings were pretty good in 2005, but a fair amount of tailwind came from the energy sector. Two thousand five S&P 500 operating earnings were up 13.9 percent, but without energy they were up 10.4 percent. The silver lining in all this for the value investor is that the dislocations last year – higher energy and commodity prices being the biggest – actually created some interesting opportunities to build positions in companies that have been temporarily squeezed by these higher input costs. One good example is Whirlpool, a world-class business franchise and a leader in its industry, that suffered a lot of stock price volatility on investors’ fears that it would be unable to pass along higher raw material costs, primarily steel, to its consumers. The whole industry raised prices during 2005, which has helped Whirlpool mitigate the negative effects of higher steel costs.

What do the growth managers have to say?

MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Consensus earnings estimates for Mastrapasqua’s large capitalization growth portfolio at the beginning of 2005 called for an 18 percent increase. It now appears that earnings gains will be closer to 28 percent. As a result, it may be more appropriate to characterize the 2005 earnings performance of our portfolio as “strong” as opposed to “good.” We view the rise in short-term rates as a return to a more normal range in relation to historic inflation rates, i.e. real rates. It is notable that long rates have remained relatively stable throughout the year. Higher energy costs adversely impacted economic growth but not to the point of preventing above-average real GDP growth.

BLUM (TCW - GROWTH): We largely agree but would add that in this environment investors were more cautious. As to nuances, one that deserves some elaboration is that up until oil prices declined from their peak in October the market was led by the energy sector, which enjoyed upward earnings revisions, and the most defensive sectors. These were areas such as utilities, real estate investment trusts (REITs) and consumer staples that offered cautious investors a perceived safe harbor.

Good corporate performance in 2005 versus negative macro factors (such as those mentioned above) points to a struggle between bottom-up factors and top-down factors. How do you weight fundamental bottom-up analysis versus macro factors into your investment process? Let’s stick with the growth managers.

MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Our investment process includes bottom-up, macro and sector analyses. All three elements are in some ways interwoven and all three are important factors in building the portfolio.

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The weighting of each component is not constant and is dependent on where we are in the economic cycle and the dynamics of influence each factor has at a particular stage in the economic cycle. The economy continues to benefit from the 2003 tax cuts and reinvigorated capital spending. Since capital spending continues to trail the profit and cash flow recovery, an important aspect of the portfolio is the build-up of quality industrial companies as well as on-going emphasis on technology that should likewise benefit from a continued capital spending catch-up expected to be achieved in 2006. High energy prices have become a stimulus for energy efficient capital spending. The best performing sector in 2005 was energy, specifically oilfield services.

“We construct the portfolio on a stock-by-stock basis. We do not try to ‘out guess’ other investors on the short-term macro factors but rather focus our efforts on [long-term] issues that may affect the business.”

Stephen Burlingame,

TCW (Growth)

BURLINGAME (TCW - GROWTH): We construct the portfolio on a stock-by-stock basis. We do not try to “out-guess” other investors on short-term macro factors but rather focus our efforts on issues that may affect the way business is being conducted over the long term. We analyze microeconomic factors. We would rather spend our time trying to quantify the addressable market for our companies’ products and get a good sense of the competitive landscape then try to guess, for example, when the Fed will stop raising the Fed funds rate.

How do the value managers balance bottom-up and top-down factors. David Katz, lead off for Matrix, will you?

KATZ (MATRIX ASSET ADVISORS - VALUE): We are an unabashedly bottom-up manager. We do, of course, recognize that certain top-down or macro factors can have a significant impact on any given company that we are considering. What we have typically found is that macro factors are a secondary consideration, as they often impact shorter-term prospects for a company. However, at the end of the day we are paying most attention to the company’s fundamentals in making our decisions.

Let’s hear from Pzena and Schneider on this point.

DESPIRITO (PZENA INVESTMENT MANAGEMENT - VALUE): It’s all bottom-up analysis that drives our investment decisions at Pzena. Of course, one can never turn a blind eye to the key factors driving performance for an industry or particular company, but all our analysis is at the company level, with our research focused on the cheapest one-fifth of our investment universe, which is the 500 largest U.S.-listed companies.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Our observations on the macro environment provide a uniform framework for our investment decision making.  However, our macro outlook does not play a significant role in the process of selecting individual stocks for the portfolio, except to occasionally help us steer clear of unattractive industries or sectors. We are predominately a bottom-up stock picker.

Once again, value stocks outperformed growth stocks in 2005 – the sixth straight year, in fact. From the perspective of your own style (value or growth), what’s your perspective on this extended performance differential and do you see it continuing in 2006? Value managers: Are you finding companies that were once considered growth stocks on your value screens? Growth managers: Could we be seeing a fundamental redefinition of growth industries – i.e., from IT, pharma/biotech, media, etc. to energy, resources, infrastructure, etc. Let’s ask the value managers to begin, and we’ll start with Pzena.

DESPIRITO (PZENA INVESTMENT MANAGEMENT - VALUE): First, remember that this investment cycle started at a point where the discount for value stocks was the deepest that it had been in a generation, so we had a lot of room for value outperformance.  Despite the last six years, our data tell us that, even in environments of relatively narrow spreads between value stocks and the market average, the odds are still in the value investor’s favor to realize a margin of value outperformance over a reasonable investment horizon.

The other interesting phenomenon we are seeing is what we’ll call “role reversal” – growth investors buying what were traditionally considered value stocks, e.g., energy, commodities, industrial cyclicals, and value investors buying traditional growth names e.g., pharmaceuticals and technology. We have added a number of

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these companies to our portfolio over the past year or so – Microsoft (technology), Pfizer (pharmaceuticals) and TJX Companies (retail) are a few examples of traditional growth names with high quality franchises that were left behind as investors pursued industries with greater near-term earnings momentum.

KATZ (MATRIX ASSET ADVISORS - VALUE): We occupy a unique niche in the Liberty All-Star Equity Fund pantheon of managers, as we in effect straddle both styles. We do this as a value manager who is willing to “go anywhere for value,” including sectors and industries more traditionally thought of as growth-oriented. We strongly believe that the fundamental downward repricing of many growth stocks, combined with their continued success as businesses, has made many growth stocks into value opportunities. This is particularly true among the very largest – and often the very strongest – companies. Not surprisingly, therefore, we own several of them right now.

“We strongly believe that the fundamental downward repricing of many growth stocks, combined with their continued success as businesses, has made many growth stocks into value opportunities.”

David Katz,

Matrix Asset Advisers (Value)

Conversely, we believe there has been momentum-driven overbuying in pockets of the value area. The result is something of an inversion on the historical fundamentals of each discipline, and it is that inversion that will be a primary driver in growth overtaking value.

Having said that, we would be more reluctant to depict the current state as a redefinition of growth industries, since the valuation opportunities we see are rather dynamic and could disappear during the next year or two.

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Across the various market cap ranges, value and growth styles actually had quite similar results in 2005. Perhaps the convergence in returns is telling us that performance leadership is in transition from value to growth stocks. Growth is probably “cheaper” than value from the viewpoint of their relative valuations, and we think it is likely that growth stocks outperform over the next three to five years.

As a deep-value investment manager, we have seen only a handful of growth style stocks tumble far enough in price to meet our investment criteria. We have uncovered selected opportunities in the past couple of years in names like Carnival, Liberty Global and Dean Foods.

Very interesting observations from the value managers. There is some agreement that, in pockets, growth has morphed into value. Now, how do Mastrapasqua and TCW come at this from a growth perspective?

MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT – GROWTH): Growth stocks have lagged the sharp improvement in fundamentals since 2002 while value stocks have matched the same improvements in fundamentals. Growth stocks have started to “catch-up” to the fundamentals and this trend should become more evident as 2006 unfolds. In fact, large capitalization growth has generally outperformed large capitalization value since the second quarter of 2005. Part of the return to growth prominence should be the valuation gap, with the large capitalization price-to-earnings growth (PEG) ratio at a 40 percent discount to the S&P 500, an anticipated slowing in raising short-term interest rates by the Federal Reserve, the combination of real and perceived progress in the Iraqi effort, a continued high operating return on invested capital for large capitalization growth stocks, and historic high levels of corporate investment capital and balance sheet strength. The leading biotech and information technology companies continue to report meaningful fundamental progress that should be adequately reflected in valuations as confidence in the continued recovery is established and the pipeline of new products continues to emerge. From our perspective, as a sector focused growth manager, virtually all sectors have the potential to develop growth characteristics and be considered portfolio candidates.

“It’s all bottom-up analysis that drives our investment decisions…one can never turn a blind eye to the key factors driving performance for an industry or particular company, but all our analysis is at the company level…”

Antonio DeSpirito,

Pzena Investment Management (Value)

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BLUM (TCW - GROWTH): We feel the valuation of our classic growth holdings is fairly compelling. If their valuations are to the point that value mangers are willing to lend support we are amenable to that. As we see it, investors have become skeptical. Who could blame them after the Internet bubble burst, terrorist attacks and for several years one episode of corporate malfeasance after another appeared on the front page. We might not live to see growth stocks at their late 1990s level valuation premium. However, we do think that as leading companies win back investor confidence, we should see our type of stocks earn their normal valuation premium. In the meantime, the downside valuation risk has been reduced, and since these stocks are growing their earnings more rapidly than the broad market, even if multiples hold constant we could earn superior returns.

“…the stock market is a forward-looking mechanism, and we think that one reason for 2005’s modest returns is that investors are skeptical regarding the prospect for future earnings growth.”

Arnie Schneider,

Schneider Capital Management (Value)

Going into 2006, what’s your biggest worry - the thing that “keeps you up at night?” And, what’s your greatest hope for a positive surprise that would move markets higher? Stephen Burlingame, we’ll stay with TCW and then hear from Frank Mastrapasqua.

BURLINGAME (TCW – GROWTH): We are several years into this economic expansion. Growth has not been so robust that we fret about overheating, but at this stage we do not see a lot of pent-up consumer demand. Moreover, with higher interest rates and prices in some housing markets at unsustainable levels we think consumer spending may slow. We are not anticipating a recession in 2006 because we do not see the typical excesses of wage growth, labor shortages and stretched operating capacity. But, we do think the deceleration process is under way. On the side of positive surprise, we are not pinning our hopes on any one thing. We do see continued disintermediation of traditional media and retailing by seasoned Web-based competitors. We continue to like health care companies with distinct product advantages. We realize that corporations have the wherewithal to increase capital spending and if they do, our technology holdings will be prime beneficiaries. We believe that some financial services firms should be able to distinguish themselves versus their competitors in the current environment, as well.

MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): The biggest worry is that the Federal Reserve battles phantom inflation, not dissimilar to 2000 when the monetary excesses of 1999 and the fears of Y2K led the Fed to over-tighten monetary policy. Secondarily, Congress raises taxes or tariffs to achieve perceived short-term political gain and chooses to sacrifice economic growth. The greatest hope for a positive surprise is that the continuing avalanche of good economic news manages to break through the distorted filters of those who harbor negative political agendas, and news organizations sensationalizing adversity to gain competitive advantage. An early end to rising rates has a fair probability of occurring.

On the value side, what are the managers contemplating, both positive and negative? Arnie Schneider?

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): Two worries ... First, it’s difficult to ignore the possibility that the Fed might overreact to inflation fears, employ an excessively restrictive monetary policy and send the U.S. economy into recession sometime in 2007. We do not think this is the most likely scenario, but the Fed is capable of overshooting the mark like they have done in previous cycles. Second, the massive U.S. trade imbalance might someday lead foreigners to go on a “buyer’s strike” and pull back on their purchases of Treasury debt, resulting in a steep dollar decline and sharply higher long-term interest rates. This scenario would be damaging to the U.S. economy.

OK. We’ll hope they don’t come to pass. What about Pzena and Matrix?

DESPIRITO (PZENA INVESTMENT MANAGEMENT - VALUE): Probably our biggest concern moving into 2006 is the overheated housing industry, and what a collapse or even slowing of the housing market could portend for the consumer. As a firm, we have been skeptical about the consumer’s ability to continue spending based on

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cash-out mortgage refinancings, and have thus limited our exposure to housing and traditional consumer stocks.  We have begun to increase exposure to some consumer areas that have already experienced stress due to higher energy prices (think auto parts suppliers), and will keep our eyes open for new opportunities should this scenario play out.

Our greatest hope for the markets is continued earnings growth in a low inflation environment. We don’t expect double-digit market returns, so an environment that is conducive to generating high single-digit annual returns would be a positive outcome.

“[Our] biggest worry is that the Federal Reserve battles phantom inflation, not dissimilar to 2000 when the monetary excesses of 1999 and the fears of Y2K led the Fed to over-tighten monetary policy.”

Frank Mastrapasqua,

Mastrapasqua Asset Management (Growth)

KATZ (MATRIX ASSET ADVISORS - VALUE): As bottom-up managers, we are perennially worried in the sense that we are closely monitoring the fortunes of our individual holdings. On a more macro basis, we worry about those factors or conditions that could derail economic growth or confidence in our economy. We would especially be concerned about another spike in energy prices from current levels, which could significantly harm the economy, including the Fed’s willingness to curtail short-term interest rate hikes.

Conversely, probably the greatest opportunity for a positive surprise lies in the possibility of a significant downward movement in energy prices, which we believe would be perceived as rather stimulative to the economy and to sustained growth.

To conclude, please tell us about a stock that you have added recently to the portion of the Liberty All-Star Equity Fund portfolio that you manage and tell us why you invested in it. Let’s start with the growth managers and then hear from the value managers.

MASTRAPASQUA (MASTRAPASQUA ASSET MANAGEMENT - GROWTH): Broadcom Corp. (BRCM) designs and markets mixed-signal system on a chip (SOC) designs that optimize the cost and performance of many high volume applications, most notably: Ethernet switching, wireless local area networks (WLAN), Bluetooth wireless, cable and DSL modems and cable and satellite set-top boxes. Broadcom’s strategy is to develop leading platforms for both analog and digital functionality and integrate high performance designs that are produced by contract manufacturers. The strategy is based on low cost achieved through highly integrated designs – so the customer ultimately needs fewer components and small form factors – and volume economics. Broadcom offers competitive designs for low cost networking, multimedia broadband and nearly every wireless connection. Broadcom addresses all of these markets with leading designs, comprehensive technology roadmaps and healthy margin structures that are not dependent on cyclical pricing. Broadcom’s markets are benefiting from above-average growth and the company holds either a dominant or growing share in these markets.

BLUM (TCW - GROWTH): We recently established a position in Varian Medical Systems. Varian is the market leader in radiation therapy systems sold worldwide. We believe that advances in technology and treatment will lead to significant market growth over the next several years. Varian’s advantages include innovation, cost and patient safety. We expect worldwide demand to drive revenue growth and margin expansion beyond consensus expectations.

“We feel the valuation of our classic growth holdings is fairly compelling. If their valuations are to the point that value mangers are willing to lend support we are amenable to that.”

Craig Blum,

TCW (Growth)

KATZ (MATRIX ASSET ADVISORS - VALUE): We initiated a position in Tyco International in mid-2005 and added to it into weakness in the following months. Tyco is a leading industrial conglomerate, with significant businesses in fire and security, pumps and valves, health care supplies, and electronic components.  It had gained considerable notoriety from the corporate frauds perpetrated by its senior management in 2002. By the end of 2004, new CEO Ed Breen had revamped the entire company, from its corporate governance and board, to its executive and operating management teams, to its

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balance sheet and free cash flow profile. As a result of these actions, Tyco reemerged as a very shareholder oriented company with solid and improving cash flows, margins and earnings, selling at about a 14 multiple. We became very interested as it became clear that Breen was dissatisfied with the company’s recent stock price progress and investors’ disregard for the degree of the company’s overall improvement.

A modest disappointment in Tyco’s March quarter 2005 results created an outsized decline in the stock price, and an opportunity for us to open a position in the stock at an attractive price. We believed strongly that Breen’s previously stated willingness to take steps to increase shareholder value would generate positive stock price performance by unmasking the importance and value of the company’s constituent businesses. In fact, in late 2005, the company reiterated solid fundamental trends in its remaining operations, continued its large share repurchases, and announced the sale of its plastics business. In early January 2006, press reports indicated that the company’s board was considering splitting-up into three companies representing its component parts as a means of maximizing shareholder value. In aggregate, we believe that Tyco is worth about $40 a share versus our average cost of under $29.

DESPIRITO (PZENA INVESTMENT MANAGEMENT - VALUE): We recently invested in TJX Companies (TJX), which runs the TJ Maxx and Marshalls discount retail concepts. Here is a good example of a traditional growth company with a superb core business franchise that became available to us as its stock price stagnated as a result of some stumbles in its non-core businesses, and a slowdown in same store sales.

TJX is the leader in the off-price apparel industry. Its return on invested capital is in the high 20 percent range with 40 percent return on equity. The company is conservatively capitalized, and has consistently generated significant amounts of free cash flow which it has returned to shareholders in the form of stock repurchases.

The company’s newer concepts, which it continues to roll out at a reduced rate, have yet to achieve targeted goals. However, the company is making progress, and made a significant management change recently by rehiring the founder and former CEO of the company, Ben Cammarata. He has refocused the efforts of the business to improve same store sales, and is reevaluating the newer concepts. Consistent with our thesis for TJX, the company will either turn these newer concepts around or shutter some of them. We continue to like TJX’s strong free cash flow generation, disciplined focus on return on capital and fundamentally sound core business.

“We are an unabashedly bottom-up manager… at the end of the day we are paying most attention to the company’s fundamentals in making our decisions.”

David Katz,

Matrix Asset Advisers (Value)

SCHNEIDER (SCHNEIDER CAPITAL MANAGEMENT - VALUE): North Fork Bancorp is a regional bank that serves retail and commercial clients from 360 branches in the New York Metro area. It earns an enviable return on assets and generates low cost core deposits and commercial loans at a growth rate above its peers, while maintaining an excellent track record of credit quality. The highly capable management team focuses on profitability, not on growth for growth’s sake. Earnings have recently been under pressure from the effects of a flattening yield curve and slowing growth in mortgage loans, which gave us the opportunity to purchase this quality company at a good price.

Many thanks to all of you. Lots of varying points of views, and that always makes for an interesting discussion. We’ll look forward to a productive 2006.

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Investment Growth as of December 31, 2005

GROWTH OF A $10,000 INVESTMENT

The graph below illustrates the growth of a $10,000 investment assuming the purchase of shares of beneficial interest at the closing market price (NYSE: USA) of $6.00 on December 31, 1987, and tracking its progress through December 31, 2005. This 18-year period covers the calendar years since the Fund commenced its 10 percent distribution policy in 1988.

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Table of Distributions and 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.

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Top 20 Holdings and Economic Sectors

*       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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Major Stock Changes in the Fourth Quarter

The following are the major ($4.0 million or more) stock changes – both purchases and sales – that were made in the Fund’s portfolio during the fourth quarter of 2005.

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Schedule of Investments as of December 31, 2005

See Notes to Schedule of Investments.

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See Notes to Schedule of Investments.

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