INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST, N-30D, 1995-12-20

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST
N-30D, 1995-12-20

Previous: PILLAR FUNDS, DEF 14A, 1995-12-20

Next: PUTNAM TAX FREE HEALTH CARE FUND, DEF 14A, 1995-12-20

<PAGE> 1

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST Two World Trade Center, New York,
New York 10048

LETTER TO THE SHAREHOLDERS October 31, 1995

DEAR SHAREHOLDER:

Bonds have rallied significantly since last year. Progressive tightening of
monetary policy by the Federal Reserve Board over the 12 months through February
1995 led to slower economic growth and caused bonds to advance. The trend toward
lower long-term interest rates this year was also aided in July by a 25 basis
point reduction in the federal-funds rate (the interest rate banks charge each
other for overnight loans).

MUNICIPAL MARKET CONDITIONS

Long-term municipal bond yields declined from a high of 7.37 percent in November
1994 to 6.02 percent at the end of October 1995, as tracked by The Bond Buyer
Revenue Bond Index*. This 135 basis point decline in yield corresponded to an 11
percent price increase for callable municipal bonds with 30-year maturities.
Similarly, yields on 1-year municipal notes moved from 4.51 percent to 3.82
percent. The yield pickup for extending maturity from 1- to 30-years was 220
basis points.

Tax-exempt bonds began the year by outperforming U.S. Treasury bonds, but then
deteriorated on a relative basis. The ratio of the Revenue Bond Index yield to
the 30-year U.S. Treasury bond yield moved from 89 percent in December 1994 to
84 percent by the end of February 1995. A declining ratio means that municipal
bond prices have been stronger than U.S. Treasury prices. In the spring the
municipal market began to discount the risk of comprehensive changes in the tax
code created by flat tax rhetoric from Washington. This caused the yield ratio
to reach a high of 95 percent during the summer. Over the past 10 years, long
municipal yields have averaged 89 percent of U.S. Treasury yields.

The municipal market continued to experience consolidation in 1995. Municipal
underwriting in the first 10 months of the year was down
16 percent from the same period in 1994. This change followed a 44 percent drop
in volume for all of 1994. The effect of lower volume and

- ---------------
*The Bond Buyer Revenue Bond Index is an arithmetic average of the yields of 25
selected municipal revenue bonds with 30-year maturities. Credit ratings of
these bonds range from Aa1 to Baa1 by Moody's Investors Service, Inc., and AA+
to A- by Standard & Poor's Corp.
<PAGE> 2

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

LETTER TO THE SHAREHOLDERS October 31, 1995, continued

profitability was also apparent in the decisions of several major dealers to
withdraw from the municipal business.

TAX REFORM

Flat-tax advocates have generated increased publicity for their proposals and
have affected the municipal market since early 1995. Most of the discussion on
proposed tax-reform measures is based on theoretical concepts, containing broad
assumptions and lacking specific details. Basically, the various plans raise
questions about the fairness of changing from a progressive to a regressive tax
structure. Low flat-tax rate plans call for the elimination of deductions of
mortgage interest, charitable contributions, property taxes, and state and local
income taxes. Should politicians make tax reform a central issue in the 1996
elections, media coverage will expand from the financial page to the front page.
If that happens, municipal bonds could come under further pressure. For example,
when major tax reform turmoil occurred in 1986, municipal yields briefly
exceeded taxable yields.

In addition to the market risk associated with the flat-tax proposals, municipal
credits would also be negatively affected. If mortgage interest and property tax
deductions were eliminated, municipalities would experience a decline in their
property tax base. The loss of state and local income tax deductions would
increase the relative economic disadvantage that high-tax states already face.
The flat tax represents a shift in tax accountability from the federal to local
governments. Taxpayer recognition of the extent of changes under consideration
may impede the passage of comprehensive tax reform.

FUND PERFORMANCE

The net asset value (NAV) of InterCapital Quality Municipal Income Trust (IQI)
rose from $13.62 to $15.33 per share during the fiscal year ended October 31,
1995. Based on this NAV change plus reinvestment of tax-free dividends totaling
$0.99 per share, the Trust's total return was 21.29 percent. Over the same
period, IQI's market price on the New York Stock Exchange appreciated 15.8
percent from $11.875 to $13.75 per share. Based on this market price change and
reinvestment of tax-free dividends, the Trust's total return was 24.77 percent.
IQI began the fiscal year trading at a 13 percent discount to NAV and closed at
a 10 percent discount. Undistributed net investment income totaled $0.098 per
share on October 31, 1995 versus $0.131 per share a year ago.
<PAGE> 3

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

LETTER TO THE SHAREHOLDERS October 31, 1995, continued

PORTFOLIO STRUCTURE

On October 31, 1995, IQI's long-term portfolio was diversified among 13 specific
long-term municipal sectors and 69 credits. The three largest sectors -- general
obligation, transportation and hospital revenue bonds -- represented 39 percent
of the portfolio. The average maturity and call protection of the Trust's
long-term holdings were 21 and 7 years, respectively. Net assets exceeded $752
million.

The credit-quality ratings of the Trust's long-term portfolio are illustrated on
the right.

MOODY'S OR STANDARD & POOR'S CREDIT RATING
As of October 31, 1995
(% of Total Long-Term Investments)

Aaa or AAA 36%
A or A 34%
Aa or AA 27%
Baa or BBB 3%

THE IMPACT OF LEVERAGING

As discussed in previous reports, the total income available for distribution to
common shareholders includes incremental income provided by Auction Rate
Preferred Share (ARPS) leverage. ARPS dividends reflect prevailing short-term
interest rates on maturities normally ranging from one week to one year.
Incremental income to common shares depends on two factors: first, the spread
between the interest earned on the long-term bonds in the established portfolio
of investments and the ARPS auction rate plus ARPS expenses; second, the amount
of ARPS outstanding. The greater the amount of ARPS outstanding, the greater the
amount of incremental income available for distribution to common shareholders.

The profitability of ARPS was impaired in 1994 and the first half of 1995. ARPS
yields have moved somewhat lower since the Federal Reserve Board's initial
easing in July 1995. A reduction in the amount of ARPS outstanding -- to control
the portfolio's price volatility last year -- also diminished incremental income
to common shares. Currently, $208 million in ARPS are outstanding. This
represents 28 percent of net assets.

LOOKING AHEAD

The slower pace of economic growth in 1995 and the Federal Reserve Board's
previous interest rate moves have improved bond-market expectations. The
decreasing supply of new issues, combined with significant maturities and calls
for redemption, should continue to be positive for the municipal market.
<PAGE> 4

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

LETTER TO THE SHAREHOLDERS October 31, 1995, continued

However, tax-reduction proposals are likely to continue to receive publicity and
may cloud the outlook for tax-exempt bonds. With long-term municipal securities
yielding more than 90 percent of the yield on U.S. Treasuries, the market has
already begun the process of discounting the risk that a flat tax might
eventually become law.

The Trust's procedure for reinvestment of all dividends and distributions on
common shares is through purchases in the open market. This method helps to
support the market value of the Trust's shares. In addition, we would like to
remind you that the Trustees have approved a procedure whereby the Trust, when
appropriate, may purchase shares in the open market or in privately negotiated
transactions at a price not above market value or net asset value, whichever is
lower at the time of purchase. During the fiscal year ended October 31, 1995,
the Trust purchased and retired 2,029,300 shares of common stock at a weighted
average market discount of 10.05 percent. The Trust may also utilize procedures
to reduce or eliminate the amount of outstanding ARPS, including their purchase
in the open market or in privately negotiated transactions.

We appreciate your ongoing support of InterCapital Quality Municipal Income
Trust and look forward to continuing to serve your investment needs.

Very truly yours,

/s/ CHARLES A. FIUMEFREDDO
- -------------------------
CHARLES A. FIUMEFREDDO
Chairman of the Board
<PAGE> 5

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

RESULTS OF ANNUAL MEETING (unaudited)

* * *

On October 31, 1995, an annual meeting of the Trust's shareholders was held for
the purpose of voting on three separate matters, the results of which were as
follows:

(1) ELECTION OF TRUSTEES BY ALL SHAREHOLDERS:

<TABLE>
<S> <C>
Edwin J. Garn
For...................... 25,526,897
Withheld................. 516,539
Michael E. Nugent
For...................... 25,524,307
Withheld................. 519,129
Philip J. Purcell
For...................... 25,528,007
Withheld................. 515,429
</TABLE>

ELECTION OF TRUSTEE BY PREFERRED SHAREHOLDERS:

<TABLE>
<S> <C>
John R. Haire
For...................................................................................................... 3,241
Withheld................................................................................................. 20
</TABLE>

The following Trustees were not standing for reelection at this meeting:
Jack F. Bennett, Michael Bozic, Charles A. Fiumefreddo, Dr. Manuel H.
Johnson, Paul Kolton and John L. Schroeder.

(2) CONTINUANCE OF THE CURRENTLY EFFECTIVE INVESTMENT MANAGEMENT AGREEMENT:

<TABLE>
<S> <C>
For...................................................................................................... 24,683,985
Against.................................................................................................. 306,821
Abstain.................................................................................................. 1,052,630
</TABLE>

(3) RATIFICATION OF PRICE WATERHOUSE LLP AS INDEPENDENT ACCOUNTANTS:

<TABLE>
<S> <C>
For...................................................................................................... 25,103,763
Against.................................................................................................. 172,582
Abstain.................................................................................................. 767,091
</TABLE>
<PAGE> 6

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

PORTFOLIO OF INVESTMENTS October 31, 1995

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS (98.9%)
General Obligation (13.8%)
$ 20,000 Jefferson County School District #R-1, Colorado, Ser 1992 (AMBAC)........ 6.00 % 12/15/12 $ 20,801,000
7,500 District of Columbia, 1992 Ser B (MBIA).................................. 6.30 06/01/12 7,689,150
Hawaii,
5,000 1992 Ser BZ............................................................. 6.00 10/01/10 5,325,500
8,000 1992 Ser BZ............................................................. 6.00 10/01/11 8,490,160
4,000 Cook County, Illinois, Ser 1992 C (FGIC)................................. 6.00 11/15/09 4,254,280
Washoe County School District, Nevada, Ltd Tax
4,730 Ser 10/01/92 A (AMBAC).................................................. 6.25 04/01/11 4,986,366
8,100 Ser 10/01/92 A (AMBAC).................................................. 6.25 04/01/13 8,481,753
New York City, New York,
5,500 1993 Ser B.............................................................. 7.00 10/01/11 5,849,195
2,100 1993 Ser B.............................................................. 7.00 10/01/13 2,233,329
3,300 1993 Ser B.............................................................. 7.00 10/01/14 3,490,344
5,000 1993 Ser B.............................................................. 6.75 10/01/15 5,189,300
2,400 1992 Ser B.............................................................. 7.00 02/01/20 2,530,152
10,000 San Antonio, Texas, Refg Ser 1992........................................ 5.75 08/01/13 10,004,500
15,000 Washington, Ser 1993 A................................................... 5.75 10/01/17 14,851,800
- -------- ----------
100,630 104,176,829
- -------- ----------
Educational Facilities Revenue (2.6%)
10,000 District of Columbia, Howard University Refg Ser 1992 A.................. 6.75 10/01/12 10,310,800
2,500 University of Illinois, Auxiliary Ser 1991............................... 5.75 04/01/22 2,443,425
Scranton-Lackawanna Health & Welfare Authority, Pennsylvania,
3,000 University of Scranton 1992 Ser A....................................... 6.40 03/01/07 3,073,530
3,300 University of Scranton 1992 Ser A....................................... 6.50 03/01/13 3,490,806
- -------- ----------
18,800 19,318,561
- -------- ----------
Electric Revenue (10.0%)
9,500 Orlando Utilities Commission, Florida, Ser 1991 A........................ 5.50 10/01/26 9,078,865
10,000 Municipal Electric Authority of Georgia, Power 1992 Ser B................ 6.375 01/01/16 10,133,800
5,000 Hastings, Nebraska, Refg Ser 1992........................................ 6.30 01/01/19 5,157,250
10,000 Hamilton!, Ohio, Refg 1992 Ser A (FGIC).................................. 6.00 10/15/23 10,200,800
20,000 Piedmont Municipal Power Agency, South Carolina, Refg 1992 Ser (MBIA).... 6.375 01/01/25 20,198,000
Grant County Public Utility District #2, Washington,
8,220 Priest Rapids Hydro Second Ser 1992 A................................... 5.00 01/01/23 7,264,178
8,000 Wanapum Hydro Second Ser 1992 A......................................... 6.375 01/01/23 8,159,600
5,000 Wanapum Hydro Second Ser 1992 B (AMT)................................... 6.75 01/01/23 5,255,250
- -------- ----------
75,720 75,447,743
- -------- ----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 7

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

PORTFOLIO OF INVESTMENTS October 31, 1995, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Hospital Revenue (12.2%)
$ 8,000 Birmingham-Carraway Special Care Facilities Financing Authority, Alabama,
Carraway Methodist Health Ser 1995 A (Connie Lee) (WI).................. 5.875% 08/15/15 $ 7,976,000
4,500 Colorado Health Facilities Authority, Sisters of Charity Health Care
Systems Inc Ser 1992 A (AMBAC).......................................... 6.00 05/15/22 4,537,800
6,000 Tampa, Florida, Allegany Health/St Joseph's Hospital Ser 1991 (MBIA)..... 6.00 12/01/21 6,056,940
9,250 Massachusetts Health & Educational Facilities Authority, Massachusetts
General Hospital Ser F (MBIA)........................................... 6.00 07/01/15 9,370,898
10,000 Missouri Health & Education Facilities Authority, Health Midwest Ser 1992
B (MBIA)................................................................ 6.25 02/15/22 10,305,000
10,000 New York State Medical Care Facilities Finance Agency, The Mount Sinai
Hospital - FHA Insured Mortgage 1992 Ser C.............................. 5.75 08/15/19 9,833,600
4,500 Cuyahoga County, Ohio, Cleveland Clinic Foundation Refg Ser 1992......... 5.50 11/15/11 4,378,455
10,000 Allegheny County Hospital Development Authority, Pennsylvania,
Presbyterian University Health Ser 1992 A (MBIA)........................ 6.25 11/01/23 10,273,200
5,000 Dauphin County General Authority, Pennsylvania, HAPSO Group Inc/
The Western Pennsylvania Hospital Refg 1992 Ser A (MBIA)................ 6.25 07/01/16 5,168,300
3,000 Philadelphia Hospitals & Higher Education Facilities Authority,
Pennsylvania, Chestnut Hill Hospital Ser of 1992........................ 6.375 11/15/11 3,058,650
5,000 South Dakota Health & Educational Facilities Authority, Queen of Peace
Hospital Ser 1992 (MBIA)................................................ 6.70 07/01/17 5,365,400
15,000 Fredericksburg Industrial Development Authority, Virginia, MWH Medicorp
Ser 1991 A & B (FGIC)................................................... 6.60 08/15/23 15,799,200
- -------- ----------
90,250 92,123,443
- -------- ----------
Industrial Development/Pollution Control Revenue (7.6%)
6,000 California Pollution Control Financing Authority, Keller Cannon Landfill
Co/ Browning-Ferris Industries Inc Ser 1992 (AMT)....................... 6.875 11/01/27 6,284,580
5,000 Citrus County, Florida, Florida Power Corp Refg Ser 1992 B............... 6.35 02/01/22 5,227,600
3,500 St Lucie County, Florida, Florida Power & Light Co Ser 1991 (AMT)........ 7.15 02/01/23 3,738,035
5,000 Washoe County, Nevada, Sierra Pacific Power Co Ser 1987 (AMT) (MBIA)..... 6.65 06/01/17 5,367,800
15,000 Berkeley County, South Carolina, South Carolina Electric & Gas Co Ser
1984.................................................................... 6.50 10/01/14 15,893,400
10,000 Brazos River Authority, Texas, Houston Lighting & Power Co Ser 1992 B
(MBIA).................................................................. 6.375 04/01/12 10,595,200
10,000 Mason County, West Virginia, Appalachian Power Co Ser J.................. 6.60 10/01/22 10,290,800
- -------- ----------
54,500 57,397,415
- -------- ----------
Mortgage Revenue - Multi-Family (6.1%)
7,000 Illinois Housing Development Authority, Ser I............................ 6.625 09/01/12 7,257,810
20,000 Michigan Housing Development Authority, Rental 1992 Ser A (Bifurcated
FSA).................................................................... 6.50 04/01/23 20,487,400
Missouri Housing Development Commission,
7,845 Federally Insured Mortgage Loans Refg Ser 11/15/92...................... 6.50 07/01/16 8,033,280
10,000 Federally Insured Mortgage Loans Refg Ser 11/15/92...................... 6.60 07/01/24 10,262,400
- -------- ----------
44,845 46,040,890
- -------- ----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 8

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

PORTFOLIO OF INVESTMENTS October 31, 1995, continued

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- --------------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Mortgage Revenue - Single Family (8.3%)
$ 20,000 Connecticut Housing Finance Authority, 1992 Ser B........................ 6.70 % 11/15/12 $ 20,965,200
7,465 Georgia Housing & Finance Authority, Home Ownership 1992 Ser C........... 6.50 12/01/11 7,701,864
1,375 Idaho Housing Agency, 1992 Ser E (AMT)................................... 6.75 07/01/12 1,440,835
Minnesota Housing & Finance Agency,
3,425 Ser 1992 D-1............................................................ 6.50 01/01/17 3,539,155
7,400 Ser 1992 CD-1 (AMT)..................................................... 6.75 07/01/23 7,628,364
20,360 Virginia Housing Development Authority, 1992 Ser B SubSer B-2 (AMT)...... 6.80 07/01/21 20,882,438
- -------- ----------
60,025 62,157,856
- -------- ----------
Nursing & Health Related Facilities Revenue (2.5%)
6,265 University of Michigan, Medical Service Plan Ser 1991.................... 6.50 12/01/21 6,643,907
11,250 Minneapolis & Saint Paul Housing & Redevelopment Authority, Minnesota,
Group Health Plan Inc Ser 1992.......................................... 6.90 10/15/22 11,982,713
- -------- ----------
17,515 18,626,620
- -------- ----------
Public Facilities Revenue (5.6%)
9,800 Orlando, Florida, Cap Impr Refg Ser 1992................................. 6.00 10/01/22 9,916,228
10,000 Atlanta Downtown Development Authority, Georgia, Underground Atlanta Refg
Ser 1992................................................................ 6.25 10/01/16 10,351,500
5,000 Illinois, Civic Center Ser 1990 A (AMBAC)................................ 6.00 12/15/15 5,028,000
7,370 Indianapolis Local Public Improvement Bond Bank, Indiana, Ser 1992 D..... 6.75 02/01/20 7,864,896
8,550 Maine Municipal Bond Bank, 1992 Ser E.................................... 6.25 11/01/12 8,981,861
- -------- ----------
40,720 42,142,485
- -------- ----------
Resource Recovery Revenue (2.9%)
16,990 Broward County, Florida, Broward Waste Energy Co North Ser 1984.......... 7.95 12/01/08 19,081,129
2,500 Union County Utilities Authority, New Jersey, Solid Waste 1991 Ser A
(AMT)................................................................... 7.20 06/15/14 2,627,325
- -------- ----------
19,490 21,708,454
- -------- ----------
Transportation Facilities Revenue (13.0%)
Dade County, Florida, Aviation,
3,000 1992 Ser B (MBIA)....................................................... 6.55 10/01/13 3,197,730
5,000 1992 Ser B (AMT) (MBIA)................................................. 6.60 10/01/22 5,303,700
13,250 Chicago, Illinois, Chicago-O'Hare Int'l Terminal Ser 1992 (AMT) (MBIA)... 6.75 01/01/12 14,138,147
20,000 Illinois Toll Highway Authority, Priority 1992 Ser A..................... 6.375 01/01/15 20,478,400
15,000 St Louis, Missouri, Lambert - St Louis Int'l Airport Ser 1992 (AMT)
(FGIC).................................................................. 6.00 07/01/08 15,636,150
25,000 Clark County, Nevada, Las Vegas - McCaran Int'l Airport Passenger
Facility Charge 1992 Ser B (AMT)........................................ 6.25 07/01/22 25,297,250
Puerto Rico Highway & Transportation Authority,
6,000 Refg Ser V.............................................................. 6.625 07/01/12 6,399,960
7,115 Ser T................................................................... 6.625 07/01/18 7,536,279
- -------- ----------
94,365 97,987,616
- -------- ----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 9

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

PORTFOLIO OF INVESTMENTS October 31, 1995, continued

SHORT-TERM MUNICIPAL OBLIGATION (0.5%)
3,900 Harris County Health Facilities Development Corporation, Texas, Methodist
- -------- Hospital Ser 1994 (Demand 11/01/95) (Identified Cost $3,900,000)........ 4.00* 12/01/25 3,900,000
------------
$723,340 TOTAL INVESTMENTS (Identified Cost $705,541,776) (a).................................... 99.4%
- --------
- --------
748,508,338
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES............................................ 0.6 4,332,127
------ ------------
NET ASSETS............................................................................... 100.0% $752,840,465
------ ------------
------ ------------
</TABLE>

- ---------------------
AMT Alternative Minimum Tax.
WI Security purchased on a when issued basis.
* Current coupon of variable rate security.
(a) The aggregate cost for federal income tax purposes is
$705,541,776; the aggregate gross and net unrealized
appreciation is $42,966,562.

Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
Connie Lee Connie Lee Insurance Company.
FGIC Financial Guaranty Insurance Company.
FSA Financial Security Assurance Inc.
MBIA Municipal Bond Investors Assurance Corporation.

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 10

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

PORTFOLIO OF INVESTMENTS October 31, 1995, continued

- --------------------------------------------------------------------------------
GEOGRAPHIC SUMMARY OF INVESTMENTS
Based on Market Value as a Percent of Net Assets
October 31, 1995

<TABLE>
<S> <C>
Alabama............ 1.1%
Alaska............. 1.1
California......... 2.2
Colorado........... 3.4
Connecticut........ 2.8
District of
Columbia.......... 2.4
Florida............ 8.2
Georgia............ 3.7
Hawaii............. 1.8
Idaho.............. 0.2
Illinois........... 7.1
Indiana............ 1.0%
Maine.............. 1.2
Massachusetts...... 4.7
Michigan........... 3.6
Minnesota.......... 3.1
Missouri........... 5.9
Nebraska........... 0.7
Nevada............. 5.9
New Jersey......... 0.3
New York........... 8.6
Ohio............... 1.9
Pennsylvania....... 3.3%
Puerto Rico........ 1.8
South Carolina..... 5.9
South Dakota....... 0.7
Texas.............. 4.4
Virginia........... 6.3
Washington......... 4.7
West Virginia...... 1.4
----
Total.............. 99.4%
----
----
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 11

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

FINANCIAL STATEMENTS

<TABLE>
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1995
ASSETS:
Investments in securities, at value
(identified cost $705,541,776).......... $748,508,338
Cash..................................... 375,783
Interest receivable...................... 12,626,283
Deferred organizational expenses......... 21,054
Prepaid expenses......................... 112,616
------------
TOTAL ASSETS......................... 761,644,074
------------
LIABILITIES:
Payable for:
Investments purchased................ 7,922,101
Dividends to preferred
shareholders........................ 332,797
Investment management fee............ 230,812
Common shares of beneficial interest
purchased........................... 193,420
Accrued expenses......................... 124,479
------------
TOTAL LIABILITIES.................... 8,803,609
------------
NET ASSETS:
Preferred shares of beneficial interest
(1,000,000 shares authorized of
non-participating $.01 par value, 4,160
shares outstanding)..................... 208,000,000
------------
Common shares of beneficial interest
(unlimited shares authorized of $.01 par
value, 35,533,313 shares outstanding)... 497,161,107
Net unrealized appreciation.............. 42,966,562
Accumulated undistributed net investment
income.................................. 3,468,179
Accumulated undistributed net realized
gain.................................... 1,244,617
------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS........................ 544,840,465
------------
TOTAL NET ASSETS..................... $752,840,465
------------
------------
NET ASSET VALUE PER COMMON SHARE
($544,840,465 divided by 35,533,313
common shares outstanding).............. $15.33
-----
-----
STATEMENT OF OPERATIONS
For the year ended October 31, 1995
NET INVESTMENT INCOME:
INTEREST INCOME.......................... $ 46,353,297
------------
EXPENSES
Investment management fee................ 2,588,394
Auction commission fees.................. 609,197
Transfer agent fees and expenses......... 213,592
Professional fees........................ 107,759
Auction agent fees....................... 76,080
Shareholder reports and notices.......... 70,325
Custodian fees........................... 33,834
Registration fees........................ 32,429
Trustees' fees and expenses.............. 31,100
Organizational expenses.................. 10,994
Other.................................... 55,267
------------
TOTAL EXPENSES BEFORE EXPENSE
OFFSET............................... 3,828,971
LESS: EXPENSE OFFSET................. (33,624)
------------
TOTAL EXPENSES AFTER EXPENSE
OFFSET............................... 3,795,347
------------
NET INVESTMENT INCOME................ 42,557,950
------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain........................ 1,992,474
Net change in unrealized depreciation.... 58,771,035
------------
NET GAIN............................. 60,763,509
------------
NET INCREASE............................. $103,321,459
------------
------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 12

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

FINANCIAL STATEMENTS, continued

<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, OCTOBER 31,
1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income............................. $ 42,557,950 $ 48,165,091
Net realized gain (loss).......................... 1,992,474 (747,857)
Net change in unrealized
appreciation/depreciation........................ 58,771,035 (105,098,168)
------------ ------------
NET INCREASE (DECREASE)....................... 103,321,459 (57,680,934)
------------ ------------
DIVIDENDS TO PREFERRED SHAREHOLDERS FROM NET
INVESTMENT INCOME............................... (8,062,139) (8,532,844)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS
FROM:
Net investment income............................. (35,961,242) (40,390,228)
Net realized gain................................. -- (1,218,012)
------------ ------------
TOTAL......................................... (35,961,242) (41,608,240)
------------ ------------
TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:
Preferred......................................... (33,250,000) (38,750,000)
Common............................................ (25,887,114) (25,658,544)
------------ ------------
TOTAL......................................... (59,137,114) (64,408,544)
------------ ------------
TOTAL INCREASE (DECREASE)..................... 160,964 (172,230,562)
NET ASSETS:
Beginning of period............................... 752,679,501 924,910,063
------------ ------------
END OF PERIOD
(Including undistributed net investment income
of $3,468,179 and $4,933,610, respectively)... $752,840,465 $752,679,501
------------ ------------
------------ ------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 13

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

NOTES TO FINANCIAL STATEMENTS October 31, 1995

1. ORGANIZATION AND ACCOUNTING POLICIES

InterCapital Quality Municipal Income Trust (the "Trust") is registered under
the Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Trust was organized as a Massachusetts
business trust on March 12, 1992 and commenced operations on September 29, 1992.

The following is a summary of significant accounting policies:

A. VALUATION OF INVESTMENTS -- Portfolio securities are valued for the Trust by
an outside independent pricing service approved by the Trustees. The pricing
service has informed the Trust that in valuing the Trust's portfolio securities,
it uses both a computerized matrix of tax-exempt securities and evaluations by
its staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the bid side of the market each day. The
Trust's portfolio securities are thus valued by reference to a combination of
transactions and quotations for the same or other securities believed to be
comparable in quality, coupon, maturity, type of issue, call provisions, trading
characteristics and other features deemed to be relevant. Short-term debt
securities having a maturity date of more than sixty days at time of purchase
are valued on a mark-to-market basis until sixty days prior to maturity and
thereafter at amortized cost based on their value on the 61st day. Short-term
debt securities having a maturity date of sixty days or less at the time of
purchase are valued at amortized cost.

B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
The Trust amortizes premiums and accretes discounts over the life of the
respective securities. Interest income is accrued daily.

C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable and nontaxable income to its
shareholders. Accordingly, no federal income tax provision is required.

D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the ex-dividend date. The amount of
dividends and distributions from net investment income and net realized capital
gains are determined in accordance with federal income tax regulations which may
differ from generally accepted accounting principles. These "book/tax"
differences are either considered temporary or permanent in nature. To the
extent these differences are permanent in nature, such amounts are reclassified
within the capital accounts based on their
<PAGE> 14

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued

federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent they exceed
net investment income and net realized capital gains for tax purposes, they are
reported as distributions of paid-in-capital.

E. ORGANIZATIONAL EXPENSES -- Dean Witter InterCapital Inc. (the "Investment
Manager") paid the organizational expenses in the amount of $55,000 which have
been reimbursed for the full amount thereof. Such expenses have been deferred
and are being amortized by the straight-line method over a period not to exceed
five years from the commencement of operations.

2. INVESTMENT MANAGEMENT AGREEMENT

Pursuant to an Investment Management Agreement, the Trust pays a management fee,
calculated weekly and payable monthly, by applying the annual rate of 0.35% to
the Trust's average weekly net assets.

Under the terms of the Agreement, in addition to managing the Trust's
investments, the Investment Manager maintains certain of the Trust's books and
records and furnishes, at its own expense, office space, facilities, equipment,
clerical, bookkeeping and certain legal services and pays the salaries of all
personnel, including officers of the Trust who are employees of the Investment
Manager. The Investment Manager also bears the cost of telephone services, heat,
light, power and other utilities provided to the Trust.

3. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES

The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the year ended October 31, 1995 aggregated
$8,168,290 and $31,521,493, respectively.

Dean Witter Trust Company, an affiliate of the Investment Manager, is the
Trust's transfer agent. At October 31, 1995, the Trust had transfer agent fees
and expenses payable of approximately $17,000.

The Trust has an unfunded noncontributory defined benefit pension plan covering
all independent Trustees of the Trust who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on years of service and compensation during the last five years
of service. Aggregate pension costs for the year ended October 31, 1995 included
in Trustees' fees and expenses in the Statement of Operations amounted to
$11,903. At October 31, 1995,
<PAGE> 15

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued

the Trust had an accrued pension liability of $21,180 which is included in
accrued expenses in the Statement of Assets and Liabilities.

4. PREFERRED SHARES OF BENEFICIAL INTEREST

The Trust is authorized to issue up to 1,000,000 non-participating preferred
shares of beneficial interest having a par value of $.01 per share, in one or
more series, with rights as determined by the Trustees, without approval of the
common shareholders. On November 12, 1992, the Trust issued 1,120 shares each of
Series 1 through 5 Auction Rate Preferred Shares ("Preferred Shares") for gross
total proceeds of $280,000,000. The preferred shares have a liquidation value of
$50,000 per share plus the redemption premium, if any, plus accumulated but
unpaid dividends, whether or not declared, thereon to the date of distribution.
The Trust may redeem such shares, in whole or in part, at the original purchase
price of $50,000 per share plus accumulated but unpaid dividends, whether or not
declared, thereon to the date of redemption.

During the year ended October 31, 1995, the Trust purchased and retired
preferred shares as follows:

<TABLE>
<CAPTION>
SERIES SHARES AMOUNT
- -------- -------- -----------
<S> <C> <C>
2 392 $19,600,000
5 273 13,650,000
</TABLE>

Dividends, which are cumulative, are reset through auction procedures.

<TABLE>
<CAPTION>
RANGE OF
DIVIDEND
SHARES* SERIES RATE* RESET DATE RATES**
- ------- ------- ----- ---------- ---------------
<S> <C> <C> <C> <C>
1,120 1 3.83 % 11/07/95 3.69 % - 4.45 %
400 2 3.489 03/06/96 2.875 - 6.15
1,120 3 3.76 11/01/95 3.39 - 4.55
1,120 4 3.80 01/03/96 3.80 - 3.85
400 5 3.648 01/11/96 2.95 - 5.875
</TABLE>

- ---------------------
* As of October 31, 1995.
** For the year ended October 31, 1995.

Subsequent to October 31, 1995 and up through December 7, 1995, the Trust paid
dividends to Series 2, 4, and 5 at a rate of 3.49%, 3.60% and 3.65%,
respectively, and to each of the Series 1 and 3 at rates ranging from 3.79% to
3.92%, and 3.75% to 3.98%, respectively, in the aggregate amount of $1,077,563.
<PAGE> 16

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued

The Trust is subject to certain restrictions relating to the preferred shares.
Failure to comply with these restrictions could preclude the Trust from
declaring any distributions to common shareholders or purchasing common shares
and/or could trigger the mandatory redemption of preferred shares at
liquidation value.

The preferred shares, which are entitled to one vote per share, generally vote
with the common shares but vote separately as a class to elect two Trustees and
on any matters affecting the rights of the preferred shares.

5. COMMON SHARES OF BENEFICIAL INTEREST

Transactions in common shares of beneficial interest were as follows:

<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR EXCESS OF
SHARES VALUE PAR VALUE
---------- -------- ------------
<S> <C> <C> <C>
Balance, October 31, 1993............................................... 39,457,113 $394,571 $548,312,194
Treasury shares purchased and retired (weighted average discount
8.32%)*................................................................ (1,894,500) (18,945) (25,639,599)
---------- -------- ------------
Balance, October 31, 1994............................................... 37,562,613 375,626 522,672,595
Treasury shares purchased and retired (weighted average discount
10.05%)*............................................................... (2,029,300) (20,293) (25,866,821)
---------- -------- ------------
Balance, October 31, 1995............................................... 35,533,313 $355,333 $496,805,774
========== ======== ============
</TABLE>

- ---------------------
* The Trustees have voted to retire the shares purchased.

6. FEDERAL INCOME TAX STATUS

During the year ended October 31, 1995, the Trust utilized all of its net
capital loss carryover of approximately $747,900.

7. DIVIDENDS TO COMMON SHAREHOLDERS

The Trust has declared the following dividends from net investment income:

<TABLE>
<CAPTION>
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
- ------------------ ---------- ----------------- -----------------
<S> <C> <C> <C>
October 31, 1995 $ 0.0825 November 10, 1995 November 24, 1995
November 28, 1995 $ 0.0825 December 8, 1995 December 22, 1995
</TABLE>
<PAGE> 17

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

NOTES TO FINANCIAL STATEMENTS October 31, 1995, continued

8. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
10/31/95 7/31/95 4/30/95 1/31/95
------------------- ----------------- ------------------- -----------------
PER PER PER PER
TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE
-------- ------ ------- ----- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income............... $ 11,479 $ 0.32 $11,637 $0.33 $ 11,382 $ 0.31 $11,855 $0.32
Net investment income................. 10,538 0.30 10,684 0.30 10,438 0.28 10,898 0.30
Net realized and unrealized gain...... 13,505 0.38 8,883 0.25 15,486 0.45 22,889 0.66
</TABLE>

<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
10/31/94 7/31/94 4/30/94 1/31/94
------------------- ----------------- ------------------- -----------------
PER PER PER PER
TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE TOTAL* SHARE
-------- ------ ------- ----- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total investment income............... $ 13,220 $ 0.34 $12,842 $0.33 $ 13,038 $ 0.34 $13,568 $0.35
Net investment income................. 12,069 0.31 11,766 0.31 11,934 0.30 12,396 0.32
Net realized and unrealized gain
(loss)............................... (44,296) (1.11) 9,135 0.24 (77,138) (1.96) 6,453 0.16
</TABLE>

- ---------------------
* Amounts in thousands.
<PAGE> 18

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

FINANCIAL HIGHLIGHTS

Selected ratios and per share data for a common share of beneficial interest
outstanding throughout each period:

<TABLE>
<CAPTION>
FOR THE
PERIOD
SEPTEMBER
29, 1992*
THROUGH
FOR THE YEAR ENDED OCTOBER 31 OCTOBER
----------------------------- 31,
1995** 1994**++ 1993** 1992**
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period..................................................... $13.62 $ 16.34 $ 13.88 $ 14.06
----- ------ ------ ------
Net investment income.................................................... 1.18 1.24 1.22 0.04
Net realized and unrealized gain (loss).................................. 1.66 (2.73) 2.50 (0.20)
----- ------ ------ ------
Total from investment operations......................................... 2.84 (1.49) 3.72 (0.16)
----- ------ ------ ------
Less dividends and distributions from:
Net investment income................................................. (0.99) (1.04) (0.91) --
Common share equivalent of dividends paid to preferred shareholders... (0.22) (0.22) (0.21) --
Net realized gain..................................................... -- (0.03) -- --
----- ------ ------ ------
Total dividends and distributions........................................ (1.21) (1.29) (1.12) --
Anti-dilutive effect of acquiring treasury shares........................ 0.08 0.06 -- --
Offering costs charged against capital................................... -- -- (0.14) (0.02)
----- ------ ------ ------
Net asset value, end of period........................................... $15.33 $ 13.62 $ 16.34 $ 13.88
----- ------ ------ ------
----- ------ ------ ------
Market value, end of period.............................................. $13.75 $11.875 $15.875 $15.125
----- ------ ------ ------
----- ------ ------ ------
TOTAL INVESTMENT RETURN+................................................. 24.77% (19.30)% 11.41% 0.83%(1)
RATIOS TO AVERAGE NET ASSETS OF COMMON SHAREHOLDERS:
Total expenses before expense offset..................................... 0.72%(3) 0.75% 0.71% 0.42%(2)
Net investment income before preferred stock dividends................... 8.05%(3) 8.06% 7.95% 3.29%(2)
Preferred stock dividends................................................ 1.53% 1.43% 1.35% N/A
Net investment income available to common shareholders................... 6.52% 6.63% 6.60% 3.29%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands.................................. $752,840 $752,680 $924,910 $548,350
Asset coverage on preferred shares at end of period...................... 361% 311% 330% N/A
Portfolio turnover rate.................................................. 1% 2% 4% 4%(1)
</TABLE>

- ---------------------
* Commencement of operations.
** The per share amounts were computed using an average number of shares
outstanding during the period.
+ Total investment return is based upon the current market value on last day
of each period reported.
Dividends and distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan. Total investment
return does not reflect brokerage commissions.
++ Restated for comparative purposes.
(1) Not annualized.
(2) Annualized.
(3) The above expense and net investment income ratios would have been 0.71%
and 8.06%, respectively, which reflects 0.01% effect for custody cash
credits.

SEE NOTES TO FINANCIAL STATEMENTS
<PAGE> 19

INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES
OF INTERCAPITAL QUALITY MUNICIPAL INCOME TRUST

In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of InterCapital Quality Municipal
Income Trust (the "Trust") at October 31, 1995, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the three
years in the period then ended and for the period September 29, 1992
(commencement of operations) through October 31, 1992, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1995, by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
December 7, 1995
--------------------------------------------------------------------

1995 FEDERAL TAX NOTICE (unaudited)

During the year ended October 31, 1995, the Trust paid the
following per share amounts from tax-exempt income: $0.99 to
common shareholders, $1,870 to Series 1 preferred
shareholders, $1,831 to Series 2 preferred shareholders,
$2,019 to Series 3 preferred shareholders, $1,914 to Series 4
preferred shareholders, $1,913 to Series 5 preferred
shareholders.
<PAGE> 20

TRUSTEES
Jack F. Bennett
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
John R. Haire
Dr. Manuel H. Johnson
Paul Kolton
Michael E. Nugent
Philip J. Purcell
John L. Schroeder

OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer

Sheldon Curtis
Vice President, Secretary and General Counsel

James F. Willison
Vice President

Thomas F. Caloia
Treasurer

TRANSFER AGENT
Dean Witter Trust Company
Harborside Financial Center - Plaza Two
Jersey City, New Jersey 07311

INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York 10036

INVESTMENT MANAGER
Dean Witter InterCapital Inc.
Two World Trade Center
New York, New York 10048

DEAN WITTER
INTERCAPITAL
QUALITY
MUNICIPAL
INCOME
TRUST

[PHOTO]

ANNUAL REPORT
OCTOBER 31, 1995