<PAGE>

          UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                      Washington, DC   20549

                            FORM 10-Q/A

     (X)  Quarterly Report Pursuant to Section 13 or 15(d) of
          the Securities Exchange Act of 1934

          For the quarterly period ended June 30, 1998

                                or

     ( )  Transition Report Pursuant to Section 13 or 15(d)
          of the Securities Exchange Act of 1934

                  Commission File Number 0-12194

                         ZITEL CORPORATION
     (Exact name of Registrant as specified in its charter)



           California                        94-2566313
   (State or other jurisdiction of       (I.R.S. Employer
   incorporation or organization)       Identification No.)

     47211 Bayside Parkway                   94538-6517
      Fremont, California                    (Zip Code)
(Address of principal executive offices)


Registrant's telephone number, including area code:  (510) 440-9600


Indicate by check mark whether the Registrant (1) has filed all 
reports required to be filed by Section 13 or 15(d) of the 
Securities Exchange Act of 1934 during the preceding 12 months 
(or such shorter period that the Registrant was required to file 
such reports), and (2) has been subject to such filing 
requirements for the past 90 days.     Yes  X   No 
                                           ---     ---

The number of shares of the Registrant's Common Stock outstanding 
as of June 30, 1998, was 17,766,606.


<PAGE>
              ZITEL CORPORATION AND SUBSIDIARIES

                             INDEX


                                                            Page
                                                           Number

PART I.   Financial Information

  Item 1.  Financial Statements

     Condensed Consolidated Balance Sheets
       June 30, 1998 (unaudited) and September 30, 1997 .....  3

     Condensed Consolidated Statements of
       Operations (unaudited) - Three and Nine Months
        Ended June 30, 1998 and 1997 ........................  4

     Condensed Consolidated Statements of
       Cash Flows (unaudited) - Nine Months Ended
       June 30, 1998 and 1997 ...............................  5

     Notes to Condensed Consolidated
       Financial Statements .................................  7

  Item 2.   Management's Discussion and Analysis of
            Financial Condition and Results
              of Operations ................................. 14



                             Page 2
<PAGE>
                  ZITEL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED BALANCE SHEETS
                           ($000's)

<TABLE>
<CAPTION>
                                      (UNAUDITED)
                                        June 30,  September 30,
                                         1998         1997
                                      ----------- -------------
<S>                                   <C>         <C>
     ASSETS
Current assets:
  Cash and cash equivalents            $ 11,751      $  4,224
  Short-term investments                      0         9,596
  Accounts receivable, net                3,762         6,547
  Inventories                               207         3,050
  Deferred and refundable taxes             208         3,540
  Other current assets                    1,935           993
                                       --------      --------
    Total current assets                 17,863        27,950

Fixed assets, net                         1,442         3,700
Intangible assets, net                    4,581         5,846
Other assets, net                         9,396        11,798
                                       --------      --------
  Total assets                         $ 33,282      $ 49,294
                                       --------      --------
                                       --------      --------

     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                     $  4,200      $  4,768
  Accrued liabilities                     4,523         4,419
                                       --------      --------
    Total current liabilities             8,723         9,187
Convertible subordinated debt            15,372        24,161
                                       --------      --------
    Total liabilities                    24,095        33,348
                                       --------      --------
Shareholders' equity:
  Common stock                           48,835        27,081
  Accumulated deficit                   (39,648)      (11,135)
                                       --------      --------
  Total shareholders' equity              9,187        15,946
                                       --------      --------
  Total liabilities and 
    shareholders' equity               $ 33,282      $ 49,294
                                       --------      --------
                                       --------      --------
</TABLE>

The accompanying notes are an integral part of these financial 
statements.

                             Page 3
<PAGE>

               ZITEL CORPORATION AND SUBSIDIARIES
         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                          (UNAUDITED)
                (In thousands except per share data)

<TABLE>
<CAPTION>
                          Three Months Ended   Nine Months Ended
                               June 30,            June 30,
                          ------------------  ------------------
                            1998      1997      1998      1997
                          --------  --------  --------  --------
<S>                       <C>       <C>       <C>       <C>
Net sales                 $  4,591  $  2,215  $ 16,137  $  7,057
Royalty revenue                749     1,137     1,541     4,651
                          --------  --------  --------  --------
  Total revenue              5,340     3,352    17,678    11,708
Cost of goods sold           4,445     1,707    10,240     6,243
Research and development 
  expenses                   1,616     1,671     5,567     4,906
Selling, general & 
  administrative expenses    7,614     3,291    19,474     8,789
Loss on impairment
  of assets                  1,956         0     1,956         0
Acquisition of 
  in-process R&D                 0     6,600         0     6,600
                          --------  --------  --------  --------
  Operating loss           (10,291)   (9,917)  (19,559)  (14,830)

Interest expense             1,401     1,397     2,409     1,397
Other (income) expense         288      (234)       (2)   (1,269)
                          --------  --------  --------  --------
Loss before income taxes   (11,980)  (11,080)  (21,966)  (14,958)
Provision for (benefit 
  from) income taxes         6,547    (3,107)    6,547    (4,503)
                          --------  --------  --------  --------
Net loss                  $(18,527) $ (7,973) $(28,513) $(10,455)
                          --------  --------  --------  --------
                          --------  --------  --------  --------

Basic and diluted loss 
  per share               $  (1.07) $   (.52) $  (1.73) $   (.69)
                          --------  --------  --------  --------
                          --------  --------  --------  --------

Number of shares used in 
  basic and diluted loss 
  per share calculations    17,235    15,280    16,528    15,157
                          --------  --------  --------  --------
                          --------  --------  --------  --------
</TABLE>

The accompanying notes are an integral part of these financial 
statements.
                                Page 4

<PAGE>

              ZITEL CORPORATION AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            ($000's)

<TABLE>
<CAPTION>
                                                              (UNAUDITED)
                                                          Nine Months Ended
                                                                June 30,
                                                            1998      1997
                                                          --------  --------
<S>                                                       <C>       <C>
Cash flows provided by (used in) operating activities:
  Net loss                                                $(28,513) $(10,455)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Acquisition of in-process R&D                                0     6,600
    Decrease (increase) in deferred and
     refundable taxes                                        6,509    (4,745)
    Loss on impairment of assets                             1,956         0
    Writedown of inventory                                   1,655         0
    Writeoff of patents                                        387         0
    Adjustment of goodwill and purchased technology            658         0
    Discount amortization on subordinated debentures         1,111     1,204
    Amortization of capitalized financing costs                672         0
    Depreciation and amortization                            2,338       923
    Provision for doubtful accounts                            155       147
    Provision for inventory allowances                         160       360
    Gain on sale of trading securities                           0      (777)
    Equity in loss of unconsolidated company                   410         0
    Change in operating assets and liabilities:        
    Decrease (increase) in accounts receivable               2,630    (1,642)
    Decrease in inventories                                  1,028       469
    Increase in other current assets                          (942)     (192)
    Increase (decrease) in accounts payable                   (568)    2,000
    Increase in accrued liabilities                            719     1,764
                                                          --------  --------
 Net cash used in operating activities                      (9,635)   (4,344)
                                                          --------  --------
Cash flows provided by (used in) investing activities:
    Purchase of fixed assets                                  (549)   (1,980)
    Purchase of other assets                                (1,180)     (618)
    Investment in unconsolidated company                    (1,510)   (2,024)
    Proceeds from sale of marketable securities              9,596     3,159
    Purchase of companies, net of cash acquired                  0   (11,062)
                                                          --------  --------
 Net cash provided by (used in) 
  investing activities                                       6,357   (12,525)
                                                          --------  --------
</TABLE>

                                Page 5

<PAGE>

              ZITEL CORPORATION AND SUBSIDIARIES
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (continued)
                            ($000's)

<TABLE>
<CAPTION>
                                                              (UNAUDITED)
                                                          Nine Months Ended
                                                                June 30,
                                                            1998       1997
                                                          --------   -------
<S>                                                       <C>        <C>
Cash flows provided by financing activities:
   Issuance of common stock                                $ 1,238   $ 1,200
   Issuance of subordinated debentures                       9,567    23,795
                                                           -------   -------
 Net cash provided by financing activities                  10,805    24,995
                                                           -------   -------
 Net increase in cash                                        7,527     8,126
Cash and cash equivalents, beginning of year                 4,224     9,216
                                                           -------   -------
Cash and cash equivalents, end of period                   $11,751   $17,342
                                                           -------   -------
                                                           -------   -------

Supplemental non-cash investing and financing activities:

  Issuance of common stock in business combination         $     0   $ 1,200
                                                           -------   -------
                                                           -------   -------

  Professional costs incurred in placement of
    subordinated debentures                                $   558   $ 1,205
                                                           -------   -------
                                                           -------   -------

  Conversion of 5% subordinated debt and
    accrued interest                                       $18,791   $     0
                                                           -------   -------
                                                           -------   -------

  Common stock purchase warrants                           $   614   $     0
                                                           -------   -------
                                                           -------   -------
</TABLE>

The accompanying notes are an integral part of these financial 
statements.




                             Page 6
<PAGE>
               ZITEL CORPORATION AND SUBSIDIARIES

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                           (UNAUDITED)
            (Amounts in thousands except per share data)

1.  The condensed consolidated financial statements included herein have been 
prepared by the Company, without audit, pursuant to the rules and regulations 
of the Securities and Exchange Commission and should be read in conjunction 
with the audited financial statements of the Company.  Certain information 
and footnote disclosures, normally included in financial statements prepared 
in accordance with generally accepted accounting principles, have been 
condensed or omitted although the Company believes the disclosures which are 
made are adequate to make the information presented not misleading.  Further, 
the condensed consolidated financial statements reflect, in the opinion of 
management, all adjustments necessary to present fairly the financial 
position and results of operations as of and for the periods indicated.  The 
results of operations for the period ended June 30, 1998 are not necessarily 
indicative of the results expected for the full year.  The Company has 
sustained recurring losses related primarily to lower than anticipated 
revenues.

2. Recent Accounting Pronouncements:

    In June 1997, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting 
Comprehensive Income".  SFAS No. 130 establishes standards for the reporting 
and display of comprehensive income and its components in a full set of 
general purpose financial statements.  Comprehensive income is defined as the 
change in equity of a business enterprise during a period from transactions 
and other events and circumstances from non-owner sources.  The impact of 
adopting SFAS No. 130, which is effective for the Company in fiscal year 
1999, has not been determined.

    In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments 
of an Enterprise and Related Information".  SFAS No. 131 requires 
publicly-held companies to report financial and other information about key 
revenue-producing segments of the entity for which such information is 
available and is utilized by the chief operations decision maker.  Specific 
information to be reported for individual segments includes profit or loss, 
certain revenue and expense items and total assets.  A reconciliation of


                             Page 7
<PAGE>

segment financial information to amounts reported in the financial statements 
would be provided.  SFAS No. 131 is effective for the Company in fiscal year 
1999 and the impact of adoption has not been determined.

    On October 27, 1997, the American Institute of Certified Public 
Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software 
Revenue Recognition".  SOP 97-2 establishes the standard for the appropriate 
recognition of software revenue, effective for the Company in fiscal year 
1999.  The effect of the new SOP 97-2 has yet to be determined.

    American Institute of Certified Public Accountants Statement of Position 
("SOP") 98-1, "Accounting for Costs of Computer Software Developed or 
Obtained for Internal Use", issued on March 4, 1998, will be effective for the 
Company in fiscal year 1999.  The Company believes there will not be a 
significant impact upon adoption.

3.  Inventories:

<TABLE>
<CAPTION>
                               June 30,        September 30,
                                 1998              1997
                               --------        -------------
     <S>                        <C>               <C>
     Raw materials              $    0            $  953
     Work in process                 0               576
     Finished goods                207             1,521
                                ------            ------
                                $  207            $3,050
                                ------            ------
                                ------            ------
</TABLE>

    Inventory at June 30, 1998, consists primarily of finished goods 
inventory related to the Company's Year 2000 Services business.  During the 
quarter, the Company wrote inventory down to its net realizable value and 
incurred a related write-off of $1,655 thousand in anticipation of the sale 
of the storage business unit, which efforts began during the current quarter 
and was finalized on July 24, 1998.

4.  Intangible Assets:

    Intangible assets include goodwill and purchased technology, recorded in 
connection with the acquisition of the three software companies, which were 
being amortized on a straight-line basis over seven and five years, 
respectively.  The Company periodically assesses the recoverability of the 
intangible assets by determining whether the amortization of the asset 
balance over its remaining life can be recovered through undiscounted future 


                             Page 8
<PAGE>

operating cash flows of the acquired operation.  The amount of impairment, if 
any, is measured based on projected discounted future operating cash flows 
and is recognized as a write down of the asset to net realizable value.  At 
June 30, 1998, a write-down of a combined total of $658 thousand was made to 
goodwill and purchased technology.  In addition, the amortization period of 
goodwill was adjusted to five years from seven years.  As of June 30, 1998, 
intangible assets consist of the following:

<TABLE>
<CAPTION>
                                       June 30,     September 30,
                                        1998            1997
                                       --------     -------------
    <C>                                 <C>             <C>
    Goodwill                            $3,018          $3,242
    Purchased technology                 2,588           2,862
    Less accumulated amortization       (1,025)           (258)
                                        ------          ------
                                        $4,581          $5,846
                                        ------          ------
                                        ------          ------
</TABLE>

5.  Deferred Software Implementation Costs:

    The Company capitalizes substantially all costs related to the purchase 
of software and its implementation which includes purchased software, 
consulting fees and the use of certain specified Company resources, and are 
being amortized on a straight-line basis over the estimated life of the 
computer software, which is five years.  In June 1998, the Company wrote down 
the cost of amounts capitalized in the amount of $742 thousand and the 
related accumulated amortization of $192 thousand.  As of June 30, 1998, $351 
thousand in costs remains unamortized and are included in other long-term 
assets.  Amortization in the amount of $170 thousand has been charged to 
expense during the nine-month period in fiscal 1998.  Amortization of $111 
thousand had been charged to expense in fiscal year 1997.

6.  Investment in Unconsolidated Company:

    During the quarter ended December 31, 1997, Zitel invested an additional 
$1.5 million in MatriDigm Corporation in exchange for a convertible 
promissory note.  The note was converted into 1,050 thousand shares of common 
stock in May 1998.  As of June 30, 1998, the Company's investment in 
MatriDigm Corporation amounted to $7.4 million, consisting of 10.6 million 
shares of preferred stock and approximately 1.6 million shares of common 
stock.  The Company recorded $410 thousand equity in losses of the 
unconsolidated company during the quarter ended June 30, 1998.  The Company 
also guaranteed a bank loan in the amount of $1 million, which is classified 
in other current assets.


                             Page 9
<PAGE>

    The following is a summary of financial information with 
respect to MatriDigm:

<TABLE>
<CAPTION>
                        Three months ended     Nine months ended
                             June 30,               June 30,
                        ------------------    -------------------
                          1998      1997         1998      1997
                        --------  --------    --------- ---------
     <S>                <C>       <C>         <C>       <C>
     Net sales          $ 2,085   $     -     $  3,975  $      -
     Gross profit         1,218         -        1,478         -
     Net loss            (3,059)   (4,518)     (10,484)  (10,086)
</TABLE>

7.  Line of Credit:

    In April 1998, the Company obtained a $1.5 million secured bank line of 
credit.  The line of credit expires on September 30, 1998.  Advances bear 
interest at the bank's prime rate plus 1% (9.5% at June 30, 1998).  Under 
terms of the agreement, the borrowing base is 75% of eligible domestic and 
foreign insured accounts receivable.  Payment of interest is on a monthly 
basis, with principal limited to the borrowing base and is due upon maturity. 
In addition, the Company is required to maintain certain specified financial 
ratios.  During the quarter ended June 30, 1998, the Company was in violation 
of certain covenants, which were waived by the bank.  During the quarter 
ended June 30, 1998, the line of credit was not utilized.

8.  Convertible Subordinated Debentures:

    The current quarter includes a charge to interest expense in the amount 
of $169 thousand related to the amortization of the capitalized financing 
costs on the 5% convertible subordinated debentures.  For the nine months 
ended June 30, 1998, approximately $18.8 million was converted into 1.9 
million shares of common stock at an average price of $10.068 per share.

    On June 16, 1998, the Company issued $10,000,000 principal amount of 3% 
Convertible Subordinated Debentures (the "Debentures") which are due June 15, 
1999, and five-year common stock purchase warrants totalling 150,000 shares 
of the Company's common stock.  The Debentures include a 10% discount of 
$1,111,000, which was charged to interest expense in the current quarter.  
The Debentures accrue interest at the rate of 3% per annum and principal and 
accrued interest are convertible into common stock of the Company at a price 
of $3.92625.  The warrants were valued at $5.1041 and will be amortized over 
the life of the Debentures.  Any Debentures outstanding on June 15, 1999, 
will be automatically converted into common stock.  The Debentures restrict 
distributions and repurchases of capital stock. 


                             Page 10
<PAGE>

Reference is made to the Company's current report on Form 8-K dated June 25, 
1998 for additional information about the Debentures.

9.  Earnings Per Share (EPS):

    The Company has adopted the provisions of Statement of Financial 
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), effective 
December 31, 1997.  SFAS 128 requires the presentation of basic and diluted 
earnings per share.  Basic EPS is computed by dividing income available to 
common stockholders by the weighted average number of common shares 
outstanding for the period.  Diluted EPS is computed giving effect to all 
dilutive potential common shares that were outstanding during the period.  
Dilutive potential common shares consist of the incremental common shares 
issuable upon the conversion of convertible subordinated debt (using the "if 
converted" method) and exercise of stock options and warrants for all 
periods.  All prior period earnings per share amounts have been restated to 
comply with the SFAS 128.

    In accordance with the disclosure requirements of SFAS 128, a 
reconciliation of the numerator and denominator of basic and diluted EPS is 
provided as follow (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                      Three Months Ended  Nine Months Ended
                                           June 30,            June 30,
                                      ------------------  ------------------
                                        l998      1997      1998     1997
                                      --------  --------  --------  --------
<S>                                   <C>       <C>       <C>       <C>
Numerator - Basic and Diluted EPS
  Net loss                            $(18,527) $ (7,973) $(28,513) $(10,455)
                                      --------  --------  --------  --------
                                      --------  --------  --------  --------
Denominator - Basic EPS
  Common stock outstanding              17,235    15,280    16,528    15,157
  Common equivalent stock                    0         0         0         0
                                      --------  --------  --------  --------
                                        17,235    15,280    16,528    15,157
                                      --------  --------  --------  --------
Basic loss per share                  $  (1.07) $   (.52) $  (1.73) $   (.69)
                                      --------  --------  --------  --------
                                      --------  --------  --------  --------

Denominator - Diluted EPS
  Denominator - Basic EPS               17,235    15,280    16,528    15,157
  Effect of Dilutive Securities:
    Common stock options                     0         0         0         0
    Convertible preferred stock              0         0         0         0
                                      --------  --------  --------  --------
                                        17,235    15,280    16,528    15,157
                                      --------  --------  --------  --------
Diluted loss per share                $  (1.07) $   (.52) $  (1.73) $   (.69)
                                      --------  --------  --------  --------
                                      --------  --------  --------  --------
</TABLE>


                             Page 11
<PAGE>

    For the quarter and nine-month period ended June 30, 1998, options to 
purchase 459 thousand and 649 thousand shares, respectively, were not 
included in the computation of diluted EPS because of the anti-dilutive 
effect of including these shares in the calculation for both periods.  For 
the quarter and nine-month period ended June 30, 1997, options to purchase 
1,061 thousand and 1,302 thousand shares, respectively, were not included in 
the computation of diluted EPS because of the anti-dilutive effect of 
including these shares in the calculation for both periods.  In addition, had 
the subordinated debt been converted, it would have resulted in approximately 
4,129 thousand and 499 thousand shares for the three months ended and 2,482 
thousand and 499 thousand shares for the nine months ended June 30, 1998 and 
1997, respectively.  These shares were not included in the computation due to 
their anti-dilutive effect.

10. Sale of Storage Business Unit:

    Due to the lack of performance of the storage business unit, on July 24, 
1998, the Company completed the sale of the net assets of the business unit, 
which totalled $2.1 million, for cash and a note totalling $1.0 million and 
royalties of up to $4.0 million, payable over four years based on the sales 
performance of the new company.

    Fixed assets in the amount of $1.2 million and deferred software and 
related implementation costs of $767 thousand, which related to manufacturing 
modules that would no longer be used, were taken as a loss on impairment of 
assets during the three months ended June 30, 1998.  Inventory in the amount 
of $1.7 million and patents in the amount of $389 thousand were charged 
against cost of sales.

    Due to the excess facility capacity resulting from the sale of the 
storage business unit, a reserve in the amount of $750 thousand was recorded 
in selling, general and administrative expense during the three months ended 
June 30, 1998.  In addition, a reserve of $1.0 million was recorded in 
selling, general and administrative expense for the severance costs of the 
storage business unit personnel.

11. Deferred Taxes:

    Due to the uncertainty surrounding the realization of the NOL and credit 
carryforwards in future tax years, the Company has established a 100% 
valuation allowance against its deferred tax assets to the extent it is more 
likely than not that this asset will not be realized.  The valuation 
allowance has increased approximately $6.5 million for the three months ended 
June 30, 1998.

                             Page 12
<PAGE>

12. Common Stock:

    Common stock activity for the period from September 30, 1997 
through June 30, 1998 is as follows:

<TABLE>
<CAPTION>
                                             Common Stock     Common Stock
                                                Shares           Amount
                                             ------------     ------------
    <S>                                      <C>              <C>
    Balance at September 30, 1997               15,603           $27,081
    Conversion of subordinated debentures        1,867            20,516
    Exercise of stock options                      297             1,238
                                                ------           -------
    Balance at June 30, 1998                    17,767           $48,835
                                                ------           -------
                                                ------           -------
</TABLE>












                             Page 13
<PAGE>

        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company recorded a net loss of $18,527,000 ($1.07 per share) for the 
quarter ended June 30, 1998, compared with a net loss of $7,973,000 ($0.52 
per share) for the same quarter of the prior year.  Included in the current 
quarter results were a loss of approximately $1,400,000 related to the 
operation of the Company's storage business unit, excess capacity of the 
Fremont facility of $750,000, severance costs of the storage business unit of 
approximately $1,000,000, write-off of assets specific to the storage 
business unit of approximately $4,000,000, a discount charge of approximately 
$1,111,000 related to the $10,000,000 convertible subordinated debentures 
issued in June 1998, and a charge to operations of approximately $658,000 for 
revaluation of goodwill and intangible assets.  A loss of approximately 
$410,000 was recorded which related to the Company's minority share of an 
unconsolidated investment.  In addition, the Company wrote down its deferred 
tax assets by $6,547,000 (55% of income before income taxes).  Results for 
the quarter of the previous year included a one-time write off of in-process 
research and development in connection with the acquisition of software 
companies in June 1997.  The prior year's quarter also included a discount 
charge of approximately $1,204,000 related to the $25,000,000 convertible 
subordinated debentures issued in May 1997 and a tax benefit of $1,077,000 
(36% of income before income taxes).  Weighted average shares outstanding for 
the current quarter were 17,235,000 compared to 15,280,000 for the same 
quarter of the prior year.

For the nine months ended June 30, 1998, the net loss was $28,513,000 ($1.73 
per share) compared with a net loss of $10,455,000 ($0.69 per share) for the 
same period a year earlier.  Weighted average shares outstanding in the first 
nine months of fiscal 1998 were 16,528,000 compared to 15,157,000 for the 
same period of fiscal 1997.

Total revenue for the current quarter was $5,340,000 compared with total 
revenue of $3,352,000 for the same quarter of the prior year, an increase of 
$1,988,000.  The increase in revenue is directly attributable to an increase 
in net sales, partially offset by a decrease in royalty revenue.  Net sales 
for the current quarter were $4,591,000 versus $2,215,000 for the same 
quarter of the prior year, an increase of $2,376,000.  The 

                             Page 14
<PAGE>

increase in net sales is attributable to the net sales generated by the 
Company's software business unit (which was acquired June 30, 1997) of 
$3,510,000, which was partially offset by a decrease of $1,318,000 in net 
sales of the storage business unit.  Royalty revenue for the current quarter 
was $749,000 versus $1,137,000 for the same quarter of the prior year.  
During the quarter, the Company negotiated and received the final payment for 
all royalty obligations from IBM Corporation.  In addition, the solution 
services business unit recognized net sales on its first remediation 
contract, approximately $328,000.

For the nine months ended June 30, 1998, total revenue was $17,678,000 versus 
total revenue of $11,708,000 for the same period of the prior year, an 
increase of $5,970,000.  The increase in revenue is directly attributable to 
an increase in net sales, partially offset by a decrease in royalty revenue.  
For the nine months just ended, net sales were $16,137,000 versus $7,057,000 
for the same period of the prior year, an increase of $9,080,000.  The 
increase in net sales is directly attributable to the net sales generated by 
the Company's software business unit of $10,653,000, partially offset by a 
decrease of $1,350,000 in net sales of the storage business unit.  Royalty 
revenue was $1,541,000 for the nine-month period just ended compared with 
$4,651,000 for the same period of the prior year.

Gross margin as a percent of net sales was 3% for the quarter ended June 30, 
1998 compared to 23% for the same quarter of the prior year.  For the 
nine-month period ended June 30, 1998, gross margin was 37% versus 12% for 
the same period a year earlier.  The decrease in gross margin percentage 
during the current quarter is primarily attributable to the write-down of 
inventory and related reserves of the Company's storage business unit.  The 
increase in the gross margin percentage for the nine-month period is 
primarily the result of product mix as a result of net sales generated by the 
software business unit.

On July 24, 1998, the Company finalized the sale of its storage business unit 
for proceeds of approximately $1,000,000 with an additional $4,000,000 
royalty potential based on the new company's net sales of the storage 
product.  The transaction involved the sale of the assets and liabilities of 
this business unit.  Included in the current quarter are losses of 
approximately $1,400,000 related to the operation of this business unit.  
Additionally, costs related to the storage business unit during the quarter 
were severance costs in the amount of $1,000,000, excess capacity of the 
Fremont facility of $750,000, and the write-off of assets specific to the 
business 

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<PAGE>

unit of approximately $4,000,000.  In addition, it is anticipated that 
approximately $800,000 in personnel-related costs of the storage business 
unit will be incurred in the fourth quarter of the current fiscal year.

Research and development expenses for the quarter ended June 30, 1998, were 
30% of total revenue compared with 50% for the same quarter of the prior 
year.  Actual dollars decreased $55,000.  With the sale of the storage 
business unit, it is anticipated that research and development spending will 
decrease significantly in actual dollars.

Selling, general and administrative (SG&A) expenses were 143% of total 
revenue for the current quarter versus 98% for the same quarter of the prior 
year.  Actual spending increased $4,323,000.  The increase in spending is 
attributable to the added SG&A expenses of the acquired software companies of 
approximately $2,464,000, an increase of $637,000 in legal costs, $975,000 
for severance for the storage business unit personnel, and $750,000 estimated 
loss on excess capacity at the Fremont facility due to the sale of the 
storage business unit.

For the nine-month period just ended, SG&A expenses were 110% of total 
revenue compared to 75% for the same period of the prior year.  Actual 
spending increased $10,685,000.  The increase in spending is attributable to 
the additional SG&A expenses of the acquired software companies in the amount 
of $6,940,000; an increase in SG&A spending of the solution services business 
unit of $866,000; and the severance and facilities items indicated above.  
Management continues to reduce operating expenses to bring them in line with 
the current business operations.

Interest expense was $1,401,000 for the quarter just ended versus interest 
expense of $1,397,000 in the same quarter of the prior year.  For the current 
quarter, interest expense included the amortization of the discount on the 3% 
convertible subordinated debentures of $1,111,000 and, in the prior year, the 
amortization of the discount on the 5% convertible subordinated debentures 
was $1,204,000.  In addition, interest expense included $290,000 interest 
expense related to the convertible subordinated debentures in the current 
year compared to $193,00 in the prior year.

For the nine months just ended, interest expense was $2,409,000 compared to 
$1,397,000 in the prior year.  Included in the current year is interest 
expense in the amount of $1,296,000, which relates to the convertible 
subordinated debentures.

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<PAGE>

Other expense for the quarter just ended was $288,000 compared to income of 
$234,000 in the prior year.  The current quarter included $410,000 expense 
related to the equity in losses of MatriDigm Corporation, an unconsolidated 
company.  Interest income in the current quarter is $100,000 compared to 
$250,000 in the prior year.

For the nine months ended June 30, 1998, other income was $2,000 compared to 
income of $1,269,000 in the prior year.  Included in other income in the 
prior year is $777,000 of realized gains from the sale of marketable 
securities.  Interest income in the current year is $395,000 compared to 
$516,000 in the prior year.

Liquidity and Capital Resources

During the nine-month period ended June 30, 1998, working capital decreased 
$9,623,000 and cash flow utilized by operating activities was $9,635,000.  
The utilization of cash in operating activities resulted primarily from the 
net loss of $28,513,000.  This was partially offset by the reduction in 
deferred and refundable taxes of $6,509,000, a decrease in accounts 
receivable of $2,630,000 due to a decline in sales of the storage business 
unit, a decrease in inventory of $1,028,000 because of reserves taken against 
inventory related to the storage business unit which was in the process of 
being sold, a loss on impairment of assets in the amount of $1,956,000 
related to the planned sale of the storage business unit, and depreciation 
and amortization in the amount of $2,338,000.

During the current year, net cash provided by investing activities was 
$6,357,000.  $9,596,000 was generated from the sale of marketable securities. 
This was partially offset by the Company's investment of $1,510,000 in 
MatriDigm Corporation, an unconsolidated company, the purchase of fixed 
assets in the amount of $549,000, and the purchase of other assets of 
$1,180,000.

Net cash provided by financing activities was $10,805,000 which included 
$9,567,000 which was raised from the issuance of 3% convertible subordinated 
debentures and $1,238,000 from the exercise of employee stock options and 
from the sale of stock under the Company's employee stock purchase plan.  The 
Company has an unutilized $1,500,000 bank line of credit.  The line expires 
on September 30, 1998.

Management believes that the Company will meet its cash requirements during 
the next twelve months from current cash on 

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<PAGE>

hand, other working capital, cash flow from operations, the available bank 
line of credit, and the additional $10,000,000 debentures potentially 
available to the Company within six months of the June 1998 private placement.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", 
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related 
Information".  In October 1997, the AICPA issued SOP 97-2, "Software Revenue 
Recognition".  Readers are referred to the "Recent Accounting Pronouncements" 
section of the Notes to the Consolidated Financial Statements for further 
discussion.

American Institute of Certified Public Accountants Statement of Position 
("SOP") 98-1, "Accounting for Costs of Computer Software Developed or 
Obtained for Internal Use", issued on March 4, 1998, will be effective for 
the Company in fiscal year 1999.  The Company believes there will not be a 
significant impact upon adoption.



-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
This report contains forward-looking statements which are subject to 
uncertainties, including those contained in the Company's annual report on 
Form 10-K for the fiscal year ended September 30, 1997.

-------------------------------------------------------------------------------

Zitel is a registered trademark of Zitel Corporation. All other product names 
and brand names are trademarks or registered trademarks of their respective 
holders.

                             Page 18
<PAGE>
                            SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 
1934, Registrant has duly caused this report to be signed on its 
behalf by the undersigned thereunto duly authorized.


                                  ZITEL CORPORATION


Date:  February 16, 1999          /s/ Henry C. Harris
                                  ------------------------------
                                  Henry C. Harris
                                  Chief Financial Officer






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