UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10Q

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

                For the quarterly period ended December 31, 1995

                                       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 December
31, 1995 was 7,297,187.

<PAGE>
                       ZITEL CORPORATION AND SUBSIDIARIES


                                      INDEX



                                                                      Page     
                                                                     Number    
                                                                                
PART I.   Financial Information                                                 
                                                                                
  Item 1.  Financial Statements                                                 
                                                                                
     Condensed Consolidated Balance Sheets                                      
       December 31, 1995 (unaudited) and September 30, 1995            3     
                                                                             
     Condensed Consolidated Statements of                                    
       Operations (unaudited) - Three Months                                 
        Ended December 31, 1995 and 1994 ..................            4     
                                                                             
     Condensed Consolidated Statements of                                    
       Cash Flows (unaudited) - Three Months Ended                           
       December 31, 1995 and 1994 .........................            5     
                                                                             
     Notes to Condensed Consolidated                                         
       Financial Statements ...............................            6     
                                                                             
  Item 2.   Management's Discussion and Analysis of                          
            Financial Condition and Results                                  
              of Operations ...............................            8     
                                                                             
  Exhibits to Part I.                                                        
    Exhibit 11.1 - Computation of Net Income                                 
      per Common and Common Equivalent Share ..............           11     
                                                                             
PART II.   Other Information                                                 
                                                                             
  Item 4.  Submission of Matters to a Vote of                                
             Security Holders .............................           12     
                                                                             
  Item 6.  Exhibits and Reports on Form 8-K ...............           12     
                                                                             
                                                                      

                             Page 2

<PAGE>
                  ZITEL CORPORATION AND SUBSIDIARIES

                CONDENSED CONSOLIDATED BALANCE SHEETS
                          (UNAUDITED)
                           ($000's)

                                               December 31,   September 30,  
                                                   1995           1995       
                                                                             
     ASSETS                                                                  
Current assets:                                                              
  Cash and cash equivalents                      $ 5,103         $11,265     
  Accounts receivable, net                         7,863           4,200     
  Inventories                                      3,563           2,987     
  Deferred and refundable taxes                    3,367           4,348     
  Other current assets                             1,987             418     
                                                 -------         -------     
    Total current assets                          21,883          23,218     
                                                                             
Fixed assets, net                                  1,463           1,419     
Other assets, net                                  3,860           1,569     
                                                 -------         -------     
  Total assets                                   $27,206         $26,206     
                                                 =======         =======     
                                              
     LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current portion of long-term debt              $     5         $    13     
  Accounts payable                                 1,188           1,725     
  Accrued liabilities                              1,249           1,511     
                                                 -------         -------     
    Total current liabilities                      2,442           3,249     
                                                                            
Shareholders' equity:                                                       
  Common stock                                    20,080          19,916     
  Retained earnings                                4,684           3,041     
                                                 -------         -------     
    Total shareholders' equity                    24,764          22,957     
                                                 -------         -------     
  Total liabilities and                                                      
    shareholders' equity                         $27,206         $26,206     
                                                 =======         =======     
                                                                            
                                                
   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)


                                                       Three Months Ended
                                                          December 31,
                                                       ------------------
                                                         1995     1994  
                                                        ------   ------ 
                                                                        
Net sales                                              $ 2,844  $ 2,710 
Royalty revenue                                          4,469    4,145 
                                                       -------  ------- 
  Total revenue                                          7,313    6,855 
Cost of goods sold                                       1,920    2,213 
Research and development expenses                        1,569    1,397 
Selling, general & administrative expenses               1,980    1,691 
                                                       -------  ------- 
  Operating income                                       1,844    1,554 
                                                                        
Other income                                              (785)     (16)
                                                       -------  ------- 
  Income before income taxes                             2,629    1,570 
Provision for income taxes                                 986       94 
                                                       -------  ------- 
  Net income                                           $ 1,643  $ 1,476 
                                                       =======  ======= 
                                                                        
Net income per share                                   $   .21  $   .21 
                                                       =======  ======= 
                                                                        
Number of shares used in per share calculations          7,722    7,189 
                                                       =======  ======= 
                                                       


   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)                   (UNAUDITED)
                                                            Three Months Ended
                                                              December 31,
                                                              1995      1994
Cash flows provided by (used in)                            -------   -------  
 operating activities:                                                         
  Net income                                                $ 1,643   $ 1,476  
  Adjustments to reconcile net income to                                       
   net cash used in operating activities:                                      
    Depreciation and amortization                               243       385  
    Provision for doubtful accounts                             168        54  
    Provision for inventory allowances                          117        57  
    Unrealized gains on trading security                       (641)        -  
    Increase in accounts receivable                          (3,831)   (3,187) 
    Decrease (increase) in inventories                         (693)      734  
    Decrease in deferred and refundable taxes                   981        31  
    Decrease (increase) in other current assets                  72      (174) 
    Decrease in accounts payable                               (537)     (288) 
    Decrease in accrued liabilities                            (262)     (258) 
                                                            -------   -------  
 Net cash used in operating activities                       (2,740)   (1,170) 
                                                            -------   -------  
Cash flows used in investing activities:                                       
 Purchase of fixed assets                                      (264)     (184) 
 Purchase of other assets                                    (3,314)     (171) 
                                                            -------   -------  
 Net cash used in investing activities                       (3,578)     (355) 
                                                            -------   -------  
Cash flows provided by (used in) financing activities:      
   Issuance of common stock                                     164     3,509 
   Proceeds from borrowings                                       0     1,956 
   Repayments of borrowings                                      (8)   (1,045)
                                                            -------   ------- 
 Net cash provided by financing activities                      156     4,420 
                                                            -------   ------- 
 Net increase (decrease) in cash                             (6,162)    2,895 
                                                                              
Cash and cash equivalents,                                                    
  beginning of period                                        11,265     1,010 
                                                            -------   ------- 
                                                                              
Cash and cash equivalents,                                                    
  end of period                                             $ 5,103   $ 3,905 
                                                            =======   ======= 
   The accompanying notes are an integral part of these financial statements.
 
                                     Page 5

<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 three  months ended  December  31, 1995 are not  necessarily
indicative of the results expected for the full year.

2.  Inventories:

                             December 31,     September 30,
                                 1995             1995
                             ------------     -------------

     Raw materials              $  670           $  734

     Work in process               976              733

     Finished goods              1,917            1,520
                                ------           ------
                                $3,563           $2,987
                                ======           ======

3.  Other current assets:

    At the beginning of fiscal 1996, an investment in an unconsolidated  company
in the  amount  of  $1,000,000  was  revalued  due to a public  offering  by the
investee,  which  took  place  in  October  1995.  This  investment,  which  was
previously  classified in other  long-term  assets,  was  reclassified  to other
current

                                     Page 6
<PAGE>
assets. In accordance with S.F.A.S. No. 115, this investment will be revalued to
the current market value at the end of each reporting  period and a gain or loss
recognized for such period. For the quarter ended December 31, 1995,  unrealized
gains of $641,000 were  recognized in other income and included in other current
assets.

4.  Other assets:

    On November 17, 1995, the Company finalized an agreement to acquire 37.5% of
MatriDigm Corporation, a privately held company. The investment, which consisted
of  preferred  stock,  totaled  $3,350,000.  Under the  agreement,  the  Company
obtained an exclusive  license from MatriDigm to  incorporate  its technology in
the development of new products.  The Company does not expect development of any
new products that incorporate the technology in the current fiscal year.

5.  Effective  October  1995,  the Company  negotiated  a  $3,000,000  revolving
accounts  receivable  line  of  credit  with a  commercial  bank.  The  line  is
collateralized by accounts receivable, inventory, equipment and tangible assets.
Interest  is at the prime  rate  (8.5% at  December  31,  1995)  and is  payable
monthly. The line of credit expires on September 30, 1996. At December 31, 1995,
the Company had no borrowings against the line.

6.  Revenue recognition:

    Revenue is  recognized  at the time products are shipped to customers and at
the time services are rendered.  Royalty  revenue is recognized  when earned and
receipt is assured.

7. Income per share amounts are computed  using the weighted  average  number of
common and common equivalent  (dilutive stock options) shares outstanding during
each period presented, when dilutive.




                                     Page 7

<PAGE>
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

                       CONDITION AND RESULTS OF OPERATIONS

Result of Operations

The Company  recorded net income of  $1,643,000  ($0.21 per share) for the first
quarter of fiscal  1996  compared to  $1,476,000  ($0.21 per share) for the same
period of the prior  year.  Results  for the  quarter  ended  December  31, 1995
reflected a tax  provision of $986,000  (37.5% of income  before  income  taxes)
versus  $94,000 (6% of income  before  income  taxes) for the same period a year
earlier and a gain of $641,000 on investments held for resale.  Weighted average
shares  outstanding in the first quarter of fiscal 1996 were 7,722,000  compared
to 7,189,000 for the first quarter of fiscal 1995.

Total  revenue for the quarter  ended  December 31, 1995 was  $7,313,000  versus
total revenue of $6,855,000  for the same period of the prior year. The increase
in total revenue is attributable  to increases in both net sales  ($134,000) and
royalties  ($324,000).  The increase in net sales is due to initial shipments of
the Company's second generation of CASD products  (CASD-II) which began shipping
in November  1995.  Royalty  revenue was strong this  quarter as the third party
that sells  royalty-bearing  products began shipping their second  generation of
products  utilizing the Company's  technology.  The Company expects that royalty
revenue  will  remain  strong  for the near  future;  however,  should the third
party's  sales  decline  or  should  royalty-bearing  products  be  replaced  by
non-royalty-bearing  products,  the Company's  total revenue could be materially
and adversely affected.

In mid-December,  the Company  announced the general  availability of SCP-II for
the open systems market.  SCP-II is the open systems version of CASD-II.  SCP-II
now connects to Sun, HP, NT, Digital, and Unisys open systems platforms.  Though
the Company's  announcement  was 60 to 90 days behind its internal  plan,  early
reception   of  SCP-II  has  been   encouraging.   The  Company   believes   the
price/performance characteristics of SCP-II for certain applications should make
it an attractive  alternative  for vendors and users of open systems  platforms.
Commercial  success of SCP-II is subject  to risks and  uncertainties  including
unanticipated technical problems, the need to achieve Company credibility in the
open  systems  market,  and  introduction  of more  cost  effective  competitive
products.


                                     Page 8

<PAGE>
Gross  margin as a percent of net sales was 32% for the quarter  ended  December
31, 1995 compared to 18% of net sales for the same period of the prior year. The
improvement in gross margin  percentage is primarily  attributable to the impact
of lower indirect sales cost in the current year period.

Research and  development  expenses for the quarter ended December 31, 1995 were
21% of total revenue compared to 20% of total revenue for the same period of the
prior year. Research and development expenses increased $172,000, primarily as a
result of  continued  expenditures  on  development  of future CASD and software
products.

Selling,  general and administrative  expenses were 27% of total revenue for the
quarter  compared to 25% of total  revenue  for the same period a year  earlier.
Selling, general and administrative expenses increased $289,000.

Other  income was  $785,000  for the quarter  just ended  versus other income of
$16,000 for the  comparable  period of the prior year.  For the  quarter,  other
income included an unrealized gain of $641,000 on an investment held for resale.
Interest  income for the quarter was $139,000 versus $96,000 for the same period
a year earlier.  The increase in interest income is primarily  related to larger
cash balances  invested and higher  interest  rates on cash invested  during the
current quarter.

Liquidity and Capital Resources

For the quarter ended December 31, 1995,  working capital decreased $528,000 and
cash flows used in operating activities was $2,740,000.  The utilization of cash
flows resulted primarily from an increase in accounts  receivable of $3,831,000,
an increase in inventory of $693,000, a decrease in accounts payable of $537,000
offset by net income of  $1,643,000,  and  utilization of deferred tax assets of
$981,000.  During the quarter,  $3,578,000 was used in investing activities.  On
November 17, 1995,  the Company  completed a $3,350,000  investment in MatriDigm
Corporation. The Company acquired 37.5% of MatriDigm and also obtained a license
under  MatriDigm's  proprietary  technology.  Net  cash  provided  by  financing
activities  during the  quarter  was  $156,000.  In October  1995,  the  Company
negotiated  a  $3,000,000  revolving  accounts  receivable  line of credit which
expires on  September  30,  1996.  At  December  31,  1995,  the  Company had no
borrowings outstanding on the line of credit.



                                     Page 9

<PAGE>
Management  believes  that the  Company  will  meet its cash  requirements  from
current  cash  on  hand,  other  existing  working  capital,   cash  flows  from
operations, and the utilization of the line of credit.














------------------------------------------------------------
Zitel  and  CASD  are  registered  trademarks  of  Zitel  Corporation.  SCP is a
trademark  of Zitel  Corporation.  Digital is a trademark  of Digital  Equipment
Corporation.  HP is a registered trademark of Hewlett-Packard Company. MatriDigm
is a trademark of MatriDigm Corporation.  Sun Microsystems is a trademark of Sun
Microsystems,  Inc. Unisys is a registered trademark of Unisys Corporation.  All
other product names and brand names are  trademarks or registered  trademarks of
their respective holders.



                                     Page 10

<PAGE>


                                                                    EXHIBIT 11.1


                       ZITEL CORPORATION AND SUBSIDIARIES

                      COMPUTATION OF NET INCOME PER COMMON
                           AND COMMON EQUIVALENT SHARE

                     (In thousands except per share amounts)



                                                       Three Months Ended
                                                          December 31,
                                                       ------------------   
                                                          1995      1994    
                                                         ------    ------   
                                                                            
Weighted average common shares outstanding                7,286     6,660   
                                                                            
Computation of incremental outstanding shares :                    
   Net effect of dilutive stock options                                     
    based on treasury stock method                          436       529   
                                                         ------    ------   
                                                          7,722     7,189   
                                                         ======    ======   
                                                                            
Net income                                               $1,643    $1,476   
                                                         ======    ======   
                                                                            
Net income per share                                     $  .21    $  .21   
                                                         ======    ======   
                                                       


Primary and fully  diluted  income per share differ by less than one cent in all
periods presented.



                                     Page 11

<PAGE>
PART II.  OTHER INFORMATION

  Item 4.  Submission of Matters to a Vote of Security Holders

     An annual  meeting of  shareholders  of the Company was held on January 25,
1996. A total of 6,964,134  shares of the Company's  Common Stock out of a total
7,297,187 shares outstanding on the record date for the meeting were represented
and voted in person or by proxy.

     The Company has a five-person  Board of Directors.  At the annual  meeting,
all five  directors were nominated and re-elected to the Board of Directors by a
vote of at least  6,910,678  shares in favor and 53,456  shares  instructing  or
withholding authority to vote.

     The shareholders approved the adoption of the 1995 Non-Employee  Directors'
Stock Option Plan  including the  reservation  of 100,000 shares of Common Stock
for issuance  thereunder.  The results of the vote were 6,505,215  shares voting
for, 267,569  dissenting  votes,  57,381  abstaining  votes, and 133,969 with no
voting instruction indicated.

  Item 6.  Exhibits and Reports on Form 8-K

           (a)  Exhibits

                Exhibit  10.28 - Series A  Preferred  Stock  Purchase  Agreement
between  the  Company  and  MatriDigm   Corporation  dated  November  17,  1995.
(Confidential treatment has been requested for a portion of the exhibit.)

                Exhibit 27 - Financial Data Schedule

           (b)  No reports on Form 8-K were filed  during the  quarter for which
this report is filed.





                                     Page 12

<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 13, 1996          Henry C. Harris
                                  Henry C. Harris
                                  Vice President, Finance &
                                  Administration
                                  (Chief Financial and
                                  Accounting Officer)



                                     Page 13