AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY __, 1997
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

CALIFORNIA ____ 2566313
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)

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47211 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538-6517
(510) 440-9600
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

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HENRY C. HARRIS
CHIEF FINANCIAL OFFICER
47211 BAYSIDE PARKWAY
FREMONT, CALIFORNIA 94538-6517
(510) 440-9600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

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COPIES TO:

JOHN L. CARDOZA, ESQ.
COOLEY GODWARD LLP
ONE MARITIME PLAZA #2000
SAN FRANCISCO, CALIFORNIA 94111
(415) 693-2000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is filed in a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement of the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /

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CALCULATION OF REGISTRATION FEE

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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE (1) OFFERING PRICE (1) REGISTRATION FEE
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Common Stock (2) 3,000,000 $19.25 $57,750,000 $17,500
Common Stock 61,401 $19.25 $ 1,181,969 359
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TOTAL $17,859
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(1) Estimated in accordance with Rule 457(c) solely for the purpose of
computing the amount of the registration fee based on the average of the
high and low prices of the Company's Common Stock as reported on the
Nasdaq National Market System on July 8, 1997.

(2) Issuable upon conversion of the 5% Convertible Subordinated Debenture of
the Company (the "Debentures"). For purposes of estimating the number of
shares of Common Stock to be included in the Registration Statement the
Company calculated the number of shares of Common Stock issuable upon
conversion of the Debentures using a conversion price at the time of such
conversion of $8.33-1/3 per share which is below the conversion price
as of July 11, 1997 ($17.75 per share) and was arbitrarily selected.
In addition to the shares set forth in the table, the amount to be
registered includes an indeterminate number of shares issuable upon
conversion of or in respect of the debentures, as such number may be
adjusted as a result of stock splits, stock dividends and antidilution
provisions (including floating rate conversion prices) in accordance
with Rule 416.

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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ZITEL CORPORATION

Cross Reference Sheet showing the location in the Prospectus of the Items on
Form S-3

FORM S-3 ITEM AND CAPTION LOCATION IN PROSPECTUS

1. Forepart of Registration Statement and Outside
Cover Page of Prospectus . . . . . . . . . . . . . Outside Front Cover Page

2. Inside Front and Outside Back Cover
Pages of Prospectus. . . . . . . . . . Inside Front and Outside Back Cover

3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges. . . . . . . . . . . . The Company; Risk Factors

4. Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . Use of Proceeds

5. Determination of Offering Price. . . . . . . . . . . . . . . . . . . . . *

6. Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

7. Selling Security Holders . . . . . . . . . . . . . Selling Securityholders

8. Plan of Distribution . . . . . . . . . . Outside Front Cover Page; Plan of
Distribution
9. Description of Securities to Be Registered . . . . . . . . . . . . . . . *

10. Interests of Named Experts and Counsel . . . . . . . . . . . . . . . . . *

11. Material Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

12. Incorporation of Certain Information by Reference. . . . Inside Front Cover

13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities. . . . . . . . . . . . . . . . . . . . . . *

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* Such item is inapplicable or the answer thereto is in the negative.

PROSPECTUS
3,061,401 SHARES

ZITEL CORPORATION

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COMMON STOCK
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This Prospectus relates to a total of 3,061,401 shares of Common Stock
(the "Shares") (the "Common Stock") of Zitel Corporation (the "Company")
which are being offered and sold by certain stockholders of the Company (the
"Selling Securityholders"). Of such Shares (i) 61,401 were issued by the
Company in connection with the acquisition of Palmer & Webb Systems, BV, and
(ii) up to 3,000,000 are issuable pursuant to the conversion of 5%
Convertible Subordinated Debentures of the Company (the "Debentures"). The
Debentures, with accrued interest thereon, are convertible into Common Stock
at a price equal to 90% of the average low trading price of the Common Stock
for the five trading days preceding the date of conversion, but in no event
greater than $26.975 per share; accordingly, the number of shares issuable
upon conversion could be greater or less than 3,000,000. An aggregate of
$25,000,000 of Debentures was sold to four institutional investors who are
Selling Securityholders. In connection with the acquisition and with the
private placement of the Debentures the Company agreed to register the resale
of the Common Stock into which the Debentures are convertible.

The Shares may be offered by the Selling Securityholders or certain
pledgees, donees, transferees or other successors in interest from time to
time in long or short transactions on the Nasdaq National Market System, in
privately negotiated transactions, through the writing or exercise of
options, or a combination of such methods of sale, at fixed prices that may
be changed, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. The
Selling Securityholders may effect such transactions by selling the Shares to
or through broker-dealers, and such broker-dealers may receive compensation
in the form of discounts, concessions or commissions from the Selling
Securityholders or the purchasers of the Shares for whom such broker-dealers
may act as agent or to whom they sell as principal or both (which
compensation to a particular broker-dealer might be in excess of customary
commissions). See "Selling Securityholders" and "Plan of Distribution."

The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Securityholders hereof. See "Plan of Distribution."

The Selling Securityholders, directly or through agents, dealers or
underwriters, may sell the Shares offered hereby from time to time on terms
to be determined at the time of sale. The Company's Common Stock is traded
on the Nasdaq National Market System under the symbol ZITL.

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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 5.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

No underwriting commissions or discounts will be paid by the Company in
connection with this offering. Estimated expenses payable by the Company in
connection with this offering are $40,000. The aggregate proceeds to the
Selling Securityholders from the sale of the Shares will be the purchase
price of the Shares sold less the aggregate agents' commissions and
underwriters' discounts, if any, and other expenses of issuance and
distribution not borne by the Company. See "Plan of Distribution."

The Selling Securityholders and any broker-dealers, agents or
underwriters that participate with the Selling Securityholders in the
distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended (the "Act"), and any
commission received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Act. The Company has agreed to indemnify the Selling
Securityholders and certain other persons against certain liabilities,
including liabilities under the Act.

The date of this Prospectus is July __, 1997.
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained or
incorporated by reference in this Prospectus, and any information or
representation not contained or incorporated herein must not be relied upon
as having been authorized by the Company. This Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, by any person in any
jurisdiction in which it is unlawful for such person to make such offer or
solicitation. Neither the delivery of this Prospectus at any time nor

any sale made hereunder shall, under any circumstances, imply that the
information herein is correct as of any date subsequent to the date hereof.

AVAILABLE INFORMATION

The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's following Regional Offices: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
and New York Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of such Web site is http://www.sec.gov. The Company's Common Stock is
quoted on the Nasdaq National Market System, and such reports, proxy
statements and other information can also be inspected at the offices of The
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.

Additional information regarding the Company and the Shares offered
hereby is contained in the Registration Statement on Form S-3 and the
exhibits thereto filed with the Commission under the Securities Act of 1933,
as amended (the "Securities Act"). This Prospectus does not contain all of
the information contained in such Registration Statement and the exhibits
thereto. Statements contained in this Prospectus regarding the contents of
any document or contract may be incomplete and, in each instance, reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement. For further information pertaining to the Company and
the Shares, reference is made to the Registration Statement and the exhibits
thereto, which may be inspected without charge at, and copies thereof may be
obtained at prescribed rates from, the office of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act are by this reference incorporated in and made a part of
this Prospectus:

(1) The Annual Report on Form 10-K for the fiscal year ended September 30, 1996
filed on December 20, 1996, including all matters incorporated by
reference therein;

(2) The Proxy Statement filed on February 3, 1997, including all matters
incorporated by reference therein;

(3) The Quarterly Report on Form 10-Q for the quarterly period ended
December 31, 1996, filed on February 12, 1997, including all matters
incorporated by reference therein; and

(4) The Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1997, filed on May 14, 1997, including all matters incorporated by
reference therein.

(5) The Current Report on Form 8-K filed June 26, 1996.

(6) The Current Report on Form 8-K filed May 29, 1997.

(7) The Current Report on Form 8-K filed July 14, 1997.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering shall be deemed to be incorporated by reference
herein and to be a part of this Prospectus from the date of filing of such
documents. Any statement contained in a

document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.

Copies of all documents which are incorporated herein by reference (not
including the exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents or into this
Prospectus) will be provided without charge to each person, including any
beneficial owner to whom this Prospectus is delivered, upon a written or oral
request to Zitel Corporation, Attention: Henry C. Harris, 47211 Bayside
Parkway, Fremont, California 94538-6517; telephone number (510) 440-9600.

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THE COMPANY

Zitel Corporation was incorporated in California in 1979. The Company's
executive offices are located at 47211 Bayside Parkway, Fremont, California
94538-6517, and its telephone number is (510) 440-9600.

USE OF PROCEEDS

The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Securityholders.

DIVIDEND POLICY

The Company has never paid cash dividends. The Company's Board of
Directors currently intends to retain any earnings for use in the Company's
business and does not anticipate paying any cash dividends in the foreseeable
future. The Company's 5% Convertible Subordinated Debentures and the
Company's bank credit agreement prohibit the payment of dividends.

RISK FACTORS

AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY BEFORE PURCHASING THE
COMMON STOCK OFFERED HEREBY.

RECENT LEVELS OF NET SALES; DEPENDENCE ON ROYALTY REVENUE

In recent years the Company has not generated net sales sufficient to
produce an operating profit and has relied on a stream of royalty payments
under an agreement with IBM to support its activities. These royalties
amounted to $15,421,000 in fiscal 1995 and $14,473,000 in fiscal 1996. In
late 1996 IBM introduced a new version of the royalty bearing device with
substantially greater capacity and royalty revenue declined to $2,318,000 in
the first quarter of fiscal 1997 and $1,196,000 in the quarter ended March
31, 1997. The Company believes that IBM is transitioning to a device which
does not require royalty payments to the Company, and that as a result
royalty revenue will continue to decline. The Company has sustained
operating losses and net losses in the quarters ended December 31, 1996 and
March 31, 1997. In the most recent quarter the Company realized a negative
net margin on net sales. The Company must generate substantial additional
net sales of its hardware products in order to restore gross margins on those
products, must generate profitable revenue from its recently acquired
software businesses and must generate revenue from its new systems solutions
division in order to remain a viable operating entity. There is no assurance
that the Company can achieve those objectives.

FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly operating results have in the past varied and may
in the future vary significantly depending on a number of factors, including:
the level of competition, the size, timing, cancellation or rescheduling of
significant orders; product configuration and mix; market acceptance of new
products and product enhancements; new product announcements or introductions
by the Company's competitors; deferrals of customer orders in anticipation of
new products or product enhancements; changes in pricing by the Company or
its competitors; the impact of price protection measures and return
privileges granted by the Company to its distributors and value added
resellers (VARs); the ability of the Company to develop, introduce and market
new products and product enhancements on a timely basis; hardware component
costs and availability, particularly with respect to hardware components
obtained from sole source suppliers; hardware supply constraints; the
Company's success in expanding its sales and marketing programs;
technological changes in the market for the Company's products, product mix
and the mix of sales among the Company's sales channels; levels of
expenditures on research and development; changes in the Company's strategy;
personnel changes; general economic trends and other factors.

Sales for any quarter are not predictable with any significant degree of
certainty. The Company generally operates with limited order backlog because
its products typically are shipped shortly after orders are received. Sales

to a single customer in a quarter have affected and may affect net sales and
operating margins. As a result, sales in any quarter are generally dependent
on orders booked and shipped in that quarter. Sales are also difficult to
forecast because the Company has not as yet generated significant sales of
its products incorporating cache activated storage device (CASD) technology.
Due to the typical timing of customer orders, the Company often ships
products representing a significant portion of its net sales for a quarter
during the last month of that quarter. Any significant deferral of these
sales could have a material adverse effect on the Company's results of
operations in any particular quarter. To the extent that the Company
completes significant sales earlier than expected, operating results for
subsequent quarters may be adversely affected. The Company's expense levels
are based, in part, on its expectations as to future sales. As a result, if
sales levels are below expectations, net income may be disproportionately
affected.

The mix of the products marketed by the Company has been evolving over
the last three years, and the Company's net sales have declined over that
period. Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indicator of future
performance. It is possible that in some future quarter the Company's
operating results may be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would
likely be materially and adversely affected.

INVESTMENT IN MATRIDIGM

The Company has invested $5,588,000 to acquire an approximate 30%
interest in MatriDigm Corporation ("MatriDigm"), a private company organized
to provide software maintenance and re-engineering services for users of IBM
mainframe computer systems. MatriDigm has initially focused on development
of a set of automated tools to identify and specifically modify dates within
IBM COBOL programs to bring them into compliance with the Year 2000
requirements and to test the modified programs. MatriDigm in February 1997
announced commercial availability of an automated tool set for a pac-binary
solution for programs written in ANSI COBOL 85 and, to respond to market
demand, has recently announced commercial availability of a windowing
solution. MatriDigm intends to continue to refine its current tool set and
to extend its tool set to modify other COBOL languages as well as other
computer languages widely used to write programs for IBM mainframe computers.
Industry sources report a multi-billion dollar demand for services such as
those being developed by MatriDigm and an automated tool set should provide
greater profit margins than can be realized using other available methods.
However, MatriDigm has not realized revenue as yet, and there is no assurance
that it can successfully market its automated tool set, develop extensions
for other computer languages or generate substantial revenue and profits.
During the course of development, the Company has made additional investments
in MatriDigm and may be required to make additional investments in the future.

VOLATILITY OF STOCK PRICE

The price of the Company's Common Stock has been subject to extreme
volatility over the past nine months, as the closing bid price has ranged
between a low of 5-1/8 and a high of 61-1/4, with a recent price of 19. The
Company believes that the principal reasons for this volatility are rumored
progress of and rumored problems in the product development program of
MatriDigm. MatriDigm, which expects to provide an automated solution to the
Year 2000 problem, is a private company and the principal vehicle for public
participation in ownership of MatriDigm is indirectly through ownership of
Common Stock of the Company. MatriDigm has been unable or unwilling to
provide public information on a regular basis about the status of its
development effort, and as a result an opportunity is presented for third
parties to initiate rumors which result in significant swings in the price of
the Company's Common Stock. Until MatriDigm successfully develops a solution
and generates significant sustained revenue, it will remain difficult for
investors to apply standard methods of analysis to the value of the Company's
investment in MatriDigm and the pattern of volatility should be expected to
continue.

COMPETITION

The data storage market is intensely competitive, with technological
advances fueling continuous erosion of prices for data storage capacity. The
Company competes with much larger independent companies such as EMC Corp and
Data General Corporation as well as manufacturers of computer systems such as
Unisys Corporation, Sun Microsystems, Inc. and Hewlett-Packard Corporation.
Many of its competitors have substantially greater financial resources and
installed bases than the Company and, on account of their substantially
higher level of purchases, are able to achieve significantly lower prices
from suppliers of component parts. While the Company believes that its CASD
products are currently superior to competitive products, unless it can
significantly increase the level of net sales and additional cost savings on
component purchases, it will be unable to generate adequate gross margins on
its CASD products. There can be no assurance that the Company will be able
to generate the level of net sales to achieve adequate gross margins.

The market for Year 2000 services is intensely competitive, with services
being provided by a number of national, regional and local firms, many of
which have existing relationships and contractual arrangements with
customers. Many of these competitors have substantially greater financial,
technical and marketing resources than the Company and MatriDigm. The
ability of the Company and MatriDigm to compete in this market will depend on
the ability of MatriDigm to develop a successful automated solution and as
yet there can be no assurance that MatriDigm will be successful in this
effort. In addition, the Company must attract and retain qualified personnel
in which are also highly sought by its competition and must successfully
leverage its own resources with contract and partnering relationships with
other companies, including companies which are also competitors.

The market for system management tools in which the Company's software
products division competes is intensely competitive. Many of the companies
with which the Company competes, such as Hewlett-Packard Corporation,
Computer Associates and BGS, Inc. have substantially larger installed bases
and greater financial resources than the Company.

DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE

The markets in which the Company operates are characterized by rapid
technological change, changing customer needs, frequent new product
introductions and evolving industry standards. The introduction of products
embodying new technologies, increased storage capacities by the Company's
competitors and the emergence of new industry standards could render the
Company's existing hardware products obsolete and unmarketable. The
Company's future success will depend upon its ability to develop and to
introduce new products on a timely basis that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The Company has not as yet realized
significant sales of its CASD products. There can be no assurance that the
Company will be successful in generating significant sales of these products.
The failure of the Company to achieve significant net sales from these
products could have a material adverse effect on the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be successful in developing and marketing any other products
that respond to technological changes or evolving industry standards, that
the Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products, or that
its new products will adequately meet the requirements of the marketplace and
achieve market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new products in a timely manner in
response to changing market conditions or customer requirements, the
Company's business, operating results and financial condition will be
materially and adversely affected.

PRODUCT LIABILITY

The Company's standard warranty provides that, if the Company's product
does not function to published specifications, the Company will repair or
replace the defective component without charge. Although to date the
Company's suppliers of hardware components have generally covered the
warranty costs associated with such components, there can be no assurance
that such manufacturers will continue to be willing or able to cover such
costs, and their failure to do so would result in such costs being borne by
the Company. There can be no assurance that the

Company's warranty costs will not be significant in the future. Significant
warranty costs could have a material adverse effect on the Company's
business, operating results or financial condition.

The Company's agreements with its customers typically contain provisions
intended to limit the Company's exposure to potential product liability
claims. It is possible that the limitation of liability provisions contained
in the Company's agreements may not be effective. Although the Company has
not received any product liability claims to date, the sale and support of
products by the Company and the incorporation of products from other
companies may entail the risk of such claims. A successful product liability
claim against the Company could have a material adverse effect on the
Company's business, operating results and financial condition.

DEPENDENCE ON PROPRIETARY TECHNOLOGY

The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent,
copyright and trademark laws, trade secrets, confidentiality agreements and
contractual provisions to protect its proprietary rights. The Company seeks
to protect its software, documentation and other written materials under
trade secret and copyright laws, which afford only limited protection. The
Company has registered its Zitel, CASD, VAM and Datametrics trademarks and
will continue to evaluate the registration of additional trademarks as
appropriate. The Company generally enters into confidentiality agreements
with its employees and with key vendors and suppliers. The Company currently
has eight United States patents associated with its CASD technology. There
can be no assurance that these patents will provide the Company with any
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have a material adverse effect on the
Company's ability to do business. The Company believes that the rapidly
changing technology in the computer storage industry makes the Company's
success depend more on the technical competence and creative skills of its
personnel than on patents.

There has also been substantial litigation in the computer industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has not received
significant claims that it is infringing third parties' intellectual property
rights, but there can be no assurance that third parties will not in the
future claim infringement by the Company with respect to current or future
products, trademarks or other proprietary rights. The Company expects that
companies in the storage systems market will increasingly be subject to
infringement claims as the number of products and competitors in the
Company's target markets grows. Any such claims or litigation may be
time-consuming and costly, cause product shipment delays, require the Company
to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on
the Company's business, operating results or financial condition. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no
assurance that the Company's means of protecting its proprietary rights will
be adequate or that the Company's competitors will not independently develop
similar technology, duplicate the Company's products or design around patents
issued to the Company or other intellectual property rights of the Company.

INTERNATIONAL SALES AND OPERATIONS

Sales to customers outside the United States have accounted for
significant portions of the Company's net sales, and the Company expects that
the recent acquisition of companies headquartered and operating in the United
Kingdom and the Netherlands, respectively, will result in international sales
representing an increasingly significant portion of the Company's net sales.
International sales pose certain risks not faced by companies that limit
themselves to domestic sales. Fluctuations in the value of foreign
currencies relative to the U.S. dollar, for example, could make the Company's
products less price competitive and, if the Company in the future denominates
any of its sales in foreign currencies, result in losses from foreign
currency transactions. International sales also could be adversely affected
by factors beyond the Company's control, including the imposition of
government controls, export license requirements, restrictions on technology
exports, changes in tariffs and taxes and general economic and political
conditions. The laws of some countries do not protect the Company's
intellectual property rights to the same extent as the laws of the United
States.

RECENT ACQUISITIONS

The Company, on June 30, 1997, concluded the acquisition of the assets or
stock of three companies: Datametrics Systems Corporation, headquartered in
Fairfax, Virginia; Palmer & Webb Systems, Limited, headquartered in England
and Palmer & Webb Systems, B.V., headquartered in the Netherlands. The
operations of these acquired companies are substantial in relation to the
previous operations of the Company and there are significant risks involved
in integrating the operations and financial systems of these companies, in
part because of the relative size of the acquired operations and the distance
of the headquarters of these companies from the headquarters of the Company.
Acquisitions involve a number of special risks, including diversion of
management's attention, failure to retain key acquired personnel,
unanticipated events or circumstances, legal liabilities and amortization of
acquired intangible assets, some or all of which could have a material
adverse effect on the Company's results of operations and financial
condition. Client satisfaction or performance problems at a single acquired
firm could have a material adverse impact on the reputation of the Company as
a whole.

While the Company has had experience developing and marketing software, a
substantial majority of the Company's efforts and experience have been
devoted to the development, manufacturing and marketing of computer memory
systems and embedded software and firmware. The new focus on developing and
marketing software will involve new and different skills and there can be no
assurance that the Company will be successful in that effort.

DEPENDENCE ON KEY PERSONNEL

The Company's future performance depends in significant part upon the
continued service of its key technical and senior management personnel. The
Company provides incentives such as salary, benefits and option grants (which
are typically subject to vesting over four years) to attract and retain
qualified employees. The loss of the services of one or more of the
Company's officers or other key employees could have a material adverse
effect on the Company's business, operating results and financial condition.
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical and management personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical and management employees or that it
can attract, assimilate and retain other highly qualified technical and
management personnel in the future.

The future success of the Company's systems solutions division will
depend to a significant extent on its ability to attract, train, motivate and
retain highly skilled software development professionals, particularly
project managers, software engineers and other senior technical personnel.
The Company believes that in the United States and elsewhere there is a
shortage of, and significant competition for, software development
professionals with the advanced technological skills necessary to perform the
services offered by the systems solutions division. The increasing
recognition of the scope and significance of the year 2000 problem has
materially increased the competition for personnel with appropriate skills
and salary requirements have increased as availability of such personnel has
decline precipitously. The Company's ability to maintain and renew existing
relationships and obtain new business depends, in large part, on its ability
to hire and retain technical personnel with the information technology skills
who keep pace with continuing changes in information processing technology,
evolving industry standards and changing client preferences. An inability to
hire such additional qualified personnel could impair the ability of the
systems solutions division to manage and complete its existing projects and
to bid for or obtain new projects. Further, the Company must train and
manage its growing employee base, requiring an increase in the level of
responsibility for both existing and new management personnel. There can be
no assurance that the management skills and systems currently in place will
be adequate or that the Company will be able to assimilate new employees
successfully. Accordingly, there can be no assurance that the Company will
be successful in retaining current or future employees.

DILUTION FROM 5% CONVERTIBLE SUBORDINATED DEBENTURES

The Company's 5% Convertible Subordinated Debentures (the "Debentures")
(and accrued interest) are convertible at any time at the option of the
holders thereof into Common Stock at a conversion price equal to the lesser
of (a) 90% of the average low trading price of the Common Stock on the five
trading days preceding the date of conversion or $26.975. In addition,
certain penalties may have the effect of increasing the amounts convertible
into Common Stock. If converted on July 11, 1997 the Debentures would have
been convertible into approximately 1,408,253 shares of Common Stock (not
including shares of Common Stock issuable upon conversion with respect to
accrued interest on the Debentures) but this number of shares could prove to
be significantly greater in the event of a decrease in the trading price of
the Common Stock. Purchasers of Common Stock could therefore experience
substantial dilution of their investment upon conversion of the Debentures.

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Certificate of Incorporation, as
amended and restated, and Bylaws, as amended, California law and the
Company's indemnification agreements with certain officers and directors of
the Company may be deemed to have an anti-takeover effect. Such provisions
may delay, defer or prevent a tender offer

or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a
premium over the market price for the shares held by stockholders.

The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having
the number of shares designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations as determined by
the Board of Directors without stockholder approval.

The Board of Directors of the Company has approved the adoption of a
Preferred Share Purchase Rights Plan (the "Rights Plan"). Terms of the
Rights Plan provide for a dividend distribution of one preferred share
purchase right (a "Right") for each outstanding share of common stock, no par
value per share (the "Common Shares"), of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth of a
share of Series A Junior Participating Preferred Stock, no par value (the
"Preferred Stock"), at an exercise price of $69.50 per one one-hundredth of a
Preferred Share (the "Purchase Price"), subject to adjustment, and a
redemption price of $.01 per Right. Each one one-hundredth of a share of
Preferred Stock has designations and the powers, preferences and rights, and
the qualifications, limitations and restrictions which make its value
approximately equal to the value of a Common Share.

The Rights are not exercisable until the earlier to occur of (i) 10 days
following a public announcement that a person, entity or group of affiliated
or associated persons (an "Acquiring Person") have acquired beneficial
ownership of 15% or more of the outstanding Common Shares or (ii) 10 business
days (or such later date as may be determined by action of the Board of
Directors prior to such time as any person or entity becomes an Acquiring
Person) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer the consummation of which would result
in the beneficial ownership by a person or group of 15% or more of such
outstanding Common Shares.

The Rights have certain anti-takeover effects as they would cause
substantial dilution to a person or group that attempted to acquire the
Company on terms not approved by the Company's Board of Directors. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors, since the Rights may be redeemed by the
Company at $.01 per Right prior to the earliest of (i) the twentieth day
following the time that a person or group has acquired beneficial ownership
of 15% or more of the Common Shares (unless extended for one or more 10 day
periods by the Board of Directors), (ii) a change of control, or (iii) the
final expiration date of the rights.

10.

THE COMPANY

BUSINESS

Zitel Corporation ("Zitel" or the "Company") develops, markets and
supports a wide range of data management solutions in the form of high
performance storage technology and software products for performance
monitoring, analysis and modeling. The Company provides solution services
for the year 2000 century date conversion opportunity through expanded
product and service offerings and representing MatriDigm Corporation's
MAP2000 factory conversion service. The Company has three divisions:

The storage division develops, manufactures and markets products based on
proprietary Cached Actuator Storage Device (CASD) technology. CASD was the
basis for the joint development agreement with IBM that resulted in IBM's
RAMAC storage product line. The Company has received eight United States
patents on the CASD technology and others are in process. The value of the
Company's products incorporating CASD technology is the result of proprietary
caching algorithms, embedded intelligence and retentive learning, which
provide a unique probablistic, predictive caching storage solution for high
performance applications needs.

The software products division is the combination of the recently
acquired Datametrics Systems Corporation and Palmer & Webb Systems companies,
with the Company's performance & modeling software products. The combined
subsidiaries operate under the Datametrics Systems name. The division's
product line is composed of a suite of systems with data management,
monitoring, analysis, modeling and control capabilities for mainframe
computers, open systems servers and distributed network systems. These
products are also used in the marketing of storage division products, and may
have applications in the services provided by solutions services division.

The solution services division provides Year 2000 conversion services,
including project management, planning, analysis, code conversion, and
testing. Zitel's primary code conversion methodology is based on the
MatriDigm MAP2000 process for Cobol. In addition, as a solution provider,
Zitel utilizes other tools and processes to meet customer needs in different
environments. Zitel serves its Year 2000 customers both directly, with its
own consulting staff, and through a teaming program where Zitel may be the
subcontractor or partner to other solution providers worldwide.

In 1992, the Company entered into a joint development agreement with
International Business Machines Corporation ("IBM"). In September and
October of 1994, IBM announced general availability of RAMAC products, which
incorporate Zitel technology, and upon which the Company is receiving
royalties based on RAMAC products sold. In October 1995 and September 1996,
IBM announced the general availability of RAMAC 2 and RAMAC 3, respectively,
its second and third generation of RAMAC, which continues to include Zitel
technology and upon which Zitel will receive royalties. Royalties from RAMAC
products constituted 38%, 65% and 63% of total revenue in fiscal 1994, 1995
and 1996, respectively, and 42% in the first two quarters of fiscal 1997.

DATA STORAGE PRODUCTS

The Company offers a family of rotating memory systems utilizing the CASD
technology for use with Unisys A and V mainframe computers and with most
UNIX, NT, Open VMS and NETWARE server platforms. CASD-II, the second
generation of the Company's CASD products, was introduced in September, 1995.
CASD products integrate a high-capacity solid state cache with multiple
rotating disk drives and utilize interactive caching algorithms. Modules
utilizing the technology are available with cache sizes ranging from 64 to
512 megabytes and with one to four disk drives with capacities from 3.0 to
36.4 gigabytes, depending on the market the products are sold into. These
modules can be sold on an individual module basis or are available in cabinet
configurations ranging from one to six modules and up to 218 gigabytes per
cabinet. Pricing for a single module ranges from approximately $17,400 to
$41,500. Subsystems incorporating CASD technology are available in prices
from $ 24,400 to $256,000 depending on the number of modules utilized, the
amount of cache utilized, optional equipment, and other factors.

11.

SOFTWARE PRODUCTS

The Company's software products division offers a suite of products
utilized for data management, monitoring, analysis and control of mainframe
computers, open systems servers and distributed network systems. These
products are utilized by corporate customers with significant investments in
management information systems to maximize efficiency of existing systems and
plan system enhancements. These products function with IBM VMS, Digital VMS,
Unisys proprietary platforms as well as a wide variety of open systems
platforms. The principal products of the division are the following:

VAM/Capacity Planner is a Windows-based system modeling tool that reduces
analyses and planning costs by enabling companies to correctly identify
current system utilization and undertake sophisticated analyses of
modifications in system deployment or design. VAM/Capacity Planner's
embedded expertise allows easy examination of the effects of various
configuration changes and determines the best equipment enhancements. This
software tool aids system administrators to anticipate, track and correct
system performance bottlenecks and I/O problems.

NetArchitect is a network modeling tool that utilizes a Windows-based
graphical user interface. This package is designed for the network
administrator who has the responsibility of designing and installing a new
network, or maintaining and expanding existing structures. NetArchitect also
has practical applications as a pre-sales tool for systems integrators, VARs
and other channels selling or consulting on network management.

ViewPoint is a real-time data collector of approximately 2,000 different
system attributes. It operates on select computer mainframes and all major
open system server platforms. While the data is collected on the computer
system, ViewPoint allows the user to replay the real-time data on any
Windows-based PC. Included in ViewPoint are extensive comparative and
auto-analysis capabilities and an auto-correlation engine.

MultiPoint provides the ViewPoint capabilities on distributed networks or
local area networks (LANS). The ProPoint product is an extension of
ViewPoint in that it provides an extensive analytical capability to conduct
longitudinal analysis of historic data.

ProPoint is a capacity planning tool that maintains historical computer
system data on a personal computer and enables a system manager to display
graphically long term historical performance and capacity metrics which can
be organized in notebooks and stored in Microsoft database files.

ControlPoint is a host independent, single point of control, application
management system. Using the latest client/server and Microsoft-Registered
Trademark- Windows-TM- technology, ControlPoint controls multiple platforms
and hosts from a single point and can be implemented in discreet modules or
as a complete applications management solution.

MATRIDIGM CORPORATION

Zitel has invested approximately $5,558,000 to acquire a 30% interest in
MatriDigm Corporation ("MatriDigm"), a private company formed to provide
COBOL maintenance and re-engineering services. The Company's percentage
ownership has changed and will continue to change as MatriDigm raises
additional capital and as options under MatriDigm's stock option plan vest
and are exercised.

The initial focus of MatriDigm has been development of technology to
automate the conversion of legacy software code which could not recognize or
utilize dates after the year 1999 (the "Year 2000 Problem") into code which
is able to recognize and utilize dates into the next century. MatriDigm has
devoted substantially all of its resources to development of such technology.
In May 1997, MatriDigm announced the commercial availability of its MAP2000
windowing process for programs written in ANSI COBOL 85. MatriDigm intends
to continue to refine its current tool set and to extend its tool set to
modify other COBOL languages, as well as other computer languages widely used
to write programs for IBM mainframe computers.

12.

Substantially all software programs written assume that the first two
digits of any date are "19" and cannot recognize or utilize dates commencing
with the year 2000. Estimates of the cost and available market for
conversion of existing code to eliminate this problem are in the hundreds of
billions of dollars. A large number of companies, many of which have
substantially greater resources than MatriDigm, are offering conversion
services or are developing systems to provide such services, and competition
is expected to be intense among the providers of such services.

The Company's solution services division provides Year 2000 conversion
services, including project management, planning analysis, code conversion
and testing. The primary code conversion methodology of this division is
based on MatriDigm's MAP2000 process; the division will also use other tools
and processes to meet customer needs in different environments. The Company
has an exclusive right to create temporary conversion centers utilizing the
MAP2000 process at customer sites for customers with security or other
requirements which prohibit delivery of code to offsite conversion
facilities. The solution services division was formed in the first quarter
of the current fiscal year. As the commercial availability of MatriDigm's
MAP2000 windowing process was announced in May 1997, at June 30, 1997 this
division had not as yet realized revenue.

MARKETING

The Company offers its products through system integrators, value-added
resellers and distributors, OEMs, and directly to end users. The Company's
direct sales and service staff consists of employees who operate from
California, Colorado, Florida, Georgia, Kansas, Massachusetts, Maryland, New
Jersey, New York, Virginia, Washington and Europe.

The Company provides maintenance for its software products, but does not
maintain a field service organization for its hardware products. Typically,
customers contract with a third party to maintain the Company's hardware
products. Technical support personnel make or assist in the initial
installations; assist the service organization with problem resolution and
field upgrades; and help customers determine how best to deploy Zitel
products in their system to achieve the maximum benefit.

COMPETITION

The Company's storage division competes with independent companies, such
as EMC Corp and Data General Corporation, as well as manufacturers of
computer systems, such as Unisys Corporation, Sun Microsystems, Inc. and
Hewlett-Packard Corporation. Most of its competitors have substantially
greater financial resources and installed bases than the Company. The data
storage market is intensely competitive, with technological advances driving
continuous erosion of prices for data storage capacity. The Company competes
by providing customers with superior performance solutions.

The market for system management tools in which the Company's software
products division competes is intensely competitive. Many of the companies
with which the Company competes such as Hewlett-Packard Corporation, Computer
Associates and BGS, Inc. have substantially larger installed bases and
greater financial resources than the Company. The Company competes in this
market by providing better solutions for its customers.

PATENTS

Management believes that technical expertise, responsiveness to user
requirements and implementation of technological advances are mandatory
factors in the markets in which the Company competes. The Company applied
for additional patent protection on certain elements of its CASD products,
VAM software products and other products

13.

in the development stage. The Company currently holds eight issued United
States patents. There can be no assurance that any of the Company's patents
provide meaningful protection.

MANUFACTURING AND SUPPLIERS

The Company manufactures a large percentage of its hardware products from
standard component parts and subassemblies purchased from others. Certain of
these parts, including printed circuit boards and subassemblies, are produced
from design and to its specifications. Use of such standard items simplifies
the manufacturing process, reduces the number of items carried in inventory
and permits the Company to expand its product line while minimizing the
expense of designing and developing new assemblies.

The Company utilizes various subcontractors to assemble and solder
printed circuit boards using material purchased by the Company or to produce
surface mount ASICs to the Company's workmanship standards. Completed
assemblies are then inspected by the Company's receiving inspection
department and submitted to its manufacturing test operation. This test
operation provides board-level and system-level testing under stressed
operating conditions.

The Company's hardware products use a large number of components that are
generally available from several sources and the Company believes that the
loss of one or more of its suppliers will not have a material adverse effect
on operations.

EMPLOYEES

At July 1, 1997, the Company employed 233 persons on a full-time basis,
77 in research and development, 19 in manufacturing, 86 in sales and
marketing, and 61 in general management and administration.

The Company believes that its further success will depend, in part, on
its ability to attract and retain qualified employees, who are in great
demand. None of the Company's employees are represented by a labor union and
the Company believes that its employee relations are good.

PROPERTIES

The Company leases its headquarter manufacturing and office facility in
Fremont, California. Under a non-cancelable operating lease, which expires
in March 1998, with an average annual rent of $502,000. The Company is
presently negotiating for an extension of this lease and believes that
suitable facilities are available at substantially increased rent.

The software division is headquartered in an office facility in Fairfax,
Virginia, under a lease which expires in October 1997 with a rent of
approximately $437,000 per annum. The Company is negotiating for an
extension of this lease and believes that suitable facilities are available.
The software division also occupies leased facilities in England under leases
expiring in 2010 with rents of approximately $124,000 per annum.

14.

SELLING SECURITYHOLDERS

The following table sets forth the names of the Selling Securityholders,
the number of shares of Common Stock owned by each Selling Securityholder
prior to this offering, the number of shares of Common Stock being offered
for the account of each Selling Securityholder and the number of shares of
Common Stock to be owned by each Selling Securityholder after completion of
this offering. This information is based upon information provided by the
Selling Securityholders. Because the Selling Securityholders may offer all,
some or none of their Common Stock, no definitive estimate as to the number
of Shares thereof that will be held by the Selling Securityholders after such
offering can be provided.

SHARES BENEFICIALLY SHARES BEING SHARES BENEFICIALLY
SELLING SECURITYHOLDER OWNED PRIOR TO OFFERING (1) OFFERED OWNED AFTER OFFERING (3)
---------------------- --------------------------- ------------ ------------------------

RGC International Investors, LDC 1,000,000(2) 1,000,000(2) 0
Halifax Fund, L.P. 1,000,000(2) 1,000,000(2) 0
Nelson Partners (4) 500,000(2) 500,000(2) 0
Olympus Securities, Ltd. (4) 500,000(2) 500,000(2) 0
Hell Sails B.V. 61,401 61,401 0

(1) Unless otherwise indicated below, the persons named in the table have or
will have sole voting and investment power with respect to all shares
beneficially owned by them.

(2) Assumes, arbitrarily, that the Debentures are converted at a conversion
price of $8.33-1/3 per share (exclusive of shares issuable upon
conversion of accrued 5% interest on the Debentures to the date of
conversion) and no limits or adjustments are applicable. Pursuant to the
terms of the Debentures, if the Debentures had been actually converted
on July 11, 1997 the conversion price would have been $17.75 (90% of the
average of the daily low trading price of the Common Stock for the five
trading days immediately preceding such date) at which price the number
of shares owned by these Selling Securityholders would have been
approximately 1,408,253 shares (exclusive of shares issuable upon
conversion of the accrued 5% interest). Pursuant to the terms of the
Debentures, the Debentures are convertible by any holder only to the
extent that the number of shares of Common Stock thereby issuable,
together with the number of shares of Common Stock owned by such holder
and its affiliates (but not including shares of Common Stock underlying
unconverted Debentures) would not exceed 4.9% of the then outstanding
Common Stock as determined in accordance with Section 13(a) of the
Exchange Act. Accordingly the number of shares of Common Stock set forth
in the table for these Selling Securityholders exceeds the number of
shares of Common Stock that these Selling Securityholders could own
beneficially at any given time through their ownership of the Debentures.
In that regard, beneficial ownership of these Selling Securityholders set
forth in the table is not determined in accordance with Rule 13d-3 under
the Exchange Act.

(3) Assumes the sale of all Shares offered hereby. The Company has agreed to
pay all reasonable fees and expenses incident to the filing of this
offering. See "Plan of Distribution."

(4) Citadel Limited Partnership is the managing general partner of Nelson
Partners ("Nelson") and the trading manager of Olympus Securities,
Ltd. ("Olympus") and consequently has voting control and investment
discretion over securities held by both Nelson and Olympus. The
ownership information for Nelson does not include the shares owned by
Olympus and the ownership information for Olympus does not include the
shares owned by Nelson.

15.

PLAN OF DISTRIBUTION

The Shares may be offered by the Selling Securityholders or by certain
pledgees, donees, transferees or other successors in interest from time to
time in long or short transactions on the Nasdaq National Market System, in
privately negotiated transactions, through the writing or exercise of
options, or a combination of such methods of sale, at fixed prices that maybe
changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling the Shares directly
or by or through agents or broker-dealers who may receive compensation in the
form of discounts, concessions or commissions from the Selling
Securityholders or the purchasers of the Shares for whom such broker-dealers
may act as agent or to whom they sell as principal or both (which
compensation to a particular broker-dealer might be in excess of customary
commissions).

The Selling Securityholders and any underwriters, dealers or agents that
participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by them and any provided pursuant to the
sale of the Shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. In order to comply with the securities
laws of certain states, if applicable, the Shares will be sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the Shares may not be sold unless it has been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied
with.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to such Shares for a period of nine
business days prior to the commencement of such distribution. In addition
and without limiting the foregoing, each Selling Securityholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, rules 10b-2, 10b-6 and
10b-7, which may limit the timing of purchases and sales of the Shares by the
Selling Securityholders. All of the foregoing may affect the marketability
of the Shares.

The Company entered into agreements with the Selling Securityholders to
register their Shares under applicable federal and state securities laws.
The Company will pay substantially all of the expenses incident to the
offering and sale of the Shares to the public, other than commissions,
concessions and discounts of underwriters, dealers or agents. Such expenses
(excluding such commissions and discounts) are estimated to be $40,000. Such
agreements provide for cross-indemnification of the Selling Securityholders
and the Company to the extent permitted by law, for losses, claims, damages,
liabilities and expenses arising, under certain circumstances, out of
registration of the Shares.

16.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for the
Company by Cooley Godward LLP, San Francisco, California.

EXPERTS

The financial statements of Zitel Corporation appearing in Zitel
Corporation's Annual Report on Form 10-K for the years ended September 30,
1996 and 1995 have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein in reliance upon the reports of Coopers & Lybrand L.L.P. pertaining to
such financial statements given upon the authority of such firm as experts in
accounting and auditing.

The financial statements of Datametrics Systems Corporation appearing in
Zitel Corporation's Current Report on Form 8-K dated July 14, 1997 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon
such report given upon the authority of such firm as experts in accounting
and auditing.

The financial statements of Palmer & Webb Systems B.V. appearing in Zitel
Corporation's Current Report on Form 8-K dated July 14, 1997 have been
audited by Van Doesburg & Partners, independent auditors, as set forth in
their report thereon included therein and incorporated herein by reference.
Such financial statements are incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.

The financial statements of Palmer & Webb Systems Limited appearing in
Zitel Corporation's Current Report on Form 8-K filed July 14, 1997 have been
audited by M P Saunders & Company, Chartered Accountant and Registered
Auditor, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
by reference herein upon the authority of such firm as experts in accounting
and auditing.

17.

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

Page
----
Available Information . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by Reference . . . . . . . . . . . 2
Summary Information . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Selling Securityholders . . . . . . . . . . . . . . . . . . . . . . . 14
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . 15
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

3,061,401 SHARES

ZITEL CORPORATION

COMMON STOCK

----------

PROSPECTUS

----------

JULY __, 1997

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

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the expenses payable by the Company in
connection with the sale, issuance and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts
are estimates except the SEC registration fee. None of these expenses will
be paid by the Selling Securityholders.

SEC Registration Fee . . . . . . . . . $17,859
Printing and Engraving Expenses . . . 7,500
Legal Fees and Expenses . . . . . . . 9,500
Accounting Fees and Expenses . . . . . 4,000
Blue Sky Fees and Expenses . . . . . . 1,141
-------
Total . . . . . . . . . . . . . . . . $40,000
-------
-------

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Registrant's Amended and Restated Articles of Incorporation and Bylaws
include provisions to (i) eliminate the personal liability of its directors
for monetary damages resulting from breaches of their fiduciary duty to the
extent permitted by California law and (ii) require the Registrant to
indemnify its directors and officers to the fullest extent permitted by
California law, including circumstances in which indemnification is otherwise
discretionary. Pursuant to California law, a corporation generally has the
power to indemnify its present and former directors, officers, employees and
agents against expenses incurred by them in connection with any suit to which
they are, or are threatened to be made, a party by reason of their serving in
such positions so long as they acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of a
corporation, and, with respect to any criminal action, they had no reasonable
cause to believe their conduct was unlawful. The Registrant believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers. These provisions do not eliminate liability for
breach of the director's duty of loyalty to the Registrant or its
stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, for any transaction from
which the director derived an improper personal benefit or for any willful or
negligent payment of any unlawful dividend or any unlawful stock purchase
agreement or redemption.

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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

EXHIBIT
NUMBER DESCRIPTION

5.1 Opinion of Cooley Godward LLP.
23.1 Consent of Coopers & Lybrand L.L.P., Independent Accountants.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
23.3 Consent of M P Saunders & Co., Independent Accountants.
23.4 Consent of Van Doesburg & Partners, Independent Accountants.
23.5 Consent of Ernst & Young, LLP, Independent Accountants.
24.1 Power of Attorney (included on signature page II-3).

____________

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material
change to such information in the registration statement;

(2) That, for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering. The undersigned registrant hereby
undertakes that, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of
the registrant pursuant to provisions described in Item 15, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent,submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Fremont, State of California, on July 15, 1997.

ZITEL CORPORATION

By s/Jack H. King
----------------------------------
Jack H. King
President and Chief Executive Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack H. King and Henry C. Harris, or any of
them, his attorneys-in-fact, and agents each with the power of substitution,
for him in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement (or any other
registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby granting unto
said attorneys-in-fact and agents, and each of them, full power and authority
to do and perform each and every act and thing requisite or necessary to be
done in and about the premises, as full to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them or their or his substitutes may
lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE

s/ Jack H. King President, Chief Executive July 15, 1997
- ----------------------- Officer and Director
Jack H. King (PRINCIPAL EXECUTIVE OFFICER)

s/ Henry C. Harris Vice President, Finance and July 15, 1997
- ----------------------- Administration, Chief Financial
Henry C. Harris and Accounting Officer and
Secretary
(PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)

s/ William R. Lonergan Chairman of the Board of Directors July 15, 1997
- -----------------------
William R. Lonergan

s/ Catherine P. Lego Director July 15, 1997
- -----------------------
Catherine P. Lego

s/ William M. Regitz Director July 15, 1997
- -----------------------
William M. Regitz

s/ Robert H. Welch Director July 15, 1997
- -----------------------
Robert H. Welch

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