Preheat oven to 350 degrees F (175 degrees C). Oil bottoms only of medium muffin tins.
Mix together cream cheese, 1/4 cup white sugar, lemon peel, vanilla, and 1 egg with an electric mixer. Set filling aside.
In a large bowl, mix together flour, 1/3 cup white sugar, baking powder, and salt until well blended. Beat remaining egg, and stir in milk and oil; pour into flour mixture, and stir until moistened. Fill muffin cups about 1/2 full. Spoon 1 teaspoon filling onto batter. Top with batter to 3/4 full.
Bake 30 to 35 minutes. Don't brown these; muffins should be light in color. Roll while still hot in sifted confectioners' sugar.
