Oracle executives found themselves in an unenviable position last week-on the defensive. The company was forced to address claims that it overcharged the state of California $41 million for a database and applications. It also lost its lead in the database market to rival IBM, according to one report, and is close to concluding what analysts predict will be the fifth consecutive quarter of negative growth-a first in the company's history-all of which sent its share price tumbling to a 52-week low of $7.50.

In a growing controversy that's being investigated by California's attorney general, Oracle disputed claims that it overcharged its home state in a $95 million contract. The vendor says it will cancel the deal if the state wants out of it.

Oracle also grappled with bad news concerning its biggest-selling product, the database software on which many businesses run. A report by Morgan Stanley software analyst Charles Phillips, based on a survey of 500 of Oracle's largest database users, found only 6% had immediate need for new database licenses and only 15% more might buy new licenses later this year if the economy improves.

For the first time, IBM surpassed Oracle to take the No. 1 spot in worldwide database sales by a slim margin, Gartner's Dataquest market research unit said in a report last week. Oracle disputes Dataquest's figures, although the company's database sales have slowed because of the sluggish economy. More customers also are buying the less-expensive standard edition Oracle database rather than the top-of-the-line enterprise edition.

Oracle's setbacks are the result of the economic slowdown and its own missteps: Software-quality problems and licensing snafus have affected Oracle's reputation with customers and investors in recent weeks.

But Oracle executives are working to regain customers' trust. Jack Corrie, CIO at the California Public Employees Retirement System, a state employee-benefits agency, says Oracle has been trying harder to please customers. Its most significant effort to date: a major software-quality initiative.

"That's really critical for us," Oracle CFO Jeff Henley says. Oracle is taking broad action to overcome software-quality problems, including training 1,000 developers to use automated software testing tools, making every developer a quality-assurance tester, and implementing the company's first-ever formal development methodology with automated compliance checking.

Oracle recently trained testers and developers in the use of Mercury Interactive Corp.'s WinRunner and Loadrunner testing tools. The vendor previously relied on a small quality-assurance group and beta testers to catch quality problems. It's also developing an automated performance analyzer to test for issues that affect performance for customers who run very large databases.

To help customers overcome software upgrade problems, Oracle next month will release a tool designed to speed the process. An upgrade analysis utility will examine the contents of a database and use the resulting information to create a personalized upgrade script, alerting IT personnel to issues they will have to deal with manually and taking care of what can be dealt with totally automatically.

The company is taking other steps to keep customers happy and spur sales. It will release a new version of the Oracle9i database to developers this week and an upgrade of its 11i applications suite later this month.

Driving quality assurance into every step of the development process is "a major shift," Henley acknowledges. Tom Wyatt, president of the Oracle Applications User Group and IT director at Baltimore outsourcer Sitel Corp., says he's encouraged by Oracle's focus on quality.

Application quality was a key concern for Imagistics International Inc. before it signed a $40 million contract with Oracle last year. Robert Butler, CIO of the Trumbull, Conn., seller of office systems, knew of the bugs associated with Oracle apps and spent a great deal of time with Oracle executives getting assurances that the problems would be fixed in time for deployment. Imagistics has installed Oracle financials and supply-chain applications and plans to install Oracle's customer-relationship management software in January.

Similarly, Legerity Inc., an integrated circuits manufacturer in Austin, Texas, had problems with Oracle's order management and core financials. "We felt we were a guinea pig last year," applications manager Raman Batra says. For the most part, those problems have been solved and the company is happy enough with quality that it bought the Shop Floor Management module.

But Reeves Smith, director of Deloitte Consulting's Oracle practice, says there are still questions about the quality and stability of Oracle 11i E-Business Suite. While Deloitte recently closed several new Oracle 11i contracts, the deals were not at the volume the company expected.

Cap Gemini Ernst & Young is a bit more upbeat about the 11i business, says Rick Hymer, VP of Oracle services. It has seen a 20% increase in deals in the past six months.