With annual sales of $12 billion and a $65 billion market cap, Oracle ( ORCL) doesn't get a lot of sand kicked in its face.

But Microsoft's ( MSFT) full-tilt push in the database market and SAP's ( SAP) continuing domination of the applications software market are threatening to squeeze Oracle and prompting investors to raise yellow caution flags.

The multipronged offensive by two of Oracle's chief rivals follows its own purchase of nine software vendors -- a spending spree with a price tag of $13 billion (net acquired cash) that includes PeopleSoft, Retek and the still-pending takeout of Siebel Systems ( SEBL). Designed to advance Oracle's lagging applications business, the M&A binge, while boosting the bottom line, has not yet shown evidence of top-line success.

Indeed, an analysis of Oracle's application business by Prudential Securities analyst Brent Thill indicates that the company hasn't gotten much for its money. By combining year-ago sales of the then-independent PeopleSoft (which had swallowed J.D. Edwards) and Retek with Oracle's organic application business, Thill found that new license revenue would have been $215 million had all three companies been under one roof. But after the combination actually took place, Oracle's license revenue was $127 million in its most recent quarter, 41% below what the companies were each doing on their own.

How could so many sales dollars simply evaporate? Listen to Greg Maffei, who last week quit his job as Oracle's co-president and CFO after just four months on the job. He was asked that question at a dinner with investors and analysts shortly before he left the company. According to a source who attended the meeting, Maffei's answer was this: "One plus one does not equal two." In a less cryptic follow-up, he then reportedly said, "Oracle fired half of PeopleSoft's sales reps. It will take time to rebuild the pipeline."

Oracle didn't respond to a request for further information on sales force changes made following the PeopleSoft merger.

Looked at another way, Oracle's share of the applications market (measured by license revenue of the top five players) will reach 17% at the end of calendar 2005, compared with 16% in 2001. Assuming that the Siebel deal closes, which is likely, Oracle will gain an additional 7% in 2006. And that, Thill estimates, will give Oracle a 25% share of the market. Prudential does not have an investment banking relationship with the companies mentioned in this story.

But SAP's share, which was 45% in 2001, will likely hit 59% in 2006. "Oracle is spending more than $1 billion per point of market share, while SAP grew 15% organically," he said.

To be fair, Oracle's largest acquisitions are designed to bolster margins and help the company to hit its target of a 20% average rise in earnings over five years. Smaller buys such as Retek are supposed to open new sources of revenue, particularly in industry verticals. And existing PeopleSoft customers are still paying high-margin maintenance and subscription fees to Oracle.

But the lag in license revenue growth is worrisome, if not yet a sell signal, say investors. "It will take at least two more quarters to see what the real level of demand for Oracle products actually is," says Chuck Jones of Atlantic Trust Stein Roe in San Francisco, which owns Oracle shares. Jones says that PeopleSoft's sales reps pulled as much business forward as possible before the merger was completed, thus emptying the pipeline.

Investors, says Jones, will look for evidence that the pipeline is being rebuilt and that Oracle is aggressively selling PeopleSoft products. "This may be just an air pocket," he adds.

Meanwhile, Monday's launch of Microsoft's first major upgrade to its SQL Server database software will, at the very least, make the Redmond, Wash., company more competitive with Oracle in the mid-range market. In 2004, Oracle and IBM ( IBM) each had about a 33% share of the database market while Microsoft held a share of about 20%, according to market research firm Gartner.

Although the debut of SQL Server 2005 was several years late, analysts are giving it high marks for new features and perhaps most importantly, its "scalability," -- industry-speak for its ability to cope with the larger user bases and bigger data stores used by large customers.

And not coincidentally, Microsoft has been deepening its relationship with SAP, a company it once considered purchasing. The two software giants now claim 20,000 joint customers, said Microsoft CEO Steve Ballmer. As evidence of the database's power, Ballmer said it was so scalable that 93,000 users at an SAP installation could use it concurrently. It is, however, a hard claim to verify. For one thing, the largest existing SAP deployment is only about 9,300 users, Ballmer said.

Pat Becker Jr., a portfolio manager with Becker Capital Management, says Oracle risks losing database customers because of its high pricing and arrogant business practices. "If you talk to large Oracle customers you won't find many that actually like doing business with them. If a more competitive product was available and was cheaper, they'd consider switching, he said. Becker Capital holds shares of Microsoft but not Oracle.

Still, it would take a lot of coaxing to make a customer tear out an Oracle database in favor of Microsoft's; it would be very expensive, and the largest companies may still not be convinced that SQL Server is robust enough to handle their business. It's likely, says Lehman Brothers analyst Israel Hernandez, "that as Oracle moves down market and Microsoft moves up market, the companies find themselves competing more in the mid-market." SQL Server 2005, he said, is well suited for that competition. Lehman Brothers has an investment banking relationship with IBM, but not Microsoft.

Microsoft did raise the price of its high-end database and mid-range database product by about one-third third and 25% respectively, but its database products are still cheaper than Oracle's.

Like Jones, Becker says "it's still early innings. A squeeze is possible, but it's too soon to predict winners and losers."

Several other key products also launched by Microsoft on Monday, including a set of tools used by developers to write software programs, are now much more closely integrated with the database and other parts of Microsoft's stack, or enterprise software offering.

Simply put, a stack is a set of software that includes an operating system, middleware, applications and a database that will run business processes for a large and complex company.

In the past, analysts generally believed that Microsoft's stack was not very well integrated, and didn't measure up to offerings from IBM. Now that the stack has been strengthened, the company will have easier entry to the largest customers.

Similarly, Oracle has scored points against SAP by claiming, (correctly, in the view of many analysts) that its German rival lacks a powerful stack beyond its applications. In fact, Oracle CEO Larry Ellison has often said that only software companies with powerful, integrated platforms offering a full range of capabilities to customers will survive.

By combining Microsoft's newly strengthened database and platform with SAP's robust applications, the two companies are, in a sense, fulfilling Ellison's vision -- but not in the manner he would have hoped for.