The $100m (£63m)-plus deal, signed in May 2001, was lambasted by critics after it emerged that the contract had not been properly put out to tender.
The furore surrounding the deal has caused the closure of California's Department of Information Technology and the firing or resignation of several state officials.
The trouble began in April when the state auditor published a damning report on the contract with Oracle and systems integrator Northrop Grumman.
Announcing the agreement, state Attorney General Bill Lockyer said, "The state is relieved of any further financial obligations including all associated interest and fees.
"Oracle and Northrop Grumman were under no obligation to help California by rescinding this contract, and we appreciate their co-operation."
For its part, Oracle said it was, "pleased to have resolved this matter to the satisfaction of the State of California. We look forward to working with the state in the future."