When the presidential candidates issued their third-quarter fundraising reports earlier this month, it looked like Hillary Clinton and Barack Obama were in much better shape financially than the third “top-tier” Democrat, John Edwards. In fact, Clinton and Obama were in their own tier, with year-to-date fundraising totals of about $75 million each and cash on hand in excess of $30 million apiece. Edwards had raised $27.9 million, with just $10 million on hand.

But unlike either of his rivals, Edwards has chosen to accept public financing, and is entitled so far to $13.6 million in taxpayer funds, according to the Campaign Finance Institute at George Washington University. CFI adds that Edwards “substantially closed the cash gap” merely by opting into the public system, and can plan as if he has upward of $20 million in the bankdouble the $11 million held by Republican frontrunner Rudy Giuliani.

Meanwhile, Edwards is spending at about half his rivals’ rates$18 million to date for Edwards versus $44 million and $41 million for Obama and Clinton, respectively. And he’s spent less in Iowa, as the Des Moines Register‘s political columnist David Yepsen noted last week: “Clinton and Obama have dropped millions on television commercials in the state. Edwards has yet to make his big media buy.” Thus Yepsen thinks Iowa “may still give [Edwards] a new lease on political life” at caucus time. Clinton’s moved ahead in the polls there, Yepsen notes, but Edwards remains close behind (as is Obama); Edwards is competing well for the Democrats who actually show up at the caucuses: older, working-class and rural, as opposed to younger, better-heeled and suburban.

CFI’s figures show Edwards receiving a higher percentage of his money from small contributors ($200 or less) than Obama or Clinton, and much less from those who give the maximum $2,300. That’s one reason public funds appealed to Edwards: Regardless how big the contribution, only the first $250 qualifies for an equal public match. The other reason: Edwards needed the money to compete in Iowa and New Hampshire.

But by taking it, CFI notes, Edwards is locked into the public system’s “archaic” spending limit of about $50 million for the entire primary season. In 1996, Bob Dole made a similar decision and, after clinching the Republican nomination, was virtually out of money for advertising in the spring and summer, while Bill Clinton’s campaign pounded him on the airwaves. Edwards says that won’t happen to a Democrat in ’08as the nominee, he might be broke, but the Democratic party is raising money at record rates and can sustain its candidate against any Republican comer.