Tut Systems is working through the kinks that stalled the availability of its MPEG-4 set-top boxes for high-definition television (HDTV). Though the vendor was unable to fulfill orders for those set-tops in the second quarter due to problems with middleware and conditional access functions, those problems are now being resolved, according to multiple sources.

“Our discussions with numerous other members of the IPTV food chain suggest a near-unison in the belief that we are finally on the cusp of resolving the final software bugs holding up mass shipments of HDTV AVC set-tops,” Think Equity Partners analysts said in a note issued today. “Our sources suggest that these final software tweaks should be completed in the 30 to 60 days.”

During Tut Systems’ third-quarter earnings conference call Tuesday, Chief Executive Officer Sal D’Auria predicted “improved availability” of Tut’s MPEG-4 set-top boxes in the fourth quarter but said “popular configurations” of the product would become “more readily available” in the first quarter of next year. HDTV upgrades will begin in the fourth quarter, start to ramp in next year’s first quarter and become a significant part of Tut’s business by the middle of next year, he said.

The “ecosystem” for MPEG-4 set-tops improved in the middle of the third quarter, D’Auria said, as the company’s sales funnel grew to record levels. “We have set-top boxes demonstrating MPEG-4 solutions. We didn’t have them in the second quarter.”

Today Tut announced that its Astria video head-end can now convert stored video-on-demand content from MPEG-2 to MPEG-4, which offers greater compression. Cavalier Telephone is currently using the Astria converter, Tut said.

Also generally available in the fourth quarter will be Tut’s power-over-Ethernet products, which are now being beta-tested.

Tut’s third-quarter revenue was down 18% from a year earlier and up less than 2% sequentially to $8.2 million. At $12 million, its inventory was double what it was a year earlier, but the company expects to turn much of that inventory into cash in the fourth quarter as the sales pipeline starts flowing again. Tut expects fourth-quarter revenue to be sequentially flat or up less than 4%.

Confounding Tut’s expectations somewhat is uncertainty over the timing of some large tier-one customers the vendor is pursuing. “We’re getting closer,” D’Auria said. “The list of competitors is getting smaller.” However, the pace of the process has been frustrating.

“The decision-making process, particularly on the tier-one side, would probably astound people,” D’Auria said. “They haven’t made the decisions you’d expect them to have made. Every tier-one [carrier] is behind the schedule they communicated earlier. They’re all behind. A lot of people believe all the decisions have been made, but that’s not the case.”

D’Auria expects those large carriers to make equipment selections within the next quarter or two. In addition, Tut entered another large-carrier lab trial this quarter.

“Tut's toughest challenge is its thin balance sheet,” Think Equity’s analysts wrote. “Customers do not buy only a product but also the supplier's balance sheet. In this regard, Tut has been in a race against time, as its sources of funding become more expensive and outright uncertain.”

Tut says it has a partner that would work with it to supply large carriers and quell any fears those carriers might have about Tut’s financial wherewithal.