Input/ Output (IO – NYSE)

Dear Bottarelli Research Member,

I don’t know how much longer the markets can keep moving up, so be prepared to use any coming pullback as a second entry opportunity on our top small-cap positions. I’ll closely monitor the situation and tell you the exact time to strike, but for today I have an exciting smal- cap company that’s rapidly growing and will only get better in Q3 and Q4.

As I look at our entire small-cap portfolio, names like Metalline Mining (MMG – AMEX), Polymet Mining (PLM – AMEX), and Minera Andes (MNEAF.OB) offer us great exposure to companies on the verge of exciting results in the zinc, copper, silver, and molybdenum markets.

We also have natural gas exposure with Big Cat Energy (BCTE.OB) and a near term oil producer with Nevtah Capital Management (NTAH.PK). In addition, we have our cash generators through Canetic Resources Trust (CNE – NYSE), Advantage Energy Income Fund (AAV – NYSE), and Provident Energy Trust (PVX – NYSE), plus a sweet little play on advanced genetic-based testing in Upstream Biosciences (UPBS.OB). Upstream has actually pulled back a little, so it could be time to add to this one. I’ll tell you for sure next week. Let’s also not forget about our China coking coal play, Puda Coal (PUDC.OB), and our two uranium plays Uranium Resources (URRE.OB) and Yellowcake Mining (YCKM.OB).

Taken collectively, these small-cap holdings give us exposure to all of the strongest market sectors – but I’d like to get ourselves over-exposed in the small-cap oil sector. This leads me right in to today’s new play.

As I poured through company after company looking for that special one that meets our strict parameters, none stood out more than the one I am giving you today. This small (but rapidly growing) company just reported earnings that were extremely strong – and they’ll only get stronger going into the last half of 2007.

I believe now is the time to strike, before everyone else catches wind and bids the shares up even higher.

This company is using a new type of seismic mapping and land imaging technology that is truly amazing. Everything is in 4-D and real time. High level reporting like this saves oil and gas exploration companies time and money because they’ll have a comprehensive understanding of what lies beneath the ground before they drill.

If you read through their latest earnings release, it’s clear that their services are catching on very quickly (more on this in Bryan’s section below). They have offices in Europe, Canada, China, Russia and the Middle East, so they’re truly a global small-cap oil play. Plus, they’ve just taken on several joint ventures (the latest with a South American firm) so they’re quickly expanding their global footprint even more. Every oil and gas company I can think of could benefit from this company’s new technology – and I want you to ride this upside momentum right alongside them.

As Bryan and I spoke about the company earlier this week, I mentioned to him that this one reminds me very much of Bolt Technology (BTJ – AMEX) from last year. One look at the chart below and you’ll see the enormous potential I’m talking about.

Today’s pick could offer the same type of upside move. The company is called Input/Output (IO – NYSE) and I believe now is the time to take a position at or under $15.30 per share. I’ll turn things over to Bryan here, as I’m sure he’s got a lot to tell you about our newest pick. But before I go, I’d like to wish you and your family a safe and relaxing Memorial Day weekend.

Sincerely,

Q1 Revenues Increased 91%…
(And They Expect Q1 to be the Weakest Quarter of the Year)

Input/Output (IO – NYSE) is a “pure play” on the most advanced oil service technology on the market. For the last 35 years, I/O has been the innovative leader in land seismic imaging – which means they offer oil and gas companies integrated seismic data that helps them to identify what lies under the surface. Thanks to their high-end technology, they offer services for not only land masses but also for marine, arctic, desert, and even fractured reservoir regions.

It’s a simple concept, really. If you think that oil exploration will continue to be in high demand, then I/O is perfectly positioned to offer the most advanced early-stage exploration services to the world’s leading oil and gas companies. Thanks to their 2004 acquisitions of Concept Systems and GX Technology (GXT), no other competitor can offer the oil and gas industry imaging services and seismic data software quite like I/O.

To begin, let’s quickly break down I/O’s four business segments, noting that all four of them are experiencing exploding year-over-year growth. Here’s the run-down:

I/O’s Land Imaging System offers cable-based, cable-less, and radio-controlled data acquisition systems as well as vehicles and vibrator energy sources. Revenues from land imaging more than doubled to $73.5 million from $34.9 million a year ago.

I/O’s Marine Imaging Systems manufacture towed marine streamers and shipboard electronics, seismic data systems and shipboard recorders. Revenues from marine increased 65.9% to $44.1 million from $26.6 million a year ago.

I/O’s Data Management Solutions offer multiple software packages that include:

• SPECTRA: A navigation and survey control software system for towed streamer-based seismic surveys.
• GATOR: A software system for ocean bottom cable and transition zone operations that provides multi-vessel positioning, data management solutions, and 4-D survey operations.
• SPRINT: Navigation processing software for marine geophysical surveys.
• REFLEX: Software for navigation and seismic data analysis.
• SWAT: Software for Web-based assessment of survey progress and quality assurance of data acquisition operations.

When you add these five data management solutions together, their revenues more than doubled to $40.9 million compared to $20.3 million a year ago.

And finally, I/O’s Seismic Imaging Solutions offer seismic data processing and imaging services for marine and land environments.

Combine I/O’s four main business segments, and you’ll arrive at their most recent earnings report: Q1 revenues increased 91% to $165 million.

This includes a first quarter net income that came in at $3.1 million ($0.04 per share) compared to net loss of $3.3 million (-$0.04 per share) for the same period last year.

Q1 earnings from operations came in at $5.9 million compared to a loss of $1.1 million in Q1 2006. And Q1 EBITDA (earnings before net interest expense, taxes, depreciation and amortization) improved to $20.4 million compared to $5.2 million in the first quarter of last year. Lump it all together, and you have quite a remarkable year-over-year turnaround. And that’s why the stock has been setting a series of new 52-week highs. Check it out:

When you look at a stock chart like this, it’s clear that I/O is gaining some tremendous upside momentum. But when you listen to President and Chief Executive Officer Bob Peebler, you’ll realize that the upside momentum is just beginning.

For example, Mr. Peebler commented on the Q1 numbers by saying, “We are particularly pleased with our first quarter results because, as we stated in the Guidance call last December and the fourth quarter earnings call this March, we expected the first quarter to be the weakest of the year from a seasonal standpoint. We continue to expect our financial results to improve throughout 2007, with a larger portion of the revenues and earnings occurring in the second half of the year.”

Yes, you read that correctly. Even after posting a Q1 revenue increase of 91%, I/O management believes that Q1 will be their weakest quarter of the year.

This could spark an upside run that witnesses I/O moving all the way up to $20.00 and beyond.

In terms of future price triggers, I/O expects to roll out new marine imaging technology called DigiFin which addresses positioning constraints in marine towed streamer data acquisition. They’ll also benefit from the extension of an exclusive agreement with RXT, which comes with a commitment of $160 million in equipment sales over a four year period. But the true upside price catalyst is I/O’s ability to keep ramping up revenues in each of their four business segments. If Q1 is truly their weakest quarter, then we’ll have some remarkable gains ahead of us.

Here is a look at their 4-D imaging technology.

With such tremendous year-over-year growth (which only looks to get better), the time to enter a new position in Input/Output (IO – NYSE) is now. In fact, Lehman Brothers just initiated coverage of I/O on May 17^th – which signals that the word is starting to get out on this fast-growing company. In Lehman’s research report, I/O’s new FireFly product was highlighted as a forward revenue driver. It’s the world’s first cable-less system for full-wave land seismic acquisitions, and the analysts said it could be a “game-changing” system.

Looking forward, Wall Street is projecting revenues of $0.55 in 2007 and $0.82 in 2008, but if CEO Bob Peebler is right, I/O could soon be exceeding these numbers and rewarding early shareholders like you and me.

With their stock up 73.64% over the last 52 weeks, quarterly revenue growth up 91% year over year, and average trading volume of 975,000 shares per day, I/O is a stock that you should have no trouble adding to your small-cap portfolio next Tuesday (remember that the markets are closed Monday for Memorial Day).

All things considered, Input/Output (IO – NYSE) is a dynamite way to get our small-cap portfolio over-exposed in the oil sector and experience remarkable year-over-year growth in the next 6 to 12 months. Let’s add Input/Output (IO – NYSE) shares to our portfolio now.

PLAY: Buy shares of Input/Output (IO – NYSE) at or under $15.50, good for the week.

Sincerely,