How do producers pick the contestants?

Before I get all obsessed with season 4 starting in two weeks I, like most others, were a bit disappointed with how season 3 ended, and how they went from having no more than 3 matches to 10. Also looking at who they say are actual matches really leaves you wondering who the producers got to do their matchmaking.

While there are lots of accusations of saying that the entire thing is rigged, I would love to know how the producers picked the contestants because I feel that could have a lot to do with how well each "perfect match" is actually good for each other.

The way I see it the producers could pick their contestants in one of two ways:

1) 10,000 people apply to the show. The producers give the list over to their "professional" matchmaker, and they proceed to match each male and female with their best match out of the 10,000 applicants. Once the matches are made they return the list of couples to producers who go through it and pick the hottest and most interesting couples to be on the show.

2) 10,000 people apply to the show. The producers go through the list and pick 10 males and 10 females whom they feel are the hottest and most interesting. They give the list of 20 people to their professional matchmaker to put them into couples.

Of course if they used method #2, with a pool of only 20 people, the chances of someone being your "perfect" match is slim. And because of how things ended up in the last season I am almost sure that is the method they used. Anyone know?