UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 001-31552

Smith & Wesson Holding Corporation

(Exact name of registrant as specified in its charter)

Nevada		87-0543688
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

2100 Roosevelt Avenue
Springfield, Massachusetts		01104
(Address of principal executive offices)		(Zip Code)

(800) 331-0852
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o     No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

     The registrant had 59,748,802 shares of common stock, par value $0.001, outstanding as of March 1, 2010.

 

 

SMITH & WESSON HOLDING CORPORATION
Quarterly Report on Form 10-Q
For the Nine Months Ended January 31, 2010

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			30
Item 3. Quantitative and Qualitative Disclosures About Market Risk			38
Item 4. Controls and Procedures			38
PART II OTHER INFORMATION
Item 1. Legal Proceedings			38
Item 6. Exhibits			39
Signatures			40
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I — FINANCIAL INFORMATION

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of:

		January 31, 2010				April 30, 2009
		(Unaudited)
		(In thousands, except par value and share data)
ASSETS
Current assets:
Cash and cash equivalents		$	37,045			$	39,822
Accounts receivable, net of allowance for doubtful accounts of $568 on January 31, 2010 and $2,386 on April 30, 2009			57,233				48,232
Inventories			47,662				41,729
Other current assets			4,300				3,093
Deferred income taxes			12,198				12,505
Income tax receivable			6,506				—
Total current assets			164,944				145,381
Property, plant and equipment, net			55,713				51,135
Intangibles, net			16,207				5,940
Goodwill			80,507				—
Deferred income taxes			—				1,143
Other assets			5,982				6,632
		$	323,353			$	210,231
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	18,140			$	21,009
Accrued expenses			18,884				17,606
Accrued payroll			7,841				7,462
Accrued income taxes			—				2,790
Accrued taxes other than income			2,119				2,208
Accrued profit sharing			5,816				6,208
Accrued product/municipal liability			3,057				3,418
Accrued warranty			3,799				4,287
Current portion of notes payable			540				2,378
Total current liabilities			60,196				67,366
Deferred income taxes			4,333				—
Notes payable, net of current portion			80,000				83,606
Other non-current liabilities (Note 11)			23,765				8,633
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $.001 par value, 20,000,000 shares authorized, no shares issued or outstanding			—				—
Common stock, $.001 par value, 100,000,000 shares authorized, 60,948,802 shares issued and 59,748,802 shares outstanding on January 31, 2010 and 48,967,938 shares issued and 47,767,938 shares outstanding on April 30, 2009			61				49
Additional paid-in capital			167,266				91,103
Retained earnings/(accumulated deficit)			(5,945	)			(34,203	)
Accumulated other comprehensive income			73				73
Treasury stock, at cost (1,200,000 common shares)			(6,396	)			(6,396	)
Total stockholders’ equity			155,059				50,626
		$	323,353			$	210,231

The accompanying notes are an integral part of these consolidated financial statements.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME/(LOSS) AND COMPREHENSIVE INCOME/(LOSS)

		For the Three Months Ended:								For the Nine Months Ended
		(in thousands, except per share data)
		January 31,				January 31,				January 31,				January 31,
		2010				2009				2010				2009
Net product and services sales		$	89,379			$	83,712			$	300,424			$	235,419
Cost of products and services sold			64,363				62,182				205,222				169,231
Gross profit			25,016				21,530				95,202				66,188
Operating expenses:
Research and development			1,166				700				3,087				2,093
Selling and marketing			8,703				7,244				24,209				22,323
General and administrative			13,221				9,064				38,159				28,973
Impairment of long-lived assets (Note 3)			—				—				—				98,243
Total operating expenses			23,090				17,008				65,455				151,632
Income/(loss) from operations			1,926				4,522				29,747				(85,444	)
Other income/(expense):
Other income/(expense), net			977				366				11,463				(515	)
Interest income			91				26				333				213
Interest expense			(1,235	)			(1,219	)			(3,757	)			(4,684	)
Total other income/(expense), net			(167	)			(827	)			8,039				(4,986	)
Income/(loss) before income taxes			1,759				3,695				37,786				(90,430	)
Income tax expense/(benefit)			(621	)			1,340				9,528				(18,808	)
Net income/(loss)/comprehensive income/(loss)		$	2,380			$	2,355			$	28,258			$	(71,622	)
Weighted average number of common shares outstanding, basic			59,721				47,206				57,674				46,592
Net income/(loss) per share, basic		$	0.04			$	0.05			$	0.49			$	(1.54	)
Weighted average number of common and common equivalent shares outstanding, diluted (Note 13)			60,413				48,091				64,946				46,592
Net income/(loss) per share, diluted (Note 13)		$	0.04			$	0.05			$	0.46			$	(1.54	)

The accompanying notes are an integral part of these consolidated financial statements.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended January 31, 2010

														Retained				Accumulated
		Common								Additional				Earnings				Other								Total
		Stock								Paid-In				(Accumulated				Comprehensive				Treasury				Stockholders’
(In thousands)		Shares				Amount				Capital				Deficit)				Income				Stock				Equity
Balance at April 30, 2009			48,967			$	49			$	91,103			$	(34,203	)		$	73			$	(6,396	)		$	50,626
Issuance of common stock in connection with an equity offering, net of costs of $2,418			6,000				6				35,076																35,082
Issuance of common stock in connection with acquisition of Universal Safety Response, Inc., net of costs of $13			5,600				6				38,173																38,179
Exercise of employee stock options			127				0				190																190
Stock-based compensation											2,380																2,380
Book deduction of stock-based compensation in excess of tax deductions											(36	)															(36	)
Shares issued under employee stock purchase plan			114				—				504																504
Net income															28,258												28,258
Issuance of common stock under restricted stock unit awards, net of shares surrendered			141				—				(124	)															(124	)
Balance at January 31, 2010			60,949			$	61			$	167,266			$	(5,945	)		$	73			$	(6,396	)		$	155,059

The accompanying notes are an integral part of these consolidated financial statements.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Nine Months Ended
		January 31, 2010				January 31, 2009
		(In thousands)
Cash flows from operating activities:
Net income		$	28,258			$	(71,622	)
Adjustments to reconcile net income to net cash used by operating activities (net of acquisition):
Amortization and depreciation			11,283				10,001
Loss on sale of assets			359				62
Provision for/(recoveries of) losses on accounts receivable			(403	)			998
Impairment of long-lived assets			—				98,243
Deferred income taxes			3,954				(22,451	)
Stock-based compensation expense			2,380				2,487
Changes in operating assets and liabilities:
Accounts receivable			1,220				10,917
Inventories			(1,961	)			1,052
Other current assets			(503	)			1,131
Income tax receivable/payable			(9,224	)			2,833
Accounts payable			(7,414	)			(7,425	)
Accrued payroll			(142	)			655
Accrued profit sharing			(392	)			(485	)
Accrued taxes other than income			(579	)			306
Accrued other expenses			(7,787	)			(1,013	)
Accrued product/municipal liability			(361	)			467
Accrued warranty			(547	)			1,730
Other assets			(132	)			(52	)
Other non-current liabilities			(4,345	)			1,275
Net cash provided by operating activities			13,664				29,109
Cash flows from investing activities:
Payments for the purchase of Universal Safety Response, Inc.			(21,074	)			—
Payments to acquire patents			(160	)			(25	)
Proceeds from sale of property and equipment			23				30
Payments to acquire property and equipment			(11,033	)			(4,280	)
Net cash used for investing activities			(32,244	)			(4,275	)
Cash flows from financing activities:
Proceeds from loans and notes payable			2,950				22,698
Debt issue costs — bank debt			(20	)			(46	)
Proceeds from issuance of common stock, net of issuance costs			35,082				32,045
Proceeds from disgorgement of profit			—				3
Proceeds from exercise of options to acquire common stock including employee stock purchase plan			694				466
Taxes paid related to restricted stock issuance			(124	)			—
Excess book deduction of stock-based compensation			(36	)			(206	)
Payments on loans and notes payable			(22,743	)			(62,813	)
Net cash provided by/(used in) financing activities			15,803				(7,853	)
Net increase/(decrease) in cash and cash equivalents			(2,777	)			16,981
Cash and cash equivalents, beginning of period			39,822				4,359
Cash and cash equivalents, end of period		$	37,045			$	21,340
Supplemental disclosure of cash flow information
Cash paid for:
Interest		$	3,606			$	4,547
Income taxes			15,565				2,397

The accompanying notes are an integral part of these consolidated financial statements.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

(1) Basis of Presentation:

     The consolidated balance sheet as of January 31, 2010, the consolidated statements of income for the nine months ended January 31, 2010 and 2009, the consolidated statement of changes in stockholders’ equity for the nine months ended January 31, 2010, and the consolidated statements of cash flows for the nine months ended January 31, 2010 and 2009 have been prepared by us, without audit. In our opinion, all adjustments, which include only normal recurring adjustments necessary to fairly present the financial position, results of operations, changes in stockholders’ equity, and cash flows at January 31, 2010 and for the periods presented have been included. All significant intercompany transactions have been eliminated. The balance sheet as of April 30, 2009 has been derived from our audited financial statements.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended April 30, 2009. The results of operations for the nine months ended January 31, 2010 may not be indicative of the results that may be expected for the year ending April 30, 2010 or any other period.

Reclassification

     Certain amounts presented in the prior periods’ consolidated financial statements related to licensing revenue, inventory, and foreign currency transactions have been reclassified to conform to the current period’s presentation.

(2) Organization:

     We are a U.S.-based, global provider of products and services for safety, security, protection, and sport. We are one of the world’s leading manufacturers of firearms. We manufacture a wide array of revolvers, pistols, tactical rifles, hunting rifles, black powder firearms, handcuffs, and firearm-related products and accessories for sale to a wide variety of customers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, protection focused individuals, law enforcement agencies and officers, and military agencies in the United States and throughout the world. We also design and construct facility perimeter security solutions for military and commercial applications.

     We were incorporated on June 17, 1991 in the state of Nevada.

     On May 11, 2001, we acquired all of the outstanding stock of Smith & Wesson Corp. from U.K.-based Tomkins. Smith & Wesson Corp. and its predecessors have been in business since 1852.

     On January 3, 2007, we acquired all the outstanding capital stock of Thompson Center Holding Corporation (formerly Bear Lake Acquisition Corp.) and its subsidiaries, including Thompson/Center Arms Company, Inc. (“TCA”). This acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations for the acquired business have been included in our consolidated financial statements since the acquisition date.

     On July 20, 2009, we acquired all of the outstanding capital stock of Universal Safety Response, Inc. (“USR”). Two of USR’s former stockholders originally dissented to the acquisition. On November 17, 2009, we settled with these former stockholders on the same terms as those given to the other former stockholders of USR in the acqusition. The initial purchase price was $59,253, which consisted of $21,062 in cash and $38,191 in common stock paid at closing. The stock was valued based on our closing stock price on the date issued, with 5,492,286 shares issued at a stock price of $6.86 and 107,714 shares issued at a stock price of $4.77. In addition, the former stockholders of USR have the right to earn up to 4,080,000 shares of our common stock if USR achieves certain EBITDAS targets, as defined, in calendar years 2009 and 2010. Based on USR’s actual calendar year 2009 results, no additional shares were earned or paid as EBITDAS for that period was below the $8 million threshold to achieve a distribution. If EBITDAS for calendar year 2010 exceeds $15 million, the former stockholders of USR will earn the full 4,080,000 shares with a prorated reduction in shares earned for EBITDAS less than $15 million and no shares earned for EBITDAS less than $12 million. As of the closing date, this contingent consideration was assigned a fair value of $27,824, or 4,001,522 shares based on the closing share price of $6.86 on July 20, 2009 and 78,478 shares at a closing share price of $4.77 on November 17, 2009. This valuation was established in accordance with the Business Combinations Topic, Accounting Standards Codification (“ASC”) 805-20-25-20. As of January 31, 2010, this liability was adjusted to a fair value of $16,157, classified entirely as a non-current liability because we expect that the former USR stockholders will earn the full 4,080,000 shares based on USR achieving the highest level EBITDAS target with its calendar year 2010 results. The $11,668 in income associated with the reduction in the contingent consideration versus the value recorded at the date of closing has been recorded as other income.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     USR, based in Franklin, Tennessee, sells and installs perimeter security products to the military and large corporate customers. Our acquisition of USR was designed to enable us to leverage USR’s business model, product line, and broad customer base to foster its growth as a part of our company and enable us to expand into new markets in the security industry.

     We are currently finalizing the valuation of the assets acquired and liabilities assumed; therefore, the fair values set forth below are subject to adjustment as we obtain additional information regarding income taxes. The following table summarizes the preliminary allocation of the purchase price:

Total purchase consideration:
Cash		$	21,062
Stock			38,191
Contingent consideration			27,824
Total purchase consideration		$	87,077
Accounts receivable		$	9,817
Inventories			3,973
Income tax receivable			72
Other current assets			704
Deferred income taxes			425
Total current assets			14,991
Property, plant and equipment, net			1,315
Intangibles, net			13,190
Goodwill			80,507
Other assets			10
Total assets acquired			110,013
Accounts payable			4,545
Accrued expenses			719
Accrued payroll			521
Accrued taxes other than income			489
Accrued warranty			58
Current portion of notes payable			7,231
Total current liabilities			13,563
Deferred income taxes			2,254
Notes payable, net of current portion			7,119
Total liabilities assumed			22,936
		$	87,077

     Included in general and administrative costs is $584 of acquisition-related costs incurred during the nine months ended January 31, 2010. An additional $13 of stock issuance costs related to the acquisition of USR were incurred and recorded against additional paid-in capital.

     None of the $9,817 in accounts receivable is subject to AICPA SOP 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer.” Receivables have been recorded at fair value, which is equal to the gross contractual amounts receivable less an allowance for doubtful accounts of $35. We expect all contractual cash flows, net of the allowance for doubtful accounts, to be fully collected.

     Goodwill is not expected to be deductible for tax purposes and is fully allocated to the perimeter security segment (Note 18).

     We amortize customer relationships and developed technology in proportion to the expected yearly revenue generated from the customer lists acquired or products expected to be sold. We amortize order backlog over the contract lives as they are executed. Trademarks and tradenames are expected to have an indefinite life. The following are the identifiable intangible assets acquired and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

their respective weighted average lives:

						Weighted
						Average
						Life
		Amount				(In years)
Developed technology		$	2,090				10.0
Maintenance customer relationships			500				12.0
Trademarks and tradenames			7,500			Indefinite
Order backlog			3,100				0.8
		$	13,190

(3) Significant Accounting Policies:

     Revenue Recognition — For our firearm segment, we recognize revenue when the following four basic criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. We report revenue, net of shipping costs and revenue-based taxes, including sales, use, and federal excise taxes, when applicable. For our perimeter security segment, we recognize revenue from fixed-price installation contracts using the percentage-of-completion method, measured by the percentage of costs incurred to date to our estimate of total costs for each contract.

     Product sales account for a substantial portion of our revenue. We recognize revenue from product sales when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which is generally upon shipment. We also provide tooling, forging, casting, heat treating, finishing, plating, and engineering support services to customers. We recognize this revenue when accepted by the customer, when no further contingencies or material performance obligations exist, and when collectability is reasonably assured, thereby earning us the right to receive and retain payments for services performed and billed.

     We recognize trademark licensing revenue for all individual licensees based on historical experience and expected cash receipts from licensees. This revenue consists of minimum royalties and/or a percentage of a licensee’s sales on licensed products. Under our current licensing agreements, this revenue is payable on a calendar quarter basis. We recognize as revenue non-refundable license fees received upon initial signing of license agreements when no future service is required on our part. As a result of uncertainties regarding existing licensees, including current and past payment performance, market acceptance of the licensee’s product, and insufficient historical experience, we believe that reasonable assurance of collectability of future license amounts does not exist. Therefore, we do not recognize minimum royalty payments upon contract signing but instead record royalty revenue monthly when the royalty can be reasonably estimated for that month and payment is assured.

     Use of Estimates — The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting periods. In addition, future facts and circumstances could alter our estimates with respect to the adequacy of insurance reserves. Operating results in the future could vary from the amounts derived from these estimates and assumptions. Our significant estimates include revenue recognition with regard to percentage of completion estimates, accruals for warranty, product liability, workers’ compensation, environmental liability, excess and obsolete inventory, forfeiture rates on stock-based awards, asset impairments, and medical claims payable. Actual results could differ from those estimates.

     Accounting for Acquisitions — Effective May 1, 2009, we account for acquired businesses using the acquisition method of accounting as prescribed by the Business Combinations Topic, ASC 805. This statement requires an acquirer to recognize and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at their fair values as of the acquisition date. The statement requires acquisition costs and any restructuring costs associated with the business combination to be recognized separately from the fair value of the business combination. ASC 805 establishes requirements for recognizing and measuring goodwill acquired in the business combination or a gain from a bargain purchase, as well as disclosure requirements designed to enable users to better interpret the results of the business combination. Acquisitions consummated prior to May 1, 2009 were accounted for in accordance with the previously applicable guidance of Statement of Financial Accounting Standards (“SFAS”) No. 141. In connection with the acquisition of USR, we expensed $584 of acquisition-related costs during the nine months ended January 31, 2010.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     Segment Information — Under Segment Reporting Topic, ASC 280-10, we are required to report financial and descriptive information about our reportable operating segments. We identify our operating segments based on how we internally evaluate separate financial information, business activities, and management responsibility. We believe we operate in two business segments. For further information regarding our business segments, see Note 18.

     Valuation of Long-lived Tangible and Intangible Assets and Goodwill — We have significant long-lived tangible and intangible assets, which are susceptible to valuation adjustments as a result of changes in various factors or conditions. Our most significant long-lived tangible and intangible assets are goodwill, fixed assets, developed technology, customer relationships, patents, trademarks, and tradenames. We amortize all finite-lived intangible assets either on a straight-line basis or based upon patterns in which we expect to utilize the economic benefits of such assets. With the exception of goodwill and intangible assets with indefinite lives, we initially determine the values of intangible assets by a risk-adjusted, discounted cash flow approach. We assess the potential impairment of identifiable intangible assets and fixed assets whenever events or changes in circumstances indicate that the carrying values may not be recoverable and at least annually. Factors we consider important, which could trigger an impairment of such assets, include the following:

	•		significant underperformance relative to historical or projected future operating results;
	•		significant changes in the manner of or use of the assets or the strategy for our overall business;
	•		significant negative industry or economic trends;
	•		a significant decline in our stock price for a sustained period; and
	•		a decline in our market capitalization below net book value.

     Future adverse changes in these or other unforeseeable factors could result in an impairment charge that would materially impact future results of operations and financial position in the reporting period identified.

     We test goodwill and intangible assets with indefinite lives for impairment on an annual basis as of February 1^st and between annual tests if indicators of potential impairment exist. The impairment test compares the fair value of each reporting unit to its carrying amount, including goodwill and intangible assets with indefinite lives, to assess whether impairment is present. We have reviewed the provisions of ASC 280-10 with respect to the criteria necessary to evaluate the number of reporting units that exist. Based on our review of the Segment Reporting Topic, ASC 280-10-50, we have determined that we operate in three reporting units: one for our Springfield, Massachusetts and Houlton, Maine operations, a second for our Rochester, New Hampshire operation, and a third for USR. We have determined that we operate in two segments: one for our firearm companies and a second for our perimeter security subsidiary, USR. Goodwill recorded on our books in fiscal 2010 is associated solely with USR as it arose out of our acquisition of USR on July 20, 2009. As detailed in our Form 10-K for the fiscal year ended April 30, 2009, we determined that indicators for impairment of goodwill and intangible assets existed in our Rochester, New Hampshire reporting unit and, as a result, we conducted an evaluation of the goodwill and intangible assets associated with the acquisition of that reporting unit. Based on the work performed, we recorded a goodwill impairment loss of $41,173 during the three months ended October 31, 2008.

     We periodically review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of those assets are no longer appropriate. We base each impairment test on a comparison of the undiscounted cash flows to the recorded carrying value for the asset. If impairment is indicated, write down the asset to its estimated fair value based on a discounted cash flow analysis. As noted above, economic and market conditions affecting the Rochester, New Hampshire reporting unit required us to test for impairment of long-lived assets pertaining to that location during the second quarter of fiscal 2009. Based on this assessment, we recorded an impairment charge of $57,070 to reflect the excess of the carrying value of long-lived intangible assets over the discounted cash flows.

     Significant judgments and estimates are involved in determining the useful lives of our long-lived assets, determining what reporting units and segments exist, and assessing when events or circumstances would require an interim impairment analysis of goodwill or other long-lived assets to be performed. Changes in our organization or our management reporting structure, as well as other events and circumstances, including technological advances, increased competition, or changing economic or market conditions, could result in (a) shorter estimated useful lives, (b) additional reporting units, which may require alternative methods of estimating fair values or greater disaggregation or aggregation in our analysis by reporting unit, and (c) other changes in previous assumptions or estimates. In turn, this could have an additional impact on our consolidated financial statements through accelerated amortization and impairment charges.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

(4) Notes Payable:

     Credit Facilities — Pursuant to a credit agreement, dated November 30, 2007, we, as guarantor, along with certain of our direct and indirect subsidiaries, including Smith & Wesson Corp. (“SWC”) and TCA, as borrowers, refinanced our existing credit facility to, among other things, increase our acquisition line of credit to $70,000 and consolidate and increase our revolving lines of credit to $40,000. In May 2008, we utilized proceeds from our 2008 stock offering to repay the $28,000 outstanding balance on the acquisition line and terminated the acquisition line. We incurred a $485 non-cash charge associated with the write-off of unamortized debt acquisition costs as a result of our decision to terminate the acquisition line. Pursuant to an amendment of the credit agreement dated October 31, 2008, TD Bank, N.A. (the “Lender”) became the sole lender and successor administrative agent under our credit facility. This amendment also documented the termination of the acquisition line of credit, increased our second and third fiscal quarter 2009 leverage ratio to 3.25:1, and released the security interest on our intellectual property. Pursuant to a second amendment of the credit agreement dated March 12, 2009, we increased our leverage ratio to 3.50:1 for the fiscal quarters ending April 30, 2009, July 31, 2009, January 31, 2010, January 31, 2010, and April 30, 2010, with the ratio returning to 3.25:1 for all subsequent quarters. Pursuant to a third amendment of the credit agreement dated July 20, 2009, we added USR as a co-borrower and pledged the assets associated with that business as security for the obligations under the credit facility. On December 1, 2009, we paid in full our two term loans with $4,814 cash from operations. Pursuant to a fourth amendment of the credit agreement dated December 3, 2009, we increased our revolving line of credit to $60,000 and extended the agreement to December 2012.

     As of January 31, 2010, the credit facility included a revolving line of credit of up to a maximum amount of the lesser of (a) $60,000, or (b) the sum of (i) 80% of the net amount of SWC’s, TCA’s, and USR’s eligible accounts receivable (as defined in the credit agreement), plus (ii) the lesser of (A) $15,000 or (B) 60% of SWC’s , TCA’s and USR’s eligible inventory (as defined in the credit agreement). The revolving line of credit provides for availability until November 30, 2012 for working capital needs. The revolving line of credit bears interest at LIBOR or a variable rate equal to prime, at our election. As of January 31, 2010, after adjustment for $3,803 of standby letters of credit, there was $38,331 available for borrowings, of which there were no borrowings outstanding. Had there been borrowings, they would have borne an interest rate of 3.25% per annum.

     As security for the credit facility, the Lender has a first priority lien on all of our personal property and real estate assets.

     We may prepay in whole or in part any of the loans that have interest rates determined by reference to the prime rate, with interest accrued to the date of the prepayment on the amount prepaid, without any penalty or premium. Loans with a fixed rate of interest determined by reference to the LIBOR interest rate may be prepaid provided that we reimburse the Lender for any costs associated with (i) our making payments on dates other than those specified in the credit agreement, or (ii) our borrowing or converting a LIBOR loan on a date other than the borrowing or conversion dates specified in the credit agreement. We received a waiver of the 2% prepayment penalty associated with our repayment of the acquisition line of credit, as described above.

     The credit facility contains various covenants, including certain financial covenants, all of which were met as of January 31, 2010.

     Convertible Debt — On December 15, 2006, we issued an aggregate of $80,000 of 4% Senior Convertible Notes (the “Notes”) maturing on December 15, 2026 to qualified institutional buyers pursuant to the terms and conditions of a securities purchase agreement and indenture. We used the net proceeds from the Notes, together with $28,000 from our acquisition line of credit, to fund our acquisition of Thompson Center Holding Corporation and its subsidiaries.

     The Notes bear interest at a rate of 4% per annum payable on June 15 and December 15 of each year.

     The Notes are convertible into shares of our common stock, initially at a conversion rate of 81.0636 shares per $1,000 principal amount of Notes, or a total of 6,485,084 shares, which is equivalent to an initial conversion price of $12.336 per share. The Notes may be converted at any time. Until December 15, 2011, we may redeem all or a portion of the Notes at the redemption price of 100% of the principal amount of the Notes plus accrued and unpaid interest only if the closing price of our common stock exceeds 150% of the then applicable conversion price of the Notes for no fewer than 20 trading days in any period of 30 consecutive trading days. After December 15, 2011, we may redeem all or a portion of the Notes. Noteholders may require us to repurchase all or part of their Notes on December 15, 2011, December 15, 2016, or December 15, 2021 and in the event of a fundamental change in our company, as defined in the indenture covering the Notes.

     The Notes are our general unsecured obligations, ranking senior in right of payment to our subordinated indebtedness and ranking pari passu with all other unsecured and unsubordinated indebtedness. Until such time that the closing price of our common stock exceeds 200% of the then applicable conversion price of the Notes for at least 30 trading days in any period of 40 consecutive trading days, we agreed not to incur any additional indebtedness in excess of the greater of (1) $62,000 available under our credit facility, and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

(2) three times LTM EBITDA (as defined in the indenture covering the Notes) at the time such additional debt is incurred and including any amounts outstanding under our credit facility.

     We evaluated the conversion features of the Notes and determined that no beneficial conversion feature existed and that there are no features of the instruments that require bifurcation.

(5) Inventory:

     The following sets forth a summary of inventories, stated at the lower of cost or market, as of January 31, 2010 and April 30, 2009:

		January 31, 2010				April 30, 2009
Finished goods		$	20,055			$	17,212
Finished parts			13,981				13,228
Work in process			7,586				6,793
Raw material			6,040				4,496
Total inventories		$	47,662			$	41,729

(6) Goodwill:

     The changes in the carrying amount of goodwill during the nine months ended January 31, 2010 were as follows:

Balance as of April 30, 2009		$	—
Acquisition of Universal Safety Response, Inc. (see Note 2)			80,507
Balance as of January 31, 2010		$	80,507

(7) Intangible Assets:

     Intangible assets consisted of the following as of January 31, 2010 and April 30, 2009:

		January 31, 2010				April 30, 2009
Developed technology		$	3,830			$	1,740
Customer relationships			500				—
Patents, trademarks, and tradenames			12,366				4,706
Backlog			3,700				600
			20,396				7,046
Less: Accumulated amortization			(4,189	)			(1,106	)
Total intangible assets		$	16,207			$	5,940

(8) Accrued Expenses:

     Accrued expenses consisted of the following as of January 31, 2010 and April 30, 2009:

		January 31, 2010				April 30, 2009
Accrued rebates and promotions		$	1,988			$	690
Accrued professional fees			2,976				1,695
Accrued audit liability			—				860
Accrued employee benefits			3,144				2,549
Accrued distributor incentives			4,117				6,330
Accrued environmental			102				184
Interest payable			418				1,198
Accrued workers’ compensation			658				640
Accrued utilities			391				440
Accrued other			5,090				3,020
Total accrued expenses		$	18,884			$	17,606

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

(9) Advertising Costs:

     We expense advertising costs, primarily consisting of magazine advertisements and printed materials, as incurred. For the nine months ended January 31, 2010 and 2009, advertising expense was approximately $11,629 and $11,447, respectively.

(10) Warranty Reserve:

     We generally provide a lifetime warranty to the “original” purchaser of our firearm products. We provide for estimated warranty obligations in the period in which we recognize the related revenue. We quantify and record an estimate for warranty-related costs based on our actual historical claims experience and current repair costs. We make adjustments to accruals as warranty claim data, product recalls, and historical experience warrant. Should we experience actual claims and repair costs that are higher than the estimated claims and repair costs used to calculate the provision, our operating results for the period or periods in which such additional costs materialize would be adversely impacted. Warranty expense for the nine months ended January 31, 2010 and 2009 was $2,065 and $3,925, respectively.

     The following sets forth the change in accrued warranties, a portion of which is recorded as a non-current liability, in the nine-month periods ended January 31, 2010 and 2009:

		Nine Months Ended
		January 31,				January 31,
		2010				2009
Beginning Balance		$	5,335			$	1,923
Liabilities assumed in the acquisition of Universal Safety Response, Inc.			58				—
Warranties issued and adjustments to provisions			2,065				3,925
Warranty claims			(2,827	)			(1,453	)
Ending Balance		$	4,631			$	4,395

(11) Other Non-Current Liabilities:

     Other non-current liabilities consisted of the following as of January 31, 2010 and April 30, 2009:

		January 31, 2010				April 30, 2009
Product & municipal liability		$	3,390			$	3,462
Environmental			577				577
Workers’ compensation			1,903				1,883
Other			—				150
Post retirement medical			23				23
Sales tax			39				39
Warranty			832				1,047
Accrued contingent consideration (Note 2)			16,157				—
Accrual for uncertain income tax positions (Note 14)			393				929
Pension liability			451				523
Other non-current liabilities		$	23,765			$	8,633

(12) Self-Insurance Reserves:

     As of January 31, 2010 and April 30, 2009, we had reserves for workers’ compensation, product liability, municipal liability, and medical/dental costs totaling $10,582 and $10,986, respectively, of which $5,293 and $5,345, respectively, has been classified as non-current and included in other non-current liabilities, and the remaining amounts of $5,289 and $5,641, respectively, have been included in current liabilities on the accompanying consolidated balance sheets. In addition, $324 of excess workers’ compensation receivable has been classified as an other asset. While we believe these reserves to be adequate, there exists a possibility that the ultimate liabilities will exceed such estimates. Amounts charged to expense were $7,902 and $9,270 for the nine months ended January 31, 2010 and 2009, respectively.

     It is our policy to provide an estimate for loss as a result of expected adverse findings or legal settlements when we believe such losses are probable and are reasonably estimable. It is also our policy to accrue for reasonably estimable legal costs associated with defending such litigation. While such estimates involve a range of possible costs, we determine, in consultation with litigation counsel, the most likely cost within such range on a case-by-case basis. At January 31, 2010 and April 30, 2009, we had product liability and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

municipal litigation reserves of $6,447 and $6,880, respectively, consisting entirely of estimated legal defense costs, of which $3,390 and $3,462, respectively, has been included in other non-current liabilities, and the remaining amounts of $3,057 and $3,418, respectively, have been included in current liabilities on the accompanying consolidated balance sheets. In addition, at January 31, 2010 and April 30, 2009, we had recorded receivables from insurance carriers related to these liabilities of $2,108 and $2,060, respectively, of which $2,083 and $2,035, respectively, have been classified as other assets and the remaining $25 for both periods has been classified as other current assets.

(13) Stockholders’ Equity:

Common Stock

     During the nine months ended January 31, 2010, options or warrants were exercised and common stock issued as follows:

     (a) We issued 126,499 shares of common stock having a market value of $734 to current and former employees upon the exercise of options granted to them while employees of our company. The cost to purchase these shares was $190.

     (b) In May 2009, we completed a stock offering of 6,000,000 shares of common stock, which yielded net proceeds of $35,082.

     (c) In July 2009, we issued 5,492,286 shares of common stock in conjunction with our acquisition of USR (see Note 2).

     (d) In September 2009, we issued 113,208 shares of common stock in connection with our Employee Stock Purchase Plan having a purchase price of $504.

     (e) In November 2009, we issued 107,714 shares of common stock in connection with our acquisition of USR (see Note 2).

Earnings per Share

     The following table provides a reconciliation of the income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the three months ended January 31, 2010 and 2009:

		For the Three Months Ended January 31,
		2010												2009
																						Per
		Net								Per Share				Net								Share
		Income				Shares				Amount				Loss				Shares				Amount
Basic earnings/(loss)		$	2,380				59,720,847			$	0.04			$	2,355				47,205,685			$	0.05
Effect of dilutive stock options and warrants			—				692,599				—				—				885,741				—
Diluted earnings/(loss)		$	2,380				60,413,446			$	0.04			$	2,355				48,091,426			$	0.05

     For the three months ended January 31, 2010, 6,485,084 shares of our common stock issuable upon conversion of the Notes and options to purchase 1,073,064 shares of common stock were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive. For the three months ended January 31, 2009, 6,485,084 shares of our common stock issuable upon conversion of the Notes and options and warrants to purchase 2,776,479 shares of common stock were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive.

     The following table provides a reconciliation of the income amounts and weighted average number of common and common equivalent shares used to determine basic and diluted earnings per share for the nine months ended January 31, 2010 and 2009:

		For the Nine Months Ended January 31,
		2010												2009
		Net								Per Share				Net								Per Share
		Income				Shares				Amount				Loss				Shares				Amount
Basic earnings/(loss)		$	28,258				57,674,210			$	0.49			$	(71,622	)			46,592,482			$	(1.54	)
Effect of dilutive stock options and warrants			—				786,993				—				—				—				—
Effect of assumed conversion of convertible debt			1,487				6,485,084				(0.03	)			—				—				—
Diluted earnings/(loss)		$	29,745				64,946,287			$	0.46			$	(71,622	)			46,592,482			$	(1.54	)

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     For the nine months ended January 31, 2010, options to purchase 583,200 shares of common stock were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive. For the nine months ended January 31, 2009, 6,485,084 shares of our common stock issuable upon conversion of the Notes and options and warrants to purchase 2,157,189 shares were excluded from the computation of diluted earnings per share because the effect would be anti-dilutive.

Stock Warrants Issued and Repurchased

     On September 12, 2005, we issued warrants to purchase 1,200,000 shares of our common stock to investors as part of a private placement offering. We also issued warrants to purchase 120,000 shares of our common stock to the placement agent. The warrants issued to investors had an expiration date of September 2006, and all warrants were exercised prior to expiration. In June 2007, the placement agent exercised warrants to purchase 50,000 shares of our common stock on a net exercise cashless basis, netting 34,857 shares. The remaining warrants to purchase 70,000 shares of our common stock expire September 12, 2010.

     The following outlines the activity related to the warrants for the periods indicated:

		For the Nine Months Ended January 31,
		2010								2009
		Number				Weighted-				Number				Weighted-
		of				Average				of				Average
		Shares				Exercise Price				Shares				Exercise Price
Warrants outstanding, beginning of the period			70,000			$	4.36				70,000			$	4.36
Warrants exercised during the period			—				—				—			$	—
Warrants outstanding, end of the period			70,000			$	4.36				70,000			$	4.36
Warrants exercisable, end of the period			70,000			$	4.36				70,000			$	4.36
Weighted average remaining life		0.6 years								1.6 years

Incentive Compensation and Employee Stock Purchase Plans

     We have two stock option plans (the “SOPs”): the 2001 Stock Option Plan and the 2004 Incentive Stock Plan. New grants under the 2001 Stock Option Plan have not been made since the approval of the 2004 Incentive Stock Plan at our September 13, 2004 annual meeting of stockholders. All new grants covering all participants are issued under the 2004 Incentive Stock Plan. The 2004 Incentive Stock Plan authorizes the issuance of the lesser of (1) 15% of the shares of our common stock outstanding from time to time; or (2) 10,000,000 shares of our common stock. The plan allows for granting of options to acquire common stock, the granting of restricted common stock and deferred stock, the granting of restricted stock units, the granting of stock appreciation rights, and the granting of dividend equivalents. Our board of directors, or a committee established by the board, administers the SOPs, selects recipients to whom awards are granted and determines the grants to be awarded. Options granted under the SOPs are exercisable at a price determined by the board or committee at the time of grant, but in no event less than fair market value of our common stock on the date granted. Grants of options may be made to employees and directors with or without regard to any performance measures. All options issued pursuant to the SOPs are nontransferable and subject to forfeiture. Unless terminated earlier by our board of directors, the 2004 Incentive Stock Plan will terminate on the earlier of (1) ten years from the date of the later to occur of (i) the original date the plan was approved by our board of directors or our stockholders, whichever is earlier, or (ii) the date an increase in the number of shares reserved for issuance under the plan is approved by our board of directors (so long as such increase is also approved by our stockholders), and (2) at such time as no shares of common stock remain available for issuance under the plan and our company has no further rights or obligations with respect to outstanding awards under the plan. The date of grant of an award is deemed to be the date upon which our board of directors or board committee authorizes the granting of such award. Generally, awards vest over a period of three years. The awards are exercisable for a period of ten years. The plan also allows for grants of awards to non-employees, which the board has granted in the past. A separate option grant, outside of the 2004 Incentive Stock Plan, for 500,000 shares was made to Michael F. Golden in connection with his hiring as our President and Chief Executive Officer during the fiscal year ended April 30, 2005.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

The number of shares and weighted average exercise prices of options granted under the SOPs and separate grant for the nine months ended January 31, 2010 and 2009 are as follows:

		For the Nine Months Ended January 31,
		2010								2009
						Weighted-								Weighted-
						Average								Average
		Shares				Exercise Price				Shares				Exercise Price
Options outstanding, beginning of year			2,428,263			$	4.76				2,247,262			$	3.88
Granted during year			900,500				5.19				598,000				5.42
Exercised during year			(126,499	)			1.51				(19,667	)			2.32
Canceled/forfeited during year			—				—				(5,000	)			4.55
Options outstanding, end of year			3,202,264			$	5.01				2,820,595			$	4.21
Options exercisable, end of year			1,883,600			$	4.45				2,001,926			$	3.22

     A summary of stock options outstanding, vested, and exercisable at January 31, 2010 follows:

		Outstanding												Vested and Exercisable
		Number				Weighted Average				Weighted				Number				Weighted
		Outstanding				Remaining				Average				Exercisable at				Average
		at January 31, 2010				Contractual Life				Exercise Price				at January 31, 2010				Exercise Price
Range of Exercise Prices
$0.81 — $4.19			1,161,333			5.84 years				$	2.17				893,833			$	1.58
$4.27 — $5.69			1,242,431			7.76 years					5.02				620,765				4.67
$5.77 — $15.00			798,500			8.32 years					9.10				369,002				11.02
$0.81 — $15.00			3,202,264			7.20 years				$	5.01				1,883,600			$	4.45

     We have an Employee Stock Purchase Plan (“ESPP”), which authorizes the sale of up to 10,000,000 shares of our common stock to employees. The ESPP commenced on June 24, 2002 and continues in effect for a term of ten years unless sooner terminated. The ESPP was implemented by a series of offering periods of two years duration, with four six-month purchase periods in the offering period. The plan was amended in September 2004 so that future offering periods, commencing with the October 1, 2004 offering period, are six months, consistent with the six month purchase period. The purchase price is 85% of the fair market value of our common stock on the offering date or on the purchase date, whichever is lower. A participant may elect to have payroll deductions made on each payday during the offering period in an amount not less than 1% and not more than 20% (or such greater percentage as the board may establish from time to time before an offering date) of such participant’s compensation on each payday during the offering period. The last day of each offering period is the purchase date for such offering period. An offering period commencing on April 1 ends on the next September 30. An offering period commencing on October 1 ends on the next March 31. Our board of directors has the power to change the duration and/or the frequency of offering and purchase periods with respect to future offerings and purchases without stockholder approval if such change is announced at least five days prior to the scheduled beginning of the first offering period to be affected. The maximum number of shares an employee may purchase during each purchase period is the lesser of 12,500 shares or a total value of $25 in shares, based on the fair market value on the first day of the purchase period. All options and rights to participate in the ESPP are nontransferable and subject to forfeiture in accordance with the ESPP guidelines. In the event of certain corporate transactions, each option outstanding under the ESPP will be assumed or an equivalent option will be substituted by the successor corporation or a parent or subsidiary of such successor corporation. During the nine months ended January 31, 2010 and 2009, 113,208 and 132,180 shares, respectively, were purchased under the ESPP.

     We account for our stock-based compensation in accordance with the Compensation – Stock Compensation Topic, ASC 718, which requires the measurement of the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. In accordance with ASC 718, we have calculated the fair value of our stock options and warrants issued to employees using the Black-Scholes model at the time the options and warrants were granted. That amount is then amortized over the vesting period of the option or warrant. With our ESPP, fair value is determined at the beginning of the purchase period and amortized over the term of the offering period.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     The following assumptions were used in valuing our options granted during the nine-month periods ended January 31, 2010 and 2009:

		For the nine months ended January 31,
		2010				2009
Stock option grants:
Risk-free interest rate		3.42 — 3.80		%		3.48 — 4.05		%
Expected term		7.08 — 10.0 years				7.08 — 10.0 years
Expected volatility		76.0 — 76.9		%		72.8 — 73.1		%
Dividend yield			0	%			0	%
Employee Stock Purchase Plan
Risk-free interest rate			0.18	%			1.49	%
Expected term		6 months				6 months
Expected volatility			71.4	%			70.2	%
Dividend yield			0	%			0	%

     We estimate expected volatility using historical volatility for the expected term. The fair value of each stock option or ESPP purchase was estimated on the date of grant using the Black-Scholes option pricing model. The weighted-average fair value of stock options granted during the nine months ended January 31, 2010 was $4.06. There were 900,500 and 598,000 options granted during the nine months ended January 31, 2010 and 2009, respectively. The total stock-based compensation expense related to SFAS 123(R), including stock options, purchases under the ESPP, and restricted stock unit awards, was $2,379 and $2,487 for the nine months ended January 31, 2010 and 2009, respectively. Stock-based compensation expense is included in general and administrative expenses.

     During the nine months ended January 31, 2010 and 2009, we granted 47,400 and 18,000 restricted stock units, or RSUs, respectively, to employees and non-employees. Our fiscal 2010 grants include an aggregate of 39,900 RSUs granted to Michael F. Golden, our President and Chief Executive Officer, and William F. Spengler, our Executive Vice President and Chief Financial Officer. These RSUs are performance-based and the receipt of shares of common stock is subject to our company achieving certain financial targets. The aggregate fair market value of our RSU grants is being amortized to compensation expense over the vesting period (three years). Compensation expense recognized related to grants of RSUs was $301 and $758 for the nine months ended January 31, 2010 and 2009, respectively. During the nine months ended January 31, 2010 and 2009, we issued 141,157 and 173,973 shares of common stock, respectively, under RSUs that had vested during the nine months with a total market value of $680 and $890, respectively. During the nine months ended January 31, 2010, we cancelled 12,333 RSU grants to former employees. During the nine months ended January 31, 2009, we cancelled 53,334 performance-based RSUs previously granted to Michael Golden, our President and Chief Executive Officer, as financial targets associated with these RSUs were not met for the fiscal year ended April 30, 2009. As of January 31, 2010, there was $409 of unrecognized compensation cost related to unvested RSUs. This cost is expected to be recognized over a weighted average of 1.1 years.

Stockholder Rights Plan

     On August 9, 2005, we adopted a stockholder rights plan (the “Rights Plan”). Under the Rights Plan, we made a dividend distribution of one preferred share purchase right (a “Right”) for each outstanding share of common stock. The dividend is payable to stockholders of record at the close of business on August 26, 2005. Each Right entitles the registered holder to purchase from us one one-thousandth of a share of our Series A Junior Participating Preferred Stock, par value $.001 per share (the “Preferred Stock”), at a price of $36.00 per one one-thousandth of a share of Preferred Stock, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement dated as of August 25, 2005, as the same may be amended from time to time, between us and Interwest Transfer Company, Inc., as Rights Agent.

     In general, until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (with certain exceptions) has acquired beneficial ownership of 15% or more of the outstanding shares of common stock, or (ii) 10 business days (or such later date as may be determined by action of our board of directors prior to such time as any person or group of affiliated persons becomes an “Acquiring Person”) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the then outstanding shares of common stock, the Rights will be evidenced, with respect to any of the common stock certificates outstanding as of August 25, 2005, by such common stock certificates together with a copy of a summary describing the Rights. As of January 31, 2010, we have not had any such changes that would have resulted in the execution of the Rights Plan.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

(14) Income Taxes:

     We use an asset and liability approach for financial accounting and reporting of income taxes. We determine deferred tax assets and liabilities based on temporary differences between financial reporting and tax bases of assets and liabilities and are measured by applying enacted tax rates and laws to the taxable years in which differences are expected to be recovered or settled. We recognize the effect on deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.

     At January 31, 2010, we had unrecognized tax benefits of approximately $393, most of which, if recognized, would favorably impact the effective tax rate. Included in our accrual at January 31, 2010 is approximately $147 of accrued interest and penalties related to uncertain tax positions.

     The full value of our unrecognized tax benefits has been classified as non-current income tax liabilities because a payment of cash is not anticipated within one year of the balance sheet date. In fiscal 2010, we recognized a reduction in our reserve for unrecognized tax benefits because of the expiration of the related statute of limitations. We expect that this reduction in liabilities will be partially offset by additional interest incurred on outstanding tax. We do not expect either change to be material. Interest and penalties related to income tax liabilities are included in income tax expense.

     With limited exception, we are subject to U.S. federal, state, local, and non-U.S. income tax audits by tax authorities for several years. The examination by the Internal Revenue Service of our income taxes for tax years ended April 30, 2008 and 2007 was closed in February 2010 with no material assessments noted.

(15) Commitments and Contingencies:

Litigation

     We, together with other firearm manufacturers and certain related organizations, are a co-defendant in various legal proceedings involving product liability claims and are aware of other product liability claims, including allegations of defective product design, manufacturing, negligent marketing, and/or distribution of firearms leading to personal injury, including wrongful death. The lawsuits and claims are based principally on the theory of “strict liability,” but also may be based on negligence, breach of warranty, and other legal theories. In many of the lawsuits, punitive damages, as well as compensatory damages, are demanded. Aggregate claimed amounts currently exceed product liability accruals and, if applicable, insurance coverage. We believe that, in every case, the various allegations as described above are unfounded, and, in addition, that any accident and any results from them were due to negligence or misuse of the firearm by the claimant or a third party and that there should be no recovery against us.

     In addition, we are a co-defendant in legal proceedings brought by the city of Gary, Indiana against numerous firearm manufacturers, distributors, and dealers seeking to recover damages allegedly arising out of the misuse of firearms by third parties in shootings. The city’s complaint seeks money damages, among other things, for the costs of investigating crime, preventing crime, costs of medical care, police and emergency services, and decreases in property values. In addition, nuisance abatement and/or injunctive relief is sought to change the design, manufacture, marketing, and distribution practices of the various defendants. The suit alleges public nuisance, negligent distribution and marketing, and negligent design. We believe that the various allegations as described above are unfounded, and, in addition, that any accidents and any results from them were due to negligence or misuse of the firearm by a third party and that there should be no recovery against us.

     We, our Chairman of the Board, our Chief Executive Officer, and our former Chief Financial Officer were named in three similar purported securities class action lawsuits. The complaints in these actions, which have been consolidated into one action, were brought individually and on behalf of all persons who purchased securities of our company between June 15, 2007 and December 6, 2007. The plaintiffs seek unspecified damages for alleged violations of Section 10(b) and Section 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We filed a Motion to Dismiss the litigation. As a result, the Court dismissed our Chairman of the Board from the litigation. Plaintiffs have filed a motion for class certification and we are opposing that motion. Our brief in opposition was filed on March 8, 2010. Discovery is ongoing.

     We were involved in a purported stockholder derivative lawsuit in the U.S. District Court for the District of Nevada. The action was brought by putative plaintiffs on behalf of our company against certain of our officers and directors. We have filed a Motion to Dismiss the litigation. On March 3, 2010, the court granted our motion, dismissing the case in its entirety. Plaintiffs have until April 2, 2010 to appeal that decision. We are also involved in two purported stockholder derivative lawsuits in the U.S. District Court for the District of Massachusetts. These actions were brought by putative plaintiffs on behalf of our company against certain of our officers and directors. On January 29, 2010, plaintiffs filed their Verified Shareholder Complaint. We have until March 31, 2010 to answer or otherwise respond to that Complaint.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     We intend to defend ourselves vigorously in these class action and derivative lawsuits. There can be no assurance, however, that we will not have to pay significant damages or amounts in settlement above insurance coverage. An unfavorable outcome or prolonged litigation could harm our business. Litigation of this nature also is expensive and time consuming, and diverts the time and attention of our management.

     We monitor the status of known claims and the product liability accrual, which includes amounts for defense costs for asserted and unasserted claims. While it is difficult to forecast the outcome of these claims, we believe, after consultation with litigation counsel, that it is uncertain whether the outcome of these claims will have a material adverse effect on our financial position, results of operations, or cash flows. We believe that we have provided adequate reserves for defense costs. We do not anticipate material adverse judgments and intend to vigorously defend ourselves.

     At this time, an estimated range of reasonably possible additional losses relating to unfavorable outcomes cannot be made.

     We have recorded our liability for defense costs before consideration for reimbursement from insurance carriers. We have also recorded the amount due as reimbursement under existing policies from the insurance carriers as a receivable shown in other current assets and other assets.

     New Cases

     The following new cases were filed against us or became reportable during the three months ended January 31, 2010.

     Jay Dee Nelson, et. al. v. Smith & Wesson Corp., et al. in the United States District Court for the District of Alaska. The suit was filed in the State Court of Alaska on June 3, 2009 and removed to Federal Court on January 25, 2010 after service of process. The plaintiffs claim that plaintiff minor, Kariel Young, was injured and caused to be a paraplegic due to a Smith & Wesson         .22 caliber revolver being fired by Wyatt Nelson, a minor, on June 6, 2007. The plaintiffs’ claims allege product liability due to defective design, manufacture, and the lack of an effective safety lock on the .22 revolver when discharged by a minor. Plaintiffs’ Complaint asserts emotional distress, compensable damages, and punitive damages. We have filed a Motion to Dismiss the plaintiffs’ Complaint challenging the sufficiency of the pleadings as set forth by the plaintiffs. The plaintiffs have sought to remand the case to State Court. Both the Motion to Dismiss and the Motion to Remand remain pending with the District Court.

     Kelly Cousins v. Smith & Wesson Corp. In the United States District Court for the Eastern District of Louisiana. The Complaint was filed on April 28, 2009 in State Court in Louisiana and removed to Federal Court on May 26, 2009. The plaintiff seeks to recover damages for personal injuries allegedly sustained by Kelly Cousins on or about October 25, 2008 while attempting to holster his Walther PPK/S pistol. Plaintiff’s allegations assert claims of defective design and an unreasonably dangerous condition in the subject pistol and that a round discharged from the pistol causing injury to plaintiff’s leg On February 20, 2009, we announced a recall of certain Walther PPK/S pistols manufactured by us to correct a condition that may occur in certain of our pistols. We have inspected the pistol and filed liability and damage expert reports pursuant to the Court’s Case Management Order. Plaintiff untimely filed an expert liability report. On January 11, 2010, we filed a Motion for Summary Judgment. No decision has issued to date. Discovery is ongoing. A settlement conference is scheduled for March 18, 2010. Trial is scheduled for April 12, 2010.

     Jeremy McCutchen v. Thompson/Center Arms Company, Inc., et al., in the District Court of Harris County, Texas. The complaint, filed on December 21, 2009, asserts claims based on theories of strict liability, breach of warranty, negligence, and failure to warn. The plaintiff seeks unspecified money damages. The plaintiff claims to have been using a Thompson/Center Arms rifle on December 22, 2007 when the firearm allegedly malfunctioned causing injury to the plaintiff. Thompson/Center Arms filed an answer to plaintiff’s complaint on January 29, 2010 denying all allegations of liability. Discovery is ongoing. Trial has not yet been scheduled.

     Steve and Michelle Santoyo v. Bear Lake Holdings, Inc., d/b/a Thompson/Center Arms, et al., in the Circuit Court of Boone County, Missouri. The complaint, filed on or about February 11, 2010, asserts claims based on theories of strict liability, negligence, failure to warn, negligently supplying a dangerous instrumentality, loss of consortium, and punitive damages. The plaintiffs seek unspecified money damages. Plaintiff Steve Santoyo claims to have been using a Thompson/Center Arms Black Diamond muzzleloader on November 28, 2008, when the firearm allegedly malfunctioned causing injury to him. Our response to the complaint is due on April 1, 2010. Trial has not yet been scheduled.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     Cases Dismissed or Resolved

     Scott C. Worrall v. Smith & Wesson Corp., et. al., in the Superior Court for the State of Indiana for the County of Vigo. On February 25, 2010, this case was settled within the limits of our self-insured retention.

     Roger Foltz v. Smith & Wesson Corp., in the United States District Court for the Northern District of Texas. On August 24, 2009, the court granted our motion to dismiss and dismissed the case in its entirety. The plaintiff’s deadline to appeal has expired. The plaintiff did not appeal.

     Jesse James and Kay James v. Thompson/Center Arms Company, Inc., et. al., in the 151^st Judicial District for Harris County, Texas. On October 28, 2009, this case was settled within the limits of our self-insured retention.

     Paul “Rob” Lewis v. Smith & Wesson Corp., et. al., in the Superior Court of Washington, King County, in the state of Washington. On November 13, 2009, this case was settled within the limits of our self-insured retention.

     Steve J. Bezet v. Smith & Wesson Corp., in the United States District Court for the Middle District of Louisiana. On November 16, 2009, this case was settled within the limits of our self-insured retention.

     Jeremy T. Hunter and Alysha Hunter v. Smith & Wesson Corp., et al. in the United States District Court for the Southern District of Illinois. On August 14, 2009, this case was settled within the limits of our self-insured retention.

     Cases on Appeal

     The following case is still subject to appeal:

     Cary Green v. Smith & Wesson Holding Corp., et al. in the United States District Court for the District of Nevada. This action is a purported derivative action brought by plaintiffs on behalf of our company against certain of our officers and directors. The complaints seek to assert claims including alleged breach of fiduciary duties, waste of corporate assets, and unjust enrichment. The putative plaintiffs seek unspecified damages on behalf of our company from the individual defendants, and recovery of their attorneys’ fees. On April 29, 2008, the parties submitted, and the Court entered, a joint stipulation to stay this action in its entirety until 30 days after the United States District Court for the District of Massachusetts issues a ruling on any motion to dismiss the complaint filed in In re Smith & Wesson Holding Corp. Securities Litigation . On March 26, 2009, our motion in that case was granted as to Mr. Monheit and denied as to the remaining defendants. On June 11, 2009, we filed a motion to dismiss. On August 25, 2009, plaintiffs filed a Verified Amended Shareholder Derivative Complaint. On October 9, 2009, we filed a motion to dismiss plaintiff’s amended complaint. Plaintiff filed a brief opposing our motion to dismiss on November 6, 2009. On March 3, 2010, the court granted our motion to dismiss in its entirety. Plaintiffs have until April 2, 2010 to appeal.

     Pending Cases

     In re Smith & Wesson Holding Corp. Securities Litigation. This case is a consolidation of the following three cases: William Hwang v. Smith & Wesson Holding Corp., et al.; Joe Cranford v. Smith & Wesson Holding Corp., et al.; Joanne Trudelle v. Smith & Wesson Holding Corp., et al. It is pending in the United States District Court for the District of Massachusetts (Springfield), and is a purported securities class action lawsuit brought individually and on behalf of all persons who purchased the securities of our company between June 15, 2007 and December 6, 2007. The putative plaintiffs seek unspecified damages against us, certain of our officers, and our directors for alleged violations of Sections 10(b) and 20(a) of the Exchange Act. On February 11, 2008, the plaintiffs in each of the above-referenced actions filed motions for consolidation of the actions and to appoint lead class plaintiffs and lead counsel pursuant to the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The Oklahoma Firefighters Pension and Retirement System was appointed Lead Plaintiff of the putative class. On May 30, 2008, Lead Plaintiff Oklahoma Firefighters Pension and Retirement System filed a Consolidated Class Action Complaint seeking unspecified damages against us and several officers and directors for alleged violations of Sections 10(b) and 20(a) of the Exchange Act. On August 28, 2008, we and the named officers and directors moved to dismiss the Consolidated Amended Complaint because it fails to state a claim under the federal securities laws and the PSLRA. The putative class Lead Plaintiff submitted its Opposition to our motion on October 28, 2008. We filed our reply to that Opposition on December 12, 2008. A hearing was held on our motion to dismiss on January 12, 2009. On March 26, 2009, our motion was granted as to Mr. Monheit and denied as to the remaining defendants. Our brief in opposition was filed on March 8, 2010. Discovery is ongoing. Trial is scheduled to begin on February 7, 2011.

     Art Bundy v. Smith & Wesson Holding Corp., et al.; and Dwight Nance v. Smith & Wesson Holding Corp., et al.; in the United States District Court for the District of Massachusetts. These actions were filed on or about October 15, 2009. They are purported derivative actions brought by two separate plaintiffs on behalf of our company against certain of our officers and directors. The complaints allege that the officer and director defendants have breached their fiduciary duties by providing misleading statements

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

concerning the company’s earnings and business prospects for the fiscal year 2008. The complaints also assert that between June 14, 2007 and December 6, 2007, the officer and director defendants provided false statements about the company’s financial results. The putative plaintiffs seek unspecified damages on behalf of our company from the individual defendants, and recovery of their attorneys’ fees. A motion to consolidate the two actions was granted on December 15, 2009. On January 29, 2010, plaintiffs filed their Verified Consolidated Shareholder Derivative Complaint. We will answer or otherwise respond to the pleading by no later than March 31, 2010.

     Oren Gorden v. Smith & Wesson Corp., et. al., in the Territorial Court of the Virgin Islands, District of St. Croix. The complaint was filed on January 19, 2001 and seeks unspecified compensatory damages for personal injuries allegedly sustained by Mr. Gorden. The complaint alleges that Mr. Gorden’s Smith & Wesson handgun malfunctioned and exploded when he tried to load it. We filed an answer denying all allegations of liability. On November 17, 2003, the firearm at issue in this case was lost in transit by a commercial carrier while it was being returned by us to plaintiff. On April 21, 2004, the court denied our motion for summary judgment and extended the pretrial deadlines. Mediation was conducted on April 13, 2005. Expert discovery is ongoing. A status conference was held on October 29, 2007. Trial rescheduled for May 10, 2010 was set aside. No new trial date has been scheduled.

     Todd Brown and Kathy Brown v. Smith & Wesson Corp., in the United States District Court for the Western District of Arkansas. The complaint, filed on July 18, 2008, asserts claims for negligence, strict liability, and breach of warranty. The plaintiff seeks unspecified money damages. The plaintiff claims to have been using a Smith & Wesson Model 460 revolver on December 26, 2007 when he sustained injuries to his left hand during the firing of the revolver. The plaintiff alleges that we failed to provide adequate warnings regarding the risk of personal injury associated with the gases escaping from the barrel cylinder gap of the revolver during firing. We filed our Answer to the Complaint on August 14, 2008, denying plaintiff’s allegations of liability. Discovery is ongoing. Trial is scheduled to begin on June 28, 2010.

     Mark D. Lee v. Smith & Wesson Corp., et al., in the Court of Common Pleas of Richland County, Ohio. This civil action, filed on November 11, 2008, alleges that the plaintiff sustained an injury to his right eye on November 11, 2006 while operating a Smith & Wesson Model 460 XVR revolver. The plaintiff seeks unspecified damages against us and the seller of the firearm. The complaint alleges that this incident occurred when the cylinder of the revolver swung open upon firing, allowing gases and particles to escape from the firearm during firing. The complaint asserts claims for negligence, strict liability, and breach of warranty. On January 2, 2009, we filed a motion to strike and a partial motion to dismiss certain portions of plaintiff’s complaint. On January 9, 2009 our motion was denied by the court. On February 4, 2009, we filed our answer to plaintiff’s complaint. Discovery is ongoing. Trial was rescheduled for September 7, 2010.

     Chester Wolfe, et. al. v. Smith & Wesson Holding Corporation, et. al. in the Common Pleas Court of Miami County, Ohio. The complaint, filed on December 16, 2008, alleges that the plaintiff sustained an amputation of his left thumb on December 25, 2007, while operating a Smith & Wesson Model 460 revolver, due to gas escaping from the barrel cylinder gap at the front of the revolver. Plaintiffs allege products liability asserting claims for design and manufacturing defect, failure to warn, and loss of consortium. Plaintiffs seek damages in excess of $25,000. On January 14, 2009, we filed our answer denying plaintiffs’ allegations. On December 11, 2009, plaintiff withdrew their case against the dealer, leaving us as the only defendant in the case. On December 21, 2009, we removed the case to federal court. Discover is ongoing. Trial is scheduled to begin on August 15, 2011.

     Michael Robinson v. Smith & Wesson Corp., in Superior Court for the Judicial District of New London, in New London, Connecticut. The complaint, filed on May 8, 2009, seeks to recover damages for personal injuries allegedly sustained by the plaintiff on or about March 18, 2007. The plaintiff seeks unspecified monetary and punitive damages against us and a subsequent seller of the firearm. The plaintiff claims to have been injured when a Walther PPK/S firearm allegedly manufactured and distributed by us accidentally discharged. As it relates to us, the plaintiff alleges design and manufacturing defect, failure to warn, negligence, and breach of warranty, in that the Walther PPK/S pistol was defective in that it discharged without the trigger being pulled. Plaintiff also asserts a claim for temporary or permanent injunction to prevent us from modifying the firearm in question. On February 20, 2009, we announced a recall of Walther PPK/S pistols manufactured by us, to correct a condition that may occur in certain of our pistols. We will evaluate the impact the condition that led to the recall had on this firearm, if any. On June 18, 2009, we filed our answer and partial motion to dismiss. On October 22, 2009, our motion to strike the claim for punitive damages and portions of our motion to dismiss were granted. Discovery is ongoing. Trial is not yet scheduled.

     Brian Ward v. Thompson/Center Arms Company, Inc., et. al., in the Forty-Sixth Circuit Court for Otsego County, Michigan. The complaint was filed on October 16, 2006 and alleges that plaintiff sustained eye injuries using a Thompson/Center Arms rifle. Plaintiff asserts product liability claims against both Thompson/Center Arms and the retailer based on negligence and warranty principles. The plaintiff is seeking an unspecified amount of compensatory damages. On November 15, 2006, Thompson/Center Arms filed an answer

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

denying all allegations of liability. On February 2, 2009, the plaintiff filed a second amended complaint. On February 17, 2009, we filed our answer to plaintiff’s complaint. On October 9, 2009, we filed a motion for summary judgment. On October 21, 2009, plaintiff opposed our motion. A hearing on our motion for summary judgment was held on November 3, 2009. No decision has been issued to date. Expert discovery is ongoing. A case evaluation as required by the Michigan court was held on November 13, 2009, in which the panel recommended a settlement in favor of the plaintiff in the amount of $325,000. We rejected this proposed settlement award. On December 12, 2009, the court granted our motion for summary judgment on the manufacturing defect, failure to recall, and failure to test claims, and denied our motion on the design defect claims under the theories of risk-utility and failure to warn. A settlement conference is scheduled for August 5, 2010. Trial is scheduled to begin October 19, 2010.

Foreign Corrupt Practices Act (FCPA)

     On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the firearm industry, one of whom was our Vice President Sales, International & U.S. Law Enforcement. We were not charged in the indictment. On January 22, 2010, we were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. If the DOJ determines that we violated FCPA laws, we may face sanctions, including monetary penalties and administrative relief. In addition, we are incurring legal costs for our company as well as for our employee.

Environmental Remediation

     We are subject to numerous federal, state, and local laws that regulate the discharge of materials into, or otherwise relate to the protection of, the environment. These laws have required, and are expected to continue to require, us to make significant expenditures of both a capital and expense nature. Several of the more significant federal laws applicable to our operations include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act (“RCRA”).

     We have in place programs and personnel to monitor compliance with various federal, state, and local environmental regulations. In the normal course of our manufacturing operations, we are subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. We fund our environmental costs through cash flows from operations. We believe that we are in compliance with applicable environmental regulations in all material respects.

     We are required to remediate hazardous waste at our facilities. Currently, we own designated sites in Springfield, Massachusetts and are subject to two release areas, which are the focus of remediation projects as part of the Massachusetts Contingency Plan (“MCP”). The MCP provides a structured environment for the voluntary remediation of regulated releases. We may be required to remove hazardous waste or remediate the alleged effects of hazardous substances on the environment associated with past disposal practices at sites not owned by us. We have received notice that we are a potentially responsible party from the Environmental Protection Agency and/or individual states under CERCLA or a state equivalent at one site.

     We had reserves of $679 as of January 31, 2010 ($577 as non-current) for remediation of the sites referred to above and believe that the time frame for remediation is currently indeterminable. Therefore, the time frame for payment of such remediation is likewise currently indeterminable, thus making any net present value calculation impracticable. Our estimate of these costs is based upon currently enacted laws and regulations, currently available facts, experience in remediation efforts, existing technology, and the ability of other potentially responsible parties or contractually liable parties to pay the allocated portions of any environmental obligations. When the available information is sufficient to estimate the amount of liability, that estimate has been used; when the information is only sufficient to establish a range of probable liability and no point within the range is more likely than any other, the lower end of the range has been used. We may not have insurance coverage for our environmental remediation costs. We have not recognized any gains from probable recoveries or other gain contingencies. The environmental reserve was calculated using undiscounted amounts based on independent environmental remediation reports obtained.

     Pursuant to the merger agreement signed December 15, 2006, effective January 3, 2007, we completed the acquisition of Bear Lake Acquisition Corp. and its subsidiaries, including TCA, for $102,000 in cash. Under the agreement, the former stockholders of Bear Lake Acquisition Corp. have indemnified us for losses arising from, among other things, environmental conditions related to its manufacturing activities. Of the purchase price, $8,000 was placed in an escrow account, a portion of which will be applied to environmental remediation at the manufacturing site in Rochester, New Hampshire. In November 2008, $2,500 of the escrow account was released to the sellers. We are currently working on a remediation action plan with the sellers in order to remediate the environmental contamination found at the site. It is not presently possible to estimate the ultimate amount of all remediation costs and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

potential uses of the escrow. We believe the likelihood of environmental remediation costs exceeding the amount available in escrow to be remote.

     Based on information known to us, we do not expect current environmental regulations or environmental proceedings and claims to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. However, it is not possible to predict with certainty the impact on us of future environmental compliance requirements or of the cost of resolution of future environmental proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental laws and regulations are subject to modification and changes in interpretation. There can be no assurance that additional or changing environmental regulation will not become more burdensome in the future and that any such development would not have a material adverse effect on our company.

Deferred Compensation

     Post-Retirement Pension Plan — We have a senior executive supplemental retirement plan for certain TCA officers, which covered four former executives at January 31, 2010. Benefits under this plan are paid monthly (currently monthly benefit is $3 and is adjusted annually based on the percent change in the CPI for all Urban Consumers) for ten years following the retirement of an officer or director. This is an unfunded, non-qualified, and non-contributory plan under which all future obligations are paid by us. As of January 31, 2010, $562 has been accrued in the financial statements, based upon the present value of the estimated future obligation using a discount rate of 2.46% and the remaining months of commitment. Estimated future benefit payments by fiscal year are as follows: 2010 — $28; 2011 — $110; 2012 — $110; 2013 — $110; 2014 — $92; and thereafter — $159.

Suppliers

     The inability to obtain sufficient quantities of raw materials, components, and other supplies from independent sources necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the materials used in the production of our products are available only from a limited number of suppliers. In most cases, we do not have long-term supply contracts with these suppliers.

Contracts

     Agreements with Executives — We have entered into employment, change of control, or severance agreements with certain executive officers.

     Other Agreements — We have distribution agreements with third parties in the ordinary course of business.

     Outstanding Letters of Credit — We had open letters of credit aggregating $3,803 as of January 31, 2010, with a workers’ compensation bond for self insurance of $3,500 making up the majority of this amount.

(16) Derivative Financial Instruments and Hedging Activities:

     On May 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value Measurement,” which has now been primarily codified into the Fair Value Measurements and Disclosures Topic, ASC 820-10, for our financial assets and liabilities. We adopted the provisions of ASC 820-10 for non-financial assets and non-financial liabilities, which were previously deferred by the Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) 157-2, ASC 820-10-65, on May 1, 2009. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

     Financial assets and liabilities recorded on the accompanying consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

     Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access at the measurement date (examples include active exchange-traded equity securities, listed derivatives, and most U.S. Government and agency securities).

     Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets in which trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. Level 2 inputs include the following:

•

quoted prices for identical or similar assets or liabilities in non-active markets (such as corporate and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

			municipal bonds which trade infrequently);
	•		inputs other than quoted prices that are observable for substantially the full term of the asset or liability (examples include interest rate and currency swaps); and
	•		inputs that are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability (such as certain securities and derivatives).

     Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our assumptions about the assumptions a market participant would use in pricing the asset or liability. We currently do not have any Level 3 financial assets or liabilities.

     The following table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of January 31, 2010 and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

						Quoted Prices in
		January 31,				Active Markets
Description		2010				(Level 1)
Assets:
Cash and short-term deposits		$	37,045			$	37,045
Total assets		$	37,045			$	37,045
Liabilities:
Foreign Exchange Contracts		$	274			$	274
Contingent consideration (Note 2)			16,157				16,157
Total liabilities		$	16,431			$	16,431

     We purchase certain finished goods and component parts from a European supplier and pay for them in euros. We routinely purchase foreign exchange participating forward contracts to minimize the impact of fluctuations in foreign exchange rates. Participating forward contracts provide full protection for us against the devaluation of the U.S. dollar to the euro and partial benefit from the appreciation of the U.S. dollar to the euro. If the euro strengthens above the average rate, we will not pay more than the average rate. If the euro weakens below the average rate, 50% of the euros are purchased at the average rate and the remaining 50% are paid for at the spot rate. We have not elected to designate our derivative instruments as qualifying for hedge accounting treatment under ASC 815-20-25 and, accordingly, we record any gains and losses from these derivative contracts as an element of other income (expense) at each reporting period, based on the change in the estimated fair value of these contracts. We estimate the fair values of the derivative financial instruments based on the exchange rates of the underlying currency/euros.

     The following table presents information about derivatives outstanding as of January 31, 2010 and 2009:

Derivatives Not Designated		Balance Sheet Location
as Hedging Instruments		Liabilities				2010				2009
Foreign Exchange Contracts		Accrued Expenses				$	274			$	356
Contingent Consideration (Note 2)		Other Non-current Liabilities				$	16,157			$	—

     The following table presents information about the effect of derivative instruments on our financial performance for the nine months ended January 31, 2010 and 2009:

				Amount of Gain or (Loss)
		Location of Gain or		Recognized in Income on
Derivatives Not Designated		(Loss) Recognized in		Derivative
as Hedging Instruments		Income on Derivative		2010				2009
Foreign Exchange Contracts		Other income/(expense)		$	(189	)		$	(766	)
Contingent Consideration (Note 2)		Other income/(expense)			11,668				—

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     Other than those acquired in business combinations, long-lived tangible assets are recorded at cost and depreciated over their useful lives. Intangible assets and goodwill acquired in business combinations are tested for impairment on an annual basis on February 1^st and between annual tests if indicators of potential impairment exist.

(17) Recent Accounting Pronouncements:

Recently Issued Accounting Standards

     In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures About Fair Value Measurements. The amendments in this update require new disclosures about transfers into and out of Levels 1 (fair value determined based on quoted prices in active markets for identical assets and liabilities) and 2 (fair value determined based on significant other observable inputs) and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. Except for the detailed Level 3 roll-forward disclosures, the new standard is effective for interim and annual reporting periods beginning after December 31, 2009. The requirement to provide detailed disclosures about the purchases, sales, issuances, and settlements in the roll-forward activity for Level 3 fair value measurements is effective for interim and annual reporting periods beginning after December 31, 2010. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.

     In December 2009, the FASB issued ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, or ASU 2009-17. The amendments in this update replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. This standard is effective for fiscal years beginning on or after December 15, 2009. We do not expect the adoption of this guidance to have any impact on our consolidated financial statements.

     In December 2009, the FASB issued ASU No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets, or ASU 2009-16. The amendments in this update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. This standard is effective January 1, 2010 and applies with the adoption of SFAS No. 166, which it amends. The adoption of this standard will not have any impact on our consolidated financial statements.

     In October 2009, the FASB issued ASU No. 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing, or ASU 2009-15. ASU 2009-15 provides guidance on equity-classified share-lending arrangements on an entity’s own shares when executed in contemplation of a convertible debt offering or other financing. This standard is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those years for arrangements outstanding as of the beginning of those fiscal years. The adoption of this standard will not have any impact on our consolidated financial statements.

     In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangements That Include Software Elements — a consensus of the FASB EITF, or ASU 2009-14. ASU 2009-14 changes the accounting model for revenue arrangements that include tangible products and software elements. The amendments of this update provide additional guidance on how to determine which software, if any, relating to the tangible product also would be excluded from the scope of the software revenue recognition guidance. The amendments in this update also provide guidance on how a vendor should allocate arrangement consideration to deliverables in an arrangement that includes both tangible products and software as well as arrangements that have deliverables both included and excluded from the scope of software revenue recognition guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The adoption of this standard will not have any impact on our consolidated financial statements.

     In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 650): Multiple-Deliverable Revenue

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

Arrangements — a consensus of the FASB EITF, or ASU 2009-13. ASU 2009-13 will separate multiple-deliverable revenue arrangements. This update establishes a selling price hierarchy for determining the selling price of a deliverable. The amendments of this update will replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The amendments of this update will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The amendments in this update will require that a vendor determine its best estimated selling price in a manner consistent with that used to determine the price to sell the deliverable on a standalone basis. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are currently evaluating the potential impact of this standard on our consolidated financial statements.

     In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, which has not yet been codified in the ASC. This statement eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This statement is effective for fiscal years beginning after November 15, 2009. The adoption of this standard will not have any impact on our consolidated financial statements.

     In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), which has not yet been codified in the ASC. This guidance is a revision to pre-existing guidance pertaining to the consolidation and disclosures of variable interest entities. Specifically, it changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This guidance will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. This guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009. Early application is not permitted. We do not expect the adoption of this guidance to have any impact on our consolidated financial statements.

Recently Adopted Accounting Standards

     In September 2009, the FASB issued Accounting Standards Update No. 2009-12, Fair Value Measurements and Disclosure, or ASU 2009-12. This standard provides additional guidance on using the net asset value per share, provided by an investee, when estimating the fair value of an alternate investment that does not have a readily determinable fair value and enhances the disclosures concerning these investments. Examples of alternate investments, within the scope of this standard, include investments in hedge funds and private equity, real estate, and venture capital partnerships. This standard is effective for interim and annual periods ending after December 15, 2009. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value, or ASU 2009-05. ASU 2009-05 amends Accounting Standards Codification, or the Codification, Topic 820, Fair Value Measurements. Specifically, ASU 2009-05 provides clarification that, in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following methods: (i) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets and/or (ii) a valuation technique that is consistent with the principles of Topic 820 of the Codification (e.g. an income approach or market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. This standard is effective for the first reporting period, including interim periods, beginning after issuance. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” This statement modifies the GAAP hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July 2009, the FASB ASC, also known collectively as the “Codification,” is considered the single source of authoritative U.S. accounting and reporting standards, except for additional authoritative rules and interpretive releases issued by the SEC. Nonauthoritative guidance and literature would include, among other things, FASB Concepts Statements, American Institute of Certified Public Accountants Issue Papers and

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

Technical Practice Aids, and accounting textbooks. The Codification was developed to organize GAAP pronouncements by topic so that users can more easily access authoritative accounting guidance. It is organized by topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. This statement is effective for financial statements for interim and annual reporting periods ending after September 15, 2009. All accounting references have been updated, and therefore SFAS references have been replaced with ASC references.

     In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations,” which was primarily codified into the Business Combinations Topic, ASC 805. This guidance changes the accounting for business combinations, including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs, and the recognition of changes in the acquirer’s income tax valuation allowance. This guidance is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. Although the adoption of this guidance did not have any impact on our historical consolidated financial statements, our acquisition of USR on July 20, 2009 was accounted for under this guidance.

     In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51,” which was primarily codified into the Consolidations Topic, ASC 810-10-65. This guidance establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This guidance is effective for fiscal years beginning on or after December 15, 2008. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In December 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) in EITF Issue No. 07-01, “Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property,” which was primarily codified into the Collaborative Arrangements Topic, ASC 808-10. The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenue and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in ASC 605-45, Revenue Recognition Topic, and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification and amounts of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however, required disclosure under this guidance applies to the entire collaborative agreement. This guidance is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets,” which was primarily codified into the Intangibles – Goodwill and Other Topic, ASC 350-30-50. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2008, as well as interim periods within those fiscal years. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In May 2008, the FASB issued FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement),” which was primarily codified into the Debt with Conversion and Other Options Topic, ASC 470-20-25. This guidance requires that entities with convertible debt instruments that may be settled entirely or partially in cash upon conversion should separately account for the liability and equity components of the instrument in a manner that reflects the issuer’s economic interest cost. The effect of the proposed new rules for the debentures is that the equity component would be included in the paid-in-capital section of shareholders’ equity on an entity’s consolidated balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of convertible debt. This guidance is effective for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years, with retrospective application required. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In June 2008, the FASB ratified EITF Issue 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock,” which was primarily codified into the Derivatives and Hedging Topic, ASC 815-40. This guidance addresses the accounting for certain instruments as derivatives. Under this pronouncement, specific guidance is provided regarding requirements for an entity to consider embedded features as indexed to the entity’s own stock. This guidance is effective for fiscal

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

years beginning after December 15, 2008. Although the adoption of this guidance did not have any impact on our historical consolidated financial statements, our acquisition of USR on July 20, 2009 was accounted for under this pronouncement.

     In April 2009, the FASB issued FSP 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies,” which was primarily codified into the Business Combinations Topic, 805-20. This guidance requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. This guidance is effective for the fiscal years beginning after December 15, 2008. Although the adoption of this guidance did not have any impact on our historical consolidated financial statements, our acquisition of USR on July 20, 2009 was accounted for under this pronouncement.

     In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” which was primarily codified into the Fair Value Measurements and Disclosures Topic, ASC 820-10-65. This section provides guidance on how to determine the fair value of assets and liabilities under ASC 820 in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. This guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of this guidance did not have any impact on our consolidated financial statements.

     In April 2009, the FASB issued FSP 115-2 and FSP 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” which was primarily codified into the Investments – Debt and Equity Securities Topic, ASC 320-10-65. This guidance amends the other-than-temporary impairment guidance for debt securities to improve presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements. This guidance is effective for all reporting periods ending after June 15, 2009. Neither of these pronouncements had any impact on our consolidated financial statements.

     In April 2009, the FASB issued FSP 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” which was primarily codified into the Financial Instruments Topic, ASC 825-10-65. This guidance amends prior guidance to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This guidance is effective for all reporting periods ending after June 15, 2009. The disclosures in our consolidated financials statements comply with both of these pronouncements.

     In May 2009, the FASB issued SFAS No. 165, “Subsequent Events,” which was primarily codified into the Subsequent Events Topic, ASC 855. This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet data but before financial statements are issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009. The adoption of this guidance did not have any impact on our consolidated financial statements.

(18) Segment Reporting:

     We have two reportable segments: firearms and perimeter security. The firearm segment consists of products and services manufactured and sold from our Springfield, Massachusetts, Houlton, Maine, and Rochester, New Hampshire facilities, which includes primarily firearms, handcuffs, and related accessories sold through a distribution chain and direct sales to consumers and international, state, and federal governments. The perimeter security segment consists of products and services manufactured and sold from our Franklin, Tennessee facility, which includes the sales and installation of perimeter security products to military and large government or corporate customers. Operating costs are reported based on the activities performed within each segment.

     Segment assets are those directly used in or clearly allocable to an operating segment’s operations. For both segments, assets include accounts receivable, inventory, prepaid expenses, deferred tax assets, machinery and equipment, furniture and fixtures, and computer equipment. In addition, included in the assets of the firearm segment are intangible assets totaling $5,551 and land, buildings, and leasehold improvements totaling $53,429. Included in the assets of the perimeter security segment is goodwill totaling $80,507 and intangible assets totaling $10,656.

SMITH & WESSON HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended January 31, 2010 and 2009
(Dollars in thousands, except share data)

     Results by business segment are presented in the following table for the three months ended January 31, 2010:

						Perimeter
		Firearms				Security				Total
Net product and services sales		$	74,735			$	14,644			$	89,379
Operating income/(loss)		$	2,881			$	(955)	(a)		$	1,926
As a percentage of revenue			3.9	%			-6.5	%			2.2	%
Depreciation and amortization		$	2,798			$	1,149			$	3,947

     Results by business segment are presented in the following table for the nine months ended January 31, 2010:

						Perimeter
		Firearms				Security				Total
Net product and services sales		$	267,691			$	32,733			$	300,424
Operating income		$	30,560			$	(813)	(b)		$	29,747
As a percentage of revenue			11.4	%			-2.5	%			9.9	%
Depreciation and amortization		$	8,326			$	2,957			$	11,283
Assets		$	206,604			$	116,749			$	323,353

(19) Pro Forma Results (Unaudited):

     The following table reflects the unaudited pro forma results of operations assuming that the USR acquisition had occurred on May 1, 2008:

		For the nine months ended January 31,
Description		2010				2009
Net product and services sales		$	309,012			$	257,000
Net income/(loss)		$	27,169			$	(73,252)	(c)
Net income per share		$	0.43			$	(1.41	)

     The pro forma net income has been adjusted to reflect amortization of intangibles as if the acquisition had occurred on the first day of the corresponding fiscal year. No attempt has been made to adjust the income statement impact of the fair value of the contingent consideration liability that was recorded in the nine months ended January 31, 2010.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

     Please refer to the Overview found in the Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended April 30, 2009. This Overview sets forth key management objectives and key performance indicators used by management as well as key industry data tracked by management.

Third Quarter Fiscal 2010 Highlights

     Net sales for the three months ended January 31, 2010 were $89,379,000, a $5,667,000, or 6.8%, increase over net sales of $83,712,000 for the three months ended January 31, 2009. Firearm sales decreased for the three months by $7,982,000, or 10.2%, from the three months ended January 31, 2009 due to a combination of consumer demand returning to normal levels and less available product to ship during the current quarter because of correspondingly lower inventory levels at the start of this quarter.. Within the firearm category, law enforcement shipments increased 31.7%, driven by our M&P product line; however, overall pistol sales declined by 33.0% with a significant decrease in Sigmas driving the entire category down. Walther product sales grew 7.6% based on strong demand for the new PK380 pistol as well as increased production and availability of products manufactured in Walther’s factory in Germany. Tactical rifle sales remained strong, although not at the heightened demand levels seen in recent quarters, increasing by 18.2% in the quarter. Hunting firearm sales increased 5.6% over the comparable quarter last year, reflecting a stabilization of black powder sales and continued positive results in the Thompson/Center Arms branded bolt action product lines that were introduced over the past year. Perimeter security revenues were $14,644,000, more than 70% above revenues for the same quarter last year, in spite of a number of installation delays caused by significant snow storms along the East Coast.

     Gross profit as a percentage of net revenue was 28.0% for the three months ended January 31, 2010 compared with 25.7% for the three months ended January 31, 2009, reflecting a $2,242,000 reduction in warranty expense primarily related to the Walther PPK and PPK/S recall in the third fiscal quarter of 2009. Amortization of acquisition-related intangibles totaling $888,000 arising from the USR acquisition negatively impacted gross margin results while reduced promotional spending of $774,000 favorably impacted gross margins.

     The change in our stock price from $4.27 as of October 31, 2009 to $3.96 as of January 31, 2010 required us to adjust the liability related to the contingent consideration recorded in connection with our acquisition of USR. This resulted in a fair value adjustment of $1,304,000 recorded as other income during the three months ended January 31, 2010. In future periods, our income statement may be favorably or unfavorably affected by adjustment of this liability to then fair value by recording it at our stock price at future balance sheet dates. As a result, increases and decreases in the trading price of our common stock may have a significant effect on our net income and earnings per share reported under GAAP, totally apart from our operating results. In addition, any earnings guidance that we may give and any projections of our earnings by analysts will be subject to changes in our stock price.

     Net income for the three months ended January 31, 2010 was $2,380,000, or $0.04 per fully diluted share, compared with $2,355,000, or $0.05 per fully diluted share, for the three months ended January 31, 2009.

     Net sales for the nine months ended January 31, 2010 were $300,424,000, a $65,005,000, or 27.6%, increase over net sales of $235,419,000 for the nine months ended January 31, 2009. Firearm sales increased for the nine months by $36,061,000, or 16.6%, over the nine months ended January 31, 2009. Within the firearm category, pistol and revolver sales were flat compared to the prior year, driven by consumer demand and continued strong law enforcement and international sales growth in our M&P pistol product lines offset by capacity constraints. Walther product sales grew 26.8% based on the new PK380 pistol product introduction as well as increased production and availability of German manufactured products. Tactical rifle sales remained strong, increasing by 115.2% in the period accelerated by our increased capacity to fulfill consumer and law enforcement orders. Hunting firearm sales declined 6.3% from the prior year period on economic weakness early in the fiscal year impacting the black powder market, as well as the discontinuation of Smith & Wesson-branded bolt action rifles. Perimeter security revenues reached $32,733,000, more than 90% above revenues for the same period last year, with continued growth in order intake being hampered by weather-related installation delays.

     Gross profit as a percentage of net revenue was 31.7% for the nine months ended January 31, 2010 compared with 28.1% for the nine months ended January 31, 2009, reflecting a $2,095,000 reduction in warranty expense primarily related to the Walther PPK and PPK/S recall in the third quarter of fiscal 2009 combined with improvements in efficiency and overhead absorption in our Springfield facility as well as cost-reduction improvements and efficiencies realized in our Rochester facility. Amortization of acquisition-related intangibles totaling $2,427,000 negatively impacted gross margin results while reduced promotional spending of $1,890,000 improved gross margins.

     During fiscal 2009, we determined that the goodwill and long-lived assets related to our acquisition of Thompson/Center Arms were impaired due to severe economic and market conditions that appeared to be continuing and other factors. Based on this determination under applicable accounting standards, we recorded an impairment charge of $98,243,000, less related deferred tax

liabilities of $21,766,000, yielding a $76,477,000 adverse impact to after-tax profits.

     The change in our stock price from $6.86 as of July 20, 2009, the date we acquired USR, to $3.96 as of January 31, 2010 required us to adjust the liability related to the contingent consideration recorded in connection with our acquisition of USR. This resulted in a fair value adjustment of $11,668,000 recorded as other income during the nine months ended January 31, 2010.

     Net income for the nine months ended January 31, 2010 was $28,258,000, or $0.46 per fully diluted share, compared with a loss of $71,622,000, or ($1.54) per fully diluted share, for the nine months ended January 31, 2009.

     On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from the firearm industry, one of whom was our Vice President Sales, International & U.S. Law Enforcement. We were not charged in the indictment. On January 22, 2010, we were served with a Grand Jury subpoena for the production of documents. We have always taken, and continue to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad. Although we are cooperating fully with the DOJ in this matter, the DOJ may determine that we have violated FCPA laws. We cannot predict when this investigation will be completed or its outcome. If the DOJ determines that we violated FCPA laws, we may face sanctions, including monetary penalties and administrative relief. In addition, we are incurring legal costs for our company as well as for our employee.

Results of Operations

Net Product and Services Sales

     The following table sets forth certain information relating to net product and services sales for the three months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Revolvers		$	18,061			$	22,338			$	(4,277	)			-19.1	%
Pistols			16,671				24,900				(8,229	)			-33.0	%
Walther			10,473				9,734				739				7.6	%
Tactical Rifles			10,369				8,774				1,595				18.2	%
Premium Products			4,603				3,282				1,321				40.2	%
Hunting Firearms			6,025				5,708				317				5.6	%
Parts & Accessories			3,883				3,331				552				16.6	%
Total Firearms			70,085				78,067				(7,982	)			-10.2	%
Perimeter Security			14,644				—				14,644				N/M
Handcuffs			1,570				1,448				122				8.4	%
Specialty Services			933				1,574				(641	)			-40.7	%
Other			2,147				2,623				(476	)			-18.1	%
Non-Firearms			19,294				5,645				13,649				241.8	%
Total		$	89,379			$	83,712			$	5,667				6.8	%

     Net sales for the three-month period ended January 31, 2010 increased over the comparable quarter last year because of the contribution of USR and increased capacity in tactical rifle production to fulfill strong consumer and law enforcement driven demand. Revolver sales decreased 19.1% from the comparable quarter last year in spite of continued strong consumer demand because of reduced inventory available to ship at the start of the current fiscal quarter. Pistol sales decreased 33.0%, driven by reduced available-to-ship inventory and a decline in consumer demand, particularly in the Sigma product lines. Our M&P pistol product lines were down 12.0%, with strong results in law enforcement and international channels offsetting a reduction in the sporting goods channel. Walther product sales grew 7.6% based on introduction of the PK380 as well as increased production and availability of the German manufactured products, such as the P22 and PPS. Introduction of our new M&P15-22 tactical rifle, as well as increases in our capacity to produce all tactical rifles to meet higher consumer demand, enabled us to achieve 18.2% growth in the quarter. New product offerings in Performance Center Pro Series handguns have increased sales on products within our premium product lines by 40.2% over the prior year comparable quarter. Hunting products stabilized with black powder products achieving a slight increase over the prior year quarter, and the impact of Thompson/Center bolt-action product offerings offsetting discontinued product offering close out sales. Parts and accessories sales increased over the prior year quarter because of an increased sales focus on hunting products. Perimeter security sales were nearly $15.0 million in spite of weather-related delays in installations throughout much of the United States.

     The order backlog as of January 31, 2010 was $116,749,000, of which $74,246,000 related to firearms, with the balance of $42,503,000 related to USR. The firearm order backlog was $48,897,000 lower than at the end of the comparable quarter last year and was reduced by $21,570,000 during the quarter due to shipments made, lower order intake during the quarter, and some order cancellation, but remained substantially higher than we typically experienced prior to the extraordinary increases in consumer demand in the third and fourth quarters of fiscal 2009.

     Sales into our sporting goods distribution channel were approximately $58,845,000 for the three months ended January 31, 2010, a decrease of 18.0% from the comparable quarter last year due primarily to a reduction in inventory available to ship during the current quarter as compared to the prior year quarter. Excluding USR sales, law enforcement sales of $7,057,000 were 31.7% higher than in the comparable quarter last year. Excluding $12,514,000 of USR sales, federal government sales of $922,000 increased $609,000, or 194.6%, over the three months ended January 31, 2009. International sales for the three months ended January 31, 2010 of $7,397,000 increased 28.4% over the comparable quarter last year and included firearm shipments to law enforcement agencies in Mexico, Thailand, Japan and Puerto Rico.

     The following table sets forth certain information relating to net product and services sales for the nine months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Revolvers		$	56,545			$	56,273			$	272				0.5	%
Pistols			64,391				64,190				201				0.3	%
Walther			29,938				23,619				6,319				26.8	%
Tactical Rifles			48,136				22,370				25,766				115.2	%
Premium Products			13,689				11,163				2,526				22.6	%
Hunting Firearms			26,023				27,763				(1,740	)			-6.3	%
Parts & Accessories			15,226				12,509				2,717				21.7	%
Total Firearms			253,948				217,887				36,061				16.6	%
Perimeter Security			32,733				—				32,733				N/M
Handcuffs			3,803				5,187				(1,384	)			-26.7	%
Specialty Services			4,109				5,018				(909	)			-18.1	%
Other			5,831				7,327				(1,496	)			-20.4	%
Non-Firearms			46,476				17,532				28,944				165.1	%
Total		$	300,424			$	235,419			$	65,005				27.6	%

     Net sales for the nine-month period ended January 31, 2010 increased over the comparable period last year primarily because of strong consumer driven growth in tactical rifle sales. Revolver and pistol sales were flat versus the comparable period last year with lower unit sales due to reduced availability of inventory for shipment entirely offset by lower promotional expenses in the current nine month period. Increases in the M&P pistol product lines to consumers, law enforcement, and international agencies in terms of units and sales dollars were offset by lower unit sales of Sigma products due to lower product available for sale. Walther product sales grew 26.8% based on the PK380 pistol product introduction as well as increased production and availability of the German manufactured products. Introduction of our new M&P15-22 tactical rifle as well as increases in our capacity to produce all tactical rifles to meet higher consumer demand led to increased sales of this product. New product offerings in the Classics series of handguns increased sales of products within our premium product lines by 22.6% over the prior year comparable period. Hunting products continued to be impacted by the weakness in the economy, with sales of our black powder products down slightly from the comparable period last year. In addition, Smith & Wesson-branded bolt-action rifles were discontinued late in fiscal 2009 and represent a decline in sales in the current year that is only partially offset by increased performance by Thompson/Center branded bolt-action rifles. Parts and accessories sales increased substantially because of an increased sales focus on hunting products and increased demand for parts and accessories in our handgun lines, reflecting the high demand for both new and used firearms. Perimeter security sales represented revenue that was recognized subsequent to our acquisition of USR on July 20, 2009.

     Sales into our sporting goods distribution channel were approximately $217,555,000 for the nine months ended January 31, 2010, an increase of 12.1% over the comparable period last year. Excluding $505,000 of USR sales, law enforcement sales of $22,154,000 were 30.9% higher than in the comparable period last year. Excluding $27,494,000 of USR sales, federal government sales of $3,106,000 increased $339,000, or 12.3%, over the nine months ended January 31, 2009. International sales for the nine months ended January 31, 2010 of $23,581,000 increased 17.2% over the comparable period last year and included firearm shipments to law enforcement agencies in Puerto Rico, Japan, Thailand, India, Korea, and Mexico.

Cost of Revenue and Gross Profit

     The following table sets forth certain information regarding cost of revenue and gross profit for the three months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Cost of revenue		$	64,363			$	62,182			$	2,181				3.5	%
% of net revenue			72.0	%			74.3	%
Gross profit			25,016				21,530			$	3,486				16.2	%
% of net revenue			28.0	%			25.7	%

     Gross profit for the three months ended January 31, 2010 increased as a result of the increase in sales and improved gross profit margins. Gross profit as a percentage of net revenue improved as a result of a $2,242,000 reduction in warranty expense in large part reflecting the Walther PPK and PPK/S recall that occurred in the third fiscal quarter of 2009. In addition, we reduced promotion spending by $774,000 during the third quarter of fiscal 2010 from the third quarter of fiscal 2009. The impact of our acquisition of USR on July 20, 2009 had an unfavorable impact on our gross profit as a percentage of net revenue as a result of amortization of

acquisition-related intangibles that reduced gross margin by $888,000 and lower than historical margins on selected strategic projects that also contained new product offerings.

     The following table sets forth certain information regarding cost of revenue and gross profit for the nine months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Cost of revenue		$	205,222			$	169,231			$	35,991				21.3	%
% of net revenue			68.3	%			71.9	%
Gross profit			95,202				66,188			$	29,014				43.8	%
% of net revenue			31.7	%			28.1	%

     Gross profit for the nine months ended January 31, 2010 increased as a result of the increase in sales and improved gross profit margins. As with the quarterly results, gross profit as a percentage of net revenue improved as a result of a $2,095,000 reduction in warranty expense, lower promotional spending and favorable absorption resulting from high production volume to meet consumer demand. In addition, reduced manufacturing spending and improved material efficiencies at our Rochester, New Hampshire facility contributed to the improved gross margin percentage. We reduced promotion spending by $1,890,000 during the first nine months of fiscal 2010 as compared with the first nine months of fiscal 2009. The impact of our acquisition of USR had an unfavorable impact on our gross profit as a percentage of net revenue as a result of amortization of acquisition-related intangibles that reduced gross margin by $2,427,000 and additional costs incurred as the business grows.

Operating Expenses

     The following table sets forth certain information regarding operating expenses for the three months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Research and development		$	1,166			$	700			$	466				66.6	%
Sales and marketing			8,703				7,244				1,459				20.1	%
General and administrative			13,221				9,064				4,157				45.9	%
Operating expenses		$	23,090			$	17,008			$	6,082				35.8	%
% of net revenue			25.8	%			20.3	%

     USR represented $3,147,000 of the increase in operating expenses, primarily in general and administrative. Excluding USR, operating expenses for the three months ended January 31, 2010 increased $2,935,000, resulting from increased sales and marketing expenses related to strategic growth initiatives, increased research and development costs related to our recently introduced M&P4 product line, and increased legal and consulting fees of $1,106,000 related to allegations against one of our employees under the Foreign Corrupt Practices Act, partially offset by reduced profit sharing and bad debt reserves charges.

     The following table sets forth certain information regarding operating expenses for the nine months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Research and development		$	3,087			$	2,093			$	994				47.5	%
Sales and marketing			24,209				22,323				1,886				8.4	%
General and administrative			38,159				28,973				9,186				31.7	%
Impairment of long-lived assets			—				98,243				(98,243	)			-100.0	%
Operating expenses		$	65,455			$	151,632			$	(86,177	)			-56.8	%
% of net revenue			21.8	%			64.4	%

     Excluding the impact of the impairment charge recorded in the second fiscal quarter of 2009 related to goodwill and other long-lived intangible assets related to our investment in Thompson/Center Arms and $6,306,000 of operating expense incurred in connection with our newly acquired USR operation, operating expenses for the nine months ended January 31, 2010 increased $5,760,000 because of increased profit sharing and management incentive compensation related to improved financial performance versus the prior year period, increased administrative costs related to our acquisition of USR, including legal and accounting-related consulting fees, and increased legal and consulting fees related to allegations against one of our employees under the Foreign Corrupt Practices Act. This was partially offset by lower amortization of intangibles due to our impairment of long-lived assets and Thompson/Center Arms and lower bad debt reserves charges that arose from the sudden decline in the economy in calendar 2008.

Income from Operations

     The following table sets forth certain information regarding income from operations for the three months ended January 31, 2010 and 2009 (dollars in thousands):

		2010				2009				$ Change				% Change
Income from operations		$	1,926			$	4,522			$	(2,596	)			57.4	%
% of net revenue			2.2	%			5.4	%