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                                                                   EXHIBIT 10.38

                               SEVERANCE AGREEMENT

         THIS SEVERANCE AGREEMENT ("Agreement") is made and entered into by and
between COLTON MELBY ("Melby") and SMITH & WESSON HOLDING CORP., ("S&W") as of
this 5th day of December, 2003.

                                    RECITALS:

         A.       Melby was employed by S&W as its President through December 5,
                  2003. Melby is also the member of the Board of Directors of
                  S&W as of the date of this Agreement.

         B.       On November 30, 2003, Melby advised the Audit Committee of the
                  Board of Directors of S&W that he would resign as President
                  effective as of December 5, 2003, but will remain as a
                  director of S&W.

         C.       S&W has agreed to provide severance payments to Melby through
                  the end of the 2004 calendar year.

         D.       The parties desire to document the terms of the severance
                  agreement.

         NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties agree
as follows:

                                   AGREEMENT:

1.       RESIGNATION BY MELBY. Melby's last day of employment with S&W shall be
         December 5, 2003 (the "Resignation Date").

2.       CONSIDERATION BY S&W. In consideration of Melby's performance of his
         obligations under this Agreement and in satisfaction of all claims and
         benefits under any employee benefit plans maintained by S&W, S&W shall
         provide Melby with the following consideration.

         2.1.     Severance Payments. S&W shall pay Melby $240,000, payable in
                  semi-monthly installments either by check or direct deposit,
                  beginning on the next regularly scheduled pay period and
                  continuing through December 31, 2004 (the "Severance Period").

         2.2.     Benefits. S&W shall continue to provide the following benefits
                  to Melby during the Severance Period to the extent permissible
                  under, and in accordance with, the terms and conditions of
                  such plans or policies: a car allowance of $9,600 per year,
                  payment of life insurance premiums of [$899] per year and
                  payment of long term disability premiums of [$7,580.01] per
                  year. Upon expiration of the Severance Period, S&W shall
                  assign any life insurance and disability policies to Melby and
                  grant him the right to continue coverage and make the premium
                  payments himself.

         2.3.     Stock Options. As provided in S&W's 2001 Stock Option Plan,
                  dated May 31, 2001 (the "Option Plan"), Melby may, within
                  three (3) months following the Resignation Date, purchase any
                  of the shares to which he was entitled to exercise his option
                  as of the Resignation Date.

         2.4.     Office Space. Melby shall immediately relinquish his office
                  space located at 14500 N. Northsight Boulevard, Suite 116
                  Scottsdale, Arizona 85260 and remove all personal items
                  therefrom. However, for as long as Melby serves as a director,
                  Melby will have the right to maintain an office at S&W's
                  expense, which office may not exceed the square footage of his
                  existing office nor exceed the lease payments, on a per square
                  foot basis, of S&W's offices in
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                  Scottsdale, Arizona. Such office may be located anywhere other
                  than the building in which S&W presently maintains its
                  offices. S&W will also pay for a secretary to be shared by
                  Melby and Mitchell Saltz for as long as Melby and Mitchell
                  Saltz serve as directors. Further, as long as Melby serves as
                  a director, he may use all equipment, furniture, computers,
                  television or any other items of personal property which is
                  the property of S&W presently located in his office at the
                  corporate headquarters (collectively, "Company Property").
                  Company Property shall be returned to S&W no later than 15
                  days after the later of the Severance Period or when Mr. Melby
                  is no longer on the Board.

         2.5.     All payments and benefits under this Section are subject to
                  applicable federal withholding tax and any other taxes as
                  required by law. Melby understands that he will receive no
                  other wage, benefit, or other payment from S&W other than the
                  consideration described in this Section or future
                  consideration for service as a director of S&W.

3.       VOTING OF SHARES.

         At all votes of shareholders of S&W on or before December 31, 2005,
Melby shall not directly or indirectly cause or permit any shares beneficially
owned by Melby to be voted for any person other than the nominees recommended by
the Nominating Committee of the Board of Directors of S&W and nominated by the
Board of Directors in S&W's proxy statements. The foregoing voting obligations
shall not apply if either Mitchell Saltz or Melby are not recommended by the
Nominating Committee to be nominated to stand for election to the Board of
Directors by the shareholders.

4.       NON-DISPARAGEMENT.

         Neither (i) the officers or directors of S&W and its affiliates nor
(ii) Melby and his affiliates (including Melby's trust beneficiaries,
representatives, agents, attorneys, dependents, administrators, executors,
heirs, assigns, predecessors and successors-in-interest) shall provide oral or
written information or disparage or in any manner cause harmful remarks or
comments to be disseminated to any third parties regarding the business,
aptitude, skills, practices, procedures, operations, methods, or any other
subject which may have a detrimental impact on the future business prospects or
extant business relationships of the other, except as required by law if called
as a witness in any court proceedings.

         4.1.     Injunctive Relief. Melby and S&W each acknowledge that the
                  restrictions contained in this Section 2 are a reasonable and
                  necessary protection of the immediate interests of each of
                  them and that any violation of these restrictions would cause
                  substantial injury to the other. In the event of a breach or
                  threatened breach by Melby or S&W of these restrictions, S&W
                  or Melby, as applicable, shall be entitled to apply to any
                  court of competent jurisdiction for an injunction restraining
                  the breaching party from such breach or threatened breach;
                  provided, however, that the right to apply for an injunction
                  shall not be construed as prohibiting S&W or Melby from
                  pursuing any other available remedies for such breach or
                  threatened breach.

5.       SUCCESSORS.

         This Agreement shall be binding upon Melby and upon his heirs,
administrators, representatives, executors, successors and assigns. This
Agreement shall be binding upon S&W and upon its heirs, administrators,
representatives, executors, successors and assigns.

6.       ASSIGNMENT OF PAYMENTS.

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         Any right or interest to or in any payments shall be fully assignable
by Melby including but not limited to one or more beneficiaries to receive any
amount that may be payable after his death (and shall remain enforceable by
Melby' estate).

7.       GOVERNING LAW.

         This Agreement is made and entered into in the State of Arizona and
shall in all respects be interpreted, enforced and governed under the laws of
that state.

8.       VENUE.

         Melby and S&W hereby irrevocably agree that any legal action or
proceeding arising out of or relating to this Agreement or any actions
contemplated hereby shall be brought in a court of competent jurisdiction
located in the state of Arizona.. Melby and S&W hereby expressly submit to the
personal jurisdiction and venue of such courts for the purposes thereof and
expressly waive any claim of improper venue and any claim that such courts are
an improper forum. Melby and S&W hereby irrevocably consent to the service of
process of any of the aforementioned courts in any suit, action or proceeding.

9.       SEVERABILITY.

         Should any of the provisions of this Agreement be declared or be
determined by any court to be illegal or invalid, the validity of the remaining
parts, terms or provisions shall not be affected thereby and said illegal or
invalid part, term or provision shall be deemed not to be a part of this
Agreement.

10.      SUCCESSORS TO S&W.

         Except as otherwise provided herein, this Agreement shall be binding
upon and inure to the benefit of S&W and any successor of S&W, including,
without limitation, any corporation or corporations acquiring directly or
indirectly all or substantially all of the assets of S&W whether by merger,
consolidation, sale or otherwise (and such successor shall thereafter be deemed
"S&W" for the purposes of this Agreement), but shall not otherwise be assignable
by S&W.

11.      ENTIRE AGREEMENT.

         This Agreement sets forth the entire agreement between the parties
thereto and fully supersedes any and all prior agreements, other than the
Indemnification Agreement dated September 8, 2002, the Option Plan and any
applicable stock option agreement, for understandings between the parties
thereto pertaining to the subject matter thereof.

                                    /s/ Colton Melby
                                    -----------------------------------------
                                    Colton Melby

                                    SMITH & WESSON HOLDING CORPORATION


                                    By: /s/ Roy C. Cuny
                                        -------------------------------------
                                    Its: Chief Executive Officer and Chairman
                                         ------------------------------------
                                         of the Board
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