10-Q

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

For the quarterly period ended October 29, 2005

OR

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

For the transition period from                                          to                                         

Commission File Number 1-32545

DSW INC.

(Exact name of registrant as specified in its charter)

Ohio	31-0746639
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
4150 East 5th Avenue Columbus, Ohio	43219
(Address of principal executive offices)	(Zip Code)

(614) 237-7100

Registrant’s telephone number, including area code

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

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 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ

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 number of outstanding Class A common shares, without par value, as of November 30, 2005 was 16,189,578 and Class B common shares, without par value, as of November 30, 2005 was 27,702,667.

DSW INC.

TABLE OF CONTENTS

Part I. Financial Information
	Item 1. Financial Statements
		Condensed Consolidated Balance Sheets at October 29, 2005 and January 29, 2005	3
		Condensed Consolidated Statements of Income for the three and nine months ended October 29, 2005 and October 30, 2004	4
		Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended October 29, 2005 and October 30, 2004	5
		Condensed Consolidated Statements of Cash Flows for the nine months ended October 29, 2005 and October 30, 2004	6
		Notes to the Condensed Consolidated Financial Statements	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		25
	Item 4. Controls and Procedures		25
Part II. Other Information
	Item 1. Legal Proceedings		26
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27
	Item 3. Defaults Upon Senior Securities		27
	Item 4. Submission of Matters to a Vote of Security Holders		27
	Item 5. Other Information		27
	Item 6. Exhibits		27
Signature			28
Index to Exhibits			29
Exhibit 4.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DSW INC.

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, except share amounts)

(unaudited)

	October 29,			January 29,
	2005			2005
ASSETS
Cash and equivalents	$	57,065		$	8,339
Accounts receivable, net		17,276			2,291
Receivables from related parties		14,779
Inventories		229,387			208,015
Prepaid expenses and other assets		15,196			8,940
Deferred income taxes		16,845			20,261
Total current assets		350,548			247,846
Advances to affiliates					23,676
Property and equipment, net		97,384			90,056
Goodwill		25,899			25,899
Tradenames and other intangibles, net		6,432			7,079
Deferred income taxes and other assets		2,768			881
Total assets	$	483,031		$	395,437
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	69,393		$	72,073
Accounts payable to related parties		336			47
Accrued expenses:
Compensation		6,655			6,804
Taxes		16,127			12,560
Other		32,256			17,443
Total current liabilities		124,767			108,927
Long-term obligations, net of current maturities					55,000
Other noncurrent liabilities		63,756			52,684
Commitments and contingencies
Shareholders’ equity:
Class A Common Shares, no par value; 170,000,000 authorized; 16,189,001 and none issued and outstanding, respectively		280,269
Class B Common Shares, no par value; 100,000,000 authorized; 27,702,667 and 27,702,667 issued and outstanding, respectively					101,442
Preferred Shares, no par value; 100,000,000 authorized; no shares issued or outstanding
Retained earnings		15,968			77,384
Deferred compensation		(1,729	)
Total shareholders’ equity		294,508			178,826
Total liabilities and shareholders’ equity	$	483,031		$	395,437

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

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DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)

	Three months ended						Nine months ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net sales	$	302,240		$	262,444		$	860,257		$	729,406
Cost of sales		(219,221	)		(184,991	)		(618,077	)		(517,427	)
Gross profit		83,019			77,453			242,180			211,979
Operating expenses		(65,292	)		(60,664	)		(188,712	)		(165,751	)
Operating profit		17,727			16,789			53,468			46,228
Interest income (expense), net
Non-related parties		149			(989	)		(1,792	)		(2,460	)
Related parties								(6,592	)
Earnings before income taxes		17,876			15,800			45,084			43,768
Income tax provision		(6,965	)		(6,358	)		(17,942	)		(17,613	)
Net income	$	10,911		$	9,442		$	27,142		$	26,155
Basic and diluted earnings per share:
Basic	$	0.25		$	0.34		$	0.78		$	0.94
Diluted	$	0.25		$	0.34		$	0.77		$	0.94
Shares used in per share calculations:
Basic		43,891			27,703			34,994			27,703
Diluted		44,066			27,703			35,080			27,703

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

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DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands)

(unaudited)

	Number of
	Class A		Class B		Class A		Class B						Deferred
	Common		Common		Common		Common			Retained			Compensation
	Shares		Shares		Shares		Shares			Earnings			Expense			Total
Balance, January 31, 2004				27,703			$	101,442		$	42,429					$	143,871
Net income											26,155						26,155
Balance, October 30, 2004				27,703			$	101,442		$	68,584					$	170,026
Balance, January 29, 2005				27,703			$	101,442		$	77,384					$	178,826
Sale of stock		16,172			$	277,937											277,937
Net income											27,142						27,142
Dividend to parent								(101,442	)		(88,558	)					(190,000	)
Restricted stock units granted						1,887							$	(1,887	)
Amortization of deferred compensation expense														158			158
Stock units granted		16				422											422
Exercise of stock options		1				23											23
Balance, October 29, 2005		16,189		27,703	$	280,269	$	0		$	15,968		$	(1,729	)	$	294,508

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

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DSW INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine months ended
	October 29,			October 30,
	2005			2004
Cash flows from operating activities:
Net income	$	27,142		$	26,155
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,229			9,770
Amortization of debt issuance costs		582			382
Amortization of deferred compensation expense		158
Deferred income taxes		2,223			(3,959	)
Loss on disposal of assets		250			52
Change in working capital, assets and liabilities:
Accounts receivable		(14,985	)		(4,440	)
Accounts receivable from related parties		(14,779	)
Inventories		(21,372	)		(48,440	)
Prepaid expenses and other assets		(6,962	)		(1,022	)
Advances to/from affiliates		23,676			(12,621	)
Accounts payable		(3,789	)		20,091
Proceeds from lease incentives		8,972			10,396
Other noncurrent liabilities		2,100			(1,008	)
Accrued expenses		18,293			8,741
Net cash provided by operating activities		35,738			4,097
Cash flows from investing activities:
Capital expenditures		(19,850	)		(19,860	)
Proceeds from sale of assets		26			42
Net cash used in investing activities		(19,824	)		(19,818	)
Cash flows from financing activities:
Payments on capital lease obligations					(138	)
Proceeds from sale of stock		277,937
Payment of note to parent		(190,000	)
Net (decrease) increase in revolving credit facility		(55,000	)		20,000
Debt issuance costs		(570	)
Grant of stock units		422
Proceeds from exercise of stock options		23
Net cash provided by financing activities		32,812			19,862
Net increase in cash and equivalents		48,726			4,141
Cash and equivalents, beginning of period		8,339			7,076
Cash and equivalents, end of period	$	57,065		$	11,217

The accompanying Notes are an integral part of the Condensed Consolidated Financial Statements.

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.	BUSINESS OPERATIONS
	DSW Inc. (“DSW”) and its wholly-owned subsidiary, DSW Shoe Warehouse, Inc. (“DSWSW”), are herein referred to collectively as DSW or the Company. Prior to December 2004, DSW was a wholly-owned subsidiary of Value City Department Stores, Inc., a wholly-owned subsidiary of Retail Ventures, Inc. (“RVI”). In December 2004, RVI completed a corporate reorganization whereby Value City Department Stores, Inc. merged with and into Value City Department Stores LLC (“Value City”), another wholly-owned subsidiary of RVI. In turn, Value City transferred all of the issued and outstanding shares of DSW to RVI in exchange for a promissory note. On June 29, 2005, DSW commenced an initial public offering (“IPO”) that closed on July 5, 2005. DSW is listed on the New York Stock Exchange trading under the symbol “DSW”.
	DSW operates in a single segment and sells better-branded footwear and accessories. As of October 29, 2005, DSW operated a total of 197 stores located throughout the United States. The DSW stores offer a wide selection of brand name and designer dress, casual and athletic footwear for men and women. DSW also supplies leased shoe departments for three non-affiliated retailers under supply agreements. Under these supply agreements, DSW supplies merchandise for shoe departments in Stein Mart, Inc. (“Stein Mart”), Gordmans, Inc. (“Gordmans”) and Frugal Fannie’s Fashion Warehouse (“Frugal Fannie’s”). These agreements were entered into in July 2002, June 2004 and September 2003, respectively. Additionally, pursuant to a license agreement with Filene’s Basement, Inc. (“Filene’s Basement”), a wholly-owned subsidiary of RVI, DSW supplies leased shoe departments in most Filene’s Basement stores. As of October 29, 2005, DSW supplied 157 leased departments for Stein Mart, 53 for Gordmans, 25 for Filene’s Basement and one for Frugal Fannie’s.
	During the three months and nine months ended October 29, 2005, DSW opened 13 and 27 new DSW stores, respectively, and, during the nine months ended October 29, 2005, we re-categorized two DSW/Filene’s Basement combination locations as leased shoe departments which are included in DSW.
2.	INITIAL PUBLIC OFFERING
	On July 5, 2005, DSW closed on its IPO of 14,062,500 Class A common shares. In connection with this offering, DSW granted an option to the underwriters to purchase up to an additional 2,109,375 Class A common shares to cover over-allotments, which option was exercised in full by the underwriters and also closed on July 5, 2005. DSW sold 16,171,875 Class A common shares raising net proceeds of $285.8 million, net of the underwriters’ commission and before estimated expenses of approximately $7.9 million. DSW used the net proceeds of the offering to repay $196.6 million of intercompany indebtedness, including interest, owed to RVI and for working capital and general corporate purposes, including the paying down of $20 million outstanding on DSW’s old secured revolving credit facility and $10 million intercompany advance. The 410.09 common shares of DSW held by RVI outstanding

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

	at January 29, 2005 were converted to 27,702,667 Class B common shares. It is the 27,702,667 Class B common shares which are being used in the prior period’s calculation of earnings per share. Subsequent to the IPO, the transactions between DSW and RVI and its other subsidiaries are settled in accordance with a shared services agreement and resulted in the advances from affiliates being classified as a current receivable.
3.	BASIS OF PRESENTATION
	The accompanying unaudited interim financial statements should be read in conjunction with the final prospectus dated June 28, 2005 included in DSW’s Registration Statement on Form S-1 (No. 333-123289).
	In the opinion of management, the unaudited interim financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the consolidated financial position and results of operations for the periods presented.
4.	STOCK BASED COMPENSATION
	DSW has various stock-based employee compensation plans. DSW accounts for those plans in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no stock-based employee compensation cost has been recognized for the fixed stock option plans. The following table illustrates the effect on net income and income per share if DSW had applied the fair value recognition of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation.”

	Three months ended					Nine months ended
	October 29,			October 30,		October 29,			October 30,
	2005			2004		2005			2004
	(in thousands, except per share amounts)
Net income, as reported	$	10,911		$	9,442	$	27,142		$	26,155
Add: Stock-based employee compensation expense included in reported net income, net of tax		70					94
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(628	)				(839	)
Pro forma net income	$	10,353		$	9,442	$	26,397		$	26,155
Income per share:
Basic as reported	$	0.25		$	0.34	$	0.78		$	0.94
Diluted as reported	$	0.25		$	0.34	$	0.77		$	0.94
Basic pro forma	$	0.24		$	0.34	$	0.75		$	0.94
Diluted pro forma	$	0.23		$	0.34	$	0.75		$	0.94

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

5.

EARNINGS PER SHARE

Basic earnings per share are based on net income and a simple weighted average of Class A and Class B common shares and directors stock units outstanding. Diluted earnings per share reflect the potential dilution of Class A common shares related to outstanding stock options and restricted stock units. The numerator for the diluted earnings per share calculation is net income. The denominator is the weighted average diluted shares outstanding.

	Three months ended				Nine months ended
	October 29,		October 30,		October 29,		October 30,
	2005		2004		2005		2004
	(in thousands)
Weighted average shares outstanding		43,891		27,703		34,994		27,703
Assumed exercise of dilutive stock options		76				41
Restricted stock units		99				45
Number of shares for computation of dilutive earnings per share		44,066		27,703		35,080		27,703

	For the three months and nine months ended October 29, 2005, all potentially dilutive stock options were dilutive. For the three months and nine months ended October 30, 2004, there were no potentially dilutive instruments outstanding.
6.	ADOPTION OF ACCOUNTING STANDARDS
	The Financial Accounting Standards Board (“FASB”) periodically issues Statements of Financial Accounting Standards (“SFAS”), some of which require implementation by a date falling within or after the close of the fiscal year.
	In December 2004, the FASB issued SFAS No. 123 (revised 2004) Share-Based Payment (“SFAS No. 123R”). This statement revised SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) and requires a fair value measurement of all stock-based payments to employees, including grants of employee stock options and recognition of those expenses in the statements of operations. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services and focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. In addition, SFAS No. 123R will require the recognition of compensation expense over the period during which an employee is required to provide service in exchange for an award. The effective date of this standard was originally established to be interim and annual periods beginning after June 15, 2005.

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

	In April 2005, the SEC delayed the compliance date for SFAS No. 123R until the beginning of DSW’s 2006 fiscal year. DSW is currently evaluating the impact of this statement and has not yet determined the method of adoption under SFAS No. 123R and whether the adoption will result in amounts that are similar to the pro forma disclosures currently required under SFAS No. 123 (see note 4, “Stock Based Compensation”).
7.	LONG-TERM OBLIGATIONS
	In March 2005, DSW and RVI and certain of their affiliates increased the ceiling under their then-existing revolving credit facility from $350 million to $425 million. The increase of $75 million to the revolving credit facility was accomplished by amendment under substantially the same terms as the then-existing revolving credit agreement.
	In March 2005, DSW declared a dividend and issued an intercompany note to RVI in the amount of $165 million. The indebtedness evidenced by this note was scheduled to mature in March 2020 and bore interest at a rate equal to London Interbank Offered Rate, or LIBOR, plus 850 basis points per year.
	In May 2005, DSW declared an additional dividend and issued an intercompany note to RVI in the amount of $25 million. The indebtedness evidenced by this note was scheduled to mature in May 2020 and bore interest at a rate equal to LIBOR, plus 950 basis points per year.
	In July 2005, subsequent to the IPO, DSW prepaid in full, without penalty, the principal balance of both the $165 million and $25 million dividend notes, plus accrued interest of approximately $6.6 million.
	In July 2005, upon the consummation of DSW’s IPO, RVI and the lenders thereunder amended or terminated the existing credit facilities and other debt obligations of Value City and its other affiliates, including certain facilities under which DSW had rights and obligations as a co-borrower and co-guarantor and released DSW and DSWSW from their obligations as co-borrowers and co-guarantors. At the same time, DSW entered into a new $150 million secured revolving credit facility with a term of five years. Under this new facility, DSW and its subsidiary, DSWSW, are named as co-borrowers. The new secured revolving credit facility has borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. DSW’s obligations under its new secured revolving credit facility are collateralized by a lien on substantially all of DSW’s and its subsidiary’s personal property and a pledge of all of its shares of DSWSW. In addition, this facility contains usual and customary restrictive covenants relating to its management and the operation of its business. These covenants, among other things, restrict DSW’s ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem its stock, enter into transactions with affiliates and merge or consolidate with another entity. In addition, if at any time DSW utilizes over 90% of its borrowing capacity under this facility, it must comply with a fixed charge coverage ratio test set forth in the facility documents. At October 29, 2005, DSW

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

	had no balance outstanding and was in compliance with the terms of the secured revolving credit facility.
8.	SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

	Nine months ended
	October 29,		October 30,
	2005		2004
	(in thousands)
Cash paid during the period for:
Interest
Non-related parties	$	1,544	$	2,166
Related parties		6,592
Income taxes	$	13,678	$	3,279
Noncash investing and operating activities –
Changes in accounts payable due to asset purchases	$	1,398	$	(58	)

9.	COMMITMENTS AND CONTINGENCIES
	On March 8, 2005, RVI announced that it had learned of the theft of credit card and other purchase information from a portion of DSW customers. On April 18, 2005, RVI issued the findings from its investigation into the theft. The theft took place primarily over two weeks and covered all customers who made purchases at 108 DSW stores, primarily during a three-month period from mid-November 2004 to mid-February 2005. Transaction information involving approximately 1.4 million credit cards was obtained. For each card, the stolen information included credit card or debit card numbers, name and transaction amount. In addition, data from transactions involving approximately 96,000 checks were stolen. In these cases, checking account numbers and driver’s license numbers were obtained.
	The Company has contacted and is cooperating with law enforcement and other authorities with regard to this matter. To mitigate potential negative effects on its business and financial performance, the Company is working with credit card companies and issuers and has contacted as many of its affected customers as possible. In addition, the Company worked with a leading computer security firm to minimize the risk of any further data theft. The Company is involved in several legal proceedings arising out of this incident that, after consultation with counsel, it believes will not exceed the reserves the Company has currently recorded.
	As of October 29, 2005, the Company estimates that the potential exposure for losses related to this theft, including exposure under currently pending proceedings, range from approximately $6.5 million to approximately $9.5 million. Because of many factors, including the early development of information regarding the theft and recoverability under insurance

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DSW Inc.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

policies, there is no amount in the estimated range that represents a better estimate than any other amount in the range. Therefore, in accordance with Financial Accounting Standard No. 5, Accounting for Contingencies, the Company has accrued a charge to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above, or $6.5 million. As the situation develops and more information becomes available, the amount of the reserve may increase or decrease accordingly. The amount of any such change may be material.

There can be no assurance that there will not be additional proceedings or claims brought against the Company in the future. We have contested and will continue to vigorously contest the claims made against us and continue to explore our defenses and possible claims against others.

The Company is involved in various other legal proceedings that are incidental to the conduct of its business. The Company estimates the range of liability related to pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss, the Company records the minimum estimated liability related to the claim. In the opinion of management, the amount of any liability with respect to these legal proceedings will not be material. As additional information becomes available, the Company assesses the potential liability related to its pending litigation and revises the estimates. Revisions in the Company’s estimates and potential liability could materially impact its results of operations.

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

As used in this Quarterly Report on Form 10-Q (this “Report”) and except as the context otherwise may require, “Company”, “we”, “us”, and “our” refers to DSW Inc. (“DSW”) and its wholly owned subsidiary, DSW Shoe Warehouse, Inc. (“DSWSW”).

Risk Factors and Safe Harbor Statement

We caution that certain information in this Form 10-Q, particularly information regarding future economic performance and finances, plans and objectives of management, is forward-looking (as such term is defined in the Private Securities Litigation Reform Act of 1995) and is subject to change based on various important factors. The following factors, among others, could cause our future financial performance in fiscal 2005 and beyond to differ materially from those expressed or implied in any such forward-looking statements. These risks and uncertainties include, without limitation:

• our continued ability to open and operate new stores on a profitable basis;

• our ability to maintain good vendor relationships;

• our ability to anticipate and respond to fashion trends and consumers preferences;

• the loss or disruption of our centralized distribution center or our failure to add additional distribution methods or facilities;

• our continued dependence on RVI to provide us with many key services for our business;

• our failure to retain our existing management team and to continue to attract qualified new personnel;

• competition in the retail footwear industry;

• changes in economic conditions;

• risks inherent to international trade;

• security risks related to our electronic processing and transmission of confidential customer information;

• our relationship with RVI and Schottenstein Stores Corporation (“SSC”); and

• other factors set forth in Exhibit 99 attached hereto.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of commitments and contingencies at the date of the financial statements and reported amounts of revenues and

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expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including, but not limited to, those related to inventory valuation, depreciation, amortization, recoverability of long-lived assets (including intangible assets), estimates for self insurance reserves for health and welfare, workers’ compensation and casualty insurance, income taxes, contingencies, litigation and revenue recognition. We base these estimates and judgments on our historical experience and other factors we believe to be relevant, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The process of determining significant estimates is fact-specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial and appraisal techniques. We constantly re-evaluate these significant factors and make adjustments where facts and circumstances dictate.

While we believe that our historical experience and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated statements, we cannot guarantee that our estimates and assumptions will be accurate. As the determination of these estimates requires the exercise of judgment, actual results inevitably will differ from those estimates, and such differences may be material to our financial statements.

We believe the following represent the most significant accounting policies, critical estimates and assumptions, among others, used in the preparation of our consolidated financial statements:

•	Revenue Recognition. Revenues from merchandise sales are recognized at the point of sale and are net of returns and exclude sales tax. Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift cards.
•	Cost of Sales and Merchandise Inventories. Merchandise inventories are stated at the lower of cost, determined using the first-in, first-out basis, or market, using the retail inventory method. The retail inventory method is widely used in the retail industry due to its practicality. Under the retail inventory method, the valuation of inventories at cost and the resulting gross profit are calculated by applying a calculated cost to retail ratio to the retail value of inventories. The cost of the inventory reflected on our consolidated balance sheet is decreased by charges to cost of sales at the time the retail value of the inventory is lowered through the use of markdowns. Accordingly, earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at the lower of cost or market were $18.6 million on October 29, 2005 and $14.2 million at January 29, 2005.
	Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value or mark-on, markups of initial prices established, reductions in prices due to customers’ perception of value (known as markdowns), and estimates of losses between physical inventory counts, or shrinkage, which, combined with the averaging process within the retail inventory method, can significantly impact the ending inventory valuation at cost and the resulting gross profit.
	We include in the cost of sales expenses associated with warehousing, distribution and store occupancy. Warehousing costs are comprised of labor, benefits and other labor-related costs associated with the operations of the warehouse, which are primarily payroll-related taxes and benefits. The non-labor costs associated with warehousing include rent, depreciation, insurance, utilities and maintenance and other operating costs that are passed

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	to us from the landlord. Distribution costs include the transportation of merchandise to the warehouse and from the warehouse to our stores. Store occupancy costs include rent, utilities, repairs, maintenance and janitorial costs and other costs associated with licenses and occupancy-related taxes, which are primarily real estate taxes passed to us by our landlords.
•	Asset Impairment and Long-lived Assets. We must periodically evaluate the carrying amount of our long-lived assets, primarily property and equipment, and finite life intangible assets when events and circumstances warrant such a review to ascertain if any assets have been impaired. The carrying amount of a long-lived asset is considered impaired when the carrying value of the asset exceeds the expected future cash flows (undiscounted and without interest) from the asset. Our reviews are conducted down at the lowest identifiable level, which include a store. The impairment loss recognized is the excess of the carrying value, based on discounted future cash flows, of the asset over its fair value. Should an impairment loss be realized, it will be included in gross profit. Assets acquired for stores that have been previously impaired are not capitalized when acquired if the store’s expected future cash flow (undiscounted and without interest) remains negative. The amount of impairment losses recorded in fiscal 2004 was $0.9 million, all of which was recorded in the fourth quarter. No impairment losses have been recorded during the nine months ended October 29, 2005.
	We believe at this time that the long-lived assets’ carrying values and useful lives continue to be appropriate. To the extent these future projections or our strategies change, our conclusion regarding asset impairment may differ from our current estimates.
•	Self-insurance Reserves. We record estimates for certain health and welfare, workers compensation and casualty insurance costs that are self-insured programs. These estimates are based on actuarial assumptions and are subject to change based on actual results. Should the total cost of claims for health and welfare, workers compensation and casualty insurance exceed or fall short of those anticipated, reserves recorded may not be appropriate, and, to the extent actual results vary from assumptions, earnings would be impacted.
•	Customer Loyalty Program. We maintain a customer loyalty program for our DSW stores in which customers receive a future discount on qualifying purchases. The “Reward Your Style” program is designed to promote customer awareness and loyalty and provide us with the ability to communicate with our customers and enhance our understanding of their spending trends. Upon reaching the target spending level, customers may redeem these discounts on a future purchase. Generally, these future discounts must be redeemed within six months. We accrue the estimated costs of the anticipated redemptions of the discount earned at the time of the initial purchase and charge such costs to operating expense based on historical experience. The estimates of the costs associated with the loyalty program require us to make assumptions related to customer purchase levels and redemption rates. The accrued liability as of October 29, 2005 and January 29, 2005 was $7.4 million and $4.5 million, respectively. To the extent assumptions of purchases and redemption rates vary from actual results, earnings would be impacted.

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• Income Taxes. We are required to determine the aggregate amount of income tax expense to accrue and the amount which will be currently payable based upon tax statutes of each jurisdiction we do business in. In making these estimates, we adjust income based on a determination of generally accepted accounting principles for items that are treated differently by the applicable taxing authorities. Deferred tax assets and liabilities, as a result of these differences, are reflected on our balance sheet for temporary differences that will reverse in subsequent years. A valuation allowance is established against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. If management had made these determinations on a different basis, our tax expense, assets and liabilities could be different.

Results of Operations

As of October 29, 2005, we operated 197 DSW stores in 32 states, and leased shoe departments in 157 Stein Mart stores, 53 Gordmans stores, 25 Filene’s Basement stores and one Frugal Fannie’s store. We manage our operations as one segment. The following table represents selected components of our historical consolidated results of operations, expressed as percentages of net sales:

	Three months ended						Nine months ended
	October 29,			October 30,			October 29,			October 30,
	2005			2004			2005			2004
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		(72.5	)		(70.5	)		(71.9	)		(70.9	)
Gross profit		27.5			29.5			28.1			29.1
Operating expenses		(21.6	)		(23.1	)		(21.9	)		(22.8	)
Operating profit		5.9			6.4			6.2			6.3
Interest income (expense), net		0.0			(0.4	)		(0.9	)		(0.3	)
Earnings before income taxes		5.9			6.0			5.3			6.0
Income tax provision		(2.3	)		(2.4	)		(2.1	)		(2.4	)
Net income		3.6	%		3.6	%		3.2	%		3.6	%

THREE MONTHS ENDED OCTOBER 29, 2005 COMPARED TO THREE MONTHS ENDED OCTOBER 30, 2004

Net Sales. Net sales for the thirteen week period ended October 29, 2005 increased by 15.2%, or $39.8 million, to $302.2 million from $262.4 million in the thirteen week period ended October 30, 2004. Our comparable store sales in the third quarter of fiscal 2005 improved 3.5% compared to the third quarter of fiscal 2004. The increase in DSW sales includes a net increase of 30 DSW stores, 7 non-affiliated leased shoe departments and the re-categorization of two DSW/Filene’s Basement combination stores as leased shoe departments. The DSW store locations opened subsequent to October 30, 2004 added $23.3 million in sales, while the leased shoe departments opened subsequent to October 30, 2004 added $1.5 million. Leased shoe department sales comprised 10.5% of total net sales in the third quarter of fiscal 2005, compared to 9.6% in the third quarter of fiscal 2004.

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For the third quarter of fiscal 2005, DSW comparable store sales increased in women’s by 5.7%, athletic by 1.1% and men’s by 0.4%, and decreased in the accessories category by 9.4%. Sales increases in the women’s category were driven by increases in the seasonal classes, while the increase in the athletic category was the result of an increase in the women’s fashion class. The decrease in the accessories category was the result of declines in all classes of accessories. The accessories category represents 4.6% of total comparable DSW store sales for the third quarter of fiscal 2005.

Gross Profit. Gross profit increased $5.5 million to $83.0 million in the third quarter of fiscal 2005 from $77.5 million in the third quarter of fiscal 2004, and decreased as a percentage of net sales from 29.5% in the third quarter of fiscal 2004 to 27.5% in the third quarter of fiscal 2005. In the third quarter of fiscal 2004, our inventory was positioned to allow us to reduce our markdown rate by not increasing the percent discount offered on our clearance goods. During the third quarter of fiscal 2005, we did follow our plan and increased the percent discount offered on our clearance goods. Other factors related to the decreased margin were; increased markdowns caused by higher average unit retails, additional markdowns in our accessories category and an increase in our occupancy expense. The store occupancy expense increased from 11.9% of net sales in the third quarter of fiscal 2004 to 13.2% of net sales in the third quarter of fiscal 2005. The increase in store occupancy is the result of increases in lease expense for new stores. In addition, the leased shoe departments represent an increased percent of total sales and have a higher occupancy percent to sales than in the prior year. These negative factors were partially offset by an increase in our initial markups and a decrease in warehouse expense. Warehouse expense as a percentage of net sales decreased from 2.1% in the third quarter of fiscal 2004 to 1.2% in the third quarter of fiscal 2005. The decrease in warehouse expense is the result of improved operational efficiencies achieved through the use of electronic shipping information, increased unit volumes and an increased allocation of warehouse expense to Value City’s shoe operations pursuant to the shared services agreement between the Company and RVI that became effective as of January 30, 2005 (the “Shared Services Agreement”).

Operating Expenses. For the third quarter of fiscal 2005, operating expenses increased $4.6 million to $65.3 million from $60.7 million in the third quarter of fiscal 2004, which represented 21.6% and 23.1% of net sales, respectively. The favorable operating percent was the result of leveraging store expenses and marketing, and a reduction in pre-opening costs. Operating expenses for the third quarter of fiscal 2005 include $3.6 million in pre-opening costs compared to $4.2 million in pre-opening costs in the third quarter of fiscal 2004. Pre-opening costs are expensed as incurred and therefore do not necessarily reflect expenses for the stores opened in a given fiscal period. Included in operating expenses is the related operating cost, excluding occupancy, associated with operating the leased shoe departments. The DSW stores and leased shoe departments that opened subsequent to October 30, 2004 added $4.1 million in expenses compared to the third quarter of fiscal 2004, excluding pre-opening and occupancy (excluding depreciation and amortization) expenses.

Operating Profit. Operating profit was $17.7 million in the third quarter of fiscal 2005 compared to $16.8 million in the third quarter of fiscal 2004, and decreased as a percentage of net sales from 6.4% in the third quarter of fiscal 2004 to 5.9% in the third quarter of fiscal 2005. Operating profit as a percentage of net sales was negatively impacted by the decrease in gross profit as a percentage of sales, which was partially offset by the leveraging of operating expenses.

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Interest Income (Expense). Interest income for the third quarter of fiscal 2005 was $0.1 million as compared to $1.0 million of interest expense for the third quarter of fiscal 2004. Interest income for the quarter was the result of investment activity from funds generated by the IPO and from operations. Net Interest includes the amortization of debt issuance costs of $0.1 million in the third quarter of fiscal 2004. The amortization of debt issuance costs during the third quarter of fiscal 2005 was insignificant.

Income Taxes. Our effective tax rate for the third quarter of fiscal 2005 was 39.0%, compared to 40.2% for the third quarter of fiscal 2004.

Net Income. For the third quarter of fiscal 2005, net income increased $1.5 million, or 15.6%, over the third quarter of fiscal 2004 and represented 3.6% of net sales in both periods. This increase was the result of the increase in gross profit partially offset by the increase in operating expenses.

NINE MONTHS ENDED OCTOBER 29, 2005 COMPARED TO NINE MONTHS ENDED OCTOBER 30, 2004

Net Sales. Net sales for the nine-month period ended October 29, 2005 increased by 17.9%, or $130.9 million, to $860.3 million from $729.4 million in the nine-month period ended October 30, 2004. Our comparable store sales in the nine-month period of fiscal 2005 improved 3.7% compared to the nine-month period of fiscal 2004. The increase in DSW sales includes a net increase of 30 DSW stores, 7 non-affiliated leased shoe departments and two Filene’s Basement leased shoe departments excluding the re-categorization of two DSW/Filene’s Basement combination stores as leased shoe departments. The DSW store locations opened subsequent to October 30, 2004 added $53.3 million in sales compared to the fiscal 2004 nine-month period, while the new leased shoe departments added $3.4 million. Leased shoe department sales comprised 10.6% of total net sales in the first nine-month period of fiscal 2005, compared to 9.2% in the same nine-month period of fiscal 2004.

For the nine-month period ended October 29, 2005, as compared with same nine-month period in fiscal 2004, DSW comparable store sales increased in women’s by 4.2%, athletic by 6.8% and men’s by 1.8%, and decreased in the accessories category by 6.9%. Sales increases in the women’s categories were driven by increases in the dress and seasonal classes while the increase in the men’s categories were driven by increases in the fashion and casual classes. The increase in the athletic category was the result of the improvement in the women’s and men’s fashion class. The decrease in accessories category was the result of declines in all classes of accessories. The accessories category represents 4.7% of total comparable DSW store sales in the nine-month period.

Gross Profit. Gross profit increased $30.2 million to $242.2 million in the nine-month period ended October 29, 2005 from $212.0 million in the same nine-month period of fiscal 2004, and decreased as a percentage of net sales from 29.1% in the fiscal 2004 nine-month period to 28.1% in the fiscal 2005 nine-month period. The decrease is attributable to increased markdowns in all categories and an increase in our occupancy expense. The store occupancy expense increased from 12.1% of net sales in the fiscal 2004 nine-month period to 13.1% of net sales in the fiscal 2005 nine-month period. The increase in store occupancy expense is the result of increases in lease expense for new stores. In addition, the leased shoe departments represent an increased percent of total sales and have a higher occupancy percent to sales than in the prior year. These negative factors were partially offset by an increase in our initial markups and a decrease in our warehouse

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expense. Warehouse expense as a percentage of net sales decreased from 2.2% in the fiscal 2004 nine-month period to 1.4% in the fiscal 2005 nine-month period. The decrease in warehouse expense is the result of improved operational efficiencies achieved through the use of electronic shipping information, increased unit volumes and an increased allocation of warehouse expense to Value City’s shoe operations pursuant to the Shared Services Agreement.

Operating Expenses. For the nine-month period ended October 29, 2005, operating expenses increased $22.9 million to $188.7 million from $165.8 million in the fiscal 2004 nine-month period, which represented 21.9% and 22.8% of net sales, respectively. The favorable operating percent was the result of leveraging store expenses and marketing, and a reduction in pre-opening costs. Operating expenses for the fiscal 2005 nine-month period includes $7.2 million in pre-opening costs compared to $8.8 million in the same nine-month period in fiscal 2004. Pre-opening costs are expensed as incurred and, therefore, do not necessarily reflect expenses for the stores opened in a given fiscal period. Included in operating expenses is the related operating cost associated with operating the leased shoe departments, excluding occupancy. The DSW stores and leased shoe departments that opened subsequent to October 30, 2004 added $9.4 million in expenses compared to the same nine-month period of fiscal 2004, excluding pre-opening and occupancy (excluding depreciation and amortization) expenses.

During the nine-month period ended October 29, 2005, we accrued an estimated liability related to the theft of credit card and other purchase information. Potential exposures for losses related to stolen information were estimated to fall within a range of approximately $6.5 million to approximately $9.5 million. Because of many factors, including the early development of information regarding the theft and recoverability under insurance policies, there is no amount in the estimated range that represents a better estimate than any other amount in the range. Therefore, in accordance with Financial Accounting Standard No. 5, Accounting for Contingencies, the Company has accrued a charge to operations equal to the low end of the range set forth above, or $6.5 million.

Operating Profit. Operating profit was $53.5 million in the nine-month period of fiscal 2005 compared to $46.2 million in the nine-month period of fiscal 2004, and decreased as a percentage of net sales from 6.3% in the nine-month period of fiscal 2004 to 6.2% in the nine-month period of fiscal 2005. Operating profit as a percentage of net sales was positively affected by the leveraging of our operating expenses, but these positive effects were more than offset by the reduction in gross profit and the estimate for our potential losses related to the theft of credit card and other purchase information.

Interest Income (Expense). Interest expense, net of interest income, increased $5.9 million to $8.4 million for the nine-month period of fiscal 2005 from $2.5 million for the same nine-month period of fiscal 2004. Included in interest expense is $6.6 million of interest due to RVI related to $190 million of indebtedness incurred to fund two separate dividends. The indebtedness, which was fully paid in July 2005, was evidenced by a $165 million note that bore interest at a rate equal to LIBOR plus 850 basis points and a $25 million note that bore interest at a rate equal to LIBOR plus 950 basis points. The interest expense also reflects higher weighted average borrowing rates related to the dividend notes and the write-off of unamortized debt issuance costs of $0.4 million for our old revolving credit facility. Interest expense includes the amortization of debt issuance costs of $0.2 million and $0.4 million in the nine-month periods of fiscal 2005 and 2004, respectively.

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Income Taxes. Our effective tax rate for the nine-month period of fiscal 2005 was 39.8%, compared to 40.2% for the nine-month period of fiscal 2004.

Net Income. For the nine-month period ended October 29, 2005, net income increased $1.0 million or 3.8% over the nine-month period ended October 30, 2004 and represents 3.2% versus 3.6% of net sales, respectively. This increase was the result of the increase in gross profit partially offset by the increases in operating expenses and interest expense.

Seasonality

Our business, measured in terms of net sales, is subject to seasonal trends. Our net sales, measured on a comparable stores basis, have typically been higher in spring and early fall, when our customers’ interest in new seasonal styles increases. In addition, when measured in terms of operating profit, our business has historically experienced lower levels of profitability in the fourth quarter of our fiscal year, due primarily to moderately lower sales in the fourth quarter. Unlike many other retailers, we have not historically experienced a large increase in net sales during our fourth quarter associated with the winter holiday season.

Liquidity and Capital Resources

Our primary ongoing cash requirements are for seasonal and new store inventory purchases, capital expenditures in connection with our expansion, the remodeling of existing stores and infrastructure growth. We have historically funded our expenditures with cash flows from operations and borrowings under the Value City credit facilities to which we have been a party, as described below. Our working capital and inventory levels typically build seasonally. We believe that we will be able to continue to fund our operating requirements and the expansion of our business pursuant to our growth strategy in the future with cash flows from operations and borrowings under the new DSW secured revolving credit facility.

For the thirty-nine week period ended October 29, 2005, our net cash provided by operations was $35.7 million, compared to $4.1 million provided by operations for the thirty-nine week period ended October 30, 2004. The $31.6 million increase in cash provided by operations is primarily due to lower growth in inventory over the comparable period and the cash provided from advances from affiliates during fiscal 2005 whereas in the first nine months of fiscal 2004 advances from affiliates was a net cash outflow. The increases in cash provided were partially offset by a higher growth in prepaid expenses over the comparable period and the cash outflow from accounts receivable from related parties which was primarily due to the change in classification from advances from affiliates to a current receivable during fiscal 2005.

Net working capital increased $86.9 million to $225.8 million at October 29, 2005 from $138.9 million at January 29, 2005, primarily due to increased cash, inventory related to new stores opened in fiscal 2005 and the classification of advances to affiliates to a current receivable. Current assets divided by current liabilities at January 29, 2005 and October 29, 2005 was 2.3 and 2.8 respectively.

Net cash provided by operating activities during the thirty-nine week period ended October 29, 2005 is primarily due to the increase of accrued expenses of $18.3 million and the proceeds from lease incentives of $9.0 million, partially offset by the increase in inventory of $21.4 million.

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For each of the thirty-nine week periods ended October 29, 2005 and October 30, 2004, net cash used in investing activities amounted to $19.8 million. For the thirty-nine week period ended October 29, 2005, net cash used in investing activities consisted of capital expenditures, related primarily to new stores.

Our future capital expenditures will depend primarily on the number of new stores we open, the number of existing stores we remodel and the timing of these expenditures. In fiscal 2004, we opened 31 new DSW stores and closed one DSW store. We plan to open approximately 30 stores per year in each of the next four fiscal years. During fiscal 2004, the average investment required to open a typical new DSW store was approximately $1.7 million. Of this amount, gross inventory typically accounted for approximately $880,000, fixtures and leasehold improvements typically accounted for approximately $600,000 (prior to tenant allowances) and pre-opening advertising and other pre-opening expenses typically accounted for approximately $250,000. We plan to finance investment in new stores with cash flows from operating activities and by drawing from our $150 million secured revolving credit facility when necessary.

For the thirty-nine week period ended October 29, 2005, our net cash provided by financing activities was $32.8 million, compared to $19.9 million for the corresponding period in fiscal 2004. The majority of the current year financing is related to the sale of stock during the IPO.

The Value City Revolving Credit Facility. On July 5, 2005, the Company was released from its obligation as co-borrower and co-guarantor under a Loan and Security Agreement, as amended originally entered into in June 2002. The Company, Value City and other RVI affiliates were named as co-borrowers, and RVI was a co-guarantor. This revolving credit agreement allowed DSW and the other Value City affiliates named as co-borrowers to draw on a $425 million revolving credit facility, subject to applicable borrowing base restrictions. All the capital stock of DSW and DSWSW was pledged. The Company, RVI and the other co-borrowers and guarantors named therein were jointly and severally liable for all liabilities incurred under the agreement.

At January 29, 2005, $108.5 million was available under this revolving credit facility. Direct borrowings by us aggregated $55.0 million as of January 29, 2005 while $14.9 million letters of credit were issued and outstanding as of January 29, 2005.

The DSW Secured Revolving Credit Facility. Upon consummation of the IPO on July 5, 2005, DSW and DSWSW were released from any obligations under the existing Value City revolving credit facility and entered into a new $150 million secured revolving credit facility with a term of five years. Under this new facility, DSW and DSWSW are named as co-borrowers. This new DSW facility has borrowing base restrictions and provides for borrowings at variable interest rates based on LIBOR, the prime rate and the Federal Funds effective rate, plus a margin. The new secured revolving credit facility is secured by a lien on substantially all the personal property of DSW and DSWSW and a pledge of all of the shares of DSWSW. In addition, this facility contains usual and customary restrictive covenants relating to our management and the operation of the business. These covenants, among other things, restrict the Company’s ability to grant liens on its assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem its stock, enter into transactions with affiliates and merge or consolidate with another entity. In addition, if at any time the Company utilizes over 90% of its borrowing capacity under this facility, it must comply with a fixed charge coverage ratio test set forth in the facility documents.

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At October 29, 2005, $140.8 million was available under this revolving credit facility. The Company had no direct borrowings as of October 29, 2005 while $9.2 million letters of credit were issued and outstanding as of October 29, 2005.

The Value City Term Loan Facility. Until the amendment of the term loan agreement in July 2005 in connection with the IPO, DSW and DSWSW were also co-borrowers under a Financing Agreement, as amended, among Cerberus, as agent, and other parties named therein, originally entered into in June 2002. Under the terms of this term loan agreement, Cerberus and SSC each provided to the Company, Value City and other RVI affiliates a separate $50 million three-year term loan comprised of two tranches. As a co-borrower, we were jointly and severally liable for the performance and payment of obligations under this financing agreement; however, this indebtedness has not been reflected in our financial statements as it was recorded on the books of RVI.

In July 2005, DSW and DSWSW were released from their obligations as co-borrowers pursuant to the amendment of this term loan agreement, and Value City repaid all the term loan indebtedness. In connection with the amendment of this term loan agreement, RVI agreed to amend the outstanding term loan warrants to provide SSC, Cerberus and Back Bay the right, from time to time, in whole or in part, to (i) acquire RVI common shares at the then current conversion price (subject to the existing anti-dilution provisions), (ii) acquire from RVI Class A common shares of DSW at the IPO price of $19.00 per share, (subject to anti-dilution provisions similar to those in the existing warrants), or (iii) acquire a combination thereof. Effective November 23, 2005, Back Bay transferred and assigned its warrants to Millennium Partners, L.P. (“Millennium”).

SSC and Cerberus would each receive 328,915 Class A common shares of DSW, and Millennium would receive 41,989 Class A common shares of DSW, if they were to exercise the warrants in full exclusively for DSW common shares. These warrants expire in June 2012. Although RVI does not intend or plan to undertake a spin-off of common shares to RVI shareholders, in the event that RVI were to effect such a spin-off in the future, the holders of outstanding unexercised warrants would receive the same number of DSW common shares that they would have received had they exercised their warrants in full for RVI common shares immediately prior to the record date of the spin-off, without regard to any limitation on exercise contained in the warrants. Following the completion of any such spin-off, the warrants will be exercisable solely for RVI common shares.

On July 5, 2005, DSW entered into an exchange agreement with RVI whereby DSW is required to exchange some or all of the DSW Class B common shares held by RVI for DSW Class A common shares. SSC and Cerberus have the right to require that DSW register for resale the Class A common shares issued to them upon exercise of their warrants in specified circumstances, and each of these entities and Millennium will be entitled to participate in the registrations initiated by the other entities. The Company’s failure to perform its obligations under the registration rights agreement relating to these shares would result in an event of default under the Value City senior loan facility.

The Value City Senior Subordinated Convertible Loan Facility. Until July 2005, DSW and DSWSW were also co-guarantors of a $75 million loan under an Amended and Restated Senior Subordinated Convertible Loan Agreement, as amended, entered into with Cerberus, as agent and lender, SSC, as lender, and the other parties named therein, which was convertible at the option of the lenders into common shares of RVI at an initial conversion price of $4.50 per share. This

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indebtedness has not been reflected in our financial statements as it was recorded on the books of RVI.

In July 2005, DSW and DSWSW were released from their obligations as co-guarantors pursuant to the amendment and restatement of this agreement. We have been advised by RVI that Value City repaid $25 million of this facility in July 2005. The remaining $50 million convertible loan was converted into a non-convertible loan, and the capital stock of DSW held by RVI continues to secure the amended loan facility. In addition, in connection with the amendment and restatement of this convertible loan agreement, RVI has issued to SSC and Cerberus convertible warrants which will be exercisable from time to time until the later of June 11, 2007 and the repayment in full of Value City’s obligations under the amended and restated loan agreement.

Under the convertible warrants, SSC and Cerberus will have the right, from time to time, in whole or in part, to (i) acquire RVI common shares at the conversion price referred to in the convertible loan (subject to existing anti-dilution provisions), (ii) acquire from RVI Class A common shares of DSW at an exercise price per share at the IPO price of $19.00 per share (subject to anti-dilution provisions similar to those in the existing warrants) or (iii) acquire a combination thereof. Although RVI does not intend or plan to undertake a spin-off of common shares to RVI shareholders, in the event that RVI were to effect such a spin-off in the future, the holders of outstanding unexercised warrants would receive the same number of DSW common shares that they would have received had they exercised their warrants in full for RVI common shares immediately prior to the record date of the spin-off, without regard to any limitation on exercise contained in the warrants. Following the completion of any such spin-off, the warrants will be exercisable solely for RVI common shares.

SSC and Cerberus may acquire, upon exercise of the warrants in full, an aggregate number of Class A common shares of DSW from RVI which, at the IPO price of $19.00 per share, would have a value equal to $75 million. SSC and Cerberus would each receive 1,973,685 Class A common shares if they were to exercise these warrants exclusively for DSW common shares.

Cross-Corporate Guarantees. We have historically entered into cross-corporate guarantees with various financing institutions pursuant to which we, RVI, Filene’s Basement and Value City, jointly and severally, guarantee payment obligations owed to these entities under factoring arrangements they have entered into with vendors who may provide merchandise to some or all of RVI’s subsidiaries. In connection with the IPO, these cross-corporate guarantees were terminated and we have neither outstanding balances nor potential liabilities under these past arrangements.

Contractual Obligations

DSW had outstanding letters of credit that totaled approximately $9.2 million at October 29, 2005 under the DSW secured revolving credit facility and $14.9 million at January 29, 2005 on the Value City revolving credit facility. If certain conditions are met under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, DSW does not expect to make any significant payment outside of terms set forth in these arrangements.

As of October 29, 2005, we have entered into various construction commitments, including capital items to be purchased for projects that were under construction, or for which a lease has been signed. Our obligations under these commitments aggregated to approximately $0.3 million as of

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October 29, 2005. In addition, we have signed lease agreements for 13 new store locations with annual rent of approximately $5.2 million. In connection with the new lease agreements, we will receive approximately $3.8 million of tenant allowances, which will reimburse us for expenditures at these locations.

We operate all our stores, warehouses and corporate office space from leased facilities. Lease obligations are accounted for either as operating leases or as capital leases based on lease by lease review at lease inception. The Company had no capital leases outstanding as of October 29, 2005.

On July 5, 2005, subsequent to the IPO, we paid in full the principal balance of both the $165 and $25 million dividend notes plus accrued interest of approximately $6.6 million to RVI, $20 million outstanding on the Company’s old secured revolving credit facility and a $10 million intercompany advance from RVI used to pay down on the outstanding old credit facility borrowing.

Off-Balance Sheet Arrangements

The Company does not intend to participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as special purpose entities or variable interest entities, which would facilitate off-balance sheet arrangements or other limited purposes. As of October 29, 2005, the Company has not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

Adoption of Accounting Standards

The Financial Accounting Standards Board (“FASB”) periodically issues Statements of Financial Accounting Standards (“SFAS”), some of which require implementation by a date falling within or after the close of the fiscal year.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). This statement revised SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) and requires a fair value measurement of all stock-based payments to employees, including grants of employee stock options and recognition of those expenses in the statements of operations. SFAS No. 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services and focuses on accounting for transactions in which an entity obtains employee services in share-based payment transactions. In addition, SFAS No. 123R will require the recognition of compensation expense over the period during which an employee is required to provide service in exchange for an award. The effective date of this standard was originally established to be interim and annual periods beginning after June 15, 2005. In April 2005, the SEC delayed the compliance date for SFAS No. 123R until the beginning of the Company’s fiscal year 2006. The Company is currently evaluating the impact of this statement and has not yet determined the method of adoption under SFAS No. 123R and whether the adoption will result in amounts that are similar to the pro forma disclosures required under SFAS No. 123.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company has been exposed to market risk from changes in interest rates, which may adversely affect its financial condition, results of operations and cash flows. In seeking to minimize the risks from interest rate fluctuations, the Company manages exposures through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company does not use financial instruments for trading or other speculative purposes and is not party to any leveraged financial instruments.

The Company is exposed to interest rate risk primarily through its borrowings under its new secured revolving credit facility. At October 29, 2005, no direct borrowings were outstanding under this facility. The new secured revolving credit facility permits debt commitments up to $150 million, includes a letter of credit facility, extends for a term of five years, and provides for borrowings at variable interest rates.

A hypothetical 100 basis point increase in the interest rate of the debt outstanding under the Value City revolving credit facility (prior to July 5, 2005) or the DSW new secured revolving credit facility (after July 5, 2005) for the thirty-nine week period ended October 29, 2005, net of income taxes, would have had an approximate $0.1 million impact on our results of operations for such period.

Item 4. Controls and Procedures.

The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, performed an evaluation of the Company’s disclosure controls and procedures, as contemplated by Securities Exchange Act Rule 13a-15. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of the end of the period covered by this report, that such disclosures and procedures were effective.

No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On March 8, 2005, RVI announced that it had learned of the theft of credit card and other purchase information from a portion of DSW customers. On April 18, 2005, RVI issued the findings from its investigation into the theft. The theft took place primarily over two weeks and covered all customers who made purchases at 108 DSW stores, primarily during a three-month period from mid-November 2004 to mid-February 2005. Transaction information involving approximately 1.4 million credit cards was obtained. For each card, the stolen information included credit card or debit card numbers, name and transaction amount. In addition, data from transactions involving approximately 96,000 checks were stolen. In these cases, checking account numbers and driver’s license numbers were obtained.

The Company has contacted and is cooperating with law enforcement and other authorities with regard to this matter. To mitigate potential negative effects on its business and financial performance, the Company is working with credit card companies and issuers and has contacted as many of its affected customers as possible. In addition, the Company worked with a leading computer security firm to minimize the risk of any further data theft. The Company is involved in several legal proceedings arising out of this incident that, after consultation with counsel, it believes will not exceed the reserves the Company has currently recorded.

In connection with this matter, the Company entered into a proposed consent order with the Federal Trade Commission (“FTC”), which has jurisdiction over consumer protection matters. The FTC published the proposed order for public comment on December 1, 2005, and copies of the complaint and consent order are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The public comment period expires on January 2, 2006.

The Company has not admitted any wrongdoing or that the facts alleged in the FTC’s proposed unfairness complaint are true. Under the consent order as proposed, DSW will pay no fine or damages. DSW has agreed, however, to maintain a comprehensive information security program, much of which was put in place shortly after DSW first learned of the theft, and to undergo a biannual assessment of such program by an independent third party.

There can be no assurance that there will not be additional proceedings or claims brought against the Company in the future. We have contested and will continue to vigorously contest the claims made against us and will continue to explore our defenses and possible claims against others.

As of October 29, 2005, the Company estimates that the potential exposure for losses related to this theft, including exposure under currently pending proceedings, ranges from approximately $6.5 million to approximately $9.5 million. Because of many factors, including the early development of information regarding the theft and recoverability under insurance policies, there is no amount in the estimated range that represents a better estimate than any other amount in the range. Therefore, in accordance with Financial Accounting Standard No. 5, Accounting for Contingencies, the Company has accrued a charge to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above. As the situation develops and more

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information becomes available, the amount of the reserve may increase or decrease accordingly. The amount of any such change may be material.

Although difficult to quantify, since the announcement of the theft, the Company has not discerned any material negative effect on sales trends it believes is attributable to the theft. However, this may not be indicative of the long-term developments regarding this matter.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) Recent sales of unregistered securities. Not applicable.

(b) Use of Proceeds. Not applicable.

(c) Purchases of equity securities by the issuer and affiliated purchasers

The following table provides information with respect to purchases DSW made of its common shares during the third quarter of the 2005 fiscal year, if any:

Issuer Purchases of Equity Securities

			Total
			number of	Maximum
			shares	number of
			purchased	shares that
			as part of	may yet be
	Total	Average	publicly	purchased
	number of	price	announced	under the
	shares	paid per	plans or	plans or
Period	purchased	share	programs	programs
July 31, 2005 – August 27, 2005	None	—	—	None
August 28, 2005 – October 1, 2005	None	—	—	None
October 2, 2005 – October 29, 2005	None	—	—	None
Total	None	—	—	None

Item 3. Defaults Upon Senior Securities. None.

Item 4. Submission of Matters to a Vote of Security Holders. None.

Item 5. Other Information. None.

Item 6. Exhibits. See Index to Exhibits on page 29.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DSW INC.
	(Registrant)
Date: December 8, 2005	By:	/s/ Douglas J. Probst
		Douglas J. Probst
		Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit Number	Description
4.1	Form of Term Loan Warrant for Millennium Partners, L.P.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1	Section 1350 Certification of Chief Executive Officer
32.2	Section 1350 Certification of Chief Financial Officer
99	Safe Harbor Under the Private Securities Litigation Reform Act of 1995

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EX-4.1

Exhibit 4.1

THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS SPECIFIED IN THIS WARRANT.

RETAIL VENTURES, INC.
COMMON STOCK PURCHASE WARRANT No. W-9	________, 2005

Warrant to Purchase
177,288 Shares of RVI Common Stock (plus up to 87,500 additional
Shares of RVI Common Stock under Section 3.1(b) hereof, if applicable)
or 41,989 DSW Class A Shares
(subject to adjustment as set forth herein)

          RETAIL VENTURES, INC., an Ohio corporation (the “Company”), for value received, hereby certifies that MILLENNIUM PARTNERS, L.P., or its registered assigns (the “Holder”), is entitled to purchase from the Company that number of duly authorized, validly issued, fully paid and nonassessable shares of Common Shares, no par value per share, of the Company (the “Common Stock”) equal to the Common Stock Exercise Amount (as defined below) or, in the alternative, after the consummation of a Qualifying IPO (as defined below) but prior to the consummation of a Spin-Off (as defined below) and the satisfaction of the Company’s obligations pursuant to Section 3.3(b), and in the Holder’s discretion, that number of shares of DSW Stock (as defined below) equal to the DSW Stock Exercise Amount (as defined below) owned by the Company, in each case, at a purchase price equal to the applicable Purchase Price (as defined below), at any time or from time to time but prior to 5:00 P.M., New York City time, on June 11, 2012 (the “Expiration Date”), all subject to the terms, conditions and adjustments set forth below in this Warrant (this “Warrant”); provided, that the purchase price per share of Common Stock or DSW Stock, as the case may be, hereunder shall not in any event be less than the par value of such Common Stock or DSW Stock, as applicable. For the avoidance of doubt, in the case of an exercise for DSW Stock, this Warrant shall initially be exercisable only for Class A Shares (as defined below).

          1. DEFINITIONS. As used herein, unless the context otherwise requires, the following terms shall have the meanings indicated:

          “Additional Shares of Common Stock” shall mean all shares (including treasury shares) of Common Stock issued or sold (or, pursuant to Section 3.2(b) or 3.5(b), deemed to be issued) by the Company after September 26, 2002, whether or not subsequently reacquired or retired by the Company, other than

          (a) (i) shares of Common Stock issued upon the exercise of the Term Loan Warrants and (ii) such additional number of shares of Common Stock as may become issuable upon the exercise of the Term Loan Warrants by reason of adjustments required pursuant to the anti-dilution provisions applicable to the Term Loan Warrants as in effect on the date hereof or on the date of original issuance;

          (b) up to 5,000,000 shares of Common Stock (and following June 11, 2007, up to an additional 5,000,000 shares of Common Stock) that are issued to Persons other than Affiliates of the Company, including (i) shares of Common Stock or options exercisable therefor, issued or to be issued under the Company’s 2000 Stock Option Plan as in effect on September 26, 2002 or under any other employee stock option or purchase plan or plans, or pursuant to compensatory or incentive agreements, for officers, employees or consultants of the Company or any of its Subsidiaries, in each case adopted or assumed after such date by the Company’s Board of Directors; provided in each case that the exercise or purchase price for any such share shall not be less than 95% of the fair market value (determined in good faith by the Company’s Board of Directors) of the Common Stock on the date of the grant, and such additional number of shares as may become issuable pursuant to the terms of any such plans by reason of adjustments required pursuant to antidilution provisions applicable to such securities in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock, (ii) shares of restricted stock issued by the Company to executive officers of the Company, and (iii) shares of Common Stock issued by the Company as charitable gifts; and provided, however, that all options that are issued and expire unexercised because the vesting requirements thereof are not satisfied shall not be included in the issued shares pursuant to this (b);

          (c) up to 2,153,000 shares of Common Stock issued pursuant to options that are granted to executive officers of the Company or its Subsidiaries under the Company’s 2000 Stock Option Plan as in effect on September 26, 2002 at an exercise price of no less than $4.50 per share and such additional number of shares as may become issuable pursuant to the terms of any such options under the terms of such plan by reason of adjustments required pursuant to antidilution provisions applicable to such securities in order to reflect any subdivision or combination of Common Stock, by reclassification or otherwise, or any dividend on Common Stock payable in Common Stock; provided, however, that all options that are issued and expire unexercised because the vesting requirements thereof are not satisfied shall not be included in the issued shares pursuant to this (c); and

          (d) (i) shares of Common Stock issued upon exercise of the Conversion Warrants and (ii) such additional number of shares of Common Stock as may become issuable upon the exercise of the Conversion Warrants by reason of adjustments required pursuant to anti-

2

dilution provisions applicable to the Conversion Warrants as in effect on the date hereof or on the date of original issuance.

          “Additional Shares of DSW Stock” shall mean all shares (including treasury shares) of DSW Stock issued or sold (or, pursuant to Section 3.2(b) or 3.5(b), deemed to be issued) by DSW after the closing date of a Qualifying IPO (and for the avoidance of doubt shall not include shares issued pursuant to the over-allotment option in such Qualifying IPO after such closing date), whether or not subsequently reacquired or retired by DSW, other than

               (a) (i) shares of DSW Stock issued upon the exercise of the Term Loan Warrants and (ii) such number of additional shares of DSW Stock as may become issuable upon the exercise of the Term Loan Warrants by reason of adjustments required pursuant to the antidilution provisions applicable to the Term Loan Warrants as in effect on the date hereof or on the date of original issuance; or

               (b) (i) shares of DSW Stock issued upon exercise of the Conversion Warrants and (ii) such additional number of shares as may become issuable upon the exercise of the Conversion Warrants by reason of adjustments required pursuant to antidilution provisions applicable to the Conversion Warrants as in effect on September 26, 2002 or on the date hereof; or

               (c) shares of DSW Stock, shares of restricted stock, options exercisable for DSW Stock, or any other securities or interests (including shares of DSW Stock issued upon conversion, settlement or exercise of any such options, securities or other interests), issued or to be issued under the DSW Inc. Equity Incentive Plan or any other employee stock option or purchase plan or plans, or pursuant to compensatory or incentive agreements, for officers, directors, employees or consultants of the Company, DSW or any of its respective Subsidiaries, and such additional number of shares as may become issuable pursuant to the terms of any such plans by reason of adjustments required pursuant to antidilution provisions applicable to such securities in order to reflect any subdivision or combination of DSW Stock, by reclassification or otherwise, or any dividend or distribution on DSW Stock payable in DSW Stock or other equity securities or interests; or

               (d) shares of Class A Shares issued upon exchange of Class B Shares.

          “Aggregate Purchase Price” shall have the meaning set forth in Section 2.1(a).

          “Business Day” shall mean any day other than a Saturday or a Sunday or any day on which national banks are authorized or required by law to close. Any reference to “days” (unless Business Days are specified) shall mean calendar days.

          “Class A Shares” means the shares of the Class A common shares, no par value, of DSW.

          “Class B Shares” means the shares of the Class B common shares, no par value, of DSW.

3

          “Commission” shall mean the Securities and Exchange Commission or any successor agency having jurisdiction to enforce the Securities Act.

          “Common Stock” shall have the meaning assigned to it in the introduction to this Warrant, such term to include any stock into which such Common Stock shall have been changed or any stock resulting from any reclassification of such Common Stock, and all other stock of any class or classes (however designated) of the Company the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference.

          “Common Stock Exercise Amount” shall initially mean the Initial Common Stock Exercise Amount, as the same may be adjusted and readjusted pursuant to Section 3 hereof; and shall be reduced upon each exercise of this Warrant (i) if exercised for Common Stock, by such number of shares of Common Stock for which this Warrant is then being exercised or (ii) if exercised for DSW Stock, by the Corresponding Common Stock Number applicable to the number of shares of DSW Stock for which this Warrant is then being exercised.

          “Common Stock Purchase Price” shall mean initially $4.50 per share, subject to adjustment and readjustment from time to time as provided in Section 3, and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by Section 3.

          “Company” shall have the meaning assigned to it in the introduction to this Warrant, such term to include any corporation or other entity which shall succeed to or assume the obligations of the Company hereunder in compliance with Section 4.

          “Conversion” shall have the meaning assigned to it in Section 3.1(b).

          “Conversion Warrants” means those certain warrants issued as of July 5, 2005, in connection with an amendment and restatement of the Convertible Facility.

          “Convertible Facility” shall mean that certain Amended and Restated Senior Subordinated Convertible Loan Agreement, dated as of June 11, 2002, among the Company, CPLP and SSC, as amended by Amendment No. 1 to Amended and Restated Senior Convertible Loan Agreement, dated as of June 11, 2002, and by Amendment No. 2 to Amended and Restated Senior Convertible Loan Agreement, dated as of October 7, 2003, and by Amendment No. 3 to Amended and Restated Senior Convertible Loan Agreement, dated as of December 29, 2004, and as amended and restated by the Second Amended and Restated Senior Loan Agreement, dated as of July 5, 2005 (as amended, supplemented, restated otherwise modified through the date hereof).

          “Convertible Securities” shall mean any evidences of indebtedness, shares of stock (other than Common Stock or DSW Stock) or other securities directly or indirectly convertible into or exchangeable for, in the case of the Company, Additional Shares of Common Stock or, in the case of DSW, Additional Shares of DSW Stock.

4

          “Corresponding Common Stock Number” shall mean, with respect to a specified number of shares of DSW Stock, the number of shares of Common Stock obtained by dividing: (i) the product of (A) the number of shares of DSW Stock with respect to which such determination is being made and (B) the DSW Stock Purchase Price by (ii) the Common Stock Purchase Price; rounding up in the case of any fractional share.

          “Corresponding DSW Stock Number” shall mean, with respect to a specified number of shares of Common Stock, the number of shares of DSW Stock obtained by dividing (i) the product of (A) the number of shares of Common Stock with respect to which such determination is being made and (B) the Common Stock Purchase Price by (ii) the DSW Stock Purchase Price; rounding up in the case of any fractional share.

          “CPLP” shall mean Cerberus Partners, L.P., or its assignees.

          “Current Market Price” shall mean, with respect to a security, on any date specified herein, the average of the daily Market Price of such security during the 10 consecutive trading days before such date, except that, if on any such date the shares of such security are not listed or admitted for trading on any national securities exchange or quoted in the over-the-counter market, the Current Market Price shall be the Market Price on such date.

          “DSW” shall mean DSW Inc., an Ohio corporation.

          “DSW Registration Rights Agreement” shall mean the registration rights agreement, dated as of July 5, 2005, among DSW and the Initial Holders.

          “DSW Stock” shall mean shares of Class A Shares, such term to include any stock into which such DSW Stock shall have been changed or any stock resulting from any reclassification of such DSW Stock, and all other stock of any class or classes (however designated) of DSW the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference.

          “DSW Stock Exercise Amount” shall initially mean the Initial DSW Stock Exercise Amount, as the same may be adjusted and readjusted pursuant to Section 3 hereof; and shall be reduced upon each exercise of this Warrant (i) if exercised for DSW Stock, by such number of shares of DSW Stock for which this Warrant is then being exercised or (ii) if exercised for Common Stock, by the Corresponding DSW Stock Number applicable to the number of shares of Common Stock for which this Warrant is then being exercised.

          “DSW Stock Purchase Price” shall mean initially, the IPO Price, subject to adjustment and readjustment from time to time as provided in Section 3, and, as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required by Section 3.

          “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder, or any successor statute.

5

          “Expiration Date” shall have the meaning assigned to it in the introduction to this Warrant.

          “Fair Value” shall mean, on any date specified herein (i) in the case of cash, the dollar amount thereof, (ii) in the case of a security, the Current Market Price, and (iii) in all other cases, the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by a committee of the Company’s Board of Directors consisting of directors who are not Affiliates of the Company, SSC or the Holder; provided, however, that at the reasonable request of the Holder, the Fair Value shall be determined in good faith by an independent investment banking firm selected jointly by the Company and the Holder or, if that selection cannot be made within 10 days, by an independent investment banking firm selected by the American Arbitration Association in accordance with its rules, and provided, further, that the Company shall pay all of the reasonable fees and expenses of any third parties incurred in connection with determining the Fair Value.

          “Financing Agreement” shall mean that certain Financing Agreement, dated as of June 11, 2002, among the Company, certain Affiliates of the Company, CPLP and SSC, as subsequently amended and modified through the date hereof.

          “Holder” shall have the meaning assigned to it in the introduction to this Warrant.

          “Initial Common Stock Exercise Amount” means 177,288 shares.

          “Initial DSW Stock Exercise Amount” shall mean the number of shares of DSW Stock obtained by dividing (i) the product of (A) 177,288 and $4.50 by (ii) the IPO Price; rounding up for any fractional share, which such amount is equal to 41,989 shares.

          “Initial Holders” shall mean CPLP and SSC.

          “IPO Effective Date” means the date on which a Qualifying IPO is consummated in accordance with the terms set forth in (i) Section 4.02 of the Convertible Facility and (ii) the Form S-1 Registration Statement as filed with the SEC on June 28, 2005 as amended from time to time.

          “IPO Price” means the price at which a share of DSW Stock is initially offered to the public in a Qualifying IPO as set forth on the cover page to the prospectus in such IPO, or $19.00 per share.

          “Lien” shall have the meaning set forth in the Convertible Facility.

          “Market Price” shall mean, on any date specified herein, with respect to any security, the amount per share of such security equal to (i) the last reported sale price of such security, regular way, on such date or, in case no such sale takes place on such date, the average of the closing bid and asked prices thereof regular way on such date, in either case as officially reported on the principal national securities exchange on which such security is then listed or admitted for trading, (ii) if such security is not then listed or admitted for trading on any national securities exchange but is designated as a national market system security by the NASD, the last

6

reported trading price of such security on such date, (iii) if there shall have been no trading on such date or if such security is not so designated, the average of the closing bid and asked prices of such security on such date as shown by the NASD automated quotation system, (iv) if trading in such security is quoted in the over-the-counter market, the average of the closing bid and asked prices of the security on such date as shown on the OTC Bulletin Board, or (v) if such security is not then listed or admitted for trading on any national exchange or quoted in the over-the-counter market, the fair value thereof (as of a date which is within 20 days of the date as of which the determination is to be made) determined in good faith by a committee of the Company’s Board of Directors consisting of directors who are not Affiliates of the Company, SSC or the Holder; provided, however, that at the request of the Holder, the Market Price shall be determined in good faith by an independent investment banking firm selected jointly by the Company and the Holder or, if that selection cannot be made within 10 days, by an independent investment banking firm selected by the American Arbitration Association in accordance with its rules, and provided, further, that the Company shall pay all of the fees and expenses of any third parties incurred in connection with determining the Market Price.

          “NASD” shall mean the National Association of Securities Dealers, Inc.

          “New Issuance Price” shall have the meaning set forth in Section 3.2.

          “Options” shall mean any rights, options or warrants to subscribe for, purchase or otherwise acquire, in the case of the Company, Additional Shares of Common Stock or Convertible Securities of the Company, and, in the case of DSW, Additional Shares of DSW Stock or Convertible Securities of DSW.

          “Original Issuance Date” means September 26, 2002.

          “Other Securities” shall mean any stock (other than Common Stock or DSW Stock) and other securities of the Company or DSW, as applicable, or any other Person (corporate or otherwise) which the holders of the Term Loan Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Term Loan Warrants, in lieu of or in addition to Common Stock or DSW Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or DSW Stock or Other Securities pursuant to Section 4 or otherwise.

          “Permitted Lien” shall have the meaning set forth in the Convertible Facility.

          “Person” shall mean any individual, firm, partnership, corporation, trust, joint venture, association, joint stock company, limited liability company, unincorporated organization or any other entity or organization, including a government or agency or political subdivision thereof, and shall include any successor (by merger or otherwise) of such entity.

          “Purchase Price” shall mean, with respect to the Common Stock, the Common Stock Purchase Price, and with respect to the DSW Stock, the DSW Stock Purchase Price, as applicable.

7

          “Qualifying IPO” shall mean an initial public offering of DSW (a) in which the sale price of the Class A Shares sold in the initial public offering shall reflect the fair market value of such shares at the time of the initial public offering as determined by the Company’s Board of Directors; (b) from which the net proceeds are sufficient to repay in full all obligations outstanding under the Financing Agreement and $25,000,000 of the principal amount under the Convertible Facility; and (c) which is consummated on or prior to December 31, 2005.

          “Registration Rights Agreement” shall mean the Second Amended and Restated Registration Rights Agreement, dated as of July 5, 2005, among the Company and the Initial Holders.

          “Restricted Securities” shall mean (i) any Term Loan Warrants bearing the applicable legend set forth in Section 10.1, (ii) any shares of Common Stock or DSW Stock (or Other Securities) issued or issuable upon the exercise of Term Loan Warrants which are (or, upon issuance, will be) evidenced by a certificate or certificates bearing the applicable legend set forth in Section 10.1, and (iii) any shares of Common Stock or DSW Stock (or Other Securities) issued subsequent to the exercise of any of the Term Loan Warrants as a dividend or other distribution with respect to, or resulting from a subdivision of the outstanding shares of Common Stock or DSW Stock (or Other Securities) into a greater number of shares by reclassification, stock splits or otherwise, or in exchange for or in replacement of the Common Stock or DSW Stock (or Other Securities) issued upon such exercise, which are evidenced by a certificate or certificates bearing the applicable legend set forth in Section 10.1.

          “Securities Act” shall mean the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder, or any successor statute.

          “Spin-Off” shall have the meaning assigned to it in Section 3.3.

          “SSC” shall mean Schottenstein Stores Corporation.

          “Term Loan Warrants” shall mean all warrants initially issued pursuant to the Financing Agreement (as amended and restated), including this Warrant.

          “Warrant” shall have the meaning assigned to it in the introduction to this Warrant.

          “Warrant Shares” means (a) the shares of Common Stock or DSW Stock issued or issuable upon exercise of this Warrant in accordance with Section 2, (b) all other securities or other property issued or issuable upon any such exercise or exchange in accordance with this Warrant and (c) any securities of the Company or DSW distributed with respect to the securities referred to in the preceding clauses (a) and (b).

          2. EXERCISE OF WARRANT.

          2.1. Manner of Exercise; Payment of the Purchase Price. (a) This Warrant may be exercised by the Holder hereof, in whole or in part, at any time or from time to time prior to the Expiration Date, by surrendering to the Company at its principal office this Warrant, with

8

the form of Election to Purchase Shares attached hereto as Exhibit A, or (provided that the Company has not consummated a Spin-Off and satisfied its obligation pursuant to Section 3.3(b)) if this Warrant is being exercised for Shares of DSW Stock, Exhibit B (or a reasonable facsimile thereof) duly executed by the Holder and accompanied by payment of the applicable Purchase Price for the number of shares of Common Stock or, after the consummation of a Qualifying IPO (provided that the Company has not consummated a Spin-Off and satisfied its obligations pursuant to Section 3.3(b), DSW Stock specified in such form (the “Aggregate Purchase Price”). Any partial exercise of this Warrant shall be for a whole number of Warrant Shares only.

          (b) Payment of the Aggregate Purchase Price may be made as follows (or by any combination of the following): (i) in United States currency by cash or delivery of a certified check or bank draft payable to the order of the Company or by wire transfer to the Company, (ii) by cancellation of such number of Warrant Shares otherwise issuable to the Holder upon such exercise as shall be specified for cancellation in such Election to Purchase Shares, such that the excess of the aggregate Current Market Price of such specified number and type of shares on the date of exercise over the portion of the Aggregate Purchase Price attributable to such shares shall equal the Aggregate Purchase Price attributable to the shares of Common Stock or DSW Stock, as the case may be, to be issued upon such exercise, in which case such excess amount shall be deemed to have been paid to the Company and the number of shares issuable upon such exercise shall be reduced by such number specified for cancellation, or (iii) by surrender to the Company for cancellation certificates representing shares of Common Stock or transfer to the Company certificates representing shares of DSW Stock owned by the Holder (properly endorsed for transfer in blank) having a Current Market Price on the date of Warrant exercise equal to the Aggregate Purchase Price.

          (c) Upon the consummation of a Spin-Off and the satisfaction of the Company’s obligations to make the distribution to the Holder required by Section 3.3(b), this Warrant shall no longer be exercisable for shares of DSW Stock and the Holder shall not be entitled to the pro rata share of the dividend or distribution pursuant to Section 3.3(a) in respect of such Spin-Off and distribution; provided, however, that this Warrant shall continue to be exercisable for shares of Common Stock without any adjustment to the Common Stock Purchase Price or Common Stock Exercise Amount as a result of such Spin-Off and distribution to the holders of the Term Loan Warrants and Conversion Warrants.

          (d) Notwithstanding anything herein to the contrary, the Holder agrees that this Warrant shall not be exercisable for shares of DSW Stock from and after the record date for a Spin-Off (as set forth in the notice provided to the Holder pursuant to Section 8 hereof) until the earliest to occur of (i) the abandonment of the Spin-Off, (ii) the date that is 60 days after the record date for such Spin-Off and (iii) two Business Days prior to the Expiration Date of this Warrant.

          2.2. When Exercise Effective. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the Business Day in the case of Common Stock and on the next succeeding Business Day in the case of DSW Stock on which this Warrant shall have been surrendered to, and the Purchase Price shall have been received by, the Company as provided in Section 2.1, and, to the extent permitted by law, at such time the

9

Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities of the Company) in the case of an exercise of this Warrant for Common Stock shall be issuable upon such exercise as provided in Section 2.3 shall be deemed to have become the holder or holders of record thereof for all purposes.

          2.3. Delivery of Stock Certificates, etc.; Charges, Taxes and Expenses. (a) As soon as practicable after each exercise of this Warrant, in whole or in part, and in any event within two Business Days thereafter in the case of Common Stock and within three Business Days in the case of DSW Stock, the Company shall cause to be issued, in the case of Common Stock, and shall use reasonable best efforts to cause to be transferred, in the case of DSW Stock, in the name of and delivered to the Holder hereof or, subject to Section 10, as the Holder may direct,

     (i) a certificate or certificates for the number and type of Warrant Shares (or Other Securities) to which the Holder shall be entitled upon such exercise, and any cash payment in lieu of any fractional shares, as provided in Section 12.5 hereof, and

     (ii) in case such exercise is for less than all of the Warrant Shares purchasable under this Warrant, a new Warrant or Warrants of like tenor, for the balance of the Warrant Shares purchasable hereunder.

          (b) Issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the Holder hereof for any issue or transfer tax or other incidental expense, in respect of the issuance or transfer of such certificates, all of which such taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax that may be payable in respect of any issuance of any Warrant or any certificate for, or any other evidence of ownership of, Warrant Shares in a name other than that of the Holder of this Warrant being exercised or exchanged.

          (c) Upon delivery of notice of exercise of this Warrant for shares of DSW Stock, the Company shall promptly effect the exchange of a sufficient number of Class B Shares for Class A Shares so as to permit the transfer of Class A Shares to the Holder in the manner and time periods provided in paragraph (a) of this Section 2.3.

          2.4. Tax Basis. The Company and the Holder shall mutually agree as to the tax basis of this Warrant for purposes of the Internal Revenue Code of 1986, as amended, and the treatment of this Warrant under such Code by each of the Company and the Holder shall be consistent with such agreement.

          3. ADJUSTMENT OF PURCHASE PRICE AND WARRANT SHARES ISSUABLE UPON EXERCISE.

          3.1. Adjustment of Number of Shares.

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          (a) Upon each adjustment of the Common Stock Purchase Price or the DSW Stock Purchase Price as a result of the calculations made in this Section 3, this Warrant shall thereafter evidence the right to receive, at the adjusted Purchase Price, that number of shares of Common Stock or DSW Stock, as the case may be, (calculated to the nearest one-hundredth) obtained by dividing (i) the product of the aggregate number of such shares covered by this Warrant immediately prior to such adjustment and the applicable Purchase Price in effect immediately prior to such adjustment of the Purchase Price by (ii) the applicable Purchase Price in effect immediately after such adjustment of the Purchase Price. For the avoidance of doubt, adjustments to the Common Stock Purchase Price shall result in an adjustment only in the number of shares of Common Stock issuable hereunder and an adjustment to the DSW Stock Purchase Price shall result in an adjustment only in the number of shares of DSW Stock issuable hereunder.

          (b) In the event that, prior to the exercise in full of this Warrant, the Company issues any shares of Common Stock upon the conversion of Convertible Securities outstanding as of the Original Issuance Date (including, without limitation, upon exercise of the Conversion Warrants) (a “Conversion”), the number of shares of Common Stock issuable upon the exercise of this Warrant (whether or not this Warrant has been partially exercised) shall be automatically increased by the number of shares equal to 0.525% of the shares of Common Stock issued upon such Conversion, and the Purchase Price shall not be adjusted in connection with such increase. Any adjustments made to the Purchase Price or the number of shares of Common Stock issuable upon exercise of the Warrant prior to such Conversion shall be made as if the Warrant were initially exercisable for such increased number of shares. Upon each such Conversion, the Company shall promptly deliver to the Holder the report required by Section 7 hereof. For the avoidance of doubt, this section 3.1(b) shall only apply to exercise of this Warrant for Common Stock and a corresponding increase shall not be made with respect to DSW Stock.

          3.2. Adjustment of Purchase Price for New Issuances.

          (a) Issuance of Additional Shares. If at any time or from time to time after the date hereof, the Company shall issue or sell Additional Shares of Common Stock or, DSW shall issue Additional Shares of DSW Stock (including, in each case, Additional Shares of Common Stock or Additional Shares of DSW Stock, as applicable, deemed to be issued pursuant to Section 3.2(b) and excluding shares issued pursuant to Section 3.3 and 3.4) without consideration or for a consideration per share less than the applicable Purchase Price in effect immediately prior to such issue or sale (the “New Issuance Price”), then, and in each such case, subject to Section 3.8, in the case of an issuance of Additional Shares of Common Stock the Common Stock Purchase Price or, in the case of an issuance of Additional Shares of DSW Stock, the DSW Stock Purchase Price, shall be reduced concurrently with such issue or sale, to the applicable New Issuance Price. For the avoidance of doubt, issuances of Additional Shares of Common Stock shall result in an adjustment only to the Common Stock Purchase Price and issuances of Additional Shares of DSW Stock shall result in an adjustment only to the DSW Stock Purchase Price.

          (b) Treatment of Options and Convertible Securities. Shares of Additional Shares of Common Stock or Additional Shares of DSW Stock shall be deemed issued if the Company or DSW, as applicable, at any time or from time to time after the date hereof shall

11

issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities of the Company or DSW, as the case may be, entitled to receive, any Options or Convertible Securities (whether or not the rights thereunder are immediately exercisable) for a consideration per share (determined pursuant to Section 3.6) that is less than, in the case of Additional Shares of Common Stock, the Common Stock Purchase Price or, in the case of Additional Shares of DSW Stock, the DSW Stock Purchase Price, in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock or DSW Stock, as applicable, trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading). Such issuance shall be deemed to occur (i) as of the time of such issue, sale, grant or assumption of the Convertible Securities or Options or (ii) in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock or DSW Stock, as applicable, trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading). No further adjustment of the Purchase Price shall be made upon the subsequent issuance of shares of Common Stock or DSW Stock, as the case may be, upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

          (c) In addition, for the avoidance of doubt, after the consummation of a Spin-Off and satisfaction of the Company’s obligations to make the distribution to the Holder required by Section 3.3(b), no adjustment shall be made pursuant to this Section 3.2 as a result of an issuance by DSW of Additional Shares of DSW Stock.

          3.3. Extraordinary Dividends and Distributions; Payment of Dividend in Case of Spin-Off.

          (a) Subject to Section 3.3(b), if the Company or DSW at any time or from time to time after the date hereof shall declare, order, pay or make a dividend or other distribution (including, without limitation, any distribution of other or additional stock or other securities or property or Options by way of dividend or spin-off, reclassification, recapitalization or similar corporate rearrangement) on, in the case of the Company, the Common Stock or, in the case of DSW, the DSW Stock, other than (a) a dividend payable in shares of Common Stock or, in the case of DSW, DSW Stock, subject to Section 3.4, or (b) a regularly scheduled cash dividend payable out of consolidated earnings or earned surplus, determined in accordance with generally accepted accounting principles or (c) a deemed issuance of Additional Shares of Common Stock or Additional Shares of DSW Stock pursuant to Section 3.2(b), in each such case, subject to Section 3.8, adequate provision shall be made so that the Holder shall receive, upon Warrant exercise for such type of Warrant Shares, a pro rata share of such dividend or other distribution based upon the maximum number of shares of Common Stock or DSW Stock, as applicable, at the time issuable to the Holder (determined without regard to whether the Warrant is exercisable at such time). For the avoidance of doubt, subject to Section 3.3(b), dividends and distributions pursuant to this Section 3.3(a) with respect to DSW Stock shall only be receivable upon exercise by a Holder of this Warrant for DSW Stock (and only with respect to the number of shares of DSW Stock for which this Warrant is exercised) and dividends and distributions with respect to Common Stock shall only be receivable upon exercise by a Holder of this Warrant for Common Stock (and only with respect to the number of shares of Common Stock for which this Warrant is exercised). In addition, for the avoidance of doubt, after the

12

consummation of a Spin-Off and satisfaction of the Company’s obligations to make the distribution to the Holder required by Section 3.3(b), no adjustment shall be made pursuant to this Section 3.3(a) as a result of an issuance by DSW of Additional Shares of DSW Stock.

          (b) Notwithstanding anything in this Warrant to the contrary, if the Company shall make any distribution of all shares of DSW Stock owned by it to its shareholders (a “Spin-Off”), then the Holder of this Warrant shall receive, and the Company shall deliver to the Holder, upon consummation of the Spin-Off, that number of shares of DSW Stock which the Holder would have received in such Spin-Off had the Holder exercised this Warrant, immediately prior to the record date for such Spin-Off, for the greatest number of shares of Common Stock for which this Warrant was then exercisable but only with respect to the portion of the Warrant that remains unexercised on the date of such distribution. Such shares of DSW Stock shall be distributed to the Holder without payment therefor by the Holder to the Company and without any action of any kind required by the Holder to the Company. Upon the consummation of a Spin-Off and receipt by the Holder of the DSW Stock as provided for in this Section 3.3(b), this Warrant shall no longer be exercisable for shares of DSW Stock and shall only be exercisable for Common Stock in accordance with Section 2.1(c). The Holder shall be entitled to at least 90 days’ prior written notice of the record date for any Spin-Off.

          3.4. Treatment of Stock Dividends, Stock Splits, etc. In case the Company or DSW at any time or from time to time after the date hereof, shall declare or pay any dividend on, in the case of the Company, the Common Stock payable in Common Stock or, in the case of DSW, the DSW Stock payable in DSW Stock, or shall effect a subdivision of the outstanding shares, in the case of the Company, of Common Stock or, in the case of DSW, of DSW Stock, into a greater number of such shares (by reclassification or otherwise than by payment of a dividend in Common Stock or DSW Stock), then, and in each such case, the number of shares of Common Stock or DSW Stock, as the case may be, obtainable upon exercise of this Warrant shall be proportionately increased and the applicable Purchase Price shall be proportionately decreased. In case the Company or DSW at any time or from time to time after the date hereof, shall effect any combination or consolidation of the outstanding shares of, in the case of the Company, Common Stock or, in the case of DSW, DSW Stock, into a lesser number of such shares, then, and in each such case, the number of shares of Common Stock or DSW Stock, as the case may be, obtainable upon exercise of this Warrant shall be proportionately decreased and the applicable Purchase Price shall be proportionately increased. Any adjustment made under this Section shall become effective (a) in the case of any such dividend, immediately after the close of business on the record date for the determination of holders of any class of securities entitled to receive such dividend, or (b) in the case of any such subdivision, at the close of business on the day immediately prior to the day upon which such corporate action becomes effective. For the avoidance of doubt, after the consummation of a Spin-Off and satisfaction of the Company’s obligations to make the distribution to the Holder required by Section 3.3(b) no adjustment shall be made pursuant to this Section 3.4 for any dividend or subdivision or consolidation or combination that is effected by DSW.

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          3.5. Adjustment of Purchase Price for Other Issuances.

          (a) Issuance of Additional Shares. If at any time or from time to time after the date hereof, the Company shall issue or sell Additional Shares of Common Stock or DSW shall issue or sell Additional Shares of DSW Stock, (including Additional Shares of Common Stock or Additional Shares of DSW Stock, as the case may be, deemed to be issued pursuant to Section 3.5(b)) for a consideration per share less than the Current Market Price thereof but greater than the applicable Purchase Price in effect immediately prior to such issue or sale, then, and in each such case, subject to Section 3.8, the applicable Purchase Price shall be reduced concurrently with such issue or sale, to a price (calculated to the nearest .01 of a cent) determined by multiplying such applicable Purchase Price by a fraction

               (x) The numerator of which shall be the sum of (i) the number of shares of, in the case of the issuance of Additional Shares of Common Stock, Common Stock or, in the case of an issuance of Additional Shares of DSW Stock, DSW Stock, outstanding immediately prior to such issue or sale and (ii) the number of shares of, in the case of the issuance of Additional Shares of Common Stock, Common Stock or, in the case of an issuance of Additional Shares of DSW Stock, DSW Stock, which the aggregate consideration received by the Company or DSW, as applicable, for the total number of such Additional Shares of Common Stock or Additional Shares of DSW Stock, as the case may be, so issued or sold would purchase at the Current Market Price thereof, and

               (y) The denominator of which shall be the number of shares of, in the case of the issuance of Additional Shares of Common Stock, Common Stock, or, in the case of an issuance of Additional Shares of DSW Stock, of DSW Stock, outstanding immediately after such issue or sale, provided that, for the purposes of this Section 3.5, (x) immediately after any Additional Shares of Common Stock or Additional Shares of DSW Stock are deemed to have been issued pursuant to Section 3.5(b), such additional shares shall be deemed to be outstanding, and (y) treasury shares shall not be deemed to be outstanding.

          (b) Treatment of Options and Convertible Securities. In case the Company or DSW at any time or from time to time after the date hereof, shall issue, sell, grant or assume, or shall fix a record date for the determination of holders of any class of securities of the Company or DSW, as the case may be, entitled to receive, any Options or Convertible Securities (other than those excluded from the definition of Additional Shares of Common Stock or the definition of Additional Shares of DSW Stock) (whether or not the rights thereunder are immediately exercisable) and the consideration per share (determined pursuant to Section 3.6) of the shares issuable upon the exercise of such Options or, in the case of Convertible Securities and the Options therefor, the conversion or exchange of such Convertible Securities would be less than the Current Market Price thereof but greater than the applicable Purchase Price in effect on the date of and immediately prior to such issue, sale, grant or assumption or immediately prior to the close of business on such record date (or, if the Common Stock or DSW Stock, as applicable, trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading), then, and in each such case, the maximum number of Additional Shares of Common Stock or Additional Shares of DSW Stock (as set forth in the instrument relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the

14

conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock or Additional Shares of DSW Stock, as the case may be, issued for the purposes of Section 3.5 as of the time of such issue, sale, grant or assumption or, in case such a record date shall have been fixed, as of the close of business on such record date (or, if the Common Stock or DSW Stock, as applicable, trades on an ex-dividend basis, on the date prior to the commencement of ex-dividend trading, provided, that in any such case in which Additional Shares of Common Stock or Additional Shares of DSW Stock are deemed to be issued:

     (i) whether or not the Additional Shares of Common Stock or Additional Shares of DSW Stock underlying such Options or Convertible Securities are deemed to be issued, no further adjustment of the applicable Purchase Price shall be made upon the subsequent issue or sale of Convertible Securities or shares of Common Stock or DSW Stock upon the exercise of such Options or the conversion or exchange of such Convertible Securities, except in the case of any such Options or Convertible Securities which contain provisions requiring an adjustment, subsequent to the date of the issue or sale thereof, of the number of Additional Shares of Common Stock or Additional Shares of DSW Stock as issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities by reason of (x) a change of control of the Company or DSW, (y) the acquisition by any Person or group of Persons of any specified number or percentage of the voting securities of the Company or (z) any similar event or occurrence, each such case to be deemed hereunder to involve a separate issuance of Additional Shares of Common Stock, Additional Shares of DSW Stock, Options or Convertible Securities, as the case may be;

     (ii) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Company or DSW, or decrease in the number of Additional Shares of Common Stock or Additional Shares of DSW Stock issuable, upon the exercise, conversion or exchange thereof (by change of rate or otherwise), the Purchase Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options, or the rights of conversion or exchange under such Convertible Securities, which are outstanding at such time;

     (iii) upon the expiration (or purchase by the Company or DSW, as the case may be, and cancellation or retirement) of any such Options which shall not have been exercised or the expiration of any rights of conversion or exchange under any such Convertible Securities which (or purchase by the Company or DSW, as applicable, and cancellation or retirement of any such Convertible Securities the rights of conversion or exchange under which) shall not have been exercised, the applicable Purchase Price computed upon the original issue, sale, grant or assumption thereof (or upon the occurrence of the record date, or date prior to the commencement of ex-dividend trading, as the case may be, with respect thereto), and any subsequent adjustments based thereon,

15

shall, upon such expiration (or such cancellation or retirement, as the case may be), be recomputed as if:

               (x) in the case of Options for Common Stock or DSW Stock, or Convertible Securities, the only Additional Shares of Common Stock or Additional Shares of DSW Stock, issued or sold were the Additional Shares of Common Stock or Additional Shares of DSW Stock, if any, actually issued or sold upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Company or DSW, as the case may be, for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration actually received by the Company or DSW, as the case may be, upon such exercise, or for the issue or sale of all such Convertible Securities which were actually converted or exchanged, plus the additional consideration, if any, actually received by the Company or DSW, as the case may be, upon such conversion or exchange, and

               (y) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued or sold upon the exercise of such Options were issued at the time of the issue or sale, grant or assumption of such Options, and the consideration received by the Company or DSW, as the case may be, for the Additional Shares of Common Stock or Additional Shares of DSW Stock, deemed to have then been issued was the consideration actually received by the Company or DSW, as the case may be, for the issue, sale, grant or assumption of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Company or DSW, as the case may be, (pursuant to Section 3.6) upon the issue or sale of such Convertible Securities with respect to which such Options were actually exercised; and

     (iv) no readjustment pursuant to subdivision (ii) or (iii) above shall have the effect of decreasing the applicable Purchase Price by an amount in excess of the amount of the adjustment thereof originally made in respect of the issue, sale, grant or assumption of such Options or Convertible Securities.

          (c) For the avoidance of doubt, after the consummation of a Spin-Off and satisfaction of the Company’s obligations to make the distribution required by Section 3.3(b), no adjustment shall be made pursuant to this Section 3.5 as a result of any issuance by DSW of Additional Shares of DSW Stock.

          3.6. Computation of Consideration. For the purposes of this Section 3,

          (a) the consideration for the issue or sale of any Additional Shares of Common Stock or Additional Shares of DSW Stock shall, irrespective of the accounting treatment of such consideration,

               (i) insofar as it consists of cash, be computed at the gross cash proceeds to the Company or DSW, as the case may be, without deducting any expenses

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paid or incurred by such company, or any commissions or compensations paid or concessions or discounts allowed to underwriters, dealers or others performing similar services in connection with such issue or sale,

               (ii) insofar as it consists of property (including securities) other than cash, be computed at the Fair Value thereof at the time of such issue or sale, and

               (iii) in case Additional Shares of Common Stock or Additional Shares of DSW Stock are issued or sold together with other stock or securities or other assets of the Company or DSW, as the case may be, for a consideration which covers both, be the portion of such consideration so received, computed as provided in clauses (i) and (ii) above, allocable to such Additional Shares of Common Stock or Additional Shares of DSW Stock, such allocation to be determined in the same manner that the Fair Value of property not consisting of cash or securities is to be determined as provided in the definition of “Fair Value” herein; and

          (b) Additional Shares of Common Stock or Additional Shares of DSW Stock deemed to have been issued pursuant to Sections 3.2(b) and 3.5(b), relating to Options and Convertible Securities, shall be deemed to have been issued for a consideration per share determined by dividing

               (i) the total amount, if any, received and receivable by the Company or DSW, as applicable, as consideration for the issue, sale, grant or assumption of the Options or Convertible Securities in question, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration to protect against dilution) payable to the Company or DSW, as the case may be, upon the exercise in full of such Options or the conversion or exchange of such Convertible Securities or, in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, in each case computing such consideration as provided in the foregoing subclause (a),

          by

               (ii) the maximum number of shares of Common Stock or DSW Stock, as applicable, (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number to protect against dilution) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

          3.7. Dilution in Case of Other Securities. In case any Other Securities shall be issued or sold or shall become subject to issue or sale upon the conversion or exchange of any stock (or Other Securities) of the Company or DSW (or any issuer of Other Securities or any other Person referred to in Section 4) or to subscription, purchase or other acquisition pursuant to any Options issued or granted by the Company or DSW (or any such other issuer or Person) for a consideration such as to dilute, on a basis consistent with the standards established in the other

17

provisions of this Section 3, the purchase rights, if any, with respect to such Other Securities, granted by this Warrant, then, and in each such case, the computations, adjustments and readjustments provided for in this Section 3 with respect to the applicable Purchase Price shall be made as nearly as possible in the manner so provided and applied to determine the amount of Other Securities from time to time receivable upon the exercise of the Warrants, so as to protect the holders of the Warrants against the effect of such dilution.

          3.8. De Minimis Adjustments. If the amount of any adjustment of the Purchase Price required pursuant to Section 3.5 would be less than one tenth (1/10) of one percent (1%) of such Purchase Price in effect at the time such adjustment is otherwise so required to be made, such amount shall be carried forward and adjustment with respect thereto made at the time of and together with any subsequent adjustment which, together with such amount and any other amount or amounts so carried forward, shall aggregate a change in such Purchase Price of at least one tenth (1/10) of one percent (1%) of such Purchase Price. All calculations under this Warrant shall be made to the nearest one-hundredth of a share.

          3.9. Abandoned Dividend or Distribution. If the Company shall take a record of the holders of Common Stock or, if DSW shall take a record of the holders of DSW Stock for the purpose of entitling them to receive a dividend or other distribution (which results in an adjustment to the applicable Purchase Price under the terms of this Warrant) and shall, thereafter, and before such dividend or distribution is paid or delivered to shareholders entitled thereto, legally abandon its plan to pay or deliver such dividend or distribution, then any adjustment made to the applicable Purchase Price by reason of the taking of such record shall be reversed, and any subsequent adjustments, based thereon, shall be recomputed; provided, however, that no additional Purchase Price or any other adjustment shall be required with regard to Warrant Shares that have been issued upon exercise of the Warrant prior to such abandonment.

          3.10. Ownership of DSW Stock. The Company shall at all times while this Warrant is outstanding, but only prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), retain ownership of at least that number of shares of DSW Stock sufficient to permit exercise in full of this Warrant and any other outstanding Conversion Warrants and Term Loan Warrants for shares of DSW Stock. The Company shall take all actions necessary such that the shares of DSW Stock required hereby to be owned by it shall remain free of all Liens, other than Permitted Liens.

          4. CONSOLIDATION, MERGER, ETC.

          4.1. By the Company. In case the Company after the date hereof (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into the Company and the Company shall be the continuing or surviving Person but, in connection with such consolidation or merger, the Common Stock or Other Securities of the Company shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the Common Stock or Other Securities of the Company (other than a capital reorganization or reclassification for which adjustment in the Purchase Price and the number of shares of Common Stock

18

obtainable upon exercise of this Warrant is provided in Section 3.4), then, and in the case of each such transaction, proper provision shall be made so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder of this Warrant, upon the exercise hereof for Common Stock at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Common Stock Purchase Price in effect at the time of such consummation for all Common Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such Holder would actually have been entitled as a shareholder upon such consummation if such Holder had exercised this Warrant for Common Stock immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in Sections 3 through 5, provided that if a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50% of the outstanding shares of Common Stock, and if the Holder so designates in a notice given to the Company on or before the date immediately preceding the date of the consummation of such transaction, the Holder of this Warrant shall be entitled to receive the highest amount of securities, cash or other property to which it would actually have been entitled as a shareholder if the Holder of this Warrant had exercised this Warrant, including the payment of the Purchase Price in accordance with Section 2.1(b) hereof, prior to the expiration of such purchase, tender or exchange offer and accepted such offer, subject to adjustments (from and after the consummation of such purchase, tender or exchange offer) as nearly equivalent as possible to the adjustments provided for in Section 3 through 5.

          4.2. By DSW. In case DSW after the date hereof, but prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), (a) shall consolidate with or merge into any other Person and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other Person to consolidate with or merge into DSW and DSW shall be the continuing or surviving Person but, in connection with such consolidation or merger, the DSW Stock or Other Securities of DSW shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other Person, or (d) shall effect a capital reorganization or reclassification of the DSW Stock or Other Securities of DSW (other than a capital reorganization or reclassification for which adjustment in the Purchase Price and the number of shares of DSW Stock obtainable upon exercise of this Warrant is provided in Section 3.4), then, the Holder of this Warrant, upon the exercise hereof for DSW Stock at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate DSW Stock Purchase Price in effect at the time of such consummation for all DSW Stock or Other Securities issuable upon such exercise immediately prior to such consummation), in lieu of the DSW Stock or Other Securities issuable upon such exercise prior to such consummation, the highest amount of securities, cash or other property to which such Holder would actually have been entitled as a shareholder upon such consummation if such Holder had exercised this Warrant for DSW Stock immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in Sections 3 through 5.

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          4.3. Assumption of Obligations. Notwithstanding anything contained in this Warrant or in the Financing Agreement to the contrary, the Company shall not effect, and, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), shall not consent to the effecting by DSW of, any of the transactions described in clauses (a) through (d) of Section 4.1 and Section 4.2, respectively, unless, prior to the consummation thereof, each Person (other than the Company or DSW (as the case may be)), which may be required to deliver any stock, securities, cash or property upon the exercise of this Warrant as provided herein shall assume, by written instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant, (a) the obligations of the Company under this Warrant (and if the Company shall survive the consummation of such transaction, such assumption shall be in addition to, and shall not release the Company from, any continuing obligations of the Company, under this Warrant), (b) the obligations of the Company under the Registration Rights Agreement or the obligations of DSW under the DSW Registration Rights Agreement, and (c) the obligation of the Company to deliver to the Holder such shares of stock, securities, cash or property as, in accordance with the foregoing provisions of this Section 4, the Holder may be entitled to receive. Unless expressly stated herein, nothing in this Section 4 shall be deemed to authorize the Company to enter into, or to consent to the entering by DSW into, any transaction.

          5. OTHER DILUTIVE EVENTS. In case any event shall occur as to which the provisions of Section 3 or Section 4 hereof are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the Holder in accordance with the essential intent and principles of such Sections, then in each such case, the Board of Directors of the Company shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to preserve, without dilution, the purchase rights represented by this Warrant.

          6. NO DILUTION OR IMPAIRMENT. The Company shall not, (i) by amendment of its articles of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, or (ii) prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), by consent to or approval of any amendment of DSW’s articles of incorporation or any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action by DSW, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder of this Warrant against dilution or other impairment. Without limiting the generality of the foregoing, the Company (a) shall not permit the par value of any shares of stock receivable upon the exercise of this Warrant to exceed the amount payable therefor upon such exercise, (b) shall take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of stock, in the case of Common Stock, or transfer shares of DSW Stock, in the case of DSW Stock, free from all liens, security interests, encumbrances (in each of the foregoing cases, other than those imposed by the Holder), taxes, preemptive rights and charges on the exercise of the Warrants from time to time outstanding, and (c) shall not take any action, or consent to the taking or approval of any action by DSW, which results in any adjustment of the Purchase Price if the total number of Warrant Shares issuable after the action upon the exercise of all of the

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Warrants would exceed the total number of shares of Common Stock then authorized by the Company’s articles of organization, or, in the case of shares of DSW Stock, the number of shares of DSW Stock owned by the Company and available for the purpose of issue upon such exercise.

          7. ACCOUNTANTS’ REPORT. In each case of any adjustment or readjustment in the number of the Warrant Shares issuable upon the exercise of this Warrant or in the applicable Purchase Price, including, without limitation, pursuant to Section 3.1, 3.2, 3.4 or 3.5, the Company at its sole expense shall promptly (after becoming aware of an adjustment with respect to the DSW Stock) compute such adjustment or readjustment in accordance with the terms of this Warrant and prepare a report setting forth such adjustment or readjustment and showing in reasonable detail the method of calculation thereof and the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock or by DSW for any Additional Shares of DSW Stock issued or sold or deemed to have been issued under Section 3, (b) the number of shares of Common Stock or DSW Stock outstanding or deemed to be outstanding, and (c) the applicable Purchase Price in effect immediately prior to such issue or sale and as adjusted and readjusted (if required by Section 3) on account thereof. The Company shall forthwith mail a copy of each such report to the Holder. In the event that the Holder disagrees with such report, the Company shall cause independent certified public accountants of recognized national standing (which may be the regular auditors of the Company) selected by the Company to review and verify or revise such computation (other than any computation of the Fair Value of property) and report. The Company shall also keep copies of all such reports at its principal office and shall cause the same to be available for inspection at such office during normal business hours by the Holder.

          8. NOTICES OF CORPORATE ACTION. In the event of:

          (a) any taking by the Company or, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), DSW, of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or

          (b) any capital reorganization of the Company or, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), DSW, any reclassification or recapitalization of the capital stock of the Company or, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), DSW, any consolidation or merger involving the Company or, so long as no Spin-Off shall have occurred, DSW and any other Person, any transaction or series of transactions in which more than 50% of the voting securities of the Company are transferred to another Person, or any transfer, sale or other disposition of all or substantially all the assets of the Company or, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), DSW to any other Person, or

21

          (c) any voluntary or involuntary dissolution, liquidation or winding-up of the Company or, prior to the consummation of a Spin-Off and satisfaction of the Company’s obligations pursuant to Section 3.3(b), DSW, or

          (d) any Spin-Off, or

          (e) the exercise by the Company of any right or remedy with respect to its Lien on the capital stock of DSW,

the Company shall mail to each holder of a Warrant a notice specifying (i) the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and (ii) the date or expected date on which any such reorganization, reclassification, recapitalization, consolidation, merger, transfer, sale, disposition, dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock or DSW Stock (or Other Securities) shall be entitled to exchange their shares of Common Stock or DSW Stock (or Other Securities) for the securities or other property deliverable upon such reorganization, reclassification, recapitalization, consolidation, merger, transfer, dissolution, liquidation or winding-up. Such notice shall be mailed at least 20 days prior to the date therein specified, and in the case of a Spin-off, such notice shall be mailed at least 90 days prior to the record date of such Spin-Off.

          9. REGISTRATION OF STOCK. If any shares of Common Stock required to be reserved for purposes of exercise of this Warrant require registration with or approval of any governmental authority under any federal or state law (other than the Securities Act) before such shares may be issued or transferred upon exercise, the Company shall, at its expense and as expeditiously as possible, use its best efforts to cause such shares to be duly registered or approved, as the case may be. At any such time as Common Stock is listed on any national securities exchange, the Company shall, at its expense, obtain promptly and maintain the approval for listing on each such exchange, upon official notice of issuance, the shares of Common Stock issuable upon exercise of the then outstanding Warrants and maintain the listing of such shares after their issuance; and the Company shall also list on such national securities exchange, register under the Exchange Act and maintain such listing of, any Other Securities of the Company that at any time are issuable upon exercise of the Warrants, if and at the time that any securities of the same class shall be listed on such national securities exchange by the Company.

          10. RESTRICTIONS ON TRANSFER.

          10.1. Restrictive Legends. Except as otherwise permitted by this Section 10, each Warrant (including each Warrant issued upon the transfer of any Warrant) shall be stamped or otherwise imprinted with a legend in substantially the following form:

     “THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR

22

OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS SPECIFIED IN THIS WARRANT.”

Except as otherwise permitted by this Section 10, each certificate for Common Stock or DSW Stock (or Other Securities) issued upon the exercise of any Warrant, and each certificate issued upon the transfer of any such Common Stock or DSW Stock (or Other Securities), shall be stamped or otherwise imprinted with a legend in substantially the following form:

     “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAW OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION TO THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS.”

          10.2. Transfer to Comply With the Securities Act. Restricted Securities may not be sold, assigned, pledged, hypothecated, encumbered or in any manner transferred or disposed of (a “Transfer”), in whole or in part, except in compliance with the provisions of the Securities Act and state securities or Blue Sky laws and the terms and conditions hereof.

          10.3. Notice of Transfer. Each Holder shall, prior to any Transfer of any Warrants, give written notice to the Company of such Holder’s intention to Transfer.

          10.4. Termination of Restrictions. The restrictions imposed by this Section 10 on the transferability of Restricted Securities shall cease and terminate as to any particular Restricted Securities (a) when a registration statement with respect to the sale of such securities shall have been declared effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) when such securities are sold pursuant to Rule 144 (or any similar provision then in force) under the Securities Act, or (c) when, in the reasonable opinion of both counsel for the Holder and counsel for the Company or DSW, as applicable, such restrictions are no longer required or necessary in order to protect the Company or DSW, as applicable, against a violation of the Securities Act upon any sale or other disposition of such securities without registration thereunder. Whenever such restrictions shall cease and terminate as to any Restricted Securities of the Company, the Holder shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing the applicable legends required by Section 10.1.

          10.5. Exempt Transfers. The restrictions on the transfer of this Warrant or the Warrant Shares set forth in this Section 10 shall not apply to any transfer to an affiliate of the

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Holder or to any transfer to any other Person, provided that such transfer is made in compliance with the provisions of the Securities Act and state securities laws.

          11. RESERVATION OF STOCK, ETC. The Company shall at all times reserve and keep available, solely for issuance (in the case of Common Stock) or transfer and delivery upon exercise of this Warrant, the number of shares of Common Stock, DSW Stock (which, for the avoidance of doubt, may be Class B Shares) or Other Securities from time to time issuable or transferable upon exercise of this Warrant. The Company shall cause all shares of Common Stock, or Other Securities of the Company issuable and shall use its reasonable best efforts to cause all shares of DSW Stock transferable, upon exercise of any Warrants to be duly authorized and, when issued or transferred upon such exercise, to be validly issued and, in the case of shares, fully paid and nonassessable, with no liability on the part of the holders thereof, and, in the case of all securities, shall be free from all liens, security interests, encumbrances (in each of the foregoing cases, other than those imposed by the Holder), taxes, preemptive rights and charges. The transfer agent for the Common Stock, and every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of any of the purchase rights represented by this Warrant, are hereby irrevocably authorized and directed at all times until the Expiration Date to reserve such number of authorized and unissued shares as shall be requisite for such purpose. The Company shall keep copies of this Warrant on file with the transfer agent for the Common Stock and with every subsequent transfer agent for any shares of the Company’s capital stock issuable upon the exercise of the rights of purchase represented by this Warrant. The Company shall supply such transfer agent with duly executed stock certificates for such purpose. All Warrants surrendered upon the exercise of the rights thereby evidenced shall be canceled, and such canceled Warrants shall constitute sufficient evidence of the number of shares of common stock, if exercised for Common Stock, which have been issued upon the exercise of such Warrants. Subsequent to the Expiration Date, no shares of stock need be reserved in respect of any unexercised Warrant.

          12. REGISTRATION AND TRANSFER OF WARRANTS, ETC.

          12.1. Warrant Register; Ownership of Warrants. Each Warrant issued by the Company shall be numbered and shall be registered in a warrant register (the “Warrant Register”) as it is issued and transferred, which Warrant Register shall be maintained by the Company at its principal office or, at the Company’s election and expense, by a Warrant agent or the transfer agent. The Company shall be entitled to treat the registered Holder of any Warrant on the Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other Person, and shall not be affected by any notice to the contrary, except that, if and when any Warrant is properly assigned in blank, the Company may (but shall not be obligated to) treat the bearer thereof as the owner of such Warrant for all purposes. Subject to Section 10, a Warrant, if properly assigned, may be exercised by a new holder without a new Warrant first having been issued.

          12.2. Transfer of Warrants. Subject to compliance with Section 10, if applicable, this Warrant and all rights hereunder are transferable in whole or in part, without charge to the Holder hereof, upon surrender of this Warrant with a properly executed Form of Assignment attached hereto as Exhibit C at the principal office of the Company. Upon any

24

partial transfer, the Company shall at its expense issue and deliver to the Holder a new Warrant of like tenor, in the name of the Holder, which shall be exercisable for such number of shares of Common Stock with respect to which rights under this Warrant were not so transferred.

          12.3. Replacement of Warrants. On receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender of such Warrant to the Company at its principal office and cancellation thereof, the Company at its expense shall execute and deliver, in lieu thereof, a new Warrant of like tenor.

          12.4. Adjustments to Purchase Price and Number of Shares. Notwithstanding any adjustment in the Purchase Price or in the number or kind of Warrant Shares purchasable upon exercise of this Warrant, any Warrant theretofore or thereafter issued may continue to express the same number and kind of Warrant Shares as are stated in this Warrant, as initially issued.

          12.5. Fractional Shares. Notwithstanding any adjustment pursuant to Section 3 in the number of Warrant Shares covered by this Warrant or any other provision of this Warrant, the Company shall not be required to issue or transfer fractions of shares upon exercise of this Warrant or to distribute certificates which evidence fractional shares. In lieu of fractional shares, the Company shall make payment to the Holder, at the time of exercise of this Warrant as herein provided, in an amount in cash equal to such fraction multiplied by the Current Market Price of a share of Common Stock or DSW Stock, as applicable, on the date of Warrant exercise.

          13. SECURITIES ACT MATTERS. The Holder represents and warrants to the Company as of the date hereof that:

          (a) The Holder is acquiring this Warrant for its own account, without a view to, or sale in connection with, the distribution thereof. The Holder has no present agreement, undertaking, arrangement, commitment or obligation providing for the disposition of the Warrant or the Warrant Shares, all without prejudice, however, to the right of the Holder at any time, in accordance with this Warrant, lawfully to sell or otherwise to dispose of all or any part of the Warrant or Warrant Shares held by it;

          (b) The Holder is an “accredited investor” within the meaning of Regulation D under the Securities Act. The Holder has not retained, utilized or been represented by any broker or finder in connection with the transactions contemplated by this Warrant;

          (c) The Holder acknowledges that, subject to the Registration Rights Agreement and the DSW Registration Rights Agreement (A) the Warrants and the Warrant Shares have not been registered under the Securities Act, in reliance on the non-public offering exemption contained in Section 4(2) of the Securities Act and Regulation D thereunder; (B) because the Warrants and the Warrant Shares are not so registered, the Holder must bear the economic risk of holding this Warrant and the Warrant Shares for an indefinite period of time unless the Warrants and the Warrant Shares are subsequently registered under the Securities Act

25

or an exemption from such registration is available with respect thereto; (C) Rule 144 under the Securities Act may or may not be available for resales of the Warrants or the Warrant Shares in the future and, if so, may only be available for sales in limited amounts; (D) there is presently no trading market for the Warrants and there is no assurance that such market will exist in the future; and (E) while there is presently a trading market for the Warrant Shares, there is no assurance that such market will be in existence in the future; and

          (d) If the Holder decides to dispose of this Warrant or the Warrant Shares, which it does not now contemplate, the Holder can do so only in accordance and in compliance with the Securities Act and Rule 144 or another exemption from the registration requirements of the Securities Act, as then in effect or through an effective registration statement under the Securities Act.

          14. REMEDIES; SPECIFIC PERFORMANCE. The Company stipulates that there would be no adequate remedy at law to any Holder in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant and accordingly, the Company agrees that, in addition to any other remedy to which the Holder may be entitled at law or in equity, the Holder shall be entitled to seek to compel specific performance of the obligations of the Company under this Warrant, without the posting of any bond, in accordance with the terms and conditions of this Warrant in any court of the United States or any State thereof having jurisdiction, and if any action should be brought in equity to enforce any of the provisions of this Warrant, the Company shall not raise the defense that there is an adequate remedy at law. Except as otherwise provided by law, a delay or omission by the Holder hereto in exercising any right or remedy accruing upon any such breach shall not impair the right or remedy or constitute a waiver of or acquiescence in any such breach. No remedy shall be exclusive of any other remedy. All available remedies shall be cumulative.

          15. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof any rights as a shareholder of the Company or as imposing any obligation on the Holder to purchase any securities or as imposing any liabilities on the Holder as a shareholder of the Company, whether such obligation or liabilities are asserted by the Company or by creditors of the Company.

          16. NOTICES. All notices and other communications (and deliveries) provided for or permitted hereunder shall be made in writing by hand delivery, telecopier, any nationally-recognized courier guaranteeing overnight delivery or first class registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Company:	Retail Ventures Inc.
	3241 Westerville Road
	Columbus, OH 43224
	Attn: James McGrady, Chief Financial Officer
	Fax No. (614) 473-2721
with copies to:	Retail Ventures, Inc.

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	3241 Westerville Road
	Columbus, OH 43224
	Attn: General Counsel
	Fax No. (614) 337-4682
If to Holder:	Millennium Partners, L.P.
	c/o Millennium Management, L.L.C.
	666 Fifth Avenue, 8th Floor
	New York, NY 10103
	Attn: David Nolan
	Fax No. (212) 841-4141
with copies to:	Millennium Partners, L.P.
	c/o Millennium Management, L.L.C.
	666 Fifth Avenue, 8th Floor
	New York, NY 10103
	Attn: Lisa Halustick, Esq.
	Fax No. (212) 905-4413

          All such notices and communications (and deliveries) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; when receipt is acknowledged, if telecopied; on the next Business Day, if timely delivered to a courier guaranteeing overnight delivery; and five days after being deposited in the mail, if sent first class or certified mail, return receipt requested, postage prepaid; provided, that the exercise of any Warrant shall be effective in the manner provided in Section 2.

          17. AMENDMENTS. This Warrant and any term hereof may not be amended, modified, supplemented or terminated, and waivers or consents to departures from the provisions hereof may not be given, except by written instrument duly executed by the Company and the Holder.

          18. DESCRIPTIVE HEADINGS, ETC. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning of terms contained herein. Unless the context of this Warrant otherwise requires: (1) words of any gender shall be deemed to include each other gender; (2) words using the singular or plural number shall also include the plural or singular number, respectively; (3) the words “hereof”, “herein” and “hereunder” and words of similar import when used in this Warrant shall refer to this Warrant as a whole and not to any particular provision of this Warrant, and Section and paragraph references are to the Sections and paragraphs of this Warrant unless otherwise specified; (4) the word “including” and words of similar import when used in this Warrant shall mean “including, without limitation,” unless otherwise specified; (5) “or” is not exclusive; and (6) provisions apply to successive events and transactions.

          19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the law of the State of New York.

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          20. REGISTRATION RIGHTS AGREEMENT. The shares of Common Stock (and Other Securities of the Company) issuable upon exercise of this Warrant shall constitute Registrable Securities (as such term is defined in the Registration Rights Agreement). The shares of DSW Stock issuable upon exercise of this Warrant shall constitute Registrable Securities (as such term is defined in the DSW Registration Rights Agreement). Each Holder shall be entitled to all of the benefits afforded to a holder of any such Registrable Securities under the Registration Rights Agreement and such Holder, by its acceptance of this Warrant, agrees to be bound by and to comply with the terms and conditions of the Registration Rights Agreement and the DSW Registration Rights Agreement, applicable to such Holder as a holder of such Registrable Securities. In addition to the foregoing, to the extent the Holder exercises this Warrant into DSW Stock within 180 days of a Qualifying IPO, such Holder agrees not to transfer such Warrant Shares until the date that is 181 days after the closing date of such Qualifying IPO.

          21. EXPIRATION. The right to exercise this Warrant shall expire at 5:00 p.m., New York City time, on June 11, 2012.

          22. COSTS AND ATTORNEYS’ FEES. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Warrant, the Company agrees and the Holder, by taking and holding this Warrant agrees, that the prevailing party shall recover from the non-prevailing party all of such prevailing party’s costs and reasonable attorneys’ fees incurred in each and every such action, suit or other proceeding, including any and all appeals or petitions therefrom.

[Remainder of this page intentionally left blank]

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          IN WITNESS WHEREOF, the Company has executed and delivered this Warrant as of the date first above written.

RETAIL VENTURES, INC.
By:
Name:	James A. McGrady
Title:	Chief Financial Officer

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EXHIBIT A to

Common Stock Purchase Warrant

FORM OF
ELECTION TO PURCHASE SHARES OF COMMON STOCK

     The undersigned hereby irrevocably elects to exercise the Warrant to purchase ___Common Shares, no par value per share (“Common Stock”), of RETAIL VENTURES, INC. and hereby makes payment of $___therefor [or] makes payment by reduction pursuant to Section 2.1(b)(ii) of the Warrant of the number of shares of Common Stock otherwise issuable to the Holder upon Warrant exercise by ___shares [or] makes payment therefor by delivery of the following Common Stock Certificates of the Company (properly endorsed for transfer in blank) for cancellation by the Company pursuant to Section 2.1(b)(iii) of the Warrant, certificates of which are attached hereto for cancellation ___[list certificates by number and amount]. The undersigned hereby requests that certificates for such shares be issued and delivered as follows:

ISSUE TO:

(NAME)

(ADDRESS, INCLUDING ZIP CODE)

(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)

DELIVER TO:

(NAME)

(ADDRESS, INCLUDING ZIP CODE)

     If the number of shares of Common Stock purchased (and/or reduced) hereby is less than the number of shares of Common Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of Common Stock not so purchased (or reduced) be issued and delivered as follows:

ISSUE TO:

(NAME OF HOLDER

(ADDRESS, INCLUDING ZIP CODE)

DELIVER TO:

(NAME OF HOLDER)

(ADDRESS, INCLUDING ZIP CODE)

Dated: __________________, 20___		NAME OF HOLDER
	By
		Name:
		Title:

30

EXHIBIT B to

Common Stock Purchase Warrant

FORM OF
ELECTION TO PURCHASE SHARES OF DSW STOCK

     The undersigned hereby irrevocably elects to exercise the Warrant to purchase ___Class A Common Shares, no par value, of DSW Inc. (“DSW Stock”) and hereby makes payment of $___ therefor [or] makes payment by reduction pursuant to Section 2.1(b)(ii) of the Warrant of the number of shares of DSW Stock otherwise issuable to the Holder upon Warrant exercise by ___shares [or] makes payment therefor by delivery of the following DSW Stock Certificates of DSW Inc. (properly endorsed for transfer in blank) for transfer to the Company pursuant to Section 2.1(b)(iii) of the Warrant, certificates of which are attached hereto for cancellation ___[list certificates by number and amount]. The undersigned hereby requests that certificates for such shares be issued and delivered as follows:

ISSUE TO:

(NAME)

(ADDRESS, INCLUDING ZIP CODE)

(SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER)

DELIVER TO:

(NAME)

(ADDRESS, INCLUDING ZIP CODE)

     If the number of shares of DSW Stock purchased (and/or reduced) hereby is less than the number of shares of DSW Stock covered by the Warrant, the undersigned requests that a new Warrant representing the number of shares of DSW Stock not so purchased (or reduced) be issued and delivered as follows:

ISSUE TO:

(NAME OF HOLDER

(ADDRESS, INCLUDING ZIP CODE)

DELIVER TO:

(NAME OF HOLDER)

(ADDRESS, INCLUDING ZIP CODE)

Dated: ________________________, 20___		NAME OF HOLDER
	By
		Name:
		Title:

31

EXHIBIT C to

Common Stock Purchase Warrant

FORM OF ASSIGNMENT

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto the Assignee named below all of the rights of the undersigned to purchase Common Shares, no par value per share (“Common Stock”) of RETAIL VENTURES, INC. (the “Company”) or, after the consummation of a Qualifying IPO (as defined in the Warrant) but prior to the consummation of a Spin-Off (as defined in the Warrant) and satisfaction of the Company’s obligations pursuant to Section 3.3(b) and at its election, Class A common shares no par value per share (“DSW Stock”) of DSW Inc. owned by the Company, and represented by the Warrant, with respect to the number of shares of Common Stock and DSW Stock set forth below:

Name of		No. of Shares of	No. of Shares of
Assignee	Address	Common Stock	DSW Stock

and does hereby irrevocably constitute and appoint                      Attorney to make such transfer on the books of maintained for that purpose, with full power of substitution in the premises.

Dated: _______________, 20___		NAME OF HOLDER
	By
		Name:
		Title:

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Jay L. Schottenstein, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of DSW Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	[Reserved];
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2005	/s/ Jay L. Schottenstein
	Jay L. Schottenstein
	Chief Executive Officer and Chairman of the Board

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Douglas J. Probst, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of DSW Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	[Reserved];
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 8, 2005	/s/ Douglas J. Probst
	Douglas J. Probst
	Chief Financial Officer

EX-32.1

Exhibit 32.1

SECTION 1350 CERTIFICATION

     In connection with the Quarterly Report of DSW Inc. (the “Company”) on Form 10-Q for the period ending October 29, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay L. Schottenstein, Chief Executive Officer and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

December 8, 2005	/s/ Jay L. Schottenstein
	Jay L. Schottenstein
	Chief Executive Officer and Chairman of the Board

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

SECTION 1350 CERTIFICATION

     In connection with the Quarterly Report of DSW Inc. (the “Company”) on Form 10-Q for the period ending October 29, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas J. Probst, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

          (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

          (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

December 8, 2005	/s/ Douglas J. Probst
	Douglas J. Probst
	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-99

EXHIBIT 99

DSW INC.

Safe Harbor Under the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Retail Ventures, Inc. (the “Company”) desires to take advantage of the “safe harbor” provisions of the Act.

Certain information in this Form 10-Q, particularly information regarding future economic performance and finances, and plans, expectations and objectives of management, is forward looking. The following factors, in addition to other possible factors not listed, could affect the Company’s actual results and cause such results to differ materially from those expressed in forward-looking statements:

We intend to open new DSW stores at an increased rate compared to historical years, which could strain our resources and have a material adverse effect on our business and financial performance.

Our continued and future growth largely depends on our ability to successfully open and operate new DSW stores on a profitable basis. During fiscal 2004, fiscal 2003 and fiscal 2002, we opened 30 (net of one store closing during that period), 16 and 22 new DSW stores, respectively. We intend to open approximately 30 stores per year in each of the next four fiscal years. This continued expansion could place increased demands on our financial, managerial, operational and administrative resources. For example, our planned expansion will require us to increase continually the number of people we employ as well as to monitor and upgrade our management information and other systems and our distribution facilities. These increased demands and operating complexities could cause us to operate our business less efficiently, adversely affect our operations and financial performance and slow our growth.

We may be unable to open all the stores contemplated by our growth strategy on a timely basis, and new stores we open may not be profitable or may have an adverse impact on the profitability of existing stores, either of which could have a material adverse effect on our business, financial condition and results of operations.

We intend to open approximately 30 stores per year in each of the next four fiscal years. However, we may not achieve our planned expansion on a timely and profitable basis or achieve results in new locations similar to those achieved in existing locations in prior periods. Our ability to open and operate new DSW stores successfully on a timely and profitable basis depends on many factors, including, among others, our ability to:

• identify suitable markets and sites for new store locations;

• negotiate favorable lease terms;

• build-out or refurbish sites on a timely and effective basis;

• obtain sufficient levels of inventory to meet the needs of new stores;

• obtain sufficient financing and capital resources or generate sufficient cash flows from operations to fund growth;

• open new stores at costs not significantly greater than those anticipated;

• successfully open new DSW stores in regions of the United States in which we currently have few or no stores;

• control the costs of other capital investments associated with store openings, including, for example, those related to the expansion of distribution facilities;

• hire, train and retain qualified managers and store personnel; and

• successfully integrate new stores into our existing infrastructure, operations and management and distribution systems or adapt such infrastructure, operations and systems to accommodate our growth.

As a result, we may be unable to open new stores at the rates expected or at all. If we fail to successfully implement our growth strategy, the opening of new DSW stores could be delayed or prevented, could cost more than anticipated and could divert resources from other areas of our business, any of which could have a material adverse effect on our business, financial condition and results of operations.

To the extent that we open new DSW stores in our existing markets, we may experience reduced net sales in existing stores in those markets. As the number of our stores increases, our stores will become more concentrated in the markets we serve. As a result, the number of customers and financial performance of individual stores may decline and the average sales per square foot at our stores may be reduced. This could have a material adverse effect on our business, financial condition and results of operations.

We rely on our good relationships with vendors to purchase brand name and designer merchandise at favorable prices. If these relationships were to be impaired, we may not be able to obtain a sufficient selection of merchandise at attractive prices, and we may not be able to respond promptly to changing fashion trends, either of which could have a negative impact on our competitive position, our business and financial performance.

We do not have long-term supply agreements or exclusive arrangements with any vendors and, therefore, our success depends on maintaining good relations with our vendors. Our growth strategy depends to a significant extent on the willingness and ability of our vendors to supply us with sufficient inventory to stock our new stores. If we fail to strengthen our relations with our existing vendors or to enhance the quality of merchandise they supply us, and if we cannot maintain or acquire new vendors of in-season brand name and designer merchandise, our ability to obtain a sufficient amount and variety of merchandise at favorable prices may be limited, which could have a negative impact on our competitive position. In addition, our inability to stock our DSW stores with in-season merchandise at attractive prices could result in lower net sales and decreased customer interest in our stores, which, in turn, would adversely affect our financial performance.

We may be unable to anticipate and respond to fashion trends and consumer preferences in the markets in which we operate, which could adversely affect our business, financial condition and results of operations.

Our merchandising strategy is based on identifying each region’s customer base and having the proper mix of products in each store to attract our target customers in that region. This requires us to anticipate and respond to numerous and fluctuating variables in fashion trends and other conditions in the markets in which our stores are situated. A variety of factors will affect our ability to maintain the proper mix of products in each store, including:

• variations in local economic conditions, which could affect our customers’ discretionary spending;

• unanticipated fashion trends;

• our success in developing and maintaining vendor relationships that provide us access to in-season merchandise at attractive prices;

• our success in distributing merchandise to our stores in an efficient manner; and

• changes in weather patterns, which in turn affect consumer preferences.

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If we are unable to anticipate and fulfill the merchandise needs of each region, we may experience decreases in our net sales and may be forced to increase markdowns in relation to slow-moving merchandise, either of which could have an adverse effect on our business, financial condition and results of operations.

Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons, which could result in a decline in the price of our Class A Common Shares.

Our business is sensitive to customers’ spending patterns, which in turn are subject to prevailing regional and national economic conditions and the general level of economic activity. Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of other factors affect our comparable store sales and quarterly financial performance, including:

• changes in our merchandising strategy;

• timing and concentration of new DSW store openings and related pre-opening and other start-up costs;

• levels of pre-opening expenses associated with new DSW stores;

• changes in our merchandise mix;

• changes in and regional variations in demographic and population characteristics;

• timing of promotional events;

• seasonal fluctuations due to weather conditions;

• actions by our competitors; and

• general United States economic conditions and, in particular, the retail sales environment.

Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other quarter, and comparable store sales for any particular future period may decrease. Our future financial performance may fall below the expectations of securities analysts and investors. In that event, the price of our Class A Common Shares would likely decline.

We rely on a single distribution center. The loss or disruption of our centralized distribution center or our failure in the future to add additional distribution facilities could have an adverse effect on our business and operations.

Most of our inventory is shipped directly from suppliers to a single centralized distribution center in Columbus, Ohio, where the inventory is then processed, sorted and shipped to one of 11 pool locations located throughout the country and then on to our stores. Our operating results depend on the orderly operation of our receiving and distribution process, which in turn depends on third-party vendors’ adherence to shipping schedules and our effective management of our distribution facilities. We may not anticipate all the changing demands that our expanding operations will impose on our receiving and distribution system, and events beyond our control, such as disruptions in operations due to fire or other catastrophic events, labor disagreements or shipping problems, may result in delays in the delivery of merchandise to our stores.

We may need to increase our distribution capacity in the future to accommodate our expanding retail store base. Because our ability to expand our distribution facilities at our current site is limited, we may need to acquire, construct or lease additional distribution facilities in other geographic locations to accommodate our planned expansion. We may also need to invest in additional information technology to achieve a unified receiving and distribution system.

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While we maintain business interruption and property insurance, in the event our distribution center were to be shut down for any reason or if we were to incur higher costs and longer lead times in connection with a disruption at our distribution center, our insurance may not be sufficient, and insurance proceeds may not be timely paid to us.

We are dependent on Retail Ventures to provide us with many key services for our business. The agreements we entered into with Retail Ventures in connection with our IPO could restrict our operations and adversely affect our financial condition. Our prior and continuing relationship with Retail Ventures exposes us to risks attributable to Retail Ventures’ business.

From 1998 until the completion of its IPO, DSW was operated as a wholly-owned subsidiary of Value City Department Stores, Inc. or Retail Ventures, and many key services required by DSW for the operation of its business were provided by Retail Ventures and its subsidiaries. In connection with our IPO, we entered into agreements with Retail Ventures related to the separation of our business operations from Retail Ventures including, among others, a master separation agreement, a shared services agreement and a tax separation agreement.

Under the terms of the shared services agreement, which when signed became effective as of January 30, 2005, Retail Ventures will provide us with key services relating to import administration, risk management, information technology, tax, logistics and inbound transportation management, legal services, financial services, shared benefits administration and payroll and will maintain insurance for us and for our directors, officers, and employees. In turn, we will provide several subsidiaries of Retail Ventures with services relating to planning and allocation support, distribution services and outbound transportation management, site research, lease negotiation, store design and construction management. The initial term of the shared services agreement will expire at the end of fiscal 2007 and will be extended automatically for additional one-year terms unless terminated by one of the parties. We expect some of these services to be provided for longer or shorter periods than the initial term. We believe it is necessary for Retail Ventures to provide these services for us under the shared services agreement to facilitate the efficient operation of our business.

Once the transition periods specified in the shared services agreement have expired and are not renewed, or if Retail Ventures does not or is unable to perform its obligations under the shared services agreement, we will be required to provide these services ourselves or to obtain substitute arrangements with third parties. We may be unable to provide these services because of financial or other constraints or be unable to timely implement substitute arrangements on terms that are favorable to us, or at all, which would have an adverse effect on our business, financial condition and results of operations.

The tax separation agreement, which became effective upon the consummation of our IPO, governs the respective rights, responsibilities, and obligations of Retail Ventures and us with respect to tax liabilities and benefits, tax attributes, tax contests and other matters regarding taxes and related tax returns. Although Retail Ventures does not intend or plan to undertake a spin-off of our stock to Retail Ventures stockholders, we and Retail Ventures have agreed to set forth our respective rights, responsibilities and obligations with respect to any possible spin-off in the tax separation agreement. If Retail Ventures were to decide to pursue a possible spin-off, we have agreed to cooperate with Retail Ventures and to take any and all actions reasonably requested by Retail Ventures in connection with such a transaction. We have also agreed not to knowingly take or fail to take any actions that could reasonably be expected to preclude Retail Ventures’ ability to undertake a tax-free spin-off. In addition, we generally would be responsible for any taxes resulting from the failure of a spin-off to qualify as a tax-free transaction to the extent such taxes are attributable to, or result from, any action or failure to act by us or certain transactions in our stock (including transactions over which we would have no control, such as acquisitions of our stock and the exercise of warrants, options, exchange rights, conversion rights or similar arrangements with respect to our stock) following or preceding a spin-off. We would also be responsible for a percentage (based on the relative market capitalizations of DSW and Retail Ventures at the time of such spin-off) of such taxes to the extent such taxes are not otherwise attributable to DSW or Retail Ventures. Our agreements in connection with such tax matters last indefinitely.

Retail Ventures is obligated to indemnify us for losses that a party may seek to impose upon us or our affiliates for liabilities relating to the Retail Ventures business that are incurred through a breach of the master separation agreement between us and Retail Ventures or any ancillary agreement between us and Retail Ventures or its non-DSW affiliates, if such losses are attributable to Retail Ventures in connection with our IPO or are not expressly

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assumed by us under the master separation agreement. Any claims made against us that are properly attributable to Retail Ventures or Value City in accordance with these arrangements would require us to exercise our rights under the master separation agreement to obtain payment from Retail Ventures. We are exposed to the risk that, in these circumstances, Retail Ventures cannot, or will not, make the required payment. If this were to occur, our business and financial performance could be adversely affected.

Prior to our IPO, we had not been operated as a stand-alone company since 1998. Our business no longer has access to the borrowing capacity, cash flow, assets and some services provided by Retail Ventures and its subsidiaries as we did while we were wholly-owned by Retail Ventures.

Our failure to retain our existing senior management team and to continue to attract qualified new personnel could adversely affect our business.

Our business requires disciplined execution at all levels of our organization to ensure that we continually have sufficient inventories of assorted brand name merchandise at below traditional retail prices. This execution requires an experienced and talented management team. If we were to lose the benefit of the experience, efforts and abilities of any of our key executive and buying personnel, our business could be materially adversely affected. We have entered into employment agreements with several of these officers. Furthermore, our ability to manage our retail expansion will require us to continue to train, motivate and manage our employees and to attract, motivate and retain additional qualified managerial and merchandising personnel. Competition for these types of personnel is intense, and we may not be successful in attracting, assimilating and retaining the personnel required to grow and operate our business profitably.

We may be unable to compete favorably in our highly competitive market.

The retail footwear market is highly competitive with few barriers to entry. We compete against a diverse group of retailers, both small and large, including locally owned shoe stores, regional and national department stores, specialty retailers and discount chains. Some of our competitors are larger and have substantially greater resources than we do. Our success depends on our ability to remain competitive with respect to style, price, brand availability and customer service. The performance of our competitors, as well as a change in their pricing policies, marketing activities and other business strategies, could have a material adverse effect on our business, financial condition, results of operations and our market share.

A decline in general economic conditions, or the outbreak or escalation of war or terrorist acts, could lead to reduced consumer demand for our footwear and accessories.

Consumer spending habits, including spending for the footwear and related accessories that we sell, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, income tax rates and policies, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers’ disposable income. A general slowdown in the United States economy or an uncertain economic outlook could adversely affect consumer spending habits.

Consumer confidence is also affected by the domestic and international political situation. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers. In the event of an economic slowdown, we could experience lower net sales than expected on a quarterly or annual basis and be forced to delay or slow our retail expansion plans.

We rely on foreign sources for our merchandise, and our business is therefore subject to risks associated with international trade.

We purchase merchandise from domestic and foreign vendors. In addition, many of our domestic vendors import a large portion of their merchandise from abroad, primarily from China, Brazil and Italy. We believe that almost all

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the merchandise we purchase is manufactured outside the United States. For this reason, we face risks inherent in purchasing from foreign suppliers, such as:

• economic and political instability in countries where these suppliers are located;

• international hostilities or acts of war or terrorism affecting the United States or foreign countries from which our merchandise is sourced;

• increases in shipping costs;

• transportation delays and interruptions, including as a result of increased inspections of import shipments by domestic authorities;

• work stoppages;

• adverse fluctuations in currency exchange rates;

• United States laws affecting the importation of goods, including duties, tariffs and quotas and other non-tariff barriers;

• expropriation or nationalization;

• changes in local government administration and governmental policies;

• changes in import duties or quotas;

• compliance with trade and foreign tax laws; and

• local business practices, including compliance with local laws and with domestic and international labor standards.

We require our vendors to operate in compliance with applicable laws and regulations and our internal requirements. However, we do not control our vendors or their labor and business practices. The violation of labor or other laws by one of our vendors could have an adverse effect on our business.

Our new secured revolving credit facility could limit our operational flexibility.

In July 2005, we entered into a new $150 million secured revolving credit facility with a term of five years. Under this new facility, we and our subsidiary, DSW Shoe Warehouse, Inc. (“DSWSW”), are named as co-borrowers. This new facility has borrowing base restrictions and provides for borrowings at variable interest rates based on the London Interbank Offered Rate, the prime rate and the Federal Funds effective rate, plus a margin. Our obligations under our new secured revolving credit facility are secured by a lien on substantially all of our and DSWSW’s personal property and a pledge of all of our shares of DSWSW. In addition, this facility contains usual and customary restrictive covenants relating to our management and the operation of our business. These covenants, among other things, restrict our ability to grant liens on our assets, incur additional indebtedness, open or close stores, pay cash dividends and redeem our stock, enter into transactions with affiliates and merge or consolidate with another entity. In addition, if at any time we utilize over 90% of our borrowing capacity under this facility, we must comply with a fixed charge coverage ratio test set forth in the facility documents. These covenants could restrict our operational flexibility, and any failure to comply with these covenants or our payment obligations would limit our ability to borrow under the new secured revolving credit facility and, in certain circumstances, may allow the lenders thereunder to require repayment.

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From 1998 until its IPO, DSW was not operated as an entity separate from Value City and Retail Ventures, and, as a result, DSW’s historical and pro forma financial information may not be indicative of DSW’s historical financial results or future financial performance.

Our consolidated financial information included in this Form 10-Q, as it relates to periods before July 5, 2005, may not be indicative of our future financial performance. This is because these statements do not necessarily reflect the historical financial condition, results of operations and cash flows of DSW as they would have been had we been operated during the periods presented as a separate, stand-alone entity.

Our consolidated financial information, as it relates to periods before July 5, 2005, assumes that DSW, for the periods presented, had existed as a separate legal entity, and has been derived from the consolidated financial statements of Retail Ventures. Some costs have been reflected in the consolidated financial statements that are not necessarily indicative of the costs that we would have incurred had we operated as an independent, stand-alone entity for all periods presented. These costs include allocated portions of Retail Ventures’ corporate overhead, interest expense and income taxes.

We face security risks related to our electronic processing and transmission of confidential customer information. On March 8, 2005, we announced the theft of credit card and other purchase information relating to DSW customers. This security breach could adversely affect our reputation and business and subject us to liability.

We rely on commercially available encryption software and other technologies to provide security for processing and transmission of confidential customer information, such as credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments, including improper acts by third parties, may result in a compromise or breach of the security measures we use to protect customer transaction data. Compromises of these security systems could have a material adverse effect on our reputation and business, and may subject us to significant liabilities and reporting obligations. A party who is able to circumvent our security measures could misappropriate our information, cause interruptions in our operations, damage our reputation and customers’ willingness to shop in our stores and subject us to possible liability. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches.

On March 8, 2005, Retail Ventures announced that it had learned of the theft of credit card and other purchase information from a portion of DSW customers. On April 18, 2005, Retail Ventures issued the findings from our investigation into the theft. The theft took place primarily over two weeks and covered all customers who made purchases at 108 DSW stores, primarily during a three-month period from mid-November 2004 to mid-February 2005. Transaction information involving approximately 1.4 million credit cards was obtained. For each card, the stolen information included credit card or debit card numbers, name and transaction amount. In addition, data from transactions involving approximately 96,000 checks were stolen. In these cases, checking account numbers and driver’s license numbers were obtained.

We have contacted and are cooperating with law enforcement and other authorities with regard to this matter. To mitigate potential negative effects on our business and financial performance, we are working with credit card companies and issuers and have contacted as many of our affected customers as possible. In addition, we worked with a leading computer security firm to minimize the risk of any future data theft. We are involved in several legal proceedings arising out of this incident that, after consultation with counsel, we believe will not exceed the reserves we have currently recorded.

In connection with this matter, we entered into a proposed consent order with the Federal Trade Commission (“FTC”), which has jurisdiction over consumer protection matters. The FTC published the proposed order for public comment on December 1, 2005, and copies of the complaint and consent order are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The public comment period expires on January 2, 2006.

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We have not admitted any wrongdoing or that the facts alleged in the FTC’s proposed unfairness complaint are true. Under the consent order as proposed, DSW will pay no fine or damages. DSW has agreed, however, to maintain a comprehensive information security program, much of which was put in place shortly after DSW first learned of the theft, and to undergo a biannual assessment of such program by an independent third party.

There can be no assurance that there will not be additional proceedings or claims brought against us in the future. We have contested and will continue to vigorously contest the claims made against us and will continue to explore our defenses and possible claims against others.

As of October 29, 2005, we estimate that the potential exposures for losses related to this theft, including exposure under currently pending proceedings, range from approximately $6.5 million to approximately $9.5 million. Because of many factors, including the early development of information regarding the theft and recoverability under insurance policies, there is no amount in the estimated range that represents a better estimate than any other amount in the range. Therefore, in accordance with Financial Accounting Standard No. 5, “Accounting for Contingencies,” we have accrued a charge to operations in the first quarter of fiscal 2005 equal to the low end of the range set forth above, or $6.5 million. As the situation develops and more information becomes available to us, the amount of the reserve may increase or decrease accordingly. The amount of any such change may be material.

Although difficult to quantify, since the announcement of the theft, we have not yet discerned any material negative effect on sales trends we believe are attributable to the theft. However, this many not be indiciative of the long-term developments regarding this matter.

We are controlled directly by Retail Ventures and indirectly by Schottenstein Stores Corporation, whose interests may differ from other shareholders.

Retail Ventures, a public corporation, owns 100% of our Class B Common Shares, which represents approximately 63.0% of our outstanding Common Shares. These shares collectively represent approximately 93.2% of the combined voting power of our outstanding Common Shares. Approximately 48.2% of Retail Ventures’ common shares on a fully diluted basis are beneficially owned by Schottenstein Stores Corporation, or SSC, a privately held corporation controlled by Jay L. Schottenstein, the Chairman of the Board of Directors of DSW and Retail Ventures and the Chief Executive Officer of DSW, and members of his immediate family. Given their respective ownership interests, Retail Ventures and, indirectly, SSC, will be able to control or substantially influence the outcome of all matters submitted to our shareholders for approval, including:

• the election of directors;

• mergers or other business combinations; and

• acquisitions or dispositions of assets.

The interests of Retail Ventures or SSC may differ from or be opposed to the interests of our other shareholders, and their control may have the effect of delaying or preventing a change in control that may be favored by other shareholders.

SSC and Retail Ventures or its affiliates may compete directly against us.

Corporate opportunities may arise in the area of potential competitive business activities that may be attractive to Retail Ventures, SSC and us in the area of employee recruiting and retention. Any competition could intensify if Value City Department Stores LLC, or Value City, begins to carry an assortment of shoes in its stores similar to those found in our stores, target customers similar to ours or adopt a similar business model or strategy for its shoe businesses. Given that Value City is a wholly-owned subsidiary of Retail Ventures and DSW is not wholly-owned, Retail Ventures and SSC may be inclined to direct relevant corporate opportunities to Value City rather than us.

Our amended and restated articles of incorporation (our “Articles”) provide that Retail Ventures and SSC are under no obligation to communicate or offer any corporate opportunity to us. In addition, Retail Ventures and SSC have the right to engage in similar activities as us, do business with our suppliers and customers and, except as limited by

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the master separation agreement between us and Retail Ventures, employ or otherwise engage any of our officers or employees. SSC and its affiliates engage in a variety of businesses, including, but not limited to, business and inventory liquidations and real estate acquisitions. Our Articles also outline how corporate opportunities are to be assigned in the event that our, Retail Ventures’ or SSC’s directors and officers learn of corporate opportunities.

Some of our directors and officers also serve as directors or officers of Retail Ventures, and may have conflicts of interest because they may own Retail Ventures stock or options to purchase Retail Ventures stock, or they may receive cash-based or equity-based awards based on the performance of Retail Ventures.

Some of our directors and officers also serve as directors or officers of Retail Ventures and may own Retail Ventures stock or options to purchase Retail Ventures stock, or they may be entitled to participate in the Retail Ventures incentive plans. Jay L. Schottenstein is our Chief Executive Officer and Chairman of the Board of Directors and Chairman of the Board of Directors of Retail Ventures; Heywood Wilansky is a director of DSW and Chief Executive Officer of Retail Ventures; Harvey L. Sonnenberg is a director of DSW and of Retail Ventures; Julia A. Davis is Executive Vice President and General Counsel of both DSW and Retail Ventures, and serves as Secretary and Assistant Secretary for DSW and Retail Ventures, respectively; Steven E. Miller is Senior Vice President and Controller of both DSW and Retail Ventures; and James A. McGrady is a Vice President of DSW and Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Retail Ventures. Retail Ventures’ incentive plans provide cash-based and equity-based compensation to employees based on Retail Ventures’ performance. These employment arrangements and ownership interests or cash-based or equity-based awards could create, or appear to create, potential conflicts of interest when directors or officers who own Retail Ventures stock or stock options or who participate in the Retail Ventures’ incentive plans are faced with decisions that could have different implications for Retail Ventures than they do for us. These potential conflicts of interest may not be resolved in our favor.

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