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

As of July 30,October 29, 2005, we operated 184197 DSW stores and leased shoe departments in 32 states, and leased shoe departments in 155157 Stein Mart stores, 5153 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:

Gross Profit.Gross profit increased $9.5$5.5 million to $76.4$83.0 million in the secondthird quarter of fiscal 2005 from $66.9$77.5 million in the secondthird quarter of fiscal 2004, and decreased as a percentage of net sales from 28.6%29.5% in the secondthird quarter of fiscal 2004 to 27.6%27.5% in the secondthird quarter of fiscal 2005. The decrease is primarily attributableIn 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, in our clearance, additional markdowns in our accessoryaccessories 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 our warehouse expense. Warehouse expense as a percentage of net sales decreased from 2.1% in the secondthird quarter of fiscal 2004 to 1.4%1.2% in the secondthird 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 a higheran 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 store occupancy expense increased from 12.5% of net sales in the second quarter of fiscal 2004 to 13.4% of net sales in the second quarter of fiscal 2005. The increase in store occupancy is the result of increases in lease expense for new stores and leased departments.2005 (the “Shared Services Agreement”).

Operating Expenses.For the secondthird quarter of fiscal 2005, operating expenses increased $4.4$4.6 million to $65.3 million from $51.3$60.7 million in the secondthird quarter of fiscal 2004, to $55.7 million in the second quarter of fiscal 2005, which represented 21.9%21.6% and 20.1%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 secondthird quarter of fiscal 2005 include $2.0$3.6 million in pre-opening costs compared to $1.6$4.2 million in pre-opening costs in the secondthird 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 new DSW stores and leased shoe departments that opened subsequent to October 30, 2004 added $5.1$4.1 million in expenses compared to the secondthird quarter of fiscal 2004, excluding pre-opening and occupancy (excluding depreciation and amortization) expenses.

Operating Profit.Operating profit was $20.7$17.7 million in the secondthird quarter of fiscal 2005 compared to $15.6$16.8 million in the secondthird quarter of fiscal 2004, and increaseddecreased as a percentage of net sales from 6.7%6.4% in the secondthird quarter of fiscal 2004 to 7.5%5.9% in the secondthird quarter of fiscal 2005. Operating profit as a percentage of net sales was positively affectednegatively impacted by the decrease in gross profit as a percentage of sales, which was partially offset by the leveraging of our store operating expenses, including marketing.expenses.

Income Taxes.Our effective tax rate for the secondthird quarter of fiscal 2005 was 41.0%39.0%, compared to 40.2% for the secondthird quarter of fiscal 2004. The increase in the quarter was the result of the write off of approximately $0.6 million of deferred tax assets no longer deductible as a result of changes in state tax regulations in Ohio.

Net Income.For the secondthird quarter of fiscal 2005, net income increased $0.4$1.5 million, or 4.0%15.6%, over the secondthird quarter of fiscal 2004 and represents 3.4% versus 3.8%represented 3.6% of net sales respectively andin both periods. This increase was the resultsresult of the increase in gross profit partially offset by the increase in operating factors described above.expenses.

Net Sales.Net sales for the six-monthnine-month period ended July 30,October 29, 2005 increased by 19.5%17.9%, or $91.0$130.9 million, to $558.0$860.3 million from $467.0$729.4 million in the six-monthnine-month period ended July 31,October 30, 2004. Our comparable store sales in the six-monthnine-month period of fiscal 2005 improved 3.9%3.7% compared to the six-monthnine-month period of fiscal 2004. After accounting forThe 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 recategorizationre-categorization of two DSW/Filene’s Basement combination stores from DSW stores toas leased shoe departments in the six-month period ended July 30, 2005, the increase includes a net increase of 26 new DSW stores, 10 non-affiliated leased shoe departments and five Filene’s Basement leased shoe departments in the fiscal 2005 six-month period.departments. The new DSW store locations opened subsequent to October 30, 2004 added $55.9$53.3 million in sales compared to the fiscal 2004 six-monthnine-month period, while the new leased shoe departments added $4.0$3.4 million. Leased shoe department sales comprised 10.7%10.6% of total net sales in the first six-monthnine-month period of fiscal 2005, compared to 9.0%9.2% in the same six-monthnine-month period of fiscal 2004.

For the six-monthnine-month period ended July 30,October 29, 2005, as compared with same six-monthnine-month period in fiscal 2004, DSW comparable store sales increased in women’s 3.5%by 4.2%, athletic 9.8%by 6.8% and men’s 2.6%by 1.8%, and decreased in the accessories category by 5.6%6.9%. Sales increases in the women’s and men’s categories were driven by increases in the dress and casualseasonal 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 men’s increase was driven by increases in casual and fashion classes. 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 $24.7$30.2 million to $159.2$242.2 million in the six-monthnine-month period ended July 30,October 29, 2005 from $134.5$212.0 million in the same six-monthnine-month period of fiscal 2004, and decreased as a percentage of net sales from 28.8%29.1% in the fiscal 2004 six-monthnine-month period to 28.5%28.1% in the fiscal 2005 six-monthnine-month period. The decrease is attributable to increased markdowns in our accessory category, higher average unit retail across 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

Operating Expenses.For the six-monthnine-month period ended July 30,October 29, 2005, operating expenses increased $18.3$22.9 million to $188.7 million from $105.1$165.8 million in the fiscal 2004 six-month period to $123.4 million in the fiscal 2005 six-monthnine-month period, which represented 22.5%21.9% and 22.1%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 six-monthnine-month period includes $3.5$7.2 million in pre-opening costs compared to $4.5$8.8 million in the same six-monthnine-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 new DSW stores and leased shoe departments that opened subsequent to October 30, 2004 added $9.8$9.4 million in expenses compared to the same six-monthnine-month period of fiscal 2004, excluding pre-opening and occupancy (excluding depreciation and amortization) expenses.

During the six-monthnine-month period ended July 30,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 $35.7$53.5 million in the six-monthnine-month period of fiscal 2005 compared to $29.4$46.2 million in the six-monthnine-month period of fiscal 2004, and increaseddecreased as a percentage of net sales from 6.3% in the six-monthnine-month period of fiscal 2004 to 6.4%6.2% in the six-monthnine-month period of fiscal 2005. Operating profit as a percentage of net sales was positively affected by the leveraging of our store operating expenses, including marketing overbut these positive effects were more than offset by the previous fiscal year which was offsetreduction in part bygross profit and the estimate for our potential losses related to the theft of credit card and other purchase information.

Interest Expense.Income (Expense).Interest expense, net of interest income, increased $7.0$5.9 million to $8.5$8.4 million for the first six-monthnine-month period of fiscal 2005 from $1.5$2.5 million for the same six-monthnine-month period of fiscal 2004. Included in interest expense is $6.6 million of interest due to RVI related to $190.0$190 million of indebtedness incurred to fund two separate dividends. The indebtedness, which was fully paid in July 2005, was evidenced by a $165.0$165 million note that bore interest at a rate equal to LIBOR plus 850 basis points and a $25.0$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 each of the six-monthnine-month periods of fiscal 2005 and 2004.2004, respectively.

Our business, measured in terms of net sales, respectivelyis subject to seasonal trends. Our net sales, measured on a comparable stores basis, have typically been higher in spring and wasearly 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 resultsfourth quarter of our fiscal year, due primarily to moderately lower sales in the operating factors described above.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.

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 twenty-sixthirty-nine week period ended July 30,October 29, 2005, our net cash provided by operations was $16.2$35.7 million, compared to $4.6$4.1 million used inprovided by operations for the twenty-sixthirty-nine week period ended July 31,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 $73.5$86.9 million to $212.4$225.8 million at July 30,October 29, 2005 from $138.9 million at January 29, 2005, primarily due to increased investing with respectcash, inventory related to new DSW stores new leased shoe departments opened in fiscal 2005 and the classification of advances to affiliates to current.a current receivable. Current assets divided by current liabilities at January 29, 2005 and July 30,October 29, 2005 was 2.3 and 2.6,2.8 respectively.

Net cash provided by operating activities during the twenty-sixthirty-nine week period ended July 30,October 29, 2005 reflects several causes,is primarily the increase of accounts payable of $16.9 million anddue to the increase of accrued expenses of $9.5$18.3 million and the proceeds from lease incentives of $9.0 million, partially offset by the increase in inventory of $23.2$21.4 million.

For the twenty-sixthirty-nine week period ended July 30,October 29, 2005, our net cash provided by financing activities was $33.3$32.8 million, compared to $19.7$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 iswas 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 pre-existingexisting 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.

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 Back BayMillennium 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 Back BayMillennium 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

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 balancebalances nor potential liabilities under these past arrangements.

DSW had outstanding letters of credit that totaled approximately $18.9$9.2 million at July 30,October 29, 2005 onunder the DSW secured revolving credit facilityand $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 July 30,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 $0.6$0.3 million as of July 30,

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.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.

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 July 30,October 29, 2005, the Company has not entered into any “off-balance sheet” arrangements, as that term is described by the SEC.

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.

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

Item 3. Defaults Upon Senior Securities.None.

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

Item 5. Other Information.None.