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 August 4, 2007
		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       1-10767     

RETAIL VENTURES, INC.

(Exact name of registrant as specified in its charter)

Ohio		20-0090238
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3241 Westerville Road, Columbus, Ohio		43224
(Address of principal executive offices)		(Zip Code)

(614) 471-4722

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ     Yes				o     No

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

Large accelerated filer     o		Accelerated filer     þ		Non-accelerated filer     o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o     Yes				þ     No

The number of outstanding Common Shares, without par value, as of August 31, 2007 was 48,623,430.

 

 

RETAIL VENTURES, INC.
TABLE OF CONTENTS

						Page No.
Part I.     Financial Information
		Item 1.		Financial Statements
				Condensed Consolidated Balance Sheets at August 4, 2007
				and February 3, 2007			2
				Condensed Consolidated Statements of Operations for the three and six
				months ended August 4, 2007 and July 29, 2006			4
				Condensed Consolidated Statements of Shareholders’ Equity
				for the three and six months ended August 4, 2007 and July 29, 2006			5
				Condensed Consolidated Statements of Cash Flows for the three
				and six months ended August 4, 2007 and July 29, 2006			6
				Notes to the Condensed Consolidated Financial Statements			7
		Item 2.		Management’s Discussion and Analysis of Financial Condition
				and Results of Operations			18
		Item 3.		Quantitative and Qualitative Disclosures About Market Risk			32
		Item 4.		Controls and Procedures			33
Part II.     Other Information
		Item 1.		Legal Proceedings			33
		Item 1A.		Risk Factors			34
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			34
		Item 3.		Defaults Upon Senior Securities			35
		Item 4.		Submission of Matters to a Vote of Security Holders			35
		Item 5.		Other Information			35
		Item 6.		Exhibits			35
Signature							36
Index to Exhibits							37
EX-10.1
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Part I. Financial Information

Item 1. Financial Statements

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)

		August 4,				February 3,
		2007				2007
ASSETS
Cash and equivalents		$	165,509			$	160,221
Restricted cash			253				511
Short-term investments			100,475				98,650
Accounts receivable, net			16,592				16,781
Accounts receivable from related parties			1,176				3,777
Inventories			582,243				545,584
Prepaid expenses and other assets			42,559				36,686
Deferred income taxes			41,817				25,737
Total current assets			950,624				887,947
Property and equipment, net			299,604				279,909
Long-term investments			2,500
Goodwill			25,899				25,899
Tradenames and other intangibles, net			32,880				34,976
Deferred income taxes			11,486				26,114
Other assets			10,846				12,372
Total assets		$	1,333,839			$	1,267,217

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

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share amounts)
(unaudited)

		August 4,				February 3,
		2007				2007
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	286,281			$	212,434
Accounts payable to related parties			5,846				4,902
Accrued expenses:
Compensation			33,915				40,886
Taxes			51,286				45,227
Other			78,897				92,894
Warrant liability			1,996				3,594
Warrant liability — related parties			97,410				212,806
Current maturities of long-term obligations			861				765
Total current liabilities			556,492				613,508
Long-term obligations, net of current maturities
Non-related parties			273,816				265,283
Related parties			250				500
Conversion feature of long-term debt			22,819				62,770
Other noncurrent liabilities			102,675				95,108
Minority interest			150,547				138,428
Shareholders’ equity:
Common shares, without par value; 160,000,000 authorized; issued, including 7,551 treasury shares, 48,623,430 and 47,270,777 outstanding, respectively			302,632				276,690
Accumulated deficit			(74,783	)			(184,461	)
Treasury shares, at cost, 7,551 shares			(59	)			(59	)
Accumulated other comprehensive loss			(550	)			(550	)
Total shareholders’ equity			227,240				91,620
Total liabilities and shareholders’ equity		$	1,333,839			$	1,267,217

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

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

		Three months ended								Six months ended
		August 4,				July 29,				August 4,				July 29,
		2007				2006				2007				2006
Net Sales		$	732,733			$	684,508			$	1,486,807			$	1,406,021
Cost of sales			(458,073	)			(409,557	)			(908,213	)			(840,445	)
Gross profit			274,660				274,951				578,594				565,576
Selling, general and administrative expenses			(282,537	)			(264,793	)			(574,112	)			(542,317	)
Change in the fair value of derivative instruments			26,953				(311	)			41,549				(1,237	)
Change in the fair value of derivative instruments - related parties			97,831				(15,032	)			95,784				(78,915	)
License fees and other income			2,371				1,660				5,335				3,222
Operating profit (loss)			119,278				(3,525	)			147,150				(53,671	)
Interest expense			(6,230	)			(3,418	)			(12,403	)			(6,284	)
Interest expense — related parties			(8	)			(1,264	)			(21	)			(2,528	)
Total interest expense			(6,238	)			(4,682	)			(12,424	)			(8,812	)
Interest income			3,041				2,339				5,757				3,977
Interest expense, net			(3,197	)			(2,343	)			(6,667	)			(4,835	)
Income (loss) before income taxes and minority interest			116,081				(5,868	)			140,483				(58,506	)
Provision for income taxes			(7,451	)			(4,473	)			(20,338	)			(10,319	)
Income (loss) before minority interest			108,630				(10,341	)			120,145				(68,825	)
Minority interest			(2,412	)			(5,660	)			(11,187	)			(12,124	)
Net income (loss)		$	106,218			$	(16,001	)		$	108,958			$	(80,949	)
Basic and diluted income (loss) per share:
Basic		$	2.21			$	(0.36	)		$	2.28			$	(1.88	)
Diluted		$	1.81			$	(0.36	)		$	1.84			$	(1.88	)
Shares used in per share calculations:
Basic			48,157				45,013				47,714				43,037
Diluted			58,776				45,013				59,073				43,037

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

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
(unaudited)

		Number of Shares
														(Accumulated)												Accumulated
						Common								Deficit/				Deferred								Other
		Common				Shares				Common				Retained				Compensation				Treasury				Comprehensive
		Shares				in Treasury				Shares				Earnings				Expense				Shares				Loss				Total
Balance, January 28, 2006			39,857				8			$	159,617			$	(36,082	)		$	(1	)		$	(59	)		$	(6,929	)		$	116,546
Net loss															(80,949	)															(80,949	)
Minimum pension liability, net of income tax benefit of $237																											369				369
Total comprehensive loss																															(80,580	)
Capital transactions of subsidiary															1,306																1,306
Stock based compensation expense, before related tax effects											215																				215
Exercise of stock options			109								854																				854
Exercise of warrants			7,000								110,317																				110,317
Excess tax benefit related to stock options exercised											329																				329
Reclassification of unamortized deferred compensation											(1	)							1
Balance, July 29, 2006			46,966				8			$	271,331			$	(115,725	)		$	0			$	(59	)		$	(6,560	)		$	148,987
Balance, February 3, 2007			47,271				8			$	276,690			$	(184,461	)		$	0			$	(59	)		$	(550	)		$	91,620
Net income															108,958																108,958
FIN 48 adoption															(641	)															(641	)
Capital transactions of subsidiary															1,361																1,361
Stock based compensation expense, before related tax effects											259																				259
Exercise of stock options			19								71																				71
Exercise of warrants			1,333								25,612																				25,612
Balance, August 4, 2007			48,623				8			$	302,632			$	(74,783	)		$	0			$	(59	)		$	(550	)		$	227,240

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

RETAIL VENTURES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

		Six months ended
		August 4,				July 29,
		2007				2006
Cash flows from operating activities:
Net income (loss)		$	108,958			$	(80,949	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of debt issuance costs and discount on debt			1,810				602
Stock based compensation expense			259				215
Stock based compensation expense of subsidiary			1,361				1,557
Depreciation and amortization			30,709				27,757
Change in fair value of derivative instruments ($(95,784) and $78,915 — related parties, respectively)			(137,333	)			80,152
Deferred income taxes and other noncurrent liabilities			(6,568	)			(12,197	)
Loss on disposal of assets			242				1,370
Minority interest in consolidated subsidiary			11,187				12,124
Other			932				729
Change in working capital, assets and liabilities:
Accounts receivable			2,790				(1,094	)
Inventories			(36,659	)			(61,381	)
Prepaid expenses and other assets			(5,183	)			(299	)
Accounts payable			73,012				29,520
Proceeds from tenant and construction allowances			12,042				3,562
Accrued expenses			(14,861	)			6,887
Net cash provided by operating activities			42,698				8,555
Cash flows from investing activities:
Restricted cash			258
Cash paid for property and equipment			(46,798	)			(19,210	)
Purchases of available-for-sale investments			(23,200	)			(69,025	)
Maturities and sales from available-for-sale investments			18,875				22,100
Purchase of intangible asset			(21	)
Net cash used in investing activities			(50,886	)			(66,135	)
Cash flows from financing activities:
Payments of capital lease obligations			(345	)			(304	)
Payment on term loan			(250	)
Net increase in revolving credit facility			8,000				37,000
Debt issuance costs							(1,170	)
Excess tax benefit related to stock options exercised							329
Proceeds from exercise of warrants			6,000				31,500
Proceeds from exercise of stock options			71				854
Net cash provided by financing activities			13,476				68,209
Net increase in cash and equivalents			5,288				10,629
Cash and equivalents, beginning of period			160,221				138,731
Cash and equivalents, end of period		$	165,509			$	149,360

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

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BUSINESS OPERATIONS

     Retail Ventures, Inc. (“Retail Ventures” or “RVI”) and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores LLC (“Value City”) and Filene’s Basement, Inc. (“Filene’s Basement”), and its controlled subsidiary DSW Inc. (“DSW”) are herein referred to collectively as the “Company”.

     The Company operates four segments in the United States of America (“United States”). The Value City and Filene’s Basement segments operate full-line, off-price department stores. The DSW segment sells branded shoes and accessories. The Corporate segment consists of all revenue and expenses related to the corporate entities that are not allocated to the other segments. As of August 4, 2007, there were a total of 113 Value City stores located principally in the Midwest, mid-Atlantic and southeastern United States, 236 DSW stores located in major metropolitan areas throughout the United States and 34 Filene’s Basement stores located in major metropolitan areas in the Northeast and Midwest. DSW also supplies shoes, under supply arrangements, to 331 locations for other non-related retailers in the United States.

     On July 5, 2005, DSW completed an initial public offering (“IPO”). As of August 4, 2007, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSW’s outstanding common shares and approximately 93.2% of the combined voting power of such shares. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW”.

     Value City. Located in the Midwest, mid-Atlantic and southeastern United States and operating principally under the name Value City for over 80 years, this segment’s strategy has been to provide exceptional value by offering a broad selection of brand name merchandise at prices substantially below conventional retail prices. In December 2006, RVI announced that it is exploring strategic alternatives for the Value City operations, including a possible sale of the division. RVI has retained financial advisors to assist in this effort to enhance shareholder value. RVI also stated that there can be no assurance that this process will result in any specific transaction.

     DSW. Located in major metropolitan areas throughout the United States, DSW stores offer a wide selection of brand name and designer dress, casual and athletic footwear for men and women, as well as accessories. During the six months ended August 4, 2007, DSW opened 14 new stores and closed one store. Additionally, pursuant to a license agreement with Filene’s Basement, DSW operates leased shoe departments in most Filene’s Basement stores. As of August 4, 2007, DSW, pursuant to supply agreements, operated 267 leased shoe departments for Stein Mart, Inc., 63 for Gordmans, Inc. and one for Frugal Fannie’s Fashion Warehouse. Supply agreements’ results are included within the DSW segment. During the six months ended August 4, 2007, DSW added three new non-affiliated leased departments, four affiliated leased departments and ceased operations in two non-affiliated leased departments and one affiliated leased department.

     Filene’s Basement. Filene’s Basement stores are located primarily in the Northeast and Midwest. Filene’s Basement focuses on providing top tier brand name merchandise at everyday low prices for men’s and women’s apparel, jewelry, shoes, accessories and home goods. During the six months ended August 4, 2007, Filene’s Basement opened four stores and closed one store.

     Corporate. The Corporate segment represents the corporate assets, liabilities and expenses not allocated to other segments through corporate allocation or shared service arrangements. The remaining results of operation are comprised of debt related expenses, income on investments and intercompany notes expenses, the latter of which is eliminated in consolidation.

2. BASIS OF PRESENTATION

     The accompanying unaudited interim financial statements should be read in conjunction with the Company’s Annual Report for the fiscal year ended February 3, 2007 on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2007 (the “2006 Annual Report”).

     In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, which are necessary to present fairly the condensed consolidated financial position, results of operations and cash flows for the periods presented.

3. ADOPTION OF ACCOUNTING STANDARDS

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), and in May 2007, the FASB issued FASB Staff Position FIN 48-1, Definition of

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Settlement in FASB Interpretation No. 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The evaluation of a tax position in accordance with FIN 48 is a two step process. The first step is recognition: the enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is measurement: a tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN 48 provides for a cumulative effect of a change in accounting principle to be recorded as an adjustment to the opening balance of retained earnings upon the initial adoption. The Company adopted FIN 48 effective February 4, 2007. The impact of the adoption of this interpretation is disclosed in Note 10.

     In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. The intent of this standard is to ensure consistency and comparability in fair value measurements and enhanced disclosures regarding the measurements. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact this statement may have on its consolidated financial statements.

     In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). This statement allows entities to choose to measure financial instruments and certain other financial assets and financial liabilities at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this statement may have on its consolidated financial statements.

4. STOCK BASED COMPENSATION

Retail Ventures Stock Compensation Plans

     The Company has an Amended and Restated 2000 Stock Incentive Plan that provides for the issuance of equity awards covering up to 13,000,000 common shares, including stock options, stock appreciation rights and restricted stock, to management, key employees of Retail Ventures and affiliates, consultants (as defined in the plan), and non-employee directors of Retail Ventures. Options granted under the plan generally vest 20% per year on a cumulative basis and remain exercisable for a period of ten years from the date of grant.

     The Company has an Amended and Restated 1991 Stock Option Plan that provided for the grant of equity awards covering up to 4,000,000 common shares. Options granted under the plan are generally exercisable 20% per year on a cumulative basis and remain exercisable for a period of ten years from the date of grant.

     During the three and six months ended August 4, 2007, the Company recorded stock based compensation expense of approximately $1.2 million and $2.3 million, respectively, which includes approximately $1.1 million and $2.0 million, respectively, of expenses recorded by DSW. Stock-based compensation expense is included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.

     The following tables summarize the activity of the Company’s stock options, stock appreciation rights (“SARs”) and restricted stock units (“RSUs”) for the six months ended August 4, 2007 (in thousands):

		Six months ended August 4, 2007
		Stock
		Options				SARs				RSUs
Outstanding beginning of period			1,335				978				170
Granted			25				140				47
Exercised			(19	)			(2	)
Cancelled
Forfeited			(10	)			(35	)
Outstanding end of period			1,331				1,081				217
Exercisable end of period			1,207				176				n/a

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Stock Options

     The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

		Six months ended
		August 4,				July 29,
		2007				2006
Assumptions
Risk-free interest rate			4.53	%			4.86	%
Expected volatility of Retail Ventures common shares			56.26	%			66.79	%
Expected option term		5.0 years				5.0 years
Expected dividend yield			0.00	%			0.00	%

     The weighted-average grant date fair value of each option granted in the three months ended August 4, 2007 and July 29, 2006 was $10.76 and $6.24 per share, respectively, and for the six months ended August 4, 2007 and July 29, 2006 was $10.90 and $6.94 per share, respectively.

Stock Appreciation Rights

     Reductions of expense of $4.9 million and $4.2 million, respectively, were recorded during the three and six months ended August 4, 2007 relating to SARs. The amount of SARs accrued at August 4, 2007 was $2.9 million. During the six months ended August 4, 2007, less than $0.1 million was paid to settle exercised SARs.

Restricted Stock Units

     Total compensation expense costs recognized related to the RSUs in the three and six months ended August 4, 2007 were a reduction of expenses of $1.0 million and $0.3 million, respectively. The amount of RSUs accrued at August 4, 2007 was $1.9 million.

Restricted Shares

     The Company issued restricted common shares to certain key employees pursuant to individual employment agreements and certain other grants from time to time which are approved by the Board of Directors. The agreements condition the vesting of the shares generally upon continued employment with the Company, with such restrictions expiring over various periods ranging from three to five years. The market value of the shares at the date of grant is charged to expense on a straight-line basis over the period that the restrictions lapse. As of August 4, 2007, the Company had no outstanding restricted common shares. At February 3, 2007, the Company had outstanding approximately 500 restricted common shares which represent less than 1% of the common basic and diluted shares outstanding.

DSW Stock Compensation Plan

     DSW has a 2005 Equity Incentive Plan that provides for the issuance of equity awards to purchase up to 4,600,000 common shares, including stock options, RSUs and director stock units, to management, key employees of DSW and affiliates, consultants (as defined in the plan), and non-employee directors of DSW. DSW options, RSUs and director stock units are not included in the number of shares used in the basic or dilutive calculation of earnings per share of Retail Ventures.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     The following tables summarize the activity of DSW’s stock options and RSUs for the six months ended August 4, 2007 (in thousands):

		Six months ended August 4, 2007
		Stock
		Options				RSUs
Outstanding beginning of period			1,084				135
Granted			496				15
Exercised			(13	)
Cancelled
Forfeited			(60	)			(3	)
Outstanding end of period			1,507				147
Exercisable end of period			324				n/a

Stock Options

     The following table illustrates the weighted-average assumptions used in the option-pricing model for options granted in each of the periods presented.

		Six months ended
		August 4,				July 29,
		2007				2006
Assumptions
Risk-free interest rate			4.90	%			4.92	%
Expected volatility of DSW common shares			36.46	%			41.00	%
Expected option term		5.0 years				4.8 years
Expected dividend yield			0.00	%			0.00	%

     The weighted-average grant date fair value of each option granted in the three months ended August 4, 2007 and July 29, 2006 was $15.52 and $15.25 per share, respectively, and for the six months ended August 4, 2007 and July 29, 2006 was $17.66 and $13.39 per share, respectively.

Restricted Stock Units

     The total aggregate intrinsic value of nonvested RSUs at August 4, 2007 was $4.6 million. As of August 4, 2007, the total compensation cost related to nonvested RSUs not yet recognized was approximately $2.1 million with a weighted average expense recognition period remaining of 2.0 years. The weighted average exercise price for all RSUs is zero.

Director Stock Units

     DSW issues stock units to directors of DSW who are not employees of DSW or Retail Ventures. During the six months ended August 4, 2007, DSW granted 7,426 director stock units and expensed $0.3 million related to these grants. As of August 4, 2007, 34,964 DSW director stock units had been issued and no DSW director stock units had been settled.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

5. INVESTMENTS

     Short-term and long-term investments include auction rate securities and are classified as available-for-sale securities. These securities are recorded at cost, which approximates fair value due to their variable interest rates, which typically reset every 7 to 275 days. Despite the long-term nature of their stated contractual maturities, the Company has the intent and ability to quickly liquidate these securities. As a result of the resetting variable rates, there are no cumulative gross unrealized or realized holding gains or losses from these investments. All income generated from these investments is recorded as interest income.

     During the six months ended August 4, 2007, $23.2 million of cash was used to purchase available-for-sale securities while $18.9 million was generated by the sale of available-for-sale securities.

     The table below details the investments classified as available-for-sale at August 4, 2007 and February 3, 2007 (in thousands):

		August 4, 2007								February 3, 2007
		Maturity of								Maturity of
		Less than 1 year				1 to 3 years				Less than 1 year				1 to 3 years
Aggregate fair value		$	100,475			$	2,500			$	98,650			$	—
Gross unrecognized holding gains
Gross unrecognized holding losses
Net carrying amount		$	100,475			$	2,500			$	98,650			$	—

6. LONG-TERM OBLIGATIONS AND WARRANT LIABILITIES

     Long — term obligations consist of the following (in thousands):

		August 4,				February 3,
		2007				2007
Credit facilities:
Revolving credit facilities		$	113,000			$	105,000
Senior Loan Agreement — related parties			250				500
PIES			143,750				143,750
Discount on PIES			(9,723	)			(10,697	)
			247,277				238,553
Capital lease obligations			27,650				27,995
			274,927				266,548
Less current maturities			(861	)			(765	)
		$	274,066			$	265,783
Letters of credit outstanding:
RVI revolving credit facility		$	24,877			$	19,355
DSW revolving credit facility		$	19,888			$	13,448
Availability under revolving credit facilities:
RVI revolving credit facility		$	76,119			$	66,838
DSW revolving credit facility		$	130,112			$	136,552

Premium Income Exchangeable Securities^SM (PIES)

     The embedded exchange feature of the Premium Income Exchangeable Securities^SM (“PIES”) is accounted for as a derivative, which is recorded at fair value, and changes in fair value are reflected in the statement of operations. Accordingly, the accounting for the embedded derivative addresses the variations in the fair value of the obligation to settle the PIES when the market value exceeds or is less than the threshold appreciation price. The fair value of the conversion feature at the date of issuance of $11.7 million was equal to the amount of the discount of the PIES and is being amortized into interest expense over the term of the PIES.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     During the three and six months ended August 4, 2007, the Company recorded a reduction of expense related to the change in fair value of the conversion feature of the PIES of $25.3 million and $40.0 million, respectively. As of August 4, 2007 and February 3, 2007, the fair value liability recorded for the conversion feature was $22.8 million and $62.8 million, respectively.

Warrants

     For the three months ended August 4, 2007 and July 29, 2006, the Company recorded a reduction of expenses of $99.5 million and a charge of $15.3 million, respectively, for the change in fair value of the Term Loan Warrants and Conversion Warrants (together, the “Warrants”). For the six months ended August 4, 2007 and July 29, 2006, the Company recorded a reduction of expenses of $97.4 million and a charge of $80.2 million, respectively, for the change in fair value of the Warrants. No tax benefit has been recognized in connection with this charge. These derivative instruments do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”); therefore, changes in the fair values are recognized in earnings in the period of change.

     Retail Ventures estimates the fair values of derivatives based on the Black-Scholes Pricing Model using current market rates and records all derivatives on the balance sheet at fair value. The fair market value of the Warrants was $99.4 million and $216.4 million at August 4, 2007 and February 3, 2007, respectively. As the Warrants may be exercised for either common shares of RVI or common shares of DSW owned by RVI, the settlement of the Warrants will not result in a cash outlay by the Company.

     During the three and six months ended August 4, 2007, Retail Ventures received $6.0 million in connection with the exercises by Cerberus Partners, L.P. (“Cerberus”) of its remaining Conversion Warrants for 1,333,333 of RVI’s common shares at an exercise price of $4.50 per share. In connection with this exercise, the senior loan agreement between Cerberus and Value City immediately matured in accordance with its terms. On June 11, 2007, Value City repaid the $250,000 principal amount of the loan, together with all accrued and unpaid interest thereon.

     During the three and six months ended July 29, 2006, Retail Ventures received $9.0 million and $31.5 million, respectively, in connection with the exercises by Cerberus of Conversion Warrants for 2,000,000 and 7,000,000, respectively, of RVI’s common shares at an exercise price of $4.50 per share. There were no exercises of the Term Loan Warrants during the three and six months ended August 4, 2007 or the three and six months ended July 29, 2006.

7. PENSION BENEFIT PLANS

     The Company adopted SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans as of February 3, 2007. The following table shows the components of net periodic benefit cost of the Company’s pension benefit plans for the three and six months ended August 4, 2007 and July 29, 2006:

		Three months ended								Six months ended
		August 4,				July 29,				August 4,				July 29,
		2007				2006				2007				2006
						(in thousands)
Service cost		$	9			$	11			$	17			$	21
Interest cost			371				362				743				725
Expected return on plan assets			(489	)			(443	)			(978	)			(886	)
Amortization of transition asset			(9	)			(9	)			(18	)			(19	)
Amortization of net loss			130				150				261				301
Net periodic benefit cost		$	12			$	71			$	25			$	142

     The Company anticipates contributing approximately $1.4 million in fiscal 2007 to meet minimum funding requirements. The Company did not make a contribution during the six months ended August 4, 2007 towards the $1.4 million contribution estimated for fiscal 2007.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8. EARNINGS PER SHARE

     Basic earnings (loss) per share are based on the net income (loss) and a simple weighted average of common shares outstanding. Diluted earnings (loss) per share reflects the potential dilution of common shares, related to outstanding stock options, SARs and warrants, calculated using the treasury stock method. The numerator for the diluted earnings (loss) per share calculation is the net income (loss). The denominator is the weighted average number of shares outstanding.

		Three months ended								Six months ended
		August 4,				July 29,				August 4,				July 29,
		2007				2006				2007				2006
						(in thousands)
Weighted average shares outstanding			48,157				45,013				47,714				43,037
Assumed exercise of dilutive SARs			306								348
Assumed exercise of dilutive stock options			620								641
Assumed exercise of dilutive Term Loan Warrants			3,241								3,351
Assumed exercise of dilutive Conversion Warrants			6,452								7,019
Number of shares for computations of dilutive earnings per share			58,776				45,013				59,073				43,037

     For the three and six months ended August 4, 2007, all potentially dilutive instruments — stock options, SARs and warrants — were dilutive. For the three and six months ended July 29, 2006, all potentially dilutive instruments — stock options, SARs and warrants — were anti-dilutive. The total amount of securities outstanding at July 29, 2006 that were not included in dilutive earnings per share because to do so would have been anti-dilutive for the periods presented, but could potentially dilute basic earnings per share in the future were:

		July 29, 2006
		(in thousands)
SARs			1,615
Stock options			1,650
Term Loan Warrants			4,413
Conversion Warrants			9,667
All potentially dilutive instruments			17,345

9. ACCUMULATED OTHER COMPREHENSIVE LOSS

     The balance sheet caption “Accumulated other comprehensive loss” of $0.6 million at both August 4, 2007 and February 3, 2007, relates to the Company’s minimum pension liability, net of income tax. For the six months ended August 4, 2007 the comprehensive income was the same as the net income. For the six months ended July 29, 2006, the total comprehensive loss was $80.6 million.

10. INCOME TAXES

     The Company establishes valuation allowances for deferred tax assets when the amount of expected future taxable income is not likely to support the use of the deduction or credit. The Company has determined that there is a probability that future taxable income may not be sufficient to fully utilize deferred tax assets (state net operating losses and charitable contribution carry forwards) which expire in future years at various dates depending on the jurisdiction. The allowance as of August 4, 2007 and February 3, 2007 was $17.3 million and $15.6 million, respectively. Based on available data, the Company believes it is more likely than not that the remaining deferred tax assets will be realized.

     The tax rate of 14.5% for the six — month period ended August 4, 2007 reflects the impact of the change in fair value of warrants, included in book income but not tax income, and an additional valuation allowance of $1.7 million on state net deferred tax assets.

     Effective February 4, 2007, the Company adopted the provisions of FIN 48. The adoption of FIN 48 resulted in an unfavorable adjustment of $0.8 million to beginning retained earnings, which includes $0.1 million recorded by DSW.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     As of February 4, 2007, the total amount of unrecognized tax benefits was $9.7 million. Unrecognized tax benefits of $9.6 million would affect the Company’s effective tax rate if recognized. There were no significant changes in unrecognized tax benefits in the second quarter of 2007.

     The Company is no longer subject to U.S. federal or state and local income tax examinations by tax authorities for the fiscal years prior to 2000. The Company’s U.S. federal income tax returns for fiscal years 2003, 2004 and 2005 are no longer under examination by the IRS. However, there are several state audits and appeals ongoing for fiscal years from 2000 through 2006. The Company estimates the range of possible changes that may result from the examinations to be insignificant at this time.

     RVI is planning to amend certain federal and state tax returns within the next 12 months which will reverse a tax benefit of $6.2 million related to the deduction of deferred state taxes. The amount was reserved for in fiscal 2006.

     Consistent with its historical financial reporting, the Company has elected to classify interest expense related to income tax liabilities, when applicable, as part of the interest expense in its condensed consolidated statement of operations rather than income tax expense. The Company will continue to classify income tax penalties as part of operating expenses in its condensed consolidated statements of operations. As of August 4, 2007 and February 4, 2007, approximately $2.1 million and $2.0 million, respectively, was accrued for the payment of interest and penalties.

11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

     A supplemental schedule of non-cash investing and financing activities is presented below:

		Six months ended
		August 4,				July 29,
		2007				2006
		(in thousands)
Cash paid during the period for:
Interest to non-related parties		$	9,991			$	4,724
Interest to related parties		$	21			$	2,514
Income taxes		$	26,829			$	25,420
Noncash activities:
Increase in accounts payable due to asset purchases		$	1,779			$	35
Additional paid in capital transferred from warrant liability for warrant exercises		$	19,612			$	78,817

12. SEGMENT REPORTING

     The Company is managed in four operating segments: Value City, DSW, Filene’s Basement, and Corporate. During the third quarter of fiscal 2006, the Company’s business segments were realigned to reflect how the Company manages the business. The realignment resulted in the addition of a Corporate segment. The Corporate segment includes activities that are not allocated to individual segments. Prior year segment tables have been updated to conform to this realignment.

     All of the Company’s segment operations are located in the United States. The Company has identified such segments based on chief operating decision maker responsibilities and measures segment profit (loss) as operating profit (loss), which is defined as profit (loss) before interest expense, income taxes and minority interest. Capital expenditures in parenthesis represent assets transferred to other segments.

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     The tables below present segment information for the three and six months ended August 4, 2007 and July 29, 2006 and total assets by segment as of August 4, 2007 and February 3, 2007:

		Value								Filene's								Intersegment
		City				DSW				Basement				Corporate				Eliminations				Total
										(in thousands)
Three months ended August 4, 2007
Net Sales		$	268,095			$	348,718			$	115,920											$	732,733
Operating (loss) profit			(11,758	)			8,326				(2,074	)		$	124,784								119,278
Depreciation and amortization			5,946				5,684				3,383				783								15,796
Interest expense			3,106				143				1,874				3,153			$	(2,038	)			6,238
Interest income			96				2,091				15				2,877				(2,038	)			3,041
Benefit (provision) for income taxes			5,426				(3,753	)			1,117				(10,241	)							(7,451	)
Capital expenditures			160				20,546				2,703				50								23,459
As of August 4, 2007
Total assets		$	418,246			$	674,886			$	194,296			$	325,295			$	(278,884	)		$	1,333,839

		Value								Filene's								Intersegment
		City				DSW				Basement				Corporate				Eliminations				Total
										(in thousands)
Three months ended July 29, 2006
Net Sales		$	290,362			$	301,302			$	92,844											$	684,508
Operating (loss) profit			(10,112	)			23,097				(1,167	)		$	(15,343	)							(3,525	)
Depreciation and amortization			6,248				4,891				2,077				700								13,916
Interest expense			3,417				142				1,123				938			$	(938	)			4,682
Interest income			948				2,117				3				209				(938	)			2,339
Benefit (provision) for income taxes			4,286				(9,731	)			972												(4,473	)
Capital expenditures			4,603				8,256				2,988				(2,068	)							13,779
As of February 3, 2007
Total assets		$	438,899			$	603,785			$	175,287			$	328,208			$	(278,962	)		$	1,267,217

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		Value								Filene's								Intersegment
		City				DSW				Basement				Corporate				Eliminations				Total
										(in thousands)
Six months ended August 4, 2007
Net Sales		$	556,330			$	705,715			$	224,762											$	1,486,807
Operating (loss) profit			(24,914	)			45,544				(10,813	)		$	137,333								147,150
Depreciation and amortization			11,563				10,874				6,711				1,561								30,709
Interest expense			6,224				281				3,617				6,377			$	(4,075	)			12,424
Interest income			173				3,948				37				5,674				(4,075	)			5,757
Benefit (provision) for income taxes			11,262				(18,946	)			5,056				(17,710	)							(20,338	)
Capital expenditures			88				39,221				9,272				(16	)							48,565

		Value								Filene's								Intersegment
		City				DSW				Basement				Corporate				Eliminations				Total
										(in thousands)
Six months ended July 29, 2006
Net Sales		$	604,789			$	617,789			$	183,443											$	1,406,021
Operating (loss) profit			(19,695	)			50,986				(4,810	)		$	(80,152	)							(53,671	)
Depreciation and amortization			12,497				9,792				4,166				1,302								27,757
Interest expense			6,416				282				2,114				1,798			$	(1,798	)			8,812
Interest income			1,941				3,581				11				242				(1,798	)			3,977
Benefit (provision) for income taxes			8,195				(21,425	)			2,911												(10,319	)
Capital expenditures			4,771				12,488				3,578				(1,588	)							19,249

13. COMMITMENTS AND CONTINGENCIES

     As previously reported, 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 the Company’s customers. On April 18, 2005, Retail Ventures issued the findings from its investigation into the theft. The theft covered transaction information involving approximately 1.4 million credit cards and data from transactions involving approximately 96,000 checks.

     DSW and Retail Ventures contacted and continue to cooperate with law enforcement and other authorities with regard to this matter. The Company is involved in a putative class action lawsuit which seeks unspecified monetary damages, credit monitoring and other relief. The lawsuit seeks to certify a class of consumers that is limited geographically to consumers who made purchases at certain stores in Ohio. A second class action lawsuit was resolved in May 2007 after DSW prevailed on a motion to dismiss on all claims in the District Court for the Southern District of Ohio and, on appeal, the parties agreed to a Stipulation of Dismissal filed with the U.S. Court of Appeals for the 6th Circuit.

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

     DSW estimated 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 possible settlement of claims 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 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 to DSW’s results of operations or financial condition. As of August 4, 2007, the balance of the associated accrual for potential exposure

RETAIL VENTURES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

was $3.2 million. Subsequent to August 4, 2007, DSW paid an additional $2.7 million from the reserve, leaving a balance of $0.5 million.

     The Company is involved in various 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 of the 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 most likely estimated liability related to the claim. In the opinion of management, the amount of any liability with respect to these proceedings will not be material to the Company’s results of operations or financial condition. As additional information becomes available, the Company will assess the potential liability related to its pending litigation and revise the estimates as needed. Revisions in its estimates and potential liability could materially impact the Company’s results of operations and financial condition.

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, “RVI”, “Retail Ventures,” “Company”, “we”, “us”, and “our” refers to Retail Ventures, Inc. and its wholly-owned subsidiaries, including but not limited to, Value City Department Stores LLC (“Value City”) and Filene’s Basement, Inc. (“Filene’s Basement”), and DSW Inc. (“DSW”), a controlled subsidiary, and DSW’s wholly-owned subsidiaries, including but not limited to, DSW Shoe Warehouse, Inc. (“DSWSW”).

OVERVIEW

     Retail Ventures is a holding company operating retail stores in three of its four segments: Value City, DSW and Filene’s Basement. Value City is a full-line, value-price retailer carrying men’s, women’s and children’s apparel, accessories, jewelry, shoes, home fashions, electronics and seasonal items. Located in the Midwest, mid-Atlantic and southeastern United States of America (“United States”) and operating for over 80 years, Value City’s strategy has been to provide exceptional value by offering a broad selection of brand name merchandise at prices substantially below conventional retail prices. As of August 4, 2007, there were 113 Value City stores in operation. DSW is a leading United States specialty branded footwear retailer operating 236 shoe stores in 36 states as of August 4, 2007. DSW offers a wide selection of brand name and designer dress, casual and athletic footwear for women and men. DSW’s typical customers are brand-, quality- and style-conscious shoppers who have a passion for footwear and accessories. Filene’s Basement stores are located in major metropolitan areas of the eastern and Midwestern United States. Filene’s Basement’s mission is to provide the best selection of stylish, high-end designer and famous brand name merchandise at surprisingly affordable prices in men’s and women’s apparel, jewelry, shoes, accessories and home goods. As of August 4, 2007, there were 34 Filene’s Basement stores in operation. The Corporate segment consists of all revenue and expenses related to the corporate entities that are not allocated to the other segments.

     We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. This discussion should be read in conjunction with our financial statements and accompanying notes as of August 4, 2007.

     On July 5, 2005, DSW completed an initial public offering (“IPO”). As of August 4, 2007, Retail Ventures owned Class B Common Shares of DSW representing approximately 63.0% of DSW’s outstanding common shares and approximately 93.2% of the combined voting power of such shares. Retail Ventures accounted for the sale of DSW as a capital transaction. DSW is a controlled subsidiary of Retail Ventures and its Class A Common Shares are traded on the New York Stock Exchange under the symbol “DSW”.

     In December 2006, we announced that we are exploring strategic alternatives for the Value City operations, including a possible sale of the division. RVI has retained financial advisors to assist in this effort to enhance shareholder value. We also stated that there can be no assurance that this process will result in any specific transaction.

     The retail industry is highly competitive. We compete with a variety of conventional and discount retail stores, including national, regional and local independent department and specialty stores, as well as with catalog operations, on-line providers, factory outlet stores and other off-price stores. Our operating entities, Value City, DSW and Filene’s Basement, have different target customers and different strategies, but each focuses on this basic principle: the value to the customer is the result of the quality of the merchandise in relationship to the price paid.

Cautionary Statement Regarding Forward-Looking Information for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

     Some of the statements in this Quarterly Report on Form 10-Q contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this Quarterly Report on Form 10-Q are based upon our historical performance and on current plans, estimates and expectations and assumptions relating to our operations, results of operations, financial condition, growth strategy and liquidity. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to numerous risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In addition to the risks discussed in “Part I, Item 1A, Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended February 3, 2007, as filed with the Securities and Exchange Commission (the “SEC”) on April 5, 2007 (the “2006 Annual Report”), and other factors discussed from time to time in our other filings with the SEC, some important factors that could cause actual results, performance or achievements for the Company to differ materially from those discussed in forward-looking statements include, but are not limited to, the following:

	•		our success in opening and operating new stores on a timely and profitable basis;
	•		maintaining good relationships with our vendors;
	•		our ability to anticipate and respond to fashion trends;
	•		fluctuation of our comparable store sales and quarterly financial performance;
	•		disruption of our distribution operations;
	•		our dependence on DSW for key services;
	•		failure to retain our key executives or attract qualified new personnel;
	•		outcome of the Value City operations strategic analysis;
	•		our competitiveness with respect to style, price, brand availability and customer service;
	•		declining general economic conditions;
	•		risks inherent to international trade with countries that are major manufacturers of apparel and footwear; and
	•		security risks related to the electronic processing and transmission of confidential customer information.

     If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results, performance or achievements may vary materially from what we may have projected. Furthermore, new factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statement speaks only as of the date on which such statement is made. RVI undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

CRITICAL ACCOUNTING POLICIES

     Management’s Discussion and Analysis discusses the results of operations and financial condition as reflected in our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. As discussed in the Notes to the Consolidated Financial Statements that are included in our 2006 Annual Report, the preparation of financial statements in conformity with generally accepted accounting principles 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 expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including, but not limited to, those related to inventory valuation, depreciation, amortization, recoverability of long-lived assets including intangible assets, the calculation of retirement benefits, estimates for self insurance reserves for health and welfare, workers’ compensation and casualty insurance, income taxes, contingencies, litigation and revenue recognition. Management bases its estimates and judgments on its historical experience

and other relevant factors, 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 financial 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 the financial statements.

     We believe the following represent the most critical estimates and assumptions, among others, used in the preparation of our consolidated financial statements. We have discussed the selection, application and disclosure of the critical accounting policies with the Audit Committee and our Board of Directors.

	•		Revenue recognition. Revenue from merchandise sales are recognized at the point of sale, net of returns and exclude sales tax. Revenue from gift cards is deferred and the revenue is recognized upon redemption of the gift cards. The Company did not recognize income during these periods from unredeemed gift cards and merchandise credits. The Company will continue to review its historical activity and will recognize income from unredeemed gift cards and merchandise credits when deemed appropriate.
	•		Cost of sales and merchandise inventories. We use the retail method of accounting for substantially all of our 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 margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. The cost of the inventory reflected on our Condensed Consolidated Balance Sheets is decreased by charges to cost of sales at the time the retail value of the inventory is lowered through the use of markdowns. Hence, earnings are negatively impacted as merchandise is marked down prior to sale. Reserves to value inventory at the lower of cost or market were $39.4 million and $44.4 million at August 4, 2007 and February 3, 2007, respectively.
			Inherent in the calculation of inventories are certain significant management judgments and estimates, including setting the original merchandise retail value or markon, markups of initial prices established, reduction of pricing due to customers’ value perception or perceived value (known as markdowns), and estimates of losses between physical inventory counts or shrinkage, which, combined with the averaging process within the retail method, can significantly impact the ending inventory valuation at cost and the resulting gross margins.
	•		Investments. Short-term and long-term investments include auction rate securities and are classified as available-for-sale securities. These securities are recorded at cost, which approximates fair value due to their variable interest rates, which typically reset every 7 to 275 days. Despite the long-term nature of their stated contractual maturities, the Company has the intent and ability to quickly liquidate these securities. As a result of the resetting variable rates, there are no cumulative gross unrealized or realized holding gains or losses from these investments. All income generated from these investments is recorded as interest income. As of August 4, 2007, the Company held $100.5 million in short-term investments and $2.5 million in long-term investments, and at February 3, 2007, the Company held $98.7 million in short-term investments and no long — term investments.
	•		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 at the lowest identifiable level which includes 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 operating expenses.
			We believe at this time that the remaining 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 impairment may differ from our current estimates.
	•		Store Closing Reserve. During the six months ending August 4, 2007, the Company recorded charges associated with the closing of one DSW store and one Filene’s Basement store and accruals for the severance related to the temporary shut down of the Downtown Crossing location. During the six months ending July 29, 2006, the Company recorded charges associated with the closing of two DSW stores. The operating lease at one of the two stores was terminated through the exercise of a lease kick-out option. During the first six months of 2006, the Company closed one Filene’s Basement store for which closing costs were accrued during the fourth quarter of 2005.

     The table below sets forth the significant components and activity related to these closing reserves:

		Balance at																Balance at
		February 3,				Related												August 4,
		2007				Charges				Payments				Adjustments				2007
		(in thousands)
Lease Costs		$	1,866			$	380			$	(429	)		$				$	1,817
Employee severance and termination benefits							1,958				(33	)							1,925
Other							22				(18	)							4
Total		$	1,866			$	2,360			$	(480	)		$				$	3,746

		Balance at																Balance at
		January 28,				Related												July 29,
		2006				Charges				Payments				Adjustments				2006
		(in thousands)
Lease Costs		$	2,130			$	392			$	(440	)		$	233			$	2,315
Employee severance and termination benefits			277				55				(296	)							36
Total		$	2,407			$	447			$	(736	)		$	233			$	2,351

	•		Self-insurance reserves. We record estimates for certain health and welfare, workers’ compensation and general liability 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 general liability insurance exceed those anticipated, reserves recorded may not be sufficient, and, to the extent actual results vary from assumptions, earnings would be impacted. For example, for workers’ compensation and liability claims estimates, a 1% increase or decrease to the assumptions for claims costs and loss development factors would increase or decrease our self-insurance accrual at August 4, 2007 by $0.4 million. The self-insurance reserves were $16.4 million and $17.5 million at August 4, 2007 and February 3, 2007, respectively.
	•		Pension. The obligations and related assets of defined benefit retirement plans are included in the Notes to the Consolidated Financial Statements in the Company’s 2006 Annual Report. Plan assets, which consist primarily of marketable equity and debt instruments, are valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate, the rate of salary

			increases and the estimated future return on plan assets. In determining the discount rate, we utilize the yield on fixed-income investments currently available with maturities corresponding to the anticipated timing of the benefit payments. Salary increase assumptions are based upon historical experience and anticipated future management actions. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans. At August 4, 2007, the actuarial assumptions of our plans have remained unchanged from our 2006 Annual Report. To the extent actual results vary from assumptions, earnings would be impacted. At August 4, 2007, the weighted-average actuarial assumptions applied to our plans were: a discount rate of 6.0%, assumed salary increases of 3.0% and a long-term rate of return on plan assets of 8.0%.
	•		Customer loyalty program. DSW maintains a customer loyalty program for the DSW stores in which program members receive a discount on future purchases. Upon reaching the target-earned threshold, members receive certificates for these discounts which must be redeemed within six months. DSW accrues the anticipated redemptions of the discount earned at the time of the initial purchase. To estimate these costs, DSW is required to make assumptions related to customer purchase levels and redemption rates based on historical experience. The accrued liability as of August 4, 2007 and February 3, 2007 was $4.9 million and $5.0 million, respectively.
	•		Change in fair value of derivative instruments. In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company recognizes all derivatives on the balance sheet at fair value. For derivatives that are not designated as hedges under SFAS No. 133, changes in the fair values are recognized in earnings in the period of change. For the three and six months ended August 4, 2007, the Company recorded income related to the change in fair value of warrants of $99.5 million and $97.4 million, respectively. For the three and six months ended July 29, 2006, the Company recorded a charge related to the change in fair value of warrants of $15.3 million and $80.2 million, respectively. For the three and six months ended August 4, 2007, the Company recorded income related to the change in the fair value of the conversion feature of the PIES of $25.3 million and $40.0 million, respectively. The PIES were not outstanding during the three and six months ended July 29, 2006.
	•		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 in which we do business. 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 our management had made these determinations on a different basis, our tax expense, assets and liabilities could be different. During the six months ended August 4, 2007, we increased the valuation allowance on state net deferred tax assets in the amount of $0.4 million which resulted from an increase of net state deferred tax assets. Also, during the six months ended August 4, 2007, we established an additional valuation allowance of $1.3 million for state net operating loss carryforwards.

     Following the completion of the DSW IPO in June 2005, DSW is no longer included in Retail Ventures’ consolidated federal tax return.

RESULTS OF OPERATIONS

     The following table sets forth, for the periods indicated, the percentage relationships to net sales of the listed items included in the Company’s Condensed Consolidated Statements of Operations.

		Three months ended								Six months ended
		August 4,				July 29,				August 4,				July 29,
		2007				2006				2007				2006
Net Sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			(62.5	)			(59.8	)			(61.1	)			(59.8	)
Gross profit			37.5				40.2				38.9				40.2
Selling, general and administrative expenses			(38.5	)			(38.7	)			(38.6	)			(38.5	)
Change in the fair value of derivative instruments			3.6				0.0				2.8				(0.1	)
Change in the fair value of derivative instruments - related parties			13.4				(2.2	)			6.4				(5.6	)
License fees and other income			0.3				0.2				0.4				0.2
Operating profit (loss)			16.3				(0.5	)			9.9				(3.8	)
Interest expense			(0.9	)			(0.5	)			(0.8	)			(0.4	)
Interest expense — related parties			0.0				(0.2	)			0.0				(0.2	)
Total interest expense			(0.9	)			(0.7	)			(0.8	)			(0.6	)
Interest income			0.4				0.3				0.4				0.3
Interest expense, net			(0.5	)			(0.4	)			(0.4	)			(0.3	)
Income (loss) before income taxes and minority interest			15.8				(0.9	)			9.5				(4.1	)
Provision for income taxes			(1.0	)			(0.6	)			(1.4	)			(0.8	)
Income (loss) before minority interest			14.8				(1.5	)			8.1				(4.9	)
Minority interest			(0.3	)			(0.8	)			(0.8	)			(0.9	)
Net income (loss)			14.5	%			(2.3	)%			7.3	%			(5.8	)%