|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON,
 D.C. 20549           
|                                  
|FORM 10-K                         

|                                                                                  |                                                                                      
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|x                                                                                 | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                  |                                                                                      
|FOR THE FISCAL YEAR ENDED JANUARY 29, 2011                                       
|OR                                                                               
|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT
|FOR THE TRANSITION PERIOD FROM _________________ TO _________________            
|                                                                                 
|COMMISSION FILE NUMBER: 0-14818                                                  
|                                                                                 
|TRANS
 WORLD ENTERTAINMENT CORPORATION                                           
|                                                                                 
|(Exact name of registrant as specified in its charter)                           

|                                                               |                                        
|-------------------------------------------------------------- | ---------------------------------------
|New York                                                       | 14-1541629                             
|                                                               |                                        
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number)

|                                                                                                                                         
|-----------------------------------------------------------------------------------------------------------------------------------------
|38 Corporate Circle                                                                                                                      
|Albany, New York 12203                                                                                                                   
|                                                                                                                                         
|(Address of principal executive offices, including zip code)                                                                             
|                                                                                                                                         
|(518) 452-1242                                                                                                                           
|                                                                                                                                         
|(Registrants telephone number, including area code)                                                                                     
|                                                                                                                                         
|Securities registered pursuant to Section 12(b) of the Act: None                                                                         
|                                                                                                                                         
|Securities registered pursuant to Section 12(g) of the Act: Common
 Stock, $0.01 par value                                               
|                                                                                                                                         
|Indicate by check mark if the registrant is a well-known seasoned
 issuer, as defined in the Rule 405 of the Securities Act. Yes o No x  
|                                                                                                                                         
|Indicate by check mark if the
 registrant is not required to file reports pursuant to Section 13 or Section
 15(d) of the Act. Yes o No x

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

Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrants Knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or an amendment to this
Form 10-K. x

Indicate by
checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company (as defined in
Rule 12b-2 of the Act).

Large
accelerated filer o
          Accelerated
filer o
          Non-accelerated
filer o          Small
reporting company x

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

As of July 31,
2010, 31,424,529 shares of the Registrants Common Stock, excluding 25,102,990
shares of stock held in Treasury, were issued and outstanding. The aggregate
market value of the voting stock held by non-affiliates of the Registrant,
based upon the closing sale price of the Registrants Common Stock on July 31,
2010 as reported on the National Market tier of The NASDAQ Stock Market, Inc.
was $31,160,810. Shares of Common Stock held by the Companys controlling
shareholder, who controlled approximately 46.2% of the outstanding Common
Stock, have been excluded for purposes of this computation. Because of such
shareholders control, shares owned by other officers, directors and 5%
shareholders have not been excluded from the computation. As of March 31, 2011,
there were 31,454,529 shares of Common Stock Issued and Outstanding.

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|                                                                                                                                               |  |                                                                          
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------
|Documents of Which Portions Are Incorporated by Reference                                                                                      |  | Parts of the Form 10-K into Which Portion of 
 Documents are Incorporated
|                                                                                                                                               |  |                                                                          
|Proxy Statement for Trans World Entertainment Corporations July 14,
 2011 Annual Meeting of Shareholders to be filed on or about June 6, 2011 |  | III                                                                      

2

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PART
I

Cautionary Statement
for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995

This document
includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements relate to analyses
and other information that are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also relate to the
Trans World Entertainment Corporations (the Companys) future prospects,
developments and business strategies. The statements contained in this document
that are not statements of historical fact may include forward-looking
statements that involve a number of risks and uncertainties.

We have used
the words anticipate, believe, could, estimate, expect, intend,
may, plan, predict, project, and similar terms and phrases, including
references to assumptions, in this document to identify forward-looking
statements. These forward-looking statements are made based on managements
expectations and beliefs concerning future events and are subject to
uncertainties and factors relating to our operations and business environment,
all of which are difficult to predict and many of which are beyond the
Companys control, that could cause actual results to differ materially from
those matters expressed in or implied by these forward-looking statements. The
following factors are among those that may cause actual results to differ
materially from the Companys forward-looking statements.

| |   |                                                                            |  |   |                                                                   
| | - | -------------------------------------------------------------------------- |  | - | ------------------------------------------------------------------
| |  | new product introductions (hit releases);                                |  |  | availability of new real estate;                                  
| |  | accelerated declines in compact disc (CD) and DVD
     industry sales;   |  |  | vendor terms;                                                     
| |  | highly competitive nature of the retail entertainment
business;            |  |  | dependence on key employees and the ability to hire new employees;
| |  | new technology, including digital downloading;                             |  |  | product liability claims;                                         
| |  | competitive pricing;                                                       |  |  | change in laws;                                                   
| |  | current economic conditions;                                               |  |  | adverse publicity; and                                            
| |  | the Companys level of debt and related restrictions and
     limitations; |  |  | interest rate fluctuations;                                       
| |  | future cash flows;                                                         |  |   |                                                                   

The reader
  should keep in mind that any forward-looking statement made by us in this
  document, or elsewhere, pertains only as of the date on which we make it. New
  risks and uncertainties come up from time-to-time and its impossible
  for us to predict these events or how they may affect us. In light of these
  risks and uncertainties, you should keep in mind that any forward-looking statements
  made in this report or elsewhere might not occur.

In addition,
the preparation of financial statements in accordance with accounting
principles generally accepted in the United States (GAAP) requires us to make
estimates and assumptions. These estimates and assumptions affect:

| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | the reported
 amounts and timing of revenue and expenses,              
| |   |                                                                        
| |  | the reported
 amounts and classification of assets and liabilities, and
| |   |                                                                        
| |  | the
 disclosure of contingent assets and liabilities.                  

Actual results
may vary from our estimates and assumptions. These estimates and assumptions
are based on historical results, assumptions that we make, as well as
assumptions by third-parties.

Item
1.   BUSINESS

Company Background

Trans World Entertainment
Corporation, which, together with its consolidated subsidiaries, is referred to
herein as the Company, we, us and our, was incorporated in New York in
1972. It owns 100% of the outstanding common stock of Record Town, Inc.,
through which its principal operations are conducted. The Company operates
retail stores and three e-commerce sites and is one of the largest specialty
retailers of entertainment software, including music, video, and video games
and related products in the United States.

Stores and
Store Concepts

At January 29,
2011, the Company operated 460 stores totaling approximately 3.1 million square
feet in the United States, the District of Columbia, the Commonwealth of Puerto
Rico and the U.S. Virgin Islands.

3

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Mall Stores

At January 29,
2011, the Company operated 376 mall-based stores, predominantly under the
f.y.e. (For Your Entertainment) brand, including:

| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | f.y.e.  f.y.e. stores average about 6,300 square feet and carries a full
 complement of entertainment software, including music, video and related
 accessories. There were 354 f.y.e. mall based stores at the end
 of Fiscal 2010.                                                         
| |                                                                                                                                                                                                                                                                                              
| | Video only stores.The Company operated 22 video only stores, under the Suncoast Motion
 Pictures and Saturday Matinee brands. These stores specialize in the sale of
 video and related accessories. They are located in large, regional shopping
 malls and average about 2,400 square feet.

Freestanding
Stores

The Company
operated 84 freestanding stores as of January 29, 2011, including 6 f.y.e.
superstores, predominantly under the f.y.e. brand. They carry a full complement
of entertainment software, including music, video and related accessories and
are located in freestanding, strip center and downtown locations. The
freestanding stores, excluding the superstores, average approximately 7,500
square feet. The freestanding f.y.e. Superstores average about 45,000 square
feet.

E-Commerce
Sites

The Company
operates three retail web sites including, www.fye.com, www.wherehouse.com
and www.secondspin.com.
These sites offer a similar mix of products as offered in the Companys
stores.

Merchandise Categories

Net sales by
merchandise category as a percentage of total net sales for Fiscal 2010, 2009
and 2008 were as follows:

|            |  |      |       |      |  |       |   |  |       |  
|----------- |  | ---- | ----- | ---- |  | ----- | - |  | ----- | -
|            |  |      |       |      |  |       |  
|            |  | 2010 |       | 2009 |  | 2008  |  
|            |  |      |       |      |  |       |  
|Music       |  |      | 35.5  | %    |  | 35.2  | % |  | 35.4  | %
|Video       |  |      | 43.7  |      |  | 41.7  |   |  | 41.3  |  
|Video games |  |      | 5.7   |      |  | 8.6   |   |  | 9.1   |  
|Other       |  |      | 15.1  |      |  | 14.5  |   |  | 14.2  |  
|            |  |      |       |      |  |       |   |  |       |  
|Total       |  |      | 100.0 | %    |  | 100.0 | % |  | 100.0 | %
|            |  |      |       |      |  |       |   |  |       |  

The Other
category includes electronics, accessories and trend items, none of which
individually exceeded 10% of total net sales.


Business Environment

Music, video
and video games represent an approximately $24 billion industry nationwide, and
represented approximately 85% of the Companys net sales in Fiscal 2010.

According to
statistical information from Nielsen Sound Scan (SoundScan), the total number
of music albums sold, including CD and digital albums, decreased 13% to
approximately 325 million units in 2010. Excluding digital albums, album sales
decreased 20% to approximately 234 million units. In 2009, the total number of
music albums sold, including CD, cassette and digital albums decreased 12%
compared to 2008. Excluding digital albums, album sales in 2009 decreased 18%
compared to 2008.

According to
statistics obtained from Warner Brothers Home Entertainment, overall video
retail sales in 2010 were $9.5 billion, a decrease of 9% from 2009. Video
retail sales in 2009 decreased 15% compared to 2008.

4

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Competition

CD sales have
suffered from the legal (e.g., iTunes) and illegal downloading of music and
specialty retailers have been impacted by the proliferation of mass merchants
(e.g., Wal-Mart and Target) and electronics superstores (e.g., Best Buy) that
offer entertainment software and, collectively, have gained a larger share of
the market. The number of specialty and independent retailers has decreased
dramatically due to their reliance on sales of CDs. The Company has taken
advantage of competitor exits from markets, made acquisitions, diversified its
products and taken other measures to position itself competitively within its
industry. The Company believes it effectively competes in the following ways:

|  |                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|§ | Location and
 convenience: a strength of the Company is its convenient store locations that
 are often the exclusive retailer in centers offering a full complement of
 entertainment software;                            
|§ | Marketing:
 the Company uses email blasts, newspaper, radio and television advertising
 and in-store visual displays to market to consumers;                                                                               
|§ | Selection
 and assortment: the Company maintains a high in-stock position in a large
 assortment of product, particularly CDs, DVDs and Bluray and a compelling assortment
     of the latest entertainment trend products;
|§ | Customer
 service: the Company offers personalized customer service at its stores.                                                                                                                                         

Seasonality

The Companys
business is seasonal, with its fourth fiscal quarter constituting the Companys
peak selling period. In Fiscal 2010, the fourth quarter accounted for
approximately 35% of annual net sales. In anticipation of increased sales
activity during these months, the Company purchases additional inventory and
hires additional temporary employees to supplement its core store sales staff.
If, for any reason, the Companys net sales were below seasonal norms during
the fourth quarter, the Companys operating results could be adversely
affected. Quarterly sales can also be affected by the timing of new product
releases, new store openings or closings and the performance of existing
stores.

Advertising

The Company
makes use of visual displays. It uses a mass-media marketing program, including
newspaper, radio, and television advertisements, as well as sending email
blasts. Certain vendors from whom the Company purchases merchandise offer
advertising allowances, of varying duration and amount, to promote their
merchandise.

Suppliers and
Purchasing

The Company
purchases inventory from approximately 640 suppliers. In Fiscal 2010, 70% of
purchases were made from ten suppliers including EMI Music Distribution, Sony
Music Entertainment, Warner Music Group, Universal Music Group Distribution,
Fox Video Inc., Paramount Home Entertainment Inc., Walt Disney Studios Home
Entertainment, Warner Home Entertainment, Universal Studios Home Entertainment
and Sony Pictures Home Entertainment. The Company does not have material
long-term purchase contracts; rather, it purchases products from its suppliers
on an order-by-order basis. Historically, the Company has not experienced
difficulty in obtaining satisfactory sources of supply and management believes
that it will continue to have access to adequate sources of supply.

Trade Customs and Practices

Under current
trade practices with large suppliers, retailers of music and video products are
generally entitled to return unsold merchandise they have purchased in exchange
for other titles carried by the suppliers. The four largest music suppliers
charge a related merchandise return penalty or return handling fee. Most
manufacturers and distributors of video products do not typically charge a
return penalty or handling fee. Under current trade practices with large
suppliers, retailers of video games and related products may receive markdown
support from suppliers to help clear slow turning merchandise. Merchandise return
policies and other trade practices have not changed significantly in recent
years. The Company generally adapts its purchasing policies to changes in the
policies of its largest suppliers.

Employees

As of January 29, 2011, the
Company employed approximately 4,700 people, of whom approximately 1,800 were
employed on a full-time basis. Others were employed on a part-time or temporary
basis. The Company hires seasonal sales employees during its fourth quarter
peak selling season to ensure continued levels of personalized customer
service. Assistant store managers, store managers, district managers and
regional managers are eligible to receive incentive compensation based on the
sales and/or profitability of stores for which they are responsible. Sales
support managers are generally eligible to receive incentive compensation based
on achieving Company performance targets. None of the Companys employees are
covered by collective bargaining agreements and management believes that the
Company enjoys favorable relations with its employees.

5

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Trademarks

The trademarks, f.y.e. for your entertainment, Suncoast Motion
    Pictures and Saturday Matinee are registered with the U.S. Patent and Trademark
    Office and are owned by the Company. We believe that our rights to these
    trademarks are adequately protected. We hold no material patents, licenses,
    franchises or concessions; however, our established trademarks and trade
    names are essential to maintaining our competitive position in the entertainment
    retail industry.

Information Systems

The Company utilizes primarily IBM AS400 technology to run its
management information systems, including its merchandising, distribution and
financial systems. Management believes its systems contribute to enhanced
customer service and operational efficiency, as well as provide the ability to
monitor critical performance indicators versus plans and historical results.

Available Information

The Companys headquarters are located at 38 Corporate Circle, Albany,
New York 12203, and its telephone number is (518) 452-1242. The Companys
corporate web site address is www.twec.com. The Company makes available, free
of charge, its Exchange Act Reports (Forms 10-K, 10-Q, 8-K and any amendments
thereto) on its web site as soon as practical after the reports are filed with
the Securities and Exchange Commission (SEC). The public may read and copy
any materials the Company files with the SEC at the SECs Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation
of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. This information can be obtained from the site
http://www.sec.gov. The Companys Common Stock, $0.01 par value, is quoted on
the NASDAQ National Market under the trading symbol TWMC. The Companys
fiscal year end is the Saturday closest to January 31. The Fiscal 2010 (Fiscal
2010) year ended on January 29, 2011; Fiscal 2009 (Fiscal 2009) year ended
on January 30, 2010; and Fiscal 2008 (Fiscal 2008) year ended on January 31,
2009.

Item 1A. RISK FACTORS


The following is a discussion of certain factors, which could affect
the financial results of the Company.


The Companys results of operations are
affected by the availability of new products.


The Companys business is affected by the release of hit music and
    video titles, which can create fluctuations in sales. It is not possible to determine
    the timing of these fluctuations or the future availability of hit titles. The
    Company is dependent upon the major music and movie producers to continue to
    produce hit products. To the extent that new hit releases are not available, or
    not available at prices attractive to consumers, or, if manufacturers fail to
    introduce or delay the introduction of new products, the Companys results
    of operations may be adversely affected. The Companys results of operations
        are affected by the continued declines in the music industry.
 The music retailing industry is a mature industry and has
      experienced declines in recent years. Physical Music represents one of
      our primary product categories in terms of sales and has been impacted
      by new distribution channels, including digital distribution and internet
      fulfillment. As a result, the Company has had negative comparable store
      sales for the past five years.


The Companys results of operations may
suffer if the Company does not accurately predict consumer acceptance of new
product or distribution technologies.


The entertainment industry is characterized by changing technology,
evolving format standards, frequent new and enhanced product introductions and
rapid product obsolescence. These characteristics require that the Company
respond quickly to technological changes and understand the impact of these
changes on customers preferences. If the Company is unable to participate in
new product or distribution technologies, its results of operations may suffer.
Specifically, the CD and DVD formats have experienced a continuous decline as
digital forms of music and video content have become more prevalent. If the
Company does not timely adapt to these changing technologies or sufficiently
focus on the other core categories, operating results could significantly
suffer.


Increased competition from existing retailers
has adversely affected the Companys
results of operations.


The Company competes with a wide variety of entertainment retailers,
including deep-discount retailers, mass merchandisers, consumer electronics
outlets, internet retailers and independent operators, some of whom have
greater financial and other resources than the Company.


In addition, the Companys success depends on our ability to positively
differentiate ourselves from other retailers. The retail business is highly
competitive. In the past the Company has been able to compete successfully by
differentiating our customer shopping experience by creating an attractive
value proposition through a careful combination of price, merchandise
assortment, convenience, customer service and marketing efforts. Customer
perceptions regarding our stores and our in-stock levels and deep assortment of
product are also factors in our ability to compete. No single competitive factor
is dominant, and actions by our competitors on any of these factors could have
an adverse effect on our sales, gross profit and expenses. If we fail to
continue to positively differentiate ourselves from our competitors, our
results of operations could be adversely affected.

6

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The Companys business is influenced
by the general economic conditions.


The Companys performance is subject to general economic conditions and
their impact on levels of discretionary consumer spending. General economic
conditions impacting discretionary consumer spending include, among others,
wages and employment, consumer debt, reductions in net worth, residential real
estate and mortgage markets, taxation, fuel and energy prices, interest rates,
consumer confidence and other macroeconomic factors.


Consumer purchases of discretionary items, such as our merchandise,
generally decline during recessionary periods and other periods where
disposable income is adversely affected. A downturn in the economy affects
retailers disproportionately, as consumers may prioritize reductions in
discretionary spending, which could have a direct impact on purchases of our
merchandise and adversely impact our results of operations and continued
growth. In addition, reduced consumer spending may drive us and our competitors
to offer additional products at promotional prices, which would have a negative
impact on gross profit.

Disruption of global capital and credit
markets may have a material adverse effect on the Companys liquidity and capital
resources.

Distress in the financial markets has in the past and can in the future
result in extreme volatility in security prices and diminished liquidity and
credit availability, and there can be no assurance that our liquidity will not
be affected by changes in the financial markets and the global economy or that
our capital resources will at all times be sufficient to satisfy our liquidity
needs. We believe that cash provided by sales of merchandise inventory and
available borrowing capacity under our credit facility, which expires in April
2013, will provide us with sufficient liquidity through the expiration of this
credit facility.

Historically, we have experienced declines
and we may continue to experience fluctuation in our level of sales, results
from operations and operating cash flow.


A variety of factors has historically affected, and will continue to
affect, our comparable stores sales results and profit margins. These factors
include general regional and national economic conditions; competition; actions
taken by our competitors; consumer trends and preferences; new product
introductions and changes in our product mix; timing and effectiveness of
promotional events and weather. The Companys comparable store sales may
decline further than they did in Fiscal 2010. Also, they may vary from quarter
to quarter as our business is highly seasonal in nature. Our highest sales and
operating income historically occur during the fourth fiscal quarter, which is
due in part, to the holiday selling season. The fourth quarter generated
approximately 35% of our net sales for Fiscal 2010. Any decrease in our fourth
quarter sales, whether because of a slow holiday selling season, unseasonable
weather conditions, economic conditions or otherwise, could have a material
adverse effect on our business, financial condition and operating results for
the entire fiscal year. There is no assurance that we will achieve positive
levels of sales and earnings growth, and any decline in our future growth or
performance could have a material adverse effect on our business and results of
operations.


Failure to open new stores may limit our
earnings.


Historically, the Companys growth has come from the opening of new
stores and the acquisition of stores. The Company opens new stores if it finds
desirable locations and is able to negotiate suitable lease terms. A lack of
new store growth may impact the Companys ability to increase sales and
earnings. The Company acquired five new stores in Fiscal 2010.


A change in one or more of the Companys
vendors policies or the Companys relationship with those vendors could
adversely affect the Companys results of operations.


The Company is dependent on its vendors to supply merchandise in a
timely and efficient manner. If a vendor fails to deliver on its commitments,
whether due to financial difficulties or other reasons, the Company could
experience merchandise shortages that could lead to lost sales.


The majority of the Companys purchases come from ten major suppliers.
As is standard in its industry, the Company does not maintain long-term
contracts with its suppliers but instead makes purchases on an order-by-order
basis. If the Company fails to maintain customary trade terms or enjoy positive
vendor relations, it could have an adverse effect on the Companys results of
operations.

If the Companys vendors fail to provide
marketing and merchandising support at historical levels, the Companys results
of operations could be adversely affected.


The manufacturers of entertainment products have typically provided
retailers with significant marketing and merchandising support for their
products. As part of this support, the Company receives cooperative advertising
and other allowances from these vendors. These allowances enable the Company to
actively promote and merchandise the products it sells at its stores and on its
websites. If the Companys vendors fail to provide this support at historical
levels, the Companys results of operations could be negatively impacted.


Loss of Key Personnel or the inability to
attract, train and retain qualified employees could adversely affect the
Companys results of operations.

7

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The Company believes that its future prospects depend, to a significant
extent, on the services of its executive officers, particularly, Robert J.
Higgins, our Chairman and Chief Executive Officer. Our future success will also
depend on our ability to attract and retain qualified key personnel. The loss
of the services of certain of the Companys executive officers and other key
management personnel could adversely affect the Companys results of
operations. In particular, if we were to lose the services of Robert J.
Higgins, we may not able to replace his skills and experience.

In addition to our executive officers, the Companys business is
dependent on our ability to attract, train and retain a large number of
qualified team members. Many of those team members are employed in entry-level
or part-time positions with historically high turnover rates. Our ability to
meet our labor needs while controlling our costs is subject to external factors
such as unemployment levels, health care costs and changing demographics. If we
are unable to attract and retain adequate numbers of qualified team members,
our operations, customer service levels and support functions could suffer.
Those factors, together with increased wage and benefit costs, could adversely
affect our results of operations.

Because our Chairman and Chief Executive
Officer owns approximately 46.5% of the outstanding Common Stock, he has
significant influence and control over the outcome of any vote of the Companys
Shareholders.


Robert J. Higgins serves as Chairman of the Board of the Company
    and its Chief Executive Officer and owns approximately 46.5% of the outstanding
Common Stock of the Company, as of March 31, 2011 and there are no limitations
    on his acquiring shares in the future. Accordingly, he will have significant
    influence on the outcome of any vote of the Companys
    Shareholders and on the policies and affairs of the Company. His interests
    may differ from the interests of the other stockholders.


Failure to comply with legal and regulatory
requirements could adversely affect the Companys results of operations.


The Companys business is subject to a wide array of laws and
regulations. Significant legislative changes that impact our relationship with
our workforce (none of which is represented by unions) could increase our
expenses and adversely affect our operations. Examples of possible legislative
changes impacting our relationship with our workforce include changes to an
employers obligation to recognize collective bargaining units, the process by
which collective bargaining units are negotiated or imposed, minimum wage
requirements, and health care mandates.


Our policies, procedures and internal controls are designed to comply
with all applicable laws and regulations, including those imposed by the
Securities and Exchange Commission and the New York Stock Exchange, as well as
applicable employment laws. Additional legal and regulatory requirements
increase the complexity of the regulatory environment in which we operate and
the related cost of compliance. Failure to comply with such laws and
regulations may result in damage to our reputation, financial condition and
market price of our stock.

We could be materially and adversely affected
if our distribution center is disrupted.


We operate a distribution center in Albany, New York. We ship
approximately 71% of our merchandise inventory through our distribution center.
If our distribution center is destroyed, or disrupted for any reason, including
because of weather or labor issues, we could incur significantly higher costs
and longer lead times associated with distributing our products to our stores
during the time it takes to reopen or replace the centers.


We maintain business interruption insurance to protect us from the
costs relating to matters such as a shutdown, but our insurance may not be
sufficient, or the insurance proceeds may not be timely paid to us, in the
event of a shutdown.

The Companys stock price has experienced and
could continue to experience volatility and could decline further, resulting in
a substantial loss on your investment.


The stock market in general and the market for music and home
    video related stocks in particular, has been highly volatile. For example,
    the closing price of our Common Stock has fluctuated between $0.52 and $2.44
    from January 31, 2009 and March 31, 2011. Our stock price has experienced,
    and could continue to experience in the future, substantial volatility as
    a result of many factors, including recent global economic conditions, broad
    market fluctuations and public perception of the prospects for music and
    the home video industry. Changes in our comparable store net sales results
    could also affect the price of our Common Stock. Failure to meet market expectations,
    particularly with respect to comparable store sales, net revenues, operating
    margins and earnings per share, would likely result in a continued decline
    in the market price of our stock.


In addition, an active trading market for our Common Stock may
    not be sustained, which could affect the ability of our stockholders to sell
their shares and could depress the market price of their shares.

As a result, the market price of our Common Stock has been and is
likely to remain volatile, and investors in our Common Stock may experience a
decrease in the value of their stock, including decreases unrelated to our
operating performance or prospects.

8

---



The failure to maintain a minimum closing
share price of $1.00 per share of our Common Stock could result in the
delisting of our shares on The NASDAQ Global Market, which would harm the
market price of the Companys Common Stock.

In order to retain our listing on The NASDAQ Global Market we are
required by NASDAQ to maintain a minimum bid price of $1.00 per share. Our stock price
is currently above $1.00 and has been since October 6, 2009. However, in the
event that our stock did close below the minimum bid price of $1.00 per share
for any 30 consecutive business days, we would regain compliance if our Common
Stock closed at or above $1.00 per share for 10 consecutive days during the 180
days immediately following failure to maintain the minimum bid price. If we are
unable to do so, our stock could be delisted from The NASDAQ Global Market,
transferred to a listing on The NASDAQ Capital Market, or delisted from the
NASDAQ markets altogether. The failure to maintain our listing on The NASDAQ
Global Market could harm the liquidity of the Companys Common Stock and could
have an adverse effect on the market price of our Common Stock.

If we fail to protect the security of
personal information about our customers, we could be subject to costly
government enforcement actions or private litigation and our reputation could
suffer.


The nature of our business involves the receipt and storage of personal
information about our customers. If we experience a data security breach, we
could be exposed to government enforcement actions and private litigation. In
addition, our customers could lose confidence in our ability to protect their
personal information, which could cause them to stop shopping at our stores.
Such events could lead to lost sales and adversely affect our results of operations.


Item 1B. UNRESOLVED SEC COMMENTS

None.

9

---



Item 2. PROPERTIES

Retail Stores

At January 29, 2011, the Company operated 460 stores under operating
leases, some of which have renewal options. The majority of the leases provide
for the payment of fixed monthly rentals and expenses for maintenance, property
taxes and insurance while the others provide for the payment of monthly rentals
based on a percentage of sales. Certain leases provide for added rent based on
store sales in excess of specified levels. The following table lists the leases
due to expire as of the fiscal year-end in each of the years shown, assuming
any renewal options are not exercised:

|     |  |                |  |                  |  |                | 
|---- |  | -------------- |  | ---------------- |  | -------------- | 
|Year |  | No. of
 Leases |  | Year             |  | No. of
 Leases | 
|     |  |                |  |                  |  |                | 
|    
|2011 |  | 255            |  | 2015             |  | 13             | 
|     |  |                |  |                  |  |                | 
|2012 |  | 110            |  | 2016             |  | 12             | 
|     |  |                |  |                  |  |                | 
|2013 |  | 42             |  | 2017             |  | 4              | 
|     |  |                |  |                  |  |                | 
|2014 |  | 21             |  | 2018
 and beyond |  | 3              | 

As leases expire, the Company will evaluate the decision to exercise
renewal rights or obtain new leases for the same or similar locations based on
store profitability.

Corporate Offices and Distribution Center
Facilities

The Company leases its Albany, New York, distribution facility and
corporate office space from its largest shareholder and Chairman and Chief
Executive Officer under three capital lease arrangements that extend through
2015. These leases are at fixed rentals with provisions for biennial increases
based on increases in the Consumer Price Index. The Company incurs all property
taxes, insurance and maintenance costs. The office portion of the facility is
approximately 39,800 square feet and the distribution center portion is
approximately 141,500 square feet.

The Company believes that its existing distribution facility is
adequate to meet the Companys planned business needs. Shipments from the
distribution facility to the Companys stores provide approximately 71% of all
merchandise shipment requirements to stores. Stores are serviced by common
carriers chosen on the basis of geography and rate considerations. The balance
of the stores merchandise requirements is satisfied through direct shipments
from vendors.

The Company leases an additional 31,700 square feet of office space in
Albany, New York. The operating lease expires in June 2014 and includes two,
five-year options to renew.

Item 3. LEGAL PROCEEDINGS

The Company is subject to various legal proceedings and claims that
have arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance as to the ultimate disposition
of these matters, it is managements opinion, based upon the information
available at this time, that the expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on
the results of operations and financial condition of the Company.

Item 4. [Reserved]

10

---



PART II

Item 5. MARKET FOR THE REGISTRANTS COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.
The Companys Common Stock trades on the NASDAQ Stock Market under the symbol
TWMC. As of March 31, 2011, there were 448 shareholders of record. The
following table sets forth high and low last reported sale prices for each
fiscal quarter during the period from February 1, 2009 through March 31, 2011.

|                                     |  |                      |      |     |   |      | 
|------------------------------------ |  | -------------------- | ---- | --- | - | ---- | 
|                                     |  | Closing Sales Prices |     
|                                     |  |                      |      |     |   |      | 
|                                     |  | High                 |      | Low |  
|2009                                 |  |                      |      |     |   |      | 
|1st
 Quarter                         |  | $                    | 0.89 |     | $ | 0.52 | 
|2nd
 Quarter                         |  | $                    | 1.29 |     | $ | 0.69 | 
|3rd
 Quarter                         |  | $                    | 1.59 |     | $ | 0.88 | 
|4th
 Quarter                         |  | $                    | 1.64 |     | $ | 1.29 | 
|                                     |  |                      |      |     |   |      | 
|                                     |  |                      |      |     |   |      | 
|2010                                 |  |                      |      |     |   |      | 
|1st
 Quarter                         |  | $                    | 2.44 |     | $ | 1.17 | 
|2nd
 Quarter                         |  | $                    | 2.22 |     | $ | 1.66 | 
|3rd
 Quarter                         |  | $                    | 1.88 |     | $ | 1.50 | 
|4th
 Quarter                         |  | $                    | 1.83 |     | $ | 1.60 | 
|                                     |  |                      |      |     |   |      | 
|2011                                 |  |                      |      |     |   |      | 
|1st Quarter (through March 31, 2011) |  | $                    | 1.94 |     | $ | 1.63 | 

On March 31, 2011, the last reported sale price on the Common Stock on
the NASDAQ National Market was $1.65.

Dividend Policy: The
Company has never declared dividends on its Common Stock. The Companys amended
credit facility does not allow the payment of cash dividends.

11

---



Five-Year Performance Graph:

The following
line graph reflects a comparison of the cumulative total return of the
Companys Common Stock from January 31, 2006 through January 31, 2011 with the
Nasdaq Index (U.S. Stocks) and with the Nasdaq National Market Retail Trade
Stocks index. Because none of the Companys leading competitors has been an
independent publicly traded company over the period, the Company has elected to
compare shareholder returns with the published index of retail companies
compiled by NASDAQ. All values assume a $100 investment on January 31, 2006,
and that all dividends were reinvested.

(LINE GRAPH)

|                                       |      |      |      |      |      |      |     | 
|-------------------------------------- | ---- | ---- | ---- | ---- | ---- | ---- | --- | 
|                                       | 2006 | 2007 | 2008 | 2009 | 2010 | 2011
|                                       |      |      |      |      |      |     
|Trans World Entertainment
 Corporation | 100  | 107  | 82   |      | 15   | 25   | 33  | 
|NASDAQ (U.S. Stocks)                   | 100  | 107  | 103  |      | 51   | 75   | 95  | 
|NASDAQ Retail Trade Stocks             | 100  | 109  | 97   |      | 63   | 93   | 116 | 

12

---



Item 6. SELECTED CONSOLIDATED FINANCIAL DATAThe following table sets forth selected Statement of
Operations and Balance Sheet data for the five fiscal years ended January 29,
2011 and is derived from the Companys audited Consolidated Financial
Statements. The fiscal year ended February 3, 2007 consisted of 53 weeks while
all the other fiscal years of the Company presented consisted of 52 weeks. This
information should be read in conjunction with the Companys audited
Consolidated Financial Statements and related notes and other financial
information included herein, including Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.

|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|------------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | ------------------ | -- | ------------------ | - | ------------------ | ------- | ------------------ | -- | --------- | - | - | --------- | -
|                                                                                     |  | Fiscal
 Year Ended                     |        
|                                                                                     |  |                                        |        
|                                                                                     |  | January
 29,
 2011                     |         | January
 30,
 2010 |    | January
 31,
 2009 |   | February
 2,
 2008 |         | February
 3,
 2007 |   
|                                                                                     |  |                                        |        
|                                                                                     |  | (in
 thousands, except per share data) |        
|STATEMENTS OF OPERATIONS
 DATA:                                                      |  |                                        |        
|Net sales                                                                            |  | $                                      | 652,416 |                    | $  | 813,988            |   | $                  | 987,625 |                    | $  | 1,265,658 |   | $ | 1,471,157 |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Cost of sales                                                                        |  |                                        | 433,036 |                    |    | 552,327            |   |                    | 656,730 |                    |    | 819,911   |   |   | 951,935   |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Gross profit                                                                         |  |                                        | 219,380 |                    |    | 261,661            |   |                    | 330,895 |                    |    | 445,747   |   |   | 519,222   |  
|Selling, general and administrative expenses                                         |  |                                        | 244,749 |                    |    | 310,710            |   |                    | 380,802 |                    |    | 470,386   |   |   | 519,246   |  
|Asset impairment charges                                                             |  |                                        | 1,973   |                    |    | 3,643              |   |                    | 15,158  |                    |    | 30,731    |   |   |          |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Loss from operations                                                                 |  |                                        | (27,342 | )                  |    | (52,692            | ) |                    | (65,065 | )                  |    | (55,370   | ) |   | (24       | )
|Interest expense                                                                     |  |                                        | 3,557   |                    |    | 2,910              |   |                    | 4,098   |                    |    | 6,519     |   |   | 5,504     |  
|Other income                                                                         |  |                                        | (211    | )                  |    | (168               | ) |                    | (180    | )                  |    | (429      | ) |   | (4,435    | )
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Loss before income taxes, extraordinary gain  unallocated negative
 goodwill        |  |                                        | (30,688 | )                  |    | (55,434            | ) |                    | (68,983 | )                  |    | (61,460   | ) |   | (1,093    | )
|Income tax expense (benefit)(1)                                                      |  |                                        | 275     |                    |    | (12,985            | ) |                    | (28     | )                  |    | 37,975    |   |   | (2,041    | )
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|(Loss) earnings before extraordinary gain  unallocated negative
 goodwill           |  |                                        | (30,963 | )                  |    | (42,449            | ) |                    | (68,955 | )                  |    | (99,435   | ) |   | 948       |  
|Extraordinary gain  unallocated negative goodwill, net of income
 taxes(2)          |  |                                        |        |                    |    |                   |   |                    |        |                    |    |          |   |   | 10,721    |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Net (loss) income                                                                    |  | ($                                     | 30,963  | )                  | ($ | 42,449             | ) | ($                 | 68,955  | )                  | ($ | 99,435    | ) | $ | 11,669    |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Basic (loss) earnings per share:                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|(Loss) earnings per share before extraordinary gain  unallocated
 negative goodwill |  | ($                                     | 0.99    | )                  | ($ | 1.35               | ) | ($                 | 2.21    | )                  | ($ | 3.20      | ) | $ | 0.03      |  
|Extraordinary gain  unallocated negative goodwill                                   |  |                                        |        |                    |    |                   |   |                    |        |                    |    |          |   |   | 0.35      |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Basic (loss) earnings per share                                                      |  | ($                                     | 0.99    | )                  | ($ | 1.35               | ) | ($                 | 2.21    | )                  | ($ | 3.20      | ) | $ | 0.38      |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|                                                                                    
|Weighted average number of shares outstanding- basic                                 |  |                                        | 31,417  |                    |    | 31,370             |   |                    | 31,223  |                    |    | 31,046    |   |   | 30,797    |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Diluted (loss) earnings per share:                                                   |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|(Loss) earnings per share before extraordinary gain  unallocated
 negative goodwill |  | ($                                     | 0.99    | )                  | ($ | 1.35               | ) | ($                 | 2.21    | )                  | ($ | 3.20      | ) | $ | 0.03      |  
|Extraordinary gain  unallocated negative goodwill                                   |  |                                        |        |                    |    |                   |   |                    |        |                    |    |          |   |   | 0.33      |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Diluted (loss) earnings per share                                                    |  | ($                                     | 0.99    | )                  | ($ | 1.35               | ) | ($                 | 2.21    | )                  | ($ | 3.20      | ) | $ | 0.36      |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  
|Weighted average number of shares  diluted                                          |  |                                        | 31,417  |                    |    | 31,370             |   |                    | 31,223  |                    |    | 31,046    |   |   | 31,986    |  
|                                                                                     |  |                                        |         |                    |    |                    |   |                    |         |                    |    |           |   |   |           |  

|                                                                |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|--------------------------------------------------------------- |  | ------------------------------------------------------ | ------- | ------------------ | - | ------------------ | - | ------------------ | ------- | ------------------ | - | ------- | - | - | ------- | -
|                                                                |  | Fiscal
 Year Ended                                     |        
|                                                                |  |                                                        |        
|                                                                |  | January
 29,
 2011                                     |         | January
 30,
 2010 |   | January
 31,
 2009 |   | February
 2,
 2008 |         | February
 3,
 2007 |  
|                                                                |  |                                                        |        
|                                                                |  | (in
 thousands, except per share and store count data) |        
|                                                                |  |                                                        |        
|BALANCE
SHEET DATA (at the end of the period):                  |  |                                                        |        
|                                                               
|Total assets                                                    |  | $                                                      | 348,724 |                    | $ | 394,566            |   | $                  | 487,036 |                    | $ | 638,993 |   | $ | 829,690 |  
|Current portion of long-term debt and capital lease obligations |  |                                                        | 1,363   |                    |   | 1,974              |   |                    | 3,748   |                    |   | 3,501   |   |   | 3,393   |  
|Long-term obligations                                           |  |                                                        | 5,511   |                    |   | 6,874              |   |                    | 8,844   |                    |   | 12,588  |   |   | 16,085  |  
|Shareholders equity                                            |  | $                                                      | 161,798 |                    | $ | 193,353            |   | $                  | 235,015 |                    | $ | 298,149 |   | $ | 393,205 |  
|                                                                |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|OPERATING DATA:                                                 |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|Store count (open at end of period):                            |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|Mall stores                                                     |  |                                                        | 376     |                    |   | 449                |   |                    | 549     |                    |   | 610     |   |   | 737     |  
|Freestanding stores                                             |  |                                                        | 84      |                    |   | 108                |   |                    | 163     |                    |   | 203     |   |   | 255     |  
|Total stores                                                    |  |                                                        | 460     |                    |   | 557                |   |                    | 712     |                    |   | 813     |   |   | 992     |  
|                                                                |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|Comparable store sales decrease(3)                              |  |                                                        | (4.2%   | )                  |   | (9.8%              | ) |                    | (10.8%  | )                  |   | (8.5%   | ) |   | (6.2%   | )
|                                                                |  |                                                        |         |                    |   |                    |   |                    |         |                    |   |         |   |   |         |  
|Total square footage                                            |  |                                                        | 3,149   |                    |   | 3,794              |   |                    | 4,560   |                    |   | 5,117   |   |   | 5,950   |  

13

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Included in income tax expense for Fiscal 2007 is deferred
 tax expense of $42.5 million, the recording of which was primarily due to the
 establishment of a full valuation allowance against the Companys net
 deferred tax assets. Included in income tax benefit for 2009 is a tax refund
 of $10.4 million due to revised tax carryback legislation.                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                             
|2. | The Companys acquisition of substantially all of the net
 assets of Musicland Holding Corp. stores in Fiscal 2006 resulted in an
 extraordinary gain recorded in Fiscal 2006. The gain, net of tax, represented
 the excess of fair value of net assets acquired over the purchase price of
 the acquired assets.                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                             
|3. | A store is included in comparable store sales calculations
 at the beginning of its thirteenth full month of operation. Mall stores
 relocated in the same shopping center after being open for at least thirteen
 months are considered comparable stores. Closed stores that were open for at
 least thirteen months are included in comparable store sales through the
 month immediately preceding the month of closing.

14

---



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Managements
Discussion and Analysis of Financial Condition and Results of Operations
provide information that the Companys management believes necessary to achieve
an understanding of its financial condition and results of operations. To the
extent that such analysis contains statements which are not of a historical
nature, such statements are forward-looking statements, which involve risks and
uncertainties. These risks include, but are not limited to, changes in the
competitive environment for the Companys merchandise, including the entry or
exit of non-traditional retailers of the Companys merchandise to or from its
markets; releases by the music, video, and video game industries of an
increased or decreased number of hit releases; general economic factors in
markets where the Companys merchandise is sold; and other factors discussed in
the Companys filings with the Securities and Exchange Commission. The
following discussion and analysis of the Companys financial condition and
results of operations should be read in conjunction with Selected Consolidated
Financial Data and the Consolidated Financial Statements and related notes
included elsewhere in this report.

At January 29,
2011, the Company operated 460 stores totaling approximately 3.1 million square
feet in the United States, the District of Columbia, the Commonwealth of Puerto
Rico and the U.S. Virgin Islands. In the fiscal year ended January 29, 2011
(referred to herein as Fiscal 2010), the Companys net sales decreased as
compared to the fiscal year ended January 30, 2010, (referred to herein as
Fiscal 2009) as a result of lower average store count and a decrease in
comparable store sales. Comparable store sales decreased 4.2% during Fiscal
2010.

The U.S.
entertainment retailing industry is a mature industry and has experienced
declines in recent years. Physical Music and Video represent our primary
product categories in terms of sales and both categories have been impacted by
new distribution channels, including digital distribution and internet
fulfillment. As a result, the Company has had negative comparable store sales
for the past five years. To mitigate or lessen the impact these changes have
had, the Company has focused on the following areas in an effort to improve its
business:

Improving
Product Mix and Creating Value to the Customer

The Company
tailors the product mix of its stores toward regional tastes in order to
optimize the productivity of its stores, seeking to serve key customer segments
within each store. We have also focused on creating a stronger value statement
with our customers in our two core categories of music and video to drive
additional traffic into the stores and improve customer conversion rates, while
offering product in other categories to drive additional sales.

Store
Portfolio Evaluation

During Fiscal
2010 and Fiscal 2009, the Company closed 102 and 157 stores, respectively. The
Companys real estate strategy is to reposition our store portfolio by reducing
our store base to a core group of profitable locations, while evaluating
opportunities for new locations. The Company acquired five stores in 2010 and
opened two new stores in Fiscal 2009.

The Company
closes stores when minimum operating thresholds are not achieved or upon lease
expiration when either renewal is not available or management determines that
renewal is not in the Companys best interest. The Company has signed
short-term lease agreements for desirable locations, which enables us to
negotiate rents that are responsive to the then-current sales environment. We
will continue to close stores that do not meet our profitability goals, a
process which could result in additional future asset impairments and store
closure costs. The Company expects the reduction in stores to lower total sales
and gross profit of the Company. However, the elimination of direct and
overhead expenses related to the closing stores will offset the decline in
gross profit and improve the operating results of the Company. The store
closings in Fiscal 2009 helped reduce the Companys Net Loss in Fiscal 2010 to
$31 million from $42 million in Fiscal 2009.

The Company
believes that there is near-term opportunity in improving the productivity of
existing stores. The environment in which our stores operate is intensely
competitive and includes Internet-based retailers and mass merchants. A
specialty retailer that can differentiate themselves by offering a distinctive
customer experience, and who can operate efficiently will be better positioned
to maintain or grow market share. Therefore, we remain dedicated to the
operational improvement of our stores and offering our customers a rewarding
shopping experience.

Expanding
Customer Base

To strengthen
customer loyalty, the Company offers its customers the option of signing up for
a Backstage Pass card which provides an additional 10% discount off of everyday
selling prices on nearly all product in addition to other value added offers
and services members receive through the program in exchange for a membership
fee. The Company also co-sponsors events in many of its stores to provide
various segments of its customers an opportunity to experience entertainment
and shop for unique and exclusive products based on their particular interests.

15

---



Key Performance Indicators

Management
monitors a number of key performance indicators to evaluate its performance,
including:

Net Sales and Comparable Store Sales:
The Company measures the rate of comparable store net sales change. A store is
included in comparable store net sales calculations at the beginning of its
thirteenth full month of operation. Mall stores relocated in the same shopping
center after being open for at least thirteen months are considered comparable
stores. Closed stores that were open for at least thirteen months are included
in comparable store net sales through the month immediately prior to the month
of closing. The Company further analyzes net sales by store format and by
product category.

Cost of Sales and Gross Profit:
Gross profit is calculated based on the cost of product in relation to its
retail selling value. Changes in gross profit are impacted primarily by net
sales levels, mix of products sold, vendor discounts and allowances and
distribution costs. The Company records its distribution, freight and obsolescence
expenses in cost of sales. Distribution expenses include those costs associated
with receiving, inspecting and warehousing merchandise and costs associated
with product returns to vendors.

Selling, General and Administrative
(SG&A) expenses: Included in SG&A expenses
are payroll and related costs, occupancy charges, general operating and
overhead expenses and depreciation charges (excluding those related to
distribution operations, as discussed in Note 3 of Notes to the Consolidated
Financial Statements in this Annual Report on Form 10-K). SG&A expenses
also include fixed assets write-offs associated with store closures, if any,
and miscellaneous items, other than interest.

Balance Sheet and Ratios:
The Company views cash, net inventory investment (merchandise inventory less
accounts payable) and working capital (current assets less current liabilities)
as indicators of its financial position. See Liquidity and Capital Resources
for further discussion of these items.

Fiscal Year Ended January 29, 2011 (Fiscal
2010)
Compared to Fiscal Year Ended January 30, 2010 (Fiscal 2009)

Net Sales. The
following table sets forth a year-over-year comparison of the Companys total
net sales:

|                  |  |      |         |      |   |               |  |    |         |   |  |        |  
|----------------- |  | ---- | ------- | ---- | - | ------------- |  | -- | ------- | - |  | ------ | -
|                  |  |      |         |      |   | 2010 vs. 2009 | 
|                  |  |      |         |      |   |               | 
|($ in
 thousands) |  | 2010 |         | 2009 |   | $             |  | %  |        
|                  |  |      |         |      |   |               | 
|Net Sales         |  | $    | 652,416 |      | $ | 813,988       |  | ($ | 161,572 | ) |  | (19.8% | )

The 19.8% net
sales decline from prior year is due to the comparable store net sales decline
of 4.2% coupled with a 23% decline in average store count. Stores closed in
fiscal 2009 and fiscal 2010 recorded sales of $225 million in 2009. While the
Company believes a meaningful amount of sales were transferred to ongoing
stores, there was a reduction of total sales from store closings. Total product
    units sold in Fiscal 2010 decreased 15% and the average retail price for
    units sold decreased 6%.

Net sales by
merchandise category for Fiscal 2010 and Fiscal 2009 were as follows:


|                  |  |                 |         |          |  |                 |   |          |         |                            |  |                                       |   |    |         |   |       |   
|----------------- |  | --------------- | ------- | -------- |  | --------------- | - | -------- | ------- | -------------------------- |  | ------------------------------------- | - | -- | ------- | - | ----- | --
|                  |  |                
|($ in
 thousands) |  | 2010
 Net Sales |         | %
 Total |  | 2009
 Net Sales |   | %
 Total |         | Total %
 Net Sales
 Change |  | Comparable
 Store % Net
 Sales Change |  
|                  |  |                
|Music             |  | $               | 231,721 |          |  | 35.5            | % | $        | 286,670 |                            |  | 35.2                                  | % | ($ | 54,949  | ) | (3.9  | %)
|Video             |  |                 | 284,711 |          |  | 43.7            |   |          | 339,251 |                            |  | 41.7                                  |   |    | (54,540 | ) | 1.1   |   
|Video games       |  |                 | 37,290  |          |  | 5.7             |   |          | 70,400  |                            |  | 8.6                                   |   |    | (33,110 | ) | (37.9 | ) 
|Other             |  |                 | 98,694  |          |  | 15.1            |   |          | 117,667 |                            |  | 14.5                                  |   |    | (18,973 | ) | (0.1  | ) 
|                  |  |                 |         |          |  |                 |   |          |         |                            |  |                                       |   |    |         |   |       |   
|Total             |  | $               | 652,416 |          |  | 100.0           | % | $        | 813,988 |                            |  | 100.0                                 | % | ($ | 161,572 | ) | (4.2  | %)
|                  |  |                 |         |          |  |                 |   |          |         |                            |  |                                       |   |    |         |   |       |   

The Other
category includes electronics, accessories and trend items, none of which
individually exceed 10% of total net sales.

Music


The Companys stores offer a wide range of new and used CDs and music
DVDs across most music genres, including new releases from current artists as
well as an extensive catalog of music from past periods and artists. The music
category declined 3.9% on a comparable store sale basis.


16

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Net sales of CDs represented approximately 95% of total net sales in
the music category during Fiscal 2010. The Companys annual CD unit sales
decreased 13% in Fiscal 2010 due to lower comparable store net sales and the
decrease in average store count. According to SoundScan, total CD unit sales in
the United States declined 20% during the period corresponding with the Companys
Fiscal 2010.

Video


The Company offers DVDs in all of its stores and high definition DVDs
(BluRay) in a majority of its stores. The video category increased as a
percentage of the Companys total net sales due positive comparable store sales
compared to negative comparable store sales in all the other categories.


Total net sales for Fiscal 2010 in the video category decreased 16% due
to the lower average store count, partially offset by an increase of 1.1% in
comp sales. According to Warner Home Video, total video unit sales in the
United States declined 9% during the period corresponding with the Companys
Fiscal 2010.

Video
games


The negative comparable store sales in video games was primarily due to
a reduction in the number of stores carrying games in Fiscal 2010 versus Fiscal
2009. During the Fourth Quarter of 2009, the Company eliminated the game
category in over 200 stores. As of year-end, 123 of our stores carried games.


Other


The Other category consists of electronics, accessories and trend
items. Net sales in this category have increased as a percentage of total net
sales due to slower comparable store sales declines than music and games.


Gross Profit. The
following table sets forth a year-over-year comparison of the Companys Gross
Profit:

|                             |  |      |         |      |   |               |   |    |        |   |  |        |  
|---------------------------- |  | ---- | ------- | ---- | - | ------------- | - | -- | ------ | - |  | ------ | -
|($ in
 thousands)            |  |      |         |      |   | 2010 vs. 2009 |  
|                             |  |      |         |      |   |               |  
|                             |  | 2010 |         | 2009 |   | $             |   | %  |       
|                             |  |      |         |      |   |               |  
|Gross Profit                 |  | $    | 219,380 |      | $ | 261,661       |   | ($ | 42,281 | ) |  | (16.2% | )
|As a percentage of net sales |  |      | 33.6    | %    |   | 32.1          | % |    |        |   |  |        |  

Gross margin improved 150 basis points due to higher gross margin in
the video category, fewer merchandise markdowns in our other categories of
electronics, accessories and trend and a shift in business away from the lower
margin Game business.

Selling, General and Administrative Expenses.
The following table sets forth a year-over-year comparison of the Companys
SG&A expenses:

|                                              |  |      |         |      |   |               |   |    |        |   |  |        |  
|--------------------------------------------- |  | ---- | ------- | ---- | - | ------------- | - | -- | ------ | - |  | ------ | -
|($ in thousands)                              |  |      |         |      |   | 2010 vs. 2009 |  
|                                              |  |      |         |      |   |               |  
|                                              |  | 2010 |         | 2009 |   | $             |   | %  |       
|                                              |  |      |         |      |   |               |  
|Selling, general and administrative
 expenses |  | $    | 244,749 |      | $ | 310,710       |   | ($ | 65,961 | ) |  | (21.2% | )
|                                              |  |      |         |      |   |               |   |    |        |   |  |        |  
|As a percentage of net sales                  |  |      | 37.5    | %    |   | 38.2          | % |    |        |   |  |        |  

The $66 million decrease in SG&A expenses is due to a $59 million
reduction in store expenses arising from the Company operating an average of 23%
fewer stores and negotiated rent reductions in the ongoing stores, as well as a
$5 million reduction in corporate overhead expenses. SG&A as a percentage
of net sales decreased to 37.5% from 38.2%.

Asset Impairment Charge.
During Fiscal 2010 and Fiscal 2009, the Company concluded, based on a
significant decline in sales and earnings during the fourth quarter, that
triggering events had occurred requiring a test of long-lived assets for
impairment at its retail stores and consolidated subsidiaries. Long-lived
assets at locations where impairment was determined to exist were written down
to their estimated fair values as of the end of each period resulting in the
recording of asset impairment charges of $2.0 million and $3.6 million in
Fiscal 2010 and Fiscal 2009, respectively. Estimated fair values for long-lived
assets at these locations, including store fixtures and equipment and leasehold
improvements, were determined based on a measure of discounted future cash
flows over the remaining lease terms at the respective locations. Future cash
flows were estimated based on store plans and were discounted at a rate
approximating the Companys cost of capital. Management believes its
assumptions were reasonable and consistently applied.

Interest Expense.
Interest expense in Fiscal 2010 was $3.6 million compared to $2.9 million in
Fiscal 2009. The increase is due to the

17

---



amortization of loan commitment fees related with the extension of our
credit facility in April 2010.

Other Income. Other
income includes interest income, which was $0.2 million in both Fiscal 2010 and
2009.

Income Tax Benefit.
The following table sets forth a year-over-year comparison of the Companys
income tax expense (benefit):

|                              |  |      |     |      |    |               |    |    |        |  
|----------------------------- |  | ---- | --- | ---- | -- | ------------- | -- | -- | ------ | -
|($ in
 thousands)             |  |      |     |      |    | 2010 vs. 2009 |   
|                              |  |      |     |      |    |               |   
|                              |  | 2010 |     | 2009 |    | $             |   
|                              |  |      |     |      |    |               |   
|                              |  |      |     |      |    |               |   
|Income tax
 expense (benefit) |  | $    | 275 |      | ($ | 12,985        | )  | ($ | 13,260 | )
|                              |  |      |     |      |    |               |    |    |        |  
|Effective
 tax rate           |  |      | 0.9 | %    |    | (23.4         | %) |    |        |  

The Fiscal 2010 income tax expense is the net of state taxes,
adjustments to the reserve for uncertain tax positions and the accrual of
interest.

During Fiscal 2009, the Company recorded a current federal tax benefit
of $10.4 million resulting from federal tax legislation enacted that provided
for an increased carryback period for net operating losses incurred in Fiscal
2008. Also, during Fiscal 2009, the Company recorded a deferred tax benefit of
$2.3 million related to the intra period allocation of income tax expense to
loss from current operations and accumulated other comprehensive income. The remaining
components of income tax benefit of $0.3 million is the net of certain state
taxes, adjustments to the reserve for uncertain tax positions and the accrual
of interest on uncertain tax positions.

Net Loss. The
following table sets forth a year-over-year comparison of the Companys net
loss:

|                                       |  |      |        |      |    |               |    |   |        | 
|-------------------------------------- |  | ---- | ------ | ---- | -- | ------------- | -- | - | ------ | 
|($ in thousands)                       |  |      |        |      |    |               |   
|                                       |  |      |        |      |    | 2010 vs. 2009 |   
|                                       |  |      |        |      |    |               |   
|                                       |  | 2010 |        | 2009 |    | $             |   
|                                       |  |      |        |      |    |               |   
|                                      
|Net loss                               |  | ($   | 30,963 | )    | ($ | 42,449        | )  | $ | 11,486 | 
|                                       |  |      |        |      |    |               |    |   |        | 
|Net loss as
 a percentage of net sales |  |      | (4.7   | %)   |    | (5.2          | %) |   |        | 

The $11.5 million reduction in net loss as compared to 2009 was due to
increased gross margin rate and a reduction in SG&A expenses.

18

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Fiscal Year Ended January 30, 2010 (Fiscal
2009)
Compared to Fiscal Year Ended January 31, 2009 (Fiscal 2008)

Net Sales. The following table sets forth a year-over-year comparison
of the Companys total net sales:

|                  |  |      |         |      |   |         |  |               |          |   |  |        |  
|----------------- |  | ---- | ------- | ---- | - | ------- |  | ------------- | -------- | - |  | ------ | -
|                  |  |      |         |      |   |         |  | 2009 vs. 2008 |         
|                  |  |      |         |      |   |         |  |               |         
|($ in
 thousands) |  | 2009 |         | 2008 |   | $       |  | %             |         
|                  |  |      |         |      |   |         |  |               |         
|Net Sales         |  | $    | 813,988 |      | $ | 987,625 |  | $             | (173,637 | ) |  | (17.6% | )

The 17.6% net sales decline from prior year is due to the comparable
store net sales decline of 9.8% coupled with a 13% decline in average store
count. Total product units sold in Fiscal 2009 decreased 11% and the average
retail price for units sold decreased 8%.

Net sales by merchandise category for Fiscal 2009 and Fiscal 2008 were
as follows:


|                 |  |                 |         |          |  |                 |   |          |         |                             |  |                                       |   |  |       |    |  |       |   
|---------------- |  | --------------- | ------- | -------- |  | --------------- | - | -------- | ------- | --------------------------- |  | ------------------------------------- | - |  | ----- | -- |  | ----- | --
|($ in thousands) |  | 2009
 Net Sales |         | %
 Total |  | 2008
 Net Sales |   | %
 Total |         | Total
 %
 Net Sales
 Change |  | Comparable
 Store % Net
 Sales Change |  
|                 |  |                 |         |          |  |                 |   |          |         |                             |  |                                       |  
|                 |  |                 |         |          |  |                 |   |          |         |                             |  |                                       |   |  |       |    |  |       |   
|Music            |  | $               | 286,670 |          |  | 35.2            | % | $        | 349,737 |                             |  | 35.4                                  | % |  | (18.0 | %) |  | (11.2 | %)
|Video            |  |                 | 339,251 |          |  | 41.7            |   |          | 407,884 |                             |  | 41.3                                  |   |  | (16.8 | )  |  | (7.5  | ) 
|Video games      |  |                 | 70,400  |          |  | 8.6             |   |          | 90,233  |                             |  | 9.1                                   |   |  | (22.0 | )  |  | (15.7 | ) 
|Other            |  |                 | 117,667 |          |  | 14.5            |   |          | 139,771 |                             |  | 14.2                                  |   |  | (15.8 | )  |  | (8.5  | ) 
|                 |  |                 |         |          |  |                 |   |          |         |                             |  |                                       |   |  |       |    |  |       |   
|Total            |  | $               | 813,988 |          |  | 100.0           | % | $        | 987,625 |                             |  | 100.0                                 | % |  | (17.6 | %) |  | (9.8  | %)
|                 |  |                 |         |          |  |                 |   |          |         |                             |  |                                       |   |  |       |    |  |       |   

The Other category includes electronics, accessories and trend items,
none of which individually exceed 10% of total net sales.

Music


The Companys stores offer a wide range of new and used CDs and music
DVDs across most music genres, including new releases from current artists as
well as an extensive catalog of music from past periods and artists. The music
category declined as a percentage of total net sales and declined 11% on a comparable
store sale basis due to the shift to online downloading.


Net sales of CDs represented approximately 94% of total net sales in
the music category during Fiscal 2009. The Companys annual CD unit sales
decreased 11% in Fiscal 2009 due to lower comparable store net sales and the
decrease in average store count. According to SoundScan, total CD unit sales in
the United States declined 18% during the period corresponding with the
Companys Fiscal 2009.

Video


The Company offers DVDs in all of its stores and high definition DVDs
(BluRay) in a majority of its stores. The video category increased as a
percentage of the Companys total net sales due to slower comparable store
sales decline in this category than the music and video games categories.


Total net sales for Fiscal 2009 in the video category decreased 17% due
to a comparable store net sales decrease of 8% and the lower average store
count. According to VideoScan, total video unit sales in the United States
declined 8% during the period corresponding with the Companys Fiscal 2009.

19

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Video
games


The negative comparable store sales in video games was due to the lack
of allocation of product from vendors, as well as a reduction in the number of
stores carrying games in Fiscal 2009 versus Fiscal 2008. During Fourth Quarter
2009, the Company eliminated the game category in over 200 stores. As of
year-end, 139 of our stores carried games compared to 347 a year ago.


Other


The Other category consists of electronics, accessories and trend
items. Net sales in this category have increased as a percentage of total net
sales due to increased store square footage allocations and slower comparable
store sales declines than music and video.


Gross Profit. The
following table sets forth a year-over-year comparison of the Companys Gross
Profit:

|                              |  |      |         |      |   |         |   |               |        |   |  |        |  
|----------------------------- |  | ---- | ------- | ---- | - | ------- | - | ------------- | ------ | - |  | ------ | -
|($ in thousands)              |  |      |         |      |   |         |   | 2009 vs. 2008 |       
|                              |  |      |         |      |   |         |   |               |       
|                              |  | 2009 |         | 2008 |   | $       |   | %             |       
|                              |  |      |         |      |   |         |   |               |       
|Gross Profit                  |  | $    | 261,661 |      | $ | 330,895 |   | ($            | 69,234 | ) |  | (20.9% | )
|As a
 percentage of net sales |  |      | 32.1    | %    |   | 33.5    | % |               |        |   |  |        |  

The 140 basis point decline in gross profit as a percentage of net
sales was due to lower vendor allowances.

Selling, General and Administrative Expenses. The following table sets
forth a year-over-year comparison of the Companys SG&A expenses:

|                                                |  |      |         |      |   |         |   |               |        |   |  |       |   
|----------------------------------------------- |  | ---- | ------- | ---- | - | ------- | - | ------------- | ------ | - |  | ----- | --
|($ in
 thousands)                               |  |      |         |      |   |         |   | 2009 vs. 2008 |       
|                                                |  |      |         |      |   |         |   |               |       
|                                                |  | 2009 |         | 2008 |   | $       |   | %             |       
|                                                |  |      |         |      |   |         |  
|                                                |  |      |         |      |   |         |   |               |        |   |  |       |   
|Selling,
 general and 
 administrative expenses |  | $    | 310,710 |      | $ | 380,802 |   | ($            | 70,092 | ) |  | (18.4 | %)
|                                                |  |      |         |      |   |         |   |               |        |   |  |       |   
|As a
 percentage of net sales                   |  |      | 38.2    | %    |   | 38.6    | % |               |        |   |  |       |   

The $70 million decrease in SG&A expenses is due to the Company
operating an average of 13% fewer stores. SG&A as a percentage of net sales
decreased to 38.2% from 38.6%.

Included in SG&A for Fiscal 2008 is a gain of approximately $3.1
million from the sale of the Canton, Ohio distribution facility.

Asset Impairment Charge.
During Fiscal 2009 and Fiscal 2008, the Company concluded, based on a
significant decline in sales and earnings during the fourth quarter, that
triggering events had occurred requiring a test of long-lived assets for
impairment at its retail stores and consolidated subsidiaries. Long-lived
assets at locations where impairment was determined to exist were written down
to their estimated fair values as of the end of each period resulting in the
recording of asset impairment charges of $3.6 million and $15.2 million in
Fiscal 2009 and Fiscal 2008, respectively. Estimated fair values for long-lived
assets at these locations, including store fixtures and equipment and leasehold
improvements, were determined based on a measure of discounted future cash
flows over the remaining lease terms at the respective locations. Future cash
flows were estimated based on store plans and were discounted at a rate
approximating the Companys cost of capital. Management believes its
assumptions were reasonable and consistently applied.

Interest Expense.
Interest expense in Fiscal 2009 was $2.9 million compared to $4.1 million in
Fiscal 2008. The decrease is due to lower average borrowings on the Companys
revolving line of credit and lower interest rates.

Other Income. Other income includes interest income, which was $0.2
million in Fiscal 2009 and 2008.

20

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Income Tax Benefit.The
following table sets forth a year-over-year comparison of the Companys income
tax expense (benefit):

|                    |  |      |        |      |   |     |   |               |        | 
|------------------- |  | ---- | ------ | ---- | - | --- | - | ------------- | ------ | 
|($ in
thousands)    |  |      |        |      |   |     |   | 2009 vs. 2008 |       
|                    |  |      |        |      |   |     |   |               |       
|                    |  | 2009 |        | 2008 |   | $   |  
|                    |  |      |        |      |   |     |  
|                    |  |      |        |      |   |     |   |               |        | 
|Income tax
 benefit |  | $    | 12,985 |      | $ | 28  |   | $             | 12,957 | 
|                    |  |      |        |      |   |     |   |               |        | 
|Effective
 tax rate |  |      | 23.4   | %    |   | 0.0 | % |               |        | 

During Fiscal 2009, the Company recorded a current federal tax benefit
of $10.4 million resulting from federal tax legislation enacted that provided
for an increased carryback period for net operating losses incurred in Fiscal
2008. Also, during Fiscal 2009, the Company recorded a deferred tax benefit of
$2.3 million related to the intra period allocation of income tax expense to
loss from current operations and accumulated other comprehensive income. The
remaining components of income tax benefit of $0.3 million is the net of
certain state taxes, adjustments to the reserve for uncertain tax positions and
the accrual of interest on uncertain tax positions.

Net Loss.
The following table sets forth a year-over-year comparison of the Companys net
loss:

|                                      |  |      |        |      |    |        |    |               |        | 
|------------------------------------- |  | ---- | ------ | ---- | -- | ------ | -- | ------------- | ------ | 
|($ in
thousands)                      |  |      |        |      |    |        |    | 2009 vs. 2008 |       
|                                      |  |      |        |      |    |        |    |               |       
|                                      |  | 2009 |        | 2008 |    | $      |   
|                                      |  |      |        |      |    |        |   
|Net loss                              |  | ($   | 42,449 | )    | ($ | 68,955 | )  | $             | 26,506 | 
|                                      |  |      |        |      |    |        |    |               |        | 
|Net loss as a percentage of net sales |  |      | (5.2   | %)   |    | (7.0   | %) |               |        | 

The Fiscal 2009 net loss of $42.4 million was due to the decline in
comparable store sales and lower gross margin. The $26.5 million reduction in
net loss as compared to 2008 was due to a lower impairment charge and an
increase in the income tax benefit, partially offset by lower sales and the 140
basis point decrease in gross margin.

LIQUIDITY AND CAPITAL
RESOURCES

Liquidity
and Cash Flows: The
Companys primary sources of working capital are cash provided by operations
and borrowing capacity under its revolving credit facility. The Companys cash
flows fluctuate from quarter to quarter due to various items, including
seasonality of sales and earnings, merchandise inventory purchases and returns,
the related terms on the purchases and capital expenditures. Management
believes it will have adequate resources to fund its cash needs for the
foreseeable future, including its capital spending, its seasonal increase in
merchandise inventory and other operating cash requirements and commitments.
Management has considered many initiatives as part of the development of its
operating plan for 2011 and beyond, including a focus on the operation of a
core base of stores, improved product selection based on customer preferences
and industry changes, as well as further streamlining of its operations. During
Fiscal 2010, management carried out certain strategic initiatives in its
efforts to reduce certain operating costs such as the reduction of headcount at
the home office and the elimination or curtailment of certain other general and
administrative expenses. Also, during the fourth quarter of Fiscal 2010,
management closed 73 stores and plans to continue its careful evaluation of
store profitability of its remaining 460 stores in consideration of lease
terms, conditions and expirations.

Management anticipates any cash requirements due to a shortfall in cash
from operations will be funded by the Companys revolving credit facility,
discussed hereafter. Cash flows from investing and financing activities during
Fiscal 2011 are expected to be comparable with Fiscal 2010. The Company does
not expect any material changes in the mix (between equity and debt) or the
relative cost of capital resources.

21

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The following
table sets forth a three year summary of key components of cash flow and
working capital:

|                          |  |      |         |      |   |               |   |      |         |               |    |         |   |   |          |  
|------------------------- |  | ---- | ------- | ---- | - | ------------- | - | ---- | ------- | ------------- | -- | ------- | - | - | -------- | -
|($ in
 thousands)         |  | 2010 |         | 2009 |   | 2010 vs. 2009 |   | 2008 |         | 2009 vs. 2008 |   
|                          |  |      |         |      |   |               |   |      |         |               |   
|Operating Cash Flows      |  | $    | 10,464  |      | $ | 49,789        |   | ($   | 39,325  | )             | ($ | 37,232  | ) | $ | 87,021   |  
|Investing Cash Flows      |  |      | (4,792  | )    |   | (4,586        | ) |      | (206    | )             |    | (3,873  | ) |   | (713     | )
|Financing Cash Flows      |  |      | (1,974  | )    |   | (3,744        | ) |      | 1,770   |               |    | (3,495  | ) |   | 249      |  
|                          |  |      |         |      |   |               |   |      |         |               |    |         |   |   |          |  
|Capital Expenditures      |  |      | (2,944  | )    |   | (4,586        | ) |      | 1,642   |               |    | (10,066 | ) |   | 5,480    |  
|                          |  |      |         |      |   |               |   |      |         |               |    |         |   |   |          |  
|Cash and Cash Equivalents |  |      | 75,212  |      |   | 71,514        |   |      | 3,698   |               |    | 30,055  |   |   | 41,459   |  
|Merchandise Inventory(1)  |  |      | 234,164 |      |   | 266,568       |   |      | (32,404 | )             |    | 378,188 |   |   | (111,620 | )
|Working Capital           |  |      | 158,366 |      |   | 181,920       |   |      | (23,554 | )             |    | 213,389 |   |   | (31,469  | )
|Inventory turns           |  |      | 1.7     |      |   | 1.7           |   |      |         |               |    | 1.6     |   |   |          |  

|    |                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The change in merchandise inventory from 2010 vs. 2009 includes $2.5
 million in inventory purchased as part of the Value Music acquisition as
 discussed in Note 2 of Notes to the Consolidated Financial Statements in this
 Annual Report on Form 10-K

During Fiscal 2010, cash flow from operations was $10.5 million
primarily due to a $34.9 million decrease in merchandise inventory and a $7.4
million decrease in prepaid expenses partially offset by the $31.0 million net
loss. During Fiscal 2009, cash flow from operations was $49.8 million due to a
$112 million reduction in merchandise inventory partially offset by the $42.4
million net loss and a $39.3 million reduction in accounts payable.

The Company monitors various statistics to measure its management of
inventory, including inventory turn (annual cost of sales divided by average
merchandise inventory balances), inventory investment per square foot
(merchandise inventory divided by total store square footage) and inventory
leverage (accounts payable divided by merchandise inventory). Inventory
turnover measures the Companys ability to sell merchandise and how many times
it is replaced over time. This ratio is important in determining the need for
markdowns and planning future inventory levels and assessing customer response
to our merchandise. Inventory turn in Fiscal 2010 was 1.7, the same level as
Fiscal 2009. Inventory investment per square foot measures the productivity of
the inventory. It is important in determining if the Company has the appropriate
level of inventory to meet customer demands while controlling its investment in
inventory. Inventory investment per square foot was $74 per square foot at the
end of Fiscal 2010 as compared to $70 per square foot at the end of Fiscal
2009. Accounts payable leverage measures the percentage of inventory being
funded by the Companys product vendors. The percentage is important in
determining the Companys ability to fund its business. Accounts payable
leverage on inventory was 56% as of January 29, 2011 compared with 49% as of
January 30, 2010.

Cash used in investing activities was $4.8 million in Fiscal 2010,
compared to $4.6 million in Fiscal 2009. During Fiscal 2010, cash used in
investing activities included $2.9 million for capital expenditures and $1.8
million for the acquisition of five stores. During Fiscal 2009, cash used in
investing activities consisted exclusively of capital expenditures of $4.6
million. The Companys capital expenditures in Fiscal 2010 consisted primarily
of the expenditures for store improvements and investments in information
technology improvements.

The Company has historically financed its capital expenditures through
borrowings under its credit facility, select financing arrangements and cash
generated from sales of merchandise inventory. It may also receive landlord
allowances or concessions for store openings, relocations or improvements. The
Company anticipates capital spending of approximately $7.5 million in Fiscal
2011.

Cash used in financing activities was $2.0 million in Fiscal 2010,
compared to $3.7 million in Fiscal 2009. In Fiscal 2010, the primary uses of
cash were payments of long-term debt and capital lease obligations of $0.6
million and $1.4 million, respectively. In Fiscal 2009, the primary uses of
cash were payments of long-term debt and capital lease obligations of $0.6
million and $3.2 million, respectively.

In January, 2006, the Company entered into a five-year,
    $100 million revolving secured credit facility with Bank of America (Previous
    Credit Facility). The revolving credit facility contains provisions
    governing additional indebtedness and acquisitions and is secured by the
    Companys
eligible inventory, proceeds from the sale of inventory and by the stock of the
Companys subsidiaries. In March 2006, the Company and Bank of America N.A.,
entered into a First Amendment to the Credit Facility which increased the
amount available for borrowing by the Company under the Credit Facility to $130
million and in October 2006, the Company and Bank of America N.A. entered into
a Second Amendment to the Credit Facility increasing the amount available to
the Company for borrowing to $150 million. The terms and conditions under the
amendments were the same as the original Credit Facility. In April 2010, the
Company entered into an amended and restated Credit Agreement (Amended
Credit Facility). Based on lower anticipated capital requirements, availability
under the facility was reduced to $100 million. The availability was reduced
to align the availability with the Companys capital needs. The Amended
Credit Facility, which expires in April 2013, updated certain terms and conditions
including limits on the payment of dividends, added covenants around the number
of store closings and

22

---



changed the formula for interest rates. The availability under the
Previous and Amended Credit Facility is subject to limitations based on
sufficient inventory levels. See Note 5 in the Notes to Consolidated Financial
Statements for further detail.

As of January 29, 2011, the Company did not have any borrowings and had
$0.5 million in outstanding letter of credit obligations under the Credit
Facility with Bank of America, N.A. As of January 30, 2010, the Company did not
have any borrowings or any outstanding letter of credit obligations under the
Credit Facility with Bank of America, N.A. The Company had $86 million and $132
million available for borrowing as of January 29, 2011 and January 30, 2010,
respectively. Interest expense in Fiscal 2010 was $3.6 million, of which $1.5
million was incurred for capital leases. Interest expense in Fiscal 2009 was
$2.9 million, of which $1.7 million was incurred for capital leases.

Off Balance Sheet Arrangements.The
Company has no off balance sheet arrangements as defined by Item 303 (a) (4) of
Regulation S-K.

Contractual Obligations and Commitments.
The following table summarizes the Companys contractual obligations as of
January 29, 2011, and the effect that such obligations are expected to have on
liquidity and cash flows in future periods.

|                                                        |  |      |        |             |  |              |  |                  |        |       |  |       |  |  |         | 
|------------------------------------------------------- |  | ---- | ------ | ----------- |  | ------------ |  | ---------------- | ------ | ----- |  | ----- |  |  | ------- | 
|ContractualObligation                                   |  | 2011 |        | 2012-
 2013 |  | 2014 -
 2015 |  | 2016 and
 Beyond |        | Total | 
|                                                        | 
|$ in thousands                                          |  |      |        |             |  |              |  |                  |        |       |  |       |  |  |         | 
|Operating lease and maintenance

agreement
 obligations |  |      | 47,254 |             |  | 40,094       |  |                  | 12,726 |       |  | 3,139 |  |  | 103,213 | 
|Capital lease

obligations                              |  |      | 2,154  |             |  | 4,308        |  |                  | 3,803  |       |  |      |  |  | 10,265  | 
|Long-term debt

(principal)                             |  |      | 640    |             |  | 1,402        |  |                  | 346    |       |  |      |  |  | 2,388   | 
|Long-term debt

(interest)                              |  |      | 128    |             |  | 133          |  |                  | 6      |       |  |      |  |  | 267     | 
|Purchase obligations

(1)                               |  |      |       |             |  |             |  |                  |       |       |  |      |  |  |        | 
|Other long-term liabilities

(2)                        |  |      | 2,255  |             |  | 1,094        |  |                  | 225    |       |  | 134   |  |  | 3,708   | 
|Pension benefits

(3)                                   |  |      | 140    |             |  | 1,152        |  |                  | 1,865  |       |  | 5,216 |  |  | 8,373   | 
|                                                        |  |      |        |             |  |              |  |                  |        |       |  |       |  |  |         | 
|Total                                                   |  |      | 52,571 |             |  | 48,183       |  |                  | 18,971 |       |  | 8,489 |  |  | 128,214 | 
|                                                        |  |      |        |             |  |              |  |                  |        |       |  |       |  |  |         | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the
 purposes of this table, contractual obligations for purchase of goods or
 services are defined as agreements that are enforceable and legally binding
 and that specify all significant terms, including: fixed or minimum
 quantities to be purchased; fixed, minimum or variable price provisions; and
 the approximate timing of the transaction. The Companys purchase orders are
 based on its current inventory needs and are fulfilled by its suppliers
 within short time periods.                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | Included in
 other long-term liabilities in the Consolidated Balance Sheet as of January
 29, 2011 are unfavorable lease valuations of $0.1 million and the long-term
 portion of deferred rent of $1.7 million which are not reflected in the table
 above as these amounts do not represent contractual obligations. Also
 included in other long-term liabilities is the long-term portion of the
 straight line rent liability of $1.6 million, which is included in operating
 lease obligations in the table above.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | Included in
 other long-term liabilities in the table above are the estimated asset
 retirement obligations associated with the fixed assets and leasehold
 improvements at the Companys store locations that arise under the terms of
 operating leases.                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(3) | In addition
 to the scheduled pension benefit payments, the Company offers a 401(k)
 Savings Plan to eligible employees (see also Note 8 of Notes to Consolidated
 Financial Statements in this Annual Report on Form 10-K). Total expense
 related to the Companys matching contribution was approximately $439,000, $0
 and $882,000 in Fiscal 2010, Fiscal 2009 and Fiscal 2008 respectively. As of
 March 1, 2011, the Company postponed its matching contribution.                                                 

Related Party Transactions.


The Company leases its 181,300 square foot distribution center/office
facility in Albany, New York from Robert J. Higgins, its Chairman, Chief
Executive Officer and largest shareholder, under three capital leases that
expire in the year 2015. The original distribution center/office facility was
occupied in 1985.


Under the three capital leases, dated April 1, 1985, November 1, 1989
and September 1, 1998, the Company paid Mr. Higgins an annual rent of $2.2
million, $2.1 million and $2.1 million in Fiscal 2010, 2009 and 2008
respectively. Pursuant to the terms of the lease agreements, effective January
1, 2002 and every two years thereafter, rental payments will increase in
accordance with the biennial increase in the Consumer Price Index. Under the
terms of the lease agreements, the Company is responsible for property taxes,
insurance and other operating costs with respect to the premises. During 2010,
Mr. Higgins paid $0.8 million for principal and interest on his underlying
indebtedness relating to the real property. Mr. Higgins does not have any
future obligation for principal and interest. None of the leases contain any
real property purchase options at the expiration of its term.

The Company leases one of
its retail stores from Mr. Higgins under an operating lease. Annual rental
payments under this lease were $40,000 in Fiscal 2010, 2009 and 2008. Under the
terms of the lease, the Company pays property taxes, maintenance and a
contingent rental if a specified

23

---



sales level is achieved. Total additional charges for the store,
including contingent rent, were approximately $6,800, $6,800 and $7,400 in
Fiscal 2010, 2009 and 2008 respectively.

Prior to Fiscal 2010, the Company chartered
    an aircraft from Richmor Aviation Inc., an unaffiliated corporation that
    leases an aircraft owned by Mr. Higgins, for Company business. Payments to
    Richmor Aviation Inc., to charter the aircraft owned by Mr. Higgins, in Fiscal
    2010, 2009 and 2008 were approximately $0, $94,000 and $205,000, respectively.

CRITICAL ACCOUNTING POLICIES


The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires that management apply accounting policies and make estimates and
assumptions that affect results of operations and the reported amounts of
assets and liabilities in the financial statements. Management continually
evaluates its estimates and judgments including those related to merchandise
inventory and return costs, valuation of long-lived assets, income taxes and
accounting for gift card liability. Management bases its estimates and judgments
on historical experience and other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. Note 1 of the Notes to Consolidated
Financial Statements in this Annual Report on Form 10-K includes a summary of
the significant accounting policies and methods used by the Company in the
preparation of its consolidated financial statements. Management believes that
of the Companys significant accounting policies, the following may involve a
higher degree of judgment or complexity:


Merchandise Inventory and Return Costs:
Merchandise inventory is stated at the lower of cost or market under the
average cost method. The average cost method attaches a cost to each item and
is a blended average of the original purchase price and those of subsequent
purchases or other cost adjustments throughout the life cycle of that item.

Inventory valuation requires significant judgment and estimates,
including obsolescence, shrink and any adjustments to market value; if market
value is lower than cost. Inherent in the entertainment software industry is
the risk of obsolete inventory. Typically, newer releases generate a higher
product demand. Some vendors offer credits to reduce the cost of products that
are selling more slowly, thus allowing for a reduction in the selling price and
reducing the possibility for items to become obsolete. The Company records
obsolescence and any adjustments to market value (if lower than cost) based on current
and anticipated demand, customer preferences, and market conditions. The
provision for inventory shrink is estimated as a percentage of sales for the
period from the last date a physical inventory was performed to the end of the
fiscal year. Such estimates are based on historical results and trends and the
shrink results from the last physical inventory. Physical inventories are taken
at least annually for all stores and distribution centers throughout the year
and inventory records are adjusted accordingly.

Shrink expense, including obsolescence was $7.8 million, $11.9 million
and $18.0 million, in Fiscal 2010, 2009 and 2008 respectively. As a rate to net
sales, this equaled 1.2%, 1.5% and 1.8%, respectively. Presently, a 0.1% change
in the rate of shrink provision would equal approximately $0.4 million in
additional charge or benefit to cost of sales, based on Fiscal 2010 net sales
since the last physical inventories.

The Company is generally entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. Certain
vendors reduce the credit with a per unit merchandise return charge which
varies depending on the type of merchandise being returned. Certain other
vendors charge a handling fee based on units returned. The Company records
merchandise return charges in cost of sales. The Company incurred merchandise
return charges in its Fiscal year 2010, Fiscal 2009 and Fiscal 2008 of $1.9
million, $3.2 million and $4.1 million, respectively.

Valuation of Long-Lived Assets:The
Company assesses the impairment of long-lived assets to determine if any part
of the carrying value may not be recoverable. Factors that the Company
considers to be important when assessing impairment include:


| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to historical or projected
 future operating results;                         
| |  | significant changes in the manner of the use of acquired assets
 or the strategy for the Companys overall business;
| |  | significant negative industry or economic trends;                                                                   

If the Company determines that the carrying value
    of a long-lived asset may not be recoverable, it tests for impairment to
    determine if an impairment charge is needed. For the purpose of the asset
    impairment test, the Company has two asset groupingscorporate and
    store level assets. During Fiscal 2010, 2009 and 2008, the Company recorded
    an asset impairment charge of $2.0 million, $3.6 million and $15.2 million,
    respectively, related to the write down of certain long-lived assets at underperforming
    locations. Losses for store closings in the ordinary course of business represent
    the write down of the net book value of abandoned fixtures and leasehold
    improvements. The loss on disposal of fixed assets related to store closings
    was $1.2 million, $0.9 million and $1.2 million in Fiscal 2010, 2009 and
    2008, respectively, and is included in SG&A
    expenses in the Consolidated Statement of Operations and loss on disposal
    of fixed assets in the Consolidated Statement of Cash Flows. Store closings
    usually occur at the expiration of the lease, at which time leasehold improvements,
    which constitute a majority of the assets, are fully depreciated. There was
    no impairment of corporate level assets in Fiscal 2010, Fiscal 2009 and Fiscal
    2008.

Income Taxes: Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax
operating loss carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to

24

---



apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Historically, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date.

Accounting for income taxes requires management to make estimates and
judgments regarding interpretation of various taxing jurisdictions, laws and
regulations as well as the ultimate realization of deferred tax assets. These
estimates and judgments include the generation of future taxable income, viable
tax planning strategies and support of tax filings. In assessing the propriety
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income. Management considers the scheduled reversal of taxable
temporary differences, projected future taxable income and tax planning
strategies in making this assessment. As of February 2, 2008, the Company had
incurred a cumulative three-year loss. Based on the cumulative three-year loss
and other available objective evidence, management concluded that a full
valuation allowance should be recorded against its net deferred tax assets.
During Fiscal 2011 and in future years, the Company will continue to record a
valuation allowance against recorded net deferred tax assets to a level deemed
appropriate by management to ensure that any net deferred tax assets not
allowed against will ultimately be realized.

Accounting for Gift Card Liability:The
Company sells gift cards that are redeemable only for merchandise and have no
expiration date. The Company adjusts card liability when either customers
redeem cards, at which point the Company records revenue, or when the Company
determines it does not have a legal obligation to remit unredeemed cards to the
relevant jurisdictions and the likelihood of the cards being redeemed becomes
remote, at which point the Company records breakage as a credit to SG&A
expenses. The Companys accounting for gift cards is based on estimating the
Companys liability for future card redemptions at the end of a reporting
period. Estimated liability is equal to two years of unredeemed cards, plus an
amount for outstanding cards that may possibly be redeemed for the cumulative
look-back period, exclusive of the last two years. The Companys ability to
reasonably and reliably estimate the liability is based on historical
redemption experience with gift cards and similar types of arrangements and the
existence of a large volume of relatively homogeneous transactions. The
Companys estimate is not susceptible to significant external factors and the
circumstances around gift card sales and redemptions have not changed
significantly over time.

Recently Issued Accounting Pronouncements.

There are no recently issued accounting standards that are expected to
have a material effect on our financial condition, results of operations or
cash flows.

Item 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Company does not hold any financial instruments that expose it to
significant market risk and does not engage in hedging activities. To the
extent the Company borrows under its revolving credit facility, the Company is
subject to risk resulting from interest rate fluctuations since interest on the
Companys borrowings under its credit facility can be variable. If interest
rates on the Companys revolving credit facility were to increase by 25 basis
points, and to the extent borrowings were outstanding, for every $1,000,000
outstanding on the facility, income before income taxes would be reduced by
$2,500 per year. Information about the fair value of financial instruments is
included in Note 1 of Notes to the Consolidated Financial Statements in this
Annual Report on Form 10-K.

Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

The index to the Companys Consolidated Financial Statements is
included in Item 15, and the Consolidated Financial Statements follow the
signature page to this Annual Report on Form 10-K and are incorporated herein
by reference.

The quarterly results of operations are included herein in Note 11 of
Notes to the Consolidated Financial Statements in this Annual Report on Form
10-K.

Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of
Disclosure Controls and Procedures:Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of our disclosure controls and procedures, as
such term is defined under Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation,
our principal executive officer and our principal financial officer concluded
that the Companys disclosure controls and procedures were designed to provide
reasonable assurance of achieving their objectives and as of the end of the
period covered by this annual report, our disclosure controls and procedures
were effective, in that they provide reasonable assurance that

25

---



information required to be disclosed by us in the reports we file or
submit, under the Exchange Act, is recorded, processed, summarized, as
appropriate, to allow timely decisions regarding required disclosure and
reported within the time period specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and
communicated to management including the principal executive officer and
principal financial officer

Managements Report on Internal Control Over Financial
Reporting: Management is responsible for establishing
and maintaining adequate internal control over financial reporting (as defined
in Rule 13a-15(f) and 15d  15(f) under the Securities Exchange Act of 1934, as
amended). Under the supervision and with the participation of the Companys
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal

Control-Integrated Framework.
Based on our evaluation under the framework in Internal
Control- Integrated Framework, our management concluded that our
internal control over financial reporting was effective as of January 29, 2011.

Changes in Controls and Procedures:No
change in our internal control over financial reporting occurred during the
quarterly period ended January 29, 2011 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.

Item 9B. Other Information

No events have occurred which would require disclosure under this Item.

26

---



PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE

(a) Identification of Directors

Incorporated herein by reference is the information appearing under the
captions Election of Directors and Compensation of Directors in the Companys
definitive Proxy Statement for the Registrants 2011 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after January 29, 2011.

(b) Identification of Executive Officers

Incorporated herein by reference is the information appearing under the
caption Executive Compensation in the Companys definitive Proxy Statement
for the Registrants 2011 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after January 29, 2011.

(c) Code of Ethics

We have adopted the Trans World Entertainment Corporation Code of
Ethics that applies to all officers, directors, employees and consultants of
the Company. The Code of Ethics is intended to comply with Item 406 of Regulation
S-K of the Securities Exchange Act of 1934 and with applicable rules of The
NASDAQ Stock Market, Inc. Our Code of Ethics is posted on our Internet website
under the Corporate page. Our Internet website address is www.twec.com. To
the extent required or permitted by the rules of the SEC and NASDAQ, we will
disclose amendments and waivers relating to our Code of Ethics in the same
place as our website.

Item 11. EXECUTIVE COMPENSATION

Incorporated herein by reference is the information appearing under the
caption Report of the Compensation Committee in the Companys definitive
Proxy Statement for the Registrants 2011 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days after January
29, 2011.

Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

Incorporated herein by reference is the information appearing under the
captions Report of the Compensation Committee and Principal Shareholders in
the Companys definitive Proxy Statement for the Registrants 2011 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
within 120 days after January 29, 2011.

Information on Trans World Entertainment Common Stock authorized for
issuance under equity compensation plans is contained in our Proxy Statement
for our 2010 Annual Meeting of Shareholders under the caption Report of the
Compensation Committee and is incorporated herein by reference. See Note 8 of
Notes to the Consolidated Financial Statements in this Annual Report on Form
10-K for a description of the Companys employee stock award plans.

The following table contains information about the Companys Common
Stock that may be issued, as new shares, upon the exercise of options, warrants
and rights under all of the Companys equity compensation plans as of January
29, 2011:

|                                                                        |  |                                                                                               |           |                                                                               |  |                                                                                                                                                   |  |  |           | 
|----------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------- | --------- | ----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --------- | 
|                                                                        |  |                                                                                               |           |                                                                               |  |                                                                                                                                                   |  |  |           | 
|Plan Category                                                           |  | Number of Shares to be Issued
 upon Exercise of Outstanding
 Options, Warrants and
 Rights(1) |           | Weighted Average Exercise
 Price of Outstanding Options,
 Warrants and Rights |  | Number of Shares Remaining
 Available for Future Issuance
 Under Equity Compensation
 Plans (Excluding Outstanding
 Options, Warrants and Rights) | 
|                                                                        |  |                                                                                               |           |                                                                               |  |                                                                                                                                                   |  |  |           | 
|                                                                        |  |                                                                                               |           |                                                                               |  |                                                                                                                                                   |  |  |          
|Equity Compensation Plan 
 Approved by Shareholders                     |  |                                                                                               | 6,800,679 |                                                                               |  | $6.69                                                                                                                                             |  |  | 2,740,234 | 
|Equity Compensation Plans and
 Agreements not Approved
 by Shareholders |  |                                                                                               |          |                                                                               |  |                                                                                                                                                  |  |  |          | 

(1) Excludes 80,276 restricted stock units reserved from the Companys
equity plans that will be settled in cash.

27

---



Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Incorporated herein by reference is the information appearing under the
caption Related Party Transactions in the Companys definitive Proxy
Statement for the Registrants 2011 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after January 29,
2011.

Item 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

Incorporated herein by reference is the information appearing under the
caption Other Matters in the Companys definitive Proxy Statement for the
Registrants 2011 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after January 29, 2011.

28

---



PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES

15(a) (1) Financial Statements


The Consolidated Financial Statements and Notes are listed in the Index
to Consolidated Financial Statements on page F-1 of this report.


15(a) (2) Financial Statement Schedules


Consolidated Financial Statement Schedules not filed herein have been
omitted as they are not applicable or the required information or equivalent
information has been included in the Consolidated Financial Statements or the
notes thereto.


15(a) (3) Exhibits


Exhibits are as set forth in the Index to Exhibits which follows the
Notes to the Consolidated Financial Statements and immediately precedes the
exhibits filed.


29

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|      |                 |  |                                        | 
|----- | --------------- |  | -------------------------------------- | 
|      |                 |  | TRANS WORLD
 ENTERTAINMENT CORPORATION
|      |                 |  |                                       
|Date: | April 14,
 2011 |  | By:
 /s/ ROBERT J. HIGGINS            
|      |                 |  |                                       
|      |                 |  | Robert J. Higgins                     
|      |                 |  | Chairman and Chief Executive Officer  

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                          |  |                                                                                                                        |  |               
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | --------------
|Name                      |  | Title                                                                                                                  |  | Date          
|/s/ ROBERT
 J. HIGGINS    |  | Chairman and Chief Executive Officer(Principal Executive Officer)                                                      |  | April 14, 2011
|                          |  |                                                                                                                        | 
|(Robert J.
 Higgins)      |  |                                                                                                                        | 
|                          |  |                                                                                                                        |  |               
|/s/ JOHN J.
 SULLIVAN     |  | Executive
 Vice President and Chief Financial Officer (Principal Financialand Chief
 Accounting Officer) and Secretary |  | April 14, 2011
|                          |  |                                                                                                                        | 
|(John J.
 Sullivan)       |  |                                                                                                                        | 
|                          |  |                                                                                                                        |  |               
|/s/ ISAAC
 KAUFMAN        |  | Director                                                                                                               |  | April 14, 2011
|                          |  |                                                                                                                        |  |               
|(Isaac Kaufman)           |  |                                                                                                                        |  |               
|                          |  |                                                                                                                        |  |               
|/s/ DR.
 JOSEPH G. MORONE |  | Director                                                                                                               |  | April 14, 2011
|                          |  |                                                                                                                        |  |               
|(Dr. Joseph
 G. Morone)   |  |                                                                                                                        |  |               
|                          |  |                                                                                                                        |  |               
|/s/ MICHAEL
 NAHL         |  | Director                                                                                                               |  | April 14, 2011
|                          |  |                                                                                                                        |  |               
|(Michael
 Nahl)           |  |                                                                                                                        |  |               
|                          |  |                                                                                                                        |  |               
|/s/ BRYANT
 RILEY         |  | Director                                                                                                               |  | April 14, 2011
|                          |  |                                                                                                                        |  |               
|(Bryant
 Riley)           |  |                                                                                                                        |  |               
|                          |  |                                                                                                                        |  |               
|/s/ MICHAEL
 B. SOLOW     |  | Director                                                                                                               |  | April 14, 2011
|                          |  |                                                                                                                        |  |               
|(Michael B.
 Solow)       |  |                                                                                                                        |  |               

30

---



TRANS WORLD ENTERTAINMENT CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                                       |          
|------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------
|                                                                                                                                                       | Form 10-K
|                                                                                                                                                       | Page No. 
|                                                                                                                                                       |          
|Report of
 Independent Registered Public Accounting Firm                                                                                               | F-2      
|                                                                                                                                                       |          
|Consolidated Financial Statements                                                                                                                      |          
|                                                                                                                                                       |          
|Consolidated
 Balance Sheets at January 29, 2011 and January 30, 2010                                                                                  | F-3      
|                                                                                                                                                       |          
|Consolidated
 Statements of Operations - Fiscal years ended January 29, 2011, January 30,
 2010, and January 31, 2009                                  | F-4      
|                                                                                                                                                       |          
|Consolidated
 Statements of Shareholders Equity and Comprehensive Loss - Fiscal years
 ended January 29, 2011, January 30, 2010, and January 31, 2009 | F-5      
|                                                                                                                                                       |          
|Consolidated
 Statements of Cash Flows - Fiscal years ended January 29, 2011, January 30,
 2010, and January 31, 2009                                  | F-6      
|                                                                                                                                                       |          
|Notes to
 Consolidated Financial Statements                                                                                                            | F-7      

F-1

---



Report of
Independent Registered Public Accounting Firm

The Board of Directors
and Shareholders
Trans World Entertainment Corporation:

We have audited the accompanying consolidated balance sheets of Trans
World Entertainment Corporation and subsidiaries (the Company) as of January
29, 2011 and January 30, 2010, and the related consolidated statements of
operations, shareholders equity and comprehensive loss, and cash flows for
each of the fiscal years in the three-year period ended January 29, 2011. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 29, 2011 and January
30, 2010, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 29, 2011, in conformity
with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Albany, New
York
April 14, 2011

F-2

---



TRANS WORLD
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($s in thousands except per share  amounts)

|                                                                                                                             |  |                   |          |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | ----------------- | - | -------- | -
|                                                                                                                             |  | January 29,
 2011 |          | January 30,
 2010 |  
|                                                                                                                             |  |                   |          |                   |  
|ASSETS                                                                                                                       |  |                   |          |                   |   |          |  
|CURRENT ASSETS                                                                                                               |  |                   |          |                   |   |          |  
|Cash and cash equivalents                                                                                                    |  | $                 | 75,212   |                   | $ | 71,514   |  
|Accounts receivable                                                                                                          |  |                   | 5,248    |                   |   | 4,505    |  
|Merchandise inventory                                                                                                        |  |                   | 234,164  |                   |   | 266,568  |  
|Prepaid expenses and other                                                                                                   |  |                   | 3,137    |                   |   | 10,557   |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|Total current assets                                                                                                         |  |                   | 317,761  |                   |   | 353,144  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|FIXED ASSETS, net                                                                                                            |  |                   | 21,478   |                   |   | 33,908   |  
|OTHER ASSETS                                                                                                                 |  |                   | 9,485    |                   |   | 7,514    |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|TOTAL ASSETS                                                                                                                 |  | $                 | 348,724  |                   | $ | 394,566  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|LIABILITIES                                                                                                                  |  |                   |          |                   |   |          |  
|CURRENT LIABILITIES                                                                                                          |  |                   |          |                   |   |          |  
|Accounts payable                                                                                                             |  | $                 | 130,007  |                   | $ | 130,549  |  
|Accrued expenses and other current
 liabilities                                                                              |  |                   | 28,025   |                   |   | 38,701   |  
|Current portion of long-term debt                                                                                            |  |                   | 640      |                   |   | 602      |  
|Current portion of capital lease
 obligations                                                                                |  |                   | 723      |                   |   | 1,372    |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|Total current liabilities                                                                                                    |  |                   | 159,395  |                   |   | 171,224  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|LONG TERM DEBT, less current portion                                                                                        |  |                   | 1,748    |                   |   | 2,388    |  
|CAPITAL LEASE OBLIGATIONS, less current
 portion                                                                             |  |                   | 3,763    |                   |   | 4,486    |  
|OTHER LONG-TERM LIABILITIES                                                                                                  |  |                   | 22,020   |                   |   | 23,115   |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|TOTAL LIABILITIES                                                                                                            |  |                   | 186,926  |                   |   | 201,213  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|SHAREHOLDERS EQUITY                                                                                                         |  |                   |          |                   |   |          |  
|Preferred stock ($0.01 par value; 5,000,000
 shares authorized; none issued)                                                 |  |                   |         |                   |   |         |  
|Common stock ($0.01 par value; 200,000,000
 shares authorized; 56,527,519 shares and 56,498,429 shares issued, respectively) |  |                   | 565      |                   |   | 565      |  
|Additional paid-in capital                                                                                                   |  |                   | 308,333  |                   |   | 307,823  |  
|Treasury stock at cost (25,102,990 and
 25,102,990 shares, respectively)                                                     |  |                   | (217,555 | )                 |   | (217,555 | )
|Accumulated other comprehensive income                                                                                       |  |                   | 416      |                   |   | 1,518    |  
|Retained earnings                                                                                                            |  |                   | 70,039   |                   |   | 101,002  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                   |  |                   | 161,798  |                   |   | 193,353  |  
|                                                                                                                             |  |                   |          |                   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                   |  | $                 | 348,724  |                   | $ | 394,566  |  
|                                                                                                                             |  |                   |          |                   |   |          |  

See Accompanying Notes to Consolidated
Financial Statements.

F-3

---



TRANS WORLD ENTERTAINMENT
CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | -- | ----------------- | - | -- | ------- | -
|                                                                          |  | Fiscal Year Ended |        
|                                                                          |  |                   |        
|                                                                          |  | January 29,
 2011 |         | January 30,
 2010 |    | January 31,
 2009 |  
|                                                                          |  |                   |         |                   |    |                   |  
|                                                                          |  |                   |         |                   |    |                   |  
|Net sales                                                                 |  | $                 | 652,416 |                   | $  | 813,988           |   | $  | 987,625 |  
|Cost of sales                                                             |  |                   | 433,036 |                   |    | 552,327           |   |    | 656,730 |  
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|Gross profit                                                              |  |                   | 219,380 |                   |    | 261,661           |   |    | 330,895 |  
|Selling, general and administrative
 expenses                             |  |                   | 244,749 |                   |    | 310,710           |   |    | 380,802 |  
|Asset impairment charges                                                  |  |                   | 1,973   |                   |    | 3,643             |   |    | 15,158  |  
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|Loss from operations                                                      |  |                   | (27,342 | )                 |    | (52,692           | ) |    | (65,065 | )
|Interest expense                                                          |  |                   | 3,557   |                   |    | 2,910             |   |    | 4,098   |  
|Other income                                                              |  |                   | (211    | )                 |    | (168              | ) |    | (180    | )
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|Loss before income taxes                                                  |  |                   | (30,688 | )                 |    | (55,434           | ) |    | (68,983 | )
|Income tax expense (benefit)                                              |  |                   | 275     |                   |    | (12,985           | ) |    | (28     | )
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|NET LOSS                                                                  |  | ($                | 30,963  | )                 | ($ | 42,449            | ) | ($ | 68,955  | )
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|BASIC AND DILUTED LOSS PER SHARE:                                         |  |                   |         |                   |    |                   |   |    |         |  
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|Basic and diluted loss per share                                          |  | ($                | 0.99    | )                 | ($ | 1.35              | ) | ($ | 2.21    | )
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  
|Weighted average number of common shares
 outstanding  basic and diluted |  |                   | 31,417  |                   |    | 31,370            |   |    | 31,223  |  
|                                                                          |  |                   |         |                   |    |                   |   |    |         |  

See Accompanying Notes to Consolidated Financial Statements.

F-4

---



TRANS WORLD
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
(in thousands)

|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|------------------------------------------------------------------------- |  | -------------- | ------ | ------------- | - | ---------------------------- |  | ---------------- | ------- | ----------------------- |  | ------------------------------------------------ | - | ------------------ | ------- | --------------------- | -- | ------ | - | - | ------- | - | - | ------- | -
|                                                                          |  | Common
 Shares |        | Common
 Stock |   | Additional
 Paid-in
 Capital |  | Treasury
 Shares |         | Treasury Stock
 At Cost |  | Accumulated
 Other
 Comprehensive
 Income (Loss) |   | Retained
 Earnings |         | Shareholders
 Equity |   
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |   
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Balance as of February 2, 2008                                            |  |                | 56,289 |               | $ | 563                          |  | $                | 303,998 |                         |  | (25,103                                          | ) | ($                 | 217,555 | )                     | ($ | 1,625  | ) | $ | 212,768 |   | $ | 298,149 |  
|Comprehensive loss:                                                       |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Net loss                                                                  |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    |       |   |   | (68,955 | ) |   | (68,955 | )
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Additional pension liability adjustment                                   |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    | 4,021  |   |   |        |   |   | 4,021   |  
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Total comprehensive loss                                                  |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   | (64,934 | )
|Adjustment upon adoption of new measurement date of defined pension
 plan |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    |       |   |   | (362    | ) |   | (362    | )
|Stock compensation                                                        |  |                | 1      |               |   |                             |  |                  | 1,380   |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 1,380   |  
|Issuance of stock to Directors                                            |  |                | 82     |               |   | 1                            |  |                  | 719     |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 720     |  
|Amortization of unearned compensation  restricted stock                  |  |                |       |               |   |                             |  |                  | 62      |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 62      |  
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Balance as of January 31, 2009                                            |  |                | 56,372 |               | $ | 564                          |  | $                | 306,159 |                         |  | (25,103                                          | ) | ($                 | 217,555 | )                     | $  | 2,396  |   | $ | 143,451 |   | $ | 235,015 |  
|Comprehensive loss:                                                       |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Net loss                                                                  |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    |       |   |   | (42,449 | ) |   | (42,449 | )
|Additional pension liability adjustment, net of tax of $2,332             |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    | (878   | ) |   |        |   |   | (878    | )
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Total comprehensive loss                                                  |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   | (43,327 | )
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Stock compensation                                                        |  |                |       |               |   |                             |  |                  | 1,170   |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 1,170   |  
|Issuance of stock to Directors                                            |  |                | 126    |               |   | 1                            |  |                  | 478     |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 479     |  
|Amortization of unearned compensation  restricted stock                  |  |                |       |               |   |                             |  |                  | 16      |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 16      |  
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Balance as of January 30, 2010                                            |  |                | 56,498 |               | $ | 565                          |  | $                | 307,823 |                         |  | (25,103                                          | ) | ($                 | 217,555 | )                     | $  | 1,518  |   | $ | 101,002 |   | $ | 193,353 |  
|Comprehensive loss:                                                       |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Net loss                                                                  |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    |       |   |   | (30,963 | ) |   | (30,963 | )
|Additional pension liability adjustment                                   |  |                |       |               |   |                             |  |                  |        |                         |  |                                                 |   |                    |        |                       |    | (1,102 | ) |   |        |   |   | (1,102  | )
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Total comprehensive loss                                                  |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   | (32,065 | )
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Stock compensation                                                        |  |                |       |               |   |                             |  |                  | 350     |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 350     |  
|Issuance of stock to Directors                                            |  |                | 29     |               |   |                             |  |                  | 160     |                         |  |                                                 |   |                    |        |                       |    |       |   |   |        |   |   | 160     |  
|                                                                          |  |                |        |               |   |                              |  |                  |         |                         |  |                                                  |   |                    |         |                       |    |        |   |   |         |   |   |         |  
|Balance as of January 29, 2011                                            |  |                | 56,527 |               | $ | 565                          |  | $                | 308,333 |                         |  | (25,103                                          | ) | ($                 | 217,555 | )                     | $  | 416    |   | $ | 70,039  |   | $ | 161,798 |  

See Accompanying Notes to Consolidated
Financial Statements.

F-5

---



TRANS WORLD
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)

|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|------------------------------------------------------------------------------------------ |  | ----------------- | ------- | ---------------- | -- | ---------------- | - | -- | ------- | -
|                                                                                           |  | Fiscal
Year Ended |        
|                                                                                           |  |                   |        
|                                                                                           |  | January
29,
2011  |         | January
30,
2010 |    | January
31,
2009 |  
|                                                                                           |  |                   |         |                  |    |                  |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|OPERATING ACTIVITIES:                                                                      |  |                   |         |                  |    |                  |   |    |         |  
|Net loss                                                                                   |  | ($                | 30,963  | )                | ($ | 42,449           | ) | ($ | 68,955  | )
|Adjustments to reconcile net loss to net cash provided by (used in)
 operating activities: |  |                   |         |                  |    |                  |   |    |         |  
|Depreciation and amortization of fixed assets                                              |  |                   | 12,197  |                  |    | 16,602           |   |    | 23,614  |  
|Asset impairment charges                                                                   |  |                   | 1,973   |                  |    | 3,643            |   |    | 15,158  |  
|Amortization of intangible assets                                                          |  |                   |        |                  |    | 86               |   |    | 94      |  
|Amortization of lease valuations, net                                                      |  |                   | (39     | )                |    | (217             | ) |    | (350    | )
|Long term incentive compensation                                                           |  |                   | 631     |                  |    | 2,321            |   |    | 1,930   |  
|Loss on disposal of fixed assets                                                           |  |                   | 1,204   |                  |    | 870              |   |    | 1,219   |  
|Gain on sale of assets                                                                     |  |                   |        |                  |    |                 |   |    | (3,070  | )
|Gain on bargain purchase                                                                   |  |                   | (95     | )                |    |                 |   |    |        |  
|Decrease (increase) in cash surrender value                                                |  |                   | (832    | )                |    | (1,111           | ) |    | 1,585   |  
|Changes in operating assets and liabilities, net of effects of
 acquisition:               |  |                   |         |                  |    |                  |   |    |         |  
|Accounts receivable                                                                        |  |                   | (743    | )                |    | 3,054            |   |    | 1,073   |  
|Merchandise inventory                                                                      |  |                   | 34,891  |                  |    | 111,620          |   |    | 62,053  |  
|Prepaid expenses and other                                                                 |  |                   | 7,420   |                  |    | 3,260            |   |    | 3,761   |  
|Other assets                                                                               |  |                   | (1,444  | )                |    | 212              |   |    | 186     |  
|Accounts payable                                                                           |  |                   | (542    | )                |    | (39,273          | ) |    | (66,753 | )
|Income taxes receivable/payable                                                            |  |                   |        |                  |    | (492             | ) |    | 5,708   |  
|Accrued expenses and other current liabilities                                             |  |                   | (12,230 | )                |    | (5,000           | ) |    | (8,321  | )
|Other long-term liabilities                                                                |  |                   | (964    | )                |    | (3,337           | ) |    | (6,164  | )
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Net cash provided by (used in) operating activities                                        |  |                   | 10,464  |                  |    | 49,789           |   |    | (37,232 | )
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|INVESTING ACTIVITIES:                                                                      |  |                   |         |                  |    |                  |   |    |         |  
|Purchases of fixed assets                                                                  |  |                   | (2,944  | )                |    | (4,586           | ) |    | (10,066 | )
|Acquisition of business, net of cash received                                              |  |                   | (1,848  | )                |    |                 |   |    |        |  
|Net proceeds from sale of distribution facility                                            |  |                   |        |                  |    |                 |   |    | 6,193   |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Net cash used in investing activities                                                      |  |                   | (4,792  | )                |    | (4,586           | ) |    | (3,873  | )
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|FINANCING ACTIVITIES:                                                                      |  |                   |         |                  |    |                  |   |    |         |  
|Payments of long-term debt                                                                 |  |                   | (602    | )                |    | (566             | ) |    | (533    | )
|Payments of capital lease obligations                                                      |  |                   | (1,372  | )                |    | (3,178           | ) |    | (2,964  | )
|Proceeds from exercise of stock awards                                                     |  |                   |        |                  |    |                 |   |    | 2       |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Net cash used in financing activities                                                      |  |                   | (1,974  | )                |    | (3,744           | ) |    | (3,495  | )
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Net increase (decrease) in cash and cash equivalents                                       |  |                   | 3,698   |                  |    | 41,459           |   |    | (44,600 | )
|Cash and cash equivalents, beginning of year                                               |  |                   | 71,514  |                  |    | 30,055           |   |    | 74,655  |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Cash and cash equivalents, end of year                                                     |  | $                 | 75,212  |                  | $  | 71,514           |   | $  | 30,055  |  
|                                                                                           |  |                   |         |                  |    |                  |   |    |         |  
|Supplemental disclosures and non-cash investing and financing
 activities:                 |  |                   |         |                  |    |                  |   |    |         |  
|Interest paid                                                                              |  | $                 | 3,595   |                  | $  | 2,954            |   | $  | 4,164   |  

See Accompanying Notes to Consolidated
Financial Statements.

F-6

---



TRANS WORLD
ENTERTAINMENT CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note
1. Nature of Operations and Summary of Significant Accounting Policies

Nature
of Operations: Trans World Entertainment Corporation
and subsidiaries (the Company) is one of the largest specialty retailers of
entertainment software, including music, video, video games and related
products in the United States. The Company operates a chain of retail
entertainment stores and e-commerce sites, www.fye.com, www.wherehouse.com and www.secondspin.com
in a single industry segment. As of January 29, 2011, the Company operated 460
stores totaling approximately 3.1 million square feet in the United States, the
District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin
Islands. The Companys business is seasonal in nature, with the peak selling
period being the holiday season which falls in the Companys fourth fiscal
quarter.

Liquidity:The Companys primary
sources of working capital are cash provided by operations and borrowing
capacity under its revolving credit facility as recently amended in April 2010.
The Companys cash flows fluctuate from quarter to quarter due to various
items, including seasonality of sales and earnings, merchandise inventory purchases
and returns and the related terms on the purchases and capital expenditures.
Management believes it will have adequate resources to fund its cash needs for
the foreseeable future, including its capital spending, its seasonal increase
in merchandise inventory and other operating cash requirements and commitments.
Management has considered many initiatives as part of the development of its
operating plan for 2011 and beyond that focus on the operation of a core base
of stores, improved product selection based on customer preferences and
industry changes, as well as further streamlining of its operations. During
Fiscal 2010, management carried out certain strategic initiatives in its
efforts to reduce certain operating costs such as the reduction of headcount at
the home office and the elimination or curtailment of certain other general and
administrative expenses. Also, during the fourth quarter of Fiscal 2010,
management closed 73 stores and plans to continue its careful evaluation of
store profitability of its remaining 460 stores in consideration of lease
terms, conditions and expirations.

Management anticipates any cash requirements due to a shortfall in cash
from operations will be funded by the Companys amended revolving credit
facility, discussed hereafter. Cash flows from investing and financing
activities during Fiscal 2011 are expected to be comparable with Fiscal 2010.

Basis
of Presentation: The consolidated financial statements
consist of Trans World Entertainment Corporation, its wholly-owned subsidiary,
Record Town, Inc. (Record Town), and Record Towns subsidiaries, all of which
are wholly-owned. All significant intercompany accounts and transactions have
been eliminated. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions, including those related to
merchandise inventory and return costs, valuation of long-lived assets, income
taxes, and accounting for gift card liability, that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.

Concentration
of Business Risks:The Company purchases inventory
from approximately 640 suppliers. In Fiscal 2010, 70% of purchases were made
from ten suppliers including EMI Music Distribution, Sony Music Entertainment,
Warner Music Group, Universal Music Group Distribution, Fox Video Inc.,
Paramount Home Entertainment Inc., Walt Disney Studios Home Entertainment,
Warner Home Entertainment, Universal Studios Home Entertainment and Sony
Pictures Home Entertainment. The Company does not have material long-term
purchase contracts; rather, it purchases products from its suppliers on an
order-by-order basis. Historically, the Company has not experienced difficulty
in obtaining satisfactory sources of supply and management believes that it
will continue to have access to adequate sources of supply.

Cash
and Cash Equivalents: The Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.

Concentration
of Credit Risks: The
Company maintains centralized cash management and investment programs whereby
excess cash balances are invested in short-term money market funds. The
Companys investment portfolio is diversified and consists of short-term investment
grade securities consistent with its investment guidelines. These guidelines
include the provision that sufficient liquidity will be maintained to meet
anticipated cash flow needs. The Company maintains these investments, all of
which are classified as cash equivalents due to their short term nature, with
various financial institutions. These amounts often exceed the FDIC insurance
limits. The Company limits the amount of credit exposure with any one financial
institution and believes that no significant concentration of credit risk
exists with respect to cash investments.

Accounts
Receivable:Accounts receivable are comprised of
receivables and unbilled revenues from advertising services performed for third
parties, and amounts due under operating or service agreements with
unaffiliated entities, and other, individually insignificant amounts. There are
no provisions for uncollectible amounts from retail sales of merchandise
inventory since payment is received at the time of sale.

Merchandise
Inventory and Return Costs: Merchandise inventory is
stated at the lower of cost or market under the average cost method. Inventory
valuation requires significant judgment and estimates, including obsolescence,
shrink and any adjustments to market value, if market

F-7

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value is lower than cost. The Company records obsolescence and any
adjustments to market value (if lower than cost) based on current and
anticipated demand, customer preferences and market conditions. The provision
for inventory shrink is estimated as a percentage of sales for the period from
the last date a physical inventory was performed to the end of the fiscal year.
Such estimates are based on historical results and trends, and the shrink
results from the last physical inventory. Physical inventories are taken at
least annually for all stores and distribution centers throughout the year, and
inventory records are adjusted accordingly.

The Company is generally entitled to return merchandise purchased from
major music vendors for credit against other purchases from these vendors.
Certain vendors reduce the credit with a merchandise return charge which varies
depending on the type of merchandise being returned. Certain other vendors
charge a handling fee based on units returned. The Company records merchandise
return charges in cost of sales.

Fixed
Assets and Depreciation: Fixed assets are recorded at
cost and depreciated or amortized over the estimated useful life of the asset
using the straight-line method. The estimated useful lives are as follows:

|                            |                                                                
|--------------------------- | ---------------------------------------------------------------
|Leasehold
 improvements     | Lesser of
 estimated useful life of the asset or the lease term
|Fixtures and
 equipment     | 3-7 years                                                      
|Buildings
 and improvements | 10-30 years                                                    

Major improvements and betterments to existing facilities and equipment
are capitalized. Expenditures for maintenance and repairs are expensed as
incurred. Amortization of capital lease assets is included in depreciation and
amortization expense.

Impairment
of Long-Lived Assets:Long-lived assets are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to undiscounted future net cash flows expected to be generated by the asset
over its remaining useful life. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the assets exceeds the fair value of the assets.
Fair value is generally measured based on discounted estimated future cash
flows. Assets to be disposed of would be separately presented in the
Consolidated Balance Sheets and reported at the lower of the carrying amount
or fair value less disposition costs. For the purpose of the asset impairment
test, the Company has two asset groupingscorporate and store level assets.

During Fiscal 2010, 2009 and 2008, the Company
    recorded an asset impairment charge of $2.0 million, $3.6 million and $15.2
    million, respectively, related to the write down of certain long-lived assets
    at underperforming store locations. Losses for store closings in the ordinary
    course of business represent the write down of the net book value of abandoned
    fixtures and leasehold improvements. The loss on disposal of fixed assets
    related to store closings was $1.2 million, $0.9 million and $1.2 million
    in Fiscal 2010, 2009 and 2008, respectively, and is included in selling,
    general and administrative (SG&A) expenses in the Consolidated
    Statements of Operations and loss on disposal of fixed assets in the Consolidated
    Statements of Cash Flows. Store closings usually occur at the expiration
    of the lease, at which time leasehold improvements, which constitute a majority
    of the abandoned assets, are fully depreciated.

Conditional
Asset Retirement Obligations:The Company records the fair value of an asset retirement obligation
(ARO) as a liability in the period in which it incurs a legal obligation
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or normal use of the asset. The
Company also records a corresponding asset that is depreciated over the life of
the asset. Subsequent to its initial measurement, the ARO is adjusted at the
end of each period to reflect the passage of time and changes in the estimated
future cash flows underlying the obligation.

Commitments and
Contingencies

The Company is
subject to legal proceedings and claims that have arisen in the ordinary course
of its business and have not been finally adjudicated. Although there can be no
assurance as to the ultimate disposition of these matters, it is managements
opinion, based upon the information available at this time, that the expected
outcome of these matters, individually or in the aggregate, will not have a
material adverse effect on the results of operations and financial condition of
the Company.

Revenue
Recognition: The Companys revenue is primarily from
retail sales of merchandise inventory. Revenue is recognized at the
point-of-sale. Internet sales are recognized as revenue upon shipment. Shipping
and handling fee income from the Companys Internet operations is recognized as
net sales. Loyalty card revenue is amortized over the life of the membership
period. Net sales are recorded net of estimated amounts for sales returns and
other allowances. The Company records shipping and handling costs in cost of
sales. Net sales are recorded net of applicable sales taxes.

Cost
of Sales: In addition to the cost of product, the
Company includes in cost of sales those costs associated with purchasing,
receiving, shipping, inspecting and warehousing product. Also included are
costs associated with the return of product to vendors. Cost of sales further
includes the cost of inventory shrink losses and obsolescence and the benefit
of vendor allowances and discounts.

Selling,
General and Administrative (SG&A) Expenses:
Included in SG&A expenses are payroll and related costs, store operating
costs, occupancy charges, professional and service fees, general operating and
overhead expenses and depreciation charges (excluding those related to

F-8

---



distribution operations, as discussed in Note 3 of Notes to the
Consolidated Financial Statements in this Annual Report on Form 10-K). Selling,
general and administrative expenses also include fixed asset write offs
associated with store closures, if any, and miscellaneous items, other than
interest.

Advertising
Costs and Vendor Allowances:The Company often
receives allowances from its vendors to fund in-store displays, print, radio
and television advertising, and other promotional events. Vendor advertising
allowances which exceed specific, incremental and identifiable costs incurred
in relation to the advertising and promotions offered by the Company to its
vendors are classified as a reduction in the purchase price of merchandise inventory.
Accordingly, advertising and sales promotion costs are charged to operations,
offset by direct vendor reimbursements, as incurred. Total advertising expense,
excluding vendor allowances, was $8.9 million, $14.1 million, and $23.2 million
in Fiscal 2010, 2009, and 2008, respectively. In the aggregate, vendor
allowances supporting the Companys advertising and promotion included as a
reduction of SG&A expenses, as reimbursements of such costs were $8.8
million, $13.9 million, and $14.7 million in Fiscal 2010, 2009, and 2008,
respectively.

Lease
Accounting: The Companys calculation of straight-line
rent expense includes the impact of escalating rents for periods in which it is
reasonably assured of exercising lease options and includes in the lease term
any period during which the Company is not obligated to pay rent while the
store is being constructed (rent holiday). The Company accounts for step rent
provisions, escalation clauses and other lease concessions by recognizing these
amounts on a straight line basis over the initial lease term. The Company
capitalizes leasehold improvements funded by tenant improvement allowances,
depreciating them over the lives of the related leases. The tenant improvement
allowances are recorded as deferred rent within other long-term liabilities in
the Consolidated Balance Sheet and are amortized as a reduction in rent expense
over the life of the related leases.

Store
Closing Costs: Management periodically considers the
closing of underperforming stores. Reserves are established at the time a
liability is incurred for the present value of any remaining lease obligations,
net of estimated sublease income, and other exit costs. Store closings are not
considered discontinued operations due to the expected migration of sales to
ongoing stores.

Gift
Cards: The Company offers gift cards for sale. A
deferred income account, which is included in accrued expenses and other
current liabilities in the Consolidated Balance Sheets, is established for gift
cards issued. The deferred income balance related to gift cards was $7.5
million and $10.1 million at the end of Fiscal 2010 and 2009, respectively.
When gift cards are redeemed at the store level, revenue is recorded and the
related liability is reduced. Breakage is estimated based on the historical
relationship of the redemption of gift cards redeemed to gift cards sold, over
a certain period of time. The Company has the ability to reasonably and
reliably estimate gift card liability based on historical experience with
redemption rates associated with a large volume of homogeneous transactions,
from a period of more than ten years. The Companys estimate is not susceptible
to significant external factors and the circumstances around purchases and
redemptions have not changed significantly over time. The Company recorded
breakage on its gift cards for Fiscal 2010, 2009 and 2008 in the amount of $2.1
million, $3.2 million and $4.1 million, respectively. Gift card breakage is
recorded as a reduction of SG&A expenses.

Income
Taxes:Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets are subject to valuation
allowances based upon managements estimates of realizability.

The Company recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained. Recognized income tax
positions are measured at the largest amount that is greater than 50% likely of
being realized. Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. It is the Companys practice to
recognize interest and penalties related to income tax matters in income tax
expense (benefit) in the consolidated statements of operations.

Stock-Based
Compensation:Stock-based compensation represents the
cost related to stock-based awards granted to employees and directors. The
Company measures stock-based compensation cost at grant date, based on the
estimated fair value of the award, and recognizes the cost as expense on a
straight-line basis (net of estimated forfeitures) over the options requisite
service period. The Company recognizes compensation expense based on estimated
grant date fair value using the Black-Scholes option-pricing model. Tax
benefits resulting from tax deductions in excess of the compensation cost
recognized for those options are to be classified and reported as both an
operating cash outflow and financing cash inflow.

Loss
Per Share: Basic loss per share is calculated by
dividing net loss by the weighted average common shares outstanding for the
period. Diluted loss per share is calculated by dividing net loss by the sum of
the weighted average shares outstanding and additional common shares that would
have been outstanding if the dilutive potential common shares had been issued
for the Companys common stock awards from the Companys Stock Award Plans.

F-9

---



The following is a reconciliation of the basic weighted average number
of shares outstanding to the diluted weighted average number of shares
outstanding:

|                                                      |  |             |        |      |  |        |  |  |        | 
|----------------------------------------------------- |  | ----------- | ------ | ---- |  | ------ |  |  | ------ | 
|                                                      |  | Fiscal Year |       
|                                                      |  |             |        |      |  |        | 
|                                                      |  | 2010        |        | 2009 |  | 2008   | 
|                                                      |  |             |        |      |  |        | 
|Weighted average common shares outstanding
  basic   |  |             | 31,417 |      |  | 31,370 |  |  | 31,223 | 
|Dilutive effect of outstanding stock awards           |  |             |       |      |  |       |  |  |       | 
|                                                      |  |             |        |      |  |        |  |  |        | 
|Weighted average common shares outstanding
  diluted |  |             | 31,417 |      |  | 31,370 |  |  | 31,223 | 
|                                                      |  |             |        |      |  |        |  |  |        | 
|                                                      |  |             |        |      |  |        |  |  |        | 
|Antidilutive stock awards                             |  |             | 4,817  |      |  | 6,705  |  |  | 6,651  | 
|                                                      |  |             |        |      |  |        |  |  |        | 

As the Company recorded a net loss during Fiscal 2010, 2009 and 2008,
the impact of all outstanding stock awards was not considered as such impact
would be antidilutive.

Fair
Value of Financial Instruments:The carrying amounts
reported in the Consolidated Balance Sheets for cash and cash equivalents,
accounts receivable, accounts payable and other current liabilities approximate
fair value because of the immediate or short-term maturity of these financial
instruments. The carrying value of life insurance policies included in other
assets approximates fair value based on estimates received from insurance
companies. The carrying value of the Companys long-term debt including current
portion, approximates fair value based on estimated discounted future cash
flows for remaining maturities and rates currently offered to the Company for
similar debt instruments.

Segment
Information:The Company has one reportable segment.

Note
2. Acquisition

On March 29, 2010 (Acquisition Date), the Company acquired certain
assets and assumed certain liabilities of the Value Music Concepts, Inc.,
(Value Music) a Georgia Corporation. The purchase included substantially all
of the ongoing business of Value Music, which included five store leases and
equipment and inventory  (the
Acquisition). The purchase price consideration was $1.8 million.

The total purchase price has been allocated to assets acquired and net
liabilities assumed in connection with the Acquisition based on their estimated
fair values as of the completion of the Acquisition. These allocations reflect
various provisional estimates that were available at the time and are subject
to change during the purchase price allocation period as valuations are
finalized.

The fair value of the net assets acquired was approximately $1.9
million, which exceeds the preliminary estimated purchase price of $1.8
million. Accordingly, the Company recognized the excess of the fair value of
the net assets over the purchase price of approximately $0.1 million as a gain
on bargain purchase. The gain on bargain purchase of $0.1 million was included
as a reduction of SG&A expenses within income from operations in the
Consolidated Statements of Operations in the first quarter of 2010. The
recorded amounts are provisional and subject to change. The Company continues
to evaluate the purchase price allocation, including the opening fair value of
inventory and accrued liabilities, which may require the Company to adjust the
recorded gain.

The Company believes that it was able to acquire Value Music for less
than the fair value of its assets because of (i) the sellers intent to exit
its Value Music operations through bankruptcy liquidation and (ii) the
Companys unique position as a market leader in this industry segment.

The following table summarizes the provisional amounts recognized for
assets acquired and liabilities assumed as of the Acquisition Date. A single
estimate of fair value results from a series of judgments about future events
and uncertainties and relies heavily on estimates and assumptions. The
Companys judgments used to determine the estimated fair value assigned to each
class of assets acquired and liabilities assumed are not expected to materially
impact the Companys results of operations. Certain estimated values are not
yet finalized and are subject to change. The Company will finalize the amounts
recognized as information necessary to complete the analyses is obtained. The
Company expects to finalize these amounts as soon as possible but no later than
one year from the acquisition date. The following are estimated fair value of
assets acquired and liabilities assumed as of the Acquisition date (in
thousands):

|                         |  |   |       |  
|------------------------ |  | - | ----- | -
|Cash                     |  | $ | 11    |  
|Inventory                |  |   | 2,487 |  
|Other assets             |  |   | 9     |  
|Other liabilities        |  |   | (552  | )
|                         |  |   |       |  
|Net assets acquired      |  |   | 1,955 |  
|Less: Purchase price     |  |   | 1,860 |  
|                         |  |   |       |  
|Gain on bargain purchase |  | $ | 95    |  
|                         |  |   |       |  

F-10

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Acquisition related costs (i.e., advisory, legal, valuation and other
professional fees) are not included as a component of consideration
transferred, but are accounted for as expenses in the periods in which the
costs are incurred. The Company incurred $274,000 of acquisition related costs,
which are included in Selling, General and Administrative expenses in the
Statement of Operations. Any additional acquisition expense is expected to be
immaterial.

The unaudited pro forma statement of operations of the Company assuming
this transaction occurred at February 1, 2009 is as follows:

|                                          |  |             |         |             |    |         |  
|----------------------------------------- |  | ----------- | ------- | ----------- | -- | ------- | -
|                                          |  | Fiscal Year |        
|                                          |  |             |        
|(In
 thousands, except per share amounts) |  | January 29, |         | January 30, |   
|                                          |  | 2011        |         | 2010        |   
|                                          |  |             |         |             |    |         |  
|Net Sales                                 |  | $           | 653,840 |             | $  | 826,283 |  
|Net Loss                                  |  |             | (30,608 | )           | ($ | 40,514  | )
|Diluted Loss per Share                    |  | ($          | 0.97    | )           | ($ | 1.29    | )

The unaudited pro forma financial information is presented for
informational purposes only and is not intended to represent or be indicative
of the consolidated results of operations of the Company that would have been
reported had the acquisition been completed as of the beginning of the periods
presented, and should not be taken as being representative of the future
consolidated results of operations of the Company.

Note
3. Fixed Assets


Fixed assets consist of the following:


|                                              |  |                   |          |                   |   |          |  
|--------------------------------------------- |  | ----------------- | -------- | ----------------- | - | -------- | -
|                                              |  | January 29,
 2011 |          | January 30,
 2010 |  
|                                              |  |                   |         
|                                              |  | ($ in thousands)  |         
|Buildings and improvements                    |  | $                 | 17,288   |                   | $ | 17,288   |  
|Fixtures and equipment                        |  |                   | 119,395  |                   |   | 128,044  |  
|Leasehold improvements                        |  |                   | 31,344   |                   |   | 35,905   |  
|                                              |  |                   |          |                   |   |          |  
|                                              |  |                   | 168,027  |                   |   | 181,237  |  
|Allowances for depreciation and
 amortization |  |                   | (146,549 | )                 |   | (147,329 | )
|                                              |  |                   |          |                   |   |          |  
|                                              |  | $                 | 21,478   |                   | $ | 33,908   |  
|                                              |  |                   |          |                   |   |          |  

Depreciation and amortization of fixed assets is included in the
Consolidated Statements of Operations as follows:


|                                              |  |                  |        |      |   |        |  |   |        | 
|--------------------------------------------- |  | ---------------- | ------ | ---- | - | ------ |  | - | ------ | 
|                                              |  | Fiscal Year      |       
|                                              |  |                  |       
|                                              |  | 2010             |        | 2009 |   | 2008   | 
|                                              |  |                  |        |      |   |        | 
|                                              |  | ($ in thousands) |       
|Cost of
 sales                                |  | $                | 1,143  |      | $ | 1,437  |  | $ | 1,563  | 
|Selling,
 general and administrative expenses |  |                  | 11,054 |      |   | 15,165 |  |   | 22,051 | 
|                                              |  |                  |        |      |   |        |  |   |        | 
|Total                                         |  | $                | 12,197 |      | $ | 16,602 |  | $ | 23,614 | 
|                                              |  |                  |        |      |   |        |  |   |        | 

Depreciation and amortization expense related to the Companys
distribution center facility and equipment is included in cost of sales. All
other depreciation and amortization of fixed assets is included in SG&A
expenses.

Note
4. Impairment of Long-Lived Assets


During Fiscal 2010, 2009 and 2008, the Company concluded, based on a
significant decline in sales and earnings during the fourth quarter, that
triggering events had occurred requiring a test of long-lived assets for
impairment at its retail stores and consolidated subsidiaries. Long-lived
assets at locations where impairment was determined to exist were written down
to their estimated fair values as of the end of the period, resulting in the
recording of an asset impairment charges of $2.0 million, $3.6 million and
$15.2 million in Fiscal 2010, Fiscal 2009 and Fiscal 2008, respectively. The
remaining fair value of these assets at January 29, 2011 was approximately $0.4
million. Estimated fair values for long-lived assets at these locations,
including store fixtures and equipment and leasehold improvements, were
determined based on a measure of discounted future cash flows over the
remaining lease terms at the respective locations. Future cash flows were
estimated based on store operating plans and were discounted at a rate
approximating the Companys cost of capital without reference to market
transactions. Management believes its assumptions were reasonable and
consistently applied.


F-11

---



Note 5. Debt

Credit Facility


On January 5, 2006, the Company entered into a five year, $100 million
revolving secured credit facility agreement (Credit Facility) with
Bank of America, N.A. At the election of the Company, loans under the Credit
Facility bear interest on the principal amount at a rate equal to either the
Prime Rate or LIBOR plus 0.75%. Payments of amounts due under the Credit Facility
are secured by the assets of the Company.


The Credit Facility includes customary provisions, including
affirmative and negative covenants, which include representations, warranties
and restrictions on additional indebtedness and acquisitions. The Credit
Facility also includes customary events of default, including, among other
things, material adverse effect, bankruptcy, and certain changes of control.
The Company was in compliance with terms and conditions of the Credit Facility
as of January 29, 2011.

On March 23, 2006, the Company entered into a First Amendment of the
Credit Facility with Bank of America, N.A. which increased the maximum amount
available for borrowing under the revolving secured credit facility to $130
million, under the same terms and conditions.

On October 20, 2006, the Company entered into a Second Amendment of the
Credit Facility with Bank of America, N.A. which increased the maximum amount
available for borrowing under the revolving secured credit facility to $150
million, under the same terms and conditions. The availability under the Credit
Facility is subject to limitations based on sufficient inventory levels.

Amended Credit Facility

In April 2010, the Company entered into an amended and restated Credit
Agreement (Amended Credit Facility) with Bank of America, N.A. which reduced
the availability under the facility to $100 million. The Amended Credit
Facility updates certain terms and conditions including prohibiting the payment
of dividends, added covenants around the number of store closings and changed
the formula for interest rates. The availability under the Amended Credit
Facility is subject to limitations based on sufficient inventory levels. The
principal amount of all outstanding loans under the Credit Facility together
with any accrued but unpaid interest are due and payable in April 2013, unless
otherwise paid earlier pursuant to the terms of the Amended Credit Facility.
Payments of amounts due under the Amended Credit Facility are secured by the
assets of the Company.

The Amended Credit Facility includes customary provisions, including
affirmative and negative covenants, which include representations, warranties
and restrictions on additional indebtedness and acquisitions. The Amended
Credit Facility also includes customary events of default, including, among
other things, material adverse effect, bankruptcy, and certain changes of
control. The Company was in compliance with terms and conditions of the Amended
Credit Facility as of January 29, 2011.

Interest under the Amended Credit Facility will accrue, at the election
of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of Availability as
defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans
ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans
ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also
payable on unused commitments.

As of January 29, 2011 and January 30, 2010, the Company did not have
any borrowings under the Amended Credit Facility with Bank of America, N.A.
During Fiscal 2010, 2009 and 2008, the highest aggregate balances outstanding
under the revolving credit facility were $32.9 million, $90.8 million and $97.6
million, respectively. As of January 29, 2011 and January 31, 2009, the Company
had $0.5 million and $0, respectively, of outstanding letter of credit
obligations under the Credit Facility with Bank of America, N.A. The Company
had $86 million and $132 million available for borrowing as of January 29, 2011
and January 31, 2009, respectively.

F-12

---



Mortgage Loan

During Fiscal 2004, the Company borrowed $5.8 million under a mortgage
loan to finance the purchase of real estate. The mortgage loan is
repayable in monthly installments of $64,000 over 10 years with a fixed
interest rate of 6.0% and is collateralized by the real estate. As of January
29, 2011, the outstanding balance on the loan was $2.4 million.

The following table presents principal cash payments of long-term debt
by expected maturity dates as of January 29, 2011:

|                            |  |                  |       | 
|--------------------------- |  | ---------------- | ----- | 
|                            |  | Long-term debt   |      
|                            |  |                  |      
|                            |  | ($ in thousands) |      
|2011                        |  | $                | 640   | 
|2012                        |  |                  | 680   | 
|2013                        |  |                  | 722   | 
|2014                        |  |                  | 346   | 
|                            |  |                  |       | 
|Total                       |  |                  | 2,388 | 
|Less:
 current portion      |  |                  | 640   | 
|                            |  |                  |       | 
|Long term
 debt obligation |  | $                | 1,748 | 
|                            |  |                  |       | 

F-13

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Note 6. Income Taxes


Income tax expense (benefit) consists of the following:


|                             |  |                  |     |      |    |        |   |    |     |  
|---------------------------- |  | ---------------- | --- | ---- | -- | ------ | - | -- | --- | -
|                             |  | Fiscal Year      |    
|                             |  |                  |    
|                             |  | 2010             |     | 2009 |    | 2008   |  
|                             |  |                  |    
|                             |  | ($ in thousands) |    
|                             |  |                  |     |      |    |        |   |    |     |  
|Federal  current            |  | $                | 30  |      | ($ | 10,984 | ) | ($ | 455 | )
|State  current              |  |                  | 245 |      |    | 332    |   |    | 427 |  
|Deferred                     |  |                  |    |      |    | (2,333 | ) |    |    |  
|                             |  |                  |     |      |    |        |   |    |     |  
|Income tax expense (benefit) |  | $                | 275 |      | ($ | 12,985 | ) | ($ | 28  | )
|                             |  |                  |     |      |    |        |   |    |     |  

A reconciliation of the Companys effective income tax rate with the
Federal statutory rate is as follows:

|                                                    |  |             |       |      |  |       |    |  |       |   
|--------------------------------------------------- |  | ----------- | ----- | ---- |  | ----- | -- |  | ----- | --
|                                                    |  | Fiscal Year |      
|                                                    |  |             |      
|                                                    |  | 2010        |       | 2009 |  | 2008  |   
|                                                    |  |             |      
|Federal statutory rate                              |  |             | 35.0  | %    |  | 35.0  | %  |  | 35.0  | % 
|State income taxes, net of federal tax
 effect      |  |             | (0.5  | %)   |  | (0.4  | %) |  | (0.2  | %)
|Change in valuation allowance                       |  |             | (35.7 | %)   |  | (11.8 | %) |  | (32.1 | %)
|Cash surrender value  insurance/ benefit
 programs |  |             | 0.8   | %    |  | 0.5   | %  |  | (1.0  | %)
|Other                                               |  |             | (0.5  | %)   |  | 0.1   | %  |  | (1.7  | %)
|                                                    |  |             |       |      |  |       |    |  |       |   
|Effective income tax rate                           |  |             | (0.9  | %)   |  | 23.4  | %  |  | 0.0   | % 
|                                                    |  |             |       |      |  |       |    |  |       |   

During 2009, federal tax legislation was enacted which allowed for an
increased carryback period for net operating losses incurred in 2008. Previously,
the 2008 net operating loss was included in gross deferred tax assets against
which a full valuation allowance was provided. The Company filed a refund claim
under this new legislation and in 2009 received a federal tax refund of $10.4
million and recorded a current tax benefit.

The Other category is comprised of various items, including the impacts
of non deductible meals, dues, penalties, amortization, uncertain tax
positions, tax attribute and carryback limitations, and graduate tax brackets.

Significant components of the Companys deferred tax assets are as
follows:

|                                                               |  |                   |          |                   |   |          |  
|-------------------------------------------------------------- |  | ----------------- | -------- | ----------------- | - | -------- | -
|                                                               |  | January 29,
 2011 |          | January 30,
 2010 |  
|                                                               |  |                   |         
|                                                               |  | ($ in thousands)  |         
|                                                               |  |                   |          |                   |   |          |  
|DEFERRED TAX ASSETS                                            |  |                   |          |                   |   |          |  
|Accrued expenses                                               |  | $                 | 1,234    |                   | $ | 1,730    |  
|Inventory                                                      |  |                   | 842      |                   |   | 603      |  
|Retirement and compensation related
 accruals                  |  |                   | 7,013    |                   |   | 7,238    |  
|Fixed assets                                                   |  |                   | 16,212   |                   |   | 17,681   |  
|Federal and state net operating loss and
 credit carryforwards |  |                   | 80,575   |                   |   | 64,689   |  
|Real estate leases, including deferred rent                    |  |                   | 4,383    |                   |   | 5,952    |  
|Losses on investments                                          |  |                   | 1,659    |                   |   | 1,692    |  
|Goodwill                                                       |  |                   | 2,873    |                   |   | 3,730    |  
|Other                                                          |  |                   | 985      |                   |   | 983      |  
|                                                               |  |                   |          |                   |   |          |  
|Gross deferred tax assets before valuation
 allowance          |  |                   | 115,776  |                   |   | 104,298  |  
|Less: valuation allowance                                      |  |                   | (115,776 | )                 |   | (104,298 | )
|                                                               |  |                   |          |                   |   |          |  
|Total deferred tax assets                                      |  | $                 |         |                   | $ |         |  
|                                                               |  |                   |          |                   |   |          |  
|                                                               |  |                   |          |                   |   |          |  
|DEFERRED TAX LIABILITIES                                       |  |                   |         |                   |   |         |  
|                                                               |  |                   |          |                   |   |          |  
|                                                               |  |                   |          |                   |   |          |  
|NET DEFERRED TAX ASSET                                         |  | $                 |         |                   | $ |         |  
|                                                               |  |                   |          |                   |   |          |  

F-14

---



The Company has a net operating loss carryforward of $169.2 million for
federal income tax purposes and approximately $303 million for state income tax
purposes as of the end of Fiscal 2010 that expire at various times through 2030
and are subject to certain limitations and statutory expiration periods. The
state net operating loss carryforwards are subject to various business
apportionment factors and multiple jurisdictional requirements when utilized.
The Company has federal tax credit carryforwards of $1.2 million, of which $0.2
million will expire in 2026, with the remainder available indefinitely. The
Company has state tax credit carryforwards of $1.1 million, of which $0.3
million will expire in 2027.

In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income.
Management considers the scheduled reversal of taxable temporary differences,
projected future taxable income and tax planning strategies in making this
assessment. As of January 29, 2011, the Company has incurred a cumulative
three-year loss. Based on the cumulative three-year loss and other available
objective evidence, management concluded that a full valuation allowance should
be recorded against its deferred tax assets. As of January 29, 2011, the
valuation allowance increased to $115.8 million from $104.3 million at January
30, 2010 because management believes that it is more likely than not that the
tax benefit will not be realized. The increase in the valuation allowance
equals the increase in gross deferred tax assets and is consistent with the
Companys decision to record a full valuation allowance against deferred tax
assets that have been recorded in the normal course of business, as described
above.

During Fiscal 2010, the Company paid income taxes, net of refunds, of
approximately $0.2 million.

During Fiscal 2009, the Company paid income taxes of approximately $0.2
million and received income tax refunds of approximately $10.5 million. For
Fiscal 2008, the Company paid income taxes of approximately $0.2 million and
received income tax refunds of approximately $6.0 million.

A reconciliation of the beginning and ending amounts of unrecognized
tax benefits is provided below. Amounts presented excluded interest and
penalties, where applicable, on unrecognized tax benefits:

|                                               |  |   |       |  
|---------------------------------------------- |  | - | ----- | -
|(Amounts in
 thousands)                        |  |   |       |  
|Unrecognized
 tax benefits at January 30, 2010 |  | $ | 2,360 |  
|Increases in
 tax positions from prior years   |  |   | 29    |  
|Decreases in
 tax positions from prior years   |  |   |      |  
|Increases in
 tax positions for current year   |  |   |      |  
|Settlements                                    |  |   |      |  
|Lapse of
 applicable statute of limitations    |  |   | (81   | )
|                                               |  |   |       |  
|Unrecognized
 tax benefits at January 29, 2011 |  | $ | 2,308 |  

As of January 29, 2011, the Company had $2.3 million of gross
unrecognized tax benefits, $1.6 million of which would affect the Companys tax
rate if recognized. While it is reasonably possible that the amount of
unrecognized tax benefits will increase or decrease within the next twelve
months, the Company does not expect the change to have a significant impact on
its results of operations or financial position.

The Company is subject to U.S. federal income tax as well as income tax
of multiple state jurisdictions. The Company has substantially concluded all
federal income tax matters through Fiscal 2007 and all material state and local
income tax matters through Fiscal 2003.

The Companys practice is to recognize interest and penalties
associated with its unrecognized tax benefits as a component of income tax
expense in the Companys Consolidated Statement of Operations. During Fiscal
2010, the Company accrued a provision for interest and penalties of $0.2
million. As of January 29, 2011, the liability for uncertain tax positions
reflected in the Companys Consolidated Balance Sheets was $2.3 million,
including accrued interest and penalties of $1.4 million.

F-15

---



Note 7. Leases

Leases - lessee


As more fully discussed in Note 9 in the Notes to Consolidated
Financial Statements, the Company leases its Albany, NY distribution center and
administrative offices under three capital lease arrangements with its Chief
Executive Officer and largest shareholder.


Fixed assets recorded under capital leases, which are included in fixed
assets on the accompanying Consolidated Balance Sheets, are as follows:

|                                              |  |                   |        |                   |   |         |  
|--------------------------------------------- |  | ----------------- | ------ | ----------------- | - | ------- | -
|                                              |  | January 29,
 2011 |        | January 30,
 2010 |  
|                                              |  |                   |        |                   |  
|                                              |  | ($ in thousands)  |       
|Buildings                                     |  | $                 | 9,342  |                   | $ | 9,342   |  
|Fixtures and
 equipment                       |  |                   |       |                   |   | 12,824  |  
|                                              |  |                   |        |                   |   |         |  
|                                              |  |                   | 9,342  |                   |   | 22,166  |  
|Allowances
 for depreciation and amortization |  |                   | (6,927 | )                 |   | (18,622 | )
|                                              |  |                   |        |                   |   |         |  
|                                              |  | $                 | 2,415  |                   | $ | 3,544   |  
|                                              |  |                   |        |                   |   |         |  

At January 29, 2011, the Company leased 460 stores under operating
leases, many of which contain renewal options, for periods ranging from one to
twenty-five years. Most leases also provide for payment of operating expenses
and real estate taxes. Some also provide for contingent rent based on
percentage of sales over a certain sales volume.

Net rental expense was as follows:


|                   |  |                  |        |      |   |        |  |   |         | 
|------------------ |  | ---------------- | ------ | ---- | - | ------ |  | - | ------- | 
|                   |  | Fiscal Year      |       
|                   |  |                  |       
|                   |  | 2010             |        | 2009 |   | 2008   | 
|                   |  |                  |        |      |   |        | 
|                   |  | ($ in thousands) |       
|Minimum
 rentals   |  | $                | 64,353 |      | $ | 86,016 |  | $ | 102,647 | 
|Contingent rentals |  |                  | 204    |      |   | 417    |  |   | 581     | 
|                   |  |                  |        |      |   |        |  |   |         | 
|                   |  | $                | 64,557 |      | $ | 86,433 |  | $ | 103,228 | 
|                   |  |                  |        |      |   |        |  |   |         | 

Future minimum
rental payments required under all leases that have initial or remaining
non-cancelable lease terms at January 29, 2011 are as follows:


|                                        |  |                   |         |                 |   |        | 
|--------------------------------------- |  | ----------------- | ------- | --------------- | - | ------ | 
|                                        |  | Operating
 Leases |         | Capital
 Leases |  
|                                        |  |                   |         |                 |  
|                                        |  | ($ in thousands)  |        
|2011                                    |  | $                 | 47,254  |                 |   | 2,154  | 
|2012                                    |  |                   | 25,731  |                 |   | 2,154  | 
|2013                                    |  |                   | 14,363  |                 |   | 2,154  | 
|2014                                    |  |                   | 8,595   |                 |   | 2,154  | 
|2015                                    |  |                   | 4,131   |                 |   | 1,650  | 
|Thereafter                              |  |                   | 3,139   |                 |   |       | 
|                                        |  |                   |         |                 |   |        | 
|Total minimum payments required         |  | $                 | 103,213 |                 | $ | 10,266 | 
|                                        |  |                   |         |                 |   |        | 
|Less: amounts representing interest     |  |                   |         |                 |   | 5,780  | 
|                                        |  |                   |         |                 |   |        | 
|Present value of minimum lease payments |  |                   |         |                 |   | 4,486  | 
|Less: current portion                   |  |                   |         |                 |   | 723    | 
|                                        |  |                   |         |                 |   |        | 
|Long-term capital lease obligations     |  |                   |         |                 | $ | 3,763  | 
|                                        |  |                   |         |                 |   |        | 

In addition to the obligations in the table above, a number of the
Companys stores have leases which have rent payments based on the stores
sales volume in lieu of fixed minimum rent payments. During Fiscal 2010,
minimum rent payments based on a stores sales volume were $2.9 million.

Interest rates on capital leases were between 23.4% and 46.5% per
annum.

F-16

---



Leases - lessorThe Company, as lessor, entered into a 60 year lease,
effective April 2009, covering real property owned by the Company in Miami,
Florida. Under the provisions of the lease, the Company receives minimum
monthly rent payments as follows:

|                            |  |                      |       |                 |   |         | 
|--------------------------- |  | -------------------- | ----- | --------------- | - | ------- | 
|                            |  | Annual Rent
 Payment |       | Total
 Payments |  
|                            |  |                      |       |                 |  
|                            |  | ($ in thousands)     |      
|February
 2011  March 2029 |  | $                    | 1,620 |                 | $ | 29,430  | 
|April 2029  March 2039     |  |                      | 1,782 |                 |   | 17,820  | 
|April 2039  March 2049     |  |                      | 1,960 |                 |   | 19,602  | 
|April 2049  March 2059     |  |                      | 2,156 |                 |   | 21,562  | 
|April 2059  March 2069     |  |                      | 2,372 |                 |   | 23,718  | 
|                            |  |                      |       |                 |   |         | 
|Total future payments       |  |                      |       |                 | $ | 112,132 | 
|                            |  |                      |       |                 |   |         | 

The lease
allows for the tenant to terminate the lease after the twenty fifth year and
every five years thereafter. Total guaranteed rent payments due to the Company
are $38.4 million. The Company recorded rental income of $1.6 million in Fiscal
2010.

Note 8. Benefit Plans

401(k) Savings Plan

The Company offers a 401(k) Savings Plan to eligible employees meeting
certain age and service requirements. This plan permits participants to
contribute up to 80% of their salary, including bonuses, up to the maximum
allowable by IRS regulations. Participants are immediately vested in their
voluntary contributions plus actual earnings thereon. As of March 1, 2011, the
Company suspended its matching contribution. Prior to termination, participant
vesting of the Companys matching and profit sharing contribution was based on
the years of service completed by the participant. Participants are fully
vested upon the completion of four years of service. All participant
forfeitures of non-vested benefits are used to reduce the Companys
contributions in future years. Total expense related to the Companys matching
contribution was approximately $439,000, $0 and $882,000 in Fiscal 2010, 2009
and 2008, respectively.

Stock Award Plans

The Company has five employee stock award plans, the 1994 Stock Option
Plan, the 1998 Stock Option Plan, the 1999 Stock Option Plan and the 2002 Stock
Option Plan (the Old Plans); and the 2005 Long Term Incentive and Share Award
Plan (the New Plan). Additionally, the Company has a stock award plan for
non-employee directors (the 1990 Plan). The Company no longer issues stock
options under the Old Plans.

Stock options and SSARS authorized for issuance under the Old Plans,
New Plan and 1990 Plan total 20.6 million. As of January 29, 2011, of the
awards authorized for issuance under the Old Plans, New Plan and 1990 Plan, 6.9
million were granted and are outstanding, 5.6 million of which were vested and
exercisable. Shares available for future grants of options and other share
based awards at January 29, 2011 and January 30, 2010 were 2.7 million and 3.0
million, respectively.

During Fiscal 2008, the Company issued 275,000 restricted stock units.
Restricted stock units vest 50% after two years and 50% after three years and
will be settled in cash upon vesting. During Fiscal 2010 and Fiscal 2009, the
Company recognized $128,000 and $75,000, respectively, in expenses related to
the grant of restricted stock units.

Total stock-based compensation expense recognized in the Consolidated
Statements of Operations for Fiscal 2010, Fiscal 2009 and Fiscal 2008 was $0.6
million, $2.3 million and $1.9 million. For Fiscal 2010 and 2009 the related
total deferred tax expense was $0. The related total deferred tax benefit was
approximately $0.1 million in 2008. As of January 29, 2011, there was $0.7
million of unrecognized compensation cost related to stock option awards that
is expected to be recognized as expense over a weighted average period of 1.1
years.

F-17

---



The fair values of the options granted have been estimated at the date
of grant using the Black - Scholes option pricing model with the following
assumptions:

|                                                                          |  |                   |  |             |  |              
|------------------------------------------------------------------------- |  | ----------------- |  | ----------- |  | -------------
|                                                                          |  | Stock Option Plan
|                                                                          |  |                  
|                                                                          |  | 2010              |  | 2009        |  | 2008         
|                                                                          |  |                   |  |             |  |              
|Dividend yield                                                            |  | 0%                |  | 0%          |  | 0%           
|Expected volatility                                                       |  | 76.4%-81.9%       |  | 75.6%       |  | 52.8% - 56.3%
|Risk-free interest rate                                                   |  | 1.99%-2.13%       |  | 3.33%-3.37% |  | 1.42% - 3.41%
|Expected option life in years                                             |  | 4.03-5.45         |  | 4.98-6.98   |  | 4.87  5.69  
|Weighted average fair value per share of
 options granted during the year |  | $1.33             |  | $0.69       |  | $1.34        

The following table summarizes information about the stock awards
outstanding under the Old Plans, New Plan and 1990 Plan as of January 29, 2011:


|                      |  |             |           |                        |  |                                    |  |                              |       |        |   |                                    |  |                             |           |  |   |       |  |   |         | 
|--------------------- |  | ----------- | --------- | ---------------------- |  | ---------------------------------- |  | ---------------------------- | ----- | ------ | - | ---------------------------------- |  | --------------------------- | --------- |  | - | ----- |  | - | ------- | 
|                      |  |             |           |                        | 
|                      |  | Outstanding |           | Exercisable            | 
|                      |  |             |           |                        | 
|Exercise
 Price Range |  | Shares      |           | AverageRemaining
 Life |  | Weighted
 Average
 Exercise
 Price |  | Aggregate 
 Intrinsic
 Value |       | Shares |   | Weighted
 Average
 Exercise
 Price |  | Aggregate
 Intrinsic
 Value |          
|                      |  |             |           |                        |  |                                    |  |                              |       |        |   |                                    |  |                             |          
|$0.00-$2.66           |  |             | 1,216,822 |                        |  | 8.8                                |  | $                            | 1.72  |        | $ | 129,713                            |  |                             | 68,882    |  | $ | 0.05  |  | $ | 122,376 | 
|2.67-5.33             |  |             | 2,187,014 |                        |  | 3.2                                |  |                              | 4.07  |        |   |                                   |  |                             | 2,177,014 |  |   | 4.07  |  |   |        | 
|5.34-8.00             |  |             | 281,350   |                        |  | 6.2                                |  |                              | 5.56  |        |   |                                   |  |                             | 156,987   |  |   | 5.61  |  |   |        | 
|8.01-10.67            |  |             | 2,458,504 |                        |  | 1.6                                |  |                              | 9.09  |        |   |                                   |  |                             | 2,458,504 |  |   | 9.09  |  |   |        | 
|10.68-13.33           |  |             |          |                        |  |                                   |  |                              |      |        |   |                                   |  |                             |          |  |   |      |  |   |        | 
|13.34-16.00           |  |             | 737,265   |                        |  | 4.3                                |  |                              | 14.32 |        |   |                                   |  |                             | 737,265   |  |   | 14.32 |  |   |        | 
|                      |  |             |           |                        |  |                                    |  |                              |       |        |   |                                    |  |                             |           |  |   |       |  |   |         | 
|Total                 |  |             | 6,880,955 |                        |  | 3.9                                |  | $                            | 6.80  |        | $ | 129,713                            |  |                             | 5,598,652 |  | $ | 7.62  |  | $ | 122,376 | 
|                      |  |             |           |                        |  |                                    |  |                              |       |        |   |                                    |  |                             |           |  |   |       |  |   |         | 

The aggregate intrinsic value in the preceding table represents the
total pretax intrinsic value based on the Companys closing stock price of
$1.83 as of January 29, 2011, which would have been received by the award
holders had all award holders under the Old Plans, New Plan and 1990 Plan
exercised their awards as of that date. There were no in-the-money awards
exercisable as of January 29, 2011.

The following table summarizes activity under the Stock Award Plans:

|                          |  |                                         |            |                                                  |  |                                   |  |   |       | 
|------------------------- |  | --------------------------------------- | ---------- | ------------------------------------------------ |  | --------------------------------- |  | - | ----- | 
|                          |  | Employee and Director Stock Award Plans |           
|                          |  |                                         |           
|                          |  | Number of
 Shares Subject
 To Option    |            | Stock Award
 Exercise Price 
 Range Per Share(1) |  | Weighted
 Average
 Exercise Price | 
|                          |  |                                         |            |                                                  |  |                                   | 
|Balance
 February 2, 2008 |  |                                         | 9,020,395  |                                                  |  | $3.50-$17.79                      |  | $ | 8.26  | 
|Granted                   |  |                                         | 431,728    |                                                  |  | 1.16-2.91                         |  |   | 2.66  | 
|Exercised                 |  |                                         | (94,825    | )                                                |  | 3.50                              |  |   | 3.50  | 
|Forfeited                 |  |                                         | (569,371   | )                                                |  | 3.50-17.79                        |  |   | 12.47 | 
|Canceled                  |  |                                         | (329,462   | )                                                |  | 3.50-13.28                        |  |   | 2.93  | 
|                          |  |                                         |            |                                                  |  |                                   |  |   |       | 
|Balance
 January 31, 2009 |  |                                         | 8,458,465  |                                                  |  | $1.16-$15.25                      |  | $ | 7.86  | 
|Granted                   |  |                                         | 348,264    |                                                  |  | 0.98                              |  |   | 0.98  | 
|Exercised(2)              |  |                                         | (137,693   | )                                                |  | 0.00                              |  |   | 0.00  | 
|Forfeited                 |  |                                         | (113,622   | )                                                |  | 2.76-5.50                         |  |   | 3.34  | 
|Canceled                  |  |                                         | (785,274   | )                                                |  | 3.50-15.25                        |  |   | 12.63 | 
|                          |  |                                         |            |                                                  |  |                                   |  |   |       | 
|Balance
 January 30, 2010 |  |                                         | 7,770,140  |                                                  |  | $0.98-$14.32                      |  | $ | 7.23  | 
|Granted                   |  |                                         | 1,279,898  |                                                  |  | 1.67-2.11                         |  |   | 2.07  | 
|Exercised(2)              |  |                                         | (109,364   | )                                                |  | 0.00                              |  |   | 0.00  | 
|Forfeited                 |  |                                         | (184,981   | )                                                |  | 5.32-6.43                         |  |   | 5.51  | 
|Canceled                  |  |                                         | (1,874,738 | )                                                |  | 3.50-14.32                        |  |   | 9.32  | 
|                          |  |                                         |            |                                                  |  |                                   |  |   |       | 
|Balance
 January 29, 2011 |  |                                         | 6,880,955  |                                                  |  | $0.98-$14.32                      |  | $ | 6.80  | 
|                          |  |                                         |            |                                                  |  |                                   |  |   |       | 

| |     |                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Exercise price ranges do
 not include the impact of deferred or restricted shares and restricted stock
 units that were granted at an exercise price of $0.
| | (2) | Represents vesting of
 restricted and deferred shares.                                                                                                     

F-18

---



During Fiscal 2010, 2009 and 2008, the Company recognized expenses of
approximately $74,000, $103,000 and $213,000, respectively, for deferred shares
issued to non-employee directors at an exercise price below the closing stock
price on the date of grant.

Restricted
Stock Plan

During Fiscal 2009 and Fiscal 2008, the Company
    recognized $16,000 and $62,000, respectively, in amortized unearned compensation
    related to its 1990 Restricted Stock Plan, which has expired. No expense
    was recognized in Fiscal 2010. As of January 29, 2011, there were no outstanding
awards and no shares available for grant.

Defined
Benefit Plans

The
Company maintains a non-qualified Supplemental Executive Retirement Plan
(SERP) for certain Executive Officers of the Company. The SERP, which is
unfunded, provides eligible executives defined pension benefits that supplement
benefits under other retirement arrangements. The annual benefit amount is
based on salary and bonus at the time of retirement and number of years of
service.

The
Company provides the Board of Directors with a noncontributory, unfunded
retirement plan (Director Retirement Plan) that pays a retired director an
annual retirement benefit equal to 60% of the annual retainer at the time of
retirement plus a 3% annual increase through the final payment. Payments begin
at age 62 or retirement, whichever is later, and continue for 10 years or the
life of the director and his or her spouse, whichever period is shorter.
Partial vesting in the retirement plan begins after six years of continuous
service. Participants become fully vested after 12 years of continuous service
on the Board. After June 1, 2003, new directors were not covered by the
Director Retirement Plan. Directors who were not yet vested in their retirement
benefits as of June 1, 2003 had the present value of benefits already accrued
as of the effective date converted to Deferred Shares under the 1990 Plan.
Directors that were fully or partially vested in their retirement benefits were
given a one-time election to continue to participate in the current retirement
program or convert the present value of benefits already accrued to Deferred
Shares under the 1990 Plan as of the effective date.

For Fiscal 2010, Fiscal 2009 and Fiscal 2008, net periodic benefit cost
recognized under both plans totaled approximately $0.4 million, $1.0 million,
and $1.4 million, respectively. The accrued pension liability for both plans
was approximately $12.9 million and $11.4 million at January 29, 2011 and
January 31, 2009, respectively, and is recorded within other long term
liabilities. The accumulated benefit obligation for both plans was approximately
$10.8 million and $9.6 million as of January 29, 2011 and January 31, 2009,
respectively.

The following is a summary of the Companys defined benefit pension
plans as of the most recent actuarial calculations:

Obligation
and Funded Status:


|                                            |  |                   |         |                   |    |         |  
|------------------------------------------- |  | ----------------- | ------- | ----------------- | -- | ------- | -
|                                            |  |                   |         |                   |   
|                                            |  | January 29,
 2011 |         | January 30,
 2010 |   
|                                            |  |                   |        
|                                            |  | ($ in thousands)  |        
|Change in
 Projected Benefit Obligation:    |  |                   |         |                   |    |         |  
|Benefit
 obligation at beginning of year    |  | $                 | 11,400  |                   | $  | 11,913  |  
|Service cost                                |  |                   | 133     |                   |    | 195     |  
|Interest
 cost                              |  |                   | 653     |                   |    | 802     |  
|Actuarial gain                              |  |                   | 761     |                   |    | (1,458  | )
|Benefits
 paid                              |  |                   | (92     | )                 |    | (52     | )
|                                            |  |                   |         |                   |    |         |  
|Projected Benefit obligation at end of year |  | $                 | 12,855  |                   | $  | 11,400  |  
|                                            |  |                   |         |                   |    |         |  
|                                            |  |                   |         |                   |    |         |  
|Fair value
 of plan assets at end of year   |  | $                 |        |                   | $  |        |  
|                                            |  |                   |         |                   |    |         |  
|                                            |  |                   |         |                   |    |         |  
|Reconciliation
 of Funded Status:           |  |                   |         |                   |    |         |  
|Funded
 status                              |  | ($                | 12,855  | )                 | ($ | 11,400  | )
|Unrecognized
 prior service cost            |  |                   | 1,947   |                   |    | 2,289   |  
|Unrecognized
 net actuarial gain            |  |                   | (3,462  | )                 |    | (4,906  | )
|                                            |  |                   |         |                   |    |         |  
|Accrued
 benefit cost                       |  |                   | (14,370 | )                 |    | (14,017 | )
|Decrease
 (increase) in liability           |  |                   | 1,515   |                   |    | 2,617   |  
|                                            |  |                   |         |                   |    |         |  
|Accrued pension liability                   |  | ($                | 12,855  | )                 | ($ | 11,400  | )
|                                            |  |                   |         |                   |    |         |  

F-19

---



Amounts recognized in
the Consolidated Balance Sheets consist of:


|                                        |  |                   |        |                   |    |        |  
|--------------------------------------- |  | ----------------- | ------ | ----------------- | -- | ------ | -
|                                        |  |                   |        |                   |   
|                                        |  | January 29,
 2011 |        | January 30,
 2010 |   
|                                        |  |                   |       
|                                        |  | ($ in
 thousands) |       
|                                        |  |                   |       
|Accrued
 pension liability              |  | ($                | 12,855 | )                 | ($ | 11,400 | )
|Accumulated
 other comprehensive income |  |                   | (1,515 | )                 |    | (2,617 | )
|Deferred tax
 liability (asset)         |  |                   | (1,099 | )                 |    | (1,099 | )
|                                        |  |                   |        |                   |   
|Net amount recognized                   |  | ($                | 13,271 | )                 | ($ | 12,918 | )
|                                        |  |                   |        |                   |   

|                                                                                                            |  |             |      |      |   |      |   |   |       |  
|----------------------------------------------------------------------------------------------------------- |  | ----------- | ---- | ---- | - | ---- | - | - | ----- | -
|Components of Net Periodic Benefit Cost and
 Other Amounts Recognized in Other Comprehensive (Income) Loss:
|($ in thousands)                                                                                            |  |             |      |      |   |      |   |   |       |  
|                                                                                                            |  |             |     
|Net
 Periodic Benefit Cost:                                                                                 |  | Fiscal Year |     
|                                                                                                            |  | 2010        |      | 2009 |   | 2008 |  
|                                                                                                            |  |             |      |      |   |      |  
|Service cost                                                                                                |  | $           | 133  |      | $ | 195  |   | $ | 218   |  
|Interest
 cost                                                                                              |  |             | 653  |      |   | 802  |   |   | 891   |  
|Amortization
 of prior service cost                                                                         |  |             | 342  |      |   | 342  |   |   | 342   |  
|Amortization
 of net (gain) loss                                                                            |  |             | (683 | )    |   | (346 | ) |   | (2    | )
|                                                                                                            |  |             |      |      |   |      |   |   |       |  
|Net periodic benefit cost                                                                                   |  | $           | 445  |      | $ | 993  |   | $ | 1,449 |  
|                                                                                                            |  |             |      |      |   |      |   |   |       |  

Other Changes in
Benefit Obligations Recognized in Other Comprehensive (Income) Loss:


|                                                                                     |  |    |       |   |    |        |   |  |  | 
|------------------------------------------------------------------------------------ |  | -- | ----- | - | -- | ------ | - |  |  | 
|Net prior
 service cost recognized as a component of net periodic benefit cost       |  | ($ | 342   | ) | ($ | 342    | ) |  |  | 
|Net
 actuarial gain recognized as a component of net periodic benefit cost           |  |    | 683   |   |    | 346    |   |  |  | 
|Net
 actuarial (gain) loss arising during the period                                 |  |    | 761   |   |    | (1,458 | ) |  |  | 
|                                                                                     |  |    |       |   |    |        |   |  |  | 
|                                                                                     |  |    | 1,102 |   |    | (1,454 | ) |  |  | 
|Income tax
 effect                                                                   |  |    |      |   |    | 2,332  |   |  |  | 
|                                                                                     |  |    |       |   |    |        |   |  |  | 
|Total
 recognized in other comprehensive (income) loss                               |  | $  | 1,102 |   | $  | 878    |   |  |  | 
|                                                                                     |  |    |       |   |    |        |   |  |  | 
|Total recognized in net periodic benefit
 cost and other comprehensive (income) loss |  | ($ | 1,547 | ) | ($ | 1,871  | ) |  |  | 
|                                                                                     |  |    |       |   |    |        |   |  |  | 

The pre-tax components of accumulated other comprehensive income, which
have not yet been recognized as components of net periodic benefit cost as of
January 29, 2011 and January 30, 2010 are summarized below.

|                                        |  |                   |       |                   |    |       |  
|--------------------------------------- |  | ----------------- | ----- | ----------------- | -- | ----- | -
|($ in thousands)                        |  | January 29,
 2011 |       | January 30,
 2010 |   
|                                        |  |                   |       |                   |   
|Net
 unrecognized actuarial gain        |  | ($                | 3,462 | )                 | ($ | 4,906 | )
|Net
 unrecognized prior service cost    |  |                   | 1,947 |                   |    | 2,289 |  
|                                        |  |                   |       |                   |    |       |  
|Accumulated
 other comprehensive income |  | ($                | 1,515 | )                 | ($ | 2,617 | )
|                                        |  |                   |       |                   |    |       |  

In Fiscal 2010, approximately $342,000 of net unrecognized prior
service cost and approximately $683,000 of the net unrecognized actuarial gain,
recorded as components of accumulated other comprehensive loss at January 29,
2011, will be recognized as components of net periodic benefit cost.

F-20

---



Assumptions:


|                                                                    |  |               |  |               | 
|------------------------------------------------------------------- |  | ------------- |  | ------------- | 
|                                                                    |  |              
|                                                                    |  | Fiscal Year  
|                                                                    |  |              
|                                                                    |  | 2010          |  | 2009         
|                                                                    |  |               |  |              
|Weighted-average assumptions used to
 determine benefit obligation: |  |               |  |               | 
|Discount rate                                                       |  | 5.25%         |  | 5.75%         | 
|Salary increase rate                                                |  | 4.00%         |  | 4.00%         | 
|Measurement date                                                    |  | Jan. 29, 2011 |  | Jan. 30, 2010 | 

|                                                                           |  |      |      |                   |  |      |   |  |      |  
|-------------------------------------------------------------------------- |  | ---- | ---- | ----------------- |  | ---- | - |  | ---- | -
|                                                                           |  |      |     
|                                                                           |  | 2010 |      | Fiscal Year
 2009 |  | 2008 |  
|                                                                           |  |      |     
|Weighted-average assumptions used to
 determine net periodic benefit cost: |  |      |      |                   |  |      |   |  |      |  
|Discount rate                                                              |  |      | 5.75 | %                 |  | 5.75 | % |  | 6.75 | %
|Salary increase rate                                                       |  |      | 4.00 | %                 |  | 4.00 | % |  | 4.00 | %

The discount rate is based on the rates implicit in high-quality
fixed-income investments currently available as of the measurement date. The
Citigroup Pension Discount Curve (CPDC) rates are intended to represent the
spot rates implied by the high quality corporate bond market in the U.S. The
projected benefit payments attributed to the projected benefit obligation have
been discounted using the CPDC mid-year rates and the discount rate is the
single constant rate that produces the same total present value.

The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid:

| |                      |  |                  |       | 
| | -------------------- |  | ---------------- | ----- | 
| |                      |  |                  |      
| | Year                 |  | Pension Benefits |      
| |                      |  |                  |      
| |                      |  | ($ in thousands) |      
| |                      |  |                  |      
| | 2010                 |  | $                | 140   | 
| | 2011                 |  |                  | 217   | 
| | 2012                 |  |                  | 935   | 
| | 2013                 |  |                  | 936   | 
| | 2014                 |  |                  | 929   | 
| | 2015 and
 thereafter |  |                  | 5,216 | 

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 9. Shareholders Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|The Company has never declared dividends on its Common Stock. The
 Companys Credit Facility restricts the payment of cash dividends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Note 10. Related
 Party Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|The Company leases its 181,300 square foot distribution center/office
 facility in Albany, New York from Robert J. Higgins, its Chairman, Chief
 Executive Officer and largest shareholder, under three capital leases that
 expire in the year 2015. The original distribution center/office facility was
 occupied in 1985.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Under the three capital leases, dated April 1, 1985, November 1, 1989
 and September 1, 1998, the Company paid Mr. Higgins an annual rent of $2.2
 million, $2.1 million and $2.1 million in Fiscal 2010, 2009 and 2008 respectively.
 Pursuant to the terms of the lease agreements, effective January 1, 2002 and
 every two years thereafter, rental payments will increase in accordance with
 the biennial increase in the Consumer Price Index. Under the terms of the
 lease agreements, the Company is responsible for property taxes, insurance
 and other operating costs with respect to the premises. During 2010, Mr.
 Higgins paid $0.8 million for principal and interest on his underlying
 indebtedness relating to the real property. Mr. Higgins doesnt have any
 future obligation for principal and interest. None of the leases contain any
 real property purchase options at the expiration of its term.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company leases one of its retail stores from Mr. Higgins
 under an operating lease. Annual rental payments under this lease were
 $40,000 in Fiscal 2010, 2009 and 2008. Under the terms of the lease, the
 Company pays property taxes, maintenance and a contingent rental if a
 specified sales level is achieved. Total additional charges for the store,
 including contingent rent, were approximately $6,800, $6,800 and $7,400 in
 Fiscal 2010, 2009 and 2008 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Prior to Fiscal 2010, the Company chartered
     an aircraft from Richmor Aviation Inc., an unaffiliated corporation that
     leases an aircraft owned by Mr. Higgins, for Company business. Payments
     to Richmor Aviation Inc., to charter the aircraft owned by Mr. Higgins,
     in Fiscal 2010, 2009 and 2008 were approximately $0, $94,000 and $205,000,
     respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-21

---



Note 11. Quarterly
Financial Information (Unaudited)


|                                          |  |                                                 |         |                   |   |                   |  |                |         |              |    |         |   |    |         |  
|----------------------------------------- |  | ----------------------------------------------- | ------- | ----------------- | - | ----------------- |  | -------------- | ------- | ------------ | -- | ------- | - | -- | ------- | -
|                                          |  | Fiscal 2010 Quarter Ended                       |        
|                                          |  |                                                 |        
|                                          |  | 2010                                            |         | January 29,
 2011 |   | October 30,
 2010 |  | July 31,
 2010 |         | May 1,
 2010 |   
|                                          |  |                                                 |         |                   |   |                   |  |                |         |              |   
|                                          |  | ($ in
 thousands, except for per share amounts)
|Net sales                                 |  | $                                               | 652,416 |                   | $ | 231,286           |  | $              | 128,787 |              | $  | 135,804 |   | $  | 156,539 |  
|Gross profit                              |  |                                                 | 219,380 |                   |   | 78,209            |  |                | 43,917  |              |    | 45,729  |   |    | 51,525  |  
|                                          |  |                                                 |         |                   |   |                   |  |                |         |              |    |         |   |    |         |  
|Net income (loss)                         |  | ($                                              | 30,963  | )                 | $ | 12,350            |  | ($             | 16,116  | )            | ($ | 15,782  | ) | ($ | 11,415  | )
|                                          |  |                                                 |         |                   |   |                   |  |                |         |              |    |         |   |    |         |  
|Basic and diluted income (loss) per share |  | ($                                              | 0.99    | )                 | $ | 0.38              |  | ($             | 0.51    | )            | ($ | 0.50    | ) | ($ | 0.36    | )
|                                          |  |                                                 |         |                   |   |                   |  |                |         |              |    |         |   |    |         |  

During the
fourth quarter of Fiscal 2010, the Company recorded an asset impairment charge
of $2.0 million related to the write down of certain long-lived assets at
underperforming locations. See Note 4 in the Notes to Consolidated Financial
Statements for further detail regarding the impairment charge.

|                                           |  |                                                 |         |                   |   |                   |  |                 |         |              |    |         |   |    |         |  
|------------------------------------------ |  | ----------------------------------------------- | ------- | ----------------- | - | ----------------- |  | --------------- | ------- | ------------ | -- | ------- | - | -- | ------- | -
|                                           |  | Fiscal 2009 Quarter Ended                      
|                                           |  |                                                
|                                           |  | 2009                                            |         | January 30,
 2010 |   | October 31,
 2009 |  | August 1,
 2009 |         | May 2,
 2009 |   
|                                           |  |                                                 |         |                   |   |                   |  |                 |         |              |   
|                                           |  | ($ in
 thousands, except for per share amounts)
|Net sales                                  |  | $                                               | 813,988 |                   | $ | 295,422           |  | $               | 161,387 |              | $  | 165,746 |   | $  | 191,433 |  
|Gross profit                               |  |                                                 | 261,661 |                   |   | 82,500            |  |                 | 54,639  |              |    | 58,770  |   |    | 65,752  |  
|                                          
|Net income
 (loss)                         |  | ($                                              | 42,449  | )                 | $ | 11,359            |  | ($              | 22,317  | )            | ($ | 17,755  | ) | ($ | 13,736  | )
|                                           |  |                                                 |         |                   |   |                   |  |                 |         |              |    |         |   |    |         |  
|Basic and
 diluted income (loss) per share |  | ($                                              | 1.35    | )                 | $ | 0.36              |  | ($              | 0.71    | )            | ($ | 0.57    | ) | ($ | 0.44    | )
|                                           |  |                                                 |         |                   |   |                   |  |                 |         |              |    |         |   |    |         |  

During the fourth quarter of Fiscal 2009, the Company recorded an asset
impairment charge of $3.6 million related to the write down of certain
long-lived assets at underperforming locations. See Note 4 in the Notes to
Consolidated Financial Statements for further detail regarding the impairment
charge. Also, during the fourth quarter of Fiscal 2009, the Company recorded a
current federal tax benefit of $12.6 million primarily due to federal tax
legislation enacted that provided for an increased carryback period for net
operating losses incurred in 2008.

F-22

---



Index to Exhibits
Document Number and Description

|            |                                                                                                                                                                                                                                                                                                                                                                                
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No.
|3.1         | Restated Certificate of Incorporation  incorporated herein by
 reference to Exhibit 3.1 to the Companys Annual Report on Form 10-K for the
 year ended January 29, 1994. Commission File No. 0-14818.                                                                                                                                                                        
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.2         | Certificate of Amendment to the Certificate of Incorporation 
 incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly
 Report on Form 10-Q for the fiscal quarter ended October 29, 1994. Commission
 File No. 0-14818.                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.3         | Certificate of Amendment to the Certificate of Incorporation 
 incorporated herein by reference to Exhibit 3.4 to the Companys Annual
 Report on Form 10-K for the year ended January 31, 1998. Commission File No.
 0-14818.                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.4         | Amended By-Laws  incorporated herein by reference to Exhibit 3.4 to
 the Companys Annual Report on Form 10-K for the year ended January 29, 2000.
 Commission File No. 0-14818.                                                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.5         | Certificate of Amendment to the Certificate of
 Incorporationincorporated herein by reference to Exhibit 3.5 to the Companys
 Registration Statement on Form S-4, No. 333-75231.                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.6         | Certificate of Amendment to the Certificate of
 Incorporationincorporated herein by reference to Exhibit 3.6 to the
 Companys Registration Statement on Form S-4, No. 333-75231.                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.7         | Certificate of Amendment to the Certificate of
 Incorporationincorporated herein by reference to Exhibit 4.2 to the
 Companys Current Report on Form 8-K filed August 15, 2000. Commission File
 No. 0-14818.                                                                                                                                                                
|            |                                                                                                                                                                                                                                                                                                                                                                                
|3.8         | Certificate of Amendment to the Certificate of Incorporation of -
 incorporated herein by reference to Exhibit 2 to the Companys Current Report
 on Form 8-A filed August 15, 2000. Commission File No. 0-14818.                                                                                                                                                              
|            |                                                                                                                                                                                                                                                                                                                                                                                
|4.1         | Credit Agreement dated January 5, 2006, between Trans World
 Entertainment Corporation and Bank of America N.A. - incorporated by
 reference to Exhibit 99.2 to the Companys Current Report on Form 8-K filed
 January 10, 2006. Commission File No. 0-14818.                                                                                                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                
|4.2         | First Amendment to Credit Agreement between Trans World Entertainment
 Corporation and Bank of America N.A  incorporated by reference to Exhibit
 4.1 to the Companys Current Report on Form 8-K filed March 29, 2006.
 Commission File No. 0-14818.                                                                                                                         
|            |                                                                                                                                                                                                                                                                                                                                                                                
|4.3         | Second Amendment to Credit Agreement between Trans World
 Entertainment Corporation and Bank of America N.A  incorporated by reference
 to Exhibit 4.1 to the Companys Current Report on Form 8-K filed October 23,
 2006. Commission File No. 0-14818.                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                
|4.4         | Amended and Restated Credit Agreement between Trans World
 Entertainment Corporation and Bank of America N.A.  incorporated by
 reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed
 April 15, 2010. Commission File No. 0-14818.                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                
|10.1        | Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord,
 and Record Town, Inc. and Trans World Music Corporation, as Tenant and
 Amendment thereto dated April 28, 1986  incorporated herein by reference to
 Exhibit 10.3 to the Companys Registration Statement on Form S-1, No.
 33-6449.                                                                     
|            |                                                                                                                                                                                                                                                                                                                                                                                
|10.2        | Second Addendum, dated as of November 30, 1989, to Lease, dated April
 1, 1985, among Robert J. Higgins, and Trans World Music Corporation, and
 Record Town, Inc., exercising five year renewal option  incorporated herein
 by reference to Exhibit 10.2 to the Companys Annual Report on Form 10-K for
 the year ended February 3, 1990. Commission File No. 0-14818.     
|            |                                                                                                                                                                                                                                                                                                                                                                                
|10.3        | Lease, dated November 1, 1989, between Robert J. Higgins, as
 Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant
  incorporated herein by reference to Exhibit 10.3 to the Companys Annual
 Report on Form 10-K for the year ended February 2, 1991. Commission File No.
 0-14818.                                                                 
|            |                                                                                                                                                                                                                                                                                                                                                                                
|10.5        | Lease dated September 1, 1998, between Robert J. Higgins, as
 Landlord, and Record Town, Inc. and Trans World Music Corporation, as Tenant,
 for additional office space at 38 Corporate Circle  incorporated herein by
 reference to Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for
 the fiscal quarter ended October 31, 1998. Commission File No. 0-14818.

F-23

---



|      |                                                                                                                                                                                                                                                                                                                    
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6  | Trans World Music Corporation 1990 Stock Option Plan for Non-Employee
 Directors, as amended and restated  incorporated herein by reference to
 Annex A to Trans Worlds Definitive Proxy Statement on Form 14A filed as of
 May 19, 2000. Commission File No. 0-14818.                                           
|      |                                                                                                                                                                                                                                                                                                                    
|10.7  | Trans World Entertainment Corporation 1994 Stock Option Plan 
 incorporated herein by reference to Exhibit 10.1 to the Companys Quarterly
 Report on Form 10-Q for the fiscal quarter ended July 30, 1994. Commission
 File No. 0-14818.                                                                         
|      |                                                                                                                                                                                                                                                                                                                    
|10.8  | Trans World Entertainment Corporation 1998 Stock Option Plan 
 incorporated herein by reference to Annex B to Trans Worlds Definitive Proxy
 Statement on Form 14A filed as of May 7, 1998. Commission File No. 0-14818.                                                                                         
|      |                                                                                                                                                                                                                                                                                                                    
|10.9  | Trans World Entertainment Corporation 1999 Stock Option Plan 
 incorporated herein by reference to Annex A to Trans Worlds Definitive Proxy
 Statement on Form 14A filed as of May 7, 1998. Commission File No. 0-14818.                                                                                         
|      |                                                                                                                                                                                                                                                                                                                    
|10.10 | Form of Indemnification Agreement dated May 1, 1995 between the
 Company and its officers and directors incorporated herein by reference to
 Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the fiscal
 quarter ended April 29, 1995. Commission File No. 0-14818.                                
|      |                                                                                                                                                                                                                                                                                                                    
|10.11 | Trans World Entertainment Corporation 2002 Stock Option Plan 
 incorporated herein by reference to Annex A to Trans Worlds Definitive Proxy
 Statement on Form 14A filed as of May 23, 2002. Commission File No. 0-14818.                                                                                        
|      |                                                                                                                                                                                                                                                                                                                    
|10.12 | Trans World Entertainment Corporation Supplemental Executive
 Retirement Plan, as amended  incorporated herein by reference to Exhibit
 10.1 to the Companys Form 8-K filed on December 19, 2008. Commission File
 No. 0-14818.                                                                                  
|      |                                                                                                                                                                                                                                                                                                                    
|10.13 | Employment Agreement, dated as of December 26, 2008, between the
 Company and Robert J. Higgins. Incorporated herein by reference to Exhibit
 10.1 to the Companys Form 8-K filed on December 29, 2008. Commission File
 No. 0-14818.                                                                             
|      |                                                                                                                                                                                                                                                                                                                    
|10.14 | 10.13 Trans World Entertainment Corporation 2005 Long Term Incentive
 and Share Award Plan incorporated herein by reference to Appendix A to Trans
 World Entertainment Corporations Definitive Proxy Statement on Form 14A
 filed as of May 11, 2005. Commission File No. 0-14818.                               
|      |                                                                                                                                                                                                                                                                                                                    
|10.15 | Trans World Entertainment Corporation Executive Officers Bonus Plan
  incorporated herein by reference to Appendix A to Trans World
 Entertainment Corporations Definitive Proxy Statement on Form 14A filed as
 of May 20, 2009. Commission File No. 0-14818.                                                   
|      |                                                                                                                                                                                                                                                                                                                    
|* 21  | Significant Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                    
|* 23  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                               
|      |                                                                                                                                                                                                                                                                                                                    
|*31.1 | Certification of Chief Executive Officer dated April 14, 2011,
 relating to the Registrants Annual Report on Form 10-K for the year ended
 January 29, 2011, pursuant to Rule 13a-14(a) or Rule 15a-14(a).                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                    
|*31.2 | Certification of Chief Financial Officer dated April 14, 2011,
 relating to the Registrants Annual Report on Form 10-K for the year ended
 January 29, 2011, pursuant to Rule 13a-14(a) or Rule 15a-14(a).                                                                                                        
|      |                                                                                                                                                                                                                                                                                                                    
|**32  | Certification of Chief Executive Officer and Chief Financial Officer
 of Registrant, dated April 14, 2011, pursuant to 18 U.S.C. Section 1350, as
 adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 relating to
 the Registrants Annual Report on Form 10-K for the year ended January 29,
 2011.

* Filed herewith
** Furnished herewith

F-24

---