UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
|x  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31,
2010    
|   |                                                                                                                                         
|OR
|   |                                                                                                                                         
|o  | 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)        

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 xNo o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.

|                                                                   
|-------------------------------------------------------------------
|Large
accelerated filer oAccelerated filer oNon-accelerated
filer x
|Smaller
reporting company o                                        

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

Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.

Common Stock, $.01 par value,
31,424,529 shares outstanding as of August 27, 2010

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                             |  |                    | 
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | 
|                                                                                                                             |  | Form 10-Q
Page No.
|PART 1.
FINANCIAL INFORMATION                                                                                                |  |                    | 
|                                                                                                                             |  |                    | 
|Item 1 
Interim Financial Statements (Unaudited)                                                                            |  |                    | 
|                                                                                                                             |  |                    | 
|Condensed
Consolidated Balance Sheets at July 31, 2010,
January 30, 2010 and August 1, 2009                                  |  | 3                  | 
|                                                                                                                             |  |                    | 
|Condensed
Consolidated Statements of Operations 
Thirteen Weeks and Twenty-six Weeks Ended July 31, 2010 and
August 1, 2009 |  | 4                  | 
|                                                                                                                             |  |                    | 
|Condensed
Consolidated Statements of Cash Flows 
Twenty-six Weeks Ended July 31, 2010 and
August 1, 2009                    |  | 5                  | 
|                                                                                                                             |  |                    | 
|Notes to
Unaudited Condensed Consolidated Financial Statements                                                               |  | 6                  | 
|                                                                                                                             |  |                    | 
|Item 2 -
Managements Discussion and Analysis of Financial
Condition and Results of Operations                               |  | 13                 | 
|                                                                                                                             |  |                    | 
|Item 3 
Quantitative and Qualitative Disclosures about Market Risk                                                          |  | 20                 | 
|                                                                                                                             |  |                    | 
|Item 4 
Controls and Procedures                                                                                             |  | 21                 | 
|                                                                                                                             |  |                    | 
|PART II. OTHER
INFORMATION                                                                                                   |  |                    | 
|                                                                                                                             |  |                    | 
|Item 1  Legal
Proceedings                                                                                                   |  | 22                 | 
|                                                                                                                             |  |                    | 
|Item 1A- Risk
Factors                                                                                                        |  | 22                 | 
|                                                                                                                             |  |                    | 
|Item 2 
Unregistered Sales of Equity Securities and Use of Proceeds                                                         |  | 22                 | 
|                                                                                                                             |  |                    | 
|Item 3 
Defaults Upon Senior Securities                                                                                     |  | 22                 | 
|                                                                                                                             |  |                    | 
|Item 5  Other
Information                                                                                                   |  | 22                 | 
|                                                                                                                             |  |                    | 
|Item 6 -
Exhibits                                                                                                            |  | 23                 | 
|                                                                                                                             |  |                    | 
|Signatures                                                                                                                   |  | 24                 | 

2

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 1 - Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)

|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | ---------------- | - | -------------- | - | - | -------- | -
|                                                                                                                                 |  | July 31,
2010 |          | January 30,
2010 |   | August 1,
2009 |  
|                                                                                                                                 |  |               |          |                  |   |                |  
|ASSETS                                                                                                                           |  |               |          |                  |   |                |   |   |          |  
|CURRENT ASSETS:                                                                                                                  |  |               |          |                  |   |                |   |   |          |  
|Cash and cash equivalents                                                                                                        |  | $             | 10,505   |                  | $ | 71,514         |   | $ | 7,138    |  
|Merchandise inventory                                                                                                            |  |               | 237,141  |                  |   | 266,568        |   |   | 320,413  |  
|Other current assets                                                                                                             |  |               | 8,523    |                  |   | 15,062         |   |   | 22,373   |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|Total current assets                                                                                                             |  |               | 256,169  |                  |   | 353,144        |   |   | 349,924  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|NET FIXED ASSETS                                                                                                                 |  |               | 29,074   |                  |   | 33,908         |   |   | 44,458   |  
|OTHER ASSETS                                                                                                                     |  |               | 9,356    |                  |   | 7,514          |   |   | 7,479    |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|TOTAL ASSETS                                                                                                                     |  |               | 294,599  |                  | $ | 394,566        |   | $ | 401,861  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|LIABILITIES                                                                                                                      |  |               |          |                  |   |                |   |   |          |  
|CURRENT LIABILITIES:                                                                                                             |  |               |          |                  |   |                |   |   |          |  
|Accounts payable                                                                                                                 |  | $             | 69,233   |                  | $ | 130,549        |   | $ | 94,675   |  
|Borrowings under line of credit                                                                                                  |  |               |         |                  |   |               |   |   | 28,328   |  
|Accrued expenses and other current liabilities                                                                                   |  |               | 29,408   |                  |   | 38,701         |   |   | 37,823   |  
|Current portion of long-term debt                                                                                                |  |               | 621      |                  |   | 602            |   |   | 584      |  
|Current portion of capital lease obligations                                                                                     |  |               | 677      |                  |   | 1,372          |   |   | 2,662    |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|Total current liabilities                                                                                                        |  |               | 99,939   |                  |   | 171,224        |   |   | 164,072  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|LONG-TERM DEBT, less
current portion                                                                                             |  |               | 2,072    |                  |   | 2,388          |   |   | 2,693    |  
|CAPITAL LEASE OBLIGATIONS,
less current portion                                                                                  |  |               | 4,136    |                  |   | 4,486          |   |   | 4,813    |  
|OTHER LONG-TERM LIABILITIES                                                                                                      |  |               | 22,007   |                  |   | 23,115         |   |   | 25,612   |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|TOTAL LIABILITIES                                                                                                                |  |               | 128,154  |                  |   | 201,213        |   |   | 197,190  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|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, 56,498,429 and 56,498,429 shares issued, respectively) |  |               | 565      |                  |   | 565            |   |   | 565      |  
|Additional paid-in capital                                                                                                       |  |               | 308,113  |                  |   | 307,823        |   |   | 307,306  |  
|Treasury stock at cost (25,102,990, 25,102,990 and 25,102,990 shares, respectively)                                              |  |               | (217,555 | )                |   | (217,555       | ) |   | (217,555 | )
|Accumulated other
comprehensive income                                                                                           |  |               | 1,518    |                  |   | 1,518          |   |   | 2,396    |  
|Retained earnings                                                                                                                |  |               | 73,804   |                  |   | 101,002        |   |   | 111,959  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                       |  |               | 166,445  |                  |   | 193,353        |   |   | 204,671  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                       |  | $             | 294,599  |                  | $ | 394,566        |   | $ | 401,861  |  
|                                                                                                                                 |  |               |          |                  |   |                |   |   |          |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.


3

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

|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|------------------------------------------------------------------------ |  | -------------------- | ------- | ---------------------- | - | ------------- | - | -------------- | ------- | - | - | ------- | -
|                                                                         |  | Thirteen Weeks Ended |         | Twenty-six Weeks Ended |  
|                                                                         |  | July 31,
2010        |         | August 1,
2009         |   | July 31,
2010 |   | August 1,
2009 |        
|                                                                         |  |                      |         |                        |   |               |   |                |        
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Net sales                                                                |  | $                    | 135,804 |                        | $ | 165,746       |   | $              | 292,342 |   | $ | 357,179 |  
|Cost of sales                                                            |  |                      | 90,075  |                        |   | 106,976       |   |                | 195,089 |   |   | 232,658 |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Gross profit                                                             |  |                      | 45,729  |                        |   | 58,770        |   |                | 97,253  |   |   | 124,521 |  
|Selling, general and administrative expenses                             |  |                      | 60,554  |                        |   | 75,767        |   |                | 122,732 |   |   | 155,126 |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Loss from operations                                                     |  |                      | (14,825 | )                      |   | (16,997       | ) |                | (25,479 | ) |   | (30,605 | )
|Interest expense, net                                                    |  |                      | 815     |                        |   | 684           |   |                | 1,504   |   |   | 1,386   |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Loss before income tax (benefit)                                         |  |                      | (15,640 | )                      |   | (17,681       | ) |                | (26,983 | ) |   | (31,991 | )
|Income tax expense (benefit)                                             |  |                      | 141     |                        |   | 74            |   |                | 215     |   |   | (499    | )
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Net loss                                                                 |  | $                    | (15,781 | )                      | $ | (17,755       | ) | $              | (27,198 | ) | $ | (31,492 | )
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|LOSS PER SHARE:                                                          |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Basic and diluted loss per share                                         |  | $                    | (0.50   | )                      | $ | (0.57         | ) | $              | (0.87   | ) | $ | (1.00   | )
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|Weighted average number of common shares outstanding  basic and
diluted |  |                      | 31,424  |                        |   | 31,394        |   |                | 31,410  |   |   | 31,345  |  
|                                                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.


4

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

|                                                                        |  |                        |         |                |   |         |  
|----------------------------------------------------------------------- |  | ---------------------- | ------- | -------------- | - | ------- | -
|                                                                        |  | Twenty-six Weeks Ended |        
|                                                                        |  |                        |        
|                                                                        |  | July 31,
2010          |         | August 1,
2009 |  
|                                                                        |  |                        |         |                |   |         |  
|Net cash used by operating
activities                                   |  | $                      | (56,280 | )              | $ | (47,039 | )
|                                                                        |  |                        |         |                |   |         |  
|Cash flows from investing
activities:                                   |  |                        |         |                |   |         |  
|Purchases of fixed assets                                               |  |                        | (1,539  | )              |   | (2,366  | )
|Acquisition of business, net of cash received                           |  |                        | (1,848  | )              |   |        |  
|                                                                        |  |                        |         |                |   |         |  
|Net cash used by investing
activities                                   |  |                        | (3,387  | )              |   | (2,366  | )
|                                                                        |  |                        |         |                |   |         |  
|Cash flows from financing
activities:                                   |  |                        |         |                |   |         |  
|Proceeds from line of credit                                            |  |                        |        |                |   | 28,328  |  
|Payments of long-term debt                                              |  |                        | (297    | )              |   | (279    | )
|Payments of capital lease obligations                                   |  |                        | (1,045  | )              |   | (1,561  | )
|                                                                        |  |                        |         |                |   |         |  
|Net cash (used) provided by
financing activities                        |  |                        | (1,342  | )              |   | 26,488  |  
|                                                                        |  |                        |         |                |   |         |  
|Net decrease in cash and
cash equivalents                               |  |                        | (61,009 | )              |   | (22,917 | )
|Cash and cash equivalents,
beginning of year                            |  |                        | 71,514  |                |   | 30,055  |  
|                                                                        |  |                        |         |                |   |         |  
|Cash and cash equivalents,
end of period                                |  | $                      | 10,505  |                | $ | 7,138   |  
|                                                                        |  |                        |         |                |   |         |  
|Supplemental disclosure of
non-cash investing and financing activities: |  |                        |         |                |   |         |  
|Issuance of deferred shares                                             |  | $                      |        |                | $ | 465     |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.


5

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TRANS WORLD
ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2010 and August 1, 2009

Note 1. 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, primarily under the
names f.y.e. for your entertainment and Suncoast Motion Pictures, and
e-commerce sites, www.fye.com, www.wherehouse.com, www.secondspin.com and
www.suncoast.com in a single industry segment. As of July 31, 2010, the Company
operated 534 stores totaling approximately 3.6 million square feet in the
United States, the District of Columbia, the Commonwealth of Puerto Rico and
the U.S. Virgin Islands.

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 (see Note 7 for further details on the 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
and the related terms on the purchases and capital expenditures. Management
believes it will have adequate resources to fund its cash needs for at least
the next twelve months, including its capital spending, its seasonal increase
in merchandise inventory and other operating cash requirements and commitments.
Management has considered and implemented many initiatives as part of its
operating plan for 2010 and beyond including a focus on the operation of a core
base of stores, optimized pricing strategies and further streamlining
    its operations. During Fiscal 2009, 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 2009, management closed 133 stores, with an additional
    28 stores closed in the first twenty-six weeks of 2010, and plans to continue
    the careful evaluation of store profitability of its remaining stores in
    consideration of lease terms, conditions and expirations. In addition, the
    Company plans to close its distribution facility in Carson, California during
    Fiscal 2010.


Seasonality:


The Companys business is seasonal in nature, with the fourth fiscal
quarter constituting the Companys peak selling period. In 2009, the fourth
fiscal quarter accounted for approximately 36% of annual sales. In anticipation
of increased sales activity during these months, the Company purchases
additional inventory and hires additional, temporary employees to supplement
its permanent store sales staff. If, for any reason, the Companys net sales
were below seasonal norms during the fourth quarter (which the Company has
experienced during its three most recent fourth quarters), the Companys
operating results, particularly operating and net income, would be adversely
affected. Additionally, quarterly sales results, in general, are affected by
the timing of new product releases, store closings and the performance of
existing stores.


6

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The accompanying unaudited condensed 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 interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in these unaudited condensed consolidated
financial statements reflects all normal, recurring adjustments which, in the
opinion of management, are necessary for the fair presentation of such
financial statements. 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 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. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to rules and regulations applicable to
interim financial statements.

The information presented in the accompanying unaudited condensed
consolidated balance sheet as of January 30, 2010 has been derived from the
Companys January 30, 2010 audited consolidated financial statements. All other
information has been derived from the Companys unaudited condensed
consolidated financial statements as of and for the thirteen and twenty-six
weeks ended July 31, 2010 and August 1, 2009. These unaudited condensed consolidated
financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended January 30, 2010.

The Companys significant accounting policies are the same as those
described in Note 1 to the Companys Consolidated Financial Statements on Form
10-K for the fiscal year ended January 30, 2010.

Note 3. Recently Adopted 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.

Note 4. 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 includes five store leases and
equipment, inventory and all related trade names and trademarks (the
Acquisition). The purchase price consideration was $1.8 million.

The Acquisition has been accounted for in accordance with ASC Topic
805, Business Combinations (ASC Topic 805). Accordingly, the total purchase
price has been allocated on a provisional basis 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.

7

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The fair value of the net assets acquired was approximately $2.2
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 $0.4 million as a gain
on bargain purchase. The gain on bargain purchase of $0.4 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                |  |   | 2,502 |  
|Other assets             |  |   | 9     |  
|Other
liabilities        |  |   | (312  | )
|                         |  |   |       |  
|Net assets acquired      |  |   | 2,210 |  
|Less: Purchase price     |  |   | 1,860 |  
|                         |  |   |       |  
|Gain on
bargain purchase |  | $ | 350   |  
|                         |  |   |       |  

Under ASC 805-10, 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 $277,000 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.

In the period between the Acquisition Date and July 31, 2010, Value
Music generated approximately $3.3 million of net sales and $0.5 million of net
income. The Company has included the operating results of Value Music in its
consolidated financial statements since the Acquisition Date.

8

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

|                                         |  |                      |         |                        |   |               |   |                |         |   |   |         |  
|---------------------------------------- |  | -------------------- | ------- | ---------------------- | - | ------------- | - | -------------- | ------- | - | - | ------- | -
|                                         |  | Thirteen Weeks Ended |         | Twenty-six Weeks Ended |  
|                                         |  |                      |         |                        |  
|(In thousands, except per share amounts) |  | July 31,
2010        |         | August 1,
2009         |   | July 31,
2010 |   | August 1,
2009 |        
|                                         |  |                      |         |                        |   |               |   |                |        
|Net Sales                                |  | $                    | 135,804 |                        | $ | 168,897       |   | $              | 293,766 |   | $ | 363,297 |  
|Net Loss                                 |  | $                    | (15,781 | )                      | $ | (17,220       | ) | $              | (27,222 | ) | $ | (30,513 | )
|Diluted Loss
per Share                   |  | $                    | (0.50   | )                      | $ | (0.55         | ) | $              | (0.87   | ) | $ | (0.97   | )

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 5. Stock Based Compensation

During the thirteen weeks ended July 31, 2010, the Company recognized
income of $0.1 million for stock-based compensation. Actual forfeitures of
equity based awards were greater than estimated forfeitures resulting in the
reversal of previously accrued compensation costs. Total stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the thirteen weeks ended August 1, 2009 was $0.7 million before
income taxes. No deferred tax benefit was recorded against stock-based
compensation expense for the thirteen weeks ended July 31, 2010 and August 1,
2009.

Total stock-based compensation expense recognized in the condensed
consolidated statements of operations for the twenty-six weeks ended July 31,
2010 and August 1, 2009 was $0.4 million and $1.4 million, respectively, before
income taxes. No deferred tax benefit was recorded against stock-based
compensation expense for the twenty-six weeks ended July 31, 2010 and August 1,
2009.

As of July 31, 2010, there was approximately $0.9 million of
unrecognized compensation cost related to stock awards that is expected to be
recognized as expense over a weighted average period of 1.3 years.

As of July 31, 2010, stock awards authorized for issuance under the
Companys plans total 20.6 million. Of these awards authorized for issuance,
7.2 million were granted and are outstanding, 5.7 million of which were vested
and exercisable. Awards available for future grants at July 31, 2010 were 2.5
million.

The table below outlines the assumptions that the Company used to
estimate the fair value of stock based awards granted during the twenty-six
weeks ended July 31, 2010:

|                                                                          |  |                                       |      |  
|------------------------------------------------------------------------- |  | ------------------------------------- | ---- | -
|                                                                          |  |                                       |     
|                                                                          |  | Twenty-six
weeks ended 
July 31, 2010 |     
|                                                                          |  |                                       |     
|Dividend yield                                                            |  |                                       | 0    | %
|Expected stock price
volatility                                           |  |                                       | 76.4 | %
|Risk-free interest rate                                                   |  |                                       | 2.13 | %
|Expected award life (in years)                                            |  |                                       | 5.45 |  
|Weighted average fair value
per share of awards granted during the period |  | $                                     | 1.37 |  

9

---



The following
table summarizes stock award activity during the twenty-six weeks ended July
31, 2010:

|                                 |  |                                         |            |                                    |   |                                             |  |  |     | 
|-------------------------------- |  | --------------------------------------- | ---------- | ---------------------------------- | - | ------------------------------------------- |  |  | --- | 
|                                 |  | Employee and Director Stock Award Plans |           
|                                 |  |                                         |           
|                                 |  | Number of
Shares Subject
To Award       |            | Weighted
Average
Exercise Price(1) |   | Weighted
Average
Remaining
Contractual
Term | 
|                                 |  |                                         |            |                                    |   |                                             | 
|Balance January 30, 2010         |  |                                         | 7,770,140  |                                    | $ | 7.91                                        |  |  | 4.0 | 
|Granted                          |  |                                         | 1,179,898  |                                    |   | 2.11                                        |  |  | 9.8 | 
|Exercised                        |  |                                         |           |                                    |   |                                            |  |  |    | 
|Vested deferred shares issued(2) |  |                                         | (29,090    | )                                  |   |                                            |  |  |    | 
|Forfeited                        |  |                                         | (180,956   | )                                  |   | 5.51                                        |  |  |    | 
|Expired                          |  |                                         | (1,516,785 | )                                  |   | 9.38                                        |  |  |    | 
|                                 |  |                                         |            |                                    |   |                                             | 
|Balance July 31, 2010            |  |                                         | 7,223,207  |                                    | $ | 6.89                                        |  |  | 4.5 | 
|                                 |  |                                         |            |                                    |   |                                             | 
|Exercisable at July 31, 2010     |  |                                         | 5,661,707  |                                    | $ | 7.72                                        |  |  | 3.2 | 
|                                 |  |                                         |            |                                    |   |                                             | 

|    |                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Exercise price ranges
exclude the impact of deferred or restricted stock units that were granted at
an exercise price of $0. During the twenty six weeks ended July 31, 2010,
279,898 restricted stock units were granted.
|(2) | Deferred
shares are exchangeable for common shares on a 1:1 basis and therefore have
an exercise price of $0.                                                                                                             

The intrinsic value of stock awards outstanding and exercisable as of
July 31, 2010 was $1.0 million and $123,000, respectively.

Note 6. Defined Benefit Plans

The Company maintains a non-qualified Supplemental Executive Retirement
Plan (SERP) for certain executive officers of the Company. The SERP provides
eligible executives defined pension benefits that supplement benefits under
other retirement arrangements.

The Company had previously provided the Board of Directors with a
noncontributory, unfunded retirement plan (Director Retirement Plan) that
paid retired directors an annual retirement benefit. 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
of the Companys Common Stock. 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
their benefits to deferred shares.

The measurement date for the SERP and Director Retirement Plan is
fiscal year end, using actuarial techniques which reflect estimates for
mortality, turnover and expected retirement. In addition, management makes
assumptions concerning future salary increases. Discount rates are generally
established as of the measurement date using theoretical bond models that
select high-grade corporate bonds with maturities or coupons that correlate to
the expected payouts of the applicable liabilities.

10

---



The following represents the components of the net periodic pension
cost related to the Companys SERP and Director Retirement Plan for the
respective periods:

|                                   |  |                      |      |                        |   |               |   |                |      |   |   |      |  
|---------------------------------- |  | -------------------- | ---- | ---------------------- | - | ------------- | - | -------------- | ---- | - | - | ---- | -
|                                   |  | Thirteen
weeks ended |      | Twenty-six
weeks ended |  
|                                   |  |                      |      |                        |  
|                                   |  | July 31,
2010        |      | August 1,
2009         |   | July 31,
2010 |   | August 1,
2009 |     
|                                   |  |                      |      |                        |   |               |   |                |     
|                                   |  | (in
thousands)       |      | (in
thousands)         |  
|Service cost                       |  | $                    | 33   |                        | $ | 49            |   | $              | 67   |   | $ | 98   |  
|Interest cost                      |  |                      | 163  |                        |   | 200           |   |                | 326  |   |   | 400  |  
|Amortization of prior
service cost |  |                      | 86   |                        |   | 85            |   |                | 171  |   |   | 170  |  
|Amortization of net gain           |  |                      | (171 | )                      |   | (86           | ) |                | (342 | ) |   | (172 | )
|                                   |  |                      |      |                        |   |               |   |                |      |   |   |      |  
|Net periodic pension cost          |  | $                    | 111  |                        | $ | 248           |   | $              | 222  |   | $ | 496  |  
|                                   |  |                      |      |                        |   |               |   |                |      |   |   |      |  

During the twenty-six weeks ended July 31, 2010, the Company did not
make any cash contributions to the SERP or the Director Retirement Plan, and
presently expects to pay approximately $69,000 in benefits relating to the SERP
and $29,000 in benefits relating to the Director Retirement Plan during Fiscal
2010.

Note 7. Line of
Credit

In April 2010, the Company entered into a $100 million amended and
restated Credit Agreement (Amended Credit Facility). The principal amount of
all outstanding loans under the Amended 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 Company is
compliant with all covenants. The Amended Credit Facility also includes
customary events of default, including, among other things, material adverse
effect, bankruptcy, and certain changes of control. The Amended Credit Facility
also contains other terms and conditions, including prohibiting the payment of
dividends and covenants around the number of store closings. It also changed
the formula for interest rates.

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.

The availability under the Amended Credit Facility is subject to
limitations based on sufficient inventory levels. Based on inventory levels at
the end of the quarter, the availability under the credit facility was $85.4
million as of July 31, 2010. As of July 31, 2010, the Company didnt have
any borrowings under the revolving credit facility and had $1.1 million in
outstanding letter of credit obligations. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended July 31, 2010 was 6.75%.

As of August 1, 2009, the Company had borrowed $28.3 million under
the Credit Facility, had $0.7 million in outstanding letter of credit
obligations under the Credit Facility and $104 million was

11

---



available for borrowing. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended August 1, 2009 was 1.34%.

Note 8. Comprehensive
Loss

Other accumulated comprehensive income that the Company reports in the
condensed consolidated balance sheets represents the excess of accrued pension
liability over accrued benefit cost, net of taxes, associated with the
Companys defined benefit plans. Comprehensive loss was equal to net loss for
the thirteen and twenty-six weeks ended July 31, 2010 and August 1, 2009.

Note 9. Depreciation
and Amortization of Fixed Assets

Depreciation and amortization of fixed assets included in the condensed
consolidated statements of operations is as follows:

|                                             |  |                      |       |                        |   |               |  |                |       |  |   |       | 
|-------------------------------------------- |  | -------------------- | ----- | ---------------------- | - | ------------- |  | -------------- | ----- |  | - | ----- | 
|                                             |  | Thirteen
Weeks Ended |       | Twenty-six
Weeks Ended |  
|                                             |  |                      |       |                        |  
|                                             |  | July 31,
2010        |       | August 1,
2009         |   | July 31,
2010 |  | August 1,
2009 |      
|                                             |  |                      |       |                        |   |               |  |                |      
|                                             |  | (in thousands)       |       | (in thousands)         |  
|Cost of sales                                |  | $                    | 307   |                        | $ | 372           |  | $              | 622   |  | $ | 756   | 
|Selling, general and
administrative expenses |  |                      | 2,788 |                        |   | 3,653         |  |                | 5,651 |  |   | 7,314 | 
|                                             |  |                      |       |                        |   |               |  |                |       |  |   |       | 
|Total                                        |  | $                    | 3,095 |                        | $ | 4,025         |  | $              | 6,273 |  | $ | 8,070 | 
|                                             |  |                      |       |                        |   |               |  |                |       |  |   |       | 

Note 10. Loss Per
Share

Basic loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock (net of any assumed repurchases)
that then shared in the earnings of the Company, if any. It is computed by
dividing net earnings 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.

For the thirteen and twenty-six week periods ended July 31, 2010, and
August 1, 2009, the impact of outstanding stock awards was not considered
because the Company reported a net loss and such impact would be anti-dilutive.
Accordingly, basic and diluted loss per share is the same. Total anti-dilutive
stock awards for the thirteen weeks ended July 31, 2010 and August 1, 2009 were
approximately 4.7 million and 6.5 million, respectively. Total anti-dilutive
stock awards for the twenty-six weeks ended July 31, 2010 and August 1, 2009
were approximately 4.9 million and 7.2 million, respectively.

12

---



TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 2 - Managements Discussion and Analysis of Financial Condition andResults of OperationsJuly 31, 2010 and August 1, 2009

Managements Discussion and Analysis of Financial Condition and Results
of Operations provides information that the Companys management believes
necessary to achieve an understanding of its financial statements 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, home video and video
games 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 the
unaudited condensed consolidated financial statements and related notes
included elsewhere in this report and the audited financial statements included
in the Companys Annual Report on Form 10-K for the fiscal year ended January
30, 2010.

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,
stock-based compensation 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 Notes to the Consolidated Financial Statements on Form 10-K
for the year ended January 30, 2010 includes a summary of the significant
accounting policies and methods used by the Company in the preparation of its
condensed consolidated financial statements. There have been no material
changes or modifications to the policies since January 30, 2010.

At July 31, 2010, the Company operated 534 stores totaling
approximately 3.6 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 stores offer predominantly entertainment software, including music,
video and video games and related products. In total, these categories
represented 86% of the Companys sales in the twenty-six weeks ended July 31,
2010. The balance of categories, including software accessories, electronics
and trend products represented 14% of the Companys sales in the twenty-six
weeks ended July 31, 2010.

The Companys results have been, and will continue to be, dependent
upon managements ability to understand general economic and business trends
and to manage the business in response to those trends. Management monitors a
number of key performance indicators to evaluate its performance, including:

Sales
and Comparable Store Sales: The Company measures the
rate of comparable store sales change. 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

13

---



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. The Company further analyzes
sales by store format and by product category.

Cost
of Sales and Gross Profit: Gross profit is impacted
primarily by the mix of products sold, by discounts negotiated with vendors and
discounts offered to customers. The Company records its distribution and
product shrink expenses in cost of sales. Distribution expenses include those
costs associated with purchasing, receiving, shipping, inspecting and
warehousing product and costs associated with product returns to vendors. Cost
of sales further includes obsolescence charges and is reduced by the benefit of
vendor allowances, net of direct reimbursements of expense.

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 disclosed in Note 8 to the condensed
consolidated financial statements). SG&A expenses also include asset
impairment charges and write-offs, 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 relevant indicators of its
financial position. See Liquidity and Capital Resources for further discussion
of these items.

RESULTS
OF OPERATIONS
Thirteen and Twenty-six Weeks Ended July 31, 2010
Compared to the Thirteen and Twenty-six Weeks Ended August 1, 2009

The following table sets forth a period over period comparison of the
Companys sales for the thirteen weeks and twenty-six weeks ended July 31, 2010
and August 1, 2009, by category:

|                |  |                      |         |                        |   |         |   |                |         |   |                  |     |               |  |                |    |        |         |   |   |         |                  |   |         |   |  |     |    |  |     |   
|--------------- |  | -------------------- | ------- | ---------------------- | - | ------- | - | -------------- | ------- | - | ---------------- | --- | ------------- |  | -------------- | -- | ------ | ------- | - | - | ------- | ---------------- | - | ------- | - |  | --- | -- |  | --- | --
|                |  | Thirteen
weeks ended |         | Twenty-six
weeks ended |  
|                |  |                      |         |                        |  
|                |  | July 31,
2010        |         | August 1,
2009         |   | Change  |   |                | %       |   | Comp
Store
Sales |     | July 31,
2010 |  | August 1,
2009 |    | Change |         |   | % |         | Comp
Store
Sales |  
|                |  |                      |         |                        |   |         |   |                |         |   |                  |     |               |  |                |    |        |         |   |   |        
|                |  | (in
thousands)       |         |                        |   |         |   | (in
thousands) |         |   |                  |     |              
|                |  |                      |         |                        |   |         |   |                |         |   |                  |     |              
|Net sales       |  | $                    | 135,804 |                        | $ | 165,746 |   | $              | (29,942 | ) |                  | (18 | %)            |  | (2             | %) | $      | 292,342 |   | $ | 357,179 |                  | $ | (64,837 | ) |  | (18 | %) |  | (2  | %)
|As a % of sales |  |                      |         |                        |   |         |   |                |         |   |                  |     |               |  |                |    |        |         |   |   |         |                  |   |         |   |  |     |    |  |     |   
|Music           |  |                      | 38      | %                      |   | 38      | % |                |         |   |                  |     |               |  | (3             | %) |        | 37      | % |   | 37      | %                |   |         |   |  |     |    |  | (2  | %)
|Home Video      |  |                      | 42      | %                      |   | 41      | % |                |         |   |                  |     |               |  | 3              | %  |        | 44      | % |   | 42      | %                |   |         |   |  |     |    |  | 2   | % 
|Video Games     |  |                      | 5       | %                      |   | 8       | % |                |         |   |                  |     |               |  | (37            | %) |        | 5       | % |   | 8       | %                |   |         |   |  |     |    |  | (37 | %)
|Other           |  |                      | 15      | %                      |   | 13      | % |                |         |   |                  |     |               |  | 7              | %  |        | 14      | % |   | 13      | %                |   |         |   |  |     |    |  | 3   | % 
|                |  |                      |         |                        |   |         |   |                |         |   |                  |     |               |  |                |    |        |         |   |   |         |                  |   |         |   |  |     |    |  |     |   
|Store Count:    |  |                      |         |                        |   |         |   |                |         |   |                  |     |               |  |                |    |        | 534     |   |   | 697     |                  |   | (163    | ) |  | (23 | %) |  |     |   

Net
sales.Sales decreased 18% in the thirteen and
twenty-six week periods ending July 31, 2010, respectively. The decrease in
total sales is due to comparable store sales decline of 2% for the thirteen and
twenty-six week periods ended July 31, 2010 and a decline of 23% in the number
of stores in operation as compared to the same periods last year.

Music:


The Companys stores and Internet websites offer a wide range of
compact discs (CDs) and music DVDs across most music genres, including new
releases from current artists as well as an extensive


14

---



catalog of music from past periods and artists. The music category
represented 38% and 37% of total net sales for the thirteen and twenty-six
weeks ended July 31, 2010, respectively.

During the thirteen and twenty-six weeks ended July 31, 2010, music
sales in comparable stores decreased 3% and 2%, respectively, versus the
thirteen and twenty-six weeks ended August 1, 2009. The decrease is related to
continued industry declines. Total CD unit sales industry-wide were down 22%
during the period corresponding to the Companys second fiscal quarter.

Home Video:


The Company offers DVDs and high definition DVDs (Bluray) in all of
its stores. Comparable store sales in the video category increased 3% and 2%
during the thirteen and twenty-six week periods ending July 31, 2010,
respectively. For the quarter, the industry was down 9%.


Video Games:


The 37% comparable store sales decline in video games was due to a
reduction in the number of stores carrying games. During Fiscal 2009, the
Company eliminated the game category in over 200 stores. As of quarter-end, 135
of our stores carried games compared to 360 a year ago. Video game comparable
stores sales in the 135 stores carrying games going forward were down 21%.


Other:


The Company offers accessory items for the use, care and storage of
entertainment software, along with electronics and trend products. For the
thirteen and twenty-six weeks ended July 31, 2010, comparable store net sales
increased 7% and 3% for these categories, respectively.


Gross Profit.The
following table sets forth a period over period comparison of the Companys
gross profit:

|                |  |                                    |        |                 |   |                                      |   |        |         |                |  |               |    |   |        |   |   |         |   |    |        |   |  |     |   
|--------------- |  | ---------------------------------- | ------ | --------------- | - | ------------------------------------ | - | ------ | ------- | -------------- |  | ------------- | -- | - | ------ | - | - | ------- | - | -- | ------ | - |  | --- | --
|                |  | Thirteen
weeks ended(in
thousands) |        | Change          |   | Twenty-six
weeks ended(in
thousands) |   | Change |        
|                |  |                                    |        |                 |   |                                      |   |        |        
|                |  | July 31, 
2010                     |        | August 1, 
2009 |   | $                                    |   | %      |         | July 31, 
2010 |  | August 1,2009 |    | $ |        | % |  
|                |  |                                    |        |                 |   |                                      |   |        |         |                |  |               |    |   |        |   |  
|Gross Profit    |  | $                                  | 45,729 |                 | $ | 58,770                               |   | $      | (13,041 | )              |  | (22           | %) | $ | 97,253 |   | $ | 124,521 |   | ($ | 27,268 | ) |  | (22 | %)
|               
|As a % of sales |  |                                    | 33.7   | %               |   | 35.5                                 | % |        |         |                |  |               |    |   | 33.3   | % |   | 34.9    | % |    |        |   |  |     |   

The decrease
in gross profit dollars of 22% in the thirteen and twenty-six weeks ended July
31, 2010 as compared to the same period last year is due to the decline in
total sales and a 180 basis point decline in gross profit as a percentage of
sales.

The decrease in gross profit as a percentage of sales for the
twenty-six week periods ended July 31, 2010 reflects lower vendor allowances
and higher clearance markdowns this year versus last year.

15

---



Selling, General & Administrative
Expenses (SG&A). The following table sets
forth a period over period comparison of the Companys SG&A:

|                |  |                                    |        |                 |   |                                      |   |        |         |                |  |                 |   |   |         |   |   |         |   |   |         |   |  |      |  
|--------------- |  | ---------------------------------- | ------ | --------------- | - | ------------------------------------ | - | ------ | ------- | -------------- |  | --------------- | - | - | ------- | - | - | ------- | - | - | ------- | - |  | ---- | -
|                |  | Thirteen
weeks ended(in
thousands) |        | Change          |   | Twenty-six
weeks ended(in
thousands) |   | Change |        
|                |  |                                    |        |                 |   |                                      |   |        |        
|                |  | July 31, 
2010                     |        | August 1, 
2009 |   | $                                    |   | %      |         | July 31, 
2010 |  | August 1, 
2009 |   | $ |         | % |  
|                |  |                                    |        |                 |   |                                      |   |        |         |                |  |                 |   |   |         |   |  
|SG&A            |  | $                                  | 60,554 |                 | $ | 75,767                               |   | $      | (15,213 | )              |  | (20%            | ) | $ | 122,732 |   | $ | 155,126 |   | $ | (32,394 | ) |  | (21% | )
|                |  |                                    |        |                 |   |                                      |   |        |         |                |  |                 |   |   |         |   |   |         |   |   |         |   |  |      |  
|As a % of sales |  |                                    | 44.6   | %               |   | 45.7                                 | % |        |         |                |  |                 |   |   | 42.0    | % |   | 43.4    | % |   |         |   |  |      |  

SG&A expenses for the thirteen weeks ended July 31, 2010 decreased
$15.2 million, or 20% on the net sales decline of 18%. The decrease is
primarily due to lower overhead expenses associated with the decrease in store
count, lower depreciation expense due to lower store count and the write-down
of fixed assets at underperforming locations during the fourth quarter of 2009
and lower variable selling expenses on the sales decline.

SG&A expenses for the twenty-six weeks ended July 31, 2010
decreased $32.4 million, or 21% on the net sales decline of 18%. The decrease
is primarily due to lower overhead expenses associated with the decrease in
store count, lower depreciation expense due to lower store count and the
write-down of fixed assets at underperforming locations during the fourth
quarter of 2009 and lower variable selling expenses on the sales decline.
Included in SG&A expenses is a gain on bargain purchase of $350,000 related
to the acquisition of five Value Music stores, offset by for the twenty-six
week period of 2010 is $277,000 in acquisition costs.

Interest Expense, net.Interest
expense, net was $0.8 million and $1.5 million during the thirteen and
twenty-six week periods ended July 31, 2010 compared to $0.7 million and $1.4
million for the thirteen and twenty-six week periods ended August 1, 2009,
respectively.

Income
Tax Expense (Benefit).As of January 30, 2010 and
January 31, 2009, the Company had incurred cumulative three-year losses. Based
on the cumulative three-year losses and other available objective evidence,
management concluded that a full valuation allowance should be recorded against
the Companys deferred tax assets. Due to the recognition of a full valuation
allowance as of January 30, 2010, the projected net loss for the year ending
January 29, 2011 and the net loss incurred for the twenty-six weeks ended July
31, 2010, the Company did not provide a current tax benefit for the net loss
incurred for this thirteen week period.

For the twenty-six weeks ended August 1, 2009, the tax benefit
associated with the quarter-specific items is primarily attributed to the net
impact of the interest accrual related to uncertain tax positions, the
reduction of tax reserves due to a tax examination settlement and state taxes
based on modified gross receipts incurred during this period.

For all other periods presented, the tax expense associated with the
quarter-specific items is primarily attributed to the net impact of the
interest accrual related to uncertain tax positions and state taxes based on
modified gross receipts incurred during this period.

16

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

|                             |  |                      |         |                        |   |                |   |                 |         |   |   |         |  
|---------------------------- |  | -------------------- | ------- | ---------------------- | - | -------------- | - | --------------- | ------- | - | - | ------- | -
|                             |  | Thirteen
weeks ended |         | Twenty-six
weeks ended |  
|                             |  |                      |         |                        |  
|(in
thousands)               |  | July 31, 
2010       |         | August 1, 
2009        |   | July 31, 
2010 |   | August 1, 
2009 |        
|                             |  |                      |         |                        |   |                |   |                 |        
|Loss before income tax       |  | $                    | (15,640 | )                      | $ | (17,681        | ) | $               | (26,983 | ) | $ | (31,991 | )
|                            
|Income tax expense
(benefit) |  |                      | 141     |                        |   | 74             |   |                 | 215     |   |   | (499    | )
|                             |  |                      |         |                        |   |                |   |                 |         |   |   |         |  
|Net loss                     |  | $                    | (15,781 | )                      | $ | (17,755        | ) | $               | (27,198 | ) | $ | (31,492 | )
|                             |  |                      |         |                        |   |                |   |                 |         |   |   |         |  

Loss before income tax benefit decreased $2.0 million to $15.6 million
for the second quarter of 2010, from $17.7 million last year. For the thirteen
weeks ended July 31, 2010, the Companys net loss decreased $2.0 million, to
$15.8 million from $17.8 million for the thirteen weeks ended August 1, 2009.

For the twenty-six weeks ended July 31, 2010, the loss before income
taxes decreased $5.0 million to $27.0 million from $32.0 million last year. The
Companys net loss decreased $4.3 million to $27.2 million from $31.5 million
for the twenty-six weeks ended August 1, 2009.

17

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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 (see Note 7 for further details on the 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 and the related terms on the purchases and
capital expenditures. Management believes it will have adequate resources to
fund its cash needs for at least the next twelve months, including its capital
spending, its seasonal increase in merchandise inventory and other operating
cash requirements and commitments. Management has considered and implemented many initiatives
as part of its operating plan for 2010 and beyond including
a focus on the operation of a core base of stores, optimized pricing strategies and further
streamlining of operations. During Fiscal 2009, 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 2009, management closed 133 stores, with an additional
28 stores closed in the first twenty-six weeks of 2010, and plans to continue
the careful evaluation of store profitability of its remaining stores in
consideration of lease terms, conditions and expirations. In addition, the
Company plans to close its distribution facility in Carson, California during
Fiscal 2010.

The following table sets forth a summary of key components of cash flow
and working capital for each of the twenty-six weeks ended July 31, 2010 and
August 1, 2009:

|                          |  |                        |         |                 |   |         |   |   |         |  
|------------------------- |  | ---------------------- | ------- | --------------- | - | ------- | - | - | ------- | -
|                          |  | Twenty-six
weeks ended |         | Change          |  
|                          |  |                        |         |                 |  
|(in
thousands)            |  | July 31, 
2010         |         | August 1,

2009 |   | $       |  
|                          |  |                        |         |                 |   |         |  
|Operating
Cash Flows      |  | $                      | (56,280 | )               | $ | (47,039 | ) | $ | (9,241  | )
|Investing
Cash Flows      |  |                        | (3,387  | )               |   | (2,366  | ) |   | (1,021  | )
|Financing
Cash Flows      |  |                        | (1,342  | )               |   | 26,488  |   |   | (27,830 | )
|Capital
Expenditures      |  |                        | (1,539  | )               |   | (2,366  | ) |   | 827     |  
|                          |  |                        |         |                 |   |         |   |   |         |  
|Cash
and Cash Equivalents |  |                        | 10,505  |                 |   | 7,138   |   |   | 3,367   |  
|Merchandise
Inventory     |  |                        | 237,141 |                 |   | 320,413 |   |   | (83,272 | )
|Working
Capital           |  |                        | 156,230 |                 |   | 185,852 |   |   | (29,622 | )

The Company had cash and cash equivalents of $10.5 million at July 31,
2010, compared to $71.5 million at January 30, 2010 and $7.1 million at August
1, 2009. Merchandise inventory was $67 per square foot at July 31, 2010,
compared to $72 per square foot at August 1, 2009.

Cash used by operating activities was $56.3 million for the twenty-six
weeks ended July 31, 2010. The primary uses of cash during the twenty-six weeks
ended July 31, 2010 were a seasonal reduction of accounts payable, resulting in
a $31.9 million increase in net inventory (inventory less accounts payable) and
losses from operation. The Companys merchandise inventory and accounts payable
are heavily influenced by the seasonality of its business. A significant
reduction of accounts payable occurs annually in the fiscal first quarter,
reflecting payments for merchandise inventory sold during the prior years
holiday season.

18

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Cash used by investing activities was $3.4 million for the twenty-six
weeks ended July 31, 2010. The primary use of cash was $1.8 million for the acquisition
of Value Music.

Cash used by financing activities was $1.3 million for the twenty-six
weeks ended July 31, 2010 for the payment on long term debt on capital lease
obligations.

In April 2010, the Company entered into a $100 million amended and restated
Credit Agreement (Amended Credit Facility). The principal amount of all
outstanding loans under the Amended 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 Amended Credit Facility also contains other terms and conditions
including prohibiting the payment of dividends and covenants around the number
of store closings. It also changed the formula for interest rates.

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.

The availability under the Amended Credit Facility is subject to
limitations based on sufficient inventory levels. Based on inventory levels at
the end of the quarter, the availability under the credit facility was $85.4
million as of July 31, 2010. As of July 31, 2010, the Company didnt have
any borrowings under the revolving credit facility and had $1.1 million in
outstanding letter of credit obligations. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended July 31, 2010 was 6.75%.

As of August 1, 2009, the Company had borrowed $28.3 million under
the Credit Facility, had $0.7 million in outstanding letter of credit
obligations under the Credit Facility and $104 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen weeks ended August 1, 2009 was 1.34%.

We believe that cash provided by sales of merchandise inventory and
available borrowing capacity under our credit facility, which expires on April,
2013, will provide us with sufficient liquidity through the expiration of this
credit facility.

Capital
Expenditures.During the twenty-six weeks ended July
31, 2010, the Company made capital expenditures of $1.5 million. The Company
budgeted a total of $10 million for capital expenditures in 2010 and now expects
to spend between $5 million and $10 million.

19

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CRITICAL ACCOUNTING
POLICIES AND ESTIMATES

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.

Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations included in the Form 10-K for the year ended January 30,
2010 includes a summary of the critical accounting policies and methods used by
the Company in the preparation of its condensed consolidated financial
statements. There have been no material changes or modifications to the
policies since January 30, 2010.

Recently Issued
Accounting Pronouncements:

The Financial Accounting Standards Board (the FASB) has codified a
single source of U.S. Generally Accepted Accounting Principles (GAAP), the
Accounting Standards Codification. Unless needed to clarify a point to
readers, we will refrain from citing specific section references when
discussing application of accounting principles or addressing new or pending
accounting rule changes. 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.

TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION

Item 3 - Quantitative and Qualitative Disclosures about
Market Risk

To the extent the Company borrows under its 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
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%.If interest rates on the Companys 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. For a discussion of the Companys accounting
policies for financial instruments and further disclosures relating to
financial instruments, see Nature of Operations and Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year ended January 30, 2010. The
Company does not hold any derivative instruments and does not engage in hedging
activities.

20

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Item 4  Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Companys
Chief Executive Officer and Chief Financial Officer after evaluating the
effectiveness of the design and operation of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) and 15d-15(e)) as of July 31, 2010, have concluded that as
of such date the Companys disclosure controls and procedures were adequate and
effective and designed to ensure that material information relating to the
Company and its subsidiaries would be made known to such officers on a timely
basis.

(b) Changes in internal controls. There have been no changes in the
Companys internal controls over financial reporting that occurred during the
fiscal quarter covered by this quarterly report that have materially affected,
or are reasonably likely to materially affect, the Companys internal controls
over financial reporting.

21

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES

PART II - OTHER
INFORMATION

Item 1  Legal
Proceedings


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 and in the aggregate, will not have a
material adverse effect on the results of operations and financial condition of
the Company.


Item 1A  Risk
Factors


Risks relating to the Companys business and Common Stock are described
in detail in Item 1A of the Companys most recently filed Annual Report on Form
10-K for the year ended January 30, 2010.


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


None.


Item 3  Defaults
Upon Senior Securities


None.


Item 5  Other
Information


None.


22

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Item 6 - Exhibits

|                           |      |             |                                                                                                                       
|-------------------------- | ---- | ----------- | ----------------------------------------------------------------------------------------------------------------------
|(A) Exhibits -
Exhibit No. |      | Description
|                           |      |            
|                           | 31.1 |             | Chief Executive Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                      
|                           |      |             |                                                                                                                       
|                           | 31.2 |             | Chief Financial Officer certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                      
|                           |      |             |                                                                                                                       
|                           | 32   |             | Certification pursuant to 18 U.S.C Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

23

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SIGNATURES

Pursuant to
the requirements of the Securities and 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

|                  |  |                                                                                                       
|----------------- |  | ------------------------------------------------------------------------------------------------------
|September 9,
2010 |  | By: /s/ Robert J. Higgins                                                                             
|                  |  |                                                                                                       
|                  |  | Robert J.
Higgins                                                                                     
|                  |  | Chairman and
Chief Executive Officer                                                                  
|                  |  | (Principal
Executive Officer)                                                                         
|                  |  |                                                                                                       
|September 9,
2010 |  | By: /s/ John J. Sullivan                                                                              
|                  |  |                                                                                                       
|                  |  | John J.
Sullivan                                                                                      
|                  |  | Executive
Vice President and Chief Financial Officer (Principal Financialand Chief Accounting Officer)

24

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