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 AUGUST 1, 2009

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 x No 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 o          Accelerated
filer x
          Non-accelerated
filer o Smaller reporting companyo


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No 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,
31,395,439 shares outstanding as of August 29, 2009

---



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 - Financial Statements
(Unaudited)                                                                                     |  |                    | 
|                                                                                                                              |  |                    | 
|Condensed
Consolidated Balance Sheets at August 1, 2009, January 31, 2009 and August 2,
2008                                  |  | 3                  | 
|                                                                                                                              |  |                    | 
|Condensed
Consolidated Statements of Operations  Thirteen Weeks and Twenty-six Weeks
Ended August 1, 2009 and August 2, 2008 |  | 4                  | 
|                                                                                                                              |  |                    | 
|Condensed
Consolidated Statements of Cash Flows  Twenty-six Weeks Ended August 1, 2009
and August 2, 2008                    |  | 5                  | 
|                                                                                                                              |  |                    | 
|Notes
to 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                                                           |  | 21                 | 
|                                                                                                                              |  |                    | 
|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 4  Submission of Matters to a
Vote of Security Holders                                                                  |  | 22                 | 
|                                                                                                                              |  |                    | 
|Item 5  Other Information                                                                                                    |  | 22                 | 
|                                                                                                                              |  |                    | 
|Item 6 - Exhibits                                                                                                             |  | 23                 | 
|                                                                                                                              |  |                    | 
|Signatures                                                                                                                    |  | 24                 | 

2

---



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

|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | ----------------- | - | --------------- | - | - | -------- | -
|                                                                                                                                   |  | August 1,
2009 |          | January 31,
 2009 |   | August 2,
 2008 |  
|                                                                                                                                   |  |                |          |                   |   |                 |  
|ASSETS                                                                                                                             |  |                |          |                   |   |                 |   |   |          |  
|CURRENT ASSETS:                                                                                                                    |  |                |          |                   |   |                 |   |   |          |  
|Cash and cash equivalents                                                                                                          |  | $              | 7,138    |                   | $ | 30,055          |   | $ | 10,400   |  
|Merchandise inventory                                                                                                              |  |                | 320,413  |                   |   | 378,188         |   |   | 399,193  |  
|Income taxes receivable, net                                                                                                       |  |                |         |                   |   |                |   |   | 5,111    |  
|Other current assets                                                                                                               |  |                | 22,373   |                   |   | 21,376          |   |   | 13,982   |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|Total current assets                                                                                                               |  |                | 349,924  |                   |   | 429,619         |   |   | 428,686  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|NET FIXED
 ASSETS                                                                                                                  |  |                | 44,458   |                   |   | 50,437          |   |   | 71,779   |  
|OTHER ASSETS                                                                                                                       |  |                | 7,479    |                   |   | 6,980           |   |   | 10,116   |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|TOTAL ASSETS                                                                                                                       |  | $              | 401,861  |                   | $ | 487,036         |   | $ | 510,581  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|LIABILITIES                                                                                                                        |  |                |          |                   |   |                 |   |   |          |  
|CURRENT
 LIABILITIES:                                                                                                              |  |                |          |                   |   |                 |   |   |          |  
|Accounts payable                                                                                                                   |  | $              | 94,675   |                   | $ | 170,302         |   | $ | 115,121  |  
|Borrowings under line of credit                                                                                                    |  |                | 28,328   |                   |   |                |   |   | 35,465   |  
|Accrued expenses and other current
 liabilities                                                                                    |  |                | 37,823   |                   |   | 42,180          |   |   | 45,662   |  
|Current portion of long-term debt                                                                                                  |  |                | 584      |                   |   | 570             |   |   | 554      |  
|Current portion of capital lease
 obligations                                                                                      |  |                | 2,662    |                   |   | 3,178           |   |   | 3,069    |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|Total current liabilities                                                                                                          |  |                | 164,072  |                   |   | 216,230         |   |   | 199,871  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|LONG-TERM
 DEBT, less current portion                                                                                              |  |                | 2,693    |                   |   | 2,986           |   |   | 3,273    |  
|CAPITAL
 LEASE OBLIGATIONS, less current portion                                                                                   |  |                | 4,813    |                   |   | 5,858           |   |   | 7,475    |  
|OTHER
 LONG-TERM LIABILITIES                                                                                                       |  |                | 25,612   |                   |   | 26,947          |   |   | 31,786   |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|TOTAL LIABILITIES                                                                                                                  |  |                | 197,190  |                   |   | 252,021         |   |   | 242,405  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|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; 56,498,429, 56,372,101 and 56,372,101 shares issued,
 respectively) |  |                | 565      |                   |   | 564             |   |   | 564      |  
|Additional paid-in capital                                                                                                         |  |                | 307,306  |                   |   | 306,159         |   |   | 305,442  |  
|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 loss                                                                                               |  |                | 2,396    |                   |   | 2,396           |   |   | (1,625   | )
|Retained earnings                                                                                                                  |  |                | 111,959  |                   |   | 143,451         |   |   | 181,350  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                         |  |                | 204,671  |                   |   | 235,015         |   |   | 268,176  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                         |  | $              | 401,861  |                   | $ | 487,036         |   | $ | 510,581  |  
|                                                                                                                                   |  |                |          |                   |   |                 |   |   |          |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

3

---



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 |        
|                                                                          |  | August 1,
 2009      |         | August 2,
 2008 |                        |         | August 1,
 2009 |  | August 2,
 2008 |        
|                                                                          |  |                      |         |                 |                        |        
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|Net sales                                                                 |  | $                    | 165,746 |                 | $                      | 215,226 |                 |  | $               | 357,179 |   | $ | 447,778 |  
|Cost of sales                                                             |  |                      | 106,976 |                 |                        | 139,356 |                 |  |                 | 232,658 |   |   | 288,920 |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|Gross profit                                                              |  |                      | 58,770  |                 |                        | 75,870  |                 |  |                 | 124,521 |   |   | 158,858 |  
|Selling, general and administrative
 expenses                             |  |                      | 75,767  |                 |                        | 94,533  |                 |  |                 | 155,126 |   |   | 188,331 |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|Loss from operations                                                      |  |                      | (16,997 | )               |                        | (18,663 | )               |  |                 | (30,605 | ) |   | (29,473 | )
|Interest expense, net                                                     |  |                      | 684     |                 |                        | 986     |                 |  |                 | 1,386   |   |   | 1,879   |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|Loss before income taxes                                                  |  |                      | (17,681 | )               |                        | (19,649 | )               |  |                 | (31,991 | ) |   | (31,352 | )
|Income tax expense (benefit)                                              |  |                      | 74      |                 |                        | (419    | )               |  |                 | (499    | ) |   | (296    | )
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|Net loss                                                                  |  | $                    | (17,755 | )               | $                      | (19,230 | )               |  | $               | (31,492 | ) | $ | (31,056 | )
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|LOSS PER SHARE:                                                           |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|Basic and diluted loss per share                                          |  | $                    | (0.57   | )               | $                      | (0.62   | )               |  | $               | (1.00   | ) | $ | (1.00   | )
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |         |  
|Weighted average number of common shares
 outstanding  basic and diluted |  |                      | 31,394  |                 |                        | 31,212  |                 |  |                 | 31,345  |   |   | 31,188  |  
|                                                                          |  |                      |         |                 |                        |         |                 |  |                 |         |   |   |        

See Accompanying Notes to Condensed Consolidated
Financial Statements.

4

---



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

|                                                                         |  |                        |         |                |   |         |  
|------------------------------------------------------------------------ |  | ---------------------- | ------- | -------------- | - | ------- | -
|                                                                         |  | Twenty-six Weeks Ended |        
|                                                                         |  |                       
|                                                                         |  | August 1,
 2009        |         | August 2
 2008 |  
|                                                                         |  |                       
|Net cash
 used by operating activities                                   |  | $                      | (47,039 | )              | $ | (99,027 | )
|                                                                         |  |                        |         |                |   |         |  
|Cash flows
 from investing activities:                                   |  |                        |         |                |   |         |  
|Purchases of fixed assets                                                |  |                        | (2,366  | )              |   | (5,169  | )
|Net proceeds from sale of distribution
 facility                         |  |                        |        |                |   | 6,193   |  
|                                                                         |  |                        |         |                |   |         |  
|Net cash
 (used) provided by investing activities                        |  |                        | (2,366  | )              |   | 1,024   |  
|                                                                         |  |                        |         |                |   |         |  
|Cash flows
 from financing activities:                                   |  |                        |         |                |   |         |  
|Proceeds from line of credit                                             |  |                        | 28,328  |                |   | 35,465  |  
|Payments of long-term debt                                               |  |                        | (279    | )              |   | (263    | )
|Payments of capital lease obligations                                    |  |                        | (1,561  | )              |   | (1,456  | )
|Proceeds from the exercise of stock
options                              |  |                        |        |                |   | 2       |  
|                                                                         |  |                        |         |                |   |         |  
|Net cash provided by financing activities                                |  |                        | 26,488  |                |   | 33,748  |  
|                                                                         |  |                        |         |                |   |         |  
|Net decrease in cash and cash equivalents                                |  |                        | (22,917 | )              |   | (64,255 | )
|Cash and cash equivalents, beginning of
 year                            |  |                        | 30,055  |                |   | 74,655  |  
|                                                                         |  |                        |         |                |   |         |  
|Cash and cash equivalents, end of period                                 |  | $                      | 7,138   |                | $ | 10,400  |  
|                                                                         |  |                        |         |                |   |         |  
|Supplemental disclosure of non-cash
 investing and financing activities: |  |                        |         |                |   |         |  
|Issuance of deferred shares                                              |  | $                      | 465     |                | $ | 719     |  

See Accompanying Notes to Condensed Consolidated Financial Statements.

5

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
AUGUST 1, 2009 and August 2, 2008

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, www.samgoody.com and www.suncoast.com
in a single industry segment. As of August 1, 2009, the Company operated 697
stores totaling approximately 4.5 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 sales of merchandise
inventory and borrowing capacity under its 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. We believe the
cash generated from sales of merchandise inventory and borrowing capacity under
our Credit Facility will be sufficient to finance our working capital and
capital expenditure requirements for at least the next 12 months. The
Company expects to replace its current Credit Facility prior to the expiration
of the Credit Facility on January 6, 2011. Management has considered many
initiatives as part of the development of its operating plan for 2009 and beyond
that focus on the operation of a core base of stores, improved product
selection based on customer preferences and industry changes, as well as
further streamlining its operations. During Fiscal 2008, management carried out
certain strategic initiatives in its efforts to reduce operating costs such as
the closure of the Canton, OH distribution center, reduction of headcount at
the home office and its distribution centers, the closing of 101 stores, as
well as the elimination or curtailment of certain other general and
administrative expenses. Also, during the first half of Fiscal 2009, management
closed 15 stores and plans to continue its evaluation of store profitability of
the remaining 697 stores in consideration of lease terms, conditions and
expirations. As a result of these actions, the liquidation of the merchandise
inventory from closed stores and management of overall merchandise inventory
levels, management expects improvement in its operating cash flow during Fiscal
2009.

Seasonality:

The Companys
business is seasonal in nature, with the fourth fiscal quarter constituting the
Companys peak selling period. In Fiscal 2008, the fourth quarter accounted for
approximately 35% 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 two 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

---



Note 2: Basis of Presentation

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 31, 2009 has been derived from the Companys
January 31, 2009 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 August 1, 2009 and August 2, 2008. 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 31, 2009.

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 31, 2009.

Note 3. Recently Adopted Accounting
Pronouncements

Effective
February 1, 2009, the Company adopted FSP Emerging Issues Task Force (EITF)
No. 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP-EITF
No. 03-6-1). Under FSP-EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are considered participating securities and should be included in the
two-class method of computing earnings per share. The adoption of FSP-EITF
No. 03-6-1 did not have any impact on the determination or reporting of
our earnings per share.

Effective
February 1, 2009, the Company adopted FSP FAS No. 142-3, Determination of
the Useful Life of Intangible Assets (FSP FAS No. 142-3). FSP FAS
No. 142-3 amends the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, Goodwill and Other Intangible
Assets. The objective of FSP FAS No. 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair
value of the

7

---



asset under
SFAS No. 141 (revised 2007), Business Combinations and other U.S. GAAP.
The adoption of FSP FAS No. 142-3 did not have any significant impact on
our Consolidated Financial Statements.

Effective
February 1, 2009, the Company adopted SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an Amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 seeks to improve
financial reporting for derivative instruments and hedging activities by
requiring enhanced disclosures regarding their impact on financial position,
financial performance and cash flows. To achieve this increased transparency,
SFAS No. 161 requires (1) disclosure of the fair value of derivative
instruments and gains and losses in a tabular format; (2) disclosure of
derivative features that are credit risk-related; and
(3) cross-referencing within the footnotes. The adoption of SFAS
No. 161 did not have an impact on our Consolidated Financial Statements.

Effective
February 1, 2009, the Company adopted SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements  an Amendment of ARB
No. 51, (SFAS No. 160). SFAS No. 160 was issued to improve
the relevance, comparability and transparency of the financial information that
a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The adoption of
SFAS No. 160 did not have an impact on our Consolidated Financial
Statements.

In May 2009,
the FASB issued FASB Statement No. 165, Subsequent Events (FAS 165) effective
for interim financial periods ending after June 15, 2009. FAS 165 establishes
principles and requirements for subsequent events. FAS 165 defines the period
after the balance sheet date during which events or transactions that may occur
would be required to be disclosed in a companys financial statements. Public
entities are required to evaluate subsequent events through the date that
financial statements are issued. FAS 165 also provides guidelines in evaluating
whether or not events or transactions occurring after the balance sheet date
should be recognized in the financial statements. FAS 165 requires disclosure
of the date through which subsequent events have been evaluated. We have
evaluated subsequent events through the date of issuance of this report.

Note 4. Stock Based Compensation

Total
stock-based compensation expense recognized in the condensed consolidated
statements of operations for the thirteen weeks ended August 1, 2009 and August
2, 2008 was $0.7 million and $0.4 million, respectively, before income taxes.
No deferred tax benefit was recorded against stock-based compensation expense
for the thirteen weeks ended August 1, 2009 and August 2, 2008.

Total
stock-based compensation expense recognized in the condensed consolidated
statements of operations for the twenty-six weeks ended August 1, 2009 and
August 2, 2008 was $1.4 million and $0.7 million, respectively, before income
taxes. No deferred tax benefit was recorded against stock-based compensation
expense for the twenty-six weeks ended August 1, 2009 and August 2, 2008

As of August
1, 2009, there was approximately $1.3 million of unrecognized compensation cost
related to stock awards that is expected to be recognized as expense over a
weighted average period of 1.0 years.

Stock awards authorized for issuance under the Companys plans total
20.6 million. As of August 1, 2009, of the awards authorized for issuance, 8.0
million were granted and are outstanding, 6.3 million of

8

---



which were vested and exercisable. Awards available for future grants
at August 1, 2009 were 2.9 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 August 1, 2009:

|                                                                           |  |                                        |  |        |   | 
|-------------------------------------------------------------------------- |  | -------------------------------------- |  | ------ | - | 
|                                                                           |  |                                        |  |       
|                                                                           |  | Twenty-six weeks ended
 August 1, 2009 | 
|                                                                           |  |                                        |  |       
|Dividend
 yield                                                            |  |                                        |  | 0      | % | 
|Expected
 stock price volatility                                           |  |                                        |  | 76     | % | 
|Risk-free
 interest rate                                                   |  |                                        |  | 3.3    | % | 
|Expected
 award life (in years)                                            |  |                                        |  | 6.7    |   | 
|Weighted
 average fair value per share of awards granted during the period |  |                                        |  | $ 0.69 |   | 

The following
table summarizes stock award activity during the twenty-six weeks ended August
1, 2009:

|                                           |  |                                         |   |                                 |  |                                               |       |   |  |     |  | 
|------------------------------------------ |  | --------------------------------------- | - | ------------------------------- |  | --------------------------------------------- | ----- | - |  | --- |  | 
|                                           |  | Employee and Director Stock Award Plans
|                                           |  |                                        
|                                           |  | Number of
Shares Subject
To Award       |   | Weighted
Average
Exercise Price |  | Weighted
Average 
Remaining
Contractual 
Term |      
|                                           |  |                                         |  
|Balance
 January 31, 2009                  |  | 8,458,465                               |   |                                 |  | $                                             | 7.86  |   |  | 4.4 |  | 
|Granted**                                  |  | 297,398                                 |   |                                 |  |                                               | 0.06  |   |  | 9.7 |  | 
|Grant of
 director deferred shares*        |  | 50,866                                  |   |                                 |  |                                               | 0.00  | * |  | 9.8 |  | 
|Exercised**                                |  | (11,363                                 | ) |                                 |  |                                               | 0.00  |   |  |    |  | 
|Vested
 restricted/deferred shares issued* |  | (126,330                                | ) |                                 |  |                                               | 0.00  | * |  |    |  | 
|Forfeited                                  |  | (46,786                                 | ) |                                 |  |                                               | 2.98  |   |  |    |  | 
|Expired                                    |  | (669,733                                | ) |                                 |  |                                               | 13.30 |   |  |    |  | 
|                                           |  |                                         |   |                                 |  |                                               |       |   |  |     |  | 
|Balance
 August 1, 2009                    |  | 7,952,517                               |   |                                 |  |                                               | 7.23  |   |  | 4.5 |  | 
|                                           |  |                                         |   |                                 |  |                                               |       |   |  |     |  | 
|Exercisable
 at August 1, 2009             |  | 6,343,052                               |   |                                 |  | $                                             | 8.21  |   |  | 3.6 |  | 
|                                           |  |                                         |   |                                 |  |                                               |       |   |  |     |  | 

|   |                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | Restricted/deferred
 shares are exchangeable for common shares on a 1:1 basis and therefore have
 an exercise price of $0.                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                            
|** | Equity
 awards granted and exercised during the period included restricted stock and
 restricted stock units which have an exercise price of $0. During the quarter
 the Company granted 17,500 stock settled appreciation rights with an average
 exercise price of $0.98.

The intrinsic
value of stock awards exercised was $7,954 during the twenty-six weeks ended
August 1, 2009. The intrinsic value of stock awards outstanding as of August 1,
2009 was $760,000. The intrinsic value of stock awards exercisable as of August
1, 2009 was $56,000.

Note 5. Defined Benefit Plan

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

9

---



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.

The Company
accounts for the SERP and the Director Retirement Plan in accordance with the
provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. Effective February 3, 2008, the Company
adopted the measurement date provisions of SFAS No. 158 and, in accordance with
the requirements of SFAS No. 158, recorded a reduction in retained earnings of
$362 thousand during the first quarter of Fiscal 2008, representing the
increase in accrued benefits between the old measurement date of November 1,
2007 and February 2, 2008.

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 |  
|                                    |  |                      |     |                        |  
|                                    |  | August 1, 2009       |     | August 2, 2008         |   | August 1, 2009 |   | August 2, 2008 |     
|                                    |  |                      |     |                        |  
|                                    |  | (in
thousands)       |     | (in
thousands)         |  
|Service cost                        |  | $                    | 49  |                        | $ | 54             |   | $              | 98   |   | $ | 109 |  
|Interest
 cost                      |  |                      | 200 |                        |   | 223            |   |                | 400  |   |   | 446 |  
|Amortization
 of prior service cost |  |                      | 85  |                        |   | 86             |   |                | 170  |   |   | 171 |  
|Amortization
 of net gain           |  |                      | (86 | )                      |   | (1             | ) |                | (172 | ) |   | (1  | )
|                                    |  |                      |     |                        |   |                |   |                |      |   |   |     |  
|Net periodic
 pension cost          |  | $                    | 248 |                        | $ | 362            |   | $              | 496  |   | $ | 725 |  
|                                    |  |                      |     |                        |   |                |   |                |      |   |   |     |  

During the
twenty-six weeks ended August 1, 2009, the Company did not make any cash
contributions to the SERP or the Director Retirement Plan, and presently
expects to pay approximately $35,000 in benefits relating to the SERP and
$16,000 in benefits relating to the Director Retirement Plan during Fiscal
2009.

Note 6. Line of Credit

The Company has a five-year,
$150 million secured revolving credit facility with Bank of America, N.A.
(Credit Facility) that expires in January 2011. The Credit Facility contains
provisions governing additional indebtedness and acquisitions and is secured by
the Companys eligible inventory, proceeds from the sale of inventory and by
the stock of the Companys subsidiaries. The availability under the 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 $133 million as of August 1, 2009. 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%.

10

---



As of August
2, 2008, the Company had borrowed $35.5 million under the Credit Facility,
had $0.7 million in outstanding letter of credit obligations under the
Credit Facility and $113.8 million was available for borrowing. The weighted
average interest rate on outstanding borrowings for the thirteen weeks ended
August 2, 2008 was 3.52%.

Note 7. Comprehensive Loss

Other
accumulated comprehensive loss 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 August 1, 2009 and August 2, 2008.

Note 8. Depreciation and Amortization

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

|                                              |  |                      |       |                        |   |                |  |                |       |  |   |        | 
|--------------------------------------------- |  | -------------------- | ----- | ---------------------- | - | -------------- |  | -------------- | ----- |  | - | ------ | 
|                                              |  | Thirteen Weeks Ended |       | Twenty-six Weeks Ended |  
|                                              |  |                      |       |                        |  
|                                              |  | August 1, 2009       |       | August 2, 2008         |   | August 1, 2009 |  | August 2, 2008 |      
|                                              |  |                      |       |                        |   |                |  |                |      
|                                              |  | (in thousands)       |       | (in thousands)         |  
|Cost of
 sales                                |  | $                    | 372   |                        | $ | 391            |  | $              | 756   |  | $ | 794    | 
|Selling,
 general and administrative expenses |  |                      | 3,653 |                        |   | 5,482          |  |                | 7,314 |  |   | 10,998 | 
|                                              |  |                      |       |                        |   |                |  |                |       |  |   |        | 
|Total                                         |  | $                    | 4,025 |                        | $ | 5,873          |  | $              | 8,070 |  | $ | 11,792 | 
|                                              |  |                      |       |                        |   |                |  |                |       |  |   |        | 

The decline in
depreciation expense during the thirteen and twenty-six weeks ended August 1,
2009, compared to the same periods last year, is primarily due to lower store
count and the write-down of fixed assets at underperforming locations during
the fourth quarter of 2008.

11

---



Note 9. Earnings Per Share

Basic
earnings(loss) per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period. Diluted earnings(loss) 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, 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.

Weighted
average shares are calculated as follows:

|                                                      |  |                      |        |                        |  |                |  |                |        |  |  |        | 
|----------------------------------------------------- |  | -------------------- | ------ | ---------------------- |  | -------------- |  | -------------- | ------ |  |  | ------ | 
|                                                      |  | Thirteen Weeks Ended |        | Twenty-six Weeks Ended | 
|                                                      |  |                      |        |                        | 
|                                                      |  | August 1, 2009       |        | August 2, 2008         |  | August 1, 2009 |  | August 2, 2008 |       
|                                                      |  |                      |        |                        |  |                |  |                |       
|                                                      |  | (in thousands)       |        | (in thousands)         | 
|Weighted average common shares outstanding
  basic   |  |                      | 31,394 |                        |  | 31,212         |  |                | 31,345 |  |  | 31,188 | 
|Dilutive effect of stock based awards                 |  |                      |       |                        |  |               |  |                |       |  |  |       | 
|                                                      |  |                      |        |                        |  |                |  |                |        |  |  |        | 
|Weighted average common shares outstanding
  diluted |  |                      | 31,394 |                        |  | 31,212         |  |                | 31,345 |  |  | 31,188 | 
|                                                      |  |                      |        |                        |  |                |  |                |        |  |  |        | 
|                                                      |  |                      |        |                        |  |                |  |                |        |  |  |        | 
|Anti-dilutive stock options                           |  |                      | 6,523  |                        |  | 6,965          |  |                | 7,186  |  |  | 6,124  | 
|                                                      |  |                      |        |                        |  |                |  |                |        |  |  |        | 

For the
thirteen and twenty-six week periods ended August 1, 2009 and August 2, 2008,
the impact of outstanding stock options 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.

12

---



TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
August 1, 2009 and August 2, 2008

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 31, 2009.

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 31, 2009 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 31, 2009.

At August 1, 2009, the Company operated 697 stores
totaling approximately 4.5 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 87% of the Companys sales in the twenty-six weeks ended
August 1, 2009. The balance of categories, including software accessories,
electronics and trend products represented 13% of the Companys sales in the
twenty-six weeks ended August 1, 2009.

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:
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 months are considered

13

---



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 costs 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 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 August 1, 2009
Compared to the Thirteen and Twenty-six Weeks Ended August 2, 2008

The following table sets forth a period over period
comparison of the Companys sales for the thirteen weeks and twenty-six weeks
ended August 1, 2009 and August 2, 2008, by category:

|                |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 
|--------------- |  | -------------------- | - | ---------------------- | -------------- | ------ |  | -------- | - | ------------------ | --- | --------------- |  | --------------- | -- | ------ | -------- | - | -------------- | ------------------ | - |  | -------- | - |  | --- | -- |  | --- | -- | 
|                |  | Thirteen weeks ended |   | Twenty-six weeks ended |               
|                |  |                      |   |                        |               
|                |  | August
 1,
 2009     |   | August 2,
 2008        |                | Change |  | %        |   | Comp
 Store
 Sales |     | August 1,
 2009 |  | August 2,
 2008 |    | Change |          | % |                | Comp
 Store
 Sales |  
|                |  |                      |   |                        |                |        |  |          |   |                    |    
|                |  |                      |   |                        | (in thousands) |        |  |          |   |                    |     |                 |  |                 |    |        |          |   | (in thousands) |                    |   |  |          |   |  |     |    |  |    
|                |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 
|Net sales       |  | $165,746             |   |                        | $215,226       |        |  | $(49,480 | ) |                    | (23 | )%              |  | (15             | )% |        | $357,179 |   |                | $447,778           |   |  | $(90,599 | ) |  | (20 | )% |  | (12 | )% | 
|As a % of sales |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 
|Music           |  | 38                   | % |                        | 39             | %      |  |          |   |                    |     |                 |  | (18             | )% |        | 37       | % |                | 38                 | % |  |          |   |  |     |    |  | (15 | )% | 
|Home Video      |  | 41                   | % |                        | 39             | %      |  |          |   |                    |     |                 |  | (11             | )% |        | 42       | % |                | 40                 | % |  |          |   |  |     |    |  | (7  | )% | 
|Video Games     |  | 8                    | % |                        | 8              | %      |  |          |   |                    |     |                 |  | (23             | )% |        | 8        | % |                | 8                  | % |  |          |   |  |     |    |  | (18 | )% | 
|Other           |  | 13                   | % |                        | 14             | %      |  |          |   |                    |     |                 |  | (17             | )% |        | 13       | % |                | 14                 | % |  |          |   |  |     |    |  | (13 | )% | 
|                |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 
|Store
 Count:   |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        | 697      |   |                | 789                |   |  | (92      | ) |  | (12 | )% |  |     |    | 
|                |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 
|                |  |                      |   |                        |                |        |  |          |   |                    |     |                 |  |                 |    |        |          |   |                |                    |   |  |          |   |  |     |    |  |     |    | 

Sales. Sales decreased 23% and 20% in the thirteen and twenty-six week periods ending
August 1, 2009, respectively. The decrease in total sales is due to comparable
store sales decline of 15% and 12% for the thirteen and twenty-six week periods
ended August 1, 2009, respectively and a decline of 12% in the number of stores
in operation as compared to the same periods last year.

14

---



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 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 August 1, 2009, respectively.

During the
thirteen and twenty-six weeks ended August 1, 2009, music sales in comparable
stores decreased 18% and 15%, respectively, versus the thirteen and twenty-six
weeks ended August 2, 2008. The decrease is related to continued industry
declines. Total CD unit sales industry-wide were down 23% during the
corresponding period 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 decreased 11% and 7% during the
thirteen and twenty-six week periods ending August 1, 2009, respectively. For
the quarter, the industry was down 19%.

Video Games:

The Company
offers video game hardware and software in approximately half of its stores.
Comparable store net sales decreased 23% and 18% and for the thirteen and
twenty-six weeks ended August 1, 2009, respectively. Video games represented 8%
of our business for the thirteen and twenty-six weeks ended August 1, 2009. For
the quarter, the industry was down 28%.

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 August 1, 2009, comparable store net sales decreased 17% and 13%
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 |           
|                 |  |                                     |   |                 |          |                                       |  |        |           
|                 |  | August 1,
 2009                     |   | August 2,
 2008 |          | $                                     |  | %      |            | August 1,
 2009 |  | August 2,
 2008 |  | $         |   | % |          
|                 |  |                                     |   |                 |          |                                       |  |        |            |                 |  |                 |  |           |   |   |          
|Gross Profit     |  | $ 58,770                            |   |                 | $ 75,870 |                                       |  |        | $ (17,100) |                 |  | (23)%           |  | $ 124,521 |   |   | $ 158,858 |   |  |  | $(34,337) |  |  | (22)% | 
|                 |  |                                     |   |                 |          |                                       |  |        |            |                 |  |                 |  |           |   |   |           |   |  |  |           |  |  |       | 
|As a % of
 sales |  | 35.5                                | % |                 | 35.3     | %                                     |  |        |            |                 |  |                 |  | 34.9      | % |   | 35.5      | % |  |  |           |  |  |       | 

The decrease
in gross profit dollars of 23% and 22% in the thirteen and twenty-six weeks
ended August 1, 2009 as compared to the same period last year is due to the
decline in total sales.

The decrease
in gross profit as a percentage of sales for the twenty-six week periods ended
August 1, 2009 reflects lower vendor allowances 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 |           
|                 |  |                                     |   |                 |          |                                       |  |        |           
|                 |  | August 1,
 2009                     |   | August 2,
 2008 |          | $                                     |  | %      |            | August 1,
 2009 |  | August 2,
 2008 |  | $         |   | % |          
|                 |  |                                     |   |                 |          |                                       |  |        |            |                 |  |                 |  |           |   |   |          
|SG&A             |  | $ 75,767                            |   |                 | $ 94,533 |                                       |  |        | $ (18,766) |                 |  | (20)%           |  | $ 155,126 |   |   | $ 188,331 |   |  |  | $ (33,205) |  |  | (18)% | 
|                 |  |                                     |   |                 |          |                                       |  |        |            |                 |  |                 |  |           |   |   |           |   |  |  |            |  |  |       | 
|As a % of
 sales |  | 45.7                                | % |                 | 43.9     | %                                     |  |        |            |                 |  |                 |  | 43.4      | % |   | 42.1      | % |  |  |            |  |  |       | 

The $19 million, or 20%, decrease in SG&A expenses for the thirteen
weeks ended August 1, 2009 compared to prior year is due to the Company
operating an average of 12% fewer stores. Despite the decrease, SG&A as a
percentage of sales increased to 45.7% from 43.9% due to the sales decline of
23% in the quarter. The increase in SG&A expenses as a percentage of sales
from 42.1% for the twenty-six week period ended August 2, 2008 to 43.4% for the
twenty-six week period ended August 1, 2009 is due primarily to the overall
sales decline of 20%.

Included in
SG&A for the twenty-six weeks ended August 2, 2008, is a gain of
approximately $3.1 million from the sale of the Canton, Ohio distribution
facility.

Interest Expense, net. Interest
expense, net was $0.7 million and $1.4 million during the thirteen and
twenty-six week periods ended August 1, 2009 compared to $1.0 million and $1.9
million for the thirteen and twenty-six week periods ended August 2, 2008,
respectively. The decrease is due to lower average borrowings and average
interest rates under the Companys Credit Facility.

Income Tax Expense
(Benefit).As of January 31, 2009 and February 2,
2008, 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 31, 2009, the projected net loss for the year ending
January 30, 2010 and the net loss incurred for the twenty-six weeks ended
August 1, 2009, the Company did not provide a current tax benefit for the net
loss incurred for the thirteen week period.

For the
thirteen weeks ended August 1, 2009, the tax expense is attributed to the net
impact of the FIN 48 interest accrual and state taxes based on modified gross
receipts incurred during this period.

For all other
periods presented, the tax benefit is primarily attributed to the net impact of
the FIN 48 interest accrual and the reduction of tax reserves due to a tax
examination settlement and state taxes based on modified gross receipts
incurred during this period.

16

---



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)                |  | August 1,
 2009      |         | August 2,
 2008        |   | August 1,
 2009 |   | August 2,
 2008 |        
|                              |  |                      |         |                        |   |                 |   |                 |        
|Loss before
 income tax       |  | $                    | (17,681 | )                      | $ | (19,649         | ) | $               | (31,991 | ) | $ | (31,352 | )
|Income tax
 expense (benefit) |  |                      | 74      |                        |   | (419            | ) |                 | (499    | ) |   | (296    | )
|                              |  |                      |         |                        |   |                 |   |                 |         |   |   |         |  
|Net loss                      |  | $                    | (17,755 | )                      | $ | (19,230         | ) | $               | (31,492 | ) | $ | (31,056 | )
|                              |  |                      |         |                        |   |                 |   |                 |         |   |   |         |  

Loss before
income tax benefit decreased $2.0 million to $17.7 million for the second
quarter of 2009, from $19.6 million last year. For the thirteen weeks ended
August 1, 2009, the Companys net loss decreased $1.5 million, to $17.8 million
from $19.2 million for the thirteen weeks ended August 2, 2008.

For the
twenty-six weeks ended August 1, 2009, the loss before income taxes increased
$0.6 million to $32.0 million from $31.4 million last year. The Companys net
loss increased $0.4 million to $31.5 million from $31.1 million for the
twenty-six weeks ended August 2, 2008.

17

---



LIQUIDITY
AND CAPITAL RESOURCES

Liquidity
and Cash Flows:The
Companys primary sources of working capital are cash provided by sales of
merchandise inventory and borrowing capacity under its 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. We
believe the cash generated from sales of merchandise inventory and borrowing
capacity under our Credit Facility will be sufficient to finance our working
capital and capital expenditure requirements for at least the next
12 months. The Company expects to replace its current Credit Facility
prior to the expiration of the Credit Facility on January 6, 2011. Management
has considered many initiatives as part of the development of its operating
plan for 2009 and beyond that focus on the operation of a core base of stores,
improved product selection based on customer preferences and industry changes,
as well as further streamlining of its operations. During Fiscal 2008,
management carried out certain strategic initiatives in its efforts to reduce
operating costs such as the closure of the Canton, OH distribution center, reduction
of headcount at the home office and its distribution centers, the closing of
101 stores, as well as the elimination or curtailment of certain other general
and administrative expenses. Also, during the first half of Fiscal 2009,
management closed 15 stores and plans to continue its evaluation of store
profitability of its remaining 697 stores in consideration of lease terms,
conditions and expirations. As a result of these actions, the liquidation of
the merchandise inventory from closed stores and management of overall
merchandise inventory levels, management expects improvement in its operating
cash flow during Fiscal 2009.

The following table sets forth a summary of key
components of cash flow and working capital for each of the twenty-six weeks
ended August 1, 2009 and August 2, 2008:

|                                             |  |                        |         |                  |   |         |   |   |         |  
|-------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ------- | - | - | ------- | -
|                                             |  | Twenty-six weeks ended |         | Change           |  
|                                             |  |                        |         |                  |  
|(in thousands)                               |  | August 1, 
 2009       |         | August 2, 
 2008 |   | $       |  
|                                             |  |                        |         |                  |   |         |  
|Operating
 Cash Flows                        |  | $                      | (47,039 | )                | $ | (99,027 | ) | $ | 51,988  |  
|Financing
 Cash Flows                        |  |                        | 26,488  |                  |   | 33,748  |   |   | (7,260  | )
|                                            
|Proceeds
 from sale of distribution facility |  |                        |        |                  |   | 6,193   |   |   | (6,193  | )
|Capital
 Expenditures                        |  |                        | (2,366  | )                |   | (5,169  | ) |   | 2,803   |  
|                                             |  |                        |         |                  |   |         |   |   |         |  
|Cash
 and Cash Equivalents                   |  |                        | 7,138   |                  |   | 10,400  |   |   | (3,262  | )
|Merchandise
 Inventory                       |  |                        | 320,413 |                  |   | 399,193 |   |   | (78,780 | )
|Working
 Capital                             |  |                        | 185,852 |                  |   | 228,815 |   |   | (42,963 | )

The Company had cash and cash equivalents of $7.1
million at August 1, 2009, compared to $30.1 million at January 31, 2009 and
$10.4 million at August 2, 2008. Merchandise inventory was $72 per square foot
at August 1, 2009, compared to $81 per square foot at August 2, 2008.

Cash used by operating activities was $47.0 million
for the twenty-six weeks ended August 1, 2009. The primary uses of cash during
the twenty-six weeks ended August 1, 2009 were a seasonal reduction of accounts
payable, resulting in a $17.9 million increase in net inventory (inventory less
accounts payable) and losses from operation. The Companys merchandise
inventory and accounts payable are heavily

18

---



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.

During the twenty-six weeks ended August 2, 2008, the
Company sold its Canton, Ohio distribution facility, receiving net proceeds of
$6.2 million.

Cash provided by financing activities was $26.5
million for the twenty-six weeks ended August 1, 2009. The primary source of
cash of $28.3 million was from borrowings under the Companys Credit Facility.

The Company has a five-year, $150 million secured
Credit Facility with Bank of America, N.A. that expires in January 2011. The
Credit Facility contains provisions governing additional indebtedness and
acquisitions and is secured by the Companys eligible inventory, proceeds from
the sale of inventory and by the stock of the Companys subsidiaries. The
availability under the 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 $133 million as of
August 1, 2009. 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%.

Capital
Expenditures.During the twenty-six weeks ended August 1,
2009, the Company made capital expenditures of $2.4 million. The Company plans
to spend a total of $10 million for capital expenditures in 2009.

Recently
Issued Accounting Pronouncements:

In June 2009, the FASB issued SFAS No. 168,  The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted
Accounting Principles  a replacement of FASB Statement No. 162  (SFAS 168).
SFAS 168 provides for the FASB Accounting Standards Codification TM (the
Codification) to become the single official source of authoritative,
nongovernmental U.S. GAAP. Rules and interpretative releases of the SEC under
authority of Federal Securities laws are also sources of U.S. GAAP for SEC
registrants. The Codification is not intended to change existing U.S. GAAP and
as such will not have a significant impact on the Companys financial
statements, but reorganizes the literature. SFAS 168 is effective for interim
and annual periods ending after September 15, 2009.

In June 2009, the FASB issued FAS 166, Accounting for
Transfers of Financial Assets an amendment of FAS 140. FAS 140 is intended to
improve the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about
a transfer of financial assets: the effects of a transfer on its financial
position, financial performance, and cash flows: and a transferors continuing
involvement, if any, in transferred financial assets. This statement must be
applied as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009. The Company does not expect the
adoption of FAS 166 to have an impact on the Companys results of operations,
financial condition or cash flows.

In June 2009, the FASB issued FAS 167, Amendments to
FASB Interpretation No. 46(R). FAS 167 is intended to (1) address the effects
on certain provisions of FASB Interpretation No. 46 (revised December 2003),
Consolidation of Variable Interest Entities, as a result of the elimination of
the qualifying special-purpose entity concept in FAS 166, and (2) constituent
concerns about the application

19

---



of certain key provisions of Interpretation 46(R),
including those in which the accounting and disclosures under the Interpretation
do not always provided timely and useful information about an enterprises
involvement in a variable interest entity. This statement must be applied as of
the beginning of each reporting entitys first annual reporting period that
begins after November 15, 2009. The Company does not expect the adoption of FAS
167 to have an impact on the Companys results of operations, financial
condition or cash flows.

In April 2009, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position (FSP) No. 107-1(FSP FAS
107-1) and APB 28-1 (APB 28-1), which amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, and APB Opinion
No. 28, Interim Financial Reporting, to require disclosures about the fair
value of financial instruments for interim reporting periods. FSP FAS 107-1 and
APB 28-1 will be effective for interim reporting periods ending after
June 15, 2009. The adoption of this staff position is not expected to have
a material impact on the Companys financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position
No. 157-4 (FSP FAS 157-4), which provides additional guidance in
accordance with FASB No. 157, Fair Value Measurements, when the volume and
level of activity for the asset or liability has significantly decreased. This
FSP does not change the requirements in paragraphs 2427 of Statement 157,
which provide guidance on the use of Level 1 inputs. FSP FAS 157-4 shall be
effective for interim and annual reporting periods ending after June 15,
2009. The adoption of this staff position is not expected to have a material
impact on the Companys financial position or results of operations.

In April 2009, the FASB issued FASB Staff Position
No. 115-2 (FSP FAS 115-2) and FASB Staff Position No. 124-2 (FSP
FAS 124-2), which amends the other-than-temporary impairment guidance for debt
and equity securities. FSP FAS 115-2 and FSP FAS 124-2 shall be effective for
interim and annual reporting periods ending after June 15, 2009. The adoption
of this staff position is not expected to have a material impact on the
Companys financial position or results of operations.

In April 2009, the FASB issued FSP FAS 141R-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies, which amends and clarifies SFAS No. 141
(Revised) to address application issues on initial recognition and measurement,
subsequent measurement and accounting, and disclosure of assets and liabilities
arising from contingencies in a business combination. This FSP shall be
effective for assets or liabilities arising from contingencies in business
combinations for which the acquisition date is during or after fiscal 2010.
After the effective date, the Company will apply the requirements of SFAS
No. 141R-1 to any future business combinations.

In December 2008, the Financial Accounting Standards
Board (FASB) issued FASB Staff Position (FSP) FAS No. 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan Assets (FSP FAS
No. 132(R)-1) which amends SFAS No. 132(revised 2003) Employers
Disclosures about Pensions and Other Postretirement Benefits  an Amendment of
FASB Statements No. 87, 88, and 106 (SFAS No. 132(R)). FSP FAS
No. 132(R)-1 requires more detailed disclosures about the assets of a
defined benefit pension or other postretirement plan and is effective for
fiscal years ending after December 15, 2009. We are in the process of
evaluating FSP FAS No. 132(R)-1 and do not expect it will have a significant
impact on our Consolidated Financial Statements.

20

---



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 on the Credit Facility is payable
monthly in arrears at a variable rate of either the prime rate or LIBOR plus
0.75%. 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 31, 2009. The
Company does not hold any derivative instruments and does not engage in hedging
activities.

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 August 1, 2009, 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

---



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 31, 2009.

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

None.

Item 3  Defaults Upon Senior Securities

None.

Item 4 - Submission of Matters to a Vote of
Security Holders

|   |                                                                                                                                                                                                                                                                                                  
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|A) | An Annual
 Meeting of Shareholders of Trans World Entertainment Corporation was held on
 Wednesday, June 17, 2009.                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                  
|B) | In the case
 of each individual nominee named below, authority to vote was withheld with
 respect to the number of shares shown opposite their name in Column 1, and
 each nominee received the number of votes set opposite their name in Column 2
 for election as director of the Corporation.

|                   |  |                    |           |                     |  |            | 
|------------------ |  | ------------------ | --------- | ------------------- |  | ---------- | 
|Names of
 Nominees |  | Column 1
 Withheld |           | Column 2
 Votes for | 
|                   |  |                    |           |                     | 
|Bryant Riley       |  |                    | 392,514   |                     |  | 27,821,916 | 
|Michael
 Solow     |  |                    | 3,560,956 |                     |  | 24,653,474 | 

|   |                                                                                                              
|-- | -------------------------------------------------------------------------------------------------------------
|C) | A proposal
 to adopt the Trans World Entertainment Corporation Executive Bonus Plan was
 approved as follows:

|         |  |  |            | 
|-------- |  |  | ---------- | 
|FOR-     |  |  | 27,528,689 | 
|AGAINST- |  |  | 671,204    | 
|ABSTAIN- |  |  | 14,537     | 
|NO-VOTE- |  |  | 3,177,486  | 

Item 5  Other Information

None.

22

---



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

---



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
 10, 2009 |  | By: /s/ Robert J. Higgins                                                 
|                    |  |                                                                           
|                    |  | Robert J.
 Higgins                                                        
|                    |  | Chairman and
 Chief Executive Officer                                     
|                    |  | (Principal
 Executive Officer)                                            
|                    |  |                                                                           
|September
 10, 2009 |  | By: /s/ John J. Sullivan                                                  
|                    |  |                                                                           
|                    |  | John J.
 Sullivan                                                         
|                    |  | Executive
 Vice President and Chief Financial Officer (Principal Financial
|                    |  | and Chief
 Accounting Officer)                                            

24

---