|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|WASHINGTON, 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 OCTOBER
 31, 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 oAccelerated
filer xNon-accelerated
filer oSmaller
reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes 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 November 28, 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 October 31, 2009, January 31, 2009 and
 November 1, 2008                                   |                     | 3 
|                                                                                                                                     |                     |   
|Condensed
 Consolidated Statements of Operations  Thirteen Weeks and Thirty-nine Weeks
 Ended October 31, 2009 and November 1, 2008 |                     | 4 
|                                                                                                                                     |                     |   
|Condensed
 Consolidated Statements of Cash Flows  Thirty-nine Weeks Ended October 31,
 2009 and November 1, 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)

|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | ----------------- | - | ----------------- | - | - | -------- | -
|                                                                                                                                   |  | October 31,
 2009 |          | January 31,
 2009 |   | November 1,
 2008 |  
|                                                                                                                                   |  |                   |         
|ASSETS                                                                                                                             |  |                   |          |                   |   |                   |   |   |          |  
|CURRENT
 ASSETS:                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|Cash and cash equivalents                                                                                                          |  | $                 | 9,136    |                   | $ | 30,055            |   | $ | 9,103    |  
|Merchandise inventory                                                                                                              |  |                   | 368,958  |                   |   | 378,188           |   |   | 468,832  |  
|Other current assets                                                                                                               |  |                   | 19,781   |                   |   | 21,376            |   |   | 27,388   |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|Total current assets                                                                                                               |  |                   | 397,875  |                   |   | 429,619           |   |   | 505,323  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|NET FIXED
 ASSETS                                                                                                                  |  |                   | 41,576   |                   |   | 50,437            |   |   | 68,465   |  
|OTHER ASSETS                                                                                                                       |  |                   | 7,508    |                   |   | 6,980             |   |   | 9,976    |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL ASSETS                                                                                                                       |  | $                 | 446,959  |                   | $ | 487,036           |   | $ | 583,764  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|LIABILITIES                                                                                                                        |  |                   |          |                   |   |                   |   |   |          |  
|CURRENT
 LIABILITIES:                                                                                                              |  |                   |          |                   |   |                   |   |   |          |  
|Accounts payable                                                                                                                   |  | $                 | 135,518  |                   | $ | 170,302           |   | $ | 193,315  |  
|Borrowings under line of credit                                                                                                    |  |                   | 55,545   |                   |   |                  |   |   | 62,101   |  
|Accrued expenses and other current
 liabilities                                                                                    |  |                   | 38,049   |                   |   | 42,180            |   |   | 43,450   |  
|Current portion of long-term debt                                                                                                  |  |                   | 593      |                   |   | 570               |   |   | 562      |  
|Current portion of capital lease
 obligations                                                                                      |  |                   | 2,021    |                   |   | 3,178             |   |   | 3,123    |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|Total current liabilities                                                                                                          |  |                   | 231,726  |                   |   | 216,230           |   |   | 302,551  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|LONG-TERM
 DEBT, less current portion                                                                                              |  |                   | 2,541    |                   |   | 2,986             |   |   | 3,131    |  
|CAPITAL
 LEASE OBLIGATIONS, less current portion                                                                                   |  |                   | 4,652    |                   |   | 5,858             |   |   | 6,674    |  
|OTHER
 LONG-TERM LIABILITIES                                                                                                       |  |                   | 25,376   |                   |   | 26,947            |   |   | 31,316   |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL LIABILITIES                                                                                                                  |  |                   | 264,295  |                   |   | 252,021           |   |   | 343,672  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|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                                                                                                        |  |                   | 307,615  |                   |   | 306,159           |   |   | 305,799  |  
|Treasury
 stock at cost (25,102,990, 25,102,990 and 25,102,990 shares, respectively)                                               |  |                   | (217,555 | )                 |   | (217,555          | ) |   | (217,555 | )
|Accumulated
 other comprehensive income (loss)                                                                                     |  |                   | 2,396    |                   |   | 2,396             |   |   | (1,625   | )
|Retained
 earnings                                                                                                                 |  |                   | 89,643   |                   |   | 143,451           |   |   | 152,909  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                         |  |                   | 182,664  |                   |   | 235,015           |   |   | 240,092  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  | $                 | 446,959  |                   | $ | 487,036           |   | $ | 583,764  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  

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 |         | Thirty-nine Weeks Ended |  
|                                                                          |  |                      |         |                         |  
|                                                                          |  | October 31,
 2009    |         | November 1,
 2008       |   | October 31,
 2009 |   | November 1,
 2008 |        
|                                                                          |  |                      |         |                         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Net sales                                                                 |  | $                    | 161,387 |                         | $ | 195,193           |   | $                 | 518,566 |   | $ | 642,971 |  
|Cost of sales                                                             |  |                      | 106,747 |                         |   | 129,782           |   |                   | 339,404 |   |   | 418,702 |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Gross profit                                                              |  |                      | 54,640  |                         |   | 65,411            |   |                   | 179,162 |   |   | 224,269 |  
|Selling, general and administrative
 expenses                             |  |                      | 76,166  |                         |   | 92,829            |   |                   | 231,291 |   |   | 281,160 |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Loss from operations                                                      |  |                      | (21,526 | )                       |   | (27,418           | ) |                   | (52,129 | ) |   | (56,891 | )
|Interest expense, net                                                     |  |                      | 698     |                         |   | 1,110             |   |                   | 2,085   |   |   | 2,989   |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Loss before income taxes                                                  |  |                      | (22,224 | )                       |   | (28,528           | ) |                   | (54,214 | ) |   | (59,880 | )
|Income tax expense (benefit)                                              |  |                      | 93      |                         |   | (86               | ) |                   | (406    | ) |   | (383    | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Net loss                                                                  |  | $                    | (22,317 | )                       | $ | (28,442           | ) | $                 | (53,808 | ) | $ | (59,497 | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|LOSS PER SHARE:                                                           |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Basic and diluted loss per share                                          |  | $                    | (0.71   | )                       | $ | (0.91             | ) | $                 | (1.72   | ) | $ | (1.91   | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Weighted average number of common shares
 outstanding  basic and diluted |  |                      | 31,395  |                         |   | 31,258            |   |                   | 31,362  |   |   | 31,211  |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

4

---



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

|                                                                         |  |                         |         |                   |   |          |  
|------------------------------------------------------------------------ |  | ----------------------- | ------- | ----------------- | - | -------- | -
|                                                                         |  | Thirty-nine Weeks Ended |        
|                                                                         |  |                         |        
|                                                                         |  | October 31,
 2009       |         | November 1,
 2008 |  
|                                                                         |  |                         |        
|Net cash used by operating activities                                    |  | $                       | (69,796 | )                 | $ | (123,249 | )
|                                                                         |  |                         |         |                   |   |          |  
|Cash flows
 from investing activities:                                   |  |                         |         |                   |   |          |  
|Purchases of fixed assets                                                |  |                         | (3,883  | )                 |   | (8,000   | )
|Net proceeds from sale of distribution
 facility                         |  |                         |        |                   |   | 6,193    |  
|                                                                         |  |                         |         |                   |   |          |  
|Net cash
 used by investing activities                                   |  |                         | (3,883  | )                 |   | (1,807   | )
|                                                                         |  |                         |         |                   |   |          |  
|Cash flows
 from financing activities:                                   |  |                         |         |                   |   |          |  
|Proceeds from line of credit                                             |  |                         | 55,545  |                   |   | 62,101   |  
|Payments of long-term debt                                               |  |                         | (422    | )                 |   | (396     | )
|Payments of capital lease obligations                                    |  |                         | (2,363  | )                 |   | (2,203   | )
|Proceeds from the exercise of stock options                              |  |                         |        |                   |   | 2        |  
|                                                                         |  |                         |         |                   |   |          |  
|Net cash
 provided by financing activities                               |  |                         | 52,760  |                   |   | 59,504   |  
|                                                                         |  |                         |         |                   |   |          |  
|Net decrease
 in cash and cash equivalents                               |  |                         | (20,919 | )                 |   | (65,552  | )
|Cash and
 cash equivalents, beginning of period                          |  |                         | 30,055  |                   |   | 74,655   |  
|                                                                         |  |                         |         |                   |   |          |  
|Cash and
 cash equivalents, end of period                                |  | $                       | 9,136   |                   | $ | 9,103    |  
|                                                                         |  |                         |         |                   |   |          |  
|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)
OCTOBER 31, 2009 and NOVEMBER 1, 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 and www.suncoast.com in a single
industry segment. As of October 31, 2009, the Company operated 690 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 its expiration
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 thirty-nine weeks ended October 31, 2009, management closed 24
stores and plans to continue its evaluation of store profitability of the
remaining 690 stores in consideration of lease terms, conditions and
expirations. The Company plans to close approximately 125 underperforming
stores with leases expiring in the fourth quarter. As a result of these
actions, including the liquidation of the merchandise inventory from these
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,

6

---



in general,
are affected by the timing of new product releases, store closings and the
performance of existing stores.

Subsequent
Events:

The Company
evaluated subsequent events for potential recognition or disclosure in the
financial statements through December 10, 2009, which is the date these
financial statements were issued.

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 thirty-nine weeks ended October 31,
2009 and November 1, 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

In June 2009,
the Financial Accounting Standards Board (FASB) issued its final Statement of
Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principlesa
replacement of FASB Statement No. 162. SFAS No. 168 established the FASB
Accounting Standards Codification (ASC) as the single source of authoritative
GAAP to be applied by nongovernmental entities in the preparation of financial
statements. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. All guidance in the ASC carries an
equal level of authority. The ASC supersedes all previously existing non-

7

---



SEC accounting
and reporting standards. The ASC simplifies user access to all authoritative
GAAP by reorganizing previously issued GAAP pronouncements into approximately
90 accounting topics within a consistent structure, without creating new accounting
and reporting guidance. The ASC became effective for financial statements
issued for interim and annual periods ending after September 15, 2009;
accordingly, the Company adopted the ASC in the third quarter of fiscal 2009.
Following SFAS No. 168, the FASB will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts;
instead, it will issue Accounting Standards Updates. The FASB will not consider
Accounting Standards Updates as authoritative in their own right; these updates
will serve only to update the ASC, provide background information about the
guidance, and provide the basis for conclusions on the change(s) in the ASC. In
the discussion that follows, the Company will refer to ASC citations that
relate to ASC Topics and their descriptive titles, as appropriate, and will no
longer refer to citations that relate to accounting pronouncements superseded
by the ASC.

In
May 2009, the FASB issued guidance that was codified in Topic 855,
Subsequent Events of the ASC which established principles and disclosure
requirements for subsequent events, which are defined as events that occur
after the balance sheet date but before financial statements are issued or are
available to be issued. This guidance was effective for financial statements
issued for interim and annual periods ending after June 15, 2009. The
adoption of this guidance in the second quarter of 2009 did not have a material
impact on the Companys consolidated results of operations or financial
condition. We have evaluated subsequent events through the date of issuance of
this report and no events require recognition in the consolidated financial
statements or disclosures of the Company per the definitions and requirements
of ASC Section 855-10.

Note 4. Stock Based Compensation

Total
stock-based compensation expense recognized in the condensed consolidated
statements of operations for the thirteen weeks ended October 31, 2009 and
November 1, 2008 was $0.6 million and $0.3 million, respectively, before income
taxes. No deferred tax benefit was recorded against stock-based compensation
expense for the thirteen weeks ended October 31, 2009 and November 1, 2008.

Total
stock-based compensation expense recognized in the condensed consolidated statements
of operations for the thirty-nine weeks ended October 31, 2009 and November 1,
2008 was $2.0 million and $1.0 million, respectively, before income taxes. No
deferred tax benefit was recorded against stock-based compensation expense for
the thirty-nine weeks ended October 31, 2009 and November 1, 2008

As of October
31, 2009, there was approximately $0.9 million of unrecognized compensation
cost related to stock awards that is expected to be recognized as expense over
a weighted average period of 0.7 years.

Stock awards authorized for issuance under the Companys plans total
20.6 million. As of October 31, 2009, of the awards authorized for issuance,
7.9 million were granted and are outstanding, 6.4 million of which were vested
and exercisable. Awards available for future grants at October 31, 2009 were
3.0 million.

8

---



The table
below outlines the assumptions that the Company used to estimate the fair value
of stock based awards granted during the thirty-nine weeks ended October 31,
2009:

|                                                                           |  |                                           |   |      |   | 
|-------------------------------------------------------------------------- |  | ----------------------------------------- | - | ---- | - | 
|                                                                           |  |                                           |  
|                                                                           |  | Thirty-nine weeks ended
 October 31, 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 thirty-nine weeks ended
October 31, 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                                            |  | 9.4 |  | 
|Grant of
 director deferred shares*        |  |                                         | 50,866    |                                    |   | 0.00                                            |  | 9.5 |  | 
|Exercised**                                |  |                                         | (11,363   | )                                  |   | 0.00                                            |  |    |  | 
|Vested
 restricted/deferred shares issued* |  |                                         | (126,330  | )                                  |   | 0.00                                            |  |    |  | 
|Forfeited                                  |  |                                         | (56,061   | )                                  |   | 3.39                                            |  |    |  | 
|Expired                                    |  |                                         | (755,609  | )                                  |   | 12.76                                           |  |    |  | 
|                                           |  |                                         |           |                                    |   |                                                 |  |     |  | 
|Balance
 October 31, 2009                  |  |                                         | 7,857,366 |                                    |   | 7.22                                            |  | 4.3 |  | 
|                                           |  |                                         |           |                                    |   |                                                 |  |     |  | 
|Exercisable
 at October 31, 2009           |  |                                         | 6,409,676 |                                    | $ | 8.18                                            |  | 3.5 |  | 
|                                           |  |                                         |           |                                    |   |                                                 |  |     |  | 

|   |                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*  | 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 period
 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 thirty-nine weeks ended
October 31, 2009. The intrinsic value of stock awards outstanding as of October
31, 2009 was $950,000. The intrinsic value of stock awards exercisable as of
October 31, 2009 was $70,000.

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 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

9

---



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.

Effective
February 3, 2008, the Company changed the measurement date from November 1,
2007 to February 2, 2008 to coincide with the Companys fiscal year end. As a
result, the Company recorded a reduction in retained earnings of $362,000
during the thirty-nine weeks ended November 1, 2008, representing the increase
in accrued benefits between the old and new measurement dates.

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 |     | Thirty-nine weeks ended |  
|                                    |  |                      |     |                         |  
|                                    |  | October 31,2009      |     | November 1,2008         |   | October 31,2009 |   | November 1,2008 |     
|                                    |  |                      |     |                         |   |                 |   |                 |     
|                                    |  | (in thousands)       |     | (in thousands)          |  
|Service cost                        |  | $                    | 49  |                         | $ | 54              |   | $               | 147  |   | $ | 162   |  
|Interest
 cost                      |  |                      | 200 |                         |   | 223             |   |                 | 600  |   |   | 669   |  
|Amortization
 of prior service cost |  |                      | 85  |                         |   | 86              |   |                 | 255  |   |   | 258   |  
|Amortization
 of net gain           |  |                      | (86 | )                       |   | (1              | ) |                 | (258 | ) |   | (2    | )
|                                    |  |                      |     |                         |   |                 |   |                 |      |   |   |       |  
|Net periodic
 pension cost          |  | $                    | 248 |                         | $ | 362             |   | $               | 744  |   | $ | 1,087 |  
|                                    |  |                      |     |                         |   |                 |   |                 |      |   |   |       |  

During the
thirty-nine weeks ended October 31, 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 the maximum amount of $150 million.
As of October 31, 2009, the Company had borrowed $55.5 million under the
Credit Facility, had $3.6 million in outstanding letter of credit
obligations under the Credit Facility and $90.9 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen weeks ended October 31, 2009 was 1.33%.

As
of November 1, 2008, the Company had borrowed $62.1 million under the
Credit Facility, had $1.0 million in outstanding letter of credit
obligations under the Credit Facility and $86.9 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen weeks ended November 1, 2008 was 3.78%.

10

---



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
thirty-nine weeks ended October 31, 2009 and November 1, 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 |       | Thirty-nine Weeks Ended |  
|                                              |  |                      |       |                         |  
|                                              |  | October 31,
 2009    |       | November 1,
 2008       |   | October 31,
 2009 |  | November 1,
 2008 |       
|                                              |  |                      |       |                         |   |                   |  |                   |       
|                                              |  | (in thousands)       |       | (in thousands)          |  
|Cost of
 sales                                |  | $                    | 351   |                         | $ | 385               |  | $                 | 1,106  |  | $ | 1,179  | 
|Selling,
 general and administrative expenses |  |                      | 3,933 |                         |   | 5,605             |  |                   | 11,246 |  |   | 16,603 | 
|                                              |  |                      |       |                         |   |                   |  |                   |        |  |   |        | 
|Total                                         |  | $                    | 4,284 |                         | $ | 5,990             |  | $                 | 12,352 |  | $ | 17,782 | 
|                                              |  |                      |       |                         |   |                   |  |                   |        |  |   |        | 

The decline in depreciation
expense during the thirteen and thirty-nine weeks ended October 31, 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 |        | Thirty-nine Weeks Ended | 
|                                                     |  |                      |        |                         | 
|                                                     |  | October 31,
 2009    |        | November 1,
 2008       |  | October 31,
 2009 |  | November 1,
 2008 |       
|                                                     |  |                      |        |                         |  |                   |  |                   |       
|                                                     |  | (in thousands)       |        | (in thousands)          | 
|Weighted average common shares outstanding  basic   |  |                      | 31,395 |                         |  | 31,258            |  |                   | 31,362 |  |  | 31,211 | 
|Dilutive effect of stock based awards                |  |                      |       |                         |  |                  |  |                   |       |  |  |       | 
|                                                     |  |                      |        |                         |  |                   |  |                   |        |  |  |        | 
|Weighted average common shares outstanding  diluted |  |                      | 31,395 |                         |  | 31,258            |  |                   | 31,362 |  |  | 31,211 | 
|                                                     |  |                      |        |                         |  |                   |  |                   |        |  |  |        | 
|                                                     |  |                      |        |                         |  |                   |  |                   |        |  |  |        | 
|Anti-dilutive stock based awards                     |  |                      | 6,435  |                         |  | 6,791             |  |                   | 6,935  |  |  | 6,346  | 
|                                                     |  |                      |        |                         |  |                   |  |                   |        |  |  |        | 

For the
thirteen and thirty-nine week periods ended October 31, 2009 and November 1,
2008, the impact of outstanding stock based awards was not considered because
the Company reported a net loss and such impact would be anti-dilutive.
Accordingly, basic and diluted loss per share is the same.

12

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIESItem 2 - Managements Discussion and Analysis of Financial
Condition and
Results of Operations
October 31, 2009 and November 1, 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 October 31,
2009, the Company operated 690 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 thirty-nine weeks ended October 31, 2009. The balance of categories, including
software accessories, electronics and trend products represented 13% of the
Companys sales in the thirty-nine weeks ended October 31, 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 Thirty-nine Weeks Ended October 31, 2009
Compared to the Thirteen and Thirty-nine Weeks Ended November 1, 2008

The following
table sets forth a period over period comparison of the Companys sales for the
thirteen weeks and thirty-nine weeks ended October 31, 2009 and November 1,
2008, by category:

|                |  |                       |         |                          |   |         |   |                |         |                    |     |                    |  |                    |    |        |   |         |   |                    |         |   |   |          |   |     |    |  |     |    | 
|--------------- |  | --------------------- | ------- | ------------------------ | - | ------- | - | -------------- | ------- | ------------------ | --- | ------------------ |  | ------------------ | -- | ------ | - | ------- | - | ------------------ | ------- | - | - | -------- | - | --- | -- |  | --- | -- | 
|                |  | Thirteen
 weeks ended |         | Thirty-nine
 weeks ended |  
|                |  |                       |         |                          |  
|                |  | October 31,
 2009     |         | November
 1,
 2008       |   | Change  |   | %              |         | Comp
 Store
 Sales |     | October
 31,
 2009 |  | November
 1,
 2008 |    | Change |   | %       |   | Comp
 Store
 Sales |        
|                |  |                       |         |                          |   |         |   |                |         |                    |     |                    |  |                    |    |        |   |         |   |                    |        
|                |  | (in thousands)        |         |                          |   |         |   | (in thousands) |         |                    |     |                    | 
|                |  |                       |         |                          |   |         |   |                |         |                    |     |                    | 
|Net
 sales      |  | $                     | 161,387 |                          | $ | 195,193 |   | $              | (33,806 | )                  | (17 | )%                 |  | (9                 | )% |        | $ | 518,566 |   | $                  | 642,971 |   | $ | (124,405 | ) | (19 | )% |  | (11 | )% | 
|As a % of sales |  |                       |         |                          |   |         |   |                |         |                    |     |                    |  |                    |    |        |   |         |   |                    |         |   |   |          |   |     |    |  |     |    | 
|Music           |  |                       | 37      | %                        |   | 37      | % |                |         |                    |     |                    |  | (10                | )% |        |   | 37      | % |                    | 38      | % |   |          |   |     |    |  | (14 | )% | 
|Home Video      |  |                       | 41      | %                        |   | 41      | % |                |         |                    |     |                    |  | (7                 | )% |        |   | 42      | % |                    | 40      | % |   |          |   |     |    |  | (7  | )% | 
|Video Games     |  |                       | 8       | %                        |   | 8       | % |                |         |                    |     |                    |  | (5                 | )% |        |   | 8       | % |                    | 8       | % |   |          |   |     |    |  | (15 | )% | 
|Other           |  |                       | 14      | %                        |   | 14      | % |                |         |                    |     |                    |  | (14                | )% |        |   | 13      | % |                    | 14      | % |   |          |   |     |    |  | (14 | )% | 
|                |  |                       |         |                          |   |         |   |                |         |                    |     |                    |  |                    |    |        |   |         |   |                    |         |   |   |          |   |     |    |  |     |    | 
|Store
 Count:   |  |                       |         |                          |   |         |   |                |         |                    |     |                    |  |                    |    |        |   | 690     |   |                    | 786     |   |   | (96      | ) | (12 | )% |  |     |    | 

Sales. Sales
decreased 17% and 19% in the thirteen and thirty-nine week periods ending
October 31, 2009, respectively. The decrease in total sales is due to
comparable store sales decline of 9% and 11% for the thirteen and thirty-nine
week periods ended October 31, 2009, respectively and a decline in the number
of stores in operation compared to the same periods last year.

14

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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 37% of total net sales for the thirteen and
thirty-nine weeks ended October 31, 2009.

During the
thirteen and thirty-nine weeks ended October 31, 2009, music sales in comparable
stores decreased 10% and 14%, respectively, versus the thirteen and thirty-nine
weeks ended November 1, 2008. Total CD unit sales industry-wide were down 17%
during the corresponding period to the Companys third 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 7% during the thirteen and thirty-nine week periods ending October
31, 2009, respectively. For the quarter, the industry was down 17%.

Video Games:The Company offers video game hardware and software in approximately
half of its stores. Comparable store net sales decreased 5% and 15% and for the
thirteen and thirty-nine weeks ended October 31, 2009, respectively. Video
games represented 8% of our business for the thirteen and thirty-nine weeks
ended October 31, 2009. For the quarter, the industry was down 11%.

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 thirty-nine weeks ended October 31, 2009, comparable store net
sales decreased 14% for these categories.

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

|                |  |                                    |        |                    |   |                                       |   |        |         |                    |  |                    |    |   |         |   |   |         |   |   |         |   |  |     |   
|--------------- |  | ---------------------------------- | ------ | ------------------ | - | ------------------------------------- | - | ------ | ------- | ------------------ |  | ------------------ | -- | - | ------- | - | - | ------- | - | - | ------- | - |  | --- | --
|                |  | Thirteen
weeks ended(in thousands) |        | Change             |   | Thirty-nine
weeks ended(in thousands) |   | Change |        
|                |  |                                    |        |                    |   |                                       |   |        |        
|                |  | October
 31,
 2009                 |        | November
 1,
 2008 |   | $                                     |   | %      |         | October
 31,
 2009 |  | November
 1,
 2008 |    | $ |         | % |  
|                |  |                                    |        |                    |   |                                       |   |        |         |                    |  |                    |    |   |         |   |  
|Gross Profit    |  | $                                  | 54,640 |                    | $ | 65,411                                |   | $      | (10,771 | )                  |  | (16                | )% | $ | 179,162 |   | $ | 224,269 |   | $ | (45,107 | ) |  | (20 | )%
|                |  |                                    |        |                    |   |                                       |   |        |         |                    |  |                    |    |   |         |   |   |         |   |   |         |   |  |     |   
|As a % of sales |  |                                    | 33.9   | %                  |   | 33.5                                  | % |        |         |                    |  |                    |    |   | 34.5    | % |   | 34.9    | % |   |         |   |  |     |   

The decrease
in gross profit dollars of 16% and 20% in the thirteen and thirty-nine weeks
ended October 31, 2009 compared to the same period last year is due to the
decline in total sales.

During the
thirteen weeks ended October 31, 2009, gross profit as percentage of sales
increased to 33.9% compared to 33.5% for the same period last year. The
decrease in gross profit as a percentage of sales for the thirty-nine week
periods ended October 31, 2009 from 34.9% last year to 34.5% this year reflects
lower vendor allowances this year versus last year.

15

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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             |   | Thirty-nine
weeks ended(in thousands) |   | Change |        
|                |  |                                    |        |                    |   |                                       |   |        |        
|                |  | October
 31,
 2009                 |        | November
 1,
 2008 |   | $                                     |   | %      |         | October
 31,
 2009 |  | November
 1,
 2008 |    | $ |         | % |  
|                |  |                                    |        |                    |   |                                       |   |        |         |                    |  |                    |    |   |         |   |  
|SG&A            |  | $                                  | 76,166 |                    | $ | 92,829                                |   | $      | (16,663 | )                  |  | (18                | )% | $ | 231,291 |   | $ | 281,160 |   | $ | (49,869 | ) |  | (18 | )%
|                |  |                                    |        |                    |   |                                       |   |        |         |                    |  |                    |    |   |         |   |   |         |   |   |         |   |  |     |   
|As a % of sales |  |                                    | 47.2   | %                  |   | 47.6                                  | % |        |         |                    |  |                    |    |   | 44.6    | % |   | 43.7    | % |   |         |   |  |     |   

The $17
million, or 18%, decrease in SG&A expenses for the thirteen weeks ended
October 31, 2009 compared to prior year is due to the Company operating an
average of 12% fewer stores. SG&A as a percentage of sales decreased to
47.2% from 47.6%. The increase in SG&A expenses as a percentage of sales
from 43.7% for the thirty-nine week period ended November 1, 2008 to 44.6% for
the thirty-nine week period ended October 31, 2009 is due primarily to the
overall sales decline of 19%.

Included in
SG&A for the thirty-nine weeks ended November 1, 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 $2.1 million during the thirteen and
thirty-nine week periods ended October 31, 2009 compared to $1.1 million and
$3.0 million for the thirteen and thirty-nine week periods ended November 1,
2008, respectively. The decrease is due to lower average borrowings and
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 thirty-nine weeks ended October 31, 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 October 31, 2009, the tax expense is attributed to the net
impact of the interest accrual associated with uncertain tax positions 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 interest accrual associated with uncertain tax positions 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 |         | Thirty-nine
 weeks ended |  
|                              |  |                       |         |                          |  
|(in thousands)                |  | October
 31,2009      |         | November
 1,2008         |   | October
 31,2009 |   | November
 1,2008 |        
|                              |  |                       |         |                          |   |                  |   |                  |        
|Loss before
 income tax       |  | $                     | (22,224 | )                        | $ | (28,528          | ) | $                | (54,214 | ) | $ | (59,880 | )
|Income tax
 expense (benefit) |  |                       | 93      |                          |   | (86              | ) |                  | (406    | ) |   | (383    | )
|                              |  |                       |         |                          |   |                  |   |                  |         |   |   |         |  
|                             
|Net loss                      |  | $                     | (22,317 | )                        | $ | (28,442          | ) | $                | (53,808 | ) | $ | (59,497 | )
|                              |  |                       |         |                          |   |                  |   |                  |         |   |   |         |  

Loss before income tax benefit decreased $6.3 million
to $22.2 million for the third quarter of 2009, from $28.5 million last year.
For the thirteen weeks ended October 31, 2009, the Companys net loss decreased
$6.1 million, to $22.3 million from $28.4 million for the thirteen weeks ended
November 1, 2008.

For the thirty-nine weeks ended October 31, 2009, the
loss before income taxes decreased $5.7 million to $54.2 million from $59.9
million last year. The Companys net loss decreased $5.7 million to $53.8
million from $59.5 million for the thirty-nine weeks ended November 1, 2008.
The lower net loss was due to lower SG&A and interest expense partially
offset by lower sales.

17

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows: The Companys primary
sources of working capital are cash provided by 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 its expiration 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 thirty-nine weeks
ended October 31, 2009, management closed 24 stores and plans to continue its
evaluation of store profitability of the remaining 690 stores in consideration
of lease terms, conditions and expirations. The Company plans to close
approximately 125 underperforming stores with leases expiring in the fourth
quarter. As a result of these actions, including the liquidation of the
merchandise inventory from these 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 thirty-nine weeks
ended October 31, 2009 and November 1, 2008:

|                                             |  |                          |         |                    |   |          |   |   |         |  
|-------------------------------------------- |  | ------------------------ | ------- | ------------------ | - | -------- | - | - | ------- | -
|                                             |  | Thirty-nine
 weeks ended |         | Change             |  
|                                             |  |                          |         |                    |  
|(in thousands)                               |  | October
 31,
 2009       |         | November
 1,
 2008 |   | $        |  
|                                             |  |                          |         |                    |   |          |  
|Operating
 Cash Flows                        |  | $                        | (69,796 | )                  | $ | (123,249 | ) | $ | 53,453  |  
|Financing
 Cash Flows                        |  |                          | 52,760  |                    |   | 59,504   |   |   | (6,744  | )
|Proceeds
 from sale of distribution facility |  |                          |        |                    |   | 6,193    |   |   | (6,193  | )
|Capital
 Expenditures                        |  |                          | (3,883  | )                  |   | (8,000   | ) |   | (4,117  | )
|                                             |  |                          |         |                    |   |          |   |   |         |  
|Cash
 and Cash Equivalents                   |  |                          | 9,136   |                    |   | 9,103    |   |   | 33      |  
|Merchandise
 Inventory                       |  |                          | 368,958 |                    |   | 468,832  |   |   | (99,874 | )
|Working
 Capital                             |  |                          | 166,149 |                    |   | 202,772  |   |   | (36,623 | )

The Company had cash and cash equivalents of $9.1
million at October 31, 2009, compared to $30.1 million at January 31, 2009 and
$9.1 million at November 1, 2008. Merchandise inventory was $83 per square foot
at October 31, 2009, compared to $95 per square foot at November 1, 2008.

Cash used by operating activities was $69.8 million
for the thirty-nine weeks ended October 31, 2009. The primary uses of cash
during the thirty-nine weeks ended October 31, 2009 were a seasonal reduction
of accounts payable, resulting in a $25.6 million increase in net inventory
(inventory less accounts

18

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payable) and losses from operation. The Companys
merchandise inventory and accounts payable are heavily influenced by the
seasonality of its business. A significant reduction of accounts payable occurs
annually in the fiscal first quarter, reflecting payments for merchandise
inventory sold during the prior years holiday season.

During the thirty-nine weeks ended November 1, 2008,
the Company sold its Canton, Ohio distribution facility, receiving net proceeds
of $6.2 million.

Cash provided by financing activities was $52.8
million for the thirty-nine weeks ended October 31, 2009. The primary source of
cash of $55.5 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 the maximum amount of
$150 million. As of October 31, 2009, the Company had borrowed $55.5
million under the Credit Facility, had $3.6 million in outstanding letter
of credit obligations under the Credit Facility and $90.9 million was available
for borrowing. The weighted average interest rate on outstanding borrowings for
the thirteen weeks ended October 31, 2009 was 1.33%.

Capital Expenditures.During the
thirty-nine weeks ended October 31, 2009, the Company made capital expenditures
of $3.9 million. The Company plans to spend a total of $5 million for capital
expenditures in 2009.

Recently Issued Accounting Pronouncements:

In October 2009, the FASB issued ASU
No. 2009-13, Multiple-Deliverable Revenue Arrangementsa consensus of the
FASB Emerging Issues Task Force, that provides amendments to the criteria for
separating consideration in multiple-deliverable arrangements. As a result of
these amendments, multiple-deliverable revenue arrangements will be separated
in more circumstances than under existing U.S. GAAP. The ASU does this by
establishing a selling price hierarchy for determining the selling price of a
deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific objective evidence nor third-party evidence is
available. A vendor will be required to determine its best estimate of selling
price in a manner that is consistent with that used to determine the price to
sell the deliverable on a standalone basis. This ASU also eliminates the
residual method of allocation and will require that arrangement consideration
be allocated at the inception of the arrangement to all deliverables using the
relative selling price method, which allocates any discount in the overall
arrangement proportionally to each deliverable based on its relative selling
price. Expanded disclosures of qualitative and quantitative information
regarding application of the multiple-deliverable revenue arrangement guidance
are also required under the ASU. The ASU does not apply to arrangements for
which industry specific allocation and measurement guidance exists, such as
long-term construction contracts and software transactions. The adoption of
this standard is not expected to have a material impact on the Companys
consolidated results of operations or financial condition.

19

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In August 2009, the FASB issued ASU
No. 2009-05, Measuring Liabilities at Fair Value, which provides
additional guidance on how companies should measure liabilities at fair value
under ASC 820. The ASU clarifies that the quoted price for an identical
liability should be used. However, if such information is not available, a
entity may use, the quoted price of an identical liability when traded as an
asset, quoted prices for similar liabilities or similar liabilities traded as
assets, or another valuation technique (such as the market or income approach).
The ASU also indicates that the fair value of a liability is not adjusted to
reflect the impact of contractual restrictions that prevent its transfer and
indicates circumstances in which quoted prices for an identical liability or
quoted price for an identical liability traded as an asset may be considered
level 1 fair value measurements. The adoption of this standard is not expected
to have a material impact on the Companys consolidated results of operations
or financial condition.

In June 2009, the FASB issued a new standard
regarding the accounting for transfers of financial assets amending the
existing guidance on transfers of financial assets to, among other things,
eliminate the qualifying special-purpose entity concept, include a new unit of
account definition that must be met for transfers of portions of financial
assets to be eligible for sale accounting, clarify and change the derecognition
criteria for a transfer to be accounted for as a sale, and require significant
additional disclosure. The adoption of this standard is not expected to have a
material impact on the Companys consolidated results of operations or
financial condition.

In June 2009, the FASB issued an accounting
standard that revised the consolidation guidance for variable-interest
entities. The modifications include the elimination of the exemption for
qualifying special purpose entities, a new approach for determining who should
consolidate a variable-interest entity, and changes to when it is necessary to
reassess who should consolidate a variable-interest entity. The adoption of
this standard is not expected to have a material impact on the Companys
consolidated results of operations or financial condition.

20

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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
October 31, 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

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TRANS WORLD ENTERTAINMENT CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION

Item 1  Legal Proceedings

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

Item 1A  Risk Factors

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

None.

Item 5  Other Information

None.

22

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Item 6 - Exhibits

(A) Exhibits -

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

23

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SIGNATURES

Pursuant to the requirements of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

TRANS WORLD ENTERTAINMENT CORPORATION

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

24

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