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

FORM 10-Q

|   |                                                                                                                                            
|-- | -------------------------------------------------------------------------------------------------------------------------------------------
|x  | QUARTERLY REPORT PURSUANT
  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
  QUARTERLY PERIOD ENDED OCTOBER 28, 2006
|   |                                                                                                                                            
|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, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. 
Large accelerated filer o          Accelerated
filer x          Non-accelerated
filer  o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). 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,
30,881,073 shares outstanding as of November 25, 2006

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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 28, 2006, January 28, 2006 and October
  29, 2005                                   |  | 3         | 
|                                                                                                                                       |  |           | 
|Condensed
  Consolidated Statements of Operations  Thirteen Weeks and Thirty-nine Weeks
  Ended October 28, 2006 and October 29, 2005 |  | 4         | 
|                                                                                                                                       |  |           | 
|Condensed
  Consolidated Statements of Cash Flows  Thirty-nine Weeks Ended October 28,
  2006 and October 29, 2005                    |  | 5         | 
|                                                                                                                                       |  |           | 
|Notes
  to Condensed Consolidated Financial Statements                                                                                 |  | 6         | 
|                                                                                                                                       |  |           | 
|Item 2 - Managements Discussion and
  Analysis of Financial Condition and Results of Operations                                       |  | 19        | 
|                                                                                                                                       |  |           | 
|Item 3  Quantitative and
  Qualitative Disclosures about Market Risk                                                                  |  | 30        | 
|                                                                                                                                       |  |           | 
|Item 4  Controls and Procedures                                                                                                       |  | 30        | 
|                                                                                                                                       |  |           | 
|PART II.  OTHER INFORMATION                                                                                                            |  |           | 
|                                                                                                                                       |  |           | 
|Item 1  Legal Proceedings                                                                                                             |  | 31        | 
|                                                                                                                                       |  |           | 
|Item 1A- Risk Factors                                                                                                                  |  | 31        | 
|                                                                                                                                       |  |           | 
|Item 2  Changes in Securities and Use
  of Proceeds                                                                                   |  | 31        | 
|                                                                                                                                       |  |           | 
|Item 4 - Submission of Matters to a
  Vote of Security Holders                                                                         |  | 32        | 
|                                                                                                                                       |  |           | 
|Item 6 - Exhibits and Reports on
  Form 8-K                                                                                            |  | 32        | 
|                                                                                                                                       |  |           | 
|Signatures                                                                                                                             |  | 33        | 

2

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESPART 1. FINANCIAL INFORMATIONItem 1 - Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)

|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------- | -------- | -------------------- | - | ------------------ | - | - | -------- | -
|                                                                                                                                     |  | October
  28,
  2006 |          | January
  28,
  2006 |   | October 29,
  2005 |  
|                                                                                                                                     |  |                      |          |                      |   |                    |  
|ASSETS                                                                                                                               |  |                      |          |                      |   |                    |   |   |          |  
|CURRENT ASSETS:                                                                                                                      |  |                      |          |                      |   |                    |   |   |          |  
|Cash and cash
  equivalents                                                                                                          |  | $                    | 13,543   |                      | $ | 197,209            |   | $ | 16,805   |  
|Merchandise
  inventory                                                                                                              |  |                      | 656,187  |                      |   | 402,712            |   |   | 477,732  |  
|Income taxes
  receivable                                                                                                            |  |                      | 3,544    |                      |   | 892                |   |   | 13,030   |  
|Deferred taxes                                                                                                                       |  |                      | 17,000   |                      |   | 11,266             |   |   | 12,397   |  
|Other current
  assets                                                                                                               |  |                      | 15,523   |                      |   | 14,408             |   |   | 13,513   |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|Total current
  assets                                                                                                               |  |                      | 705,797  |                      |   | 626,487            |   |   | 533,477  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|NET FIXED ASSETS                                                                                                                     |  |                      | 135,391  |                      |   | 132,464            |   |   | 129,918  |  
|DEFERRED TAXES                                                                                                                       |  |                      | 33,133   |                      |   | 27,511             |   |   | 27,640   |  
|OTHER ASSETS                                                                                                                         |  |                      | 14,477   |                      |   | 13,861             |   |   | 13,876   |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|TOTAL ASSETS                                                                                                                         |  | $                    | 888,798  |                      | $ | 800,323            |   | $ | 704,911  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|LIABILITIES                                                                                                                          |  |                      |          |                      |   |                    |   |   |          |  
|CURRENT
  LIABILITIES:                                                                                                               |  |                      |          |                      |   |                    |   |   |          |  
|Accounts payable                                                                                                                     |  | $                    | 353,521  |                      | $ | 322,831            |   | $ | 252,014  |  
|Borrowings under
  line of credit                                                                                                    |  |                      | 71,605   |                      |   |                   |   |   |         |  
|Accrued expenses
  and other current liabilities                                                                                     |  |                      | 60,241   |                      |   | 42,530             |   |   | 35,550   |  
|Current portion
  of long-term debt                                                                                                  |  |                      | 499      |                      |   | 477                |   |   | 470      |  
|Current portion
  of capital lease obligations                                                                                       |  |                      | 2,958    |                      |   | 3,182              |   |   | 3,108    |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|Total current
  liabilities                                                                                                          |  |                      | 488,824  |                      |   | 369,020            |   |   | 291,142  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|LONG-TERM DEBT,
  less current portion                                                                                               |  |                      | 4,212    |                      |   | 4,587              |   |   | 4,708    |  
|CAPITAL LEASE
  OBLIGATIONS, less current portion                                                                                    |  |                      | 12,710   |                      |   | 14,887             |   |   | 15,668   |  
|DEFERRED RENT
  AND OTHER LIABILITIES                                                                                                |  |                      | 28,819   |                      |   | 33,317             |   |   | 29,290   |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|TOTAL
  LIABILITIES                                                                                                                  |  |                      | 534,565  |                      |   | 421,811            |   |   | 340,808  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|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; 55,968,838, 55,727,575 and
  55,657,325 shares issued, respectively) |  |                      | 560      |                      |   | 557                |   |   | 557      |  
|Additional
  paid-in capital                                                                                                         |  |                      | 300,562  |                      |   | 298,669            |   |   | 298,982  |  
|Accumulated
  other comprehensive loss                                                                                               |  |                      | (2,048   | )                    |   | (2,048             | ) |   | (1,094   | )
|Treasury stock
  at cost (25,103,990, 25,104,990 and 24,444,349 shares, respectively)                                                |  |                      | (217,560 | )                    |   | (217,564           | ) |   | (213,262 | )
|Retained
  earnings                                                                                                                  |  |                      | 272,719  |                      |   | 298,898            |   |   | 278,920  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|TOTAL SHAREHOLDERS
  EQUITY                                                                                                         |  |                      | 354,233  |                      |   | 378,512            |   |   | 364,103  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  
|TOTAL
  LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  | $                    | 888,798  |                      | $ | 800,323            |   | $ | 704,911  |  
|                                                                                                                                     |  |                      |          |                      |   |                    |   |   |          |  

See
Notes to Condensed Consolidated Financial Statements.

3

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

|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | ------------------------- | - | -------------------- | - | ------------------ | ------- | - | - | ------- | -
|                                                                                                                      |  | Thirteen
  Weeks Ended |         | Thirty-nine
  Weeks Ended |  
|                                                                                                                      |  | October
  28,
  2006   |         | October
  29,
  2005      |   | October
  28,
  2006 |   | October 29,
  2005 |        
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |        
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Sales                                                                                                                 |  | $                      | 297,679 |                           | $ | 241,395              |   | $                  | 884,477 |   | $ | 779,923 |  
|Cost of sales                                                                                                         |  |                        | 188,868 |                           |   | 158,397              |   |                    | 569,009 |   |   | 499,485 |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Gross profit                                                                                                          |  |                        | 108,811 |                           |   | 82,998               |   |                    | 315,468 |   |   | 280,438 |  
|Selling, general
  and administrative expenses                                                                        |  |                        | 130,048 |                           |   | 102,325              |   |                    | 373,009 |   |   | 311,337 |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Loss from
  operations                                                                                                |  |                        | (21,237 | )                         |   | (19,327              | ) |                    | (57,541 | ) |   | (30,899 | )
|Interest expense                                                                                                      |  |                        | 1,653   |                           |   | 773                  |   |                    | 4,082   |   |   | 2,005   |  
|Other income                                                                                                          |  |                        | (46     | )                         |   | (152                 | ) |                    | (4,040  | ) |   | (1,607  | )
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Loss before
  income taxes and extraordinary gain - unallocated negative goodwill                                     |  |                        | (22,844 | )                         |   | (19,948              | ) |                    | (57,583 | ) |   | (31,297 | )
|Income tax
  benefit                                                                                                  |  |                        | (9,539  | )                         |   | (8,480               | ) |                    | (26,070 | ) |   | (11,928 | )
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Loss before
  extraordinary gain - unallocated negative goodwill                                                      |  |                        | (13,305 | )                         |   | (11,468              | ) |                    | (31,513 | ) |   | (19,369 | )
|Extraordinary
  gain - unallocated negative goodwill, net of income taxes of $2,038, $0 and
  $4,845, $0 respectively |  |                        | 1,925   |                           |   |                     |   |                    | 5,334   |   |   |        |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Net loss                                                                                                              |  | $                      | (11,380 | )                         | $ | (11,468              | ) | $                  | (26,179 | ) | $ | (19,369 | )
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|BASIC LOSS PER
  SHARE:                                                                                               |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Loss per share
  before extraordinary gain - unallocated negative goodwill                                            |  | $                      | (0.43   | )                         | $ | (0.36                | ) | $                  | (1.02   | ) | $ | (0.60   | )
|Extraordinary
  gain - unallocated negative goodwill, net of income taxes                                             |  |                        | 0.06    |                           |   |                     |   |                    | 0.17    |   |   |        |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Basic loss per
  share                                                                                                |  | $                      | (0.37   | )                         | $ | (0.36                | ) | $                  | (0.85   | ) | $ | (0.60   | )
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Weighted average
  number of common Shares outstanding  basic                                                        |  |                        | 30,842  |                           |   | 31,624               |   |                    | 30,768  |   |   | 32,350  |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|                                                                                                                     
|DILUTED LOSS PER
  SHARE:                                                                                             |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Loss per share
  before extraordinary gain - unallocated negative goodwill                                            |  | $                      | (0.43   | )                         | $ | (0.36                | ) | $                  | (1.02   | ) | $ | (0.60   | )
|Extraordinary
  gain - unallocated negative goodwill, net of income taxes                                             |  |                        | 0.06    |                           |   |                     |   |                    | 0.17    |   |   |        |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Diluted loss per
  share                                                                                              |  | $                      | (0.37   | )                         | $ | (0.36                | ) | $                  | (0.85   | ) | $ | (0.60   | )
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  
|Weighted average
  number of common shares outstanding  diluted                                                      |  |                        | 30,842  |                           |   | 31,624               |   |                    | 30,768  |   |   | 32,350  |  
|                                                                                                                      |  |                        |         |                           |   |                      |   |                    |         |   |   |         |  

See
Notes to Condensed Consolidated Financial Statements.

4

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

|                                                                              |  |                         |          |                    |   |          |  
|----------------------------------------------------------------------------- |  | ----------------------- | -------- | ------------------ | - | -------- | -
|                                                                              |  | Thirty-nine Weeks Ended |         
|                                                                              |  |                        
|                                                                              |  | October 28,
  2006      |          | October 29,
  2005 |  
|                                                                              |  |                         |          |                    |  
|Net loss                                                                      |  | $                       | (26,179  | )                  | $ | (19,369  | )
|Adjustments to reconcile net loss to net cash used by operating
  activities  |  |                         |          |                    |   |          |  
|Depreciation and amortization of fixed
assets                                 |  |                         | 29,756   |                    |   | 27,500   |  
|Amortization of intangible assets                                             |  |                         | 189      |                    |   | 268      |  
|Amortization of lease valuations, net                                         |  |                         | (1,239   | )                  |   | (321     | )
|Stock compensation programs                                                   |  |                         | 1,591    |                    |   | 19       |  
|Loss on disposal of fixed assets                                              |  |                         | 1,157    |                    |   | 1,841    |  
|Gain on sale of available-for-sale securities and
other investments           |  |                         | (3,528   | )                  |   | (813     | )
|Deferred tax (benefit) obligation                                             |  |                         | (16,201  | )                  |   | 2,715    |  
|Extraordinary gain on acquisition of business, net
of income taxes            |  |                         | (5,334   | )                  |   |         |  
|Changes in operating
  assets and liabilities, net of effects of acquisitions |  |                         |          |                    |   |          |  
|Accounts receivable                                                           |  |                         | (1,133   | )                  |   | (1,372   | )
|Merchandise inventory                                                         |  |                         | (141,087 | )                  |   | (46,485  | )
|Prepaid expenses and other                                                    |  |                         | 169      |                    |   | 1,011    |  
|Other assets                                                                  |  |                         | 167      |                    |   | (192     | )
|Accounts payable                                                              |  |                         | 30,796   |                    |   | (106,382 | )
|Income tax receivable                                                         |  |                         | (9,819   | )                  |   | (21,622  | )
|Accrued expenses and other current
liabilities                                |  |                         | (2,401   | )                  |   | (8,359   | )
|Deferred rent and other liabilities                                           |  |                         | (1,660   | )                  |   | (1,231   | )
|                                                                              |  |                         |          |                    |   |          |  
|Net cash used by operating activities                                         |  |                         | (144,756 | )                  |   | (172,792 | )
|                                                                              |  |                         |          |                    |   |          |  
|Cash flows from investing activities:                                         |  |                         |          |                    |   |          |  
|Purchases of fixed assets                                                     |  |                         | (33,675  | )                  |   | (29,063  | )
|Acquisition of businesses                                                     |  |                         | (78,750  | )                  |   |         |  
|Proceeds from sale of available-for-sale securities
and other
  investments   |  |                         | 4,116    |                    |   | 813      |  
|                                                                              |  |                         |          |                    |   |          |  
|Net cash used by investing activities                                         |  |                         | (108,309 | )                  |   | (28,250  | )
|                                                                              |  |                         |          |                    |   |          |  
|Cash flows from financing activities:                                         |  |                         |          |                    |   |          |  
|Proceeds from line of credit                                                  |  |                         | 71,605   |                    |   |         |  
|Proceeds from capital leases                                                  |  |                         |         |                    |   | 12,863   |  
|Payments of long-term debt                                                    |  |                         | (353     | )                  |   | (332     | )
|Payments of capital lease obligations                                         |  |                         | (2,401   | )                  |   | (1,394   | )
|Payments for purchases of treasury stock                                      |  |                         |         |                    |   | (26,972  | )
|Proceeds from the exercise of stock
options                                   |  |                         | 548      |                    |   | 3,914    |  
|                                                                              |  |                         |          |                    |   |          |  
|Net cash provided\(used) by financing activities                              |  |                         | 69,399   |                    |   | (11,921  | )
|                                                                              |  |                         |          |                    |   |          |  
|Net decrease in cash and cash equivalents                                     |  |                         | (183,666 | )                  |   | (212,963 | )
|                                                                              |  |                         |          |                    |   |          |  
|Cash and cash equivalents, beginning of year                                  |  |                         | 197,209  |                    |   | 229,768  |  
|                                                                              |  |                         |          |                    |   |          |  
|Cash and cash equivalents, end of period                                      |  | $                       | 13,543   |                    | $ | 16,805   |  
|                                                                              |  |                         |          |                    |   |          |  
|Supplemental disclosure of non-cash investing and financing
  activities:     |  |                         |          |                    |   |          |  
|Income tax benefit resulting from exercises of
stock options                  |  | $                       |         |                    | $ | 2,187    |  
|Issuance of shares under deferred stock
plan                                  |  |                         | 105      |                    |   |         |  
|Issuance of treasury stock under incentive stock
programs                     |  |                         | 4        |                    |   | 8        |  

See Notes to Condensed Consolidated Financial
Statements.

5

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited) 
October 28, 2006 and October 29, 2005

Note 1. Nature of Operations

Trans World
Entertainment Corporation and subsidiaries (the Company) is the largest
specialty music and video retailer in the United States. The Company operates a
chain of mall-based retail entertainment stores under the f.y.e., Sam Goody and
Suncoast brands and freestanding locations under the brands Coconuts Music and
Movies, Strawberries Music, Wherehouse, Sam Goody, Specs and Second Spin.
Consistent with the Companys strategy to establish f.y.e. as a national brand,
during the thirteen weeks ended October 28, 2006, the Company re-branded 50
stores to f.y.e., to end the quarter with over 650 f.y.e. stores. The Company
also conducts internet operations at www.fye.com, www.coconuts.com,
www.wherehouse.com, www.secondspin.com, www.samgoody.com and www.suncoast.com.

During the
thirty-nine weeks ended October 28, 2006, the Company acquired substantially
all the net assets of Musicland Holdings Inc. and acquired an 80% interest in
Mix & Burn LLC. See Note 6 to the Condensed Consolidated Financial
Statements for additional information. As of October 28, 2006, the Company
operated 1,121 stores totaling approximately 6.4 million square feet in the
United States, the District of Columbia, the Commonwealth of Puerto Rico and
the U.S. Virgin Islands.

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, and two majority owned subsidiaries that are fully consolidated for
reporting purposes. 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 28, 2006 has been derived from the Companys
January 28, 2006 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 28, 2006 and October 29, 2005. These unaudited Condensed
Consolidated Financial Statements should be read in conjunction with the
audited financial statements and notes thereto included in the Companys

6

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 
October 28, 2006 and October 29, 2005 
(continued)

Annual Report
on Form 10-K for the fiscal year ended January 28, 2006. Certain
reclassifications have been made to prior periods to conform to the current
period presentation.

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 28, 2006.

Note 3. Seasonality

The Companys
business is seasonal in nature, with the fourth fiscal quarter constituting the
Companys peak selling period. In 2005, the fourth fiscal quarter accounted for
approximately 37% of annual sales. In anticipation of increased sales activity
during these months, the Company purchases additional merchandise inventory and
hires additional, temporary employees to supplement its permanent store sales
staff. If, for any reason, the Companys sales were below seasonal norms during
the fourth quarter, the Companys operating results, particularly operating and
net income could be adversely affected. Additionally, quarterly sales results,
in general, are affected by the timing of new product releases, new store
openings or closings and the performance of existing stores.

Note 4. Stock Based Compensation

Prior to
January 29, 2006, the Company accounted for its stock-based compensation plans
under the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued
to Employees (APB Opinion No. 25) and related interpretations, as
permitted by the Financial Accounting Standards Boards (FASB) Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. Accordingly, no
stock-based compensation expense was recognized in the Condensed Consolidated
Statement of Operations for the thirteen and thirty-nine weeks ended October
29, 2005, as all options granted under the Companys stock-based employee
compensation plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. As permitted by SFAS No. 123,
stock-based compensation expense was included as a pro forma disclosure in the
Notes to the Companys Condensed Consolidated Financial Statements for the
thirteen and thirty-nine weeks ended October 29, 2005.

Effective January
29, 2006, the Company adopted the fair value recognition provisions of SFAS No.
123(R), Share-Based Payment,
using the modified prospective transition method. Under that transition method,
compensation cost recognized during the thirteen and thirty-nine weeks ended
October 28, 2006 includes compensation expense for all stock-based compensation
awards granted prior to, but not yet vested as of January 29, 2006, based on
the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123. Results for prior periods have not been restated, as allowed for under
the modified prospective transition method.

7

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 
October 28, 2006 and October 29, 2005 
(continued)

Note 4. Stock Based Compensation (continued)

Total
stock-based compensation expense recognized in the Condensed Consolidated
Statement of Operations for the thirteen and thirty-nine weeks ended October
28, 2006 was $0.5 million and $1.2 million respectively, before income taxes.
The related total deferred tax benefit was approximately $0.2 million and $0.5
million respectively, for the thirteen and thirty-nine weeks ended October 28,
2006. Prior to the adoption of SFAS No. 123(R), the Company presented all tax
benefits for deductions resulting from the exercise of stock options as
operating cash flows in the Condensed Consolidated Statements of Cash Flows.
SFAS No. 123(R) requires the tax benefits resulting from tax deductions in
excess of the compensation cost recognized for those options to be classified
and reported as both an operating cash outflow and a financing cash inflow on a
prospective basis upon adoption. As of October 28, 2006, there was $3.7 million
of unrecognized compensation cost related to stock option awards that is
expected to be recognized as expense over a weighted average period of 1.6
years.

In December
2005, the Companys Board of Directors approved the acceleration of vesting of
previously granted unvested annual options awarded to employees and officers
under the Companys stock option plans which had exercise prices greater than
$10.00 per share. Options to purchase 2.3 million shares became exercisable
immediately, representing 24% of total options outstanding, as a result of the
vesting acceleration. The decision to accelerate vesting of these stock options
was made primarily to avoid recognizing compensation expense in the
Consolidated Statement of Operations in future financial statements upon the
adoption of SFAS No.123 (R). The acceleration of vesting of these stock options
resulted in compensation expense of $5.9 million, in the pro forma net income
results for the year ended January 28, 2006.

The Company
has six employee stock option plans, the 1986 Stock Option Plan, the 1994 Stock
Option Plan, the 1998 Stock Option Plan, the 1999 Stock Option Plan and the
2002 Stock Option Plan (the Old Plans); and the 2005 Long Term Incentive
Share Plan (the New Plan). The Compensation Committee of the Board of
Directors may grant options to acquire shares of common stock to employees of
the Company at the fair market value of the common stock on the date of grant.
The Company has stopped issuing stock options under the Old Plans. Under the New
Plan, the Company generally issues Stock- Settled Appreciation Rights (SSARS)
that become exercisable in 50% increments commencing three years from the date
of grant and have a maximum term of ten years from issuance. Options and SSARS
authorized for issuance under the Old and New Plans total 19.8 million. As of
October 28, 2006, of the options authorized for issuance under the Old and New
Plans, 10.0 million were granted and are outstanding, 7.8 million of which are
vested and exercisable. Options available for future grants at October 28, 2006
total 3.8 million.

The Company
also has a stock option plan for non-employee directors (the 1990 Plan or
Directors Plan). Options under this plan are granted at an exercise price
determined by the Compensation Committee of the Board of Directors. Under the
1990 Plan, options generally become exercisable commencing one year from the
date of grant in increments of 25% per year with a maximum term of ten years
from issuance. In addition, non-employee directors of the Company receive
annual grants of deferred shares of Common Stock (Deferred Shares) issued
under the 1990 Plan which vest equally in three years from date of grant.

8

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 
October 28, 2006 and October 29, 2005 
(continued)

Note 4. Stock Based Compensation (continued)

As of October
28, 2006, there were 750,000 options authorized for issuance and 363,401
options have been granted and are outstanding, 134,661 of which were vested and
exercisable. There are 54,105 shares of common stock reserved for possible
future option grants under the 1990 Plan. In connection with the Companys
merger with Camelot in April 1999 all options issued under the Camelot Outside
Director Stock Option Plan (the Camelot Director Plan) were converted to the
Companys options. As of October 28, 2006, there were 4,750 options outstanding
and exercisable under the Camelot Director Plan. The Company no longer issues
options under the Camelot Director Plan.

SFAS No.
123(R) requires the use of a valuation model to calculate the fair value of
stock-based awards. The Company has elected to use the Black-Scholes option
valuation model, which incorporates various assumptions including those for
volatility, expected life and interest rates. The table below outlines the
weighted average assumptions that the Company used to calculate stock-based
employee compensation for the thirty-nine weeks ended October 28, 2006:

|                                                                             |  |                                            |             | 
|---------------------------------------------------------------------------- |  | ------------------------------------------ | ----------- | 
|                                                                             |  |                                            |            
|                                                                             |  | Thirty-nine weeks ended
  October 28, 2006 |            
|                                                                             |  |                                            |            
|Dividend yield                                                               |  |                                            | 0%          | 
|Expected stock price volatility                                              |  |                                            | 65.9%-71.2% | 
|Risk-free interest rate                                                      |  |                                            | 4.90%-5.04% | 
|Expected option life (in years)                                              |  |                                            | 5-7         | 
|Weighted average fair value per share of options granted during the
  period |  |                                            | $3.37       | 

The Company
has not paid dividends in the past and does not plan to pay dividends in the
foreseeable future. Expected stock price volatility is based on the historical
volatility of the Companys stock. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent term
approximating the expected life of the options. The expected option life (in
years) represents the estimated period of time until exercise and is based on
historical experience of similar awards.

9

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 
October 28, 2006 and October 29, 2005 
(continued)

Note 4. Stock Based Compensation (continued)

The following
table illustrates the effect on net loss and loss per share for the thirteen
and thirty-nine weeks ended October 29, 2005 as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation:

|                                                                                                                                                 |  |                                           |         |                           |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------- | ------- | ------------------------- | - | ------- | -
|                                                                                                                                                 |  | Thirteen
  Weeks ended                    |         | Thirty-nine
  Weeks ended |  
|                                                                                                                                                 |  |                                           |         |                           |  
|                                                                                                                                                 |  | October 29, 2005                          |         | October 29, 2005          |  
|                                                                                                                                                 |  |                                           |         |                           |  
|                                                                                                                                                 |  | (in thousands except per share
  amounts) |        
|Net loss, as reported                                                                                                                            |  | $                                         | (11,468 | )                         | $ | (19,369 | )
|Add: Stock-based employee
  compensation expense included in reported net loss, net of related income
  taxes                                    |  |                                           | 57      |                           |   | 122     |  
|Deduct: Total stock-based
  employee compensation expense determined under fair value based method for
  all awards, net of related income taxes |  |                                           | (643    | )                         |   | (2,202  | )
|                                                                                                                                                 |  |                                           |         |                           |   |         |  
|Pro forma net loss                                                                                                                               |  | $                                         | (12,054 | )                         | $ | (21,449 | )
|                                                                                                                                                 |  |                                           |         |                           |   |         |  
|Loss per share:                                                                                                                                  |  |                                           |         |                           |   |         |  
|Basic  as reported                                                                                                                              |  | $                                         | (0.36   | )                         | $ | (0.60   | )
|Basic  pro forma                                                                                                                                |  | $                                         | (0.38   | )                         | $ | (0.66   | )
|Diluted  as reported                                                                                                                            |  | $                                         | (0.36   | )                         | $ | (0.60   | )
|Diluted  pro forma                                                                                                                              |  | $                                         | (0.38   | )                         | $ | (0.66   | )

The table below
outlines the weighted average assumptions as if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation for the thirty-nine weeks ended October 29, 2005:

|                                                                             |  |                                            |       | 
|---------------------------------------------------------------------------- |  | ------------------------------------------ | ----- | 
|                                                                             |  |                                            |      
|                                                                             |  | Thirty-nine weeks ended
  October 29, 2005 |      
|                                                                             |  |                                            |      
|Dividend yield                                                               |  |                                            | 0%    | 
|Expected stock price volatility                                              |  |                                            | 55%   | 
|Risk-free interest rate                                                      |  |                                            | 3.83% | 
|Expected option life (in years)                                              |  |                                            | 5-6   | 
|Weighted average fair value per share of options granted during the
  period |  |                                            | $6.60 | 

10

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

Note 4. Stock Based Compensation (continued)

The following
table summarizes stock option activity during the thirty-nine weeks ended
October 28, 2006:

|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|------------------------------- |  | ---------------------------------------- | ---------- | ----------------------------------- |  | --------------------------------------------------- | ----- | ---------------------------------------- |  | ----------------------------------- |  | --------------------------------------------------- |  |  |  |  | ------- | - |  |  | - | ----- |  |  |  |  | --- |  | 
|                                |  | Employee Stock Option Plans              |            | Director Stock Option Plans         | 
|                                |  |                                          |            |                                     | 
|                                |  | Number of
  Shares
  Subject
  To Option |            | Weighted
  Average
  Exercise Price |  | Weighted
  Average
  Remaining
  Contractual
  Term |       | Number of
  Shares
  Subject
  To Option |  | Weighted
  Average
  Exercise Price |  | Weighted
  Average
  Remaining
  Contractual
  Term | 
|                                |  |                                          |            |                                     | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   | 
|Balance at January 28, 2006     |  |                                          | 9,521,536  |                                     |  | $                                                   | 9.10  |                                          |  |                                     |  | 6.1                                                 |  |  |  |  | 338,276 |   |  |  | $ | 4.56  |  |  |  |  | 6.2 |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|Granted                         |  |                                          | 952,675    |                                     |  |                                                     | 5.35  |                                          |  |                                     |  | 9.5                                                 |  |  |  |  | 105,000 |   |  |  |   | 0.00  |  |  |  |  | 9.5 |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|Exercised                       |  |                                          | (206,763   | )                                   |  |                                                     | 2.62  |                                          |  |                                     |  |                                                    |  |  |  |  | (34,500 | ) |  |  |   | 0.00  |  |  |  |  |    |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|Forfeited or expired            |  |                                          | (212,245   | )                                   |  |                                                     | 6.09  |                                          |  |                                     |  |                                                    |  |  |  |  | (40,625 | ) |  |  |   | 10.05 |  |  |  |  |    |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|Balance October 28, 2006        |  |                                          | 10,055,203 |                                     |  | $                                                   | 8.94  |                                          |  |                                     |  | 5.5                                                 |  |  |  |  | 368,151 |   |  |  | $ | 3.06  |  |  |  |  | 7.2 |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 
|Exercisable at October 28, 2006 |  |                                          | 7,799,469  |                                     |  | $                                                   | 10.17 |                                          |  |                                     |  | 4.8                                                 |  |  |  |  | 139,411 |   |  |  | $ | 6.34  |  |  |  |  | 4.9 |  | 
|                                |  |                                          |            |                                     |  |                                                     |       |                                          |  |                                     |  |                                                     |  |  |  |  |         |   |  |  |   |       |  |  |  |  |     |  | 

The intrinsic
value of stock options exercised under all Plans was $0.1 million and $0.8
million respectively, during the thirteen and thirty-nine weeks ended October
28, 2006. The intrinsic value of stock options outstanding and exercisable
under both plans as of October 28, 2006 was $8.5 million and $3.0 million,
respectively.

11

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

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, which is unfunded,
provides eligible executives defined pension benefits that supplement benefits
under other retirement arrangements. The annual benefit amount is based on
salary and bonus at the time of retirement and number of years of service.

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

The
measurement date for the SERP and the Director Retirement Plan is November 1
using actuarial techniques which reflect estimates for mortality, turnover and
expected retirement. In addition, management makes assumptions concerning
future salary increases. Generally discount rates are established as of the
measurement date using theoretical bond models that select high-grade corporate
bonds with maturities or coupons that correlate to the expected payouts of the
applicable liabilities.

The Company
accounts for the SERP and the Director Retirement Plan in accordance with the
provisions of SFAS No. 87, Employers Accounting for Pensions. During
the thirty-nine weeks ended October 28, 2006, 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
$15,000 in benefits relating to the Director Retirement Plan during fiscal
2006. 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 28,
  2006   |     | October 29,
  2005      |   | October 28,
  2006 |  | October 29,
  2005 |      
|                                     |  |                      |     |                         |   |                    |  |                    |      
|                                     |  | (in thousands)       |     | (in thousands)          |  
|Service cost                         |  | $                    | 170 |                         | $ | 133                |  | $                  | 510   |  | $ | 399   | 
|Interest
  cost                      |  |                      | 221 |                         |   | 196                |  |                    | 663   |  |   | 588   | 
|Amortization
  of prior service cost |  |                      | 86  |                         |   | 85                 |  |                    | 256   |  |   | 255   | 
|Amortization
  of net loss           |  |                      | 69  |                         |   | 62                 |  |                    | 207   |  |   | 186   | 
|                                     |  |                      |     |                         |   |                    |  |                    |       |  |   |       | 
|Net periodic
  pension cost          |  | $                    | 546 |                         | $ | 476                |  | $                  | 1,636 |  | $ | 1,428 | 
|                                     |  |                      |     |                         |   |                    |  |                    |       |  |   |       | 

12

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

Note 6. Business Combinations

On March 27,
2006, the Company acquired substantially all the net assets of Musicland
Holdings Inc. (Musicland). The acquisition of Musiclands assets provided the
Company with the ability to leverage its overhead expenses over a greater store
base, and strategically increase the Companys national presence and provide
further growth opportunities. Under the terms of the Asset Purchase Agreement
(APA), the Company acquired 335 of Musiclands 400 stores, with the remainder
of the stores being liquidated under an agency agreement with Hilco Merchant
Resources LLC. Musicland, which operated retail stores and websites under the
names Sam Goody (SamGoody.com), Suncoast Motion Picture Company (Suncoast.com),
On Cue and MediaPlay.com, filed a voluntary petition to restructure under
Chapter 11 of the United States Bankruptcy Code in January 2006. The
acquisition was accounted for using the purchase method of accounting. The
Condensed Consolidated Statement of Operations for the thirteen and thirty-nine
weeks ended October 28, 2006 includes the results of Musicland beginning March
27, 2006.

The purchase
price for the acquired Musicland assets was $82.6 million, including
acquisition-related costs of $1.9 million, of which $78.8 million was paid as
of October 28, 2006. The final purchase price and payment thereof, is subject
to settlement of post closing adjustments related to inventory. The total
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values as follows:

|                            |  |                  |         | 
|--------------------------- |  | ---------------- | ------- | 
|                            |  | ($ in thousands) |        
|Assets
  Acquired:          |  |                  |         | 
|Inventory                   |  | $                | 112,332 | 
|                            |  |                  |         | 
|Liabilities
  Assumed:      |  |                  |         | 
|Accrued expenses and other  |  | $                | 14,271  | 
|Other long-term liabilities |  |                  | 5,280   | 
|                            |  |                  |         | 
|Total liabilities assumed   |  | $                | 19,551  | 
|                            |  |                  |         | 
|Net assets acquired         |  | $                | 92,781  | 
|                            |  |                  |         | 

The purchase
price has been allocated on a preliminary basis using information currently
available. In accordance with SFAS No. 141, Business Combinations, the allocation of
the purchase price to the assets acquired and liabilities assumed will be
finalized within twelve months following the date of acquisition.

During the
thirteen and thirty-nine weeks ended October 28, 2006, the Company allocated
the purchase price in accordance with the provisions of SFAS No. 141, resulting
in an extraordinary gain  unallocated negative goodwill of $1.9 million and
$5.3 million, respectively, net of income taxes of $2.0 million and $4.8
million, respectively. The extraordinary gain represents the excess of the fair
value of net assets acquired over the purchase price.

13

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

Note 6. Business Combinations (continued)

The unaudited
financial information in the table below summarizes the combined results of
operations of the Company and Musicland, on a pro forma basis as though the
companies had been combined at the beginning of each period presented. This pro
forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that would have been
achieved had the acquisition taken place at the beginning of each period
presented. The pro forma information does not include one time items related to
purchase accounting, including the extraordinary gain arising from unallocated
negative goodwill.

The unaudited
pro forma Condensed Consolidated Statement of Operations for the thirteen and
thirty-nine weeks ended October 28, 2006 combines the historical results of the
Company for the thirteen and thirty-nine weeks ended October 28, 2006 and the
historical results of Musicland for the period preceding the acquisition from
January 29, 2006 through March 27, 2006. The unaudited pro forma Condensed
Consolidated Statement of Operations for the thirteen and thirty-nine weeks
ended October 29, 2005 combines the historical results of the Company and
Musicland for the periods. The following is the pro forma information,
exclusive of the effect of purchase accounting adjustments:

|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |         |   |   |           |  
|----------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ------- | ----------------------- | - | ------------------ | - | ------------------ | ------- | - | - | --------- | -
|                                                                                                            |  | Thirteen weeks ended                   |         | Thirty-nine weeks ended |  
|                                                                                                            |  |                                        |         |                         |  
|                                                                                                            |  | October 28,
  2006                     |         | October 29,
  2005      |   | October 28,
  2006 |   | October 29,
  2005 |        
|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |        
|                                                                                                            |  | in thousands,
except per share amounts |        
|Pro forma sales                                                                                             |  | $                                      | 297,679 |                         | $ | 320,807            |   | $                  | 932,939 |   | $ | 1,027,806 |  
|Pro forma loss before extraordinary gain -
  unallocated negative goodwill                                  |  |                                        | (12,509 | )                       |   | (13,397            | ) |                    | (34,140 | ) |   | (24,660   | )
|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |         |   |   |           |  
|                                                                                                           
|Pro forma net loss                                                                                          |  | $                                      | (12,509 | )                       | $ | (13,397            | ) | $                  | (34,140 | ) | $ | (24,660   | )
|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |         |   |   |           |  
|Pro forma net loss before extraordinary
  gain  unallocated negative goodwill, per basic and diluted share |  | $                                      | (0. 41  | )                       | $ | (0.42              | ) | $                  | (1.11   | ) | $ | (0.76     | )
|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |         |   |   |           |  
|                                                                                                           
|Pro forma net loss per basic and diluted
  share                                                            |  | $                                      | (0.41   | )                       | $ | (0.42              | ) | $                  | (1.11   | ) | $ | (0.76     | )
|                                                                                                            |  |                                        |         |                         |   |                    |   |                    |         |   |   |           |  

During the
thirty-nine weeks ended October 28, 2006, the Company acquired an 80% interest
in Mix & Burn LLC, a company that is fully consolidated for financial
reporting. The Company has committed funding of $5.2 million, of which $3.2
million has been funded as of October 28, 2006. Pro forma results of operations
including the results of Mix & Burn LLC have not been presented because the
pro forma effect of the acquisition would not be material to the Companys
results of operations. Mix & Burn LLC is a leading provider of digital
content services to retailers nationwide. Using its technology, consumers can
create custom music CDs from an extensive catalog of new and old content. This
acquisition will enable the Companys retail locations to offer customers new
content, new products and new services relating to music players and music
player enabled cell phones in its stores.

14

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

Note 7. Line of Credit

The Company
has a five-year, $150 million secured revolving credit facility with Bank of
America, N.A. that expires in January 2010. The revolving credit facility
contains provisions governing additional indebtedness and acquisitions and is
secured by the Companys eligible merchandise inventory, proceeds from the sale
of inventory and by the stock of the Companys subsidiaries. The Company
anticipates the amount of the revolving credit facility being fully available
to the Company through its term, and does not anticipate any difficulty in
obtaining a replacement facility upon its expiration. As of October 28,
2006, the Company had borrowed $71.6 million, under the revolving credit
facility, had $0.3 million in outstanding letter of credit obligations
under the revolving credit facility and $78.1 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen week period ended October 28, 2006 was 6.30%. There were no borrowings
outstanding under lines of credit as of October 29, 2005.

Note 8. Comprehensive Loss

The Company
accounts for comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires only additional
disclosures in the Condensed Consolidated Financial Statements; it does not
affect the Companys financial position or results of operations. Accumulated
other comprehensive loss currently included in the Condensed Consolidated
Balance Sheet is the excess of additional minimum pension liability over
unrecognized prior service cost with respect to the Companys Supplemental Executive
Retirement Plan. The Companys total comprehensive loss for the thirteen and
thirty-nine weeks ended October 28, 2006 and October 29, 2005 was as follows:

|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | -------------------- | ------- | ----------------------- | - | ------------------ | - | ----------------- | ------- | - | - | ------- | -
|                                                                                                                 |  | Thirteen Weeks ended |         | Thirty-nine Weeks ended |  
|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  
|                                                                                                                 |  | October 28,
  2006   |         | October 29,
  2005      |   | October 28,
  2006 |   | October 29
  2005 |        
|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |        
|                                                                                                                 |  | ($ in thousands)     |         | ($ in thousands)        |  
|Net loss                                                                                                         |  | $                    | (11,380 | )                       | $ | (11,468            | ) | $                 | (26,179 | ) | $ | (19,369 | )
|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  
|Other comprehensive income, net of income
  taxes:                                                               |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  
|Change in unrealized gain on
  available-for-sale securities, net of income taxes of $0 and $306,
  respectively |  |                      |        |                         |   |                   |   |                   |        |   |   | 442     |  
|                                                                                                                
|Reclassification adjustment for realized
  gain on available-for-sale securities included in income              |  |                      |        |                         |   |                   |   |                   |        |   |   | (442    | )
|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  
|Total comprehensive loss                                                                                         |  | $                    | (11,380 | )                       | $ | (11,468            | ) | $                 | (26,179 | ) | $ | (19,369 | )
|                                                                                                                 |  |                      |         |                         |   |                    |   |                   |         |   |   |         |  

15

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005 
(continued)

Note 9. Recently Issued Accounting Standards

In September
2006 the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans  an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which
the changes occur through comprehensive income. The requirements of SFAS No.
158 pertaining to the recognition of the funded status of defined benefit
postretirement plans and related disclosures are effective as of the end of
fiscal years ending after December 15, 2006 and, accordingly, will be adopted
by the Company for the year ended February 3, 2007. SFAS No. 158 also requires
that defined benefit plan assets and obligations be measured as of the date of
the employers fiscal year-end statement of financial position, however, this
requirement of the statement is effective for fiscal years ending after
December 15, 2008. We are currently assessing the impact of the adoption of
SFAS No. 158 on the Companys Consolidated Financial Statements.

In September
2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
157, Fair
Value Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
(GAAP), and expands disclosures about fair value measurements. SFAS No. 157
applies under other accounting pronouncements that require or permit fair value
measurements, however, does not require any new fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
adoption of SFAS No. 157 is not expected to have a significant impact on the
Companys Consolidated Financial Statements.

In September
2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, which expresses
the Staffs views regarding the process of quantifying financial statement
misstatements. The guidance in SAB No. 108 requires registrants to quantify
misstatements using both the balance sheet and income statement approaches and
to evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. SAB No. 108
does not change the Staffs previous guidance on evaluating the materiality of
misstatements in SAB No. 99. If the effect of initial adoption is considered to
be material, SAB No. 108 allows registrants to record the effect as a
cumulative-effect adjustment to beginning-of-year retained earnings. The
requirements of SAB No. 108 are effective for annual financial statements
covering the first fiscal year ending after November 15, 2006 and, accordingly,
will be adopted by the Company for fiscal year 2006. The adoption of SAB No.
108 is not expected to have a significant impact on the Companys Consolidated
Financial Statements.

16

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

In July 2006,
the FASB issued Interpretation No. (FIN) 48, Accounting for Uncertainty in Income
TaxesAn Interpretation of FASB Statement No. 109, which prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in
a tax return. In particular, this interpretation requires uncertain tax
positions to be recognized only if they are more-likely-than-not to be upheld
based on their technical merits. Additionally, the measurement of the tax
position will be based on the largest amount that is determined to have greater
than a 50% likelihood of realization upon ultimate settlement. Any resulting
cumulative effect of applying the provisions of FIN 48 upon adoption would be
reported as an adjustment to the beginning balance of retained earnings in the
period of adoption. FIN 48 will be effective beginning fiscal 2007. We have not
yet evaluated the impact of this interpretation on the Companys Consolidated
Financial Statements.

Note 10. 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 28,
  2006   |        | October 29,
  2005      |   | October 28,
  2006 |  | October 29,
  2005 |       
|                                               |  |                      |        |                         |   |                    |  |                    |       
|                                               |  | (in thousands)       |        | (in thousands)          |  
|Cost of
  sales                                |  | $                    | 764    |                         | $ | 778                |  | $                  | 2,281  |  | $ | 2,328  | 
|Selling,
  general and administrative expenses |  |                      | 9,810  |                         |   | 8,585              |  |                    | 27,475 |  |   | 25,172 | 
|                                               |  |                      |        |                         |   |                    |  |                    |        |  |   |        | 
|Total                                          |  | $                    | 10,574 |                         | $ | 9,363              |  | $                  | 29,756 |  | $ | 27,500 | 
|                                               |  |                      |        |                         |   |                    |  |                    |        |  |   |        | 

Note 11. Earnings Per Share

Weighted
average shares are calculated as follows:

|                                                       |  |                      |        |                         |  |                    |  |                    |        |  |  |        | 
|------------------------------------------------------ |  | -------------------- | ------ | ----------------------- |  | ------------------ |  | ------------------ | ------ |  |  | ------ | 
|                                                       |  | Thirteen Weeks Ended |        | Thirty-nine Weeks Ended | 
|                                                       |  |                      |        |                         | 
|                                                       |  | October 28,
  2006   |        | October 29,
  2005      |  | October 28,
  2006 |  | October 29,
  2005 |       
|                                                       |  |                      |        |                         |  |                    |  |                    |       
|                                                       |  | (in thousands)       |        | (in thousands)          | 
|Weighted
  average common shares outstanding  basic   |  |                      | 30,842 |                         |  | 31,624             |  |                    | 30,768 |  |  | 32,350 | 
|Dilutive
  effect of employee stock options            |  |                      |       |                         |  |                   |  |                    |       |  |  |       | 
|                                                       |  |                      |        |                         |  |                    |  |                    |        |  |  |        | 
|Weighted
  average common shares outstanding  diluted |  |                      | 30,842 |                         |  | 31,624             |  |                    | 30,768 |  |  | 32,350 | 
|                                                       |  |                      |        |                         |  |                    |  |                    |        |  |  |        | 
|                                                       |  |                      |        |                         |  |                    |  |                    |        |  |  |        | 
|Anti-dilutive
  stock options                          |  |                      | 10,517 |                         |  | 9,947              |  |                    | 10,080 |  |  | 9,851  | 
|                                                       |  |                      |        |                         |  |                    |  |                    |        |  |  |        | 

For the
thirteen and thirty-nine week periods ended October 28, 2006, the impact of
outstanding stock options was not considered because the Company reported a net
loss and such impact would be anti-dilutive.

17

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
October 28, 2006 and October 29, 2005
(continued)

Note 12. Income Taxes

During the
thirty-nine weeks ended October 29, 2005, the Company recorded an income tax
charge of $1.1 million resulting from changes in the Ohio state income tax law.
The legislation phased out state corporation franchise tax which is based on
income. The tax charge represented a write-off of the state deferred tax assets
allocated to Ohio, principally net operating losses that, based on managements
estimates, would not be realized during the phase-out period.

Note 13. Investments in Unconsolidated
Affiliates

Investments in
unconsolidated affiliates are recorded on the cost basis, with any decline in
the market value below cost that is deemed other than temporary charged to
operations. Write-off of investments in unconsolidated affiliates for other
than temporary decline in market value is reflected in SG&A expenses in the
Consolidated Statements of Operations. During the thirty-nine weeks ended October
28, 2006, the Company recorded a realized gain of $3.5 million on the sale of
an investment in an unconsolidated affiliate.

Note 14. Legal Proceedings

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

Note 15. Contractual Obligations and
Commitments

The Companys
Annual Report on Form 10-K for the year ended January 28, 2006 provides a
summary of the Companys contractual obligations at January 28, 2006, and the
effect that such obligations are expected to have on liquidity and cash flows
in future periods. The following information relating to commitments entered
into during the thirty-nine weeks ended October 28, 2006 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 most recently filed Annual Report on Form
10-K for the fiscal year ended January 28, 2006.

During the
thirty-nine weeks ended October 28, 2006, the Company acquired an 80% interest
in Mix & Burn LLC, which is fully consolidated for financial reporting
purposes. The Company has committed funding of $5.2 million, of which $3.2
million has been funded as of October 28, 2006. See Note 6 of Notes to the
Condensed Consolidated Financial Statements for further discussion.

18

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIESItem 2 - Managements Discussion and Analysis of Financial
Condition and
Results of Operations
October 28, 2006 and October 29, 2005

Overview

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, DVD 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 28,
2006.

At October 28,
2006, the Company operated 1,121 stores totaling approximately 6.4 million
square feet in 50 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 CDs, DVDs and video games. In total, these
categories represented 90% of the Companys sales in the thirty-nine weeks
ended October 28, 2006. The balance of categories, including software
accessories, boutique and electronic products represented 10% of the Companys
sales in the thirty-nine weeks ended October 28, 2006.

The Company
strives to understand general economic and business trends and to manage the
business in response to those trends, and monitors a number of key performance
indicators in this regard, 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 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 geography and by product
category.

Cost of Sales and Gross Profit:
Gross profit is impacted primarily by the mix of products sold, 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 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.

19

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
October 28, 2006 and October 29, 2005
(continued)

Selling, General and Administrative
(SG&A) expenses: Included in SG&A expenses
are payroll and related costs, occupancy charges, professional and service
fees, general operating and overhead expenses and depreciation charges
(excluding those related to distribution operations, as discussed in Note 10 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires that
management apply accounting policies and make estimates and assumptions that
affect results of operations and the reported amounts of assets and liabilities
in the financial statements. Management continually evaluates its estimates and
judgments including those related to merchandise inventory and return costs,
valuation of long-lived assets, income taxes, 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 28,
2006 includes a summary of the significant accounting policies and methods used
by the Company in the preparation of its Condensed Consolidated Financial
Statements. Management believes that of the Companys significant accounting
policies, the following may involve a higher degree of judgment or complexity:

Merchandise Inventory and Return Costs:
Merchandise inventory is stated at the lower of cost or market as determined by
the average cost method. The average cost method attaches a cost to each item
and is a blended average of the original purchase price and those of subsequent
purchases or other cost adjustments throughout the life cycle of that item.
Merchandise inventory valuation requires significant judgment and estimates,
including obsolescence, shrink and any adjustments to market value, if market
value is lower than cost. Inherent in the entertainment software industry is
the risk of obsolete inventory. Typically, newer releases generate a higher
product demand. Some vendors offer credits to reduce the cost of products that
are selling more slowly, thus allowing for a reduction in the selling price and
reducing the possibility for items to become obsolete. The Company records
obsolescence and any adjustments to market value (if lower than cost) based on
current and anticipated demand, customer preferences, and market conditions.
The provision for merchandise inventory shrink is estimated as a percentage of
sales for the period from the last date a physical inventory was performed to
the end of the fiscal period. Such estimates are based on historical results
and trends and the shrink results from the last physical inventory. Physical
inventories are taken at least annually for all stores throughout the year and
inventory records are adjusted accordingly.

20

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
October 28, 2006 and October 29, 2005
(continued)

Merchandise Inventory and Return Costs
(continued): The Company is entitled to return
merchandise purchased from major vendors for credit against other purchases
from these vendors. Certain vendors reduce the credit with a per unit
merchandise return charge which varies depending on the type of merchandise
being returned. Certain other vendors charge a handling fee based on units
returned. The Company records merchandise return charges in cost of sales.

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

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

If the Company
were to determine that the carrying value of a long-lived asset may not be
recoverable based on one or more of the above indicators, the Company would
test for impairment to determine if a write-down is needed. Store closings
usually occur at the expiration of the lease, at which time leasehold
improvements, which constitute a majority of the abandoned assets, are fully
depreciated. Also, actual store closures usually occur within three months of
the planned store closure date. As a result, changes in depreciation estimates
as required by Accounting Principles Board, Opinion No. 20, Accounting Changes
(APB 20), do not have a material impact on financial results. Losses for
store closings in the ordinary course of business represent the write down of
the net book value of abandoned fixtures and leasehold improvements. The loss
on disposal of fixed assets related to store closings is included in SG&A
expenses.

Income Taxes: Income
taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax
operating loss carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax laws and rates
is recognized in the results of operations in the period that includes the
enactment date. Accounting for income taxes requires management to make
estimates and judgments regarding interpretation of various taxing
jurisdictions, laws and regulations as well as the ultimate realization of
deferred tax assets. These estimates and judgments include the generation of future
taxable income, viable tax planning strategies and support of tax filings.
Valuation allowances are recorded against deferred tax assets if, based upon
managements estimates of realizability, it is more likely than not that some
portion or all of these deferred tax assets will not be realized.

Stock-based Compensation:
Effective January 29, 2006, the Company adopted the provisions of SFAS No.
123(R) using the modified prospective transition method. Under this transition
method, stock-based

21

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
October 28, 2006 and October 29, 2005
(continued)

compensation
expense recognized for share-based awards during the thirty-nine weeks ended
October 28, 2006 includes: (a) compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of,
January 29, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123, and
(b) compensation expense for all stock-based compensation awards granted
subsequent to January 29, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123(R). In accordance
with the modified prospective transition method, results for the prior period
have not been restated. Prior to the adoption of SFAS No. 123(R), the Company
recognized stock-based compensation expense in accordance with APB Opinion No.
25 and related Interpretations, as allowed by SFAS No. 123.

The
calculation of share-based employee compensation expense involves estimates
that require managements judgments. These estimates include the fair value of
each of the stock option awards granted, which is estimated on the date of
grant using a Black-Scholes option pricing model. There are two significant
inputs into the Black-Scholes option pricing model that require significant
judgment and estimates: expected volatility and expected term. The Company
estimates expected volatility based on the historical volatility of the
Companys stock over a term equal to the expected term of the option granted.
The expected term of stock option awards granted is derived from historical
exercise experience under the Companys stock option plans and represents the
period of time that stock option awards granted are expected to be outstanding.
The assumptions used in calculating the fair value of share-based payment
awards represent managements best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result,
if factors change and the Company uses different assumptions, stock-based
compensation expense could be materially different in the future. In addition,
the Company is required to estimate the expected forfeiture rate, and only
recognize expense for those shares expected to vest. If the Companys actual
forfeiture rate is materially different from its estimate, the stock-based
compensation expense could be significantly different from what the Company has
recorded in the current period. See Note 4 to the Condensed Consolidated
Financial Statements for a further discussion on stock-based compensation.

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

22

---



RESULTS
OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended October 28, 2006
Compared to the Thirteen and Thirty-nine Weeks Ended October 29, 2005

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 28, 2006 and October 29, 2005, by category:

|                |  |                          |         |                          |   |         |  |   |        |  |                                    |     |                          |  |                          |    |        |   |         |   |   |                                    |  |   |         |  |  |     |  |  |     |   
|--------------- |  | ------------------------ | ------- | ------------------------ | - | ------- |  | - | ------ |  | ---------------------------------- | --- | ------------------------ |  | ------------------------ | -- | ------ | - | ------- | - | - | ---------------------------------- |  | - | ------- |  |  | --- |  |  | --- | --
|                |  | Thirteen weeks ended     |         | Thirty-nine weeks ended 
|                |  |                          |         |                         
|                |  | October
        28, 2006 |         | October
        29, 2005 |   | Change  |  |   | %      |  | Comp 
        Store 
        Sales |     | October
        28, 2006 |  | October
        29, 2005 |    | Change |   |         | % |   | Comp 
        Store 
        Sales
|                |  |                          |         |                          |   |         |  |   |        | 
|                |  | (in thousands)           |         |                          |   |         |  |   |        |  | (in thousands)                     |     |                          |  |                          |    |        |  
|               
|Sales           |  | $                        | 297,679 |                          | $ | 241,395 |  | $ | 56,284 |  |                                    | 23% |                          |  | (5                       | %) |        | $ | 884,477 |   | $ | 779,923                            |  | $ | 104,554 |  |  | 13% |  |  | (6  | %)
|               
|As a % of sales |  |                          |         |                          |   |         |  |   |        |  |                                    |     |                          |  |                          |    |        |   |         |   |   |                                    |  |   |         |  |  |     |  |  |     |   
|Music           |  |                          | 46%     |                          |   | 58%     |  |   |        |  |                                    |     |                          |  | (14                      | %) |        |   | 48%     |   |   | 58%                                |  |   |         |  |  |     |  |  | (14 | %)
|Video           |  |                          | 37%     |                          |   | 27%     |  |   |        |  |                                    |     |                          |  | 8                        | %  |        |   | 35%     |   |   | 27%                                |  |   |         |  |  |     |  |  | 4   | % 
|Video Games     |  |                          | 7%      |                          |   | 6%      |  |   |        |  |                                    |     |                          |  | 8                        | %  |        |   | 7%      |   |   | 7%                                 |  |   |         |  |  |     |  |  | 4   | % 
|Other           |  |                          | 10%     |                          |   | 9%      |  |   |        |  |                                    |     |                          |  | 4                        | %  |        |   | 10%     |   |   | 8%                                 |  |   |         |  |  |     |  |  | 6   | % 
|                |  |                          |         |                          |   |         |  |   |        |  |                                    |     |                          |  |                          |    |        |   |         |   |   |                                    |  |   |         |  |  |     |  |  |     |   
|Store Count:    |  |                          |         |                          |   |         |  |   |        |  |                                    |     |                          |  |                          |    |        |   |         |   |   |                                    |  |   |         |  |  |     |  |  |     |   
|Mall            |  |                          | 827     |                          |   | 556     |  |   |        |  |                                    |     |                          |  | (4                       | %) |        |   | 827     |   |   | 556                                |  |   |         |  |  |     |  |  | (5  | %)
|Freestanding    |  |                          | 294     |                          |   | 244     |  |   |        |  |                                    |     |                          |  | (8                       | %) |        |   | 294     |   |   | 224                                |  |   |         |  |  |     |  |  | (9  | %)
|Total           |  |                          | 1,121   |                          |   | 800     |  |   |        |  |                                    |     |                          |  | (5                       | %) |        |   | 1,121   |   |   | 800                                |  |   |         |  |  |     |  |  | (6  | %)

Sales.
Sales increased 23% and 13% in the thirteen and thirty-nine week periods ending
October 28, 2006, respectively.  The
increase was due to the acquisition of the Musicland stores, (see Note 6 of
Notes to the Condensed Consolidated Financial Statements) partially offset by a
  decrease in comparable store sales of 5% and 6% for the thirteen weeks and
  thirty-nine weeks ended October 28, 2006, respectively.  The Company is in the process of changing
  its product mix to sell a higher percentage of DVDs, video games and electronics to
  better match the tastes of its customers.

Music:

The Companys stores offer a wide range of compact
discs (CDs) across most music genres, including new releases from current
artists as well as an extensive catalog of music from past periods and artists.
During the thirteen and thirty-nine weeks ended October 28, 2006, CD sales in
comparable stores decreased 14% versus the thirteen and thirty-nine weeks ended
October 29, 2005. The Companys total sales in music decreased 2% and 6%,
respectively, for the thirteen and thirty-nine weeks ended October 28,
2006.  The Companys decrease in music
sales was due to a decline in comparable store sales, partially offset by an
increase in store count.

Video:

The Company offers home video software in all of its
stores.  DVD represented 99% of home
video sales for the thirteen and thirty-nine weeks ended October 28, 2006.  Comparable store sales in the DVD category
increased 13% and 10% during the thirteen weeks ended and thirty-nine week
period ending October 28, 2006.  Total
sales for the category increased 77% and 54% for the thirteen and thirty-nine
week periods ended October 28, 2006.
The total sales increase was due to the increase in total store count
and positive comparable store sales.
The Company added over 160 video only format stores, under the Suncoast
brand, from the Musicland acquisition.
Comparable store sales for the total video category, including VHS, were
up 8% and 4% for the thirteen and thirty-nine week periods ended October 28,
2006.

23

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
(continued)

Video
Games:

The Company offers video game hardware and software in
most of its stores, with a mix that favors software.  Comparable store sales increased 8% and 4%, respectively, in the
thirteen and thirty-nine week periods ended October 28, 2006.  Total
sales increased 37% and 24% in the thirteen and thirty-nine week periods ended
October 28, 2006, respectively.

Other:

The Company offers items relating to the use, care and
storage of entertainment software, along with boutique and electronic products.
Comparable store sales increased 4% and 6%, respectively in the thirteen and
thirty-nine week period ended October 28, 2006. The increase is due to the Companys
merchandising initiatives to expand the product lines and to complement the
core merchandise categories of CD, DVD and video games.  More specifically, in the electronics
division, sales increased 41% and 28%, respectively, during the thirteen and
thirty-nine weeks ended October 28, 2006, with comparable store increases of 4%
for both periods.  This reflects the
Companys strategy to increase its presence in mobile electronics and MP3
players.

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 
  28, 2006                 |         | October 
  29, 2005 |        |        | $                                      |  |        | %      |  | October 
  28, 2006 |  | October 
  29, 2005 |         |   | $ |         |   | % |       
|                |  |                                     |         |                     |        |        |                                        | 
|Gross Profit    |  | $                                   | 108,811 |                     | $      | 82,998 |                                        |  | 25,813 |        |  | 31%                 |  | $                   | 315,468 |   | $ | 280,438 |   |   | 35,030 |  |  | 12% | 
|               
|As a % of sales |  |                                     | 36.6    | %                   |        | 34.4   | %                                      |  |        |        |  |                     |  |                     | 35.7    | % |   | 36.0    | % |   |        |  |  |     | 

The increase in the gross profit as a percentage of
sales for the thirteen weeks ended October 28, 2006 was due to increased vendor
funding and the leveraging of distribution expenses against the total sales
increase.

24

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
(continued)

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 
  28, 2006                 |         | October 
  29, 2005 |        |         | $                                      |  |        | %      |  |     | October 
  28, 2006 |   |         | October 
  29, 2005 |   |         | $ |  |        | % | 
|                |  |                                     |         |                     |        |         |                                        | 
|SG&A            |  | $                                   | 130,048 |                     | $      | 102,325 |                                        |  | 27,723 |        |  | 27% |                     | $ | 373,009 |                     | $ | 311,337 |   |  | 61,672 |   |  | 20% | 
|                |  |                                     |         |                     |        |         |                                        |  |        |        |  |     |                     |   |         |                     |   |         |   |  |        |   |  |     | 
|As a % of sales |  |                                     | 43.7    | %                   |        | 42.4    | %                                      |  |        |        |  |     |                     |   | 42.2    | %                   |   | 39.9    | % |  |        |   |  |     | 

The increase in SG&A expenses resulted from the
inclusion of expenses from the acquired Musicland stores (see Note 6 of Notes
to the Condensed Consolidated Financial Statements) and the transition costs of
$1.3 million and $7.6 million, respectively, incurred during the thirteen and
thirty-nine week periods ended October 28, 2006.  Further, increased SG&A expenses was due to the loss of
leverage on expenses in comparable stores due to lower sales, increased
advertising of the f.y.e. brand and increased training costs for store
associates.

Other
Income. Other income includes interest income and a realized
gain of $3.5 million on the sale of an investment in an unconsolidated
affiliate for the thirty-nine weeks ended October 28, 2006.  Other income includes interest income and a
realized gain of $0.8 million on the sale of available-for-sale securities for
the thirty-nine weeks ended October 29, 2005.

Income
Tax Benefit. The following table sets forth a period over
period comparison of the Companys income tax benefit:

|                                                             |  |                                     |        |                                        |   |                     |   |                     |         |   |   |         |  
|------------------------------------------------------------ |  | ----------------------------------- | ------ | -------------------------------------- | - | ------------------- | - | ------------------- | ------- | - | - | ------- | -
|                                                             |  | Thirteen
weeks ended (in thousands) |        | Thirty-nine
weeks ended (in thousands) |  
|                                                             |  |                                     |        |                                        |  
|                                                             |  | October 
  28, 2006                 |        | October 
  29, 2005                    |   | October 
  28, 2006 |   | October 
  29, 2005 |        
|                                                             |  |                                     |        |                                        |   |                     |   |                     |        
|Income tax benefit before impact of quarter-specific
  items |  | $                                   | (9,524 | )                                      | $ | (8,494              | ) | $                   | (23,822 | ) | $ | (13,060 | )
|                                                            
|Effective tax rate before impact of quarter specific
  items |  |                                     | 41.7   | %                                      |   | 42.6                | % |                     | 41.4    | % |   | 41.7    | %
|                                                            
|Tax expense (benefit) of  quarter-specific items             |  |                                     | (15    | )                                      |   | 14                  |   |                     | (2,248  | ) |   | 1,132   |  
|                                                            
|Income tax benefit                                           |  | $                                   | (9,539 | )                                      | $ | (8,480              | ) | $                   | (26,070 | ) | $ | (11,928 | )

25

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
(continued)

The Company records its quarterly income tax expense
(benefit) based on an estimate of its annual effective tax rate, which further
requires the Company to estimate its annual pretax income.  The effective tax rate before impact of
quarter-specific items was 41.4% for the thirty-nine weeks ended October 28,
2006 compared to 41.7% for the thirty-nine weeks ended October 29, 2005.  Changes in the estimate of annual pretax
income, as well as tax-favored and nondeductible items, impacted the tax
rate.

For the thirty-nine weeks ended October 28, 2006, the
tax benefit of quarter-specific items is primarily attributable to a tax
favored gain from the sale of an investment and the net impact of favorable
settlements of tax examinations and federal tax credits approved by the IRS
offset by state tax legislation enacted during the period and changes in
managements estimates of the realization of state net operating losses.  For the thirty-nine weeks ended October 29,
2005, the tax expense of quarter-specific items is attributable to changes in
state tax laws, primarily Ohio, enacted during the period.  The Ohio legislation phases out the State
Corporation Franchise Tax.  The tax
change represents a write off of Ohio state deferred tax assets, principally
net operating losses that, based on managements estimates, will not be
realized during the phase-out period.

Extraordinary
Gain  Unallocated Negative Goodwill. On March 27, 2006, the
Company acquired substantially all of the net assets of Musicland Holdings Inc.
The Company has performed a preliminary purchase price allocation in accordance
with the provisions of SFAS No. 141, Business Combinations, resulting in an
extraordinary gain related to unallocated negative goodwill. The gain
represents the excess of the fair value of net assets acquired over the
purchase price.  The purchase price was
allocated on a preliminary basis during the thirteen weeks ended April 29, 2006
using information available at the time. Extraordinary gain recorded in the
thirteen weeks ended April 29, 2006 was $0.9 million, which was net of income
taxes of $0.7 million, related to unallocated negative goodwill.  In accordance with SFAS No.141, the
allocation of the purchase price to the assets and liabilities acquired was
adjusted during the thirteen weeks ended October 28, 2006, resulting in an
extraordinary gain of $1.9 million, which is net of income taxes of $2.0
million, related to unallocated negative goodwill. The extraordinary gain
adjustment during the quarter represents adjustments to the value of acquired
inventory ($1.6 million), and an adjustment to customer liabilities related to
the former loyalty program ($3.4 million), partially offset by occupancy
related expenses ($0.2 million) and an adjustment to the cash purchase price
($0.8 million).  See Note 6 of Notes to
Condensed Consolidated Financial Statements for details regarding the
allocation of purchase price.

26

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
(continued)

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

|                                                                                                                     |  |                                     |         |                                        |   |                  |   |                  |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------- | -------------------------------------- | - | ---------------- | - | ---------------- | ------- | - | - | ------- | -
|                                                                                                                     |  | Thirteen
weeks ended (in thousands) |         | Thirty-nine
weeks ended (in thousands) |  
|                                                                                                                     |  |                                     |         |                                        |  
|                                                                                                                     |  | October 28, 2006                    |         | October
  29, 2005                     |   | October 28, 2006 |   | October 29, 2005 |        
|                                                                                                                     |  |                                     |         |                                        |   |                  |   |                  |        
|Loss before extraordinary gain                                                                                       |  | $                                   | (13,305 | )                                      | $ | (11,468          | ) | $                | (31,513 | ) | $ | (19,369 | )
|                                                                                                                    
|Extraordinary gain  unallocated negative goodwill,
  net of income taxes of $2,038, $0 and $4,845, $0, respectively |  |                                     | 1,925   |                                        |   |                 |   |                  | 5,334   |   |   |        |  
|                                                                                                                    
|                                                                                                                     |  |                                     |         |                                        |   |                  |   |                  |         |   |   |         |  
|                                                                                                                    
|Net loss                                                                                                             |  | $                                   | (11,380 | )                                      | $ | (11,468          | ) | $                | (26,179 | ) | $ | (19,369 | )
|                                                                                                                     |  |                                     |         |                                        |   |                  |   |                  |         |   |   |         |  

The increase in loss before extraordinary gain in the
thirteen and thirty-nine weeks ended October 28, 2006 was, as discussed above,
substantially due to sales declines in comparable stores and higher SG&A
expenses.

27

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition and
Results of Operations
(continued)

Liquidity.
The Companys primary sources of working capital are cash provided by
operations and borrowings under its revolving credit facility.  The Companys cash flows fluctuate from
quarter to quarter due to various items, including seasonality of sales and
results from operations, merchandise inventory purchases and the related terms
on the purchases, tax payments, capital expenditures and stock repurchase activity.  Management believes the Company will have
adequate resources to fund its cash needs for the foreseeable future.  The following table sets forth a summary of
key components of cash flow and working capital for the thirty-nine weeks ended
October 28, 2006 and October 29, 2005:

|                            |  |                           |          |                       |   |          |   |   |         |  
|--------------------------- |  | ------------------------- | -------- | --------------------- | - | -------- | - | - | ------- | -
|                            |  | Thirty-nine
  weeks ended |          | Change                |  
|                            |  |                           |          |                       |  
|(in
thousands)              |  | October
  28, 
  2006     |          | October
  29, 
  2005 |   | $        |  
|                            |  |                           |          |                       |   |          |  
|Operating Cash Flows        |  | $                         | (144,756 | )                     | $ | (172,792 | ) | $ | 28,036  |  
|Financing Cash Flows        |  |                           | 69,399   |                       |   | (11,921  | ) |   | 81,320  |  
|                           
|Acquisition of
  businesses |  |                           | (78,750  | )                     |   |         |   |   | (78,750 | )
|Capital Expenditures        |  |                           | (33,675  | )                     |   | (29,063  | ) |   | (4,612  | )
|                            |  |                           |          |                       |   |          |   |   |         |  
|Cash and Cash
  Equivalents |  |                           | 13,543   |                       |   | 16,805   |   |   | (3,262  | )
|Inventories                 |  |                           | 656,187  |                       |   | 477,732  |   |   | 178,455 |  
|Working Capital             |  |                           | 216,973  |                       |   | 242,335  |   |   | (25,362 | )

The Company had cash balances of $13.5 million at
October 28, 2006, compared to $197.2 million at January 28, 2006 and $16.8
million at October 29, 2005.  Inventory
was $102 per square foot at October 28, 2006, compared to $97 per square foot
at October 29, 2005.

Cash used by operating activities was $144.8 million
for the thirty-nine weeks ended October 28, 2006.  Inventory has increased $253.4 million from year-end, of which
$112.3 million relates to inventory acquired in the Musicland acquisition,
resulting in a net use of cash from operations of $141.1 million.  This is due to the Companys normal seasonal
increase in inventory in anticipation of the holiday season and an increase in
store count.  Cash uses during the first
thirty-nine weeks of the year are offset by a significant cash source in the
fiscal fourth quarter from the seasonal increase in sales during the holiday
season (see Note 3 of Notes to the Condensed Consolidated Financial
Statements).

Cash provided by financing activities was $69.4
million for the thirty-nine weeks ended October 28, 2006.  The primary source of cash was borrowings
under the Companys line of credit of $71.6 million.

28

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of Financial Condition andResults
of Operations
(continued)

LIQUIDITY
AND CAPITAL RESOURCES (continued)

The Company has a five-year, $150 million secured
revolving credit facility with Bank of America, N.A. that expires in January
2010. The revolving credit facility contains provisions governing additional
indebtedness and acquisitions and is secured by the Companys eligible merchandise
inventory, proceeds from the sale of inventory and by the stock of the
Companys subsidiaries.  The Company
anticipates the amount of the revolving credit facility being fully available
to the Company through its term, and does not anticipate any difficulty in
obtaining a replacement facility upon its expiration. As of October 28,
2006, the Company had borrowed $71.6 million, under the revolving credit
facility, had $0.3 million in outstanding letter of credit obligations
under the revolving credit facility and $78.1 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen week period ended October 28, 2006 was 6.30%. There were no borrowings
outstanding as of October 29, 2005.  The
additional funding during the thirty-nine weeks ended October 28, 2006 is due
to the Musicland acquisition.

During 2005, the Company financed the replacement of
its point-of-sale system through a five year capital lease arrangement for
$12.0 million. The lease arrangement bears an average interest rate
of 5.76% and will be repaid in monthly installments through June, 2010.

Capital
Resources.  During the
thirty-nine weeks ended October 28, 2006, the Company made capital expenditures
of $33.7 million. During the thirty-nine weeks ended October 28, 2006, the
Company opened 59 new stores, acquired 335 stores, relocated 11 stores and
closed 55 stores. The Company plans to spend approximately $50 million for
capital expenditures in 2006.

29

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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 revolving 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 $1.0 million outstanding on the facility, income before
income taxes would be reduced by about $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 Form 10-K for the year ended January 28, 2006. 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 28, 2006, 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.

On
March 27, 2006, the Company acquired substantially all the net assets of
Musicland Holdings Inc. (Musicland), as more fully described in Note 6 of the
Notes to Condensed Consolidated Financial Statements.  We excluded from our evaluation the internal control over
financial reporting at Musicland, as it was not possible to conduct such an
evaluation between the date of acquisition and the date of this report.  Total revenues and total assets recorded
during the quarter related to the acquired Musicland stores were $62.6 million
and $112.3 million, respectively, for the quarter ended October 28, 2006.  The impact of the acquired Musicland stores
was net income from operations of $0.2 million during the quarter.

30

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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 or 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 28, 2006.

Item 2  Changes in Securities and Use of
Proceeds

None.

31

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TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

PART
II - OTHER INFORMATION

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

None.

Item 6 -
Exhibits and Reports on Form 8-K

(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.

(B)
Reports on Form 8-K 

A Form
8-K was filed on November 17, 2006, incorporating by reference the Companys
November 16, 2006 press release announcing the Companys financial results for
the thirteen and thirty-nine weeks ended October 28, 2006 and the transcript
for the earnings conference call held on November 16, 2006.

A Form
8-K was filed on October 23, 2006, incorporating by reference Trans World
Entertainments entry into a Second Amendment, dated October 20, 2006, to the
Companys existing revolving Credit Facility with Bank of America N.A., dated
January 5, 2006, increasing the maximum amount available to the Company for
borrowing to $150 million from $130 million, under the same terms and
conditions.

Omitted from this Part II are items which are not
applicable or to which the answer is negative to the periods covered.

32

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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 7, 2006 |  | By:                                                                                                         | /s/ Robert J. Higgins
|                 |  |                                                                                                            
|                 |  | Robert J. Higgins                                                                                          
|                 |  | Chairman and Chief Executive Officer                                                                       
|                 |  | (Principal Executive Officer)                                                                              
|                 |  |                                                                                                             |                      
|December 7, 2006 |  | By:                                                                                                         | /s/ John J. Sullivan 
|                 |  |                                                                                                            
|                 |  | John J. Sullivan                                                                                           
|                 |  | Executive Vice President
  and Chief Financial Officer
  (Principal Financial and Chief Accounting Officer)

33

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