**UNITED STATES        SECURITIES AND EXCHANGE COMMISSION        WASHINGTON, D.C. 20549**

**FORM 10-Q**

|  X                   |   | QUARTERLY REPORT PURSUANT TO                SECTION 13 OR 15(d) OF THE                                                                                                                                                                                                                                                                                                                                               |
|--------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |   | SECURITIES EXCHANGE ACT OF                1934 FOR THE QUARTERLY PERIOD ENDED                                                                                                                                                                                                                                                                                                                                        |
|                           |   | AUGUST 4, 2007                                                                                                                                                                                                                                                                                                                                                                                                       |
|                           |   |                                                                                                                                                              OR |
|                           |
|       |   | TRANSITION REPORT PURSUANT                TO SECTION 13 OR 15(d) OF THE                                                                                                                                                                                                                                                                                                                                              |
|                           |   | SECURITIES EXCHANGE ACT FOR                THE TRANSITION PERIOD FROM                                                                                                                                                                                                                                                                                                                                                |
|                           |   | TO                                                                                                                                                                                                                                                                                                                                                                                                                   |

COMMISSION FILE NUMBER: 0-14818

TRANS WORLD ENTERTAINMENT CORPORATION        (Exact name of registrant as specified in its charter)

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

38 Corporate Circle        Albany, New York 12203(Address of principal executive offices, including zip code)

(518) 452-1242(Registrant’s telephone number, including area code)

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[        _ ]

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 [ ]              Accelerated filer [ X ]              Non-accelerated filer [ ]

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

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

     Common Stock, $.01 par        value,        31,081,909 shares outstanding as of August 31, 2007

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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                August 4, 2007,                                         |   |      |
|                     February 3, 2007 and July 29,                2006                                  |   | 3         |
|                                                                                                                  |   |      |
|  Condensed Consolidated Statements of                Operations –                                          |   |      |
|                       Thirteen Weeks and Twenty-six Weeks Ended                August 4, 2007 and |   |      |
|                       July 29, 2006                                                               |   | 4         |
|                                                                                                                  |   |      |
|  Condensed Consolidated Statements of Cash                Flows –                                          |   |      |
|                       Twenty-six Weeks Ended August 4, 2007                and                    |   |      |
|                       July 29, 2006                                                               |   | 5         |
|                                                                                                                  |   |      |
|  Notes                to Condensed Consolidated Financial Statements                                             |   | 6         |
|                                                                                                                  |   |      |
| Item 2 -                Management’s Discussion and Analysis of Financial                                       |   |      |
|                       Condition and Results of                Operations                          |   | 14        |
|                                                                                                                  |   |      |
| Item 3                – Quantitative and Qualitative Disclosures about Market Risk                              |   | 24        |
|                                                                                                                  |   |      |
| Item 4                – Controls and Procedures                                                                 |   | 24        |
|                                                                                                                  |   |      |
| PART II.                OTHER INFORMATION                                                                             |   |      |
|                                                                                                                  |   |      |
| Item 1                – Legal Proceedings                                                                       |   | 25        |
|                                                                                                                  |   |      |
| Item 1A-                Risk Factors                                                                                  |   | 25        |
|                                                                                                                  |   |      |
| Item 2                – Unregistered Sales of Equity Securities and Use of Proceeds                             |   | 25        |
|                                                                                                                  |   |      |
| Item 4                – Submission of Matters to a Vote of Security Holders                                     |   | 25        |
|                                                                                                                  |   |      |
| Item 6 -                Exhibits                                                                                      |   | 25        |
|                                                                                                                  |   |      |
| Signatures                                                                                                            |   | 26        |

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

|                                                                                                                           |   | **August 4,** |     | **February 3,** |   | **July 29,** |   |
|--------------------------------------------------------------------------------------------------------------------------------|--------|---------------|----------|-----------------|--------|--------------|--------|
|                                                                                                                           |   | **2007**      |     | **2007**        |   | **2006**     |   |
| **ASSETS**                                                                                                                     |   |          |     |            |   |         |   |   |   |   |
| CURRENT                ASSETS:                                                                                                 |   |          |     |            |   |         |   |   |   |   |
|  Cash and cash                equivalents                                                                                 |   | $             | 13,258   |            | $      | 118,630      |   | $ | 18,213 |   |
|  Merchandise                inventory                                                                                     |   |          | 474,753  |            |   | 504,860      |   |   | 505,463 |   |
|  Income taxes                receivable, net                                                                              |   |          | 16,358   |            |   | ---          |   |   | 8,741 |   |
|  Deferred                taxes                                                                                            |   |          | 7,795    |            |   | 9,039        |   |   | 12,916 |   |
|  Other current                assets                                                                                      |   |          | 27,482   |            |   | 13,827       |   |   | 13,320 |   |
|                             Total current assets                                            |   |          | 539,646  |            |   | 646,356      |   |   | 558,653 |   |
|                                                                                                                           |
| NET FIXED                ASSETS                                                                                                |   |          | 125,781  |            |   | 138,252      |   |   | 135,183 |   |
| DEFERRED                TAXES                                                                                                  |   |          | 34,561   |            |   | 32,715       |   |   | 31,724 |   |
| OTHER ASSETS                                                                                                                   |   |          | 11,691   |            |   | 12,367       |   |   | 14,574 |   |
|                             TOTAL ASSETS                                                    |   | $             | 711,679  |            | $      | 829,690      |   | $ | 740,134 |   |
|                                                                                                                           |
| **LIABILITIES**                                                                                                                |   |          |     |            |   |         |   |   |   |   |
| CURRENT                LIABILITIES:                                                                                            |   |          |     |            |   |         |   |   |   |   |
|  Accounts                payable                                                                                          |   | $             | 166,494  |            | $      | 306,377      |   | $ | 191,289 |   |
|  Borrowings                under line of credit                                                                           |   |          | 61,755   |            |   | ---          |   |   | 40,728 |   |
|  Income taxes                payable, net                                                                                 |   |          | ---      |            |   | 13,646       |   |   | --- |   |
|  Accrued                expenses and other current liabilities                                                            |   |          | 51,014   |            |   | 56,736       |   |   | 70,253 |   |
|  Current                portion of long-term debt                                                                         |   |          | 521      |            |   | 506          |   |   | 491 |   |
|  Current                portion of capital lease obligations                                                              |   |          | 2,864    |            |   | 2,887        |   |   | 3,075 |   |
|                             Total current liabilities                                       |   |          | 282,648  |            |   | 380,152      |   |   | 305,836 |   |
|                                                                                                                           |
| LONG-TERM DEBT,                less current portion                                                                            |   |          | 3,822    |            |   | 4,085        |   |   | 4,338 |   |
| CAPITAL LEASE                OBLIGATIONS, less current portion                                                                 |   |          | 10,544   |            |   | 12,000       |   |   | 13,407 |   |
| OTHER LONG-TERM                LIABILITIES                                                                                     |   |          | 37,591   |            |   | 40,248       |   |   | 51,508 |   |
|                             TOTAL LIABILITIES                                               |   |          | 334,605  |            |   | 436,485      |   |   | 375,089 |   |
|                                                                                                                           |
| **SHAREHOLDERS’ EQUITY**                                                                                                 |   |          |     |            |   |         |   |   |   |   |
| Preferred stock                ($0.01 par value; 5,000,000 shares                                                              |   |          |     |            |   |         |   |   |   |   |
| authorized; none                issued)                                                                                        |   |          | ---      |            |   | ---          |   |   | --- |   |
| Common stock ($0.01                par value; 200,000,000 shares                                                               |   |          |     |            |   |         |   |   |   |   |
| authorized;                56,184,899, 55,998,109 and 55,943,389                                                               |   |          |     |            |   |         |   |   |   |   |
| shares issued,                respectively)                                                                                    |   |          | 562      |            |   | 560          |   |   | 559 |   |
| Additional paid-in                capital                                                                                      |   |          | 302,894  |            |   | 301,526      |   |   | 299,999 |   |
| Treasury stock at                cost (25,102,990, 25,103,990 and                                                              |   |          |     |            |   |         |   |   |   |   |
|    25,104,990 shares,                        respectively)                                                      |   |          | (217,555 | )               |   | (217,560     | )      |   | (217,564 | ) |
| Accumulated other                comprehensive loss                                                                            |   |          | (1,888   | )               |   | (1,888       | )      |   | (2,048 | ) |
| Retained                earnings                                                                                               |   |          | 293,061  |            |   | 310,567      |   |   | 284,099 |   |
|                             TOTAL SHAREHOLDERS’ EQUITY                                |   |          | 377,074  |            |   | 393,205      |   |   | 365,045 |   |
|                             TOTAL LIABILITIES AND SHAREHOLDERS’                EQUITY |   | $             | 711,679  |            | $      | 829,690      |   | $ | 740,134 |   |

*See Accompanying Notes to Condensed Consolidated        Financial Statements.*

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

|                                                                                                      | **Thirteen Weeks Ended** |    |         | **Twenty-six Weeks Ended** |    |
|-----------------------------------------------------------------------------------------------------------|--------------------------|---------|--------------|----------------------------|---------|
|                                                                                                      | **August 4,**            |    | **July 29,** |                       |    | **August 4,** |   | **July 29,** |   |
|                                                                                                      | **2007**                 |    | **2006**     |                       |    | **2007** |   | **2006** |   |
|                                                                                                      |
|                                                                                                      |
| Sales                                                                                                     | $                        | 267,305 |         | $                          | 298,261 |   |   | $ | 553,612 |   | $ | 586,798 |   |
| Cost of                sales                                                                              |                     | 169,343 |         |                       | 192,049 |   |   |   | 351,269 |   |   | 380,142 |   |
| Gross profit                                                                                              |                     | 97,962  |         |                       | 106,212 |   |   |   | 202,343 |   |   | 206,656 |   |
| Selling, general                and administrative expenses                                               |                     | 114,823 |         |                       | 128,857 |   |   |   | 233,622 |   |   | 242,961 |   |
| Loss from                operations                                                                       |                     | (16,861 | )            |                       | (22,645 | ) |   |   | (31,279 | ) |   | (36,305 | ) |
| Interest                expense                                                                           |                     | 1,836   |         |                       | 1,504   |   |   |   | 3,278 |   |   | 2,428 |   |
| Other income                                                                                              |                     | (97     | )            |                       | (3,565  | ) |   |   | (136 | ) |   | (3,994 | ) |
| Loss before income                taxes and extraordinary gain                                            |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       - unallocated negative goodwill                                 |                     | (18,600 | )            |                       | (20,584 | ) |   |   | (34,421 | ) |   | (34,739 | ) |
| Income tax                benefit                                                                         |                     | (8,526  | )            |                       | (10,367 | ) |   |   | (15,278 | ) |   | (16,531 | ) |
| Loss before                extraordinary gain                                                             |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       - unallocated negative goodwill                                 |                     | (10,074 | )            |                       | (10,217 | ) |   |   | (19,143 | ) |   | (18,208 | ) |
| Extraordinary gain                - unallocated negative goodwill,                                        |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       net of income taxes of $0, $2,087 and                $0,$2,807, |                     | ---     |         |                       | 2,475   |   |   |   | --- |   |   | 3,409 |   |
|                       respectively                                                    |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
| Net loss                                                                                                  | $                        | (10,074 | )            |                       | (7,742  | ) |   | $ | (19,143 | ) | $ | (14,799 | ) |
|                                                                                                      |
| BASIC LOSS PER                SHARE:                                                                      |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
| Loss per share                before extraordinary gain                                                   |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       -unallocated negative goodwill                                  | $                        | (0.32   | )            |                       | (0.33   | ) |   | $ | (0.62 | ) | $ | (0.59 | ) |
| Extraordinary gain                - unallocated negative goodwill,                                        |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       net of income taxes                                             |                     | ---     |         |                       | 0.08    |   |   |   | --- |   |   | 0.11 |   |
| Basic loss per                share                                                                       | $                        | (0.32   | )            |                       | (0.25   | ) |   | $ | (0.62 | ) | $ | (0.48 | ) |
|                                                                                                      |
| Weighted average                number of common                                                          |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       shares outstanding – basic                                |                     | 31,051  |         |                       | 30,818  |   |   |   | 31,004 |   |   | 30,731 |   |
|                                                                                                      |
| DILUTED LOSS PER                SHARE:                                                                    |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
| Loss per share                before extraordinary gain                                                   |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       -unallocated negative goodwill                                  | $                        | (0.32   | )            |                       | (0.33   | ) |   | $ | (0.62 | ) | $ | (0.59 | ) |
| Extraordinary gain                - unallocated negative goodwill,                                        |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       net of income taxes                                             |                     | ---     |         |                       | 0.08    |   |   |   | --- |   |   | 0.11 |   |
| Diluted loss per                share                                                                     | $                        | (0.32   | )            |                       | (0.25   | ) |   | $ | (0.62 | ) | $ | (0.48 | ) |
|                                                                                                      |
| Weighted average                number of common                                                          |                     |    |         |                       |    |   |   |   |   |   |   |   |   |
|                       shares outstanding – diluted                              |                     | 31,051  |         |                       | 30,818  |   |   |   | 31,004 |   |   | 30,731 |   |

*See Accompanying Notes to Condensed Consolidated        Financial Statements.*

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**TRANS WORLD ENTERTAINMENT CORPORATION AND        SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(in thousands)        (unaudited)**

|                                                                                                                 |   |          | **Twenty-six Weeks Ended** |         |
|----------------------------------------------------------------------------------------------------------------------|--------|---------------|----------------------------|--------------|
|                                                                                                                 |   | **August 4,** |                       | **July 29,** |   |
|                                                                                                                 |   | **2007**      |                       | **2006**     |   |
| Net loss                                                                                                             |   | $             | (19,143                    | )            | $ | (14,799 | ) |
| Adjustments to                reconcile net loss to net cash used by operating activities:                           |   |          |                       |         |   |   |   |
|                   Depreciation and amortization of fixed                assets                             |   |          | 19,785                     |         |   | 19,182 |   |
|                   Amortization of intangible assets                                                        |   |          | 148                        |         |   | 115 |   |
|                   Amortization of lease valuations, net                                                    |   |          | (687                       | )            |   | (958 | ) |
|    Stock                compensation                                                                       |   |          | 905                        |         |   | 992 |   |
|    Loss                on disposal of fixed assets                                                         |   |          | 1,633                      |         |   | 1,147 |   |
|    Gain                on sale of available-for-sale securities and other investments                      |   |          | ---                        |         |   | (3,528 | ) |
|                   Deferred tax benefit                                                                     |   |          | 189                        |         |   | (8,669 | ) |
|                   Extraordinary gain on acquisition of business,                net of income taxes        |   |          | ---                        |         |   | (3,409 | ) |
| Changes in                operating assets and liabilities, net of effects of acquisitions:                          |   |          |                       |         |   |   |   |
|                   Merchandise inventory                                                                    |   |          | 30,107                     |         |   | 8,016 |   |
|    Other                current assets                                                                     |   |          | (13,657                    | )            |   | 1,366 |   |
|    Other                assets                                                                             |   |          | 334                        |         |   | 202 |   |
|                   Accounts payable                                                                         |   |          | (139,724                   | )            |   | (115,727 | ) |
|    Income                tax receivable/(payable)                                                          |   |          | (28,490                    | )            |   | (7,849 | ) |
|                   Accrued expenses and other current                liabilities                            |   |          | (5,978                     | )            |   | (3,731 | ) |
|    Other                long-term liabilities                                                              |   |          | (2,442                     | )            |   | 1,470 |   |
| Net cash used by                operating activities                                                                 |   |          | (157,020                   | )            |   | (126,180 | ) |
|                                                                                                                 |
| Cash flows from                investing activities:                                                                 |   |          |                       |         |   |   |   |
|                   Purchases of fixed assets                                                                |   |          | (8,947                     | )            |   | (23,219 | ) |
|                   Acquisition of businesses                                                                |   |          | ---                        |         |   | (73,079 | ) |
|                   Proceeds from sale of available-for-sale                securities and other investments |   |          | ---                        |         |   | 4,116 |   |
| Net cash used by                investing activities                                                                 |   |          | (8,947                     | )            |   | (92,182 | ) |
|                                                                                                                 |
| Cash flows from                financing activities:                                                                 |   |          |                       |         |   |   |   |
|                   Proceeds from line of credit                                                             |   |          | 61,755                     |         |   | 40,728 |   |
|                   Payments of long-term debt                                                               |   |          | (248                       | )            |   | (235 | ) |
|                   Payments of capital lease obligations                                                    |   |          | (1,479                     | )            |   | (1,587 | ) |
|                   Proceeds from the exercise of stock                options                               |   |          | 567                        |         |   | 460 |   |
| Net cash provided                by financing activities                                                             |   |          | 60,595                     |         |   | 39,366 |   |
|                                                                                                                 |
| Net decrease in                cash and cash equivalents                                                             |   |          | (105,372                   | )            |   | (178,996 | ) |
|                                                                                                                 |
| Cash and cash                equivalents, beginning of year                                                          |   |          | 118,630                    |         |   | 197,209 |   |
| Cash and cash                equivalents, end of period                                                              |   | $             | 13,258                     |         | $ | 18,213 |   |
| Supplemental                disclosure of non-cash investing and financing activities:                               |   |          |                       |         |   |   |   |
|                   Issuance of treasury stock under incentive stock                programs                 |   | $             | 6                          |         | $ | --- |   |
|                   Issuance of deferred shares                                                              |   | $             | 160                        |         | $ | 105 |   |

*See Accompanying Notes to Condensed Consolidated        Financial Statements.*

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     **TRANS WORLD        ENTERTAINMENT CORPORATION AND SUBSIDIARIES****NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)        August 4, 2007 and July 29, 2006**

**Note 1. Nature of Operations**

Trans World Entertainment Corporation and subsidiaries        (“the Company”) is one of the largest specialty retailers of entertainment        software, including music, home video, video games and related products in the United        States. The Company operates a chain of retail entertainment stores and e-commerce sites,        www.fye.com, www.wherehouse.com, www.secondspin.com, www.samgoody.com and www.suncoast.com        in a single industry segment. As of August 4, 2007, the Company operated 963 stores        totaling approximately 5.8 million square feet in the United States, the District of        Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands.

***Seasonality:***

The Company’s business is seasonal in nature, with        the fourth fiscal quarter constituting the Company’s peak selling period. In 2006,        the fourth fiscal quarter accounted for approximately 40% of annual sales. In anticipation        of increased sales activity during these months, the Company purchases additional inventory        and hires additional, temporary employees to supplement its permanent store sales staff.        If, for any reason, the Company’s net sales were below seasonal norms during the        fourth quarter, 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 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. 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. Certain        reclassifications have been made to prior periods to conform to the current period        presentation.The        preparation of financial statements in conformity with U.S. generally accepted accounting        principles 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 U.S. generally accepted accounting principles 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 February 3, 2007 has been derived from the        Company’s February 3, 2007 audited consolidated financial statements. All other        information has been derived from the Company’s unaudited condensed consolidated        financial statements as of and for the thirteen and twenty-six weeks ended August 4, 2007        and July 29, 2006. These unaudited condensed consolidated financial statements should be        read in

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conjunction with the audited financial statements and        notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal        year ended February 3, 2007.

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 February 3, 2007.

**Note 3. Stock Based Compensation**

Effective January 29, 2006, the Company adopted        Statement of Financial Accounting Standards No. 123 (Revised 2004),*“Share-Based Payment”*(“SFAS No. 123 (R)”), which amends SFAS No. 123 and        supersedes Accounting Principles Board Opinion (“APB”) No. 25 in establishing        standards for the accounting for transactions in which an entity exchanges its equity        instruments for goods or services, as well as transactions in which an entity incurs        liabilities in exchange for goods or services that are based on the fair value of the        entity’s equity instruments or that may be settled by the issuance of those equity        instruments. As allowed under SFAS No. 123 (R), the Company elected the modified        prospective method of adoption, under which compensation cost is recognized in the        financial statements beginning with the effective date of SFAS No. 123 (R) for all        share-based payments granted after that date, and for all unvested awards granted prior to        the effective date of SFAS No. 123 (R).

Total stock-based compensation expense recognized in the        condensed consolidated statements of operations, before income taxes, was approximately        $0.5 million for the thirteen weeks ended August 4, 2007 and July 29, 2006 and the related        total deferred tax benefit was approximately $0.2 million in each period.

Total stock-based compensation expense recognized in the        condensed consolidated statements of operations for the twenty-six weeks ended August 4,        2007 and July 29, 2006 was $0.9 million and $1.0 million, respectively, before income        taxes. The related total deferred tax benefit was approximately $0.4 million for the        twenty-six weeks ended August 4, 2007 and July 29, 2006.

As of August 4, 2007, there was approximately $4.0        million of unrecognized compensation cost related to stock awards that is expected to be        recognized as expense over a weighted average period of 2.9 years.

The Company has six employee stock award 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”). Additionally, the Company has a        stock award plan for non-employee directors (the “1990 Plan”). The Company no        longer issues stock options under the Old Plans. 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. Under the 1990 Plan, awards generally become exercisable commencing        one year from the date of grant in increments of 25% per year with a maximum term of ten        years. In addition, 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.

Stock awards authorized for issuance under the Old        Plans, New Plan and 1990 Plan total 20.6 million. As of August 4, 2007, of the awards        authorized for issuance, 10.2 million were granted and are

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outstanding, 7.7 million of which were vested and        exercisable. Awards available for future grants at August 4, 2007 were 3.2        million.

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 award valuation model, which incorporates various assumptions including those        for volatility, expected life and interest rates.

The table below outlines the assumptions that the        Company used to estimate the fair value of stock based awards granted during the twenty-six        weeks ended August 4, 2007:

|                                                                                                 |        |   | Twenty-six weeks                ended |   |
|------------------------------------------------------------------------------------------------------|-------------|--------|---------------------------------------|--------|
|                                                                                                 |        |   | August 4, 2007                        |   |
| Dividend                yield                                                                        |        |   | 0%                                    |   |
| Expected stock                price volatility                                                       |        |   | 65.1% - 68.7%                         |   |
| Risk-free interest                rate                                                               |        |   | 4.54% - 4.94%                         |   |
| Expected award life                (in years)                                                        |        |   | 5-7                                   |   |
| Weighted average                fair value pershareofawards granted                during the period | $3.40  |   |
|                                                                                                 |        |   |                                       |   |

The Company has not paid dividends in the past and does        not plan to pay dividends in the near 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 awards. The expected award life (in years)        represents the estimated period of time until exercise and is based on historical        experience of similar awards.

The following table summarizes stock award activity        during the twenty-six weeks ended August 4, 2007:

|                                        | **Employee and Director Stock Award                Plans** |
|---------------------------------------------|------------------------------------------------------------|
|                                        | **Number of**                                              |   | **Weighted** | **Weighted** |
|                                        | **Shares**                                                 |   | **Average** | **Average** |
|                                        | **Subject**                                                |   | **Exercise** | **Remaining** |
|                                        | **To Award**                                               |   | **Price** | **Contractual** |
|                                        |                                                       |   |   | **Term** |
| Balance                February 3, 2007     | 10,058,854                                                 |   | $8.69   | 5.5 |
| Granted                                     | 647,216                                                    |   | 4.43 | --- |
| Exercised                                   | (164,064                                                   | ) | 3.46 | --- |
| Forfeited or expired                        | (351,861                                                   | ) | 9.91 | --- |
| Balance August                4, 2007       | 10,190,145                                                 |   | 8.47 | 5.4 |
| Exercisable at                August 4,2007 | 7,711,980                                                  |   | $9.70   | 4.4 |

The intrinsic value of stock awards exercised during the        thirteen and twenty-six weeks ended August 4, 2007 was $13,000 and $290,000, respectively.        The intrinsic value of stock awards outstanding and exercisable as of August 4, 2007 was        $3,826,000 and $1,921,000, respectively.

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**Note 4. 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 Company had previously provided the Board of        Directors with a noncontributory, unfunded retirement plan (“Director Retirement        Plan”) that paid retired directors an annual retirement benefit. Directors who were        not yet vested in their retirement benefits as of June 1, 2003 had the present value of        benefits already accrued as of the effective date converted to deferred shares of the        Company’s Common Stock. Directors that were fully or partially vested in their        retirement benefits were given a one time election to continue to participate in the        current retirement program or convert the present value of their benefits to deferred        shares.

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

The Company accounts for the SERP and the Director        Retirement Plan in accordance with the provisions of SFAS No. 158,*Employers’ Accounting for Defined Benefit Pension and Other        Postretirement Plans*. The following represents the components        of the net periodic pension cost related to the Company’s SERP and Director        Retirement Plan for the respective periods:

|                                              |          |                        **Thirteen weeks ended** |   |         |             | **Twenty-six weeks ended** |
|---------------------------------------------------|---------------|-----------------------------------------------------------|--------|--------------|------------------|----------------------------|
|                                              | **August 4,** |                                                      |   | **July 29,** |             | **August 4,**              |   |   | **July 29,** |
|                                              | **2007**      |                                                      |   | **2006**     |             | **2007**                   |   |   | **2006** |
|                                              |          | *(in                thousands)*                           |   |         | *(in thousands)* |
| Service cost                                      | $             | 54                                                        |   |         | $                | 170                        |   | $ | 108 |   |   | $ | 340 |
| Interest                cost                      |          | 191                                                       |   |         |             | 221                        |   |   | 382 |   |   |   | 442 |
| Amortization of                prior service cost |          | 86                                                        |   |         |             | 85                         |   |   | 171 |   |   |   | 170 |
| Amortization of net                (gain)/loss    |          | (0                                                        | )      |         |             | 69                         |   |   | (1 | ) |   |   | 138 |
| Net periodic                pension cost          | $             | 331                                                       |   |         | $                | 545                        |   | $ | 660 |   |   | $ | 1,090 |

During the twenty-six weeks ended August 4, 2007, 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 2007.

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**Note 5. Business Combinations**

On March 27, 2006, the Company acquired substantially        all the net assets of Musicland Holding Corp. (“Musicland”). At the time of        acquisition, 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, the Company acquired 335 of        Musicland’s 400 stores, with the remainder of the stores 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 unaudited condensed consolidated        statement of operations for the twenty-six weeks ended July 29, 2006 includes the results        of Musicland beginning March 27, 2006.

The purchase price for the acquired Musicland assets was        $78.8 million, including acquisition-related costs of $1.8 million. From March 27, 2006 to        February 3, 2007, the Company allocated the purchase price in accordance with the        provisions of SFAS No. 141,*Business        Combinations*, resulting in an extraordinary gain –        unallocated negative goodwill of $10.7 million, net of income taxes of $6.7, representing        the excess of the fair value of net assets acquired over the purchase price. The        extraordinary gain recorded during the thirteen and twenty-six weeks ended July 29, 2006        was $2.5 million and $3.4 million, respectively, which was net of income taxes of $2.1        million and $2.8 million, respectively.

In March 2006, the Company acquired a majority interest        in Mix & Burn LLC, a company that is fully consolidated for financial reporting. Mix        & Burn LLC is a 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 enables 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.

**Note 6. 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 2011. The        revolving credit facility contains provisions governing additional indebtedness and        acquisitions and is secured by the assets of the Company. 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 August 4, 2007, the Company had borrowed $61.8 million, under the        revolving credit facility, had $0.1 million in outstanding letter of credit obligations        under the revolving credit facility and $88.1 million was available for borrowing. The        weighted average interest rate on outstanding borrowings for the thirteen weeks ended        August 4, 2007 and July 29, 2006 was 6.32% and 6.05%, respectively.

During the thirteen week period ended July 29, 2006, the        Company’s borrowing capacity under the revolving credit facility was $130 million. As        of July 29, 2006, the Company had borrowed $40.7 million, under the revolving credit        facility, had $26.1 million in outstanding letter of credit obligations under the revolving        credit facility and $63.2 million was available for borrowing.

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**Note 7. Income Taxes**

In July 2006, the Financial Accounting Standards Board        (“FASB”) issued Interpretation No. 48 (“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 tax positions taken or expected to be taken in a tax return. In particular, FIN 48        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 a 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        adopting the provisions of FIN 48 are to be reported as an adjustment to the beginning        balance of retained earnings in the period of adoption.

The Company adopted FIN 48 as of February 4, 2007 which        resulted in a $1.6 million decrease in the Company’s reserve for uncertain tax        positions. At the beginning of Fiscal 2007 the Company had $3.2 million of gross        unrecognized tax benefits, $1.7 million (net of offsetting benefits from different taxing        jurisdictions) of which would affect the Company’s tax rate if recognized. The        Company does not expect any material changes to the estimated amount of liability        associated with its uncertain tax positions through February 2, 2008.

The Company is subject to U.S. federal income tax as        well as income tax of multiple state jurisdictions. The Company has substantially concluded        all federal income tax matters for the years through 2000 and all material state and local        income tax matters for the years through 2002.

The Company’s practice is to recognize interest        and penalties related to income tax matters in income tax expense (benefit). The Company        had $0.8 million accrued for interest and penalties as of February 4, 2007.

**Note 8. Comprehensive Loss**

The Company accounts for comprehensive (loss) income in        accordance with SFAS No. 130,*Reporting Comprehensive        Income*. SFAS No. 130 requires only additional disclosures in        the consolidated financial statements; it does not affect the Company’s financial        position or results of operations. Other accumulated comprehensive loss that the Company        currently reports in the condensed consolidated balance sheets represents the excess of        accrued pension liability over accrued benefit cost, net of taxes, associated with the        Company’s defined benefit plans. Comprehensive loss was equal to net loss for the        thirteen and twenty-six weeks ended August 4, 2007 and July 29, 2006.

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**Note 9. Depreciation and Amortization**

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

|                                                                                                    |                          | **Thirteen Weeks Ended** |                            | **Twenty-six Weeks Ended** |
|----------------------------------------------------------------------------------------------------|--------------------------|--------------------------|----------------------------|----------------------------|
|                                                                                                    | **August 4,**            |                          | **July 29,**               |                            | **August 4,** |  | **July 29,** |
|                                                                                                    | **2007**                 |                          | **2006**                   |                            | **2007** |  | **2006** |
|                                                                                                    |                          | ***(in thousands)***     |                            |                            | ***(in thousands)*** |
|                             Cost of sales                       | $                        | 671                      |                            | $                          | 761 |  | $ | 1,350 |  | $ | 1,517 |
|                             Selling, general and administrative |                          |                     |                       |                       |   |   |   |   |   |   |   |
|                             expenses                            |                     | 9,194                    |                            |                       | 9,012 |  |   | 18,435 |  |   | 17,665 |
|                             Total                               | $                        | 9,865                    |                            | $                          | 9,773 |  | $ | 19,785 |  | $ | 19,182 |
|                                                                                               |
|                                                                                               |
|                                                                                               |
| **Note 10. Earnings Per                Share**                                                     |                          |                     |                       |                            |   |   |  |   |   |  |   |
| Weighted average shares are                calculated as follows:                                  |                     |                          |                       |                       |  |   |   |  |   |
|                                                                                               |
|                                                                                               | **Thirteen Weeks Ended** |                     | **Twenty-six Weeks Ended** |
|                                                                                                    | **August 4,**            |                          | **July 29,**               |                            | **August 4,** |  | **July 29,** |
|                                                                                                    | **2007**                 |                          | **2006**                   |                            | **2007** |  | **2006** |
|                                                                                               | ***(in thousands)***     |                     | ***(in thousands)***       |
|                         Weighted average common shares outstanding        |                          |                     |                       |                            |   |   |  |   |   |  |   |
|                         – basic                                     |                          | 31,051                   |                            |                            | 30,818 |  |  | 31,004 |  |  | 30,731 |
|                         Dilutive effect of employee stock options         |                     | ---                      |                            |                       | --- |  |   | --- |  |   | --- |
|                         Weighted average common shares outstanding        |                          |                          |                            |                            |  |  |  |  |  |  |  |
|                         – diluted                                   |                     | 31,051                   |                            |                       | 30,818 |  |   | 31,004 |  |   | 30,731 |
|                                                                                               |
|                         Anti-dilutive stock options                       |                     | 6,638                    |                       |                       | 7,289 |   |   | 6,794 |   |   | 7,315 |

For the thirteen and twenty-six week periods ended        August 4, 2007 and July 29, 2006, the impact of outstanding stock options was not        considered because the Company reported a net loss and such impact would be        anti-dilutive.

**Note 11. Gain on Sale of Investment in Unconsolidated        Affiliate**

During the thirteen weeks ended July 29, 2006, the        Company recorded a realized gain of $3.5 million on the sale of an investment in an        unconsolidated affiliate.

**Note 12. Legal Proceedings**

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

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**Note 13. Contractual Obligations and        Commitments.**

The Company’s Annual Report on Form 10-K for the        year ended February 3, 2007 provides a summary of the Company’s contractual        obligations at February 3, 2007, and the effect that such obligations are expected to have        on liquidity and cash flows in future periods. There were no material commitments entered        into and there have been no material changes in the status of existing commitments during        the thirteen and twenty-six weeks ended August 4, 2007.

 

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**TRANS WORLD ENTERTAINMENT CORPORATION AND        SUBSIDIARIESItem 2 - Management’s Discussion and Analysis of Financial        Condition and        Results of Operations        August 4, 2007 and July 29, 2006**

**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, home video and video games industries of an increased or decreased        number of “hit releases”; general economic factors in markets where the        Company’s merchandise is sold; and other factors discussed in the Company’s        filings with the Securities and Exchange Commission. The following discussion and analysis        of the Company’s financial condition and results of operations should be read in        conjunction with the unaudited condensed consolidated financial statements and related        notes included elsewhere in this report and the audited financial statements included in        the Company’s Annual Report on Form 10-K for the fiscal year ended February 3,        2007.

As of August 4, 2007, the Company operated 963 stores        totaling approximately 5.8 million square feet in the United States, the District of        Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company’s        stores offer predominantly entertainment software, including music, home video and video        games and related products. In total, these categories represented 88% of the        Company’s sales in the twenty-six weeks ended August 4, 2007. The balance of        categories, including software accessories, boutique and electronic products represented        12% of the Company’s sales in the twenty-six weeks ended August 4, 2007.

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

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

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

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**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 disclosed in Note 9 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 of America 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 February 3, 2007        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, with cost being 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.

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

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The Company is generally entitled to return merchandise        purchased from major vendors for credit against other purchases from these vendors. Major        music vendors reduce the credit with a per unit charge which varies depending on the type        of merchandise being returned. The Company records these 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 value may not be recoverable. Factors that the        Company considers to be important when assessing impairment include:

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

If the Company determines that the carrying value of a        long-lived asset may not be recoverable, it tests for impairment to determine if an        impairment charge is needed.

**Income Taxes:**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 and viable tax planning strategies.        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. The accounting for tax positions        in accordance with FIN 48 requires management to make estimates relative to the likelihood        of realization upon ultimate settlement of certain tax positions. For additional discussion        regarding income taxes refer to Note 7 in the notes to the condensed consolidated financial        statements in this Quarterly Report on Form 10-Q and Note 6 in the notes to the        consolidated financial statements in the Annual Report on Form 10-K for the year ended        February 3, 2007.

**Stock-based Compensation:**The Company accounts for stock-based compensation under SFAS No. 123(R)        which requires compensation to be recorded based on the fair value of stock awards on the        date of grant. Determining the amount of stock-based compensation to be recorded requires        the Company to develop estimates to be used in calculating the grant-date fair value of        stock options. The Company calculates the grant-date fair values using the Black-Scholes        valuation model. The Black-Scholes model requires the Company to make estimates of the        following assumptions:

Expected volatility—The estimated stock price        volatility was derived based upon the Company’s actual historic stock prices over the        expected life of the options, which represents the Company’s best estimate of        expected volatility.

Expected option life—The Company’s estimate        of an expected option life was calculated based on actual historical data relating to        grants, exercises and cancellations.

 

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Risk-free interest rate—The Company used the yield on        zero-coupon U.S. Treasury securities for a period that is commensurate with the expected        life assumption as the risk-free interest rate.

The amount of stock-based compensation recognized during        a period is based on the value of the portion of the awards that are ultimately expected to        vest. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if        necessary, in subsequent periods if actual forfeitures differ from those estimates. The        term “forfeitures” is distinct from “cancellations” or        “expirations” and represents only the unvested portion of the surrendered        option. The Company reviewed historical forfeiture data and determined the appropriate        forfeiture rate based on that data. The Company will re-evaluate this analysis periodically        and adjust the forfeiture rate as necessary. Ultimately, the Company will recognize the        actual expense over the vesting period only for the shares that vest.

**Accounting for Gift Card Liability:**The Company sells gift cards that are redeemable only for merchandise        and have no expiration date. The Company reverses 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 at the end of        a reporting period. Estimated liability is equal to two years of unredeemed cards, plus an        amount for outstanding cards that may possibly be redeemed for the cumulative look-back        period, exclusive of the last two years. The Company’s ability to reasonably and        reliably estimate the liability is based on historical redemption experience with gift        cards and similar types of arrangements and the existence of a large volume of relatively        homogeneous transactions. The Company’s estimate is not susceptible to significant        external factors and the circumstances around gift card sales and redemptions have not        changed significantly over time.

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**RESULTS OF OPERATIONS****Thirteen and Twenty-six Weeks Ended August 4, 2007        Compared to the Thirteen and Twenty-six Weeks Ended July 29, 2006**

The following table sets forth a period over period        comparison of the Company’s sales for the thirteen weeks and twenty-six weeks ended        August 4, 2007 and July 29, 2006, by category:

|                                                 | **Thirteen weeks ended** |              | **Twenty-six weeks ended** |
|-------------------------------------------------|--------------------------|--------------|----------------------------|
|                                                 | **August 4,**            | **July 29,** |                       | **Change** |  | **%** |  | **Comp** |   | **August 4,** |  | **July 29,** |   | **Change** |  | **%** | **Comp** |
|                                                 | **2007**                 | **2006**     |                       |  |  |  |  | **Store** |   | **2007** |  | **2006** |   |  |  |  | **Store** |
|                                                 |                     |              |                       |  |   |   |   |   | **Sales** |  |   |   |   |   |  |   |   |   | **Sales** |
|                                                 |                          |              | *(in thousands)*           |   |  |  |  |  |  |  |   |  |  | *(in thousands)* |   |  |  |  |  |  |
|                                            |
| **Sales**                                       | $267,305                 |         | 298,261                    |   |   | ($30,956 | ) | (10%) |   | (6 | %) |   | $553,612 |   | $586,798 |   |   | ($33,186 | ) | (6%) | (8 | %) |
|                                            |
| As a % of sales                                 |                     |         |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Music        | 43%                      |              | 49%                        |  |   |   |   |   |   | (19 | %) |   | 43% |  | 50% |  |   |   |   |   | (21 | %) |
|                     Home Video   | 36%                      |              | 32%                        |  |   |   |   |   |   | 7 | % |   | 37% |  | 32% |  |   |   |   |   | 6 | % |
|                     Video Games  | 8%                       |              | 7%                         |  |   |   |   |   |   | 5 | % |   | 8% |  | 7% |  |   |   |   |   | (3 | %) |
|                       Other | 13%                      |              | 12%                        |  |   |   |   |   |   | 16 | % |   | 12% |  | 11% |  |   |   |   |   | 15 | % |
|                                            |
| **Store                Count:**                 | **963**                  |         | **1,091**                  |   |   | **(128** | **)** | **(12****%)** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

**Sales.**Sales decreased        10% and 6% in the thirteen and twenty-six week periods ending August 4, 2007, respectively.        The decrease in total sales is primarily due to comparable store sales declines of 6% and        8% for the thirteen and twenty-six week periods ended August 4, 2007, respectively.        Additionally, during the thirteen week period ended August 4, 2007, the Company operated        12% fewer stores as compared to the thirteen week period ended July 29, 2006.

***      Music:***The Company’s stores and Internet websites offer a wide range of        compact discs (“CDs”) and music DVDs across most music genres, including new        releases from current artists as well as an extensive catalog of music from past periods        and artists. The CD category represented 96% of total music sales for the twenty-six weeks        ended August 4, 2007.

During the thirteen and twenty-six weeks ended August 4,        2007, CD sales in comparable stores decreased 20% and 21%, respectively, versus the        thirteen and twenty-six weeks ended July 29, 2006. The decrease is directly related with        continued industry declines.

***      Home        Video:***The Company offers home video products, including DVD and VHS, in        all of its stores. The DVD category represented 99% of the home video category sales in the        twenty-six weeks ended August 4, 2007. Comparable store sales in the DVD category increased        7% during both the thirteen and twenty-six week periods ending August 4, 2007. The increase        in DVD sales was driven by catalog performance and strong promotional efforts.

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***      Video        Games:***The Company offers video game hardware and software in most of its        stores. Comparable store sales increased 5% during the thirteen weeks ended August 4, 2007        while decreasing 3% during the twenty-six week period ended August 4, 2007. The large        difference is due to the 12% comparable store sale decline reported in the first quarter of        2007. The comparable store sales increase over the first quarter was driven by better        hardware availability and improved software sales.

***      Other:***The Company offers accessory items for the use, care and storage of        entertainment software, along with boutique and electronic        products.Comparable        store sales, on a combined basis, increased 16% and 15% during the thirteen and twenty-six        week periods ended August 4, 2007,        respectively**.**In        addition, on a combined basis, these categories represented 12% of total sales during the        twenty-six weeks ended August 4, 2007 compared to 11% for the twenty-six weeks ended July        29, 2006. The increase in this category was driven by added sales of MP3 players and mobile        phones.

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

|                                |        | **Thirteen weeks ended** |        |        |              |        |                  |        |        |            | **Twenty-six weeks ended** |        |        |               |        |        |              |        |
|--------------------------------|--------|--------------------------|--------|--------|--------------|--------|------------------|--------|--------|------------|----------------------------|--------|--------|---------------|--------|--------|--------------|--------|
|                           |   | *(in thousands)*         |   |   | **Change**   |   | *(in thousands)* |   |   | **Change** |
|                                |        | **August 4,**            |        |        | **July 29,** |        |                  |        |        |            |                            |        |        | **August 4,** |        |        | **July 29,** |        |  |  |  |  |  |  |
|                                |        | **2007**                 |        |        | **2006**     |        |                  | **$**  |   |       | **%**                      |   |   | **2007**      |   |   | **2006**     |   |   | **$** |   |   | **%** |   |
| Gross Profit                   |   | $97,962                  |   |   | $106,212     |   |             | (8,250 | )      |       | (8                         | %)     |   | $202,343      |   |   | $206,656     |   |   | (4,313 | ) |   | (2 | %) |
|                           |
|                           |
| As a % of                sales |   | 36.6%                    |        |   | 35.6%        |        |             |   |   |       |                       |   |   | 36.5%         |        |   | 35.2%        |        |   |   |   |   |   |   |

The increase in gross profit as a percentage of sales        for the thirteen and twenty-six week periods ended August 4, 2007 reflects increased gross        margin across the Company’s core categories of music and home video resulting from a        greater percentage of higher margin catalog sales.

**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** |        |        |              |        |                  |         |        |            | **Twenty-six weeks ended** |        |        |               |        |        |              |        |
|--------------------------------|--------|--------------------------|--------|--------|--------------|--------|------------------|---------|--------|------------|----------------------------|--------|--------|---------------|--------|--------|--------------|--------|
|                           |   | *(in thousands)*         |   |   | **Change**   |   | *(in thousands)* |    |   | **Change** |
|                                |        | **August 4,**            |        |        | **July 29,** |        |                  |         |        |            |                            |        |        | **August 4,** |        |        | **July 29,** |        |  |  |  |  |  |  |
|                                |        | **2007**                 |        |        | **2006**     |        |                  | **$**   |   |       | **%**                      |   |   | **2007**      |   |   | **2006**     |   |   | **$** |   |   | **%** |   |
| SG&A                       |   | $114,823                 |   |   | $128,857     |   |             | (14,034 | )      |       | (11                        | %)     |   | $233,622      |   |   | $242,961     |   |   | (9,339 | ) |   | (4 | %) |
|                           |
|                           |
| As a % of                sales |   | 43.0%                    |        |   | 43.2%        |        |             |    |   |       |                       |   |   | 42.2%         |        |   | 41.4%        |        |   |   |   |   |   |   |

The $14 million decrease in SG&A expenses for the        thirteen weeks ended August 4, 2007 compared to prior year is due to the Company operating        an average of 12% fewer stores and the absence of approximately $4.4 million of integration        costs related to the Musicland acquisition that were incurred during the thirteen weeks        ended July 29, 2006. The increase in SG&A expenses as a percentage of sales from 41.4%        for the twenty-six week period ended July 29, 2006 to 42.2% for the twenty-six week period        ended August 4, 2007 is due to the overall sales decline of 6%, partially offset by the        absence of Musicland acquisition integration costs.

19

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**Interest Expense.**Interest expense was $1.8 million and $3.3 million during the thirteen        and twenty-six week periods ended August 4, 2007 compared to $1.5 million and $2.4 million        for the thirteen and twenty-six week periods ended July 29, 2006. The increase is due to        higher average borrowings and average interest rates under the Company’s revolving        credit facility.

**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 thirteen and twenty-six weeks ended July        29, 2006.

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

|                                                            |        |        | **Thirteen weeks ended** |        |        |        | **Twenty-six weeks ended** |        |
|------------------------------------------------------------|--------|--------|--------------------------|--------|--------|--------|----------------------------|--------|
|                                                            |        |   | *(in thousands)*         |   |        |   | *(in thousands)*           |   |
|                                                            |        |        | **August 4,**            |        |        |        | **July 29,**               |        |  |  | **August 4,** |  |  |  | **July 29,** |  |
|                                                            |        |   | **2007**                 |   |        |   | **2006**                   |   |  |   | **2007** |   |  |   | **2006** |   |
| Income tax benefit                before impact of         |   |        |                     |   |   |        |                       |   |   |  |   |   |   |  |   |   |
| quarter-specific                items                      |   | $      | (8,388                   | )      |   | $      | (8,293                     | )      |   | $ | (15,576 | ) |   | $ | (14,298 | ) |
|                                                       |
| Effective tax rate                before impact of quarter |   |        |                     |   |   |        |                       |   |   |  |   |   |   |  |   |   |
| specific                items                              |   |        | 45.1                     | %      |   |        | 40.3                       | %      |   |  | 45.3 | % |   |  | 41.2 | % |
|                                                       |
| Tax (benefit)                expense of quarter-specific   |   |        |                     |   |   |        |                       |   |   |  |   |   |   |  |   |   |
| items                                                      |   |        | (138                     | )      |   |        | (2,074                     | )      |   |  | 298 |   |   |  | (2,233 | ) |
|                                                       |
| Income tax                benefit                          |   | $      | (8,526                   | )      |   | $      | (10,367                    | )      |   | $ | (15,278 | ) |   | $ | (16,531 | ) |

The Company records its quarterly income tax (benefit)        expense based on an estimate of its annual effective tax rate, which further requires the        Company to estimate its annual pretax income. The higher the estimate of annual pre-tax        income, the lower the tax rate, due to the inclusion in income tax expense of certain taxes        that are incurred regardless of the level of taxable income and due to the impact of        nondeductible expenses. Conversely, these items cause the tax rate to increase as pre-tax        income (and estimates thereof) decrease. The effective tax rate before impact of        quarter-specific items for the thirteen and twenty-six weeks ended August 4, 2007 increased        because the estimate of annual pre-tax income for 2007 is lower than the estimate of 2006        annual pre-tax income used to determine income taxes for the thirteen and twenty-six weeks        ended July 29, 2006.

For the thirteen weeks ended August 4, 2007, the tax        benefit associated with quarter-specific items is primarily attributable to changes in        state tax laws enacted during the period. For the thirteen weeks ended July 29, 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        offset by state tax legislation enacted during the quarter.

For the twenty-six weeks ended August 4, 2007, the tax        expenses associated with period-specific items is primarily attributable to changes in        state tax laws enacted during the period. For the twenty-six weeks ended July 29, 2006, the        tax benefit of quarter-specific items is attributable to 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.

20

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**Extraordinary Gain – Unallocated Negative        Goodwill.**On March 27, 2006, the Company acquired        substantially all of the net assets of Musicland Holding Corp. During the thirteen and        twenty-six weeks ended July 29, 2006, the Company determined the preliminary purchase price        allocation in accordance with the provisions of SFAS No. 141,*Business Combinations*, resulting in an        extraordinary gain of $2.5 million, net of income taxes of $2.1 million and $3.4 million,        net of income tax of $2.8 million, related to unallocated negative goodwill for the        respective thirteen and twenty-six week periods ended July 29, 2006.

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

|                                                       |        |        | **Thirteen weeks ended** |        |        |        | **Twenty-six weeks ended** |        |
|-------------------------------------------------------|--------|--------|--------------------------|--------|--------|--------|----------------------------|--------|
|                                                       |        |   | *(in thousands)*         |   |        |   | *(in thousands)*           |   |
|                                                       |        |        | **August 4,**            |        |        |        | **July 29,**               |        |  |  | **August 4,** |  |  |  | **July 29,** |  |
|                                                       |        |   | **2007**                 |   |        |   | **2006**                   |   |  |   | **2007** |   |  |   | **2006** |   |
| Loss before                extraordinary gain         |   | $      | (10,074                  | )      |   | $      | (10,217                    | )      |   | $ | (19,143 | ) |   | $ | (18,208 | ) |
|                                                  |
|                                                  |
| Extraordinary gain                – unallocated |   |        |                     |   |   |        |                       |   |   |  |   |   |   |  |   |   |
| negative goodwill,                net of income taxes |   |        |                     |   |   |        |                       |   |   |  |   |   |   |  |   |   |
| of $0, $2,087 and                $0, $2,807,          |   |        | ---                      |   |   |        | 2,475                      |   |   |  | --- |   |   |  | 3,409 |   |
| respectively                                          |   |   |                     |   |   |   |                       |   |   |   |   |   |   |   |   |   |
|                                                  |
| Net loss                                              |   | $      | (10,074                  | )      |   | $      | (7,742                     | )      |   | $ | (19,143 | ) |   | $ | (14,799 | ) |

Loss before extraordinary gain for the thirteen week        period August 4, 2007 decreased $0.1 million compared to the thirteen weeks ended July 29,        2006 as the $14.0 million decrease in SG&A expenses offset the $8.3 million decrease in        gross profit, $3.5 million decrease in other income, $0.3 million increase in interest        expense and $1.8 million decrease in income tax benefit.

Loss before extraordinary gain for the twenty-six week        period ended August 4, 2007 increased $0.9 million compared to the twenty-six weeks ended        July 29, 2006 as the $9.3 million decrease in SG&A expenses was not enough to offset        the $4.3 million decrease in gross profit, $3.9 million decrease in other income, $0.9        increase in interest expense and $1.3 million decrease in income tax benefit.

Net loss for the thirteen and twenty-six week periods        ended July 29, 2006 included extraordinary gains, net of tax, of $2.5 million and $3.4        million, respectively.

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**LIQUIDITY AND CAPITAL RESOURCES**

**Liquidity and Cash Flows.**The Company’s primary sources of working capital are cash provided        by operations and borrowings under its revolving credit facility. The Company’s cash        flows fluctuate from quarter to quarter due to various items, including the seasonality of        sales and results from operations, merchandise inventory purchases and the related terms on        the purchases, tax payments, capital expenditures, and store acquisitions. 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 twenty-six weeks ended August 4, 2007        and July 29, 2006:

|                                          |        |   | **Twenty-six weeks ended** |        |        |   | **Change**   |        |
|------------------------------------------|--------|--------|----------------------------|--------|--------|--------|--------------|--------|
| *(in thousands)*                         |        |        | **August 4,**              |        |        |        | **July 29,** |        |  |  | **$** |   |
|                                          |        |   | **2007**                   |        |        |   | **2006**     |        |  |   |   |  |
| Operating Cash                Flows      |   | $      | (157,020                   | )      |   | $      | (126,180     | )      |   | $ | (30,840 | ) |
| Financing Cash                Flows      |   |        | 60,595                     |   |   |        | 39,366       |   |   |  | 21,229 |   |
|                                     |
| Acquisition of                businesses |   |        | ---                        |   |   |        | (73,079      | )      |   |  | 73,079 |   |
| Capital                Expenditures      |   |        | (8,947                     | )      |   |        | (23,219      | )      |   |  | 14,272 |   |
|                                     |
| Cash and Cash                Equivalents |   |        | 13,258                     |   |   |        | 18,213       |   |   |  | (4,955 | ) |
| Merchandise                Inventory     |   |        | 474,753                    |   |   |        | 505,463      |   |   |  | (30,710 | ) |
| Working                Capital           |   |        | 256,998                    |   |   |        | 252,817      |   |   |  | 4,181 |   |

The Company had cash balances of $13.3 million at August        4, 2007, compared to $118.6 million at February 3, 2007 and $18.2 million at July 29, 2006.        Inventory was $82 per square foot at August 4, 2007, compared to $80 per square foot at        July 29, 2006.

Cash used by operating activities was $157.0 million for        the twenty-six weeks ended August 4, 2007. The primary use of cash was a $139.7 million        seasonal reduction of accounts payable. The Company’s merchandise inventory and        accounts payable are heavily influenced by the seasonality of its business. A significant        reduction of accounts payable occurs annually in the fiscal first quarter, reflecting        payments for merchandise inventory sold during the prior year’s holiday season. In        addition, during the thirteen week period ended August 4, 2007, the Company made a final        principal and interest payment of $7.4 million in settlement of an agreement with the        IRS.

Cash provided by financing activities was $60.6 million        for the twenty-six weeks ended August 4, 2007. The primary source of cash was borrowings        under the Company’s line of credit of $61.8 million.

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**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 2011. The        revolving credit facility contains provisions governing additional indebtedness and        acquisitions and is secured by the assets of the Company. 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 August 4, 2007, the Company had borrowed $61.8 million, under the        revolving credit facility, had $0.1 million in outstanding letter of credit obligations        under the revolving credit facility and $88.1 million was available for borrowing. The        weighted average interest rate on outstanding borrowings for the thirteen weeks ended        August 4, 2007 and July 29, 2006 was 6.32% and 6.05%, respectively.

During the thirteen week period ended July 29, 2006, the        Company’s borrowing capacity under the revolving credit facility was $130 million. As        of July 29, 2006, the Company had borrowed $40.7 million, under the revolving credit        facility, had $26.1 million in outstanding letter of credit obligations under the revolving        credit facility and $63.2 million was available for        borrowing.****

**Capital Resources.**During the twenty-six weeks ended August 4, 2007, the Company made        capital expenditures of $8.9 million. The Company plans to spend between $25 million and        $28 million for capital expenditures in 2007.

 

 

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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 revolving        credit facility, the Company is subject to risk resulting from interest rate fluctuations        since interest on the Company’s borrowings under its revolving credit facility is        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 revolving credit facility were to increase by 25 basis points, and to the        extent borrowings were outstanding, for every $1,000,000 outstanding on the facility,        income before income taxes would be reduced by $2,500 per year. For a discussion of the        Company’s accounting policies for financial instruments and further disclosures        relating to financial instruments, see “Nature of Operations and Summary of        Significant Accounting Policies” in the Notes to Consolidated Financial Statements in        the Company’s Annual Report on Form 10-K for the year ended February 3, 2007. The        Company does not hold any derivative instruments and does not engage in hedging        activities.

**Item 4 – Controls and        Procedures**

(a) Evaluation of disclosure controls and procedures.        The Company’s Chief Executive Officer and Chief Financial Officer after evaluating        the effectiveness of the design and operation of the Company’s disclosure controls        and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and        15d-15(e)) as of August 4, 2007, 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.

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**TRANS WORLD ENTERTAINMENT CORPORATION AND        SUBSIDIARIES**

**PART II - OTHER        INFORMATION**

**Item 1 – Legal        Proceedings**

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

**Item 1A – Risk        Factors**

Risks relating to the Company’s business and        Common Stock are described in detail in Item 1A of the Company’s most recently filed        Annual Report on Form 10-K for the year ended February 3, 2007.

**Item 2 – Unregistered Sales        of Equity Securities and Use of Proceeds**

None.

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

| **A)**                     | An Annual Meeting of Shareholders of Trans                World Entertainment Corporation was held on Wednesday, June 6, 2007.                                                                                                                                                                                                             |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      |
| **B)**                     | In the case of each individual nominee named                below, authority to vote was withheld with respect to the number of shares shown                opposite their name in Column 1, and each nominee received the number of votes set                opposite their name in Column 2 for election as director of the Corporation. |
|                                      |

|   |                             | Column 1                         | Column 2  |
|--------|----------------------------------|----------------------------------|-----------|
|   | Names of                Nominees |                             | Withheld  | Votes for |
|   |                             | Robert J.                Higgins |      | 3,361,518 | 25,901,469 |
|   | Brett Brewer                     |                             | 3,304,932 | 25,958,055 |
|   |                             | Mark                Cohen        |      | 3,385,242 | 25,877,745 |
|   | Joseph Morone                    |                             | 3,304,832 | 25,958,155 |

 

**Item 6 - Exhibits**

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

25

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**SIGNATURES**

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

**TRANS WORLD ENTERTAINMENT CORPORATION**

| September 13, 2007 |   | **By: /s/ Robert J.                Higgins**                                             |
|--------------------|--------|------------------------------------------------------------------------------------------|
|               |   | Robert J. Higgins                                                                        |
|               |   | Chairman and Chief Executive                Officer                                      |
|               |   | (Principal Executive                Officer)                                             |
|               |
| September 13, 2007 |   | **By: /s/ John J.                Sullivan**                                              |
|               |   | John J. Sullivan                                                                         |
|               |   | Executive Vice President and                Chief Financial Officer (Principal Financial |
|               |   | and Chief Accounting                Officer)                                             |

26

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