**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

**FORM 10-Q**
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD  ENDED APRIL 29, 2006**                                                                                                                                                                                                         |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                    |
| **OR**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                    |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM                      TO                   ** |

 

COMMISSION FILENUMBER:  **0-14818**

**TRANSWORLD ENTERTAINMENT CORPORATION**(Exact name of registrant as specified in its charter)

 

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

######  

###### **38 Corporate CircleAlbany, New York 12203**(Address of principal executive offices, including zipcode)

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

Indicate by acheck mark whether the Registrant (1) has filed all reports required to befiled by Sections 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x    No o

Indicate by check mark whether the registrant is a largeaccelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of accelerated filer and large accelerated filer in Rule 12b-2of the Exchange Act.

Large accelerated filer o          Acceleratedfiler x          Non-acceleratedfiler o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o    No x

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

Common Stock, $.01par value,30,804,712 shares outstanding as of June 1, 2006

 

 

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**TRANS WORLD ENTERTAINMENTCORPORATION AND SUBSIDIARIES**

**QUARTERLY REPORT ON FORM 10-Q**

**INDEX TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

** **
|                                                                                                                          | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                                     |       |       |       |
| PART 1.  FINANCIAL INFORMATION                                                                                      |       |       |       |
|                                                                                                                     |       |       |       |
| Item 1—Financial  Statements (Unaudited)                                                                            |       |       |       |
|                                                                                                                     |       |       |       |
| Condensed Consolidated Balance Sheets at  April 29, 2006, January 28, 2006 and April 30, 2005             |       |       |       |
|                                                                                                                     |       |       |       |
| Condensed Consolidated Statements of Operations—Thirteen  Weeks Ended April 29, 2006 and  April 30, 2005  |       |       |       |
|                                                                                                                     |       |       |       |
| Condensed Consolidated Statements of Cash Flows  —Thirteen Weeks Ended April 29, 2006 and  April 30, 2005 |       |       |       |
|                                                                                                                     |       |       |       |
| Notes to Condensed Consolidated Financial Statements                                                                     |       |       |       |
|                                                                                                                     |       |       |       |
| Item 2—Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  |       |       |       |
|                                                                                                                     |       |       |       |
| Item 3—Quantitative and Qualitative Disclosures about  Market Risk                                                  |       |       |       |
|                                                                                                                     |       |       |       |
| Item  4—Controls and Procedures                                                                                     |       |       |       |
|                                                                                                                     |       |       |       |
| PART II.  OTHER INFORMATION                                                                                         |       |       |       |
|                                                                                                                     |       |       |       |
| Item  1—Legal Proceedings                                                                                           |       |       |       |
|                                                                                                                     |       |       |       |
| Item  1A—Risk Factors                                                                                               |       |       |       |
|                                                                                                                     |       |       |       |
| Item 2—Changes in Securities and Use of Proceeds                                                                    |       |       |       |
|                                                                                                                     |       |       |       |
| Item 6—Exhibits and Reports on Form 8-K                                                                        |       |       |       |
|                                                                                                                     |       |       |       |
| Signatures                                                                                                               |       |       |       |

 

2

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**TRANS WORLD ENTERTAINMENT CORPORATION ANDSUBSIDIARIESPART 1. FINANCIAL INFORMATIONItem 1 - Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts)(unaudited)**
| ** **                                                                                                                         | ** ** | **April 29,** | ** ** | **January 28,** | ** ** | **April 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**           | ** ** | **2006**             | ** ** | **2005**           | ** ** |
| **ASSETS**                                                                                                                         |       |               |       |                 |       |               |       |
| CURRENT ASSETS:                                                                                                                    | ** ** | ** **         |       |                 | ** ** | ** **         | ** ** |
| Cash and cash equivalents                                                                                                          |       | $                  | 17,887     |                 | $          | 197,209            |       | $ | 68,005 |   |
| Merchandise inventory                                                                                                              |       | 568,735            |       | 402,712              |       | 409,369            |       |
| Income taxes receivable                                                                                                            |       | 3,119              |       | 892                  |       | —             |       |
| Deferred taxes                                                                                                                     |       | 12,673             |       | 11,266               |       | 14,059             |       |
| Other current assets                                                                                                               |       | 15,224             |       | 14,408               |       | 12,695             |       |
| Total current assets                                                                                                               |       | 617,638            |       | 626,487              |       | 504,128            |       |
|                                                                                                                               |       |               |       |                 |       |               |       |
| NET FIXED ASSETS                                                                                                                   |       | 128,878            |       | 132,464              |       | 126,266            |       |
| DEFERRED TAXES                                                                                                                     |       | 29,593             |       | 27,511               |       | 27,755             |       |
| OTHER ASSETS                                                                                                                       |       | 15,925             |       | 13,861               |       | 14,369             |       |
| TOTAL ASSETS                                                                                                                       |       | $                  | 792,034    |                 | $          | 800,323            |       | $ | 672,518 |   |
|                                                                                                                               |       |               |       |                 |       |               |       |
| **LIABILITIES**                                                                                                                    |       |               |       |                 |       |               |       |
| CURRENT LIABILITIES:                                                                                                               |       |               |       |                 |       |               |       |
| Accounts payable                                                                                                                   |       | $                  | 252,311    |                 | $          | 322,831            |       | $ | 184,942 |   |
| Borrowings under line of credit                                                                                                    |       | 35,550             |       | —               |       | —             |       |
| Income taxes payable                                                                                                               |       | —             |       | —               |       | 2,170              |       |
| Accrued expenses and other                                                                                                         |       | 72,683             |       | 42,530               |       | 36,473             |       |
| Current portion of long-term debt                                                                                                  |       | 484                |       | 477                  |       | 456                |       |
| Current portion of capital lease obligations                                                                                       |       | 3,144              |       | 3,182                |       | 1,312              |       |
| Total current liabilities                                                                                                          |       | 364,172            |       | 369,020              |       | 225,353            |       |
|                                                                                                                               |       |               |       |                 |       |               |       |
| LONG-TERM DEBT,  less current portion                                                                                              |       | 4,464              |       | 4,587                |       | 4,943              |       |
| CAPITAL LEASE  OBLIGATIONS, less current portion                                                                                   |       | 14,093             |       | 14,887               |       | 11,752             |       |
| DEFERRED RENT  AND OTHER LIABILITIES                                                                                               |       | 37,220             |       | 33,317               |       | 30,795             |       |
| TOTAL LIABILITIES                                                                                                                  |       | 419,949            |       | 421,811              |       | 272,843            |       |
|                                                                                                                               |       |               |       |                 |       |               |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                      |       |               |       |                 |       |               |       |
| Preferred stock  ($0.01 par value; 5,000,000 shares authorized; none issued)                                                       |       | —             |       | —               |       | —             |       |
| Common stock  ($0.01 par value; 200,000,000 shares authorized; 55,876,421, 55,727,575 and  55,429,941 shares issued, respectively) |       | 559                |       | 557                  |       | 554                |       |
| Additional  paid-in capital                                                                                                        |       | 299,324            |       | 298,699              |       | 296,931            |       |
| Unearned  compensation — restricted stock                                                                                     |       | (27                | )          | (30                  | )          | (41                | )          |
| Accumulated  other comprehensive loss                                                                                              |       | (2,048             | )          | (2,048               | )          | (652               | )          |
| Treasury stock  at cost (25,104,990, 25,104,990 and 22,550,549 shares, respectively)                                               |       | (217,564           | )          | (217,564             | )          | (194,452           | )          |
| Retained  earnings                                                                                                                 |       | 291,841            |       | 298,898              |       | 297,335            |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                                    |       | 372,085            |       | 378,512              |       | 399,675            |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                   |       | $                  | 792,034    |                 | $          | 800,323            |       | $ | 672,518 |   |

 

*See Notes to Condensed Consolidated FinancialStatements.*

 

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**TRANS WORLD ENTERTAINMENT CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)(unaudited)**
| ** **                                                                                                   | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                   | ** ** | **April 29,  2006**           | ** ** | **April 30,  2005** | ** ** |
| Sales                                                                                                        |       | $                                  | 288,537    |   | $ | 285,410 |   |
| Cost of sales                                                                                                |       | 188,093                            |       | 180,845 |   |
| Gross profit                                                                                                 |       | 100,444                            |       | 104,565 |   |
| Selling, general  and administrative expenses                                                                |       | 114,104                            |       | 105,867 |   |
| Loss from  operations                                                                                        |       | (13,660                            | )          | (1,302 | ) |
| Interest  expense, net                                                                                       |       | 495                                |       | 229 |   |
| Loss before  income taxes and extraordinary gain - unallocated negative goodwill                             |       | (14,155                            | )          | (1,531 | ) |
| Income tax  benefit                                                                                          |       | (6,164                             | )          | (577 | ) |
| Loss before  extraordinary gain - unallocated negative goodwill                                              |       | $                                  | (7,991     | ) | $ | (954 | ) |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $720 and $0,  respectively  |       | 934                                |       | — |   |
| Net loss                                                                                                     |       | $                                  | (7,057     | ) | $ | (954 | ) |
|                                                                                                         |       |                               |       |   |   |
| BASIC LOSS PER SHARE:                                                                                        |       |                               |       |   |   |
| Loss per share  before extraordinary gain -unallocated negative goodwill                                     |       | $                                  | (0.26      | ) | $ | (0.03 | ) |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $720 and $0,  respectively  |       | 0.03                               |       | — |   |
| Basic loss per  share                                                                                        |       | $                                  | (0.23      | ) | $ | (0.03 | ) |
|                                                                                                         |       |                               |       |   |   |
| Weighted average  number of common shares outstanding—basic                                             |       | 30,649                             |       | 32,945 |   |
|                                                                                                         |       |                               |       |   |   |
| DILUTED LOSS PER SHARE:                                                                                      |       |                               |       |   |   |
| Loss per share  before extraordinary gain -unallocated negative goodwill                                     |       | $                                  | (0.26      | ) | $ | (0.03 | ) |
| Extraordinary  gain - unallocated negative goodwill, net of income taxes of $720 and $0,  respectively  |       | 0.03                               |       | — |   |
| Diluted loss per  share                                                                                      |       | $                                  | (0.23      | ) | $ | (0.03 | ) |
|                                                                                                         |       |                               |       |   |   |
| Weighted average number  of common shares outstanding—diluted                                           |       | 30,649                             |       | 32,945 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

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**TRANS WORLD ENTERTAINMENTCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**
| ** **                                                               | ** ** | **Thirteen Weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                               | ** ** | **April 29,  2006**           | ** ** | **April 30,  2005** | ** ** |
| Net cash used by  operating activities                                   |       | $                                  | (135,542   | ) | $ | (156,410 | ) |
|                                                                     |       |                               |       |   |   |
| Cash flows from  investing activities:                                   |       |                               |       |   |   |
| Purchases of  fixed assets                                               |       | (5,928                             | )          | (5,497 | ) |
| Acquisition of  businesses                                               |       | (73,079                            | )          | — |   |
| Net cash used by  investing activities                                   |       | (79,007                            | )          | (5,497 | ) |
|                                                                     |       |                               |       |   |   |
| Cash flows from  financing activities:                                   |       |                               |       |   |   |
| Proceeds from  line of credit                                            |       | 35,550                             |       | — |   |
| Payments of  long-term debt                                              |       | (116                               | )          | (109 | ) |
| Proceeds from  capital lease obligations                                 |       | —                             |       | 5,947 |   |
| Payments of  capital lease obligations                                   |       | (832                               | )          | (192 | ) |
| Payments for  purchases of treasury stock                                |       | —                             |       | (8,154 | ) |
| Proceeds from  the exercise of stock options                             |       | 627                                |       | 2,652 |   |
| Net cash provided by  financing activities                               |       | 35,227                             |       | 144 |   |
|                                                                     |       |                               |       |   |   |
| Net decrease in cash  and cash equivalents                               |       | (179,322                           | )          | (161,763 | ) |
| Cash and cash  equivalents, beginning of year                            |       | 197,209                            |       | 229,768 |   |
| Cash and cash equivalents,  end of period                                |       | $                                  | 17,887     |   | $ | 68,005 |   |
| Supplemental disclosure  of non-cash investing and financing activities: |       |                               |       |   |   |
|  Income tax benefit resulting from exercises  of stock options      |       | $                                  | —     |   | $ | 1,363 |   |

 

*See Notesto Condensed Consolidated Financial Statements.*

 

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**TRANSWORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)April 29, 2006 and April 30, 2005**

**Note 1.Nature of Operations**

Trans WorldEntertainment Corporation and subsidiaries (“the Company”) is the largestspecialty music and video retailer in the United States. The Company operates achain of mall-based retail entertainment stores under the f.y.e., Sam Goody andSuncoast brands and freestanding locations under the names Coconuts Music andMovies, Strawberries Music, Wherehouse, Sam Goody, Spec’s and Second Spin. TheCompany also operates on the web at www.fye.com, www.coconuts.com,www.wherehouse.com, www.secondspin.com, www.samgoody.com and www.suncoast.com.During the thirteen weeks ended April 29, 2006, the Company acquired substantiallyall the net assets of Musicland Holdings Inc. and acquired an 80% interest inMix & Burn LLC. See Note 6 to the Condensed Consolidated FinancialStatements for detail. As of April 29, 2006, the Company operated 1,107stores totaling approximately 6.1 million square feet in the United States, theDistrict of Columbia, the Commonwealth of Puerto Rico and the U.S. VirginIslands.

**Note 2:Basis of Presentation**

The accompanyingunaudited condensed consolidated financial statements consist of Trans WorldEntertainment Corporation, its wholly owned subsidiary Record Town, Inc. (“RecordTown”) and Record Town’s subsidiaries, all of which are wholly owned, and twomajority-owned subsidiaries that are fully consolidated for reporting purposes.All significant intercompany accounts and transactions have been eliminated.

The interimcondensed consolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. The informationfurnished in these unaudited condensed consolidated financial statementsreflects all normal, recurring adjustments which, in the opinion of management,are necessary for the fair presentation of such financial statements. Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements, and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates. Certaininformation and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to rules andregulations applicable to interim financial statements.

The information presentedin the accompanying unaudited condensed consolidated balance sheet as of January 28,2006 has been derived from the Company’s January 28, 2006 auditedconsolidated financial statements. All other information has been derived fromthe Company’s unaudited Condensed Consolidated Financial Statements as of andfor the thirteen weeks ended April 29, 2006 and April 30, 2005. Theseunaudited Condensed Consolidated Financial Statements should be read inconjunction with the audited financial statements and notes thereto included inthe Company’s Annual Report on Form 10-K for the fiscal year ended January 28,2006. Certain reclassifications have been made to prior periods to conform tothe current period presentation.

The Company’s significant accounting policies are the same as thosedescribed in Note 1 to the Company’s Consolidated Financial Statements onForm 10-K for the fiscal year ended January 28, 2006.

 

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**Note 3.Seasonality**

The Company’sbusiness is seasonal in nature, with the fourth fiscal quarter constituting theCompany’s peak selling period. In 2005, the fourth fiscal quarter accounted forapproximately 37% of annual sales. In anticipation of increased sales activityduring 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 saleswere below seasonal norms during the fourth quarter, the Company’s operatingresults, particularly operating and net income, could be adversely affected. Additionally,quarterly sales results, in general, are affected by the timing of new productreleases, new store openings or closings and the performance of existingstores.

**Note 4. Stock Based Compensation**

Prior to January 29,2006, the Company accounted for its stock-based compensation plans under therecognition and measurement provisions of Accounting Principles Board Opinion No. 25,“*Accounting for Stock Issued to Employees*”(“APB Opinion No. 25”) and related interpretations, as permitted by theFinancial Accounting Standards Board’s (“FASB”) Statement of FinancialAccounting Standards (“SFAS”) No. 123, *Accounting for Stock-BasedCompensation*, as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure.*Accordingly,no stock-based compensation expense was recognized in the CondensedConsolidated Statement of Operations for the thirteen weeks ended April 30,2005, as all options granted under the Company’s stock-based employeecompensation plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. As permitted by SFAS No. 123,stock-based compensation expense was included as a pro forma disclosure in theNotes to the Company’s Condensed Consolidated Financial Statements for thethirteen weeks ended April 30, 2005.

Effective January 29,2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R),*Share-Based Payment*, using the modifiedprospective transition method. Under that transition method, compensation costrecognized during the thirteen weeks ended April 29, 2006 includescompensation expense for all stock-based compensation awards granted prior to, but not yet vested as of January 29,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123. There were no stock-based compensation awardsgranted during the thirteen weeks ended April 29, 2006. Results for priorperiods have not been restated, as allowed for under the modified prospective transitionmethod.

Total stock-basedcompensation expense recognized in the condensed consolidated statement ofoperations for the thirteen weeks ended April 29, 2006 was $0.3 millionbefore income taxes. The related total deferred tax benefit was approximately$0.1 million for the thirteen weeks ended April 29, 2006. Prior to theadoption of SFAS No. 123(R), the Company presented all tax benefits fordeductions resulting from the exercise of stock options as operating cash flowsin the Condensed Consolidated Statements of Cash Flows. SFAS No. 123(R) requiresthe tax benefits resulting from tax deductions in excess of the compensationcost recognized for those options to be classified and reported as both anoperating cash outflow and a financing cash inflow on a prospective basis uponadoption.

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As of April 29,2006, there was approximately $1.7 million of unrecognized compensation costrelated to stock option awards that is expected to be recognized as expenseover a weighted average period of 1.3 years.

In December 2005,the Company’s Board of Directors approved the acceleration of vesting ofpreviously granted unvested annual options awarded to employees and officersunder the Company’s Stock Option Plans which had exercise prices greater than$10.00 per share. Options to purchase 2.3 million shares became exercisableimmediately, representing 24% of total options outstanding, as a result of thevesting acceleration. The decision to accelerate vesting of these stock optionswas made primarily to avoid recognizing compensation expense in theConsolidated Statement of Operations in future financial statements upon theadoption of SFAS No.123 (R), Share-Based Payment, which the Company adopted on January 29,2006. The acceleration of vesting of these stock options resulted incompensation expense of $5.9 million, in the pro forma net income (loss)results for the year ended January 28, 2006.

The Company has sixemployee stock option plans, the 1986 Stock Option Plan, the 1994 Stock OptionPlan, the 1998 Stock Option Plan, the 1999 Stock Option Plan and the 2002 StockOption Plan (the “Old Plans”); and the 2005 Long Term Incentive Share Plan (the“New Plan”). The Compensation Committee of the Board of Directors may grantoptions to acquire shares of common stock to employees of the Company at thefair market value of the common stock on the date of grant. Under the New andOld Plans, options generally become exercisable commencing one year from thedate of grant in increments of 25% per year with a maximum term of ten years.  The Company has stopped issuing stock optionsunder the Old Plans. Options authorized for issuance under the Old and NewPlans totaled 19.8 million. As of April 29, 2006, of the optionsauthorized for issuance under the Old and New Plans, 9.3 million were grantedand are outstanding, 7.1 million of which were vested and exercisable. Optionsavailable for future grants at April 29, 2006 were 4.7 million.

The Company alsohas a stock option plan for non-employee directors (the “1990 Plan”). Optionsunder this plan are granted at an exercise price determined by the CompensationCommittee of the Board of Directors. Under the 1990 Plan, options generallybecome exercisable commencing one year from the date of grant in increments of25% per year with a maximum term of ten years. In addition, directors of theCompany receive annual grants of deferred shares of Common Stock (“DeferredShares”) issued under this plan which vest equally in three years from date ofgrant. As of April 29, 2006, there were 750,000 options authorized forissuance and 329,026 options have been granted and are outstanding, 140,014 ofwhich were vested and exercisable. There are 118,480 shares of common stockreserved for possible future option grants under the 1990 Plan. In connectionwith the Company’s merger with Camelot in April 1999 all options issuedunder the Camelot Outside Director Stock Option Plan (the “Camelot DirectorPlan”) were converted to the Company’s options. As of April 29, 2006,there were 4,750 options outstanding and exercisable under the Camelot DirectorPlan. The Company no longer issues options under the Camelot Director Plan.

SFAS No. 123(R) requiresthe use of a valuation model to calculate the fair value of stock-based awards.The Company has elected to use the Black-Scholes option valuation model, whichincorporates various assumptions including those for volatility, expected lifeand interest rates.

8

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The Company has not paiddividends in the past and does not plan to pay dividends in the near future. Expectedstock price volatility is based on the historical volatility of the Company’sstock. The risk-free interest rate is based on the implied yield available onU.S. Treasury issues with an equivalent term approximating the expected life ofthe options. The expected option life (in years) represents the estimatedperiod of time until exercise and is based on historical experience of similarawards.The following table illustrates the effect on net loss and loss pershare for the thirteen weeks ended April 30, 2005 as if the Company hadapplied the fair value recognition provisions of SFAS No. 123 tostock-based employee compensation: 
| ** **                                                                                                                             | ** ** | **Thirteen weeks ended  April 30, 2005**     | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **(in thousands except  per share amounts)** | ** ** |
| Net loss, as  reported                                                                                                                 |       | $                                                                | (954       | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of income  taxes                                    |       | 43                                                               |       |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of income taxes |       | (719                                                             | )          |
| Pro forma net loss                                                                                                                     |       | $                                                                | (1,630     | ) |
| Loss per share:                                                                                                                        |       |                                                             |       |
| Basic—as  reported                                                                                                                |       | $                                                                | (0.03      | ) |
| Basic—pro forma                                                                                                                   |       | $                                                                | (0.05      | ) |
| Diluted—as  reported                                                                                                              |       | $                                                                | (0.03      | ) |
| Diluted—pro forma                                                                                                                 |       | $                                                                | (0.05      | ) |

 

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The table below outlinesthe weighted average assumptions as if the Company had applied the fair valuerecognition provisions of SFAS No. 123 to stock-based employeecompensation for the thirteen weeks ended April 30, 2005:

|                                                                             | ** ** | **Thirteen weeks ended  April 30, 2005** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Dividend yield                                                              |       | 0%                                                           |       |
| Expected stock  price volatility                                            |       | 57%                                                          |       |
| Risk-free  interest rate                                                    |       | 3.71%                                                        |       |
| Expected option  life (in years)                                            |       | 5                                                            |       |
| Weighted average fair  value per share of options granted during the period |       | —                                                       |       |

 

The following table summarizes stock option activityduring the thirteen weeks ended April 29, 2006:

 
| ** **                          | ** ** | **Employee Stock Option Plans** | ** ** | **Director Stock Option Plans** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                     | ** ** | ** **                                     | ** ** | **Weighted** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | **Number of**                             | ** ** | **Weighted**                                   | ** ** | **Average** | ** ** | **Number of** | ** ** | **Weighted** | ** ** | **Average** | ** ** |
| ** **                          | ** ** | **Shares **                               | ** ** | **Average**                                    | ** ** | **Remaining** | ** ** | **Shares** | ** ** | **Average** | ** ** | **Remaining** | ** ** |
| ** **                          | ** ** | **Subject**                                    | ** ** | **Exercise **                             | ** ** | **Contractual** | ** ** | **Subject** | ** ** | **Exercise ** | ** ** | **Contractual** | ** ** |
| ** **                          | ** ** | **To Option**                             | ** ** | **Price**                                      | ** ** | **Term** | ** ** | **To Option** | ** ** | **Price** | ** ** | **Term** | ** ** |
| Balance  January 28, 2006      |       | 9,521,536                                      |       | $                                              | 9.10       |   | 6.1 |   | 338,276 |   | $ | 4.56 |   | 6.2 |   |
| Granted                             |       | —                                         |       | —                                         |       | — |   | — |   | — |   | — |   |
| Exercised                           |       | (144,346                                       | )          | 2.26                                           |       | — |   | (4,500 | ) | 1.35 |   | — |   |
| Forfeited or  expired               |       | (32,919                                        | )          | 7.26                                           |       | — |   | — |   | — |   | — |   |
| Balance  April 29, 2006        |       | 9,344,271                                      |       | $                                              | 9.21       |   | 5.8 |   | 333,776 |   | $ | 4.52 |   | 6.0 |   |
| Exercisable at  April 29, 2006 |       | 6,986,485                                      |       | $                                              | 10.63      |   | 5.4 |   | 135,514 |   | $ | 8.64 |   | 3.4 |   |

 

The intrinsicvalue of stock options exercised under both Plans was $789,000 during thethirteen weeks ended April 29, 2006. The intrinsic value of stock optionsoutstanding and exercisable under both plans as of April 29, 2006 were$12,376,300 and $3,465,000, respectively.

**Note 5.**          Defined Benefit Plans

The Company maintains anon-qualified Supplemental Executive Retirement Plan (“SERP”) for certainexecutive officers of the Company. The SERP, which is unfunded, provideseligible executives defined pension benefits that supplement benefits underother retirement arrangements. The annual benefit amount is based on salary andbonus at the time of retirement and number of years of service.

The Company provides the Board of Directors with a noncontributory,unfunded retirement plan (“Director Retirement Plan”) that pays a retireddirector an annual retirement benefit equal to 60% of the annual retainer atthe time of retirement plus a 3% annual increase through the final payment. Paymentsbegin at age 62 or retirement, whichever is later, and continue for 10 years orthe life of the director and his or her spouse, whichever period is shorter. Partialvesting in the retirement plan begins after six years of continuous service. Participantsbecome fully vested after 12 years of

10

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continuous service on theBoard. After June 1, 2003, new directors were not covered by theretirement plan. Directors who were not yet vested in their retirement benefitsas of June 1, 2003 had the present value of benefits already accrued as ofthe effective date converted to Deferred Shares under the Directors Plan. Directorsthat were fully or partially vested in their retirement benefits were given aone time election to continue to participate in the current retirement programor convert the present value of benefits already accrued to Deferred Sharesunder the Directors Plan as of the effective date.

The measurement date forthe SERP and Director Retirement Plan is November 1 using actuarialtechniques which reflect estimates for mortality, turnover and expectedretirement. In addition, management makes assumptions concerning future salaryincreases. Generally discount rates are established as of the measurement dateusing theoretical bond models that select high-grade corporate bonds withmaturities or coupons that correlate to the expected payouts of the applicableliabilities.

The Company accounts forthe SERP and the Director Retirement Plan in accordance with the provisions ofSFAS No. 87, *Employers’ Accounting for Pensions*.During the thirteen weeks ended April 29, 2006, the Company did not makeany cash contributions to the SERP or the Director Retirement Plan, andpresently expects to pay $35,000 in benefits relating to SERP and $15,000 inbenefits relating to the Director Retirement Plan during fiscal 2006. The following represents the components ofthe net periodic pension cost related to the Company’s SERP and DirectorRetirement Plan for the respective periods: 

|                                     | ** ** | **Thirteen weeks ended** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **April 29, 2006**       | ** ** | **April 30, 2005** | ** ** |
| ** **                          | ** ** | **($ in thousands)**     | ** ** |
| Service cost                        |       | $                                  | 170        |   | $ | 133 |   |
| Interest cost                       |       | 221                                |       | 196 |   |
| Amortization of  prior service cost |       | 85                                 |       | 85 |   |
| Amortization of  net (gain)/loss    |       | 69                                 |       | 62 |   |
| Net periodic pension  cost          |       | $                                  | 545        |   | $ | 476 |   |

 

11

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**Note 6. BusinessCombinations**

On March 27,2006, the Company acquired substantially all the net assets of MusiclandHoldings Inc. (“Musicland”). The acquisition of Musicland’s assets provides theCompany with the ability to leverage its store locations, and strategicallyincrease the Company’s national presence and provide further growthopportunities. Under the terms of the Asset Purchase Agreement (“APA”), theCompany acquired 335 of Musicland’s 400 stores, with the remainder of thestores being liquidated under an agency agreement with Hilco MerchantResources LLC. Musicland, which operated retail stores and websites underthe names Sam Goody (SamGoody.com), Suncoast Motion Picture Company(Suncoast.com), On Cue and MediaPlay.com, filed a voluntary petition torestructure under Chapter 11 of the United States Bankruptcy Code in January 2006.Under the terms of the APA, the Company has the right for a certain time afterconsummation of the transaction to close any of the acquired stores through theMusicland bankruptcy proceeding without obligation. The impact of suchclosings, if any, on the purchase price will depend on the timing and number ofstores closed and therefore, cannot be estimated at the present time. Theacquisition was accounted for using the purchase method of accounting. Thecondensed consolidated statement of operations for the thirteen weeks ended April 29,2006 combines the historical results of the Company for the thirteen weeksended April 29, 2006 and includes the results of Musicland for the periodfrom March 27, 2006 through April 29, 2006.

The purchase pricefor the acquired Musicland assets is approximately $81.8 million,including acquisition-related costs of approximately $1.9 million, ofwhich $71.5 million was paid as of April 29, 2006. The final purchaseprice and payment thereof, is subject to settlement of post closing adjustmentsrelated to inventory which is expected to be finalized by the end of June 2006.The total purchase price was allocated to the assets acquired and liabilitiesassumed based on their fair values as follows:

|                             | ** ** | **($ in thousands)** | ** ** |
|-----------------------------|------------|--------------------------------|------------|
| Assets Acquired:            |       |                           |       |
| Inventory                   |       | $                              | 110,684    |   |
| Other current assets        |       | 93                             |       |
| Total assets acquired       |       | $                              | 110,777    |   |
| Liabilities Assumed:        |       |                           |       |
| Accrued expenses and other  |       | $                              | 21,901     |   |
| Other long-term liabilities |       | 5,410                          |       |
| Total liabilities assumed   |       | $                              | 27,311     |   |
| Net assets  acquired        |       | $                              | 83,466     |   |

 

The unauditedfinancial information in the table below summarizes the combined results ofoperations of the Company and Musicland, on a pro forma basis as though thecompanies had been combined at the beginning of each period presented. This proforma information is presented for informational purposes only and is notnecessarily indicative of the results of operations that would have beenachieved had the acquisition taken place at the beginning of each periodpresented. The pro forma information also does not include one time itemsrelated to acquisition accounting, including the extraordinary gain arisingfrom unallocated negative goodwill, which is discussed below in this Note.

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The unaudited proforma condensed consolidated statement of operations for the thirteen weeksended April 29, 2006 combines the historical results of the Company forthe thirteen weeks ended April 29, 2006 and the historical results ofMusicland for the period preceding the acquisition from January 29, 2006through March 27, 2006. The unaudited pro forma condensed consolidatedstatement of operations for the thirteen weeks ended April 30, 2005combines the historical results of the Company and Musicland for the periods.The following is the pro forma information, after giving effect to purchaseaccounting adjustments:

 
| ** **                                                                                                    | ** ** | **Thirteen weeks ended**                                    | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                    | ** ** | **April 29, 2006**                                          | ** ** | **April 30, 2005** | ** ** |
| ** **                                                                                                    | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Pro forma sales                                                                                               |       | $                                                                     | 336,999    |   | $ | 372,880 |   |
| Pro forma loss  before extraordinary gain - unallocated negative goodwill                                     |       | (14,056                                                               | )          | (9,752 | ) |
| Pro forma net loss                                                                                            |       | $                                                                     | (14,056    | ) | $ | (9,752 | ) |
| Pro forma net loss  before extraordinary gain—unallocated negative goodwill per basic and diluted  share |       | $                                                                     | (0.46      | ) | $ | (0.30 | ) |
| Pro forma net loss per  basic and diluted share                                                               |       | $                                                                     | (0.46      | ) | $ | (0.30 | ) |

 

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

During the thirteen weeks ended April 29, 2006,the Company allocated the purchase price in accordance with the provisions ofSFAS No. 141, resulting in an extraordinary gain of $0.9 million, net of incometaxes of $0.7 million, related to unallocated negative goodwill. The gainrepresents the excess of the fair value of net assets acquired over thepurchase price.

During the thirteen weeks ended April 29, 2006,the Company acquired an 80% interest in Mix & Burn LLC, a company thatis fully consolidated for financial reporting purposes. The Company hascommitted funding of $5.2 million, of which $2.0 million has been funded as of April 29,2006. Pro forma results of operations including the results of Mix &Burn LLC have not been presented because the pro forma effect of theacquisition would not be material to the Company’s results of operations. Mix &Burn LLC is a leading provider of digital content services to retailersnationwide. Using its technology, consumers can mix and burn music CDs anddownload digital songs on demand, allowing the creation of customized playlistsfrom an extensive catalog of new and old content. The acquisition will enablethe Company’s retail locations to offer customers new content, new products andnew services relating to music players, cell phones and cell phone serviceplans in its stores.

13

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**Note 7.Line of Credit**

The Company hasentered into a five year, $130 million revolving secured Credit Agreement withBank of America, N.A that expires in January 2010. The revolving creditfacility contains provisions governing additional indebtedness and acquisitionsand is secured by the Company’s eligible merchandise inventory, proceeds fromthe sale of inventory and by the stock of the Company’s subsidiaries. TheCompany anticipates the amount of the revolving credit facility being fullyavailable to the Company through its term, and does not anticipate anydifficulty in obtaining a similar, replacement facility upon its expiration. Asof April 29, 2006, the Company had borrowed $35.6 million, under therevolving credit facility, had $26.1 million in outstanding letter ofcredit obligations under the revolving credit facility and $68.3 million wasavailable for borrowing. The weighted average interest rate on outstandingborrowings as of April 29, 2006 was 6.51%. There were no borrowingsoutstanding as of April 30, 2005.

**Note 8. Comprehensive Loss**

The Companyaccounts for comprehensive income (loss) in accordance with SFAS No. 130, *Reporting Comprehensive Income*. SFAS No. 130 requiresonly additional disclosures in the consolidated financial statements; it doesnot affect the Company’s financial position or results of operations. Items ofother accumulated comprehensive loss that the Company currently reports in theCondensed Consolidated Balance Sheet are the excess additional minimum pensionliability over unrecognized prior service cost with respect to the Company’sdefined benefit plans.

The Company’stotal comprehensive loss for the thirteen weeks ended April 29, 2006 and April 30,2005 was as follows:

|                                                                                                               | ** ** | **Thirteen Weeks ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                    | ** ** | **April 29, 2006**       | ** ** | **April 30, 2005** | ** ** |
| ** **                                                                                                    | ** ** | **($ in thousands)**     | ** ** |
| Net loss                                                                                                      |       | $                                  | (7,057     | ) | $ | (954 | ) |
|                                                                                                          |       |                               |       |   |   |
| Other comprehensive  income, net of income taxes:                                                             |       |                               |       |   |   |
| Change in unrealized gain on available-for-sale  securities, net of income taxes of $0 and $306, respectively |       | —                             |       | 442 |   |
| Total comprehensive  loss                                                                                     |       | $                                  | (7,057     | ) | $ | (512 | ) |

 

**Note 9.Recently Issued Accounting Standards**

In March 2006, theFASB issued SFAS No. 156, *Accounting for Servicingof Financial Assets - an amendment of FASB Statement No. 140*.SFAS No. 156 amends SFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities-areplacement of FASB Statement No. 125*. SFAS No. 156permits entities to subsequently measure servicing rights at fair value andreport changes in fair value in earnings rather than amortize servicing rightsin proportion to and over the estimated net servicing income or loss and assessthe rights for impairment or the need for an increased obligation as requiredunder SFAS No. 140.

14

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Entities that elect tosubsequently measure their servicing rights at fair value may no longer find itnecessary to qualify for and apply the provisions of SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*,to achieve an income statement effect similar to the application of hedgeaccounting for instruments used to manage the effect of interest rate changeson servicing rights. The adoption of SFAS No.156 is not expected to have asignificant impact on the Company’s condensed consolidated financial positionor results of operations.

In February 2006,the FASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments - an amendment of FASB Statements No. 133 and140*, to simplify and make more consistent the accounting for certainfinancial instruments. Specifically, SFAS No. 155 amends SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*, to permit fair value remeasurement for any hybridfinancial instrument with an embedded derivative that otherwise would requirebifurcation, provided that the whole instrument is accounted for on a fairvalue basis. SFAS No. 155 amends SFAS No. 140, *Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities,* to allow a qualifying special-purpose entity to hold aderivative financial instrument that pertains to a beneficial interest otherthan another derivative financial instrument. SFAS No. 155 applies to allfinancial instruments acquired or issued after the beginning of an entity’sfirst fiscal year that begins after September 15, 2006, with earlierapplication allowed. The adoption of SFAS No.155 is not expected to have asignificant impact on the Company’s condensed consolidated financial positionor results of operations.

In November 2005, the FASB issued FASB StaffPosition No. 115-1, *The Meaning of Other-than-TemporaryImpairment and Its Application to Certain Investments* (“FSP 115-1”).FSP 115-1 addresses the determination as to when an investment isconsidered impaired, whether that impairment is other than temporary and themeasurement of an impairment loss. FSP 115-1, which is effective forreporting periods beginning after December 15, 2005, also includesaccounting considerations subsequent to the recognition of another-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. The adoption of FSP 115-1 is not expected to have asignificant impact on the Company’s condensed consolidated financial positionor results of operations.

**Note 10.Depreciation and Amortization**

Depreciation andamortization of fixed assets included in the condensed consolidated statementsof operations is as follows:

 

|                                               | ** ** | **Thirteen weeks ended** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|
| ** **                                    | ** ** | **April 29, 2006**       | ** ** | **April 30, 2005** | ** ** |
| ** **                                    | ** ** | **(in thousands)**            | ** ** |
| Cost of sales                                 |       | $                                  | 756        |   | $ | 780 |   |
| Selling, general  and administrative expenses |       | 8,652                              |       | 8,220 |   |
| Total                                         |       | $                                  | 9,408      |   | $ | 9,000 |   |

 

15

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**Note 11.Earnings Per Share**

Weighted averageshares are calculated as follows:
| ** **                                               | ** ** | **Thirteen weeks ended** | ** ** |
|----------------------------------------------------------|------------|--------------------------|------------|
| ** **                                               | ** ** | **April 29, 2006**  | ** ** | **April 30, 2005** | ** ** |
| Weighted average  common shares outstanding — basic |       | 30,649                   |       | 32,945 |   |
| Dilutive effect  of employee stock options               |       | —-                  |       | —- |   |
| Weighted average  common shares outstanding—diluted |       | 30,649                   |       | 32,945 |   |
|                                                     |       |                     |       |   |   |
| Anti-dilutive stock  options                             |       | 9,673                    |       | 8,860 |   |

 

For the thirteenweek periods ended April 29, 2006, and April 30, 2005, the impact ofoutstanding stock options was not considered because the Company reported a netloss and such impact would be anti-dilutive.

**Note 12.Legal Proceedings**

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

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

The Company’s Annual Report on Form 10-Kfor the year ended January 28, 2006 provides a summary of the Company’scontractual obligations at January 28, 2006, and the effect that suchobligations are expected to have on liquidity and cash flows in future periods.The following information relating to commitments entered into during thethirteen weeks ended April 29, 2006 should be read in conjunction with theunaudited Condensed Consolidated Financial Statements and related notesincluded elsewhere in this report and the audited financial statements includedin the Company’s most recently filed Annual Report on Form 10-K forthe fiscal year ended January 28, 2006.

During the thirteen weeks ended April 29, 2006,the Company acquired an 80% interest in Mix & Burn LLC, that isfully consolidated for financial reporting purposes. The Company has committedfunding of $5.2 million of which $2.0 million has been funded as of April 29,2006. See Note 6 of notes to the Condensed Consolidated Financial Statementsfor further discussion.

 

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**TRANS WORLD ENTERTAINMENT CORPORATION ANDSUBSIDIARIESItem 2 - Management’s Discussion and Analysis of Financial Condition andResults of OperationsApril 29, 2006 and April 30, 2005**

**Overview**

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations provides information that the Company’s management believesnecessary to achieve an understanding of its financial statements and resultsof operations. To the extent that such analysis contains statements which arenot of a historical nature, such statements are forward-looking statements,which involve risks and uncertainties. These risks include, but are not limitedto, changes in the competitive environment for the Company’s merchandise,including the entry or exit of non-traditional retailers of the Company’smerchandise to or from its markets; releases by the music, DVD and video gamesindustries of an increased or decreased number of “hit releases”; generaleconomic factors in markets where the Company’s merchandise is sold; and otherfactors discussed in the Company’s filings with the Securities and ExchangeCommission. The following discussion and analysis of the Company’s financialcondition and results of operations should be read in conjunction with theunaudited condensed consolidated financial statements and related notesincluded elsewhere in this report and the audited financial statements includedin the Company’s Annual Report on Form 10-K for the fiscal yearended January 28, 2006.

 

At April 29, 2006, the Company operated 1,107 stores totalingapproximately 6.1 million square feet in 50 states, the District of Columbia,the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The Company’sstores offer predominantly entertainment software, including music, DVD and videogames. In total, these categories represented 91% of the Company’s sales in thethirteen weeks ended April 29, 2006. The balance of categories, includingsoftware accessories, boutique and electronic products represented 9% of theCompany’s sales in the thirteen weeks ended April 29, 2006.

 

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

** **

**Sales:**  The Company measures the rate of comparablestore sales change. A store is included in comparable store sales calculationsat the beginning of its thirteenth full month of operation.  Mall stores relocated in the same shoppingcenter after being open for at least thirteen months are considered comparablestores. Closed stores that were open for at least thirteen months are includedin comparable store sales through the month immediately preceding the month ofclosing. The Company further analyzes sales by store format (i.e., mall versusfreestanding) and by product category.

**Cost ofSales and Gross Profit:** Gross profit is impacted primarily by the mix of products sold, bydiscounts negotiated with vendors and discounts offered to customers. TheCompany 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 associatedwith product returns to vendors. Cost of sales further includes obsolescencecosts and is reduced by the benefit of vendor allowances, net of directreimbursements of expense.

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**Selling,General and Administrative (“SG&A”) expenses:** Included inSG&A expenses are payroll and related costs, occupancy charges,professional and service fees, general operating and overhead expenses anddepreciation charges (excluding those related to distribution operations, as discussedin Note 10 to the Condensed Consolidated Financial Statements). SG&Aexpenses also include asset impairment charges and write-offs, if any, andmiscellaneous items, other than interest.

**Balance Sheet and Ratios:**  The Company views cash, net inventoryinvestment (merchandise inventory less accounts payable) and working capital(current assets less current liabilities) as indicators of its financialposition. See Liquidity and Capital Resources for further discussion of theseitems.

** **

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires that managementapply accounting policies and make estimates and assumptions that affectresults of operations and the reported amounts of assets and liabilities in thefinancial statements. Management continually evaluates its estimates andjudgments including those related to merchandise inventory and return costs,valuation of long-lived assets, income taxes, stock-based compensation andaccounting for gift card liability. Management bases its estimates andjudgments on historical experience and other factors that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions.  Note 1 of Notes to the Consolidated FinancialStatements on Form 10-K for the year ended January 28, 2006includes a summary of the significant accounting policies and methods used bythe Company in the preparation of its condensed consolidated financialstatements. Management believes that of the Company’s significant accountingpolicies, the following may involve a higher degree of judgment or complexity:

**MerchandiseInventory and Return Costs:** Merchandise inventory is statedat the lower of cost or market as determined by the average cost method. Theaverage cost method attaches a cost to each item and is a blended average ofthe original purchase price and those of subsequent purchases or other costadjustments throughout the life cycle of that item. Merchandise inventoryvaluation 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 obsoleteinventory. Typically, newer releases generate a higher product demand. Somevendors offer credits to reduce the cost of products that are selling moreslowly, thus allowing for a reduction in the selling price and reducing thepossibility for items to become obsolete. The Company records obsolescence andany adjustments to market value (if lower than cost) based on current andanticipated demand, customer preferences, and market conditions. The provisionfor merchandise inventory shrink is estimated as a percentage of sales for theperiod from the last date a physical inventory was performed to the end of thefiscal period. Such estimates are based on historical results and trends andthe shrink results from the last physical inventory. Physical inventories aretaken at least annually for all stores throughout the year and inventoryrecords are adjusted accordingly. The Company is entitled to return merchandisepurchased from major vendors for credit against other purchases from thesevendors.  Certain vendors reduce thecredit with a merchandise return charge ranging from 0% to 20% of the originalmerchandise purchase price depending on the type of merchandise being returned.Certain other vendors charge a handling fee based on units returned. TheCompany records merchandise return charges in cost of sales.

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**Valuation of Long-Lived Assets:**  The Company assesses the potential impairmentof long-lived assets to determine if any part of the carrying values may not berecoverable. Factors that the Company considers when assessing impairmentinclude:

 

·     significant underperformance relative tohistorical or future operating results;

 

·     significant changes in the manner of theuse of assets or the strategy for the Company’s overall business;

 

·     significant negative industry or economictrends;

 

If the Company were to determine that the carrying value of along-lived asset may not be recoverable based on one or more of the aboveindicators, the Company would test for impairment to determine if a write-downis needed.

 

Store closingsusually occur at the expiration of the lease, at which time leaseholdimprovements, which constitute a majority of the abandoned assets, are fullydepreciated. Also, actual store closures usually occur within three months ofthe planned store closure date. As a result, changes in depreciation estimatesas required by Accounting Principles Board, Opinion No. 20, AccountingChanges (“APB 20”), do not have a material impact on financial results.  Losses for store closings in the ordinarycourse of business represent the write down of the net book value of abandonedfixtures and leasehold improvements. The loss on disposal of fixed assetsrelated to store closings is included in SG&A expenses.

**Income Taxes:** Income taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and tax operating losscarryforwards. Deferred tax assets and liabilities are measured using enactedtax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inthe results of operations in the period that includes the enactment date. Accountingfor income taxes requires management to make estimates and judgments regardinginterpretation of various taxing jurisdictions, laws and regulations as well asthe ultimate realization of deferred tax assets. These estimates and judgmentsinclude the generation of future taxable income, viable tax planning strategiesand support of tax filings. Valuation allowances are recorded against deferredtax assets if, based upon management’s estimates of realizability, it is morelikely than not that some portion or all of these deferred tax assets will notbe realized.

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**Stock-basedCompensation:** Effective January 29, 2006, the Companyadopted the provisions of SFAS No. 123(R) using the modifiedprospective transition method. Under this transition method, stock-basedcompensation expense recognized for share-based awards during the thirteenweeks ended April 29, 2006 includes: (a) compensation expense for allstock-based compensation awards granted prior to, but not yet vested as of, January 29,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, and (b) compensation expense forall stock-based compensation awards granted subsequent to January 29,2006, based on the grant date fair value estimated in accordance with theprovisions of SFAS No. 123(R). In accordance with the modified prospectivetransition method, results for the prior period have not been restated. Priorto the adoption of SFAS No. 123(R), the Company recognized stock-basedcompensation expense in accordance with APB Opinion No. 25 and relatedInterpretations, as allowed by SFAS No. 123.

The calculation ofshare-based employee compensation expense involves estimates that requiremanagement’s judgments. These estimates include the fair value of each of thestock option awards granted, which is estimated on the date of grant using aBlack-Scholes option pricing model. There are two significant inputs into theBlack-Scholes option pricing model that require significant judgment andestimates: expected volatility and expected term. The Company estimatesexpected volatility based on the historical volatility of the Company’s stockover a term equal to the expected term of the option granted. The expected termof stock option awards granted is derived from historical exercise experienceunder the Company’s stock option plans and represents the period of time thatstock option awards granted are expected to be outstanding. The assumptionsused in calculating the fair value of share-based payment awards representmanagement’s best estimates, but these estimates involve inherent uncertaintiesand the application of management judgment. As a result, if factors change andthe Company uses different assumptions, stock-based compensation expense couldbe materially different in the future. In addition, the Company is required toestimate the expected forfeiture rate, and only recognize expense for thoseshares expected to vest. If the Company’s actual forfeiture rate is materiallydifferent from its estimate, the stock-based compensation expense could besignificantly different from what the Company has recorded in the currentperiod. See Note 4 to the condensed consolidated financial statements for afurther discussion on stock-based compensation.

 

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**RESULTSOF OPERATIONS**

**ThirteenWeeks Ended April 29, 2006Compared to the Thirteen Weeks Ended April 30, 2005**

The followingtable sets forth a period over period comparison of the Company’s sales bycategory:
| ** **                | ** ** | **Thirteen weeks ended** | ** **  | ** **                   | ** ** | ** **  | ** ** |
|---------------------------|------------|------------------------------------|-------------|------------------------------|------------|-------------|------------|
| ** **                | ** ** | **April 29, 2006**       | ** **  | **April 30, 2005** | ** ** | **Change**  | ** ** | **%** | ** ** | **Comparable  Store Sales** | ** ** |
| ** **                | ** ** | **(in thousands)**            | ** **  | ** **                   | ** ** | ** **  | ** ** |
| **Sales**                 | ** ** | **$**                              | **288,537** | ** **                   | **$**      | **285,410** | ** ** | **$** | **3,127** | ** ** | **1.1** | **%** | **(6.7** | **)%** |
| As a percentage  of sales |       |                               |        |                         |       |        |       |   |   |   |   |
| Music                     |       | 51                                 | %           | 56                           | %          |        |       |   |   | (12.8 | )% |
| Video (DVD/VHS)           |       | 33                                 | %           | 28                           | %          |        |       |   |   | 2.8 | % |
| Video Games               |       | 7                                  | %           | 7                            | %          |        |       |   |   | (3.7 | )% |
| Other                     |       | 9                                  | %           | 9                            | %          |        |       |   |   | 3.0 | % |
|                      |       |                               |        |                         |       |        |       |   |   |   |   |
| **Store Count:**          |       |                               |        |                         |       |        |       |   |   |   |   |
| Mall                      |       | 801                                |        | 556                          |       | 245         |       | 44.1 | % | (5.6 | )% |
| Freestanding              |       | 306                                |        | 248                          |       | 58          |       | 23.4 | % | (9.4 | )% |
| **Total**                 | ** ** | **1,107**                          | ** **  | **804**                      | ** ** | **303**     | ** ** | **37.7** | **%** |   |   |
|                           |            |                                    |             |                              |            |             |            |  |  |  |  |  |  |  |

 

**Sales.  **The increase in sales duringthe thirteen weeks ended April 29, 2006 resulted from the inclusion ofsales from the acquired Musicland stores (see Note 6 of Notes to the Condensed ConsolidatedFinancial Statements) for the month of April 2006, offset by a comparablestore sales decline of 6.7%.

***Music:***The Company’s stores and internet websites offer a widerange of compact discs (“CDs”) and audio cassettes across most music genres,including new releases from current artists as well as an extensive catalog ofmusic from past periods and artists. CDs represented over 99% of the musiccategory sales in the thirteen weeks ended April 29, 2006.

The Company’smusic sales for the thirteen weeks ended April 29, 2006 decreased 12.8%and comparable store sales in the CDs category decreased 12.1%. Sales for theTop 50 CDs for the thirteen weeks ended April 29, 2006 decreased 28%compared to sales for the thirteen weeks ended April 30, 2005, reflectinglower sales of new releases.

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***Video:***The Company offers video, including DVD in all of itsstores. DVD represented 98% of the video category sales in the thirteen weeksended April 29, 2006. Comparable store sales in the Video categoryincreased 2.8% driven by a comparable store sales increase of 9.2% in the DVDcategory. The increase in DVD sales was due to a larger number of new releasesin the thirteen weeks ended April 29, 2006 as compared to the thirteenweeks ended April 30, 2005.

***Video Games:***The Company offers video game hardware and software inmost of its stores. Comparable store sales decreased 3.7% in the thirteen weeksended April 29, 2006, due to comparisons with last year’s release of Sony’sPSP in the thirteen weeks ended April 30, 2005 and insufficient allocationof hardware product (Microsoft’s Xbox) early in the quarter.

***Other:***The Company offers accessory items for the use, care andstorage of entertainment software, along with boutique and electronic products.The increase in this category was driven by the sales of MP3 players andassorted products that complement the core merchandise categories of music,video and video games. The Company continues to implement merchandisinginitiatives to improve this category, including the expansion of product linesand adding new items.

**GrossProfit.**        Thefollowing table sets forth a period over period comparison of the Company’sgross profit:

|                                | *** *** | **Thirteen weeks ended**(in thousands) | ** ** | **Change**                   | ** ** |
|--------------------------------|--------------|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                     | ** **   | **April 29, 2006**                          | ** ** | **April 29, 2006** | ** ** | **$** | ** ** | **%** | ** ** |
| Gross Profit                   |         | $                                                     | 100,444    |                         | $          | 104,565 |   | $ | (4,121 | ) | (3.9 | )% |
|  As a percentage of sales |         | 34.8                                                  | %          | 36.6                         | %          |   |   |   |   |
|                                |              |                                                       |            |                              |            |  |  |  |  |  |  |  |

 

## The decrease in the gross profit rate as a percentage of sales wasprimarily due to competitive pricing in newreleases in the CD and DVD categories.

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##  

**SG&AExpenses.**The following table sets forth a period over periodcomparison of the Company’s SG&A expenses:

|                                | *** *** | **Thirteen weeks ended**(in thousands)** | ** ** | **Change**                   | ** ** |
|--------------------------------|--------------|---------------------------------------------------------|------------|------------------------------|------------|
| ** **                     | ** **   | **April 29, 2006**                            | ** ** | **April 29, 2006** | ** ** | **$** | ** ** | **%** | ** ** |
| SG&A  Expenses             |         | $                                                       | 114,104    |                         | $          | 105,867 |   | $ | 8,237 |   | (7.8 | )% |
|  As a percentage of sales |         | 39.5                                                    | %          | 37.1                         | %          |   |   |   |   |
|                                |              |                                                         |            |                              |            |  |  |  |  |  |  |  |

##  

The increase of$8.2 million in SG&A expenses during the thirteen weeks ended April 29,2006 resulted from the inclusion of expenses from the acquired 335 Musiclandstores (see Note 6 of Notes to the Condensed Consolidated Financial Statements)for the month of April 2006. The Company also incurred transition costs ofabout $2.0 million, $0.3 million for stock options, and $0.3 million related tothe Company’s investment in Mix & Burn LLC.

**IncomeTax Expense (Benefit).**The following table sets forth aperiod over period comparison of the Company’s income tax expense (benefit):

|                                                                       | *** *** | **Thirteen weeks ended**(in thousands)** | ** ** |
|-----------------------------------------------------------------------|--------------|---------------------------------------------------------|------------|
| ** **                                                            | ** **   | **April 29, 2006**                            | ** ** | **April 30, 2005** | ** ** |
| Income tax  expense (benefit) before impact of quarter-specific items |         | $                                                       | (6,005     | ) | $ | (624 | ) |
|  Effective tax rate before impact of quarter  specific items     |         | 42.4                                                    | %          | 40.8 | % |
|  Tax expense (benefit) of quarter-specific  items                |         | (159                                                    | )          | 47 |   |
|  Income tax expense (benefit)                                    |         | $                                                       | (6,164     | ) | $ | (577 | ) |

 

The Companyrecords its quarterly income tax expense (benefit) based on an estimateof its annual effective tax rate, which further requires the Company toestimate its annual pretax income. Historically, the higherthe estimate of annual pre-tax income, the lower the tax rate due tothe inclusion in income tax expense of certain fixed, minimum taxes thatare paid regardless of the level of taxable income. Conversely, these fixed,minimum taxes cause the tax rate to increase as earnings (and estimatesthereof) decrease. The effective tax rate before impact ofquarter-specific items for the thirteen weeks ended April 29, 2006increased because the estimate of annual pre-tax income for 2006 islower than estimate of 2005 annual pre-tax income used to determine incometaxes for the thirteen weeks ended April 30, 2005.

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**IncomeTax Expense (Benefit). (continued)**For the thirteen weeksended April 29, 2006, the tax benefit of quarter-specific items isattributable to federal tax credits approved by the IRS net of a reduction inestimated realization of state net operating losses. For the thirteen weeksended April 30, 2005, the tax expense of quarter-specific items isattributable to changes in state tax laws enacted during the period.

**ExtraordinaryGain — Unallocated Negative Goodwill.** On March 27, 2006,the Company acquired substantially all of the net assets of Musicland HoldingCorp. During the thirteen weeks ended April 29, 2006, the Companydetermined the purchase price allocation in accordance with the provisions ofSFAS No. 141, *Business Combinations*,resulting in an extraordinary gain of $0.9 million, net of income taxes of $0.7million, related to unallocated negative goodwill. The gain represents theexcess of the fair value of net assets acquired over the purchase price. SeeNote 6 of Notes to condensed consolidated financial statements for details regardingthe allocation of purchase price.

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

|                                                                                                                       | *** *** | **Thirteen weeks ended(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|--------------|-------------------------------------------------------|------------|
| ** **                                                                                                            | ** **   | **April 29, 2006**                          | ** ** | **April 30, 2005** | ** ** |
| Loss before extraordinary  gain                                                                                       |         | $                                                     | (7,991     | ) | $ | (954 | ) |
|  Extraordinary gain—unallocated negative  goodwill, net of income taxes of $0.7 million and $0 respectively |         | 934                                                   |       | —- |   |
|  Net loss                                                                                                        |         | $                                                     | (7,057     | ) | $ | (954 | ) |

 

The increase innet loss is due to lower gross margin rate, higher SG&A expenses as aresult of operating a greater number of stores in the month of April dueto the acquisition (see Note 6 of Notes to the Condensed Consolidated FinancialStatements) and inclusion of integration costs related to the Musicland stores.

 

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**LIQUIDITY ANDCAPITAL RESOURCES**

**Liquidity.**   TheCompany’s primary sources of working capital are cash provided by operationsand borrowings under its revolving credit facility. The Company’s cash flowsfluctuate from quarter to quarter due to various items, including theseasonality of sales and results from operations, merchandise inventorypurchases and the related terms on the purchases, tax payments, capitalexpenditures, stock repurchase activity and store acquisitions. Managementbelieves it will have adequate resources to fund its cash needs for theforeseeable future.

Thefollowing table sets forth a summary of key components of cash flow and workingcapital for each of the thirteen weeks ended April 29, 2006 and April 30,2005:
| ** **                 | ** ** | **Thirteen weeks ended** | ** ** | **Change**                   | ** ** |
|----------------------------|------------|------------------------------------|------------|------------------------------|------------|
| **(in thousands)**    | ** ** | **April 29, 2006**       | ** ** | **April 30, 2005** | ** ** | **$** | ** ** |
| Operating Cash  Flows      |       | $                                  | (135,542   | )                            | $          | (156,410 | ) | $ | 20,868 |   |
| Financing Cash  Flows      |       | 35,227                             |       | 144                          |       | 35,083 |   |
| Acquisition of  businesses |       | (73,079                            | )          | ——                 |       | (73,079 | ) |
| Capital Expenditures       |       | 5,928                              |       | 5,497                        |       | (431 | ) |
|                       |       |                               |       |                         |       |   |   |
| Cash and Cash  Equivalents |       | 17,887                             |       | 68,005                       |       | (50,118 | ) |
| Inventories                |       | 568,735                            |       | 409,369                      |       | 159,366 |   |
| Working Capital            |       | 253,466                            |       | 278,775                      |       | (25,309 | ) |
| Inventory turns            |       | 0.4                                |       | 0.4                          |       |   |   |
|                            |            |                                    |            |                              |            |  |  |  |  |  |

 

The Company had cash balancesof $17.9 million at April 29, 2006, compared to $197.2 millionat January 28, 2006 and $68.0 million at April 30, 2005. Inventorywas $93 per square foot at April 29, 2006, compared to $82 per squarefoot at April 30, 2005. The increase in inventory per square foot as of April 29,2006 as compared to April 30, 2005 is due to acquisition of approximately$35 million of merchandise inventory at a third party distribution centeras part of the Musicland transaction. The Company anticipates that it will take90 to 120 days to flow through the stores. Additionally, the increase ininventory per square foot as of April 29, 2006 was due to special buys toflow product to the acquired stores.

Cash used by operatingactivities was $135.5 million for the thirteen weeks ended April 29,2006. The primary uses of cash were a $70.5 million seasonal reduction ofaccounts payable and an increase of $55.3 million in merchandise inventory.As noted earlier, the increase in merchandise inventory was due to theacquisition of merchandise inventory to replenish the acquired Musiclandstores. The Company’s inventory and accounts payable are heavily influenced bythe seasonality of its business. A significant reduction of accounts payableoccurs annually in the fiscal first quarter, reflecting payments formerchandise inventory sold during the prior year’s holiday season. Similarly,inventory increases each year throughout the fall season and peaks during theholiday selling season.

 

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The seasonality of theCompany’s earnings in its fiscal fourth quarter also results in the timing ofsubstantially all of income tax payments to be made subsequent to year end.These cash uses are offset by a significant cash source in the fiscal fourthquarter from the increase in sales during the holiday season.

Cash provided byfinancing activities was $35.2 million for the thirteen weeks ended April 29,2006. The primary source of cash of $35.6 million was through the Company’sline of credit.

The Company has a fiveyear, $130 million revolving secured Credit Agreement with Bank ofAmerica, N.A that expires in January 2010. The revolving credit facilitycontains provisions governing additional indebtedness and acquisitions and issecured by the Company’s eligible merchandise inventory, proceeds from the saleof inventory and by the stock of the Company’s subsidiaries. The Companyanticipates the amount of the revolving credit facility being fully availableto the Company through its term, and does not anticipate any difficulty inobtaining a similar, replacement facility upon its expiration. As of April 29,2006, the Company had borrowed $35.6 million, under the revolving creditfacility, had $26.1 million in outstanding letter of credit obligationsunder the revolving credit facility and $68.3 million was available forborrowing.

During the thirteen weeksended April 30, 2005, the Company entered into an agreement to finance thereplacement of its point-of-sale system through a capital lease for $12.0 million,bearing an average interest rate of 5.76% with repayments in monthlyinstallments over 5 years. As of April 30, 2005, the Company haddrawn down $5.9 million of the lease.

**Capital Resources.**   Duringthe thirteen weeks ended April 29, 2006, the Company made capitalexpenditures of $5.9 million. The Company plans to spend approximately$55 million for capital expenditures in 2006, of which $12 million isfor the acquired Musicland stores. During the thirteen weeks ended April 29,2006, the Company opened or relocated 4 stores, acquired 335 storesand closed 10 stores.

 

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**Item3—Quantitative and Qualitative Disclosures about Market Risk**

To the extent the Companyborrows under its credit facility, the Company is subject to risk resultingfrom interest rate fluctuations since interest on the Company’s borrowingsunder its credit facility can be variable. Interest on the revolving creditfacility is payable monthly in arrears at a variable rate of either the primerate or LIBOR plus 0.75%. If interest rates on the Company’s credit facilitywere to increase by 25 basis points, and to the extent borrowings wereoutstanding, for every $1,000,000 outstanding on the facility, income beforeincome taxes would be reduced by $2,500 per year. For a discussion of theCompany’s accounting policies for financial instruments and further disclosuresrelating to financial instruments, see “Nature of Operations and Summary ofSignificant Accounting Policies” in the Notes to Consolidated FinancialStatements in the Company’s Form 10-K for the year ended January 28,2006. The Company does not hold any derivative instruments and does not engagein hedging activities.

**Item 4—Controls and Procedures**

(a)             Evaluation of disclosure controlsand procedures.   The Company’s Chief Executive Officer and ChiefFinancial Officer after evaluating the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inthe Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))as of April 29, 2006, have concluded that as of such date the Company’sdisclosure controls and procedures were adequate and effective and designed toensure that material information relating to the Company and its subsidiarieswould be made known to such officers on a timely basis.

(b)             Changes in internal controls.   Therehave been no changes in the Company’s internal controls over financialreporting that occurred during the fiscal quarter covered by this quarterlyreport that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial reporting.

On March 27, 2006,the Company acquired substantially all the net assets of Musicland HoldingsInc. (“Musicland”), as more fully described in Note 6 of Notes to CondensedConsolidated Financial Statements. We excluded from our evaluation the internalcontrol over financial reporting at Musicland, as it was not possible toconduct such an evaluation between the date of acquisition and the date of thisreport. Total revenues and total assets recorded during the quarter related tothe acquired Musicland stores were $26.2 million and $110.8 million,respectively, for the quarter ended April 29, 2006. The impact of theacquired Musicland stores was break-even on loss from operations during thequarter, excluding integration costs.

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**TRANS WORLD ENTERTAINMENT CORPORATION ANDSUBSIDIARIES**

**PART II - OTHER INFORMATION**

**Item 1 —Legal Proceedings**The Company is subject to legal proceedings and claims that have arisen in theordinary course of its business and have not been finally adjudicated. Althoughthere can be no assurance as to the ultimate disposition of these matters, itis management’s opinion, based upon the information available at this time,that the expected outcome of these matters, individually or in the aggregate,will not have a material adverse effect on the results of operations andfinancial condition of the Company.

**Item 1A —Risk Factors**Risks relating to the Company’s business and common stock are described indetail in Item 1A of the Company’s most recently filed Annual Report on Form 10-Kfor the year ended January 28, 2006.

**Item 2 — Changes in Securities and Use of Proceeds**None.

**Item 6 -Exhibits and Reports on Form 8-K**

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

** **

**(B) ****    Reports on Form 8-K—**

A Form 8-K was filed on May 18, 2006incorporating by reference the Company’s May 18, 2006 press releaseannouncing its financial results for the thirteen weeks ended April 29,2006.

Omitted from this Part IIare items which are not applicable or to which the answer is negative to theperiods covered**.**

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**SIGNATURES**

Pursuant to therequirements of the Securities and Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
| **TRANS WORLD ENTERTAINMENT CORPORATION** |
|-------------------------------------------|
|                                      | ** ** | ** ** |
|                                      | ** ** | ** ** |
| June 8, 2006                         | **By:** | **/s/ ROBERT J. HIGGINS** | ** ** |
|                                      | ** ** | Robert J. Higgins |
|                                      | ** ** | Chairman and Chief Executive Officer |
|                                      |   | (Principal Executive Officer) |
|                                      |   |   |
|                                      |   |   |
| June 8, 2006                         | **By:** | **/s/ JOHN J. SULLIVAN** | ** ** |
|                                      |   | John J. Sullivan |
|                                      |   | Executive Vice President and Chief Financial Officer |
|                                      |   | (Principal Financial and Chief Accounting Officer) |

 

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