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

FORM 10-Q

|   |                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------
|x  | QUARTERLY
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 2010   
|   |                                                                                                                                             
|OR
|   |                                                                                                                                             
|o  | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT FOR THE
 TRANSITION PERIOD FROM ___________ TO ___________
|   |                                                                                                                                             

COMMISSION FILE NUMBER: 0-14818

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

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

|                                                            
|------------------------------------------------------------
|38 Corporate Circle 
 Albany, New York 12203                
|                                                            
|(Address of principal executive offices, including zip code)
|                                                            
|(518) 452-1242                                              
|                                                            
|(Registrants telephone number, including area code)        

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

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.Large accelerated filer o Accelerated
filer o
Non-accelerated filer x
Smaller reporting company o

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

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

Common Stock, $.01 par value, 
31,424,529 shares outstanding as of November 27, 2010

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES 
QUARTERLY REPORT ON FORM 10-Q 
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                                     |  |                     
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------
|                                                                                                                                     |  | Form 10-Q 
 Page No.
|PART 1. FINANCIAL INFORMATION                                                                                                        |  |                     
|                                                                                                                                     |  |                     
|Item 1 
 Interim Financial Statements (Unaudited)                                                                                   |  |                     
|                                                                                                                                     |  |                     
|Condensed
 Consolidated Balance Sheets at October 30, 2010, January 30, 2010 and October
 31, 2009                                   |  | 3                   
|                                                                                                                                     |  |                     
|Condensed
 Consolidated Statements of Operations  Thirteen Weeks and Thirty-nine Weeks
 Ended October 30, 2010 and October 31, 2009 |  | 4                   
|                                                                                                                                     |  |                     
|Condensed
 Consolidated Statements of Cash Flows  Thirty-nine Weeks Ended October 30,
 2010 and October 31, 2009                    |  | 5                   
|                                                                                                                                     |  |                     
|Notes to
 Unaudited Condensed Consolidated Financial Statements                                                                      |  | 6                   
|                                                                                                                                     |  |                     
|Item 2 -
 Managements Discussion and Analysis of Financial Condition and Results of
 Operations                                     |  | 13                  
|                                                                                                                                     |  |                     
|Item 3 
 Quantitative and Qualitative Disclosures about Market Risk                                                                 |  | 20                  
|                                                                                                                                     |  |                     
|Item 4 
 Controls and Procedures                                                                                                    |  | 21                  
|                                                                                                                                     |  |                     
|PART II. OTHER
 INFORMATION                                                                                                          |  |                     
|                                                                                                                                     |  |                     
|Item 1  Legal
 Proceedings                                                                                                          |  | 22                  
|                                                                                                                                     |  |                     
|Item 1A- Risk
 Factors                                                                                                               |  | 22                  
|                                                                                                                                     |  |                     
|Item 2 
 Unregistered Sales of Equity Securities and Use of Proceeds                                                                |  | 22                  
|                                                                                                                                     |  |                     
|Item 3 
 Defaults Upon Senior Securities                                                                                            |  | 22                  
|                                                                                                                                     |  |                     
|Item 5  Other
 Information                                                                                                          |  | 22                  
|                                                                                                                                     |  |                     
|Item 6 -
 Exhibits                                                                                                                   |  | 23                  
|                                                                                                                                     |  |                     
|Signatures                                                                                                                           |  | 24                  

2

---



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

|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | ----------------- | - | ----------------- | - | - | -------- | -
|                                                                                                                                   |  | October 30,
 2010 |          | January 30,
 2010 |   | October 31,
 2009 |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|ASSETS                                                                                                                             |  |                   |          |                   |   |                   |   |   |          |  
|CURRENT ASSETS:                                                                                                                    |  |                   |          |                   |   |                   |   |   |          |  
|Cash and cash equivalents                                                                                                          |  | $                 | 6,127    |                   | $ | 71,514            |   | $ | 9,136    |  
|Merchandise inventory                                                                                                              |  |                   | 270,800  |                   |   | 266,568           |   |   | 368,958  |  
|Other current assets                                                                                                               |  |                   | 17,673   |                   |   | 15,062            |   |   | 19,781   |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|Total current assets                                                                                                               |  |                   | 294,600  |                   |   | 353,144           |   |   | 397,875  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|NET FIXED ASSETS                                                                                                                   |  |                   | 26,763   |                   |   | 33,908            |   |   | 41,576   |  
|OTHER ASSETS                                                                                                                       |  |                   | 9,427    |                   |   | 7,514             |   |   | 7,508    |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL ASSETS                                                                                                                       |  | $                 | 330,790  |                   | $ | 394,566           |   | $ | 446,959  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|LIABILITIES                                                                                                                        |  |                   |          |                   |   |                   |   |   |          |  
|CURRENT LIABILITIES:                                                                                                               |  |                   |          |                   |   |                   |   |   |          |  
|Accounts payable                                                                                                                   |  | $                 | 115,312  |                   | $ | 130,549           |   | $ | 135,518  |  
|Borrowings under line of credit                                                                                                    |  |                   | 8,588    |                   |   |                  |   |   | 55,545   |  
|Accrued expenses and other current liabilities                                                                                     |  |                   | 27,635   |                   |   | 38,701            |   |   | 38,049   |  
|Current portion of long-term debt                                                                                                  |  |                   | 630      |                   |   | 602               |   |   | 593      |  
|Current portion of capital lease obligations                                                                                       |  |                   | 700      |                   |   | 1,372             |   |   | 2,021    |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|Total current liabilities                                                                                                          |  |                   | 152,865  |                   |   | 171,224           |   |   | 231,726  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|LONG-TERM DEBT, less current
 portion                                                                                              |  |                   | 1,911    |                   |   | 2,388             |   |   | 2,541    |  
|CAPITAL LEASE OBLIGATIONS,
 less current portion                                                                                   |  |                   | 3,953    |                   |   | 4,486             |   |   | 4,652    |  
|OTHER LONG-TERM LIABILITIES                                                                                                        |  |                   | 21,621   |                   |   | 23,115            |   |   | 25,376   |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL LIABILITIES                                                                                                                  |  |                   | 180,350  |                   |   | 201,213           |   |   | 264,295  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|SHAREHOLDERS
 EQUITY                                                                                                              |  |                   |          |                   |   |                   |   |   |          |  
|Preferred
 stock ($0.01 par value; 5,000,000 shares authorized; none issued)                                                       |  |                   |         |                   |   |                  |   |   |         |  
|Common
 stock ($0.01 par value; 200,000,000 shares authorized; 56,527,519, 56,498,429
 and 56,498,429 shares issued, respectively) |  |                   | 565      |                   |   | 565               |   |   | 565      |  
|Additional paid-in capital                                                                                                         |  |                   | 308,223  |                   |   | 307,823           |   |   | 307,615  |  
|Treasury stock at cost (25,102,990, 25,102,990 and 25,102,990 shares, respectively)                                                |  |                   | (217,555 | )                 |   | (217,555          | ) |   | (217,555 | )
|Accumulated other comprehensive income                                                                                             |  |                   | 1,518    |                   |   | 1,518             |   |   | 2,396    |  
|Retained earnings                                                                                                                  |  |                   | 57,689   |                   |   | 101,002           |   |   | 89,643   |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                         |  |                   | 150,440  |                   |   | 193,353           |   |   | 182,664  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  | $                 | 330,790  |                   | $ | 394,566           |   | $ | 446,959  |  
|                                                                                                                                   |  |                   |          |                   |   |                   |   |   |          |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.

3

---



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

|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|------------------------------------------------------------------------- |  | -------------------- | ------- | ----------------------- | - | ----------------- | - | ----------------- | ------- | - | - | ------- | -
|                                                                          |  | Thirteen Weeks Ended |         | Thirty-nine Weeks Ended |  
|                                                                          |  | October 30,
 2010    |         | October 31,
 2009       |   | October 30,
 2010 |   | October 31,
 2009 |        
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Net sales                                                                 |  | $                    | 128,787 |                         | $ | 161,387           |   | $                 | 421,129 |   | $ | 518,566 |  
|Cost of sales                                                             |  |                      | 84,870  |                         |   | 106,747           |   |                   | 279,959 |   |   | 339,404 |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Gross profit                                                              |  |                      | 43,917  |                         |   | 54,640            |   |                   | 141,170 |   |   | 179,162 |  
|Selling, general and
 administrative expenses                             |  |                      | 59,051  |                         |   | 76,166            |   |                   | 181,783 |   |   | 231,291 |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Loss from operations                                                      |  |                      | (15,134 | )                       |   | (21,526           | ) |                   | (40,613 | ) |   | (52,129 | )
|Interest expense, net                                                     |  |                      | 927     |                         |   | 698               |   |                   | 2,431   |   |   | 2,085   |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Loss before income tax
 (benefit)                                         |  |                      | (16,061 | )                       |   | (22,224           | ) |                   | (43,044 | ) |   | (54,214 | )
|Income tax expense
 (benefit)                                             |  |                      | 55      |                         |   | 93                |   |                   | 270     |   |   | (406    | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Net loss                                                                  |  | $                    | (16,116 | )                       | $ | (22,317           | ) | $                 | (43,314 | ) | $ | (53,808 | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|LOSS PER SHARE:                                                           |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Basic and diluted loss per
 share                                         |  | $                    | (0.51   | )                       | $ | (0.71             | ) | $                 | (1.38   | ) | $ | (1.72   | )
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Weighted average number of common shares outstanding  basic and
 diluted |  |                      | 31,425  |                         |   | 31,395            |   |                   | 31,415  |   |   | 31,362  |  
|                                                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.

4

---



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

|                                                                         |  |                         |         |                   |   |         |  
|------------------------------------------------------------------------ |  | ----------------------- | ------- | ----------------- | - | ------- | -
|                                                                         |  | Thirty-nine Weeks Ended |        
|                                                                         |  |                         |        
|                                                                         |  | October 30,
 2010       |         | October 31,
 2009 |  
|                                                                         |  |                         |         |                   |   |         |  
|Net cash used by operating
 activities                                   |  | $                       | (68,126 | )                 | $ | (69,796 | )
|                                                                         |  |                         |         |                   |   |         |  
|Cash flows from investing activities:                                    |  |                         |         |                   |   |         |  
|Purchases of fixed assets                                                |  |                         | (2,347  | )                 |   | (3,883  | )
|Acquisition of business,
 net of cash received                           |  |                         | (1,848  | )                 |   |        |  
|                                                                         |  |                         |         |                   |   |         |  
|Net cash used by investing
 activities                                   |  |                         | (4,195  | )                 |   | (3,883  | )
|                                                                         |  |                         |         |                   |   |         |  
|Cash flows from financing
 activities:                                   |  |                         |         |                   |   |         |  
|Proceeds from line of credit                                             |  |                         | 8,588   |                   |   | 55,545  |  
|Payments of long-term debt                                               |  |                         | (449    | )                 |   | (422    | )
|Payments of capital lease obligations                                    |  |                         | (1,205  | )                 |   | (2,363  | )
|                                                                         |  |                         |         |                   |   |         |  
|Net cash provided by
 financing activities                               |  |                         | 6,934   |                   |   | 52,760  |  
|                                                                         |  |                         |         |                   |   |         |  
|Net decrease in cash and
 cash equivalents                               |  |                         | (65,387 | )                 |   | (20,919 | )
|Cash and cash equivalents,
 beginning of year                            |  |                         | 71,514  |                   |   | 30,055  |  
|                                                                         |  |                         |         |                   |   |         |  
|Cash and cash equivalents,
 end of period                                |  | $                       | 6,127   |                   | $ | 9,136   |  
|                                                                         |  |                         |         |                   |   |         |  
|Supplemental disclosure of
 non-cash investing and financing activities: |  |                         |         |                   |   |         |  
|Issuance of deferred shares                                              |  | $                       | 160     |                   | $ | 465     |  

See Accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.

5

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
October 30, 2010 and October 31, 2009

Note 1. Nature of Operations

Trans World Entertainment Corporation and subsidiaries (the Company)
is one of the largest specialty retailers of entertainment software, including
music, video, video games and related products in the United States. The
Company operates a chain of retail entertainment stores, primarily under the
brand names f.y.e.
for your entertainment and Suncoast Motion Pictures, and operates
e-commerce sites www.fye.com, www.secondspin.com and www.wherehouse.com in a
single industry segment. As of October 30, 2010, the Company operated 533
stores totaling approximately 3.6 million square feet in the United States, the
District of Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin
Islands.

Liquidity and Cash Flows:The Companys primary sources of working capital
are cash provided by operations and borrowing capacity under its revolving
credit facility (see Note 7 for further details on the revolving credit
facility). The Company generated $49.8 million in cash flow from operations in
2009. The Companys cash flows fluctuate from quarter to quarter due to
various items, including seasonality of sales and earnings, merchandise inventory
purchases and returns and the related terms on the purchases and capital
expenditures. Management believes it will have adequate resources to fund its
cash needs for at least the next twelve months, including its capital spending,
its seasonal increase in merchandise inventory and other operating cash
requirements and commitments. Management has considered and implemented many
initiatives as part of its operating plan for 2010 and beyond, including a
focus on the operation of a core base of stores, optimized pricing strategies
and further streamlining its operations. During Fiscal 2009, management carried
out certain strategic initiatives in its efforts to reduce certain operating
costs such as the reduction of headcount at the home office, the closure of 157
stores and the elimination or curtailment of certain other general and
administrative expenses. Also, during the thirty nine weeks ended October 30,
2010, the Company closed an additional 29 stores. During the fourth quarter of
Fiscal 2010, management plans to close between 60 and 80 of the remaining 533
stores and plans to continue its careful evaluation of store profitability of
its remaining stores in consideration of lease terms and expirations. In addition,
the Company plans to close its distribution facility in Carson, California during
the Fourth Quarter of 2010.

Seasonality:The Companys business is seasonal in nature, with
the fourth fiscal quarter constituting the Companys peak selling period. In 2009,
the fourth fiscal quarter accounted for approximately 36% of annual sales. In
anticipation of increased sales activity during these months, the Company
purchases additional inventory and hires additional, temporary employees to
supplement its permanent store sales staff. If, for any reason, the Companys
net sales were below seasonal norms during the fourth quarter (which the
Company has experienced during its three most recent fourth quarters), the
Companys operating results, particularly operating and net income, would be
adversely affected. Additionally, quarterly sales results, in general, are
affected by the timing of new product releases, store closings and the
performance of existing stores.

6

---



Note 2: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements
consist of Trans World Entertainment Corporation, its wholly-owned subsidiary,
Record Town, Inc. (Record Town), and Record Towns subsidiaries, all of which
are wholly-owned. All significant intercompany accounts and transactions have
been eliminated.

The interim condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. The information furnished in these unaudited condensed consolidated
financial statements reflects all normal, recurring adjustments which, in the
opinion of management, are necessary for the fair presentation of such
financial statements. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to rules and regulations applicable to
interim financial statements.

The information presented in the accompanying unaudited condensed consolidated
balance sheet as of January 30, 2010 has been derived from the Companys
January 30, 2010 audited consolidated financial statements. All other
information has been derived from the Companys unaudited condensed
consolidated financial statements as of and for the thirteen and thirty-nine
weeks ended October 30, 2010 and October 31, 2009. These unaudited condensed
consolidated financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the fiscal year ended January 30, 2010.

The Companys significant accounting policies are the same as those
described in Note 1 to the Companys Consolidated Financial Statements on Form
10-K for the fiscal year ended January 30, 2010.

Note 3. Recently Adopted Accounting
Pronouncements

There are no recently issued accounting standards that are expected to
have a material effect on our financial condition, results of operations or
cash flows.

Note 4. Acquisition

On March 29, 2010 (Acquisition Date), the Company acquired certain
assets and assumed certain liabilities of the Value Music Concepts, Inc.,
(Value Music) a Georgia Corporation. The purchase included substantially all
of the ongoing business of Value Music, which includes five store leases and
equipment, inventory and all related trade names and trademarks (the
Acquisition). The purchase price consideration was $1.8 million.

The Acquisition has been accounted for in accordance with ASC Topic
805, Business Combinations (ASC Topic 805). Accordingly, the total purchase
price has been allocated on a provisional basis to assets acquired and net
liabilities assumed in connection with the Acquisition based on their estimated
fair values as of the completion of the Acquisition. These allocations reflect
various provisional

7

---



estimates that were available at the time and are subject to change
during the purchase price allocation period as valuations are finalized.

The fair value of the net assets acquired was approximately $2.2
million, which exceeds the preliminary estimated purchase price of $1.8
million. Accordingly, the Company recognized the excess of the fair value of
the net assets over the purchase price of approximately $0.4 million as a gain
on bargain purchase. The gain on bargain purchase of $0.4 million was included
as a reduction of SG&A expenses within income from operations in the
Consolidated Statements of Operations in the first quarter of 2010. The
recorded amounts are provisional and subject to change. The Company continues
to evaluate the purchase price allocation, including the opening fair value of
inventory and accrued liabilities, which may require the Company to adjust the
recorded gain.

The Company believes that it was able to acquire Value Music for less
than the fair value of its assets because of (i) the sellers intent to exit
its Value Music operations through bankruptcy liquidation and (ii) the
Companys unique position as a market leader in this industry segment.

The following table summarizes the provisional amounts recognized for
assets acquired and liabilities assumed as of the Acquisition Date. A single
estimate of fair value results from a series of judgments about future events
and uncertainties and relies heavily on estimates and assumptions. The
Companys judgments used to determine the estimated fair value assigned to each
class of assets acquired and liabilities assumed are not expected to materially
impact the Companys results of operations. Certain estimated values are not
yet finalized and are subject to change. The Company will finalize the amounts
recognized as information necessary to complete the analyses is obtained. The
Company expects to finalize these amounts as soon as possible but no later than
one year from the acquisition date. The following are estimated fair value of
assets acquired and liabilities assumed as of the Acquisition date (in
thousands):

|                          |  |   |       |  
|------------------------- |  | - | ----- | -
|Cash                      |  | $ | 11    |  
|Inventory                 |  |   | 2,502 |  
|Other assets              |  |   | 9     |  
|Other
 liabilities        |  |   | (312  | )
|                          |  |   |       |  
|Net assets acquired       |  |   | 2,210 |  
|Less: Purchase price      |  |   | 1,860 |  
|                          |  |   |       |  
|Gain on
 bargain purchase |  | $ | 350   |  
|                          |  |   |       |  

Under ASC 805-10, acquisition related costs (i.e., advisory, legal,
valuation and other professional fees) are not included as a component of consideration
transferred, but are accounted for as expenses in the periods in which the
costs are incurred. The Company incurred $277,000 of acquisition related costs,
which are included in Selling, General and Administrative expenses in the
Statement of Operations. Any additional acquisition expense is expected to be
immaterial.

8

---



The unaudited pro forma statement of operations of the Company assuming
this transaction occurred at February 1, 2009 is as follows:

|                                          |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|----------------------------------------- |  | -------------------- | ------- | ----------------------- | - | ----------------- | - | ----------------- | ------- | - | - | ------- | -
|                                          |  | Thirteen Weeks Ended |         | Thirty-nine Weeks Ended |  
|                                          |  |                      |         |                        
|(In
 thousands, except per share amounts) |  | October 30,
 2010    |         | October 31,
 2009       |   | October 30,
 2010 |   | October 31,
 2009 |        
|                                          |  |                      |         |                         |   |                   |   |                   |        
|Net Sales                                 |  | $                    | 128,787 |                         | $ | 164,097           |   | $                 | 422,553 |   | $ | 527,394 |  
|Net Loss                                  |  | $                    | (16,116 | )                       | $ | (21,938           | ) | $                 | (43,338 | ) | $ | (52,431 | )
|Diluted Loss
 per Share                   |  | $                    | (0.51   | )                       | $ | (0.70             | ) | $                 | (1.38   | ) | $ | (1.67   | )

The unaudited pro forma financial information is presented for
informational purposes only and is not intended to represent or be indicative
of the consolidated results of operations of the Company that would have been
reported had the acquisition been completed as of the beginning of the periods
presented, and should not be taken as being representative of the future
consolidated results of operations of the Company.

Note 5. Stock Based Compensation

During the thirteen weeks ended October 30, 2010, the Company
recognized expense of $0.1 million for stock-based compensation. Total
stock-based compensation expense recognized in the condensed consolidated
statements of operations for the thirteen weeks ended October 31, 2009 was $0.6
million before income taxes. No deferred tax benefit was recorded against
stock-based compensation expense for the thirteen weeks ended October 30, 2010
and October 31, 2009.

Total stock-based compensation expense recognized in the condensed
consolidated statements of operations for the thirty-nine weeks ended October
30, 2010 and October 31, 2009 was $0.5 million and $2.0 million, respectively,
before income taxes. No deferred tax benefit was recorded against stock-based
compensation expense for the thirty-nine weeks ended October 30, 2010 and
October 31, 2009.

As of October 30, 2010, there was approximately $0.8 million of
unrecognized compensation cost related to stock awards that is expected to be
recognized as expense over a weighted average period of 1.2 years.

As of October 30, 2010, stock awards authorized for issuance under the
Companys plans total 20.6 million. Of these awards authorized for issuance,
7.2 million were granted and are outstanding, 5.7 million of which were vested
and exercisable. Awards available for future grants at October 30, 2010 were
2.6 million.

The table below outlines the assumptions that the Company used to
estimate the fair value of stock based awards granted during the thirty-nine
weeks ended October 30, 2010:

|                                                                           |  |                                           |   |      |   | 
|-------------------------------------------------------------------------- |  | ----------------------------------------- | - | ---- | - | 
|                                                                           |  |                                           |  
|                                                                           |  | Thirty-nine weeks ended
 October 30, 2010 |  
|                                                                           |  |                                           |  
|Dividend yield                                                             |  |                                           |   | 0    | % | 
|Expected stock price volatility                                            |  |                                           |   | 76.4 | % | 
|Risk-free interest rate                                                    |  |                                           |   | 2.13 | % | 
|Expected award life (in years)                                             |  |                                           |   | 5.45 |   | 
|Weighted average fair value per share of
 awards granted during the period |  |                                           | $ | 1.37 |   | 

9

---



The following table summarizes stock award activity during the
thirty-nine weeks ended October 30, 2010:

|                                  |  |                                         |            |                                       |   |                                                 |  |  |     | 
|--------------------------------- |  | --------------------------------------- | ---------- | ------------------------------------- | - | ----------------------------------------------- |  |  | --- | 
|                                  |  | Employee and Director Stock Award Plans |           
|                                  |  |                                         |           
|                                  |  | Number of
 Shares
 Subject
 To Award    |            | Weighted
 Average
 Exercise
 Price(1) |   | Weighted
 Average
 Remaining
 Contractual
 Term | 
|                                  |  |                                         |            |                                       |   |                                                 | 
|Balance January 30, 2010          |  |                                         | 7,770,140  |                                       | $ | 7.91                                            |  |  | 4.0 | 
|Granted                           |  |                                         | 1,179,898  |                                       |   | 2.11                                            |  |  | 9.5 | 
|Exercised                         |  |                                         |           |                                       |   |                                                |  |  |    | 
|Vested deferred shares
 issued(2) |  |                                         | (29,090    | )                                     |   |                                                |  |  |    | 
|Forfeited                         |  |                                         | (183,356   | )                                     |   | 3.17                                            |  |  |    | 
|Expired                           |  |                                         | (1,551,150 | )                                     |   | 9.34                                            |  |  |    | 
|                                  |  |                                         |            |                                       |   |                                                 |  |  |     | 
|Balance October 30, 2010          |  |                                         | 7,186,442  |                                       |   | 6.89                                            |  |  | 4.3 | 
|                                  |  |                                         |            |                                       |   |                                                 |  |  |     | 
|Exercisable at October 30,
 2010  |  |                                         | 5,629,842  |                                       |   | 7.72                                            |  |  | 3.0 | 
|                                  |  |                                         |            |                                       |   |                                                 |  |  |     | 

|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Exercise price ranges
 exclude the impact of deferred or restricted stock units that were granted at
 an exercise price of $0. During the thirty six weeks ended October 30, 2010,
 279,898 restricted stock units were granted.
|(2) | Deferred shares are
 exchangeable for common shares on a 1:1 basis and therefore have an exercise
 price of $0.                                                                                                                 

Note 6. Defined Benefit Plans

The Company maintains a non-qualified Supplemental Executive Retirement
Plan (SERP) for certain executive officers of the Company. The SERP provides
eligible executives defined pension benefits that supplement benefits under
other retirement arrangements.

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

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

10

---



The following represents the components of the net periodic pension
cost related to the Companys SERP and Director Retirement Plan for the
respective periods:

|                                    |  |                      |      |                         |   |                    |   |                    |      |   |   |      |  
|----------------------------------- |  | -------------------- | ---- | ----------------------- | - | ------------------ | - | ------------------ | ---- | - | - | ---- | -
|                                    |  | Thirteen weeks ended |      | Thirty-nine weeks ended |  
|                                    |  |                      |      |                         |  
|                                    |  | October 30, 
 2010   |      | October 31, 
 2009      |   | October 30, 
 2010 |   | October 31, 
 2009 |     
|                                    |  |                      |      |                         |  
|                                    |  | (in
 thousands)      |      | (in
 thousands)         |  
|Service cost                        |  | $                    | 33   |                         | $ | 49                 |   | $                  | 99   |   | $ | 147  |  
|Interest
 cost                      |  |                      | 163  |                         |   | 200                |   |                    | 489  |   |   | 600  |  
|Amortization
 of prior service cost |  |                      | 86   |                         |   | 85                 |   |                    | 258  |   |   | 255  |  
|Amortization
 of net gain           |  |                      | (171 | )                       |   | (86                | ) |                    | (513 | ) |   | (258 | )
|                                    |  |                      |      |                         |   |                    |   |                    |      |   |   |      |  
|Net periodic
 pension cost          |  | $                    | 111  |                         | $ | 248                |   | $                  | 333  |   | $ | 744  |  
|                                    |  |                      |      |                         |   |                    |   |                    |      |   |   |      |  

During the thirty-nine weeks ended October 30, 2010, the Company did
not make any cash contributions to the SERP or the Director Retirement Plan,
and presently expects to pay approximately $69,000 in benefits relating to the
SERP and $29,000 in benefits relating to the Director Retirement Plan during
Fiscal 2010.

Note
7. Line of Credit

In April 2010, the Company entered into a $100 million amended and
restated Credit Agreement (Amended Credit Facility). The principal amount of
all outstanding loans under the Amended Credit Facility together with any
accrued but unpaid interest, are due and payable in April 2013, unless
otherwise paid earlier pursuant to the terms of the Amended Credit Facility.
Payments of amounts due under the Amended Credit Facility are secured by the
assets of the Company.

The Amended Credit Facility includes customary provisions, including affirmative
and negative covenants, which include representations, warranties and
restrictions on additional indebtedness and acquisitions. The Company is
compliant with all covenants. The Amended Credit Facility also includes
customary events of default, including, among other things, material adverse
effect, bankruptcy, and certain changes of control. The Amended Credit Facility
also contains other terms and conditions, including prohibiting the payment of
dividends and covenants around the number of store closings. It also changed
the formula for interest rates.

Interest under the Amended Credit Facility will accrue, at the election
of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of Availability as
defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans
ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans
ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also payable
on unused commitments.

The availability under the Amended Credit Facility is subject to
limitations based on sufficient inventory levels. Based on inventory levels at
the end of the quarter, the availability under the credit facility was $90.0
million as of October 30, 2010. As of October 30, 2010, the Company had
$8.6 million outstanding on the revolving credit facility and had $1.1
million in outstanding letter of credit obligations and $80.3 million was
available for borrowing. The weighted average interest rate on outstanding
borrowings for the thirteen weeks ended October 30, 2010 was 5.42%.

As of October 31, 2009, the Company had borrowed
    $55.5 million under the previous Credit Facility, had $3.6 million in
    outstanding letter of credit obligations under the previous Credit Facility
    and $90.9



11

---



million was available for borrowing. The weighted average interest rate
on outstanding borrowings for the thirteen weeks ended October 31, 2009 was
1.33%.

Note
8. Comprehensive Loss

Other accumulated comprehensive income that the Company reports in the
condensed consolidated balance sheets represents the excess of accrued pension
liability over accrued benefit cost, net of taxes, associated with the
Companys defined benefit plans. Comprehensive loss was equal to net loss for
the thirteen and thirty-nine weeks ended October 30, 2010 and October 31, 2009.

Note
9. Depreciation and Amortization of Fixed Assets

Depreciation and amortization of fixed assets included in the condensed
consolidated statements of operations is as follows:

|                                              |  |                      |       |                         |   |                    |  |                    |       |  |   |        | 
|--------------------------------------------- |  | -------------------- | ----- | ----------------------- | - | ------------------ |  | ------------------ | ----- |  | - | ------ | 
|                                              |  | Thirteen Weeks Ended |       | Thirty-nine Weeks Ended |  
|                                              |  |                      |       |                         |  
|                                              |  | October 30, 
 2010   |       | October 31, 
 2009      |   | October 30, 
 2010 |  | October 31, 
 2009 |      
|                                              |  |                      |       |                         |  
|                                              |  | (in thousands)       |       | (in thousands)          |  
|Cost of
 sales                                |  | $                    | 297   |                         | $ | 351                |  | $                  | 919   |  | $ | 1,106  | 
|Selling,
 general and administrative expenses |  |                      | 2,769 |                         |   | 3,933              |  |                    | 8,420 |  |   | 11,246 | 
|                                              |  |                      |       |                         |   |                    |  |                    |       |  |   |        | 
|Total                                         |  | $                    | 3,066 |                         | $ | 4,284              |  | $                  | 9,339 |  | $ | 12,352 | 
|                                              |  |                      |       |                         |   |                    |  |                    |       |  |   |        | 

Note
10. Loss Per Share

Basic loss per share is calculated by dividing net loss by the weighted
average common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock (net of any assumed repurchases) that
then shared in the earnings of the Company, if any. It is computed by dividing
net earnings by the sum of the weighted average shares outstanding and
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued for the Companys common stock awards
from the Companys Stock Award Plans.

For the thirteen and thirty-nine week periods ended October 30, 2010,
and October 31, 2009, the impact of outstanding stock awards was not considered
because the Company reported a net loss and such impact would be anti-dilutive.
Accordingly, basic and diluted loss per share is the same. Total anti-dilutive
stock awards for the thirteen weeks ended October 30, 2010 and October 31, 2009
were approximately 4.7 million and 6.4 million, respectively. Total
anti-dilutive stock awards for the thirty-nine weeks ended October 30, 2010 and
October 31, 2009 were approximately 4.9 million and 6.9 million, respectively.

12

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIESItem 2 - Managements
Discussion and Analysis of Financial Condition andResults of OperationsOctober 30, 2010 and October 31, 2009

Managements Discussion and Analysis of Financial Condition and Results
of Operations provides information that the Companys management believes
necessary to achieve an understanding of its financial statements and results
of operations. To the extent that such analysis contains statements which are
not of a historical nature, such statements are forward-looking statements,
which involve risks and uncertainties. These risks include, but are not limited
to, changes in the competitive environment for the Companys merchandise,
including the entry or exit of non-traditional retailers of the Companys
merchandise to or from its markets; releases by the music, home video and video
games industries of an increased or decreased number of hit releases; general
economic factors in markets where the Companys merchandise is sold; and other
factors discussed in the Companys filings with the Securities and Exchange
Commission. The following discussion and analysis of the Companys financial
condition and results of operations should be read in conjunction with the
unaudited condensed consolidated financial statements and related notes
included elsewhere in this report and the audited financial statements included
in the Companys Annual Report on Form 10-K for the fiscal year ended January
30, 2010.

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires that management apply accounting policies and make estimates and
assumptions that affect results of operations and the reported amounts of
assets and liabilities in the financial statements. Management continually
evaluates its estimates and judgments including those related to merchandise
inventory and return costs, valuation of long-lived assets, income taxes,
stock-based compensation and accounting for gift card liability. Management
bases its estimates and judgments on historical experience and other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions.

Note 1 of Notes to the Consolidated Financial Statements on Form 10-K
for the year ended January 30, 2010 includes a summary of the significant
accounting policies and methods used by the Company in the preparation of its
condensed consolidated financial statements. There have been no material
changes or modifications to the policies since January 30, 2010.

At October 30, 2010, the Company operated 533 stores totaling
approximately 3.6 million square feet in the United States, the District of
Columbia, the Commonwealth of Puerto Rico and the U.S. Virgin Islands. The
Companys stores offer predominantly entertainment software, including music,
video and video games and related products. In total, these categories
represented 85% of the Companys sales in the thirty-nine weeks ended October
30, 2010. The balance of categories, including software accessories,
electronics and trend products represented 15% of the Companys sales in the
thirty-nine weeks ended October 30, 2010.

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

13

---



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

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

Selling,
General and Administrative (SG&A) Expenses:
Included in SG&A expenses are payroll and related costs, occupancy charges,
general operating and overhead expenses and depreciation charges (excluding
those related to distribution operations, as disclosed in Note 9 to the
condensed consolidated financial statements). SG&A expenses also include
asset impairment charges and write-offs, if any, and miscellaneous items, other
than interest.

Balance
Sheet and Ratios: The Company views cash, net
inventory investment (merchandise inventory less accounts payable) and working
capital (current assets less current liabilities) as relevant indicators of its
financial position. See Liquidity and Capital Resources for further discussion
of these items.

RESULTS
OF OPERATIONS
Thirteen and Thirty-nine Weeks Ended October 30, 2010
Compared to the Thirteen and Thirty-nine Weeks Ended October 31, 2009

The following table sets forth a period over period comparison of the
Companys sales for the thirteen weeks and thirty-nine weeks ended October 30,
2010 and October 31, 2009, by category:

|                |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   |         |   |                     |         |   |   |         |   |  |       |    |  |       |   
|--------------- |  | --------------------- | ------- | ------------------------ | - | ------- | - | - | ------- | ------------------- |  | ----------------- | -- | ----------------- | ----- | ------ | - | ------- | - | ------------------- | ------- | - | - | ------- | - |  | ----- | -- |  | ----- | --
|                |  | Thirteen
 weeks ended |         | Thirty-nine
 weeks ended |  
|                |  |                       |         |                          |  
|                |  | October 
 30, 2010    |         | October
31, 2009         |   | Change  |   | % |         | Comp
 Store 
 Sales |  | October
 30, 2010 |    | October
 31, 2009 |       | Change |   | %       |   | Comp
 Store 
 Sales |        
|                |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   |         |   |                     |        
|                |  |                       |         | (in
 thousands)          |   |         |   |   |         |                     |  |                   |    | (in
 thousands)   |       |        |   |         |   |                     |        
|                |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   |         |   |                     |         |   |   |         |   |  |       |    |  |       |   
|Net sales       |  | $                     | 128,787 |                          | $ | 161,387 |   | $ | (32,600 | )                   |  | (20.2             | )% |                   | (4.5  | )%     | $ | 421,129 |   | $                   | 518,566 |   | $ | (97,437 | ) |  | (18.8 | )% |  | (3.1  | )%
|As a % of sales |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   |         |   |                     |         |   |   |         |   |  |       |    |  |       |   
|Music           |  |                       | 36      | %                        |   | 37      | % |   |         |                     |  |                   |    |                   | (6.9  | )%     |   | 37      | % |                     | 37      | % |   |         |   |  |       |    |  | (3.4  | )%
|Home Video      |  |                       | 44      | %                        |   | 41      | % |   |         |                     |  |                   |    |                   | 1.8   | %      |   | 43      | % |                     | 42      | % |   |         |   |  |       |    |  | 1.7   | % 
|Video Games     |  |                       | 5       | %                        |   | 8       | % |   |         |                     |  |                   |    |                   | (41.0 | )%     |   | 5       | % |                     | 8       | % |   |         |   |  |       |    |  | (38.1 | )%
|Other           |  |                       | 15      | %                        |   | 14      | % |   |         |                     |  |                   |    |                   | 4.7   | %      |   | 15      | % |                     | 13      | % |   |         |   |  |       |    |  | 3.8   | % 
|                |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   |         |   |                     |         |   |   |         |   |  |       |    |  |       |   
|Store Count:    |  |                       |         |                          |   |         |   |   |         |                     |  |                   |    |                   |       |        |   | 533     |   |                     | 690     |   |   | (157    | ) |  | (22.8 | %) |  |       |   

Net
sales.Sales decreased 20% and 19% in the thirteen and
thirty-nine week periods ending October 30, 2010, respectively. The decrease in
total sales is due to comparable store sales decline of 5% and 3% for the
thirteen and thirty-nine week periods ended October 30, 2010, respectively and
a decline of 23% in the number of stores in operation as compared to the same
periods last year.

14

---



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Music:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The Companys stores and Internet websites offer a wide range of
 compact discs (CDs) and music DVDs across most music genres, including new
 releases from current artists as well as an extensive catalog of music from
 past periods and artists. The music category represented 36% and 37% of total
 net sales for the thirteen and thirty-nine weeks ended October 30, 2010,
 respectively.                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|During the thirteen and thirty-nine weeks ended October 30, 2010,
 music sales in comparable stores decreased 7% and 3%, respectively, versus
 the thirteen and thirty-nine weeks ended October 31, 2009. The decrease is
 related to continued industry declines. Total CD unit sales for the Company
 decreased 12% and 8% during the thirteen and thirty-nine weeks ended October
 30, 2010. According to Soundscan, total CD unit sales industry-wide were down
 24% and 21% during the thirteen and thirty-nine weeks ended October 30, 2010.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Home Video:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|The Company offers DVDs and high definition DVDs (Bluray) in all of
 its stores. Comparable store sales in the video category increased 2% during
 the thirteen and thirty-nine week periods ending October 30, 2010. Total DVD
 and Bluray unit sales for the Company decreased 9% during the thirteen and
 thirty-nine weeks ended October 30, 2010. According to Warner Brothers Home
 Entertainment, total DVD and Bluray unit sales industry-wide were down 11%
 and 12% during the thirteen and thirty-nine weeks ended October 30, 2010. 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Video Games:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|The 41% comparable store sales decline in video games during the
 thirteen weeks ended October 30, 2010 was due to a reduction in the number of
 stores carrying games. During Fiscal 2009, the Company eliminated the game
 category in over 200 stores. As of quarter-end, 135 of our stores carried
 games compared to 347 a year ago.                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Other:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|The Company offers accessory items for the use, care and storage of
 entertainment software, along with electronics and trend products. For the
 thirteen and thirty-nine weeks ended October 30, 2010, comparable store net
 sales increased 5% and 4% for these categories, respectively.                                                                                                                                                                                                                                                       

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

|                |  |                                     |        |                   |   |                                        |   |        |         |                   |  |                   |    |   |         |   |   |         |   |   |         |   |  |       |   
|--------------- |  | ----------------------------------- | ------ | ----------------- | - | -------------------------------------- | - | ------ | ------- | ----------------- |  | ----------------- | -- | - | ------- | - | - | ------- | - | - | ------- | - |  | ----- | --
|                |  | Thirteen weeks ended(in
 thousands) |        | Change            |   | Thirty-nine weeks ended(in
 thousands) |   | Change |        
|                |  |                                     |        |                   |   |                                        |   |        |        
|                |  | October 30,
 2010                   |        | October 31,
 2009 |   | $                                      |   | %      |         | October 30,
 2010 |  | October 31,
 2009 |    | $ |         | % |  
|                |  |                                     |        |                   |   |                                        |   |        |         |                   |  |                   |    |   |         |   |  
|Gross Profit    |  | $                                   | 43,917 |                   | $ | 54,640                                 |   | $      | (10,723 | )                 |  | (19.6             | )% | $ | 141,170 |   | $ | 179,162 |   | $ | (37,992 | ) |  | (21.2 | )%
|                |  |                                     |        |                   |   |                                        |   |        |         |                   |  |                   |    |   |         |   |   |         |   |   |         |   |  |       |   
|As a % of sales |  |                                     | 34.1   | %                 |   | 33.9                                   | % |        |         |                   |  |                   |    |   | 33.5    | % |   | 34.5    | % |   |         |   |  |       |   

Gross profit dollars decreased 20% and 21% in the thirteen and
thirty-nine weeks ended October 30, 2010, respectively, as compared to the same
period last year. The decline is due to the decline in total sales.

The decrease in gross profit as a percentage of sales for the
thirty-nine week periods ended October 30, 2010 reflects lower vendor
allowances this year versus last year.

15

---



Selling, General & Administrative
Expenses (SG&A). The following table sets
forth a period over period comparison of the Companys SG&A:

|                |  |                                      |        |                   |   |                                         |   |        |         |                   |  |                   |    |   |         |   |   |         |   |   |         |   |  |       |   
|--------------- |  | ------------------------------------ | ------ | ----------------- | - | --------------------------------------- | - | ------ | ------- | ----------------- |  | ----------------- | -- | - | ------- | - | - | ------- | - | - | ------- | - |  | ----- | --
|                |  | Thirteen
 weeks ended(in
 thousands) |        | Change            |   | Thirty-nine
 weeks ended(in
 thousands) |   | Change |        
|                |  |                                      |        |                   |   |                                         |   |        |        
|                |  | October 30,
 2010                    |        | October 31,
 2009 |   | $                                       |   | %      |         | October 30,
 2010 |  | October 31,
 2009 |    | $ |         | % |  
|                |  |                                      |        |                   |   |                                         |   |        |         |                   |  |                   |    |   |         |   |  
|SG&A            |  | $                                    | 59,051 |                   | $ | 76,166                                  |   | $      | (17,115 | )                 |  | (22.5             | )% | $ | 181,783 |   | $ | 231,291 |   | $ | (49,508 | ) |  | (21.4 | )%
|                |  |                                      |        |                   |   |                                         |   |        |         |                   |  |                   |    |   |         |   |   |         |   |   |         |   |  |       |   
|As a % of sales |  |                                      | 45.9   | %                 |   | 47.2                                    | % |        |         |                   |  |                   |    |   | 43.2    | % |   | 44.6    | % |   |         |   |  |       |   

SG&A expenses for the thirteen weeks ended October 30, 2010
decreased $17.1 million, or 23% on the net sales decline of 20%. The decrease
is primarily due to lower overhead expenses associated with the decrease in
store count, lower depreciation expense due to lower store count, the
write-down of fixed assets at underperforming locations during the fourth
quarter of 2009 and lower variable selling expenses on the sales decline.

SG&A expenses for the thirty-nine weeks ended October 30, 2010
decreased $49.5 million, or 21% on the net sales decline of 19%. The decrease
is primarily due to lower overhead expenses associated with the decrease in
store count, lower depreciation expense due to lower store count, the
write-down of fixed assets at underperforming locations during the fourth
quarter of 2009 and lower variable selling expenses on the sales decline.
Included in SG&A expenses for the thirty-nine weeks ended October 30, 2010
is a gain on bargain purchase of $0.4 million related to the acquisition of five
Value Music stores, which is offset by $277,000 in acquisition costs incurred
during the thirty-nine week period of 2010.

Interest Expense, net. Interest
expense, net was $0.9 million and $2.4 million during the thirteen and
thirty-nine week periods ended October 30, 2010 compared to $0.7 million and
$2.1 million for the thirteen and thirty-nine week periods ended October 31,
2009, respectively. The increase in interest expense is due to higher effective
interest rates on the Companys amended credit facility as compared to the
previous credit facility.

Income Tax Expense
(Benefit).As of January 30, 2010 and January 31,
2009, the Company had incurred cumulative three-year losses. Based on the
cumulative three-year losses and other available objective evidence, management
concluded that a full valuation allowance should be recorded against the
Companys deferred tax assets. Due to the recognition of a full valuation
allowance as of January 30, 2010, the projected net loss for the year ending
January 29, 2011 and the net loss incurred for the thirty-nine weeks ended
October 30, 2010, the Company did not provide a current tax benefit for the net
loss incurred for this thirteen week period.

For the
thirty-nine weeks ended October 31, 2009, the tax benefit associated with the
quarter-specific items is primarily attributed to the net impact of the
interest accrual related to uncertain tax positions, the reduction of tax
reserves due to a tax examination settlement and state taxes based on modified
gross receipts incurred during this period.

For all other
periods presented, the tax expense associated with the quarter-specific items
is primarily attributed to the net impact of the interest accrual related to
uncertain tax positions and state taxes based on modified gross receipts
incurred during this period.

16

---



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

|                              |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|----------------------------- |  | -------------------- | ------- | ----------------------- | - | ----------------- | - | ----------------- | ------- | - | - | ------- | -
|                              |  | Thirteen weeks ended |         | Thirty-nine weeks ended |  
|                              |  |                      |         |                        
|(in thousands)                |  | October 30,
 2010    |         | October 31,
 2009       |   | October 30,
 2010 |   | October 31,
 2009 |        
|                              |  |                      |         |                         |   |                   |   |                   |        
|Loss before
 income tax       |  | $                    | (16,061 | )                       | $ | (22,224           | ) | $                 | (43,044 | ) | $ | (54,214 | )
|Income tax
 expense (benefit) |  |                      | 55      |                         |   | 93                |   |                   | 270     |   |   | (406    | )
|                              |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  
|Net loss                      |  | $                    | (16,116 | )                       | $ | (22,317           | ) | $                 | (43,314 | ) | $ | (53,808 | )
|                              |  |                      |         |                         |   |                   |   |                   |         |   |   |         |  

Loss before income tax benefit decreased $6.1 million to $16.1 million
for the third quarter of 2010, from $22.2 million last year. For the thirteen
weeks ended October 30, 2010, the Companys net loss decreased $6.2 million, to
$16.1 million from $22.3 million for the thirteen weeks ended October 31, 2009.
The decrease in the Companys net loss for the thirteen weeks ended October 30,
2010 as compared to the prior year is due to lower SG&A expenses.

For the thirty-nine weeks ended October 30, 2010, the loss before
income taxes decreased $11.2 million to $43.0 million from $54.2 million last
year. The Companys net loss decreased $10.5 million to $43.3 million from
$53.8 million for the thirty-nine weeks ended October 31, 2009. The decrease in
the Companys net loss for the thirty nine weeks ended October 30, 2010 as
compared to the prior year is due to lower SG&A expenses.

17

---



LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows: The Companys
    primary sources of working capital are cash provided by operations and borrowing
    capacity under its revolving credit facility (see Note 7 for further details
    on the revolving credit facility). The Company generated $49.8 million in
    cash flow from operations in 2009. The Companys cash flows fluctuate
    from quarter to quarter due to various items, including seasonality of sales
    and earnings, merchandise inventory purchases and returns and the related
    terms on the purchases and capital expenditures. Management believes it will
    have adequate resources to fund its cash needs for at least the next twelve
    months, including its capital spending, its seasonal increase in merchandise
    inventory and other operating cash requirements and commitments. Management
    has considered and implemented many initiatives as part of its operating
    plan for 2010 and beyond, including a focus on the operation of a core base
    of stores, optimized pricing strategies and further streamlining its operations.
    During Fiscal 2009, management carried out certain strategic initiatives
    in its efforts to reduce certain operating costs such as the reduction of
    headcount at the home office, the closure of 157 stores and the elimination
    or curtailment of certain other general and administrative expenses. Also,
    during the thirty nine weeks ended October 30, 2010, the Company closed an
    additional 29 stores. During the fourth quarter of Fiscal 2010, management
    plans to close between 60 and 80 of the remaining 533 stores and plans to
    continue its careful evaluation of store profitability of its remaining stores
    in consideration of lease terms and expirations. In addition, the Company
    plans to close its distribution facility in Carson, California during the
    Fourth Quarter of 2010.

The following table sets forth a summary of key components of cash flow
and working capital for each of the thirty-nine weeks ended October 30, 2010
and October 31, 2009:

|                           |  |                         |         |                 |   |         |   |   |         |  
|-------------------------- |  | ----------------------- | ------- | --------------- | - | ------- | - | - | ------- | -
|                           |  | Thirty-nine weeks ended |         | Change          |  
|                           |  |                         |         |                 |  
|(in thousands)             |  | October 30,2010         |         | October 31,2009 |   | $       |  
|                           |  |                         |         |                 |   |         |  
|Operating
 Cash Flows      |  | $                       | (68,126 | )               | $ | (69,796 | ) | $ | 1,670   |  
|Investing
 Cash Flows      |  |                         | (4,195  | )               |   | (3,883  | ) |   | (312    | )
|Financing
 Cash Flows      |  |                         | 6,934   |                 |   | 52,760  |   |   | (45,826 | )
|Capital
 Expenditures      |  |                         | (2,347  | )               |   | (3,883  | ) |   | 1,536   |  
|                           |  |                         |         |                 |   |         |   |   |         |  
|Cash
 and Cash Equivalents |  |                         | 6,127   |                 |   | 9,136   |   |   | (3,009  | )
|Merchandise
 Inventory     |  |                         | 270,800 |                 |   | 368,958 |   |   | (98,158 | )
|Working
 Capital           |  |                         | 141,735 |                 |   | 166,149 |   |   | (24,414 | )

The Company had cash and cash equivalents of $6.1 million at October
30, 2010, compared to $71.5 million at January 30, 2010 and $9.1 million at
October 31, 2009. Merchandise inventory was $76 per square foot at October 30,
2010, compared to $83 per square foot at October 31, 2009.

Cash used by operating activities was $68.1 million for the thirty-nine
weeks ended October 30, 2010. The primary uses of cash during the thirty-nine
weeks ended October 30, 2010 were a seasonal reduction of accounts payable,
resulting in a $19.5 million increase in net inventory (inventory less accounts
payable) and losses from operations. The Companys merchandise inventory and
accounts payable are heavily influenced by the seasonality of its business. A
significant reduction of accounts payable occurs annually in the fiscal first
quarter, reflecting payments for merchandise inventory sold during the prior
years holiday season.

18

---



Cash used by investing activities was $4.2 million for the thirty-nine
weeks ended October 30, 2010. The primary use of cash was $2.3 million in
capital expenditures.

Cash provided by financing activities was $6.9 million for the
thirty-nine weeks ended October 30, 2010. Borrowings on the companys line of
credit were $8.6 million during the period, which were offset by payments on
long term debt on capital lease obligations.

In April 2010, the Company entered into a $100 million amended and
restated Credit Agreement (Amended Credit Facility). The principal amount of
all outstanding loans under the Amended Credit Facility together with any
accrued but unpaid interest, are due and payable in April 2013, unless
otherwise paid earlier pursuant to the terms of the Amended Credit Facility.
Payments of amounts due under the Amended Credit Facility are secured by the
assets of the Company.

The Amended Credit Facility includes customary provisions, including
affirmative and negative covenants, which include representations, warranties
and restrictions on additional indebtedness and acquisitions. The Amended
Credit Facility also includes customary events of default, including, among
other things, material adverse effect, bankruptcy, and certain changes of
control. The Amended Credit Facility also contains other terms and conditions
including prohibiting the payment of dividends and covenants around the number
of store closings. It also changed the formula for interest rates.

Interest under the Amended Credit Facility will accrue, at the election
of the Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable
Margin, which is determined by reference to the level of Availability as
defined in the Credit Agreement, with the Applicable Margin for LIBO Rate loans
ranging from 4.00% to 4.50% and the Applicable Margin for Base Rate loans
ranging from 3.00% to 3.50%. In addition, a commitment fee of 0.75% is also payable
on unused commitments.

The availability under the Amended Credit Facility is subject to
limitations based on sufficient inventory levels. Based on inventory levels at
the end of the quarter, the availability under the credit facility was $90.0
million as of October 30, 2010. As of October 30, 2010, the Company had
$8.6 million outstanding on the revolving credit facility and had $1.1
million in outstanding letter of credit obligations and $80.3 million was
remained available for borrowing. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended October 30, 2010 was 5.42%.

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

We believe that cash flows provided by operations and available
borrowing capacity under our credit facility, which expires on April, 2013,
will provide us with sufficient liquidity through the expiration of this credit
facility.

Capital Expenditures.
During the thirty-nine weeks ended October 30, 2010, the Company made capital
expenditures of $2.3 million. The Company plans to spend less than $5 million
for capital expenditures in 2010.

19

---



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires that management apply accounting policies and make estimates and
assumptions that affect results of operations and the reported amounts of
assets and liabilities in the financial statements. Management continually
evaluates its estimates and judgments including those related to merchandise
inventory and return costs, valuation of long-lived assets, income taxes and
accounting for gift card liability. Management bases its estimates and judgments
on historical experience and other factors that are believed to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions.

Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations included in the Form 10-K for the year ended January 30,
2010 includes a summary of the critical accounting policies and methods used by
the Company in the preparation of its condensed consolidated financial statements.
There have been no material changes or modifications to the policies since
January 30, 2010.

Recently Issued Accounting Pronouncements:

The Financial Accounting Standards Board (the FASB) has codified a
single source of U.S. Generally Accepted Accounting Principles (GAAP), the
Accounting Standards Codification . Unless needed to clarify a point to
readers, we will refrain from citing specific section references when
discussing application of accounting principles or addressing new or pending
accounting rule changes. There are no recently issued accounting standards that
are expected to have a material effect on our financial condition, results of
operations or cash flows.

TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART I  FINANCIAL INFORMATION

Item 3 -
Quantitative and Qualitative Disclosures about Market Risk

To the extent the Company borrows under its Credit Facility, the
Company is subject to risk resulting from interest rate fluctuations since
interest on the Companys borrowings under its Credit Facility can be variable
Interest under the Amended Credit Facility will accrue, at the election of the
Company, at a Base Rate or LIBO Rate, plus, in each case, an Applicable Margin,
which is determined by reference to the level of Availability as defined in the
Credit Agreement, with the Applicable Margin for LIBO Rate loans ranging from
4.00% to 4.50% and the Applicable Margin for Base Rate loans ranging from 3.00%
to 3.50%. If interest rates on the Companys Credit Facility were to increase by
25 basis points, and to the extent borrowings were outstanding, for every
$1,000,000 outstanding on the facility, income before income taxes would be
reduced by $2,500 per year. For a discussion of the Companys accounting
policies for financial instruments and further disclosures relating to
financial instruments, see Nature of Operations and Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year ended January 30, 2010. The
Company does not currently hold any derivative instruments.

20

---



Item 4  Controls
and Procedures

(a) Evaluation of disclosure controls and procedures. The Companys
Chief Executive Officer and Chief Financial Officer after evaluating the effectiveness
of the design and operation of the Companys disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of October 30, 2010, have concluded that as of such date the
Companys disclosure controls and procedures were adequate and effective and
designed to ensure that material information relating to the Company and its
subsidiaries would be made known to such officers on a timely basis.

(b) Changes in internal controls. There have been no changes in the
Companys internal controls over financial reporting that occurred during the
fiscal quarter covered by this quarterly report that have materially affected,
or are reasonably likely to materially affect, the Companys internal controls over
financial reporting.

21

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES

PART II - OTHER
INFORMATION

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 1  Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|The Company
 is subject to legal proceedings and claims that have arisen in the ordinary
 course of its business and have not been finally adjudicated. Although there
 can be no assurance as to the ultimate disposition of these matters, it is
 managements opinion, based upon the information available at this time, that
 the expected outcome of these matters, individually and in the aggregate,
 will not have a material adverse effect on the results of operations and
 financial condition of the Company.
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Item 1A  Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Risks relating to the Companys business and Common Stock are
 described in detail in Item 1A of the Companys most recently filed Annual
 Report on Form 10-K for the year ended January 30, 2010.                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Item 2  Unregistered Sales of Equity
 Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Item 3  Defaults Upon Senior Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Item 5  Other Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|None.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

22

---



Item 6 - Exhibits

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

23

---



SIGNATURES

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

TRANS WORLD ENTERTAINMENT CORPORATION

|                  |  |                                       | 
|----------------- |  | ------------------------------------- | 
|December 9,
 2010 |  | By: /s/ Robert J. Higgins             | 
|                  |  |                                       | 
|                  |  | Robert J.
 Higgins                   
|                  |  | Chairman and
 Chief Executive Officer
|                  |  | (Principal
 Executive Officer)       

|                  |  |                                                                                                           | 
|----------------- |  | --------------------------------------------------------------------------------------------------------- | 
|December 9,
 2010 |  | By: /s/ John J. Sullivan                                                                                  | 
|                  |  |                                                                                                           | 
|                  |  | John J.
 Sullivan                                                                                        
|                  |  | Executive
 Vice President and Chief Financial Officer (Principal Financial and Chief
 Accounting Officer)

24

---