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 MAY 1,
 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 May 29, 2010

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIESQUARTERLY REPORT ON FORM 10-QINDEX 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 May 1, 2010, January 30,
 2010 and May 2, 2009             |  |                      | 3 
|                                                                                                    |  |                      |   
|Condensed Consolidated Statements of Operations  Thirteen Weeks
 Ended May 1, 2010 and May 2, 2009 |  |                      | 4 
|                                                                                                    |  |                      |   
|Condensed Consolidated Statements of Cash Flows  Thirteen Weeks
 Ended May 1, 2010 and May 2, 2009 |  |                      | 5 
|                                                                                                    |  |                      |   
|Notes to Condensed Consolidated Financial Statements                                                |  |                      | 6 
|                                                                                                    |  |                      |   
|Item 2 - Managements Discussion and Analysis of Financial Condition
 and Results of Operations     |  |                      | 13
|                                                                                                    |  |                      |   
|Item 3  Quantitative and Qualitative Disclosures about Market Risk                                 |  |                      | 20
|                                                                                                    |  |                      |   
|Item 4  Controls and Procedures                                                                    |  |                      | 20
|                                                                                                    |  |                      |   
|PART II. OTHER INFORMATION                                                                          |  |                      |   
|                                                                                                    |  |                      |   
|Item 1  Legal Proceedings                                                                          |  |                      | 21
|                                                                                                    |  |                      |   
|Item 1A- Risk Factors                                                                               |  |                      | 21
|                                                                                                    |  |                      |   
|Item 2  Unregistered Sales of Equity Securities and Use of Proceeds                                |  |                      | 21
|                                                                                                    |  |                      |   
|Item 3  Defaults Upon Senior Securities                                                            |  |                      | 21
|                                                                                                    |  |                      |   
|Item 4  Submission of Matters to a Vote of Security Holders                                        |  |                      | 21
|                                                                                                    |  |                      |   
|Item 5  Other Information                                                                          |  |                      | 21
|                                                                                                    |  |                      |   
|Item 6  Exhibits                                                                                   |  |                      | 21
|                                                                                                    |  |                      |   
|Signatures                                                                                          |  |                      | 22

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)

|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | ----------------- | - | ------------ | - | - | -------- | -
|                                                                                                                                   |  | May 1,
 2010 |          | January 30,
 2010 |   | May 2,
 2009 |  
|                                                                                                                                   |  |              |          |                   |   |              |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|ASSETS                                                                                                                             |  |              |          |                   |   |              |   |   |          |  
|CURRENT
 ASSETS:                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Cash and cash equivalents                                                                                                          |  | $            | 21,275   |                   | $ | 71,514       |   | $ | 8,221    |  
|Merchandise inventory                                                                                                              |  |              | 251,279  |                   |   | 266,568      |   |   | 332,695  |  
|Other current assets                                                                                                               |  |              | 7,718    |                   |   | 15,062       |   |   | 20,798   |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Total current assets                                                                                                               |  |              | 280,272  |                   |   | 353,144      |   |   | 361,714  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|NET FIXED
 ASSETS                                                                                                                  |  |              | 31,398   |                   |   | 33,908       |   |   | 47,552   |  
|OTHER ASSETS                                                                                                                       |  |              | 9,790    |                   |   | 7,514        |   |   | 6,817    |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL ASSETS                                                                                                                       |  | $            | 321,460  |                   | $ | 394,566      |   | $ | 416,083  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|LIABILITIES                                                                                                                        |  |              |          |                   |   |              |   |   |          |  
|CURRENT
 LIABILITIES:                                                                                                              |  |              |          |                   |   |              |   |   |          |  
|Accounts
 payable                                                                                                                  |  | $            | 74,746   |                   | $ | 130,549      |   | $ | 89,304   |  
|Borrowings
 under line of credit                                                                                                   |  |              |         |                   |   |             |   |   | 28,981   |  
|Accrued
 expenses and other current liabilities                                                                                    |  |              | 34,411   |                   |   | 38,701       |   |   | 37,960   |  
|Current
 portion of long-term debt                                                                                                 |  |              | 611      |                   |   | 602          |   |   | 579      |  
|Current
 portion of capital lease obligations                                                                                      |  |              | 828      |                   |   | 1,372        |   |   | 3,121    |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Total current liabilities                                                                                                          |  |              | 110,596  |                   |   | 171,224      |   |   | 159,945  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|LONG-TERM
 DEBT, less current portion                                                                                              |  |              | 2,231    |                   |   | 2,388        |   |   | 2,839    |  
|CAPITAL
 LEASE OBLIGATIONS, less current portion                                                                                   |  |              | 4,314    |                   |   | 4,486        |   |   | 5,142    |  
|OTHER
 LONG-TERM LIABILITIES                                                                                                       |  |              | 22,129   |                   |   | 23,115       |   |   | 26,054   |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL LIABILITIES                                                                                                                  |  |              | 139,270  |                   |   | 201,213      |   |   | 193,980  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|SHAREHOLDERS
EQUITY                                                                                                               |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Preferred stock ($0.01 par value; 5,000,000
 shares authorized; none issued)                                                       |  |              |         |                   |   |             |   |   |         |  
|Common stock ($0.01 par value; 200,000,000
 shares authorized; 56,498,429, 56,498,429 and 56,494,906 shares issued,
 respectively) |  |              | 565      |                   |   | 565          |   |   | 565      |  
|Additional paid-in capital                                                                                                         |  |              | 308,074  |                   |   | 307,823      |   |   | 306,982  |  
|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                                                                                                                  |  |              | 89,588   |                   |   | 101,002      |   |   | 129,715  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                         |  |              | 182,190  |                   |   | 193,353      |   |   | 222,103  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  | $            | 321,460  |                   | $ | 394,566      |   | $ | 416,083  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  

See
Accompanying Notes to Condensed Consolidated Financial Statements.

3

---



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

|                                                              |  |                      |         |              |   |         |  
|------------------------------------------------------------- |  | -------------------- | ------- | ------------ | - | ------- | -
|                                                              |  | Thirteen Weeks Ended |        
|                                                              |  |                      |        
|                                                              |  | May 1,
 2010         |         | May 2,
 2009 |  
|                                                              |  |                      |         |              |  
|                                                             
|Net sales                                                     |  | $                    | 156,539 |              | $ | 191,433 |  
|Cost of
 sales                                                |  |                      | 105,014 |              |   | 125,681 |  
|                                                              |  |                      |         |              |   |         |  
|Gross profit                                                  |  |                      | 51,525  |              |   | 65,752  |  
|Selling,
 general and administrative expenses                 |  |                      | 62,178  |              |   | 79,359  |  
|                                                              |  |                      |         |              |   |         |  
|Loss from
 operations                                         |  |                      | (10,653 | )            |   | (13,607 | )
|Interest
 expense, net                                        |  |                      | 688     |              |   | 703     |  
|                                                              |  |                      |         |              |   |         |  
|Loss before
 income tax expense (benefit)                     |  |                      | (11,341 | )            |   | (14,310 | )
|Income tax
 expense (benefit)                                 |  |                      | 74      |              |   | (574    | )
|                                                              |  |                      |         |              |   |         |  
|Net loss                                                      |  | $                    | (11,415 | )            | $ | (13,736 | )
|                                                              |  |                      |         |              |   |         |  
|                                                              |  |                      |         |              |   |         |  
|LOSS PER
 SHARE:                                              |  |                      |         |              |   |         |  
|Basic and
 diluted loss per share                             |  | $                    | (0.36   | )            | $ | (0.44   | )
|                                                              |  |                      |         |              |   |         |  
|                                                              |  |                      |         |              |   |         |  
|Weighted
 average number of common shares  basic and diluted |  |                      | 31,395  |              |   | 31,296  |  
|                                                              |  |                      |         |              |   |         |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

4

---



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

|                                                                         |  |                      |         |               |   |         |  
|------------------------------------------------------------------------ |  | -------------------- | ------- | ------------- | - | ------- | -
|                                                                         |  | Thirteen Weeks Ended |        
|                                                                         |  |                      |        
|                                                                         |  | May 1, 
 2010        |         | May 2, 
 2009 |  
|                                                                         |  |                      |         |               |  
|Net cash
 used by operating activities                                   |  | $                    | (46,779 | )             | $ | (48,570 | )
|                                                                         |  |                      |         |               |   |         |  
|                                                                         |  |                      |         |               |   |         |  
|Cash flows
 from investing activities:                                   |  |                      |         |               |   |         |  
|Purchases of fixed assets                                                |  |                      | (747    | )             |   | (1,334  | )
|Acquisition
 of business, net of cash received                           |  |                      | (1,849  | )             |   |        |  
|                                                                         |  |                      |         |               |   |         |  
|Net cash
 used by investing activities                                   |  |                      | (2,596  | )             |   | (1,334  | )
|                                                                         |  |                      |         |               |   |         |  
|                                                                         |  |                      |         |               |   |         |  
|Cash flows
 from financing activities:                                   |  |                      |         |               |   |         |  
|Proceeds
 from line of credit                                            |  |                      |        |               |   | 28,981  |  
|Payments of
 long-term debt                                              |  |                      | (148    | )             |   | (138    | )
|Payments of
 capital lease obligations                                   |  |                      | (716    | )             |   | (773    | )
|                                                                         |  |                      |         |               |   |         |  
|Net cash
 (used) provided by financing activities                        |  |                      | (864    | )             |   | 28,070  |  
|                                                                         |  |                      |         |               |   |         |  
|                                                                         |  |                      |         |               |   |         |  
|Net decrease
 in cash and cash equivalents                               |  |                      | (50,239 | )             |   | (21,834 | )
|Cash and
 cash equivalents, beginning of period                          |  |                      | 71,514  |               |   | 30,055  |  
|                                                                         |  |                      |         |               |   |         |  
|Cash and
 cash equivalents, end of period                                |  | $                    | 21,275  |               | $ | 8,221   |  
|                                                                         |  |                      |         |               |   |         |  
|Supplemental
 disclosure of non-cash investing and financing activities: |  |                      |         |               |   |         |  
|Issuance of deferred shares                                              |  | $                    |        |               | $ | 465     |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

5

---



TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (unaudited)
May 1, 2010 and May 2, 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
names f.y.e. for your entertainment and Suncoast Motion Pictures, and
e-commerce sites, www.fye.com, www.wherehouse.com, www.secondspin.com and
www.suncoast.com in a single industry segment. As of May 1, 2010, the Company
operated 544 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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 many initiatives as part of the development of its
operating plan for 2010 and beyond including a focus on the operation of a core
base of stores, improved product selection based on customer preferences and
industry changes, as well as further streamlining of 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 and the elimination or curtailment of certain other general and
administrative expenses. Also, during the fourth quarter of Fiscal 2009,
management closed 133 stores, with an additional 18 stores closed in the first
quarter of 2010, and plans to continue its careful evaluation of store
profitability of its remaining stores in consideration of lease terms,
conditions and expirations. The Company expects to close its distribution
facility in Carson, California during Fiscal 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 weeks ended May 1,
2010 and May 2, 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

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.

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.

7

---



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 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 $163,000 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.

In the period between the Acquisition Date and May 1, 2010, Value Music
generated approximately $0.8 million of net sales and $0.1 million of net
income. The Company has included the operating results of Value Music in its
consolidated financial statements since the Acquisition Date.

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 |        
|                                          |  |                      |        
|(In
 thousands, except per share amounts) |  | May 1,
 2010         |         | May 2,
 2009 |  
|                                          |  |                      |         |              |  
|                                          |  |                      |         |              |   |         |  
|Net Sales                                 |  | $                    | 157,963 |              | $ | 194,584 |  
|Net Loss                                  |  | $                    | (11,439 | )            | $ | (13,201 | )
|                                          |  |                      |         |              |   |         |  
|Diluted Loss
 per Share                   |  | $                    | (0.36   | )            | $ | (0.42   | )

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

Total stock-based compensation expense recognized in the condensed
consolidated statements of operations for the thirteen weeks ended May 1, 2010
and May 2, 2009 was $0.5 million and $0.7 million, respectively, before income
taxes. No deferred tax benefit was recorded against stock-based compensation
expense for the thirteen weeks ended May 1, 2010 and May 2, 2009.

As of May 1, 2010, there was approximately $0.3 million of unrecognized
compensation cost related to stock award awards that is expected to be
recognized as expense over a weighted average period of 0.4 years. Following
the end of the first quarter of 2010, the Company issued 900,000 options which
will increase unrecognized compensation costs and extend the weighted average
period that expense will be recognized.

As of May 1, 2010, stock awards authorized for issuance under the
Companys plans total 20.6 million. Of these awards authorized for issuance,
6.5 million were granted and are outstanding, 6.1 million of which were vested
and exercisable. Awards available for future grants at May 1, 2010 were 3.4
million. During the thirteen weeks ended May 1, 2010, the Company did not issue
any SSARS (Stock-Settled Appreciation Rights), or other instruments, requiring
use of an option pricing valuation model.

9

---



The following table summarizes stock award activity during the thirteen
weeks ended May 1, 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 |                                      | $ | 7.24                                            |  |  | 4.0 | 
|Granted                     |  |                                         |          |                                      |   |                                                |  |  |    | 
|Exercised                   |  |                                         |          |                                      |   |                                                |  |  |    | 
|Forfeited                   |  |                                         | (456,854  | )                                    |   | 1.11                                            |  |  |    | 
|Expired                     |  |                                         | (835,680  | )                                    |   | 10.34                                           |  |  |    | 
|                            |  |                                         |           |                                      |   |                                                 |  |  |     | 
|Balance May
 1, 2010        |  |                                         | 6,477,606 |                                      | $ | 7.27                                            |  |  | 3.6 | 
|                            |  |                                         |           |                                      |   |                                                 |  |  |     | 
|Exercisable
 at May 1, 2010 |  |                                         | 6,080,254 |                                      | $ | 7.59                                            |  |  | 3.3 | 
|                            |  |                                         |           |                                      |   |                                                 |  |  |     | 

|(1) | Exercise price ranges include
        the impact of deferred or restricted stock units that were granted at
    an exercise price of $0.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

The intrinsic value of stock awards outstanding and exercisable as of
May 1, 2010 was $729,473 and $219,537, respectively.

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 |     
|                                    |  |                      |     
|                                    |  | May 1,
2010          |      | May 2,
2009 |  
|                                    |  |                      |      |             |  
|                                    |  | ($ in
 thousands)    |     
|Service cost                        |  | $                    | 33   |             | $ | 49  |  
|Interest
 cost                      |  |                      | 163  |             |   | 200 |  
|Amortization
 of prior service cost |  |                      | 86   |             |   | 85  |  
|Amortization
 of net gain           |  |                      | (171 | )           |   | (86 | )
|                                    |  |                      |      |             |   |     |  
|Net periodic
 pension cost          |  | $                    | 111  |             | $ | 248 |  
|                                    |  |                      |      |             |   |     |  

During the thirteen weeks ended May 1, 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 $88.2
million as of May 1, 2010. As of May 1, 2010, the Company didnt have any
borrowings under the revolving credit facility and had $1.8 million in
outstanding letter of credit obligations. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended May 1, 2010 was 3.25%.

As of May 2, 2009, the Company had borrowed $29.0 million under
the previous revolving credit facility, had $0.1 million in outstanding
letter of credit obligations under the revolving credit facility and

11

---



$113.3 million was available for borrowing. The weighted average
interest rate on outstanding borrowings for the thirteen weeks ended May 2,
2009 was 1.46%.

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 weeks ended May 1, 2010 and May 2, 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 |      
|                                              |  |                      |      
|                                              |  | May 1, 
 2010        |       | May 2, 
 2009 |  
|                                              |  |                      |       |               |  
|                                              |  | (in thousands)       |      
|Cost of
 sales                                |  | $                    | 316   |               | $ | 384   | 
|Selling,
 general and administrative expenses |  |                      | 2,863 |               |   | 3,660 | 
|                                              |  |                      |       |               |   |       | 
|Total                                         |  | $                    | 3,179 |               | $ | 4,044 | 
|                                              |  |                      |       |               |   |       | 

The $0.9 million decline in depreciation expense during the thirteen
weeks ended May 1, 2010, compared to the same period last year, is primarily
due to lower store count and the write-down of fixed assets at underperforming
locations during the fourth quarter of 2009.

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 week periods ended May 1, 2010, and May 2, 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 May 1, 2010 and May 2, 2009 were approximately 5.1
million and 7.8 million, respectively.

12

---



TRANS
WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION
Item 2 - Managements Discussion and Analysis of
Financial Condition and
Results of Operations
May 1, 2010 and May 2, 2009

Overview


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


At May 1, 2010, the Company operated 544 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 86% of the
Companys sales in the thirteen weeks ended May 1, 2010. The balance of
categories, including software accessories, electronics and trend products
represented 14% of the Companys sales in the thirteen weeks ended May 1, 2010.

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

Sales
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 costs and is reduced by the benefit of
vendor allowances, net of direct reimbursements of expense.

13

---



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
Weeks Ended May 1, 2010
Compared to the Thirteen Weeks Ended May 2, 2009

The following
table sets forth a period over period comparison of the Companys net sales by
category:

|                               |  |                                  |         |               |   |         |   |   |         |                                 |       |    |  |       |    | 
|------------------------------ |  | -------------------------------- | ------- | ------------- | - | ------- | - | - | ------- | ------------------------------- | ----- | -- |  | ----- | -- | 
|                               |  | Thirteen weeks ended             |         |               |   |         |  
|                               |  |                                  |         |               |   |         |  
|                               |  | May 1, 
 2010                    |         | May 2, 
 2009 |   | Change  |   | % |         | Comparable
 
 Store Net 
 Sales |      
|                               |  | (in thousands except store data) |         |               |   |         |  
|                               |  |                                  |         |               |   |         |   |   |         |                                 |      
|                               |  |                                  |         |               |   |         |   |   |         |                                 |       |    |  |       |    | 
|Net sales:                     |  | $                                | 156,539 |               | $ | 191,433 |   | $ | (34,894 | )                               | (18.2 | %) |  | (2.7  | %) | 
|As a percentage of net
 sales: |  |                                  |         |               |   |         |   |   |         |                                 |       |    |  |       |    | 
|Music                          |  |                                  | 36      | %             |   | 36      | % |   |         |                                 |       |    |  | (0.6  | %) | 
|Video                          |  |                                  | 44      | %             |   | 43      | % |   |         |                                 |       |    |  | 1.0   | %  | 
|Video Games                    |  |                                  | 6       | %             |   | 8       | % |   |         |                                 |       |    |  | (36.4 | %) | 
|Other                          |  |                                  | 14      | %             |   | 13      | % |   |         |                                 |       |    |  | 0.5   | %  | 
|                               |  |                                  |         |               |   |         |   |   |         |                                 |       |    |  |       |    | 
|Store Count:                   |  |                                  | 544     |               |   | 704     |   |   | (160    | )                               | (22.7 | %) |  |       |    | 

Net
sales.The 18% decrease in net sales during the
thirteen weeks ended May 1, 2010, as compared to the same period last year,
resulted from a comparable store net sales decline of 2.7% along with the
decrease in store count of 23%.

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% of total net sales
for the thirteen weeks ended May 1, 2010.


Comparable store net sales in the music category decreased 0.6% during
the thirteen weeks ended May 1, 2010. Total unit sales industry-wide were down
12% during the period corresponding to the Companys first fiscal quarter.

14

---



Video:


The Company offers DVDs and high definition DVDs (Bluray) in all of
its stores. Comparable store net sales in the video category increased 1.0%
during the first quarter. For the quarter, the industry was down 8%. Strong
promotions and the performance of Avatar helped drive comp sales results.


Video Games:


The -36.4% comparable store sales in video games 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, 139 of our
stores carried games compared to 283 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 weeks ended May 1, 2010, comparable store net sales increased 0.5% for
these categories.


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

|                              |  |                                     |        |              |   |        |   |   |         |   |       |    | 
|----------------------------- |  | ----------------------------------- | ------ | ------------ | - | ------ | - | - | ------- | - | ----- | -- | 
|                              |  | Thirteen
 weeks ended(in thousands) |        | Change       |  
|                              |  |                                     |        |              |  
|                              |  | May 1,
 2010                        |        | May 2,
 2009 |   | $      |   | % |        
|                              |  |                                     |        |              |   |        |   |   |        
|Gross Profit                  |  | $                                   | 51,525 |              | $ | 65,752 |   | $ | (14,227 | ) | (21.6 | %) | 
|                             
|As a percentage of net
 sales |  |                                     | 32.9   | %            |   | 34.3   | % |   |         |   |       |    | 

The reduction in gross profit as a percentage of sales was due to lower
vendor allowances this year versus last year.

SG&A Expenses. The
following table sets forth a period over period comparison of the Companys
SG&A expenses:

|                              |  |                                     |        |             |   |        |   |   |         |   |       |    | 
|----------------------------- |  | ----------------------------------- | ------ | ----------- | - | ------ | - | - | ------- | - | ----- | -- | 
|                              |  | Thirteen
 weeks ended(in thousands) |        | Change      |  
|                              |  |                                     |        |             |  
|                              |  | May 1, 2010                         |        | May 2, 2009 |   | $      |   | % |        
|                              |  |                                     |        |             |   |        |   |   |        
|SG&A Expenses                 |  | $                                   | 62,178 |             | $ | 79,359 |   | $ | (17,181 | ) | (21.6 | %) | 
|As a percentage of net
 sales |  |                                     | 39.7   | %           |   | 41.5   | % |   |         |   |       |    | 

SG&A expenses decreased $17.2 million, or 22% on the net sales
decline of 18%. The decrease is primarily due to lower overhead expenses
associated with the decrease in store count, lower depreciation expense due to
lower store count and 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 is a gain on bargain
purchase of $350,000 related to the acquisition of five Value Music stores,
offset by $163,000 in acquisition costs.

Interest Expense, Net. Net
interest expense was $0.7 million during the thirteen weeks ended May 1, 2010
and May 2, 2009.

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

15

---



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 thirteen weeks ended May 1,
2010, the Company did not provide a current tax benefit for the net loss
incurred for this thirteen week period.

For the thirteen weeks ended May 1, 2010, 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.

For the thirteen weeks ended May 2, 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.

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

|                                          |  |                                    |         |             |   |         |  
|----------------------------------------- |  | ---------------------------------- | ------- | ----------- | - | ------- | -
|                                          |  | Thirteen weeks ended(in thousands) |        
|                                          |  |                                    |        
|                                          |  | May 1, 2010                        |         | May 2, 2009 |  
|                                          |  |                                    |         |             |  
|Loss before
 income tax expense (benefit) |  | $                                  | (11,341 | )           | $ | (14,310 | )
|                                          |  |                                    |         |             |   |         |  
|Income tax
 expense (benefit)             |  |                                    | 74      |             |   | (574    | )
|                                          |  |                                    |         |             |   |         |  
|                                          |  |                                    |         |             |   |         |  
|Net loss                                  |  | $                                  | (11,415 | )           | $ | (13,736 | )
|                                          |  |                                    |         |             |   |         |  

For the thirteen weeks ended May 1, 2010, the Companys net loss
decreased $2.3 million to $11.4 million from $13.7 million for the thirteen
weeks ended May 2, 2009. The decreased loss was due to a reduction in SG&A
expenses partially offset by the decline in gross profit from lower sales and a
decrease in gross margin percentage.

16

---



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. 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 many initiatives as part of the development of its
operating plan for 2010 and beyond including a focus on the operation of a core
base of stores, improved product selection based on customer preferences and
industry changes, as well as further streamlining of 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 and the elimination or curtailment of certain other general and
administrative expenses. Also, during the fourth quarter of Fiscal 2009,
management closed 133 stores, as well as closing 18 stores in the first quarter
of 2010, and plans to continue its careful evaluation of store profitability of
its remaining 544 stores in consideration of lease terms, conditions and
expirations. The Company expects to close its distribution facility in
Carson, California during Fiscal 2010.

Management anticipates any cash requirements due to a shortfall in cash
from operations will be funded by the Companys revolving credit facility,
discussed hereafter. Cash flows from investing and financing activities during
Fiscal 2010 are expected to be comparable with Fiscal 2009. The Company does
not expect any material changes in the mix (between equity and debt) or the
relative cost of capital resources.

The following table sets forth a summary of key components of cash flow
and working capital for each of the thirteen weeks ended May 1, 2010 and May 2,
2009, or at those dates:

|                           |  |                       |         |               |   |         |   |   |         |  
|-------------------------- |  | --------------------- | ------- | ------------- | - | ------- | - | - | ------- | -
|                           |  | Thirteen
 weeks ended |         | Change        |  
|                           |  |                       |         |               |  
|(in
 thousands)            |  | May 1, 
 2010         |         | May 2, 
 2009 |   | $       |  
|                           |  |                       |         |               |   |         |  
|Operating
 Cash Flows      |  | $                     | (46,779 | )             | $ | (48,570 | ) | $ | 1,791   |  
|Investing
 Cash Flows      |  |                       | (2,596  | )             |   | (1,334  | ) |   | (1,262  | )
|Financing
 Cash Flows      |  |                       | (864    | )             |   | 28,070  |   |   | (28,934 | )
|Capital
 Expenditures      |  |                       | (747    | )             |   | (1,334  | ) |   | 587     |  
|                           |  |                       |         |               |   |         |   |   |         |  
|Cash
 and Cash Equivalents |  |                       | 21,275  |               |   | 8,221   |   |   | 13,054  |  
|Merchandise
 Inventory     |  |                       | 251,279 |               |   | 332,695 |   |   | (81,416 | )
|Working
 Capital           |  |                       | 169,676 |               |   | 201,769 |   |   | (32,093 | )

The Company had cash and cash equivalents of $21.3 million at May 1,
2010, compared to $71.5 million at January 30, 2010 and $8.2 million at May 2,
2009. In line with our initiative to reduce our inventory levels, merchandise
inventory was $69 per square foot at May 1, 2010, compared to $74 per square
foot at May 2, 2009.

Cash used by operating activities was $46.8 million for the thirteen
weeks ended May 1, 2010. The primary use of cash was a $55.8 million seasonal
reduction of accounts payable. The Companys merchandise inventory and accounts
payable are influenced by the seasonality of its business. A

17

---



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.

Cash used by investing activities was $2.6 million for the thirteen
weeks ended May 1, 2010. The primary use of cash was $1.8 million for the
acquisition of Value Music.

Cash used by financing activities was $0.9 million for the thirteen
weeks ended May 1, 2010 for the payment 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 $88.2
million as of May 1, 2010. As of May 1, 2010, the Company didnt have any
borrowings under the revolving credit facility and had $1.8 million in
outstanding letter of credit obligations. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended May 1, 2010 was 3.25%.

As of May 2, 2009, the Company had borrowed $29.0 million under
the previous revolving credit facility, had $0.1 million in outstanding
letter of credit obligations under the revolving credit facility and $113.3
million was available for borrowing. The weighted average interest rate on
outstanding borrowings for the thirteen weeks ended May 2, 2009 was 1.46%.

We believe that cash provided by sales of merchandise inventory 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 Resources.During
the thirteen weeks ended May 1, 2010, the Company made capital expenditures of
$0.7 million. The Company plans to spend approximately $10 million for capital
expenditures in fiscal 2010.

18

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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.

19

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART I  FINANCIAL INFORMATION

Item 3 -
Quantitative and Qualitative Disclosures about Market Risk

To the extent the Company borrows under its revolving credit facility,
the Company is subject to risk resulting from interest rate fluctuations since
interest on the Companys borrowings under its revolving credit facility can be
variable. Interest on the revolving credit facility is payable monthly in
arrears at a variable rate of either the prime rate or LIBOR plus 0.75%. If
interest rates on the Companys revolving credit facility were to increase by
25 basis points, and to the extent borrowings were outstanding, for every
$1,000,000 outstanding on the facility, income before income taxes would be
reduced by $2,500 per year. For a discussion of the Companys accounting
policies for financial instruments and further disclosures relating to
financial instruments, see Nature of Operations and Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements in the
Companys Annual Report on Form 10-K for the year ended January 30, 2010. The
Company does not hold any derivative instruments and does not engage in hedging
activities.

Item 4  Controls
and Procedures

(a) Evaluation of disclosure controls and procedures. The Companys
Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness
of the design and operation of the Companys disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of May 1, 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.

20

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES

PART II - OTHER
INFORMATION

Item 1  Legal
ProceedingsThe 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
FactorsRisks relating to the Companys business and Common
Stock are described in detail in Item 1A of the Companys most recently filed
Annual Report on Form 10-K for the year ended January 31, 2009.

Item 2 
Unregistered Sales of Equity Securities and Use of ProceedsNone.

Item 3  Defaults
Upon Senior SecuritiesNone.

Item 4 
Submissions of Matters to a Vote of Security HoldersNone.

Item 5  Other
InformationNone.

Item 6 - Exhibits

|                              |      |             |                                                                                                                         
|----------------------------- | ---- | ----------- | ------------------------------------------------------------------------------------------------------------------------
|(A) Exhibits
 - 
 Exhibit No. |      | Description
|                              |      |            
|                              | 10.1 |             | Offer Letter
 for Mike Honeymen, President and Chief Operating Officer                                                  
|                              |      |             |                                                                                                                         
|                              | 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.

21

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SIGNATURES

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

TRANS WORLD ENTERTAINMENT CORPORATION

|               |  |     |                                                                                                         
|-------------- |  | --- | --------------------------------------------------------------------------------------------------------
|June 10,
 2010 |  | By: | /s/ Robert J. Higgins                                                                                   
|               |  |     |                                                                                                         
|               |  |     | Robert J.
 Higgins                                                                                      
|               |  |     | Chairman and
 Chief Executive Officer                                                                   
|               |  |     | (Principal
 Executive Officer)                                                                          
|               |  |     |                                                                                                         
|June 10,
 2010 |  | By: | /s/ John J. Sullivan                                                                                    
|               |  |     |                                                                                                         
|               |  |     | John J.
 Sullivan                                                                                       
|               |  |     | Executive
 Vice President and Chief Financial Officer(Principal Financial and Chief
 Accounting Officer)

22

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