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 2,
 2009         
|   |   |                                                                                                                                              
|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 x     Non-accelerated
filer o 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,
31,391,916 shares outstanding as of May 29, 2009

---



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

|                                                                                                    |                     |   
|--------------------------------------------------------------------------------------------------- | ------------------- | --
|                                                                                                    | Form 10-Q
 Page No.
|                                                                                                    |                     |   
|PART 1. FINANCIAL INFORMATION                                                                       |                     |   
|                                                                                                    |                     |   
|Item 1 - Financial Statements (Unaudited)                                                           |                     |   
|                                                                                                    |                     |   
|Condensed Consolidated Balance Sheets at
 May 2, 2009, January 31, 2009 and May 3, 2008             |                     | 3 
|                                                                                                    |                     |   
|Condensed Consolidated Statements of
 Operations  Thirteen Weeks Ended May 2, 2009 and May 3, 2008 |                     | 4 
|                                                                                                    |                     |   
|Condensed Consolidated Statements of Cash
 Flows  Thirteen Weeks Ended May 2, 2009 and May 3, 2008 |                     | 5 
|                                                                                                    |                     |   
|Notes to Condensed Consolidated Financial
 Statements                                               |                     | 6 
|                                                                                                    |                     |   
|Item 2 - Managements Discussion and
 Analysis of Financial Condition and Results of Operations     |                     | 12
|                                                                                                    |                     |   
|Item 3  Quantitative and Qualitative
 Disclosures about Market Risk                                |                     | 19
|                                                                                                    |                     |   
|Item 4  Controls and Procedures                                                                    |                     | 19
|                                                                                                    |                     |   
|PART II. OTHER INFORMATION                                                                          |                     |   
|                                                                                                    |                     |   
|Item 1  Legal Proceedings                                                                          |                     | 20
|                                                                                                    |                     |   
|Item 1A- Risk Factors                                                                               |                     | 20
|                                                                                                    |                     |   
|Item 2  Unregistered Sales of Equity Securities and Use of Proceeds                                |                     | 20
|                                                                                                    |                     |   
|Item 3  Defaults Upon Senior Securities                                                            |                     | 20
|                                                                                                    |                     |   
|Item 4  Submission of Matters to a Vote of Security Holders                                        |                     | 20
|                                                                                                    |                     |   
|Item 5  Other Information                                                                          |                     | 20
|                                                                                                    |                     |   
|Item 6  Exhibits                                                                                   |                     | 20
|                                                                                                    |                     |   
|Signatures                                                                                          |                     | 21

2

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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 2,
 2009 |          | January 31,
 2009 |   | May 3,
 2008 |  
|                                                                                                                                   |  |              |          |                   |   |              |  
|ASSETS                                                                                                                             |  |              |          |                   |   |              |   |   |          |  
|CURRENT
 ASSETS:                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Cash and cash equivalents                                                                                                          |  | $            | 8,221    |                   | $ | 30,055       |   | $ | 13,092   |  
|Merchandise inventory                                                                                                              |  |              | 332,695  |                   |   | 378,188      |   |   | 417,004  |  
|Income taxes receivable, net                                                                                                       |  |              |         |                   |   |             |   |   | 5,036    |  
|Other current assets                                                                                                               |  |              | 20,798   |                   |   | 21,376       |   |   | 12,430   |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Total current assets                                                                                                               |  |              | 361,714  |                   |   | 429,619      |   |   | 447,562  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|NET FIXED
 ASSETS                                                                                                                  |  |              | 47,552   |                   |   | 50,437       |   |   | 75,315   |  
|OTHER ASSETS                                                                                                                       |  |              | 6,817    |                   |   | 6,980        |   |   | 10,261   |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL ASSETS                                                                                                                       |  | $            | 416,083  |                   | $ | 487,036      |   | $ | 533,138  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|LIABILITIES                                                                                                                        |  |              |          |                   |   |              |   |   |          |  
|CURRENT
 LIABILITIES:                                                                                                              |  |              |          |                   |   |              |   |   |          |  
|Accounts payable                                                                                                                   |  | $            | 89,304   |                   | $ | 170,302      |   | $ | 128,055  |  
|Borrowings under line of credit                                                                                                    |  |              | 28,981   |                   |   |             |   |   | 22,711   |  
|Accrued expenses and other current
 liabilities                                                                                    |  |              | 37,960   |                   |   | 42,180       |   |   | 48,084   |  
|Current portion of long-term debt                                                                                                  |  |              | 579      |                   |   | 570          |   |   | 545      |  
|Current portion of capital lease obligations                                                                                       |  |              | 3,121    |                   |   | 3,178        |   |   | 3,016    |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|Total current liabilities                                                                                                          |  |              | 159,945  |                   |   | 216,230      |   |   | 202,411  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|LONG-TERM
 DEBT, less current portion                                                                                              |  |              | 2,839    |                   |   | 2,986        |   |   | 3,414    |  
|CAPITAL
 LEASE OBLIGATIONS, less current portion                                                                                   |  |              | 5,142    |                   |   | 5,858        |   |   | 8,262    |  
|OTHER
 LONG-TERM LIABILITIES                                                                                                       |  |              | 26,054   |                   |   | 26,947       |   |   | 32,564   |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL LIABILITIES                                                                                                                  |  |              | 193,980  |                   |   | 252,021      |   |   | 246,651  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|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; 56,494,906, 56,372,101 and 56,300,409 shares issued,
 respectively) |  |              | 565      |                   |   | 564          |   |   | 563      |  
|Additional
 paid-in capital                                                                                                        |  |              | 306,982  |                   |   | 306,159      |   |   | 304,524  |  
|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 (loss)                                                                                     |  |              | 2,396    |                   |   | 2,396        |   |   | (1,625   | )
|Retained
 earnings                                                                                                                 |  |              | 129,715  |                   |   | 143,451      |   |   | 200,580  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL SHAREHOLDERS EQUITY                                                                                                         |  |              | 222,103  |                   |   | 235,015      |   |   | 286,487  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                         |  | $            | 416,083  |                   | $ | 487,036      |   | $ | 533,138  |  
|                                                                                                                                   |  |              |          |                   |   |              |   |   |          |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

3

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

|                                                               |  |                      |         |              |   |         |  
|-------------------------------------------------------------- |  | -------------------- | ------- | ------------ | - | ------- | -
|                                                               |  | Thirteen Weeks Ended |        
|                                                               |  |                      |        
|                                                               |  | May 2,
 2009         |         | May 3,
 2008 |  
|                                                               |  |                      |         |              |  
|                                                               |  |                      |         |              |   |         |  
|Net sales                                                      |  | $                    | 191,433 |              | $ | 232,551 |  
|Cost of
 sales                                                 |  |                      | 125,681 |              |   | 149,563 |  
|                                                               |  |                      |         |              |   |         |  
|Gross profit                                                   |  |                      | 65,752  |              |   | 82,988  |  
|Selling, general and administrative expenses                   |  |                      | 79,359  |              |   | 93,798  |  
|                                                               |  |                      |         |              |   |         |  
|Loss from
 operations                                          |  |                      | (13,607 | )            |   | (10,810 | )
|Interest
 expense, net                                         |  |                      | 703     |              |   | 893     |  
|                                                               |  |                      |         |              |   |         |  
|Loss before
 income tax (benefit) expense                      |  |                      | (14,310 | )            |   | (11,703 | )
|Income tax
 (benefit) expense                                  |  |                      | (574    | )            |   | 123     |  
|                                                               |  |                      |         |              |   |         |  
|Net loss                                                       |  | $                    | (13,736 | )            | $ | (11,826 | )
|                                                               |  |                      |         |              |   |         |  
|                                                               |  |                      |         |              |   |         |  
|LOSS PER
 SHARE:                                               |  |                      |         |              |   |         |  
|Basic and
 diluted loss per share                              |  | $                    | (0.44   | )            | $ | (0.38   | )
|                                                               |  |                      |         |              |   |         |  
|                                                               |  |                      |         |              |   |         |  
|Weighted
 average number of common shares 
 basic and diluted |  |                      | 31,296  |              |   | 31,164  |  
|                                                               |  |                      |         |              |   |         |  

See Accompanying Notes to Condensed
Consolidated Financial Statements.

4

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

|                                                                         |  |                      |         |              |   |         |  
|------------------------------------------------------------------------ |  | -------------------- | ------- | ------------ | - | ------- | -
|                                                                         |  | Thirteen Weeks Ended |        
|                                                                         |  |                      |        
|                                                                         |  | May 2,
 2009         |         | May 3,
 2008 |  
|                                                                         |  |                      |         |              |  
|Net cash used by operating activities                                    |  | $                    | (48,570 | )            | $ | (87,289 | )
|                                                                         |  |                      |         |              |   |         |  
|Cash flows from investing activities:                                    |  |                      |         |              |   |         |  
|Purchases of
 fixed assets                                               |  |                      | (1,334  | )            |   | (2,328  | )
|Net proceeds
 from sale of distribution facility                         |  |                      |        |              |   | 6,193   |  
|                                                                         |  |                      |         |              |   |         |  
|Net cash (used) provided by investing activities                         |  |                      | (1,334  | )            |   | 3,865   |  
|                                                                         |  |                      |         |              |   |         |  
|Cash flows from financing activities:                                    |  |                      |         |              |   |         |  
|Proceeds from
 line of credit                                            |  |                      | 28,981  |              |   | 22,711  |  
|Payments of
 long-term debt                                              |  |                      | (138    | )            |   | (130    | )
|Payments of
 capital lease obligations                                   |  |                      | (773    | )            |   | (722    | )
|Proceeds from
 the exercise of stock awards                              |  |                      |        |              |   | 2       |  
|                                                                         |  |                      |         |              |   |         |  
|Net cash provided by financing activities                                |  |                      | 28,070  |              |   | 21,861  |  
|                                                                         |  |                      |         |              |   |         |  
|Net decrease in cash and cash equivalents                                |  |                      | (21,834 | )            |   | (61,563 | )
|Cash and cash equivalents, beginning of period                           |  |                      | 30,055  |              |   | 74,655  |  
|                                                                         |  |                      |         |              |   |         |  
|Cash and cash equivalents, end of period                                 |  | $                    | 8,221   |              | $ | 13,092  |  
|                                                                         |  |                      |         |              |   |         |  
|Supplemental disclosure of non-cash investing and
 financing activities: |  |                      |         |              |   |         |  
|Issuance of
 deferred shares                                             |  | $                    | 465     |              | $ | 160     |  

See
Accompanying Notes to Condensed Consolidated Financial Statements.

5

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TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
May 2, 2009 and May 3, 2008

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 2, 2009, the Company operated 704 stores totaling
approximately 4.5 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 sales of merchandise inventory
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 the
foreseeable future, 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 2009 and beyond that 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 2008, management carried out certain strategic initiatives in its
efforts to reduce operating costs such as the closure of the Canton, OH
distribution center, reduction of headcount at the home office and the Albany,
NY distribution center, the closing of 101 stores, as well as the elimination
or curtailment of certain other general and administrative expenses. Also, during
the first quarter of Fiscal 2009, management closed 8 stores and plans to
continue its evaluation of store profitability of its remaining 704 stores in
consideration of lease terms, conditions and expirations. As a result of these
actions, the liquidation of the merchandise inventory from closed stores and
management of overall merchandise inventory levels, management expects improvement
in its operating cash flow during Fiscal 2009.

Seasonality:

The Companys business is
seasonal in nature, with the fourth fiscal quarter constituting the Companys
peak selling period. In 2008, the fourth fiscal quarter accounted for
approximately 35% 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 two 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

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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 31, 2009 has been derived from the Companys January 31, 2009 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 2, 2009 and May 3, 2008. 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 31, 2009.

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
31, 2009.

Note 3.
Recently Adopted Accounting Pronouncements

Effective February 1,
2009, the Company adopted FSP Emerging Issues Task Force (EITF)
No. 03-6-1, Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities (FSP-EITF
No. 03-6-1). Under FSP-EITF No. 03-6-1, unvested share-based payment
awards that contain rights to receive nonforfeitable dividends (whether paid or
unpaid) are considered participating securities and should be included in the
two-class method of computing earnings per share. The adoption of FSP-EITF
No. 03-6-1 did not have any impact on the determination or reporting of
our earnings per share.

Effective February 1,
2009, the Company adopted FSP FAS No. 142-3, Determination of the Useful
Life of Intangible Assets (FSP FAS No. 142-3). FSP FAS No. 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, Goodwill and Other Intangible Assets. The objective
of FSP FAS No. 142-3 is to improve the consistency between the useful life
of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS
No. 141 (revised 2007), Business Combinations and other U.S. GAAP. The

7

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adoption of FSP FAS
No. 142-3 did not have any significant impact on our Consolidated
Financial Statements.

Effective February 1,
2009, the Company adopted SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities  an Amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 seeks to improve
financial reporting for derivative instruments and hedging activities by
requiring enhanced disclosures regarding their impact on financial position,
financial performance and cash flows. To achieve this increased transparency,
SFAS No. 161 requires (1) disclosure of the fair value of derivative
instruments and gains and losses in a tabular format; (2) disclosure of
derivative features that are credit risk-related; and
(3) cross-referencing within the footnotes. The adoption of SFAS
No. 161 did not have an impact on our Consolidated Financial Statements.

Effective February 1,
2009, the Company adopted SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an Amendment of ARB No. 51, (SFAS
No. 160). SFAS No. 160 was issued to improve the relevance,
comparability and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The adoption of SFAS
No. 160 did not have an impact on our Consolidated Financial Statements.

Note 4.
Stock Based Compensation

Total stock-based
compensation expense recognized in the condensed consolidated statements of
operations for the thirteen weeks ended May 2, 2009 and May 3, 2008 was $0.7
million and $0.5 million, respectively, before income taxes. No deferred tax
benefit was recorded against stock-based compensation expense for the thirteen
weeks ended May 2, 2009 and May 3, 2008.

As of May 2, 2009, there
was approximately $1.6 million of unrecognized compensation cost related to
stock award awards that is expected to be recognized as expense over a weighted
average period of 1.2 years.

Stock awards authorized for issuance under the
Companys plans total 20.6 million. As of May 2, 2009, of the awards authorized
for issuance, 8.5 million were granted and are outstanding, 6.9 million of
which were vested and exercisable. Awards available for future grants at May 2,
2009 were 2.9 million. During the thirteen weeks ended May 2, 2009, the Company
did not issue any SSARS (Stock-Settled Appreciation Rights), or other
derivative securities, requiring use of the Black-Scholes award valuation
model.

8

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The following
table summarizes stock award activity during the thirteen weeks ended May 2,
2009:

|                                             |  |                                          |           |                                     |   |                                               |  |     |  | 
|-------------------------------------------- |  | ---------------------------------------- | --------- | ----------------------------------- | - | --------------------------------------------- |  | --- |  | 
|                                             |  | Employee
 and Director Stock Award Plans |          
|                                             |  |                                         
|                                             |  | Number of
 Shares 
 Subject
 To Award    |           | Weighted
 Average
 
 Exercise Price |   | Weighted
 AverageRemaining
 Contractual
 Term | 
|                                             |  |                                         
|Balance January 31, 2009                     |  |                                          | 8,458,465 |                                     | $ | 7.86                                          |  | 4.4 |  | 
|Granted**                                    |  |                                          | 279,898   |                                     |   | 0.00                                          |  | 9.9 |  | 
|Grant of
 director deferred shares*          |  |                                          | 50,866    |                                     |   | 0.00                                          |  |    |  | 
|Exercised**                                  |  |                                          | (11,363   | )                                   |   | 0.00                                          |  |    |  | 
|Vested
 deferred shares issued to directors* |  |                                          | (80,866   | )                                   |   | 0.00                                          |  |    |  | 
|Forfeited                                    |  |                                          | (16,500   | )                                   |   | 3.00                                          |  |    |  | 
|Expired                                      |  |                                          | (132,450  | )                                   |   | 10.53                                         |  |    |  | 
|                                             |  |                                         
|Balance May
 2, 2009                         |  |                                          | 8,548,050 |                                     |   | 7.61                                          |  | 4.5 |  | 
|                                             |  |                                         
|Exercisable
 at May 2, 2009                  |  |                                          | 6,911,776 |                                     | $ | 8.61                                          |  | 3.6 |  | 
|                                             |  |                                         

|   |                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------
|*  | Director deferred shares
 are exchangeable for common share on a 1:1 basis and therefore have an
 exercise price of $0.                     
|  
|** | Equity awards granted and
 exercised during the period were restricted stock and restricted stock units
 which have an exercise price of $0.

The intrinsic
value of stock awards exercised was $7,954 during the thirteen weeks ended May
2, 2009. The intrinsic value of stock awards outstanding and exercisable as of
May 2, 2009 was $519,557 and $64,768, respectively.

Note 5. 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.

The Company
accounts for the SERP and the Director Retirement Plan in accordance with the
provisions of SFAS No. 158, Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. Effective February 3, 2008, the Company
adopted the measurement date provisions of SFAS No. 158 and, in accordance with
the requirements of SFAS No. 158, recorded a reduction in retained earnings of
$362 thousand during the first quarter of Fiscal 2008, representing the

9

---



increase in
accrued benefits between the old measurement date of November 1, 2007 and
February 2, 2008.

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 2,
 2009 |   |   | May 3,
 2008 |  
|                                   |  |                       |             
|                                   |  | ($ in
 thousands)     |             
|Service cost                       |  | $                     | 49           |   | $ | 54           |  
|Interest cost                      |  |                       | 200          |   |   | 223          |  
|Amortization of prior service cost |  |                       | 85           |   |   | 86           |  
|Amortization of net gain           |  |                       | (86          | ) |   | (1           | )
|                                   |  |                       |              |   |   |              |  
|Net periodic pension cost          |  | $                     | 248          |   | $ | 362          |  
|                                   |  |                       |              |   |   |              |  

During the
thirteen weeks ended May 2, 2009, the Company did not make any cash
contributions to the SERP or the Director Retirement Plan, and presently
expects to pay approximately $35,000 in benefits relating to the SERP and
$29,000 in benefits relating to the Director Retirement Plan during Fiscal
2009.

Note 6. Line of
Credit

The Company
has a five-year, $150 million secured revolving credit facility with Bank of
America, N.A. (Credit Facility) that expires in January 2011. The Credit
Facility contains provisions governing additional indebtedness and acquisitions
and is secured by the Companys eligible inventory, proceeds from the sale of
inventory and by the stock of the Companys subsidiaries. The availability
under the 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 $142.4 million as of May 2, 2009. As
of May 2, 2009, the Company had borrowed $29.0 million under the 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%.

As of May 3,
2008, the Company had borrowed $22.7 million, under the revolving credit
facility, had $0.1 million in outstanding letter of credit obligations
under the revolving credit facility and $127.2 million was available for
borrowing. The weighted average interest rate on outstanding borrowings for the
thirteen weeks ended May 3, 2008 was 4.13%.

Note 7. Comprehensive
Loss

Other
accumulated comprehensive income (loss) 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 2, 2009 and May 3, 2008.

10

---



Note 8. 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 2,2009 |  |   | May 3, 
 2008 | 
|                                             |  |                       |            |  |   |               | 
|                                             |  | (in
 thousands)       |           
|Cost of sales                                |  | $                     | 384        |  | $ | 403           | 
|Selling, general and administrative expenses |  |                       | 3,660      |  |   | 5,517         | 
|                                             |  |                       |            |  |   |               | 
|Total                                        |  | $                     | 4,044      |  | $ | 5,920         | 
|                                             |  |                       |            |  |   |               | 

The $1.9
million decline in depreciation expense during the thirteen weeks ended May 2,
2009, 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 2008.

Note 9. 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.

Weighted
average shares are calculated as follows:

|                                                      |  |                       |        |              |  |        | 
|----------------------------------------------------- |  | --------------------- | ------ | ------------ |  | ------ | 
|                                                      |  | Thirteen
 weeks ended |       
|                                                      |  |                       |       
|                                                      |  | May 2,
 2009          |        | May 3,
 2008 | 
|                                                      |  |                       |        |              |  |        | 
|                                                      |  | (in
 thousands)       |       
|                                                      |  |                       |        |              |  |        | 
|Weighted
 average common shares outstanding  basic   |  |                       | 31,296 |              |  | 31,164 | 
|Dilutive
 effect of outstanding stock awards          |  |                       |       |              |  |       | 
|                                                      |  |                       |        |              |  |        | 
|Weighted
 average common shares outstanding  diluted |  |                       | 31,296 |              |  | 31,164 | 
|                                                      |  |                       |        |              |  |        | 
|                                                     
|Antidilutive
 stock awards                            |  |                       | 7,848  |              |  | 5,509  | 
|                                                      |  |                       |        |              |  |        | 

For the
thirteen week periods ended May 2, 2009, and May 3, 2008, the impact of
outstanding stock awards was not considered because the Company reported a net
loss and such impact would be antidilutive. Accordingly, basic and diluted loss
per share is the same.

11

---



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 2, 2009 and May 3, 2008

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
31, 2009.

At May 2,
2009, the Company operated 704 stores totaling approximately 4.5 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 87% of the Companys sales in
the thirteen weeks ended May 2, 2009. The balance of categories, including
software accessories, electronics and trend products represented 13% of the
Companys sales in the thirteen weeks ended May 2, 2009.

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:
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.

12

---



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 8 to the condensed
consolidated financial statements). SG&A expenses also include asset
impairment charges and write-offs, if any, and miscellaneous items, other than
interest.

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

RESULTS
OF OPERATIONS

Thirteen
Weeks Ended May 2, 2009
Compared to the Thirteen Weeks Ended May 3, 2008

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

|                               |  |                                   |         |               |   |         |   |   |          |                                 |         |  |      |       |    | 
|------------------------------ |  | --------------------------------- | ------- | ------------- | - | ------- | - | - | -------- | ------------------------------- | ------- |  | ---- | ----- | -- | 
|                               |  | Thirteen weeks ended              |         |               |   |         |   |   |         
|                               |  |                                   |         |               |   |         |   |   |          |                                
|                               |  | May 2, 
 2009                     |         | May 3, 
 2008 |   | Change  |   | % |          | Comparable
 
 Store Net 
 Sales |        
|                               |  | (in
 thousands except store data) |         |               |  
|                               |  |                                   |         |               |   |         |   |   |         
|                               |  |                                   |         |               |   |         |   |   |          |                                 |         |  |      |       |    | 
|Net sales:                     |  | $                                 | 191,433 |               | $ | 232,551 |   |   | ($41,118 | )                               | (17.7)% |  | (9.0 | )%    |   
|As a percentage of net
 sales: |  |                                   |         |               |   |         |   |   |          |                                 |         |  |      |       |    | 
|Music                          |  |                                   | 36      | %             |   | 37      | % |   |          |                                 |         |  |      | (13.0 | )% | 
|Video                          |  |                                   | 43      | %             |   | 41      | % |   |          |                                 |         |  |      | (4.1  | )% | 
|Games                          |  |                                   | 8       | %             |   | 8       | % |   |          |                                 |         |  |      | (13.2 | )% | 
|Other                          |  |                                   | 13      | %             |   | 14      | % |   |          |                                 |         |  |      | (10.3 | )% | 
|                               |  |                                   |         |               |   |         |   |   |          |                                 |         |  |      |       |    | 
|Store Count:                   |  |                                   | 704     |               |   | 799     |   |   | (95      | )                               | (11.9)% |  |      |       |   

Net sales.The
18% decrease in net sales during the thirteen weeks ended May 2, 2009, as
compared to the same period last year, resulted from a comparable store net
sales decline of 9% along with the decrease in store count of 12%.

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 2, 2009.

Comparable
store net sales in the CD category decreased 13% during the thirteen weeks
ended May 2, 2009. Total CD unit sales industry wide were down 19% during the
corresponding period to the Companys first fiscal quarter.

13

---



Video:

The Company
offers DVDs and high definition DVDs (Bluray) in all of its stores.
Comparable store net sales in the video category decreased 4% during the first
quarter. For the quarter, the industry
was down 12%. Strong promotions and the
performance of Twilight helped us outperform the industry. Declines in standard DVD have not been
offset by sales of Bluray as the penetration of Bluray players has been slower
than expected.

Video Games:

The Company
offers video game hardware and software in approximately half of its
stores. Comparable store net sales
decreased 13% and represented 8% of our business. For the quarter, the industry was down 8%.

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 2,
2009, comparable store net sales decreased 10% 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 2, 2009                        |        | May 3, 2008 |   | $      |   | % |        
|                              |  |                                    |        |             |   |        |   |   |        
|Gross Profit                  |  | $                                  | 65,752 |             | $ | 82,988 |   | $ | (17,236 | ) | (20.8)% | 
|                             
|As a percentage of net
 sales |  |                                    | 34.3   | %           |   | 35.7   | % |   |         |   |         |  | 

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 2, 2009                        |        | May 3, 2008 |   | $      |   | % |        
|                              |  |                                    |        |             |   |        |   |   |        
|SG&A Expenses                 |  | $                                  | 79,359 |             | $ | 93,798 |   | $ | (14,439 | ) | (15.4)% | 
|                             
|As a percentage of net
 sales |  |                                    | 41.5   | %           |   | 40.3   | % |   |         |   |         |  | 

SG&A
expenses decreased $14.4 million, or 15% 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 2008 and lower variable selling expenses on the sales
decline. During the thirteen weeks ended May 3, 2008, the Company sold its
Canton, Ohio distribution facility, resulting in a net gain of $3.1 million
which is included as an offset to SG&A expenses and favorably impacted the
rate to net sales by approximately 130 basis points.

14

---



Interest Expense,
Net. Net interest expense was $0.7 million during the
thirteen weeks ended May 2, 2009 compared to $0.9 million for the thirteen
weeks ended May 3, 2008. The decrease
is due to a lower interest rate on the Companys revolving credit facility.

Income Tax Expense (Benefit).
As of January 31, 2009 and February 2, 2008, 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 31, 2009, the
projected net loss for the year ending January 30, 2010 and the net loss
incurred for the thirteen weeks ended May 2, 2009, 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 2, 2009, the tax benefit associated with the
quarter-specific items is primarily attributed to the net impact of the FIN 48
interest accrual and the reduction of tax reserves due to a tax examination
settlement and state taxes based on modified gross receipts incurred during
this period.

For the
thirteen weeks ended May 3, 2008, the tax expense associated with
quarter-specific items is primarily attributable to the FIN 48 interest accrual
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 2, 2009                        |         | May 3, 2008 |  
|                                          |  |                                    |         |             |  
|Loss before
 income tax (benefit) expense |  | $                                  | (14,310 | )           | $ | (11,703 | )
|Income tax
 (benefit) expense             |  |                                    | (574    | )           |   | 123     |  
|                                          |  |                                    |         |             |   |         |  
|                                         
|Net loss                                  |  | $                                  | (13,736 | )           | $ | (11,826 | )
|                                          |  |                                    |         |             |   |         |  

For the
thirteen weeks ended May 2, 2009, the Companys net loss increased $1.9 million
to $13.7 million from $11.8 million for the thirteen weeks ended May 3,
2008. The increased loss was due to
the $3.1 million gain on the sale of
the Canton distribution center recorded in the first quarter last year.

15

---



LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Cash Flows:
The Companys primary sources of working capital are cash provided by sales
of merchandise inventory 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 the foreseeable future, 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 2009 and beyond that 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 2008,
management carried out certain strategic initiatives in its efforts to reduce
operating costs such as the closure of the Canton, OH distribution center,
reduction of headcount at the home office and the Albany, NY distribution
center, the closing of 101 stores, as well as the elimination or curtailment
of certain other general and administrative expenses. Also, during the first
quarter of Fiscal 2009, management closed 8 stores and plans to continue its
evaluation of store profitability of its remaining 704 stores in consideration
of lease terms, conditions and expirations. As a result of these actions, the
liquidation of the merchandise inventory from closed stores and management of
overall merchandise inventory levels, management expects improvement in its
operating cash flow during Fiscal 2009.

The following
table sets forth a summary of key components of cash flow and working capital
for each of the thirteen weeks ended May 2, 2009 and May 3, 2008:

|                               |  |  |                      |         |              |   |         |   |   |         |  
|------------------------------ |  |  | -------------------- | ------- | ------------ | - | ------- | - | - | ------- | -
|                               |  |  | Thirteen weeks ended |         | Change       |  
|                               |  |  |                      |         |              |  
|(in thousands)                 |  |  | May 2, 
 2009        |         | May 3,
 2008 |   | $       |  
|                               |  |  |                      |         |              |   |         |  
|Operating
 Cash Flows          |  |  | $                    | (48,570 | )            | $ | (87,289 | ) | $ | 38,719  |  
|Financing
 Cash Flows          |  |  |                      | 28,070  |              |   | 21,861  |   |   | 6,209   |  
|Sale
 of distribution facility |  |  |                      |        |              |   | 6,193   |   |   | (6,193  | )
|Capital
 Expenditures          |  |  |                      | (1,334  | )            |   | (2,328  | ) |   | 994     |  
|                               |  |  |                      |         |              |   |         |   |   |         |  
|Cash
 and Cash Equivalents     |  |  |                      | 8,221   |              |   | 13,092  |   |   | (4,871  | )
|Merchandise
 Inventory         |  |  |                      | 332,695 |              |   | 417,004 |   |   | (84,309 | )
|Working
 Capital               |  |  |                      | 201,769 |              |   | 245,151 |   |   | (43,382 | )

The Company
had cash and cash equivalents of $8.2 million at May 2, 2009, compared to $30.1
million at January 31, 2009 and $13.1 million at May 2, 2008. In line with our initiative to reduce our
inventory levels, merchandise inventory was $74 per square foot at May 2, 2009,
compared to $83 per square foot at May 3, 2008.

Cash used by
operating activities was $48.6 million for the thirteen weeks ended May 2, 2009. The primary use of cash was a seasonal
reduction of accounts payable, resulting in a $35.0 million increase in net
inventory (inventory less accounts payable).
The Companys merchandise inventory and accounts payable are 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.

16

---



Cash provided
by financing activities was $28.1 million for the thirteen weeks ended May 2,
2009. The primary source of cash of
$29.0 million was from borrowings under the Companys revolving credit
facility.

During the
thirteen weeks ended May 3, 2008, the Company sold its Canton, Ohio
distribution facility, receiving net proceeds of $6.2 million.

The Company
has a five-year, $150 million secured revolving credit facility with Bank of
America, N.A. that expires in January 2011. The revolving credit facility
contains provisions governing additional indebtedness and acquisitions and is
secured by the Companys eligible inventory, proceeds from the sale of
inventory and by the stock of the Companys subsidiaries. As of May 2, 2009, the Company had
borrowed $29.0 million under the 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%. The availability under the 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 $142.4 million as of May 2,
2009. As inventory levels increase for
the holiday season, the availability under the credit facility will increase to
$150 million. During Fiscal 2008, the
highest aggregate balance outstanding under the revolving credit facility was
$97.6 million. We believe that cash provided
by sales of merchandise inventory and available borrowing capacity under our
credit facility, which expires on January 6, 2011, will provide us with
sufficient liquidity through the expiration of this credit facility.

Capital Resources.
During the thirteen weeks ended May 2, 2009,
the Company made capital expenditures of $1.3 million. The Company plans to
spend approximately $10 million for capital expenditures in fiscal 2009.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Note 1 of
Notes to the Consolidated Financial Statements on Form 10-K for the year ended
January 31, 2009 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 31, 2009.

Recently Issued Accounting Pronouncements:

In April 2009,
the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. 107-1(FSP FAS 107-1) and APB 28-1 (APB 28-1), which amends
FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, and APB Opinion No. 28, Interim Financial Reporting, to
require disclosures about the fair value of financial instruments for interim
reporting periods. FSP FAS 107-1 and APB 28-1 will be effective for interim
reporting periods ending after

17

---



June 15,
2009. The adoption of this staff position is not expected to have a material
impact on the Companys financial position or results of operations.

In April 2009,
the FASB issued FASB Staff Position No. 157-4 (FSP FAS 157-4), which
provides additional guidance in accordance with FASB No. 157, Fair Value
Measurements, when the volume and level of activity for the asset or liability
has significantly decreased. This FSP does not change the requirements in
paragraphs 2427 of Statement 157, which provide guidance on the use of Level 1
inputs. FSP FAS 157-4 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of this staff position is
not expected to have a material impact on the Companys financial position or
results of operations.

In April 2009,
the FASB issued FASB Staff Position No. 115-2 (FSP FAS 115-2) and FASB
Staff Position No. 124-2 (FSP FAS 124-2), which amends the
other-than-temporary impairment guidance for debt and equity securities. FSP
FAS 115-2 and FSP FAS 124-2 shall be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of this staff position is
not expected to have a material impact on the Companys financial position or
results of operations.

In April 2009,
the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies, which amends
and clarifies SFAS No. 141 (Revised) to address application issues on
initial recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. This FSP shall be effective for assets or liabilities arising from
contingencies in business combinations for which the acquisition date is during
or after fiscal 2010. After the effective date, the Company will apply the
requirements of SFAS No. 141R-1 to any future business combinations.

In December
2008, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) FAS No. 132(R)-1, Employers Disclosures about Postretirement
Benefit Plan Assets (FSP FAS No. 132(R)-1) which amends SFAS
No. 132(revised 2003) Employers Disclosures about Pensions and Other
Postretirement Benefits  an Amendment of FASB Statements No. 87, 88, and
106 (SFAS No. 132(R)). FSP FAS No. 132(R)-1 requires more detailed
disclosures about the assets of a defined benefit pension or other
postretirement plan and is effective for fiscal years ending after
December 15, 2009. We are in the process of evaluating FSP FAS
No. 132(R)-1 and do not expect it will have a significant impact on our
Consolidated Financial Statements.

18

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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 31, 2009. 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 3, 2008, 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.

19

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TRANS WORLD ENTERTAINMENT CORPORATION AND
SUBSIDIARIES
PART II - OTHER INFORMATION

Item 1  Legal Proceedings

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

Item 1A  Risk Factors

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

Item 2  Unregistered Sales
of Equity Securities and Use of Proceeds

None.

Item 3  Defaults Upon
Senior Securities

None.

Item 4  Submissions of
Matters to a Vote of Security Holders

None.

Item 5  Other Information

None.

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.

20

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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 11,
 2009 | By: | /s/ Robert
J. Higgins                                                                                    | 
|               |     |                                                                                                          | 
|               |     | Robert J.
 Higgins                                                                                       | 
|               |     | Chairman and
 Chief Executive Officer                                                                    | 
|               |     | (Principal
 Executive Officer)                                                                           | 
|              
|June 11,
 2009 | By: | /s/ John J.
Sullivan                                                                                     | 
|               |     |                                                                                                          | 
|               |     | John J.
 Sullivan                                                                                        | 
|               |     | Executive
 Vice President and Chief Financial Officer(Principal Financial and Chief
 Accounting Officer)

21

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