TRANS WORLD ENTERTAINMENT CORP, S-4/A, 1999-03-30

TRANS WORLD ENTERTAINMENT CORP
S-4/A, 1999-03-30
RECORD & PRERECORDED TAPE STORES

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 29, 1999

REGISTRATION NO. 333-75231

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

------------------------

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

<TABLE>
<S> <C> <C>
NEW YORK 5735 14-1541629
(Primary Standard Industrial
(State or other jurisdiction of Classification (IRS Employer
incorporation or organization) Code Number) Identification No.)
</TABLE>

------------------------

38 CORPORATE CIRCLE
ALBANY, NEW YORK 12203
(518) 452-1242
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------

ROBERT J. HIGGINS
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS AND
TRANS WORLD ENTERTAINMENT CORPORATION
38 CORPORATE CIRCLE
ALBANY, NEW YORK 12203
(518) 452-1242

(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------

COPIES TO:

<TABLE>
<S> <C> <C>
WILLIAM M. HARTNETT, ESQ. VICTOR I. LEWKOW, ESQ. THOMAS F. MCKEE, ESQ.
CAHILL GORDON & REINDEL CLEARY, GOTTLIEB, STEEN & CALFEE, HALTER & GRISWOLD LLP
80 PINE STREET HAMILTON 1400 MCDONALD INVESTMENT CENTER
NEW YORK, NY 10005 ONE LIBERTY PLAZA 800 SUPERIOR AVENUE CLEVELAND,
(212) 701-3000 NEW YORK, NY 10006 OH 44114
(212) 225-2000 (216) 622-8200
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger pursuant to the merger agreement described herein have
been satisfied or are waived.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRELIMINARY COPY--SUBJECT TO COMPLETION--DATED MARCH 29, 1999
TRANS WORLD ENTERTAINMENT CORPORATION
38 CORPORATE CIRCLE, ALBANY, NEW YORK 12203

------------------------

NOTICE OF SPECIAL MEETING OF HOLDERS OF COMMON STOCK
TO BE HELD ON APRIL 22, 1999

------------------------

We have called a special meeting of stockholders of Trans World
Entertainment Corporation, a New York corporation, to be held on April 22, 1999,
at 8:00 a.m., local time, at the offices of Trans World, located at 38 Corporate
Circle, Albany, New York, for the following purposes:

1. To consider and vote upon a proposal to amend Trans World's
certificate of incorporation to increase the number of authorized
shares of Trans World common stock, par value $.01 per share, from
50,000,000 to 200,000,000.

2. To consider and vote upon a proposal to authorize the issuance of up
to 20,685,608 shares of Trans World common stock in connection with
the merger described below.

3. To consider and vote upon a proposal to elect two proposed new
directors to Trans World's board of directors, effective upon
completion of the merger.

4. To consider and vote upon a proposal to amend Trans World's
certificate of incorporation to adopt a classified board of
directors.

5. To transact such other business as may properly be brought before the
special meeting and any adjournments or postponements.

Proposals 1 and 4 each requires the approval of a majority of the
outstanding shares of Trans World common stock. Proposal 2 requires the approval
of a majority of the shares represented at the special meeting. Under Proposal
3, the two candidates who receive the highest number of votes will become
directors, but only if the merger is completed. An abstention from voting or a
broker non-vote will have the same effect as a vote against the approval of
proposals 1, 2 and 4, but will have no effect on the vote required to approve
proposal 3. Holders of Trans World common stock have no dissenters' rights of
appraisal in connection with the merger.

Trans World stockholders of record on March 3, 1999 are entitled to notice
of, and to vote at, the special meeting and any adjournments or postponements.
<PAGE>
THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
APPROVED EACH OF THE PROPOSALS AND HAS DETERMINED THAT EACH OF THE PROPOSALS IS
ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF, TRANS WORLD'S STOCKHOLDERS.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TRANS WORLD'S
STOCKHOLDERS VOTE "FOR" EACH OF THE PROPOSALS.

By Order of the Board of Directors

[LOGO]

Matthew Mataraso
SECRETARY

March 31, 1999
Albany, New York

2
<PAGE>
PRELIMINARY COPY--SUBJECT TO COMPLETION--DATED MARCH 29, 1999

CAMELOT MUSIC HOLDINGS, INC.
8000 FREEDOM AVENUE, N.W., NORTH CANTON, OHIO 44720

------------------------

NOTICE OF SPECIAL MEETING OF HOLDERS OF COMMON STOCK
TO BE HELD ON APRIL 22, 1999
------------------------

We have called a special meeting of stockholders of Camelot Music Holdings,
Inc., a Delaware corporation, to be held on April 22, 1999, at 10:00 a.m., local
time, at the offices of Cleary, Gottlieb, Steen & Hamilton, located at One
Liberty Plaza, New York, New York, for the following purposes:

1. To consider and vote upon a proposal to adopt the Agreement and Plan
of Merger, dated as of October 26, 1998, by and among Trans World
Entertainment Corporation, a New York corporation, CAQ Corporation, a
Delaware corporation and a wholly owned subsidiary of Trans World,
and Camelot.

2. To transact such other business as may properly be brought before the
special meeting and any adjournments or postponements.

The affirmative vote of a majority of the outstanding shares of Camelot
common stock, par value $.01 per share, is necessary to adopt the merger
agreement. An abstention from voting or a broker non-vote will have the same
effect as a vote against adoption of the merger agreement. Holders of Camelot
common stock will be entitled to appraisal rights with respect to their shares
of Camelot common stock entitled to vote at the special meeting in connection
with the merger.

Adoption of the merger agreement is assured because Camelot stockholders
owning 58.4% of the outstanding shares of Camelot common stock have agreed to
vote "FOR" the adoption of the merger agreement. If the other conditions to the
merger are satisfied, CAQ will merge into Camelot upon the terms and conditions
of the merger agreement. A copy of the merger agreement is included as Annex A
to the attached joint proxy statement/prospectus.

Camelot stockholders of record on March 15, 1999 are entitled to notice of,
and to vote at, the special meeting and any adjournments or postponements.

THE BOARD OF DIRECTORS HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND HAS
DETERMINED THAT THE MERGER AGREEMENT IS ADVISABLE AND FAIR TO, AND IN THE BEST
INTERESTS OF, CAMELOT'S STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT CAMELOT'S STOCKHOLDERS VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT.

Some of Camelot's directors and executive officers have interests in the
merger that are different from, or in addition to, the interests of Camelot
stockholders. These potential conflicts of interest are more fully described in
the attached joint proxy statement/prospectus. The members of Camelot's board
knew about these potential conflicts of interest, and considered them, when they
adopted the merger agreement.

By Order of the Board of Directors

[LOGO]
Jack K. Rogers
PRESIDENT, CHIEF OPERATING OFFICER
AND SECRETARY

March 31, 1999
North Canton, Ohio

IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING,
WHETHER OR NOT YOU PLAN TO ATTEND IN PERSON. ACCORDINGLY, WE REQUEST THAT YOU
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE SHARES REGISTERED IN YOUR NAME IN
PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD. YOU
MAY VOTE SHARES REGISTERED IN A NOMINEE'S NAME IN PERSON IN A SIMILAR MANNER IF
YOU HAVE A PROPER POWER OF ATTORNEY.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. TRANS
WORLD MAY NOT SELL SHARES OF ITS COMMON STOCK UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL SHARES OF TRANS WORLD'S COMMON STOCK AND IT IS NOT
SOLICITING AN OFFER TO BUY SHARES OF TRANS WORLD'S COMMON STOCK IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PRELIMINARY COPY-SUBJECT TO COMPLETION-DATED MARCH 29, 1999

<TABLE>
<C> <S>
TRANS WORLD ENTERTAINMENT CAMELOT MUSIC HOLDINGS, INC.
CORPORATION
</TABLE>

JOINT PROXY STATEMENT/PROSPECTUS
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT

The boards of directors of Trans World Entertainment Corporation and Camelot
Music Holdings, Inc. have agreed to a merger. As a result of the merger, Camelot
will become a wholly owned subsidiary of Trans World. EACH SHARE OF CAMELOT
COMMON STOCK WILL BE CONVERTED IN THE MERGER INTO THE RIGHT TO RECEIVE 1.9
SHARES OF TRANS WORLD COMMON STOCK. Trans World common stock is currently listed
for quotation on the Nasdaq National Market under the symbol "TWMC," and Camelot
common stock is currently quoted on the OTC Bulletin Board under the symbol
"CMHDA." On March 26, 1999, the last reported sale price of Trans World common
stock was $11.13 per share and the last reported sale price of Camelot common
stock was $21.50 per share.

We cannot complete the merger unless:

- the stockholders of Camelot adopt the merger agreement; and

- the stockholders of Trans World approve proposals to

-- amend Trans World's certificate of incorporation to increase the
number of authorized shares of Trans World common stock from
50,000,000 to 200,000,000,

-- issue up to 20,685,608 shares of Trans World common stock in
connection with the merger, and

-- elect two proposed new directors to Trans World's board of directors,
effective upon completion of the merger.

Trans World will also ask its stockholders to vote upon a proposal to amend
Trans World's certificate of incorporation to adopt a classified board of
directors.

Each of us will hold a special meeting of our stockholders to consider and
vote upon our proposals. This document describes those meetings, our proposals
and the merger. WE ENCOURAGE YOU TO READ THIS ENTIRE DOCUMENT CAREFULLY.

The dates, times and places of the special meetings are as follows:

<TABLE>
<S> <C>
FOR TRANS WORLD STOCKHOLDERS: FOR CAMELOT STOCKHOLDERS:
38 Corporate Circle One Liberty Plaza
Albany, New York New York, New York
8:00 a.m. 10:00 a.m.
April 22, 1999 April 22, 1999
</TABLE>

Whether or not you plan to attend your stockholder meeting, please take the
time to vote by completing and returning the enclosed proxy card. YOUR VOTE IS
VERY IMPORTANT.

We enthusiastically support this combination of our companies and join with
the other members of our boards of directors in recommending that you vote in
favor of the proposal or proposals before you relating to the merger. Trans
World's board of directors also recommends that Trans World stockholders vote in
favor of the proposal to adopt a classified board of directors.

<TABLE>
<S> <C>
[LOGO] [LOGO]
Robert J. Higgins James E. Bonk
Chairman of the Board, President and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Trans World Entertainment Corporation Camelot Music Holdings, Inc.
</TABLE>

YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS IN THIS JOINT PROXY
STATEMENT/PROSPECTUS BEGINNING ON PAGE 11.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

Joint proxy statement/prospectus dated March 29, 1999
and first mailed to stockholders on or about March 31, 1999
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SUMMARY.................................................................................................. 1
RISK FACTORS............................................................................................. 11
Competition............................................................................................ 11
Uncertainties Regarding Minimum Advertised Pricing Guidelines.......................................... 11
Seasonality............................................................................................ 11
Integration of Trans World and Camelot................................................................. 11
Relationships with Vendors............................................................................. 12
Hit Products........................................................................................... 12
Growth Strategy........................................................................................ 12
New Technologies....................................................................................... 13
Minimum Wage Increases................................................................................. 13
Internal Revenue Service Claim......................................................................... 13
Control by and Dependence on Key Personnel............................................................. 14
Risks Associated with the Fixed Exchange Ratio......................................................... 14
Possible Volatility of Stock Price..................................................................... 14
No Dividends........................................................................................... 15
Anti-Takeover Provisions............................................................................... 15
Shares Available for Future Sale....................................................................... 16
Year 2000 Compliance................................................................................... 16
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS................................................ 17
COMPARATIVE PER SHARE DATA............................................................................... 18
MARKET PRICE, DIVIDEND AND STOCKHOLDER INFORMATION....................................................... 19
THE TRANS WORLD SPECIAL MEETING.......................................................................... 21
General................................................................................................ 21
Purpose of the Trans World Special Meeting............................................................. 21
Classified Board Amendment............................................................................. 21
Election of Directors.................................................................................. 22
Independent Accountants................................................................................ 22
Record Date; Quorum; Voting............................................................................ 22
Revocation of Proxies.................................................................................. 23
No Dissenters' Rights of Appraisal..................................................................... 23
Expenses of Solicitation............................................................................... 23
Recommendation of the Trans World Board................................................................ 24
Miscellaneous.......................................................................................... 24
THE CAMELOT SPECIAL MEETING.............................................................................. 25
General................................................................................................ 25
Purpose of the Camelot Special Meeting................................................................. 25
Record Date; Quorum; Voting............................................................................ 25
Revocation of Proxies.................................................................................. 26
Dissenters' Rights of Appraisal........................................................................ 26
Expenses of Solicitation............................................................................... 26
Recommendation of the Camelot Board.................................................................... 26
Miscellaneous.......................................................................................... 26
THE MERGER............................................................................................... 28
Background of the Merger............................................................................... 28
Recommendations of the Trans World Board;
Reasons for the Merger and the Classified Board Amendment............................................ 31
</TABLE>

i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Recommendations of the Camelot Board;
Reasons for the Merger............................................................................... 33
Opinion of Financial Advisor to Trans World............................................................ 35
Opinion of Financial Advisor to Camelot................................................................ 41
Conflicts of Interest.................................................................................. 50
Accounting Treatment of the Merger..................................................................... 52
Regulatory Matters..................................................................................... 52
Other Regulatory Approvals............................................................................. 53
Resale of Trans World Common Stock..................................................................... 53
Appraisal Rights of Camelot Stockholders............................................................... 54
Federal Income Tax Consequences of the Merger.......................................................... 56
Public Trading Markets; Delisting of Camelot Common Stock.............................................. 58
THE MERGER AGREEMENT..................................................................................... 59
General; Effective Time and Effects of the Merger...................................................... 59
Conversion of Camelot Shares........................................................................... 59
Dissenting Shares...................................................................................... 59
No Fractional Trans World Shares....................................................................... 59
Exchange of Shares..................................................................................... 59
Treatment of Camelot Stock Options..................................................................... 60
Employee Benefits...................................................................................... 61
Representations and Warranties......................................................................... 61
Conduct of Business of Camelot......................................................................... 63
Conduct of Business of Trans World..................................................................... 65
No Solicitation by Camelot............................................................................. 67
No Solicitation by Trans World......................................................................... 67
Board Representation................................................................................... 68
Conditions............................................................................................. 68
Termination............................................................................................ 69
Fees and Expenses...................................................................................... 70
Indemnification; Insurance............................................................................. 71
Amendment.............................................................................................. 71
Waivers; Consents...................................................................................... 71
OTHER AGREEMENTS......................................................................................... 72
The Camelot Voting Agreement........................................................................... 72
The Higgins Voting Agreement........................................................................... 73
The Registration Rights Agreement...................................................................... 73
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS................................................................................... 75
CAMELOT MUSIC HOLDINGS, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA................... 84
SELECTED HISTORICAL FINANCIAL INFORMATION FOR TRANS WORLD................................................ 89
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF TRANS WORLD..... 90
SELECTED HISTORICAL FINANCIAL INFORMATION FOR CAMELOT.................................................... 100
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CAMELOT......... 102
TRANS WORLD'S BUSINESS................................................................................... 116
CAMELOT'S BUSINESS....................................................................................... 122
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TRANS WORLD............................ 131
</TABLE>

ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF CAMELOT................................ 132
MANAGEMENT OF THE COMBINED COMPANIES..................................................................... 134
EXECUTIVE COMPENSATION AND OTHER MATTERS................................................................. 137
TRANSACTIONS WITH RELATED PARTIES........................................................................ 144
DESCRIPTION OF TRANS WORLD CAPITAL STOCK................................................................. 145
Common Stock........................................................................................... 145
Preferred Stock........................................................................................ 145
New York Anti-Takeover Law and Certain Charter and By-Law Provisions................................... 145
Transfer Agent and Registrar........................................................................... 146
COMPARISON OF STOCKHOLDER RIGHTS......................................................................... 147
Authorized Capital Stock............................................................................... 147
Business Combinations.................................................................................. 147
State Anti-Takeover Legislation........................................................................ 147
Appraisal Rights....................................................................................... 149
Amendments to Certificates of Incorporation............................................................ 149
Amendments to By-Laws.................................................................................. 150
Preemptive Rights...................................................................................... 150
Redemption of Capital Stock............................................................................ 151
Dividend Sources....................................................................................... 151
Duration of Proxies.................................................................................... 151
Stockholder Action..................................................................................... 152
Special Stockholder Meetings........................................................................... 152
Cumulative Voting...................................................................................... 152
Number and Election of Directors....................................................................... 153
Removal of Directors................................................................................... 153
Vacancies.............................................................................................. 154
Indemnification of Directors and Officers.............................................................. 155
Limitation of Personal Liability of Directors.......................................................... 157
Rights Plans........................................................................................... 158
FUTURE STOCKHOLDER PROPOSALS............................................................................. 158
LEGAL MATTERS............................................................................................ 158
EXPERTS.................................................................................................. 158
WHERE YOU CAN FIND MORE INFORMATION...................................................................... 159
INDEX TO FINANCIAL STATEMENTS............................................................................ F-1
ANNEXES
A. Merger Agreement
B. The Camelot Voting Agreement
C. The Higgins Voting Agreement
D-1. Proposed Certificate of Amendment to the Certificate of Incorporation
D-2. Proposed Certificate of Amendment to the Certificate of Incorporation
E. Section 262 of the Delaware General Corporation Law
F. Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated
G. Opinion of Goldman, Sachs & Co.
</TABLE>

iii
<PAGE>
SUMMARY

THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY
STATEMENT/PROSPECTUS. IT MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS
IMPORTANT TO YOU. WE URGE YOU TO READ CAREFULLY THE ENTIRE JOINT PROXY
STATEMENT/PROSPECTUS TO FULLY UNDERSTAND THE MERGER AND THE PROPOSALS. EACH ITEM
IN THIS SUMMARY INCLUDES A PAGE REFERENCE DIRECTING YOU TO A MORE COMPLETE
DESCRIPTION OF THAT ITEM.

THE COMPANIES

TRANS WORLD ENTERTAINMENT CORPORATION (PAGE 116)

38 Corporate Circle
Albany, New York 12203
(518) 452-1242

Trans World is one of the largest music and video specialty retailers in the
United States based on store count. At January 2, 1999, Trans World operated 501
stores in 33 states, the District of Columbia and the U.S. Virgin Islands, with
the majority of its stores concentrated in the Eastern half of the United
States. Trans World offers a wide selection of entertainment products, including
CDs, audio cassettes and videocassettes, DVDs and related accessories. Trans
World operates its stores under two real estate categories: mall and non-mall.
Mall stores include "Record Town," "Saturday Matinee" and "F.Y.E. For Your
Entertainment." Non-mall stores include "Coconuts," "Strawberries" and "Planet
Music."

CAMELOT MUSIC HOLDINGS, INC. (PAGE 122)

8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
(330) 494-2282

Camelot is a leading mall-based retailer of prerecorded music and
accessories and is one of the largest music retailers in the United States, in
each case based on store count. As of January 2, 1999, Camelot operated 498
stores in 38 states nationwide and in Puerto Rico under three brand names:
"Camelot Music," "The Wall" and "Spec's." Camelot offers a broad range of
prerecorded music, including CDs, cassettes, prerecorded video cassettes, DVDs
and accessories such as blank audio and videocassettes and music and tape care
products. Camelot seeks to position itself as the mall-based music specialist
for prerecorded music, and advertises under the motto "No One Knows Your Music
Better."
THE MERGER AND THE MERGER AGREEMENT

THE MERGER AGREEMENT IS ATTACHED AS ANNEX A. PLEASE READ THE MERGER
AGREEMENT IN ITS ENTIRETY. IT IS THE LEGAL DOCUMENT THAT GOVERNS THE MERGER.

GENERAL (PAGE 59)

We propose a merger in which a subsidiary of Trans World will merge into
Camelot, with Camelot being the surviving corporation. As a result of the
merger, Camelot will become a wholly owned subsidiary of Trans World and will
continue to operate under the name Camelot.

EFFECTIVE TIME (PAGE 59)

The merger will occur shortly after the satisfaction of all conditions to
the completion of the merger. We currently expect that the merger will occur
during Trans World's first quarter of 1999.

WHAT STOCKHOLDERS WILL RECEIVE

CAMELOT STOCKHOLDERS (PAGE 59)

Each Camelot stockholder will receive 1.9 shares of Trans World common stock
for each share of Camelot common stock that he or she owns on the date the
merger is completed. We refer to this number as the "exchange ratio." No
fractional shares of Trans World common stock will be issued. Instead, Camelot
stockholders will receive a check in payment of any fractional shares based on
the market value of Trans World common stock as of the trading day before the
merger is completed.

CAMELOT STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES UNTIL
INSTRUCTED TO DO SO AFTER THE MERGER IS COMPLETED.

APPRAISAL RIGHTS FOR CAMELOT STOCKHOLDERS
(PAGE 54)

If the merger is completed, Camelot stockholders who do not vote for the
adoption of the merger agreement and who otherwise comply

1
<PAGE>
with Section 262 of the Delaware General Corporation Law will be entitled to
appraisal rights under Delaware law.

TRANS WORLD STOCKHOLDERS (PAGE 24)

Trans World stockholders' shares of Trans World common stock will remain
issued and outstanding. However, Trans World stockholders will own shares of a
larger, more geographically diversified company.

TRANS WORLD STOCKHOLDERS SHOULD NOT SEND IN THEIR STOCK CERTIFICATES BECAUSE
TRANS WORLD STOCKHOLDERS WILL NOT EXCHANGE THEIR STOCK CERTIFICATES IN
CONNECTION WITH THE MERGER.

APPRAISAL RIGHTS FOR TRANS WORLD STOCKHOLDERS (PAGE 23)

Trans World stockholders have no dissenters' rights of appraisal in
connection with the Trans World proposals or the merger.

CAMELOT STOCK OPTIONS (PAGE 60)

Unexercised options to buy Camelot common stock under Camelot's stock option
plans will become vested and exercisable options to buy shares of Trans World
common stock. The number of shares of Trans World common stock underlying each
new option, as well as the exercise price, will be adjusted to reflect the
exchange ratio and other applicable terms of the merger.

FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE 56)

Camelot stockholders will not recognize taxable gain or loss for United
States federal income tax purposes upon the exchange of Camelot common stock for
Trans World common stock in connection with the merger, except with respect to
any cash received instead of fractional shares of Trans World common stock. The
holding period for shares of Trans World common stock received by Camelot
stockholders in the merger will include the holding period for the Camelot
common stock exchanged in the merger. This holding period determines how any
gain or loss should be treated for federal income tax purposes upon future sales
of Trans World common stock.
We have conditioned the merger on our receipt of legal opinions that the
federal income tax treatment will be as we have described in this joint proxy
statement/prospectus.

OWNERSHIP OF TRANS WORLD AFTER THE MERGER

The following table sets forth our estimated ownership of Trans World after
the merger based on the number of Trans World shares outstanding on March 3,
1999 and the number of Camelot shares outstanding on March 15, 1999, including
shares underlying outstanding options or otherwise reserved for issuance in
respect of bankruptcy claims:

<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF TRANS OF TRANS
WORLD SHARES WORLD SHARES
OUTSTANDING OUTSTANDING
------------ ---------------
<S> <C> <C>
Trans World
stockholders........... 36,597,144 63.9
Camelot
stockholders........... 20,685,608 36.1
------------ -----
Total................ 57,282,752 100.0
------------ -----
------------ -----
</TABLE>

As of March 3, 1999, 3,842,908 shares of Trans World common stock were issuable
upon the exercise of outstanding options. As of March 15, 1999, 705,000 shares
of Camelot common stock were issuable upon exercise of outstanding options and
1,731 shares of Camelot common stock were reserved for issuance in respect of
bankruptcy claims.

COMPARISON OF STOCKHOLDER RIGHTS (PAGE 147)

The rights of Camelot stockholders are governed by Camelot's certificate of
incorporation, its by-laws and Delaware law. The rights of Trans World
stockholders are governed by Trans World's certificate of incorporation, its
by-laws and New York law. After the merger, the rights of Camelot stockholders
who become Trans World stockholders will be governed by Trans World's
certificate of incorporation, Trans World's by-laws and New York law. Due to
differences in these organizational documents and governing laws, Camelot
stockholders who

2
<PAGE>
become Trans World stockholders will have different rights as Trans World
stockholders than they currently have as Camelot stockholders.

PUBLIC TRADING MARKETS (PAGE 58)

Trans World will apply for quotation on Nasdaq of the shares of Trans World
common stock issuable in connection with the merger. Upon completion of the
merger, Camelot common stock will no longer be quoted on OTC.

MARKET PRICE INFORMATION (PAGE 19)

October 23, 1998 was the last trading day before we announced the merger
agreement, and March 26, 1999 was the last trading day prior to the date of this
joint proxy statement/prospectus. The table shows closing prices of Trans World
shares and Camelot shares on these days and also shows the market value of the
consideration that Camelot stockholders would receive for each Camelot share
based on the closing price of Trans World shares on these dates given the
exchange ratio.

<TABLE>
<CAPTION>
CLOSING PRICE
-------------------------- MARKET
CAMELOT VALUE BASED
TRANS WORLD COMMON ON EXCHANGE
COMMON STOCK STOCK RATIO
------------- ----------- -----------
<S> <C> <C> <C>
October 23, 1998 $ 20.63 $ 24.50 $ 39.20
March 26, 1999 $ 11.13 $ 21.50 $ 21.15
</TABLE>

Because the exchange ratio is fixed, the number of shares of Trans World
common stock that Camelot stockholders will receive for each share of Camelot
common stock that they own on the date the merger is completed will not change
even if the market prices of Trans World and Camelot shares change before the
merger is completed. Accordingly, the market value of the consideration that
Camelot stockholders receive may be more or less than the market values
reflected in the table. You should obtain current stock price quotations for
both Trans World and Camelot common stock.

THE SPECIAL MEETINGS

TRANS WORLD SPECIAL MEETING (PAGE 21)

The Trans World special meeting will be held on April 22, 1999, at 8:00
a.m., local time, at the offices of Trans World, located at 38 Corporate Circle,
Albany, New York. At the Trans World special meeting, Trans World will ask its
stockholders to vote on the following proposals:

1. To amend Trans World's certificate of incorporation to increase the number
of authorized shares of Trans World common stock from 50,000,000 to
200,000,000.

2. To authorize the issuance of up to 20,685,608 shares of Trans World common
stock in connection with the merger.

3. To elect Michael B. Solow and George R. Zoffinger to the board of directors,
effective upon completion of the merger.

4. To amend Trans World's certificate of incorporation to adopt a classified
board of directors.

5. Any other matters that may be properly brought before the Trans World
special meeting.

CAMELOT SPECIAL MEETING (PAGE 25)

The Camelot special meeting will be held on April 22, 1999, at 10:00 a.m.,
local time, at the offices of Cleary, Gottlieb, Steen & Hamilton, located at One
Liberty Plaza, New York, New York. At the Camelot special meeting, Camelot will
ask its stockholders to vote on the following proposals:

1. To adopt the merger agreement.

2. Any other matters that may be properly brought before the Camelot special
meeting.

RECORD DATE; VOTE REQUIRED

TRANS WORLD STOCKHOLDERS (PAGE 22)

Trans World stockholders may vote at the Trans World special meeting if they
owned Trans World common stock at the close of business on March 3, 1999. On
March 3, 1999 there were 32,754,236 shares of Trans World common stock
outstanding and entitled to vote. Proposals 1 and 4 each require the approval of
a majority of the outstanding shares of Trans World common stock. Proposal 2
requires the approval of a majority of the shares represented at the special
meeting. Under Proposal 3, the two candidates

3
<PAGE>
who receive the highest number of votes will become directors, but only if the
merger is completed. Trans World stockholders can cast one vote for each share
of Trans World common stock that they owned on March 3, 1999.

CAMELOT STOCKHOLDERS (PAGE 25)

Camelot stockholders may vote at the Camelot special meeting if they owned
Camelot common stock at the close of business on March 15, 1999. On March 15,
1999 there were 10,180,431 shares of Camelot common stock outstanding and
entitled to vote. To adopt the merger agreement, the holders of a majority of
the shares of Camelot common stock outstanding on March 15, 1999 must vote in
favor of this proposal. Camelot stockholders can cast one vote for each share of
Camelot common stock that they owned on March 15, 1999.

RECOMMENDATIONS TO STOCKHOLDERS

TRANS WORLD STOCKHOLDERS (PAGE 31)

The board of directors of Trans World has determined and believes that each
of the proposals is advisable and fair to, and in the best interests of, Trans
World stockholders. Accordingly, the board of directors of Trans World
unanimously recommends that Trans World stockholders vote "FOR" each of the
proposals.

CAMELOT STOCKHOLDERS (PAGE 33)

The board of directors of Camelot has determined and believes that the
merger is advisable and fair to, and in the best interests of, Camelot
stockholders. Accordingly, the board of directors of Camelot unanimously
recommends that Camelot stockholders vote "FOR" adoption of the merger
agreement.

CONFLICTS OF INTEREST (PAGE 50)

Some of Camelot's directors and executive officers have interests in the
merger that are different from, or in addition to, the interests of Camelot
stockholders:

- James E. Bonk, Chairman and Chief Executive Officer of Camelot, is
entitled to severance payments and continued benefits pursuant to his
employment agreement if his employment terminates in connection with the
merger.

- Each other executive officer of Camelot is entitled to continued salary
and benefits pursuant to a severance agreement if his or her employment
terminates in connection with the merger.

- Unvested Camelot stock options will become fully vested and exercisable
upon completion of the merger.

- Camelot has established an employee retention program providing for a pool
of up to $3.75 million allocated among its senior executives and other
employees in connection with the merger.

- Two current Camelot directors will become directors of Trans World upon
completion of the merger.

- Following the merger, Trans World and Camelot will indemnify the former
Camelot officers and directors for events occurring before the merger and
Camelot will maintain directors' and officers' liability insurance for
these individuals.

The members of Camelot's board knew about these potential conflicts of
interests, and considered them, when they adopted the merger agreement.

OPINIONS OF FINANCIAL ADVISORS

TRANS WORLD (PAGE 35)

Goldman, Sachs & Co. has delivered its written opinion to the board of
directors of Trans World that, as of the date of its opinion, the exchange ratio
was fair from a financial point of view to Trans World. The opinion of Goldman
Sachs does not constitute a recommendation as to how you should vote with
respect to the transactions contemplated by the merger agreement.

THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS IS ATTACHED AS ANNEX
G. YOU SHOULD READ IT IN ITS ENTIRETY.

4
<PAGE>
CAMELOT (PAGE 41)

Merrill Lynch, Pierce, Fenner & Smith Incorporated has delivered its written
opinion to the board of directors of Camelot that, as of the date of its
opinion, the exchange ratio was fair, from a financial point of view, to holders
of Camelot common stock. The opinion of Merrill Lynch does not constitute a
recommendation as to how you should vote with respect to the merger agreement.

THE FULL TEXT OF THE WRITTEN OPINION OF MERRILL LYNCH IS ATTACHED AS ANNEX
F. YOU SHOULD READ IT IN ITS ENTIRETY.

OTHER AGREEMENTS

THE CAMELOT VOTING AGREEMENT (PAGE 72)

At the same time we entered into the merger agreement, stockholders owning
58.4% of the outstanding shares of Camelot common stock entered into a voting
agreement with Trans World. Adoption of the merger agreement is assured because
these stockholders agreed to vote their shares of Camelot common stock "FOR"
this proposal and against any competing proposal.

THE CAMELOT VOTING AGREEMENT IS ATTACHED AS ANNEX B. YOU SHOULD READ IT IN
ITS ENTIRETY.

THE HIGGINS VOTING AGREEMENT (PAGE 73)

At the same time we entered into the merger agreement, Robert J. Higgins,
Chairman, President and Chief Executive Officer of Trans World, entered into a
voting agreement with Camelot. Mr. Higgins agreed to vote his shares of Trans
World common stock "FOR" proposals 1, 2 and 3 and against any competing
proposal. Mr. Higgins' shares represent 35.7% of the outstanding shares of Trans
World common stock.

MR. HIGGINS' VOTING AGREEMENT IS ATTACHED AS ANNEX C. YOU SHOULD READ IT IN
ITS ENTIRETY.

5
<PAGE>
TRANS WORLD SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. We derived the historical
information from audited financial statements of Trans World for the years ended
January 29, 1994 through January 31, 1998 and unaudited financial statements for
the thirty-nine weeks ended November 1, 1997 and October 31, 1998. Each fiscal
year of Trans World consisted of 52 weeks except the fiscal year ended February
3, 1996, which consisted of 53 weeks. All share and per share amounts have been
adjusted for all periods to reflect a two-for-one stock split effected on
December 15, 1997 and a three-for-two stock split effected on September 15,
1998. The information is only a summary and you should read it in conjunction
with Trans World's historical financial statements and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Trans World" included in this joint proxy statement/prospectus.
<TABLE>
<CAPTION>
AS OF AND
FOR
THE
THIRTY-NINE
WEEK PERIOD
AS OF AND FOR THE FISCAL YEAR ENDED ENDED
--------------------------------------------------------------- -----------
JANUARY 29, JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, NOVEMBER 1,
1994 1995 1996 1997 1998 1997
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales........................................ $ 492,553 $ 536,840 $ 517,046 $ 481,657 $ 571,314 $ 329,273
Cost of sales (1)............................ 307,834 345,720 347,554 308,952 361,422 206,821
----------- ----------- ----------- ----------- ----------- -----------
Gross profit................................. 184,719 191,120 169,492 172,705 209,892 122,452
Selling, general & administrative expenses... 162,299 175,569 168,313 150,218 170,834 119,284
Restructuring charge, net (1)................ -- 16,702 24,204 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations................ 22,420 (1,151) (23,025) 22,487 39,058 3,168
Interest expense............................. 6,268 10,058 15,201 12,110 5,148 4,505
Other expenses (income), net................. (297) (518) (979) (1,343) (153) (151)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes............ 16,449 (10,691) (37,247) 11,720 34,063 (1,186)
Income tax expense (benefit)................. 6,626 (4,435) (13,431) 4,618 13,489 (470)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)............................ $ 9,823 $ (6,256) $ (23,816) $ 7,102 $ 20,574 $ (716)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

Basic earnings (loss) per
share...................................... $ 0.34 $ (0.21) $ (0.82) $ 0.24 $ 0.70 $ (0.02)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Weighted average number of shares
outstanding................................ 29,169 29,103 29,178 29,271 29,483 29,443
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

Diluted earnings (loss) per
share...................................... $ 0.34 $ (0.21) $ (0.82) $ 0.24 $ 0.66 $ (0.02)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Adjusted weighted average number of shares
outstanding................................ 29,246 29,103 29,178 29,697 31,032 29,443
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------

BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital.............................. $ 101,538 $ 93,431 $ 78,773 $ 80,368 $ 88,974 $ 67,330
Total assets................................. 380,264 426,939 391,888 311,610 374,019 316,829
Current portion of long-term obligations..... 3,695 6,818 3,420 9,557 99 96
Long-term obligations........................ 73,098 66,441 60,364 50,490 41,409 41,435
Shareholders' equity......................... 126,074 119,477 95,661 102,919 124,522 102,739

OPERATING DATA:
Store count: (open at end of period)
Mall....................................... 443 431 379 357 340 347
Non-mall................................... 241 253 163 122 199 204
----------- ----------- ----------- ----------- ----------- -----------
Total...................................... 684 684 542 479 539 551
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Comparable store sales
change (2)................................. (2.1%) 1.1% (3.5%) 3.6 % 10.2 % 8.4%

Total square footage (in thousands).......... 2,414 2,544 2,140 2,008 2,442 2,415

OCTOBER 31,
1998
-----------

<S> <C>
INCOME STATEMENT DATA:
Sales........................................ $ 430,658
Cost of sales (1)............................ 269,532
-----------
Gross profit................................. 161,126
Selling, general & administrative expenses... 143,694
Restructuring charge, net (1)................ --
-----------
Income (loss) from operations................ 17,432
Interest expense............................. 2,264
Other expenses (income), net................. (541)
-----------
Income (loss) before income taxes............ 15,709
Income tax expense (benefit)................. 6,126
-----------
Net income (loss)............................ $ 9,583
-----------
-----------
Basic earnings (loss) per
share...................................... $ 0.30
-----------
-----------
Weighted average number of shares
outstanding................................ 31,653
-----------
-----------
Diluted earnings (loss) per
share...................................... $ 0.29
-----------
-----------
Adjusted weighted average number of shares
outstanding................................ 33,565
-----------
-----------
BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital.............................. $ 99,641
Total assets................................. 363,795
Current portion of long-term obligations..... 2,279
Long-term obligations........................ 15,938
Shareholders' equity......................... 173,657
OPERATING DATA:
Store count: (open at end of period)
Mall....................................... 332
Non-mall................................... 190
-----------
Total...................................... 522
-----------
-----------
Comparable store sales
change (2)................................. 8.6 %
Total square footage (in thousands).......... 2,510
</TABLE>

- ------------------------------

(1) The restructuring charge includes the write-down of assets, estimated cash
payments to landlords for early termination of operating leases, and
employee termination benefits. The charge also includes estimated
professional fees. Inventory-related costs, including the cost of returning
merchandise after the store closes, are included in cost of sales. The
restructuring charge for the year ended February 3, 1996 has been restated.
See note 12 to Trans World's consolidated financial statements on page F-29.

(2) A store is included in comparable store sales calculations at the beginning
of its 13th full month of operation.

6
<PAGE>
CAMELOT SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)

We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. We derived the information from
audited financial statements of Camelot and its predecessors for the fiscal
periods from 1993 through 1997 and unaudited financial statements for the
thirty-nine weeks ended November 29, 1997 and November 28, 1998. The information
is only a summary and you should read it in conjunction with Camelot's
historical financial statements and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Camelot" included in this
joint proxy statement/prospectus.

The financial information for the pre-predecessor entity relates to the
operations of Camelot Music, Inc. prior to its 1993 leveraged buyout, which was
effective September 30, 1993. The financial information for the predecessor
entity relates to the operations of Camelot Music Holdings, Inc. prior to its
emergence from bankruptcy on January 27, 1998. As of January 31, 1998, Camelot
adopted fresh-start reporting in accordance with AICPA Statement of Position
90-7, which resulted in a new entity for financial reporting purposes. Financial
information for the period from March 2, 1997 to January 31, 1998 reflects the
operations of the predecessor prior to its emergence from bankruptcy. Financial
information for the period from February 1, 1998 to February 28, 1998 reflects
the operations of Camelot after its emergence from bankruptcy and the adoption
of fresh-start reporting.
<TABLE>
<CAPTION>
PREDECESSOR
PRE-PREDECESSOR ----------------------------------------------------------
-------------------------- PERIOD PERIOD
FISCAL YEAR 30 DAYS OCTOBER 1, MARCH 2,
ENDED ENDED 1993 TO 1997 TO
AUGUST 31, SEPTEMBER 30, FEBRUARY 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993 1994 1994 1995 1996 1998
----------- ------------- ------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................. $ 421,467 $ 28,958 $ 206,246 $ 459,077 $ 455,652 $ 396,502 $ 372,561
Cost of sales......................... 264,271 18,338 125,967 297,248 309,847 269,401 248,655
----------- ------------- ------------ --------- --------- --------- -----------
Gross profit.......................... 157,196 10,620 80,279 161,829 145,805 127,101 123,906
Selling, general and administrative
expenses............................ 121,786 10,145 57,974 141,943 154,645 134,519 114,491
Special items (1)..................... -- -- 8,330 -- 211,520 6,523 (4,443)
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before interest expense,
other expenses (income), net,
reorganization expenses (income),
income taxes and extraordinary
item................................ 35,410 475 13,975 19,886 (220,360) (13,941) 13,858
Interest expense...................... 2,022 188 10,693 30,655 38,319 17,418 221
Other expenses (income), net.......... 1,210 93 1,548 5,026 4,978 1,160 185
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before reorganization
expense (income), income taxes and
extraordinary item.................. 32,178 194 1,734 (15,795) (263,657) (32,519) 13,452
Reorganization expense
(income) (2)........................ -- -- -- -- -- 31,845 (26,501)
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before income taxes and
extraordinary item.................. 32,178 194 1,734 (15,795) (263,657) (64,364) 39,953
Income tax expense.................... 10,949 34 2,678 3,070 474 -- 289
Extraordinary item, net of tax (3).... -- -- -- -- -- -- (228,911)
----------- ------------- ------------ --------- --------- --------- -----------
Net income (loss)..................... $ 21,229 $ 160 $ (944) $ (18,865) $(264,131) $ (64,364) $ 268,575
----------- ------------- ------------ --------- --------- --------- -----------
----------- ------------- ------------ --------- --------- --------- -----------
Basic earnings (loss) per share....... $ 58.48 $ 0.44 $ (0.94) $ (18.87) $ (264.13) $ (64.36) $ 268.58
Diluted earnings (loss) per share..... $ 58.48 $ 0.44 $ (0.94) $ (18.87) $ (264.13) $ (64.36) $ 268.58
Weighted average number of common
shares outstanding-basic............ 363 363 1,000 1,000 1,000 1,000 1,000
Weighted average number of common
shares outstanding-diluted.......... 363 363 1,000 1,000 1,000 1,000 1,000

<CAPTION>
CAMELOT PREDECESSOR CAMELOT
------------ ------------- -------------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO 1997 TO 1998 TO
FEBRUARY 28, NOVEMBER 29, NOVEMBER 28,
1998 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................. $ 27,842 $ 260,249 $ 377,744
Cost of sales......................... 18,009 175,700 238,623
------------ ------------- -------------
Gross profit.......................... 9,833 84,549 139,121
Selling, general and administrative
expenses............................ 9,527 92,031 124,863
Special items (1)..................... -- (4,443) 1,096
------------ ------------- -------------
Income (loss) before interest expense,
other expenses (income), net,
reorganization expenses (income),
income taxes and extraordinary
item................................ 306 (3,039) 13,162
Interest expense...................... 12 186 1,299
Other expenses (income), net.......... (295) 97 (145)
------------ ------------- -------------
Income (loss) before reorganization
expense (income), income taxes and
extraordinary item.................. 589 (3,322) 12,008
Reorganization expense
(income) (2)........................ -- 3,273 --
------------ ------------- -------------
Income (loss) before income taxes and
extraordinary item.................. 589 (6,595) 12,008
Income tax expense.................... 115 -- 5,846
Extraordinary item, net of tax (3).... -- -- --
------------ ------------- -------------
Net income (loss)..................... $ 474 $ (6,595) $ 6,162
------------ ------------- -------------
------------ ------------- -------------
Basic earnings (loss) per share....... $ 0.05 $ (6.60) $ 0.61
Diluted earnings (loss) per share..... $ 0.05 $ (6.60) $ 0.60
Weighted average number of common
shares outstanding-basic............ 10,176 1,000 10,178
Weighted average number of common
shares outstanding-diluted.......... 10,176 1,000 10,353
</TABLE>

7
<PAGE>
CAMELOT SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
(CONTINUED)
<TABLE>
<CAPTION>
PREDECESSOR
PRE-PREDECESSOR ----------------------------------------------------------
-------------------------- PERIOD PERIOD
FISCAL YEAR 30 DAYS OCTOBER 1, MARCH 2,
ENDED ENDED 1993 TO 1997 TO
AUGUST 31, SEPTEMBER 30, FEBRUARY 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993 1994 1994 1995 1996 1998
----------- ------------- ------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STORE DATA
Number of stores:
Open at beginning of period......... 324 365 366 392 401 388 315
Open during period.................. 20 1 7 21 14 -- --
Closed during period................ 5 -- -- 12 27 73 10
Acquired during period.............. 26 -- 19 -- -- -- --
----------- ------------- ------------ --------- --------- --------- -----------
Open at end of period............... 365 366 392 401 388 315 305
----------- ------------- ------------ --------- --------- --------- -----------
----------- ------------- ------------ --------- --------- --------- -----------
SELECTED OPERATING DATA
Gross square footage
(000's)............................. 1,273 1,281 1,393 1,511 1,563 1,329 1,309
Sales per square foot................. $ 331 -- -- $ 304 $ 292 $ 298 --
Comparable store sales
increase (decrease) (4)............. -- -- -- (2.6%) (5.6%) (3.5%) --
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital....................... $ 73,263 $ 73,329 $ 30,448 $ 58,127 $(167,129) $ 125,329 $ 149,018
Total assets.......................... 227,720 236,052 545,484 551,370 308,670 258,648 260,319
Current portion of long-term debt..... 578 9,203 2,555 12,565 285,878 -- --
Revolving credit agreement............ -- -- -- -- -- -- --
Long-term debt, net of current
portion............................. 21,283 21,283 328,845 354,235 110,882 -- --
Liabilities subject to compromise..... -- -- -- -- -- 484,811 --
Stockholders' equity (deficit)........ 130,418 130,579 75,643 56,778 (203,940) (268,304) 194,368

- ------------------------
(1) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in fiscal 1997 when Camelot
discontinued its manual "punch card" version of its customer loyalty program
and replaced it with a more limited automated program, the write-down of the
fair value of long-lived assets in fiscal 1996 resulting in a charge of $6.5
million, the $202.9 million write-down of long-lived assets in fiscal 1995,
principally related to goodwill resulting from the 1993 leveraged buyout,
restructuring charges of $5.2 million and $3.4 million related to the
expiration of a put agreement. For the thirty-nine week period from March 1,
1998 to November 28, 1998, Camelot incurred a $1.1 million expense relating
to Camelot's proposed public offering and legal fees related to open
reorganization claims.

(2) During the eleven month period ended January 31, 1998, reorganization income
related principally to adjustments to prepetition claims that were
discharged or received no amount of recovery, offset by net adjustments to
fair value, and professional fees and other expenses related to the
bankruptcy proceedings. During fiscal 1996, reorganization expense primarily
reflected a provision for store closings (including related lease rejection
damage claims) and the write-off of financing costs associated with
prepetition indebtedness as well as professional fees.

(3) As a result of Camelot's reorganization under the Bankruptcy Code, in the
eleven month period ended January 31, 1998 Camelot recorded a one-time gain
of $228.9 million associated with the extinguishment of prepetition claims
of approximately $428 million.

(4) The percentage change in comparable store sales is calculated as the net
change in sales for each comparable store for the equivalent period in the
prior year. Comparable stores are stores that have been operating for more
than 12 months since first opening. During the 13th month of operations, new
stores are considered comparable stores. Stores which have been relocated
are treated as comparable stores. Closed stores are not categorized as
comparable stores.

8
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA

We expect that the merger of Trans World and Camelot will be accounted for
as a "pooling of interests," which means that for accounting and financial
reporting purposes we will treat our companies as if they had always been
combined. For a more detailed description of pooling of interests accounting,
see "The Merger--Accounting Treatment of the Merger."

We have presented below unaudited pro forma condensed combined financial
data for fiscal years 1995 through 1997 and the thirty-nine weeks ended November
1, 1997 and October 31, 1998. Each fiscal year consisted of 52 weeks except the
fiscal year ended February 3, 1996, which consisted of 53 weeks. All share and
per share amounts have been adjusted for all periods to reflect Trans World's
two-for-one stock split effected on December 15, 1997 and three-for-two stock
split effected on September 15, 1998. The unaudited pro forma condensed combined
financial data reflects the pooling of interests method of accounting and is
intended to give you a better picture of what our businesses might have looked
like had they always been combined.

We prepared the unaudited pro forma condensed combined financial data by
adding or combining the historical amounts of each company. We then reclassified
certain of the combined amounts to achieve a consistent presentation.

WE HAVE NOT INCLUDED FINANCIAL DATA FOR CAMELOT FOR PERIODS PRIOR TO ITS
ADOPTION OF FRESH-START REPORTING ON JANUARY 31, 1998 IN THE PRO FORMA
INFORMATION BECAUSE AN ENTITY ADOPTING FRESH-START REPORTING IS ANALAGOUS TO A
NEWLY INCORPORATED ENTERPRISE FOR FINANCIAL REPORTING PURPOSES. ACCORDINGLY, FOR
PRO FORMA PURPOSES, CAMELOT DID NOT EXIST PRIOR TO JANUARY 31, 1998.

The companies may have performed differently if they were combined. You
should not rely on the pro forma information as indicating the historical
results that we would have had or the future results that we will experience
after the merger.

9
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL DATA (CONTINUED)

<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales........................................ $ 517,046 $ 481,657 $ 599,156 $ 329,273 $ 808,402
Cost of sales (1)............................ 347,554 308,952 379,431 206,821 508,155
----------- ----------- ----------- ----------- -----------
Gross profit................................. 169,492 172,705 219,725 122,452 300,247
Selling, general & administrative expenses... 168,313 150,218 180,361 119,284 269,653
Restructuring charge, net (1)................ 24,204 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations................ (23,025) 22,487 39,364 3,168 30,594
Interest expense............................. 15,201 12,110 5,167 4,505 3,759
Other expenses (income), net................. (979) (1,343) (455) (151) (882)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes............ (37,247) 11,720 34,652 (1,186) 27,717
Income tax expense (benefit)................. (13,431) 4,618 13,604 (470) 11,972
----------- ----------- ----------- ----------- -----------
Net income (loss)............................ $ (23,816) $ 7,102 $ 21,048 $ (716) $ 15,745
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Basic earnings (loss) per
share...................................... $ (0.82) $ 0.24 $ 0.68 $ (0.02) $ 0.31
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of shares
outstanding................................ 29,178 29,271 30,966(2) 29,443 50,991
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Diluted earnings (loss) per
share...................................... $ (0.82) $ 0.24 $ 0.65 $ (0.02) $ 0.30
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Adjusted weighted average number of shares
outstanding................................ 29,178 29,697 32,515(2) 29,443 53,236
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

OPERATING DATA:
Store count: (open at end of period)......... 542 479 994 551 1,020
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Total square footage (in thousands).......... 2,140 2,008 4,366 2,415 4,739

BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital.............................. 208,249
Total assets................................. 788,857
Note payable................................. 23,800
Current portion of long-term debt
obligations, net of current portion........ 7,279
Long-term debt obligations, net of current
portion.................................... 35,938
Shareholders' equity......................... 370,168
</TABLE>

- ------------------------------

(2) For the fiscal year ended January 31, 1998, weighted average number of
shares outstanding and adjusted weighted average number of shares
outstanding are calculated giving weighted to Camelot based upon the 28 days
such shares were outstanding.

10
<PAGE>
RISK FACTORS

IN ADDITION TO GENERAL INVESTMENT RISKS AND THE OTHER FACTORS WE DISCUSS,
YOU SHOULD CONSIDER THE FOLLOWING RISKS IN DECIDING WHETHER TO APPROVE OUR
PROPOSALS. SEE "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS."

COMPETITION--WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE WITH DEEP DISCOUNTING
COMPETITORS.

As a result of deep discounting by competitors, many music specialty
retailers, including Trans World and Camelot, have experienced financial
difficulties resulting in reduced sales and profitability and corporate
restructurings. Since 1994, Trans World has pursued a restructuring plan which
included closing and relocating underperforming stores, improving operating
efficiencies and reducing its level of debt. Between 1994 and 1996, Trans
World's stock price and perceived market outlook dropped significantly. Although
deep discount pricing by retailers of entertainment products abated in 1997, if
that practice returns, it may prevent the combined company from achieving
satisfactory gross margins while remaining competitive.

UNCERTAINTIES REGARDING MINIMUM ADVERTISED PRICING GUIDELINES--OUR RESULTS OF
OPERATION AND FINANCIAL CONDITION WOULD BE ADVERSELY AFFECTED BY A RELAXATION OR
ELIMINATION OF MINIMUM ADVERTISED PRICING GUIDELINES.

Music vendors set minimum advertised pricing guidelines and seek to maintain
minimum retail prices for prerecorded music products. During 1996, music vendors
strengthened these guidelines, and music retailers consequently refrained from
deep discounting. In response to consumer complaints, the FTC is currently
investigating these guidelines to determine whether they violate provisions of
federal antitrust laws. A decision by the FTC to institute proceedings or take
other action which results in the relaxation or elimination of the guidelines
could lead to the return of deep-discount pricing practices. If these pricing
practices return, we may not be able to remain competitive without a material
adverse effect on our financial condition and results of operations.

SEASONALITY--LOW FOURTH QUARTER SALES WOULD ADVERSELY AFFECT OUR OPERATING
RESULTS.

If for any reason our net sales were below seasonal norms during the fourth
quarter, our operating results, particularly operating and net income, would be
adversely affected. The holiday season makes the fourth quarter our peak selling
period. Both companies realize a significant amount of their sales and
substantially all of their net income during this period. Due to the increased
sales activity during these months, we purchase substantial amounts of inventory
and hire many temporary employees. Quarterly results are affected by:

- the timing and strength of new releases,

- holidays,

- new store openings, and

- sales performance of existing stores.

Prevailing economic conditions may also adversely affect the combined
company's sales and earnings, particularly during the fourth quarter of the
year.

INTEGRATION OF TRANS WORLD AND CAMELOT--TRANS WORLD MAY NOT BE ABLE TO
SUCCESSFULLY INTEGRATE AND PROFITABLY MANAGE CAMELOT WITHOUT SIGNIFICANT
FINANCIAL OR OPERATIONAL DIFFICULTIES.

Trans World may not be able to successfully integrate and profitably manage
Camelot without substantial costs, delays or other financial or operational
difficulties. There are many things that could go wrong and adversely affect the
financial condition of the combined company. Some of these things include:

- diversion of management's attention,

11
<PAGE>
- the failure to retain key personnel of Camelot,

- increased expenses for accounting and computer systems and the conversion
of our systems into one system, and

- risks associated with unanticipated events or liabilities.

We cannot predict the full range of integration-related problems which may
occur.

RELATIONSHIPS WITH VENDORS--SINCE THERE ARE ONLY SIX MAJOR VENDORS, A CHANGE IN
ONE OR MORE VENDORS' POLICIES OR OUR RELATIONSHIP WITH THEM COULD ADVERSELY
AFFECT OUR OPERATIONS.

During fiscal 1997, approximately 77% of Camelot's purchases and 68% of
Trans World's purchases, net of returns, were made from the so-called "big six"
vendors:

- BMG Distribution,

- Sony Music Entertainment, Inc.,

- Universal Music and Video Distribution, Inc.,

- Warner/Electra/Atlantic Corporation,

- Polygram Group Distribution, Inc., and

- EMI Music Distribution.

As is standard in the industry, neither of us maintains long-term contracts
with suppliers. We make purchases through purchase orders. If the combined
company fails to maintain customary trade terms or enjoy positive vendor
relations, it would have a material adverse effect on our results of operations
and financial condition. See "Trans World's Business--Suppliers and Purchasing."

A number of the big six vendors have recently stopped accepting returns of
open products from all of their retail customers. This trend has had an adverse
impact on Camelot's financial condition and results of operations. This trend
may continue and our vendors may make other modifications to their policies
which have an adverse effect on the combined company.

HIT PRODUCTS--A LACK OF NEW HIT PRODUCTS SLOWS CUSTOMER TRAFFIC IN OUR STORES
AND CONSEQUENTLY ADVERSELY AFFECTS OUR SALES.

Entertainment product sales depend to some extent upon the availability of
hit products. If there are no hit products, entertainment companies may be
unprofitable even though the general economy is doing well. We cannot determine
the timing of these cycles or the future availability of hit products. Hit
products are important because they generate customer traffic in our stores.
During recent years, industry growth and sales of music and video products
slowed due to the lack of new releases of hit products. The combined company
will not control the content of the products it sells and will be dependent upon
the major music and movie producers to continue to produce hit products. To the
extent that new hits are not available, or not available at prices attractive to
consumers, our sales may be adversely affected.

GROWTH STRATEGY--THE FAILURE TO GROW OUR BUSINESS MAY LIMIT OUR EARNINGS GROWTH
AND NEGATIVELY IMPACT SHAREHOLDER VALUE.

Trans World believes that failure to grow its business may limit its
earnings growth which could negatively impact shareholder value. Our historical
growth is in large part attributable to the opening of new stores and the
acquisition of existing stores which increase sales and earnings. We will only
open new stores if we find desirable locations and if we are able to negotiate
suitable lease terms. We will acquire existing stores only if we can find
desirable stores at acceptable prices. The success of any expansion depends on
several factors, including:

- business conditions,

12
<PAGE>
- the ability to expand internal systems to accommodate our growth and
manage our increased distribution demands,

- the ability to attract and retain qualified managers and sales associates,
and

- the availability of sufficient capital.

There are special risks involved if we try to acquire existing stores,
including:

- diversion of management's attention,

- the ability to successfully integrate any acquired business,

- the incurrence of legal liabilities, and

- unanticipated events or circumstances.

NEW TECHNOLOGIES--IF WE DO NOT PREDICT WHICH OF ANY NEW PRODUCT OR DISTRIBUTION
TECHNOLOGIES WILL BE ACCEPTED BY CONSUMERS OUR SALES MAY SUFFER.

The emergence of new technologies may attract consumers from one technology
to another and reduce sales and profit margins of existing technologies. If we
are unable to predict or participate in new product or distribution technologies
that consumers accept widely, our sales may suffer.

We may sell less of our products and product returns may increase if we are
unable to effectively manage a product technology transition. For example, the
shift from cassettes to CDs reduced the demand for cassettes. We cannot assure
you that we will successfully interpret the desires of consumers or predict
which of any new product technologies will be accepted by consumers.

New technologies are also increasing the ways products can be offered to the
public. A wide selection of music and video services can now be offered to
consumers by:

- the Internet,

- cable companies,

- direct broadcast satellite companies,

- telephone companies, and

- other telecommunications companies.

We expect this trend to continue.

MINIMUM WAGE INCREASES--ANY FUTURE INCREASE IN THE MINIMUM WAGE MAY MATERIALLY
ADVERSELY IMPACT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

We employ a number of sales associates and other personnel, including
temporary employees hired during the holiday season, who are paid on an hourly
basis. Many of these hourly employees are paid at or near the minimum wage.
Increases in the minimum wage result in an increase in the wages of those hourly
employees. It also results in an increase in the wages of more highly
compensated hourly employees. Increases in the minimum wage have had a
significant effect on our compensation expense during prior periods. Any future
increases may have a material adverse effect on our results of operations and
financial condition.

INTERNAL REVENUE SERVICE CLAIM--IF AN UNRESOLVED TAX CLAIM AGAINST CAMELOT
RESULTS IN SIGNIFICANT ADDITIONAL TAX PAYMENTS, OUR RESULTS OF OPERATIONS WOULD
BE ADVERSELY AFFECTED.

The IRS asserted a priority tax claim of approximately $7.9 million against
Camelot in Camelot's bankruptcy proceedings. Under Camelot's plan of
reorganization, if the IRS prevails in its priority tax claim, the claim would
have to be paid over six years, with quarterly amortization of interest and
principal, at an interest rate of 9.0%. Camelot has acknowledged and paid a
priority tax obligation to the IRS of approximately $0.8 million. Camelot
disputes the validity of the balance of the IRS claim. If

13
<PAGE>
a judgment is rendered against Camelot for significantly more than the $0.8
million that Camelot has paid already, the combined company's results of
operations would be materially adversely affected in the fiscal period in which
the judgment is rendered.

CONTROL BY AND DEPENDENCE ON KEY PERSONNEL--ROBERT J. HIGGINS HAS A STRONG
INFLUENCE ON THE OUTCOME OF ANY VOTE OF OUR SHAREHOLDERS AND IF WE LOSE HIS
SERVICES WE MAY NOT BE ABLE TO REPLACE HIS SKILLS AND EXPERIENCE.

Robert J. Higgins serves as the President, Chief Executive Officer and
Chairman of the Board of Trans World, and owned approximately 35.7% of the
outstanding common stock of Trans World, excluding options, as of March 3, 1999.
After completion of the merger, Mr. Higgins will own approximately 22.5%,
excluding options, of the outstanding common stock of the combined company and
will continue to influence control over the combined company. His high level of
stock ownership means that he will influence the outcome of any vote that
requires a majority of the combined company's outstanding shares. These types of
votes include:

- amending Trans World's certificate of incorporation,

- electing directors, and

- approving proposed business combinations requiring a shareholder vote.

We will depend on Mr. Higgins' remaining active in our operations and our
strategic planning. If we lose his services, we may not be able to replace his
skills and experience, and this could have a material adverse effect on the
combined company.

RISKS ASSOCIATED WITH THE FIXED EXCHANGE RATIO--DUE TO THE FIXED EXCHANGE RATIO,
THE VALUE OF THE MERGER CONSIDERATION MAY DECREASE.

If there is a reduction in the market price of Trans World's stock, the
Trans World shares issued to Camelot stockholders may be worth less than they
anticipated. At the time of the merger, each share of Camelot's common stock
will be converted into the right to receive 1.9 shares of Trans World's common
stock. This exchange ratio is fixed.

There may be many reasons for a reduction in the market price of Trans
World's stock, including:

- changes in the business, operations or prospects of Camelot or Trans
World,

- the timing of the merger,

- regulatory considerations,

- industry developments, and

- general market and economic conditions.

POSSIBLE VOLATILITY OF STOCK PRICE--THE PRICE OF TRANS WORLD'S COMMON STOCK MAY
DECREASE RAPIDLY AND PREVENT STOCKHOLDERS FROM SELLING THEIR STOCK AT A PROFIT.

The market price of Trans World's common stock may be subject to significant
fluctuations. These fluctuations may occur in response to:

- operating results,

- comparable store sales announcements,

- announcements by competitors or music products suppliers, and

- announcements of new technologies.

In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of individual companies. These market fluctuations, as
well as general economic conditions, may adversely affect the

14
<PAGE>
market price of Trans World's common stock and may prevent Trans World
stockholders from realizing any profit on the sale of their stock.

NO DIVIDENDS--TRANS WORLD STOCKHOLDERS MAY NOT RECEIVE A RETURN ON THEIR SHARES
UNLESS THEY SELL THEM.

If Trans World does not pay dividends on its common stock, Trans World
stockholders will not be able to receive a return on their shares unless they
sell them. Trans World has never declared or paid cash dividends on its common
stock. Any future determination as to the payment of dividends would depend upon
capital requirements and limitations imposed by the revolving credit facility
and the discretion of the board of directors.

ANTI-TAKEOVER PROVISIONS--NEW YORK LAW ANTI-TAKEOVER PROVISIONS AND THE
CLASSIFIED BOARD AMENDMENT, IF ADOPTED, MAY DISCOURAGE UNSOLICITED TAKEOVERS AND
MAY ENTRENCH MANAGEMENT.

Anti-takeover provisions and the classified board amendment, if approved,
may discourage open market purchases or a non-negotiated tender or exchange
offer for the stock of a corporation such as Trans World. This may be adverse to
the interests of a shareholder who might receive a premium in a transaction of
this type.

NEW YORK BUSINESS CORPORATION LAW. Section 912 of the New York Business
Corporation Law prohibits a New York corporation such as Trans World from
engaging in a "business combination" with an "interested shareholder" for a
period of five years from the date that the interested shareholder acquired its
stock unless the acquisition or the business combination was approved by the
corporation's board of directors prior to the interested shareholder's becoming
an interested shareholder. After this five-year period, the business combination
must be approved by a majority of shareholders other than the interested
shareholder or the price paid to all shareholders must meet certain conditions
relating to the type and minimum amount of consideration to be paid to
shareholders other than the interested shareholder. Because Robert J. Higgins
owned his shares of Trans World common stock prior to the enactment of Section
912, Section 912 would not apply to a business combination with Mr. Higgins or
his affiliates.

For purposes of Section 912, a "business combination" includes:

- a merger or consolidation,

- a sale, lease, pledge or other disposition of assets,

- a stock issuance or transfer,

- a liquidation or dissolution,

- a reclassification of securities,

- a recapitalization, or

- any transaction in which an interested shareholder benefits
disproportionately in relation to any other shareholder.

An "interested shareholder" is defined as any person or entity that currently
owns, directly or indirectly, or in the case of affiliates and associates of the
corporation, that owned at any time during the past five years, 20% or more of
the outstanding voting stock of the corporation.

CLASSIFIED BOARD AMENDMENT. If adopted, the proposal to adopt a classified
board of directors could have the effect of entrenching incumbent management and
discouraging hostile changes of control that might be beneficial to Trans World
and its stockholders.

15
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE--THE SALE OF A SUBSTANTIAL AMOUNT OF TRANS
WORLD'S COMMON STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF TRANS WORLD'S
COMMON STOCK.

The sale of a substantial amount of Trans World's common stock after the
merger could adversely affect its market price. It could also impair the
combined company's ability to raise more money through the sale of more stock.

There will be approximately 57,282,752 shares of Trans World's common stock
outstanding after the merger, including Trans World shares issuable upon the
exercise of outstanding options. All of the shares of Trans World's common stock
that Camelot's stockholders receive in connection with the merger will be freely
transferable, except for those shares received by "affiliates" of Camelot within
the meaning of Rule 145 of the Securities Act.

Trans World has granted registration rights covering Trans World shares to
be received by four affiliates of Camelot in connection with the merger. A
potential public sale of shares entitled to the benefits of registration rights
could adversely affect the price of Trans World's common stock.

YEAR 2000 COMPLIANCE--OUR SALES MAY SUFFER IF WE DO NOT PROPERLY COMPLETE OUR
YEAR 2000 MODIFICATIONS, OR THE OTHER ENTITIES WITH WHOM WE CONDUCT BUSINESS DO
NOT COMPLETE THEIR MODIFICATIONS.

The Year 2000 issue refers to the inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process data
fields containing a two-digit year. As the Year 2000 approaches, such systems
may not be able to accurately process certain data-based information. We have
assessed our systems and equipment with respect to Year 2000 compliance and have
each developed a project plan. Many of the Year 2000 issues have already been
addressed. The remaining Year 2000 issues will be addressed either with
scheduled system upgrades or through the combined company's internal systems
development staff. The incremental costs will be charged to expense as incurred
and are not expected to have a material impact on our financial position,
results of operations or cash flows. We could lose sales if either we do not
properly complete our Year 2000 modifications, or the vendors, banks or other
entities with whom we conduct business do not complete their modifications.
Camelot may be unable to complete the final stages of implementation of its year
2000 compliance program if the merger does not occur.

16
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This joint proxy statement/prospectus contains forward-looking statements
about our financial condition, results of operations and businesses. You can
find many of these statements by looking for words like "believes," "expects,"
"anticipates," or similar expressions in this joint proxy statement/ prospectus.

These forward-looking statements are based on numerous assumptions and may
not be true in the future because of risks and uncertainties. Factors that may
cause actual results to differ from those contemplated by the forward-looking
statements include, among others, the following possibilities:

- Competitive pressures in the prerecorded music retailing industry may
increase significantly.

- Our operating results depend heavily on fourth quarter sales.

- The prerecorded music retailing industry's dependence on hit releases can
create cyclical trends that do not necessarily reflect general trends in
the economy.

- Costs or difficulties related to the integration of our businesses may be
greater than expected.

- Regulatory changes, including the investigation of minimum advertised
pricing guidelines by the FTC, may adversely affect the business in which
we are engaged.

- The proliferation of new entertainment technologies has intensified the
competition among various entertainment alternatives for consumer
entertainment spending.

- Changes in technology, including the possible expansion of the
availability of music on the Internet, as well as the sale of CDs through
the Internet, may reduce demand for the products we sell or change the way
our products are purchased.

- The absence of long term contracts with suppliers and potential supplier
consolidation may adversely affect the business of the combined entities.

Because of risks and uncertainties, actual results may differ materially
from those expressed or implied by these forward-looking statements. You should
not place too much reliance on these forward-looking statements, which speak
only as of the date of this joint proxy statement/prospectus.

You should consider the cautionary statements contained in this section when
evaluating any forward-looking statements that we may make. Neither Trans World
nor Camelot has any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date of
this joint proxy statement/prospectus or to reflect the occurrence of
unanticipated events.

17
<PAGE>
COMPARATIVE PER SHARE DATA

The following table shows information regarding earnings, dividends and book
value per share for each of Trans World common stock and Camelot common stock on
a historical basis and a historical pro forma equivalent basis for Camelot
stockholders after applying the exchange ratio of 1.9 shares of Trans World
common stock for each share of Camelot common stock. All Trans World common
stock information has been adjusted to reflect a two-for-one stock split
effected on December 15, 1997 and a three-for-two stock split effected on
September 15, 1998. You should read the table together with the historical
consolidated financial statements of Camelot and Trans World included in this
joint proxy statement/prospectus.

<TABLE>
<CAPTION>
AT OR FOR THE
END OF THE
THIRD FISCAL AT OR FOR
QUARTER IN -------------------------------------
FISCAL 1998 FISCAL 1995 FISCAL 1996 FISCAL 1997
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>

TRANS WORLD HISTORICAL (UNAUDITED)

Earnings per share--basic.................... $ 0.30 $ (0.82) $ 0.24 $ 0.70

Earnings per share--diluted.................. 0.29 (0.82) 0.24 0.66

Cash dividends declared per share............ -- -- -- --

Book value per share......................... 5.31 4.20

CAMELOT HISTORICAL (UNAUDITED) (A)

Earnings per share--basic.................... $ 0.61 -- -- 0.05

Earnings per share--diluted.................. 0.60 -- -- 0.05

Cash dividends declared per share............ -- -- -- --

Book value per share......................... 20.14 19.16

HISTORICAL TRANS WORLD
PRO FORMA EQUIVALENT FOR
CAMELOT STOCKHOLDERS (UNAUDITED) (A)

Earnings per share--basic.................... $ 0.31 $ (0.82) $ 0.24 $ 0.68

Earnings per share--diluted.................. 0.30 (0.82) 0.24 0.65

Cash dividends declared per share............ -- -- -- --
Book value per share......................... 7.11 6.52
</TABLE>

- ------------------------

(a) Financial data for Camelot for periods prior to the adoption of fresh-start
reporting on January 31, 1998 is not included in the historical or pro forma
information because an entity adopting fresh-start reporting is analogous to
a newly incorporated enterprise for financial reporting purposes.
Accordingly, for these purposes, Camelot did not exist prior to January 31,
1998. Camelot's earnings per share for fiscal 1997 represents results for
the one-month period ended February 28, 1998.

18
<PAGE>
MARKET PRICE, DIVIDEND AND STOCKHOLDER INFORMATION

Trans World common stock is quoted on Nasdaq under the symbol "TWMC."
Camelot common stock is quoted on OTC under the symbol "CMHDA." The table below
shows, for the calendar quarters indicated, the high and low closing sales
prices per share of Trans World common stock as reported on Nasdaq and Camelot
common stock as reported OTC. The table also shows the dividends per share
declared on Trans World common stock and Camelot common stock. All Trans World
common stock information has been adjusted to reflect a two-for-one stock split
effected on December 15, 1997 and a three-for-two stock split effected on
September 15, 1998. Camelot's common stock commenced trading on OTC on February
23, 1998.

<TABLE>
<CAPTION>
TRANS WORLD CAMELOT
COMMON STOCK COMMON STOCK
--------------------------------- -----------------------------------
HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
--------- --------- ----------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>

1995:

First Quarter.......................... $ 2.67 $ 1.50 -- -- -- --

Second Quarter......................... 1.75 1.17 -- -- -- --

Third Quarter.......................... 1.75 1.08 -- -- -- --

Fourth Quarter......................... 1.33 0.58 -- -- -- --

1996:

First Quarter.......................... $ 1.17 $ 0.63 -- -- -- --

Second Quarter......................... 2.27 1.02 -- -- -- --

Third Quarter.......................... 2.42 1.60 -- -- -- --

Fourth Quarter......................... 2.92 2.04 -- -- -- --

1997:

First Quarter.......................... $ 4.13 $ 2.08 -- -- -- --

Second Quarter......................... 6.00 3.50 -- -- -- --

Third Quarter.......................... 9.17 5.58 -- -- -- --

Fourth Quarter......................... 13.00 8.95 -- -- -- --

1998:

First Quarter.......................... $ 19.50 $ 13.58 -- $ 41.00 $ 33.00 --

Second Quarter......................... 28.75 17.50 -- 42.50 35.00 --

Third Quarter.......................... 29.58 11.33 -- 43.50 25.75 --

Fourth Quarter......................... 24.38 15.25 -- 44.00 24.50 --

1999:

First Quarter (through March 26,
1999)................................ $ 18.19 $ 10.75 -- $ 31.00 $ 18.75 --
</TABLE>

19
<PAGE>
DIVIDEND INFORMATION

Following the merger, the holders of Trans World common stock will be
entitled to receive such dividends as may be declared by the board of directors
of Trans World. However, if Trans World issues preferred stock, holders of
common stock will not receive any dividends until all dividends are paid in full
to holders of preferred stock. Currently, there are no outstanding shares of
Trans World preferred stock. See "Description of Trans World Capital
Stock--Preferred Stock."

RECENT CLOSING PRICES

The following table shows the closing sales prices per share of Trans World
common stock on Nasdaq and Camelot common stock on OTC on October 23, 1998, the
last trading day before announcement of the execution of the merger agreement,
and on March 26, 1999, the last trading day before the date of this joint proxy
statement/prospectus.

<TABLE>
<CAPTION>
TRANS WORLD CAMELOT
COMMON STOCK COMMON STOCK
-------------- --------------
<S> <C> <C>

October 23, 1998.................................................................. $ 20.63 $ 24.50

March 26, 1999.................................................................... $ 11.13 $ 21.50
</TABLE>

BECAUSE THE MARKET PRICE OF TRANS WORLD COMMON STOCK FLUCTUATES, THE MARKET
VALUE OF THE SHARES OF TRANS WORLD COMMON STOCK THAT CAMELOT STOCKHOLDERS WILL
RECEIVE IN THE MERGER MAY INCREASE OR DECREASE FOLLOWING THE MERGER. CAMELOT
STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR TRANS WORLD
COMMON STOCK AND CAMELOT COMMON STOCK. WE CANNOT ASSURE YOU AS TO THE FUTURE
PRICES OR MARKETS FOR TRANS WORLD COMMON STOCK OR CAMELOT COMMON STOCK.

NUMBER OF STOCKHOLDERS

As of March 3, 1999 there were approximately 4,800 stockholders of record
who held shares of Trans World common stock, as shown on the records of Trans
World's transfer agent.

As of March 15, 1999, there were 688 stockholders of record who held shares
of Camelot common stock, as shown on the records of Camelot's transfer agent.

20
<PAGE>
THE TRANS WORLD SPECIAL MEETING

GENERAL

Trans World is furnishing this joint proxy statement/prospectus to its
stockholders as part of its solicitation of proxies for use at a special meeting
of Trans World stockholders to be held at the offices of Trans World, located at
38 Corporate Circle, Albany, New York, at 8:00 a.m. on April 22, 1999. This
joint proxy statement/prospectus is first being mailed to the Trans World
stockholders on or about March 31, 1999. Each copy of this joint proxy
statement/prospectus mailed to Trans World stockholders is accompanied by a
notice of the Trans World special meeting and a form of proxy for use at the
Trans World special meeting.

PURPOSE OF THE TRANS WORLD SPECIAL MEETING

Trans World stockholders will be asked to consider and vote upon:

1. A proposal to amend Trans World's certificate of incorporation to
increase the number of authorized shares of Trans World common stock, par
value $.01 per share, from 50,000,000 to 200,000,000.

2. A proposal to authorize the issuance of up to 20,685,608 shares of Trans
World common stock in connection with the merger.

3. A proposal to elect Michael B. Solow and George R. Zoffinger to Trans
World's board of directors, effective upon completion of the merger.

4. A proposal to amend Trans World's certificate of incorporation to adopt
a classified board of directors.

Trans World stockholders will also be asked to vote upon such other business as
may properly come before the Trans World special meeting.

Proposals 1, 2 and 3 relate to the Agreement and Plan of Merger, dated as of
October 26, 1998, by and among Trans World, CAQ Corporation, a Delaware
corporation and a wholly owned subsidiary of Trans World, and Camelot Music
Holdings, Inc., a Delaware corporation, under which CAQ will merge into Camelot
upon the terms and conditions of the merger agreement. We refer to proposals 1,
2 and 3 as the Trans World merger matters. A copy of the merger agreement is
included as Annex A. The merger is conditioned upon the approval of the Trans
World merger matters. The merger is not conditioned upon the approval of the
classified board amendment. If the classified board amendment is approved, it
will be adopted whether or not the Trans World merger matters are approved and
the merger is consummated.

CLASSIFIED BOARD AMENDMENT

If the Trans World stockholders adopt the classified board amendment, the
Trans World certificate of incorporation will classify the Trans World board
into three classes. The members of each class of directors will serve for
staggered three-year terms. Trans World's current directors will be classified
as follows: the class 1 directors will be George W. Dougan, Martin E. Hanaka,
Isaac Kaufman and George R. Zoffinger, the class 2 directors will be Dean S.
Adler, Charlotte G. Fischer and Michael B. Solow and the class 3 directors will
be Robert J. Higgins, Matthew H. Mataraso and Joseph G. Morone. The terms of
classes 1, 2 and 3 will expire upon the election and qualification of directors
at the annual meeting of Trans World stockholders held in 1999, 2000 and 2001,
respectively. Commencing with the 1999 annual meeting of Trans World
stockholders, the class of directors whose term is expiring will be elected for
a full term of three years.

21
<PAGE>
ELECTION OF DIRECTORS

Trans World has agreed to increase the size of its board to add two
directors selected by the current board of directors of Camelot. Accordingly,
prior to the Trans World special meeting, the Trans World board will fix the
number of directors at ten, resulting in two vacancies. Mr. Solow and Mr.
Zoffinger are the Camelot board's nominees. If the classified board amendment is
adopted and Mr. Solow and Mr. Zoffinger are elected as directors of Trans World,
Mr. Solow will be a class 2 director and Mr. Zoffinger will be a class 1
director. The following table sets forth the names and ages as of January 15,
1999 of the Camelot board's nominees.

<TABLE>
<CAPTION>
NAME OF NOMINEE AGE
- ------------------------------------------------ ---
<S> <C>
Michael B. Solow 40
George R. Zoffinger 50
</TABLE>

MICHAEL B. SOLOW has served as a director of Camelot since March 1998. Mr.
Solow is currently a partner and Practice Manager for the Financial Services
Practice at Hopkins & Sutter, a Chicago, Illinois law firm where he has
practiced since 1985. Mr. Solow is also a member of the board of directors for
Chrisken Residential Trust, Inc. and Edwards Arts Products, and has previously
served on other corporate boards.

GEORGE R. ZOFFINGER has served as a director of Camelot since January 1998.
He has been President and Chief Executive Officer of Constellation Capital Corp.
since March 1998. Mr. Zoffinger served as President, Chief Executive Officer and
director of Value Property Trust from 1995 until that company was purchased by
Wellsford Real Properties, Inc. in March 1998. Mr. Zoffinger served as Chairman
of the Board of CoreStates New Jersey National Bank from 1994 through its merger
into CoreStates Bank, N.A. in 1996. From 1991 through 1994, he served as
President and Chief Executive Officer of Constellation Bancorp and its principal
subsidiary, Constellation Bank, N.A. Mr. Zoffinger is also a member of the board
of directors of NJ Resources, Inc.

INDEPENDENT ACCOUNTANTS

The Trans World board has selected KPMG LLP as independent auditors for
Trans World for the fiscal year ending January 30, 1999. KPMG has acted as
auditors for Trans World since 1994, when KPMG purchased the Albany practice of
Ernst & Young LLP, Trans World's auditors since 1985. Representatives of KPMG
will be present at the Trans World special meeting and available to answer
stockholder questions.

RECORD DATE; QUORUM; VOTING

Trans World has fixed the close of business on March 3, 1999 as the record
date for the Trans World special meeting. Only holders of Trans World shares of
record at the close of business on the Trans World record date are entitled to
notice of and to vote at the Trans World special meeting.

At the Trans World special meeting, the inspectors of election appointed by
the Trans World board will determine the presence of a quorum and will tabulate
the results of voting. Holders of a majority of the outstanding Trans World
shares entitled to vote at the special meeting must be present, either in person
or by proxy, at the Trans World special meeting and any adjournments or
postponements to constitute a quorum. Abstentions and broker non-votes will be
counted as present or represented for the purposes of determining a quorum for
the Trans World special meeting and any adjournments or postponements.

As of the Trans World record date, there were 32,754,236 Trans World shares
outstanding, held by approximately 4,800 holders of record, constituting all of
the Trans World shares entitled to vote at the

22
<PAGE>
Trans World special meeting. Each Trans World share entitles its holder to one
vote. Proposals 1 and 4 each requires the approval of a majority of the
outstanding shares of Trans World common stock. Accordingly, a total of
16,377,119 Trans World shares are required to be voted in favor of proposals 1
and 4 to approve such proposals. Proposal 2 requires the approval of a majority
of the shares represented at the special meeting. Under Proposal 3, the two
candidates who receive the highest number of votes will become directors, but
only if the merger is completed.

Abstentions and broker non-votes will have the same effect as a vote against
proposals 1, 2 and 4, and will have no effect on the vote required for the
approval of proposal 3. ACCORDINGLY, THE TRANS WORLD BOARD URGES THE TRANS WORLD
STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED, POSTAGE-PREPAID ENVELOPE.

Robert J. Higgins has agreed with Camelot to vote his Trans World shares in
favor of the Trans World merger matters. See "Other Agreements--The Higgins
Voting Agreement." Mr. Higgins also intends to vote in favor of the classified
board amendment. In addition, Trans World believes that each of the directors
and executive officers of Trans World intends to vote in favor of the Trans
World merger matters and the classified board amendment. As of the record date,
Mr. Higgins and the other directors and executive officers collectively owned
12,015,817 Trans World shares. Accordingly, assuming Mr. Higgins and the other
directors and officers vote as intended, approval of proposals 1 and 4 requires
the affirmative vote of an additional 4,361,302 Trans World shares, and approval
of proposal 2 requires the affirmative vote of a maximum of 4,361,302 additional
Trans World shares.

REVOCATION OF PROXIES

Any person who signs and mails the enclosed proxy may revoke it at any time
before it is voted by:

- giving written notice of revocation to Trans World,

- mailing a later-dated proxy that is received by Trans World prior to the
Trans World special meeting, or

- voting in person at the Trans World special meeting.

All written notices of revocation and other communications with respect to
revocation of Trans World proxies should be addressed to:

Trans World Entertainment Corporation
38 Corporate Circle
Albany, New York 12203
Attention: Corporate Secretary

All Trans World shares represented by valid proxies received pursuant to
this solicitation and not revoked before they are exercised will be voted in the
manner specified in those proxies. If no specification is made, a proxy will be
voted "FOR" approval of the Trans World merger matters and the classified board
amendment.

NO DISSENTERS' RIGHTS OF APPRAISAL

Trans World stockholders have no dissenters' rights of appraisal in
connection with the merger.

EXPENSES OF SOLICITATION

Trans World will pay the expenses of the solicitation of proxies with
respect to the Trans World special meeting. In addition to solicitation by mail,
Trans World will make arrangements with brokers and other custodians, nominees
and fiduciaries to send proxy materials to their principals, and Trans World
will, upon request, reimburse them for reasonable expenses of so doing. Trans
World's officers,

23
<PAGE>
directors and employees may also solicit proxies from some Trans World
stockholders by telephone, facsimile or in person after the initial
solicitation.

RECOMMENDATION OF THE TRANS WORLD BOARD

THE TRANS WORLD BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
APPROVED THE TRANS WORLD MERGER MATTERS AND THE CLASSIFIED BOARD AMENDMENT AND
HAS DETERMINED THAT THE TRANS WORLD MERGER MATTERS AND THE CLASSIFIED BOARD
AMENDMENT ARE ADVISABLE AND FAIR TO, AND IN THE BEST INTERESTS OF, THE TRANS
WORLD STOCKHOLDERS. ACCORDINGLY, THE TRANS WORLD BOARD UNANIMOUSLY RECOMMENDS
THAT TRANS WORLD STOCKHOLDERS VOTE "FOR" APPROVAL OF THE TRANS WORLD MERGER
MATTERS AND "FOR" APPROVAL OF THE CLASSIFIED BOARD AMENDMENT.

MISCELLANEOUS

Trans World does not expect that any other matters will be presented for
action at the Trans World special meeting. If any other matters are properly
brought before the Trans World special meeting, including a motion to adjourn or
postpone the Trans World special meeting to another time and/or place, the
persons named on the accompanying form of proxy will vote the shares represented
by the proxy upon those matters in their discretion. However, if Trans World
proposes to adjourn or postpone the Trans World special meeting for the purpose
of soliciting additional votes in favor of the Trans World merger matters or the
classified board amendment, no proxy that is voted against or abstains from the
Trans World merger matters or the classified board amendment will be voted in
favor of the adjournment or postponement. Any other proxy will be deemed to have
voted "FOR" the adjournment or postponement proposal. Following the postponement
or adjournment of the Trans World special meeting, all proxies will be voted in
the same manner as such proxies would have been voted when the Trans World
special meeting was originally convened, except for proxies effectively revoked
or withdrawn prior to the time proxies are voted at the reconvened special
meeting.

TRANS WORLD STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH
THEIR PROXIES. TRANS WORLD COMMON STOCK WILL REMAIN OUTSTANDING AFTER THE MERGER
AND TRANS WORLD STOCKHOLDERS WILL NOT EXCHANGE THEIR STOCK CERTIFICATES IN
CONNECTION WITH THE MERGER.

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<PAGE>
THE CAMELOT SPECIAL MEETING

GENERAL

Camelot is furnishing this joint proxy statement/prospectus to its
stockholders as part of its solicitation of proxies for use at a special meeting
of Camelot stockholders to be held at the offices of Cleary, Gottlieb, Steen &
Hamilton, located at One Liberty Plaza, New York, New York, at 10:00 a.m. on
April 22, 1999. This joint proxy statement/prospectus is first being mailed to
the Camelot stockholders on or about March 31, 1999. Each copy of this joint
proxy statement/prospectus mailed to Camelot stockholders is accompanied by the
notice of the Camelot special meeting and a form of proxy for use at the Camelot
special meeting.

PURPOSE OF THE CAMELOT SPECIAL MEETING

Camelot stockholders will be asked to consider and vote upon a proposal to
adopt the merger agreement. Camelot stockholders will also be asked to vote upon
such other business as may properly come before the Camelot special meeting and
any adjournments or postponements.

RECORD DATE; QUORUM; VOTING

Camelot has fixed the close of business on March 15, 1999 as the record date
for the Camelot special meeting. Only holders of shares of Camelot common stock
of record at the close of business on the Camelot record date are entitled to
notice of and to vote at the Camelot special meeting and any adjournments or
postponements.

At the Camelot special meeting, the inspectors of election appointed by the
Camelot board will determine the presence of a quorum and will tabulate the
results of voting. Holders of a majority of the outstanding Camelot shares
entitled to vote at the special meeting must be present, either in person or by
proxy, at the Camelot special meeting and any adjournments or postponements to
constitute a quorum. Abstentions and broker non-votes will be counted as present
or represented for the purposes of determining a quorum for the Camelot special
meeting and any adjournments or postponements.

As of the Camelot record date, there were 10,180,431 Camelot shares
outstanding, held by 688 holders of record, constituting all of the Camelot
shares entitled to vote at the Camelot special meeting. Each Camelot share
entitles its holder to one vote. Adoption of the merger agreement requires the
affirmative vote by the holders of at least a majority of the Camelot shares
outstanding and entitled to vote as of the Camelot record date. Accordingly, a
total of 5,090,216 Camelot shares are required to be voted in favor of the
merger agreement in order for the merger agreement to be adopted by the Camelot
stockholders.

Abstentions and broker non-votes will have the same effect as a vote against
the merger agreement and the merger. ACCORDINGLY, THE CAMELOT BOARD URGES THE
CAMELOT STOCKHOLDERS TO COMPLETE, DATE AND SIGN THE ACCOMPANYING PROXY AND
RETURN IT PROMPTLY IN THE ENCLOSED, POSTAGE-PREPAID ENVELOPE.

Van Kampen-Merritt Prime Rate Income Trust, Fernwood Associates, L.P. and
certain of its affiliates, Merrill Lynch and Oaktree Capital Management, LLC
have each agreed with Trans World to vote its Camelot shares in favor of the
merger agreement. These stockholders collectively own 58.4% of the outstanding
shares of Camelot common stock. Accordingly, Camelot stockholder adoption of the
merger agreement is assured without regard to the vote of other Camelot
stockholders. See "Other Agreements--The Camelot Voting Agreement."

25
<PAGE>
REVOCATION OF PROXIES

Any person who signs and returns the enclosed proxy may revoke it at any
time before it is voted by:

- giving written notice of revocation to Camelot,

- mailing a later-dated proxy that is received by Camelot prior to the
Camelot special meeting, or

- voting in person at the Camelot special meeting.

All written notices of revocation and other communications with respect to
revocation of Camelot proxies should be addressed to:

Camelot Music Holdings, Inc.
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: Corporate Secretary

All Camelot shares represented by valid proxies received pursuant to this
solicitation and not revoked before they are exercised will be voted in the
manner specified in those proxies. If no specification is made, the proxies will
be voted "FOR" adoption of the merger agreement.

DISSENTERS' RIGHTS OF APPRAISAL

If the merger is completed, Camelot stockholders who do not vote for the
adoption of the merger agreement and who otherwise comply with the procedures of
Section 262 of the Delaware General Corporation Law will be entitled to
appraisal rights under Delaware law. See "The Merger--Appraisal Rights of
Camelot Stockholders."

EXPENSES OF SOLICITATION

Camelot will pay the expenses of the solicitation of proxies with respect to
the Camelot special meeting. In addition to solicitation by mail, Camelot will
make arrangements with brokers and other custodians, nominees and fiduciaries to
send proxy materials to their principals, and Camelot will, upon request,
reimburse them for reasonable expenses of so doing. Camelot has also made
arrangements with Beacon Hill Partners, Inc. to assist in soliciting proxies
from banks, brokers, bank nominees and institutional holders and has agreed to
pay approximately $5,000 plus expenses for these services. Camelot's officers,
directors and employees may also solicit proxies from some Camelot stockholders
by telephone, facsimile or in person after the initial solicitation.

RECOMMENDATION OF THE CAMELOT BOARD

THE CAMELOT BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT AND
DETERMINED THAT THE MERGER AGREEMENT IS ADVISABLE AND FAIR TO, AND IN THE BEST
INTERESTS OF, THE CAMELOT STOCKHOLDERS. ACCORDINGLY, THE CAMELOT BOARD
UNANIMOUSLY RECOMMENDS THAT CAMELOT STOCKHOLDERS VOTE "FOR" ADOPTION OF THE
MERGER AGREEMENT.

MISCELLANEOUS

Camelot does not expect that any other matters will be presented for action
at the Camelot special meeting. If any other matters are properly brought before
the Camelot special meeting, including a motion to adjourn or postpone the
Camelot special meeting to another time and/or place, the persons named on the
accompanying form of proxy will vote the shares represented by the proxy upon
the matters in their discretion. However, if Camelot proposes to adjourn or
postpone the Camelot special meeting for the purpose of soliciting additional
votes in favor of the merger agreement, no proxy that

26
<PAGE>
is voted against or abstains from the merger agreement will be voted in favor of
the adjournment or postponement. Any other proxy will be deemed to have voted
"FOR" the adjournment or postponement proposal. Following a postponement or
adjournment of the Camelot special meeting, all proxies will be voted in the
same manner as they would have been voted when the Camelot special meeting was
originally convened, except for proxies effectively revoked or withdrawn prior
to the time proxies are voted at the reconvened Camelot special meeting.

CAMELOT STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR
PROXIES. CAMELOT COMMON STOCK CERTIFICATES WILL BE EXCHANGED FOR CERTIFICATES
REPRESENTING TRANS WORLD SHARES FOLLOWING CONSUMMATION OF THE MERGER IN
ACCORDANCE WITH INSTRUCTIONS THAT WILL BE SENT TO ALL CAMELOT STOCKHOLDERS OF
RECORD BY CHASEMELLON SHAREHOLDER SERVICES L.L.C., AS EXCHANGE AGENT.

27
<PAGE>
THE MERGER

BACKGROUND TO THE MERGER

In 1993, an investor group led by a private investment firm and members of
Camelot's current management acquired Camelot in a highly leveraged transaction.
As a result of this acquisition, Camelot had significant debt service
obligations. These debt service obligations and deteriorating profitability in
the music retail industry in the early to mid-1990s impaired Camelot's operating
and financial condition and led Camelot to file a voluntary bankruptcy petition
in August 1996. Beginning in March 1997, representatives of Camelot's creditors
committee contacted several industry participants regarding the possible sale of
the Camelot business. Trans World participated in this process. On May 5, 1997,
Trans World submitted a proposal to acquire the outstanding claims of Camelot's
creditors. The creditors committee declined to pursue the Trans World proposal.
On October 22, 1997, Trans World submitted a proposal to acquire Camelot to the
creditors committee. The creditors committee rejected Trans World's proposal.

The United States Bankruptcy Court for the District of Delaware confirmed
Camelot's joint plan of reorganization on December 12, 1997. The plan of
reorganization became effective on January 27, 1998. Under the plan of
reorganization, Camelot's creditors exchanged substantially all pre-petition
claims against Camelot for shares of Camelot common stock. All pre-petition
ownership interests in Camelot were canceled.

On June 15, 1998, Camelot filed a registration statement with the Commission
for a proposed initial public offering of Camelot common stock. One of the
objectives of this offering was to provide increased liquidity for Camelot
stockholders. During August 1998, United States securities markets experienced a
significant correction. The correction adversely affected the market prices of
music retailers' stocks and the market for new issues of securities. The Camelot
board, in consideration of this reduced prospect for a successful initial public
offering and its continued desire to increase liquidity for Camelot
stockholders, decided to indefinitely postpone Camelot's proposed public
offering in favor of pursuing a strategic combination.

At a meeting held on August 17, 1998, the Camelot board determined to
initiate a dialogue with Trans World concerning a possible strategic transaction
with Camelot. In considering whether to contact Trans World, the Camelot board
considered the limited number of potentially viable strategic partners. Based on
publicly available information and its knowledge of the industry, the Camelot
board concluded that, except for Trans World, none of the potential strategic
partners offered the synergies and had the financial or operational strength
necessary for a successful business combination. The Camelot board determined
that Trans World could offer the Camelot stockholders the superior current
value, potential for long-term growth and enhanced liquidity that the Camelot
board required as a condition to any business combination. Accordingly, the
Camelot board determined to contact only Trans World regarding a potential
strategic partnership and delegated the authority to initiate this dialogue to
the executive committee of the Camelot board. The executive committee of the
Camelot board is comprised of Michael B. Solow, George R. Zoffinger, James E.
Bonk and Jack K. Rogers.

At the August 17 meeting, the Camelot board also discussed retaining Merrill
Lynch and Policano & Manzo LLC to serve as Camelot's co-financial advisors.
Merrill Lynch had served as the lead manager of Camelot's proposed public
offering and Policano & Manzo had provided financial and operational advice to
Camelot during and subsequent to the bankruptcy proceedings. The Camelot board
delegated to the executive committee the authority to manage the engagement of
these firms.

In mid-August 1998, Robert J. Higgins, Trans World's Chairman, President and
Chief Executive Officer, made a presentation to the Trans World board concerning
the possibility of a merger with Camelot. Mr. Higgins observed that
deteriorating public equity market conditions would likely cause an indefinite
postponement of Camelot's plans for an initial public offering and that a stock
for stock

28
<PAGE>
merger would be attractive to Camelot stockholders seeking liquidity. Based on
publicly available information and his knowledge of the industry, Mr. Higgins
informed the board that a merger with Camelot might further Trans World's growth
strategy with minimal overlapping stores. The Trans World board decided to
retain Goldman Sachs to serve as its financial advisor to assist in approaching
Camelot about the possibility of a merger. The Trans World board delegated to
Mr. Higgins the authority to manage the engagement of Goldman Sachs.

On August 19, 1998, prior to Trans World approaching Camelot, the Camelot
executive committee instructed Policano & Manzo to contact Mr. Higgins
concerning a strategic transaction with Camelot. A representative of Policano &
Manzo contacted Mr. Higgins and arranged for a meeting on Tuesday, August 25,
1998 in New York City.

On August 25, 1998, Messrs. Bonk and Solow, together with Merrill Lynch and
Policano & Manzo, met with Mr. Higgins and John J. Sullivan, Trans World's Chief
Financial Officer, and Goldman Sachs to discuss Trans World's interest in
Camelot and the basis on which Camelot was willing to proceed with discussions.
Camelot's representatives requested Mr. Higgins to determine whether Trans World
had an interest in a business combination and, if so, to submit an indication of
interest based on publicly available information concerning Camelot.

On August 31, 1998, Trans World submitted a written offer to exchange 1.5
Trans World shares for each Camelot share, pro forma for Trans World's
three-for-two stock split declared on August 11, 1998. The Camelot board
considered Trans World's preliminary proposal at a meeting held on September 1,
1998 and determined, in consultation with its financial advisors, to reject the
preliminary proposal because the consideration was insufficient. Later that day,
Merrill Lynch informed Goldman Sachs of the Camelot board's decision.

On September 11, 1998, Goldman Sachs indicated that Trans World might be
able to revise its offer if Trans World was provided with additional information
concerning Camelot's historical and projected operations and financial results.
Based on this indication, Camelot agreed to a limited due diligence meeting.
Trans World and Camelot later entered into reciprocal confidentiality agreements
dated September 22, 1998 and September 25, 1998 containing customary terms
relating to the exchange of confidential information in connection with the
possible business combination.

On September 28, 1998, Messrs. Bonk and Rogers, Lee Ann Thorn, Camelot's
Chief Financial Officer, Merrill Lynch and Policano & Manzo, Messrs. Higgins and
Sullivan and Goldman Sachs met to review the historical and projected financial
results of the two companies, as well as their relative financial contributions
to a combined enterprise. At a meeting of Merrill Lynch, Policano & Manzo and
Goldman Sachs on October 1, 1998, Goldman Sachs presented Trans World's revised
proposal for a strategic combination and an offer of 1.7 Trans World shares for
each Camelot share.

The Camelot board considered Trans World's October 1 proposal at a meeting
held on October 6, 1998. The Camelot board authorized its financial advisors to
make a counter offer of 2.25 Trans World shares for each Camelot share.

On October 12, 1998, Messrs. Higgins and Sullivan and Goldman Sachs met with
Messrs. Solow, Zoffinger, Bonk and Rogers and Merrill Lynch and Policano & Manzo
to present Trans World's strategic plan for a business combination with Camelot.

On October 14, 1998, Goldman Sachs met with Merrill Lynch and discussed a
counter offer of 1.85 Trans World shares for each Camelot share.

On October 19, 1998, Messrs. Solow and Higgins conducted further
negotiations at Trans World's corporate headquarters in Albany, New York,
concerning the exchange ratio for a possible transaction. After negotiations,
Messrs. Solow and Higgins tentatively arrived at 1.9 shares of Trans World
common stock per share of Camelot common stock as the basis for a strategic
combination. The Camelot board met on October 20, 1998 and, after consulting
with its financial advisors, determined that an exchange

29
<PAGE>
ratio of 1.9 formed the basis for further negotiations and authorized
representatives of Camelot to negotiate definitive terms and resolve outstanding
issues.

Over the next week, Merrill Lynch, Policano & Manzo, Cleary, Gottlieb, Steen
& Hamilton and Calfee, Halter & Griswold LLP for Camelot and Goldman Sachs and
Cahill Gordon & Reindel for Trans World negotiated the terms of definitive
acquisition documents, exchanged drafts and conducted further reciprocal due
diligence. The principal negotiated terms were registration rights, employee
benefits, the number of Trans World directors to be selected by the Camelot
board, the employee retention program and the break up fees. On October 22,
1998, Mr. Rogers and Ms. Thorn of Camelot and Messrs. Higgins and Sullivan of
Trans World, as well as their financial advisors, met in New York City to
conduct further business and financial due diligence. On October 22 and 23,
1998, Camelot's legal advisors in Cleveland, Ohio, Calfee Halter, conducted due
diligence on Trans World at the corporate headquarters of Trans World in Albany,
New York, and Trans World's legal advisors, Cahill Gordon, conducted due
diligence on Camelot at the offices of Calfee Halter.

The Trans World board met on October 22, 1998 and reviewed the developments
that had taken place in negotiations with Camelot and consulted with its legal
and financial advisors. In addition, Cahill Gordon reviewed the terms of the
proposed merger agreement and the principal issues being negotiated.

The Camelot board met on October 23, 1998 to review the developments that
had taken place in negotiations with Trans World and consult with its legal and
financial advisors. Merrill Lynch and Policano & Manzo discussed the financial
terms of the proposed transaction and presented analyses thereof. Merrill Lynch
also indicated that, subject to the negotiation of definitive agreements, it was
prepared to render its opinion that the proposed exchange ratio of 1.9 was fair
from a financial point of view to the Camelot stockholders. In addition, Calfee
Halter and Cleary Gottlieb reviewed the terms of the proposed merger agreement
and the status of, and principal issues being negotiated in respect of, other
principal documents. The Camelot board also preliminarily approved an employee
retention program providing for a retention pool of up to $3.75 million for
Camelot executives, managers and other employees, which is described below under
"--Conflicts of Interests--Employee Retention Program," subject to discussions
with Trans World.

Negotiations on the merger agreement and related transaction documents
continued during the period from October 23 through October 25, 1998.

The Trans World board met again on October 25, 1998 and reviewed the status
of negotiations with its financial and legal advisors. At this meeting, Goldman
Sachs expressed its opinion that, as of the date of the meeting and subject to
the successful negotiation of the merger agreement and certain other factors,
the exchange ratio of 1.9 shares of Trans World common stock per share of
Camelot common stock was fair from a financial point of view to Trans World. See
"--Opinion of Financial Advisor to Trans World" and the full text of the written
opinion of Goldman Sachs attached as Annex G. In addition, Cahill Gordon
reviewed the resolution of open matters previously discussed at the October 22,
1998 meeting and other remaining legal matters. After due consideration of these
matters, the Trans World board unanimously determined that the Trans World
merger matters are advisable and fair to, and in the best interests of, the
Trans World stockholders and approved the merger.

The Camelot board met again on October 25, 1998 and reviewed the status of
negotiations with its financial and legal advisors. At this meeting, Merrill
Lynch expressed its opinion that, as of the date of the meeting and based upon
and subject to the matters reviewed with the Camelot board, the exchange ratio
of 1.9 shares of Trans World common stock per share of Camelot common stock was
fair from a financial point of view to the Camelot stockholders. In addition,
Calfee Halter and Cleary Gottlieb reviewed the resolution of open matters
previously discussed at the October 23, 1998 meeting and

30
<PAGE>
other remaining legal matters. After due consideration of these matters, the
Camelot board unanimously determined that the merger agreement is advisable and
fair to, and in the best interests of, the Camelot stockholders and adopted the
merger agreement.

Camelot and Trans World executed the merger agreement and the other related
definitive documents on October 26, 1998. In addition, certain Camelot and Trans
World stockholders, directors and executive officers simultaneously executed
related transaction documents described in greater detail below. See "--Resale
of Trans World Common Stock" and "Other Agreements." Following the execution of
the merger agreement on October 26, 1998, Camelot and Trans World issued a joint
press release announcing the execution of the merger agreement.

RECOMMENDATIONS OF THE TRANS WORLD BOARD; REASONS FOR THE MERGER AND THE
CLASSIFIED BOARD AMENDMENT

TRANS WORLD MERGER MATTERS. At a meeting of the Trans World board held on
October 25, 1998, the Trans World board determined that the merger agreement is
advisable and fair to, and in the best interests of, the Trans World
stockholders. Accordingly, the Trans World board unanimously adopted the merger
agreement and unanimously recommends that the Trans World stockholders approve
the Trans World merger matters.

In reaching its decision to adopt the merger agreement and to recommend
approval of the Trans World merger matters by the Trans World stockholders, the
Trans World board consulted with Trans World's management and Trans World's
financial and legal advisors, and considered the following material factors:

- the financial presentation and oral opinion of Goldman Sachs given at the
Trans World board meeting on October 25, 1998, confirmed in writing on
October 26, 1998 that, based upon the factors set forth in its written
opinion, as of the date of its written opinion attached as Annex G, the
exchange ratio is fair, from a financial point of view, to Trans World;

- the combined companies would have increased buying power with vendors;

- the strategic fit between Camelot and Trans World, including the
opportunity for synergies and cost savings, as well as the challenges
associated with successfully integrating the business, cultures and
managements of two major corporations;

- the merger will create the largest mall-based music retailer based on
store count;

- Trans World and Camelot have minimal store overlap, resulting in a
combination which is almost entirely additive to both companies;

- the potential for appreciation in the value of Trans World common stock as
a result of the merger;

- the expectation based on Institutional Brokers Estimate System estimates
that the transaction would be accretive to earnings per share of Trans
World common stock for the fiscal year ending January 29, 2000;

- the larger market capitalization of the combined companies would benefit
Trans World stockholders by increasing liquidity;

- the provisions of the merger agreement:

- prohibiting Camelot and Trans World from furnishing information to and
participating in negotiations with a third party with respect to an
alternative acquisition transaction unless necessary in the exercise of
the fiduciary obligations of the relevant board under applicable law,
and

31
<PAGE>
- requiring Camelot or Trans World, as the case may be, to pay a
termination fee and reimburse the other party's expenses under certain
circumstances;

- the stated willingness of Camelot stockholders owning, in the aggregate,
58.4% of the outstanding shares of Camelot common stock and of a Trans
World stockholder owning approximately 35.7% of the outstanding shares of
Trans World common stock to enter into voting agreements obligating them
to vote their respective shares in favor of the merger;

- the conditions to each party's obligations to consummate the merger,
including:

- there be no material adverse change in the business, operations,
assets, financial condition or prospects of the other party,

- required stockholder and regulatory approvals be obtained, and

- Trans World's independent certified public accountants deliver a letter
to each party stating that no conditions exist which would preclude
Trans World from being a party to a merger accounted for as a pooling
of interests; and

- the expected treatment of the merger as a pooling of interests for
financial reporting and accounting purposes, thereby not recording
goodwill and the related amortization under the purchase method of
accounting.

The Trans World board also determined that the classified board amendment is
advisable to, and in the best interests of, the Trans World stockholders.
Accordingly, the Trans World board unanimously recommends that the Trans World
stockholders approve the classified board amendment. In reaching its
determination with respect to the classified board amendment and its decision to
recommend approval of the classified board amendment by the Trans World
stockholders, the Trans World board consulted with Trans World's management and
legal advisors, and considered the following material factors:

- a classified board of directors would promote continuity of board
membership and stability of Trans World's management and policies and
would help Trans World retain the services of experienced directors for
more than one year; and

- a classified board of directors would discourage hostile changes of
control and encourage persons seeking to acquire control of Trans World to
initiate such an acquisition through arms length negotiations with the
Trans World board and Trans World management.

The Trans World board also considered that a classified board of directors could
have the effect of entrenching incumbent management and discouraging hostile
changes of control which might be beneficial to Trans World and the Trans World
shareholders. In the view of the Trans World board, however, the benefits of
continuity and stability of the board of directors and management and of
protecting their ability to negotiate the terms of any hostile change of control
outweigh the potential disadvantages of discouraging such changes of control.

The foregoing discussion of the information and factors considered by the
Trans World board is not meant to be exhaustive but is believed to include all
material factors considered by the Trans World board. The Trans World board did
not quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the Trans World merger matters and
the classified board amendment are fair to, and in the best interest of, the
Trans World stockholders and in declaring such proposals to be advisable.
Rather, the Trans World board made its determination based on the total mix of
information available to it, and the judgments of individual directors may have
been influenced to a greater or lesser degree by different factors.

THE TRANS WORLD BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT. THE
TRANS WORLD BOARD HAS DETERMINED AND BELIEVES THAT THE TRANS WORLD MERGER
MATTERS AND THE CLASSIFIED BOARD AMENDMENT ARE ADVISABLE AND FAIR TO, AND IN THE
BEST INTERESTS OF, THE TRANS WORLD STOCKHOLDERS. THE TRANS WORLD

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<PAGE>
BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE TRANS WORLD
MERGER MATTERS AND THE CLASSIFIED BOARD AMENDMENT.

RECOMMENDATIONS OF THE CAMELOT BOARD; REASONS FOR THE MERGER

At a meeting of the Camelot board held on October 25, 1998, the Camelot
board determined that the merger agreement is advisable and fair to, and in the
best interest of, the Camelot stockholders. Accordingly, the Camelot board
unanimously adopted the merger agreement and unanimously recommends that the
Camelot stockholders adopt the merger agreement.

In reaching its decision to approve the merger agreement and to recommend
adoption of the merger agreement by the Camelot stockholders, the Camelot board
consulted with Camelot's management and Camelot's financial and legal advisors,
and considered the following material factors:

- the business, operations, financial condition and earnings of Camelot on a
historical and a prospective basis:

- the financial presentation of Merrill Lynch at the Camelot board meeting
on October 23, 1998 and the oral opinion of Merrill Lynch given at the
Camelot board meeting on October 25, 1998, confirmed in writing on the
same date that, as of the date of the written opinion attached as Annex F,
the exchange ratio is fair, from a financial point of view, to the Camelot
stockholders;

- the Camelot board's knowledge and review, based on presentations by
Merrill Lynch, of

- the business, operations, financial condition and earnings of Trans
World on a historical and a prospective basis and of the combined
company on a pro forma basis,

- the historical stock price performance of Trans World common stock and

- the resulting relative interests of current holders of Camelot common
stock and Trans World common stock in the equity of the combined
company;

- that the value of the exchange ratio, based on the closing price of Trans
World common stock on October 22, 1998, represented an implied premium
over recent market prices of Camelot;

- that the value, as of the effective time of the merger, of the shares of
Trans World common stock to be received in the merger for each share of
Camelot common stock will vary as a result of any changes in the price per
share of Trans World common stock and that any such changes in value as a
result of any increase or decrease in the price per share of Trans World
common stock will not be limited by any "collar" arrangement;

- the strategic fit between Camelot and Trans World, including the
opportunity for synergies and cost savings, as well as the challenges
associated with successfully integrating the businesses, cultures and
managements of two major corporations;

- the merger will create the largest mall-based music retailer based on
store count;

- that Camelot and Trans World have minimal store overlap, resulting in a
combination which is almost entirely additive to both companies;

- that the combined companies would have increased buying power with
vendors;

- that there is substantially more liquidity for Trans World common stock,
which trades on Nasdaq, than for Camelot common stock, which trades on
OTC, and that liquidity should increase due to the larger market
capitalization of the combined companies;

- that Camelot's efforts earlier in 1998 to effect an initial public
offering of its common stock had not been successful and current market
conditions are not favorable for effecting such a public offering;

33
<PAGE>
- the potential for appreciation in the value of Trans World common stock as
a result of the merger and the ability of Camelot stockholders to benefit
from ownership in a higher growth business and to participate in the
enhanced prospects of the combined company as holders of Trans World
common stock;

- the expectation that the transaction would be accretive to earnings per
share of Trans World common stock for the fiscal year ending January 29,
2000;

- the provisions of the merger agreement:

- requiring Camelot or Trans World, as the case may be, to pay a
termination fee and reimburse the other party's expenses under certain
circumstances, and

- protecting severance and other benefits afforded to Camelot employees;

- the other provisions of the merger agreement;

- the stated willingness of certain Camelot stockholders owning, in the
aggregate, 58.4% of the outstanding shares of Camelot common stock and of
a Trans World stockholder owning approximately 35.7% of the outstanding
shares of Trans World common stock to enter into voting agreements
obligating them to vote their respective shares in favor of the merger;

- the conditions to each party's obligation to consummate the merger,
including:

- there be no material adverse change in the business, operations,
assets, financial condition or prospects of the other party,

- required stockholder and regulatory approvals be obtained, and

- the fact that two current directors of Camelot will become Trans World
directors upon consummation of the merger; and

The foregoing discussion of the information and factors considered by the
Camelot board is not meant to be exhaustive but is believed to include all
material factors considered by the Camelot board. The Camelot board did not
quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the merger agreement is fair to,
and in the best interests of, the Camelot stockholders and in declaring the
merger agreement to be advisable. Rather, the Camelot board made its
determination based on the total mix of information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by different factors. In considering the recommendation of the
Camelot board with respect to the merger, Camelot stockholders should be aware
that the interests of certain directors and executive officers with respect to
the merger are or may be different from or in addition to the interests of the
Camelot stockholders generally. The Camelot board was aware of these interests,
and took these interests into account. See "The Merger--Conflicts of Interest."

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<PAGE>
THE CAMELOT BOARD HAS UNANIMOUSLY ADOPTED THE MERGER AGREEMENT. THE CAMELOT
BOARD HAS DETERMINED AND BELIEVES THAT THE MERGER AGREEMENT IS ADVISABLE AND
FAIR TO, AND IN THE BEST INTEREST OF, THE CAMELOT STOCKHOLDERS. THE CAMELOT
BOARD RECOMMENDS THAT YOU VOTE "FOR" THE ADOPTION OF THE MERGER AGREEMENT.

OPINION OF FINANCIAL ADVISOR TO TRANS WORLD

On October 25, 1998, Goldman Sachs delivered its oral opinion to the board
of directors of Trans World that as of the date of its opinion, the exchange
ratio is fair from a financial point of view to Trans World. Goldman Sachs
confirmed its oral opinion by delivery of its written opinion dated as of
October 26, 1998.

The full text of the written opinion of Goldman Sachs dated October 26,
1998, which identifies assumptions made, matters considered and limitations on
the review undertaken in connection with the opinion, is attached as Annex G.
Stockholders of Trans World are urged to, and should, read the opinion in its
entirety.

In connection with its opinion, Goldman Sachs reviewed, among other things:

- the merger agreement;

- the Higgins voting agreement;

- the Camelot voting agreement;

- the registration rights agreement;

- Amendment No. 1 to Camelot's registration statement on Form S-1 dated
August 11, 1998;

- the annual reports to stockholders and annual reports on Form 10-K of
Trans World for the five years ended January 31, 1998;

- interim reports to stockholders of Trans World and Camelot and quarterly
reports on Form 10-Q of Trans World;

- other communications from Trans World and Camelot to their respective
stockholders; and

- internal financial analyses and forecasts for Trans World and Camelot
prepared by their respective managements.

Goldman Sachs also held discussions with members of the senior management of
Trans World and Camelot regarding the strategic rationale for, and the potential
benefits of, the merger and the past and current business operations, financial
condition, and future prospects of their respective companies. In addition,
Goldman Sachs:

- reviewed the reported price and trading activity for the Trans World
common stock and the Camelot common stock,

- compared certain financial and stock market information for Trans World
and Camelot with similar information for certain other companies the
securities of which are publicly traded,

- reviewed the financial terms of certain recent business combinations in
the music retail industry specifically and in other industries generally,
and

- performed other studies and analyses it considered appropriate.

Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In that regard, Goldman
Sachs assumed, with the consent of Trans World, that the internal financial
forecasts prepared by the management of Trans World have been reasonably
prepared on a

35
<PAGE>
basis reflecting the best currently available estimates and judgments of Trans
World, and that such forecasts will be realized in the amounts and time periods
contemplated by such forecasts. Goldman Sachs also assumed, with the consent of
Trans World, that the merger will be accounted for as a pooling of interests
under generally accepted accounting principles. In addition, Goldman Sachs has
not made an independent evaluation or appraisal of the assets and liabilities of
Trans World or Camelot or any of their respective subsidiaries and Goldman Sachs
has not been furnished with any such evaluation or appraisal. The advisory
services and opinion of Goldman Sachs were provided for the information and
assistance of the board of directors of Trans World in connection with its
consideration of the merger and its opinion does not constitute a recommendation
as to how any shareholder of Trans World should vote with respect to any
proposal.

The following is a summary of the principal financial analyses used by
Goldman Sachs in connection with providing its oral opinion to Trans World's
board of directors on October 25, 1998. Goldman Sachs utilized substantially the
same type of financial analyses in connection with providing its written opinion
attached as Annex G.

THE FOLLOWING SUMMARIES OF FINANCIAL ANALYSES INCLUDE INFORMATION PRESENTED
IN TABULAR FORMAT. YOU SHOULD READ THESE TABLES TOGETHER WITH THE TEXT OF EACH
SUMMARY.

HISTORICAL STOCK TRADING ANALYSIS. Goldman Sachs reviewed the historical
trading prices and volumes for the Trans World common stock and the Camelot
common stock. Goldman Sachs informed the board of directors of Trans World that
the Camelot common stock trades on OTC and has limited volume, which may impact
its trading value. In addition, Goldman Sachs analyzed the consideration to be
received by shareholders of Camelot in relation to the market price of the Trans
World common stock. This analysis indicated that the exchange ratio represented
a premium of 59.9% based on the market price of Trans World common stock on
Nasdaq at the close of business on October 22, 1998 of $20.63 per share and the
market price of Camelot common stock at the close of business on OTC on October
22, 1998 of $24.50.

HISTORICAL EXCHANGE RATIO. Goldman Sachs compared the exchange ratio to the
ratio implied by dividing the closing price of Camelot common stock by the
closing price of Trans World common stock for the eight months ending October
22, 1998. The average ratio was 1.73x compared to the exchange ratio of 1.90x.

SELECTED COMPANIES ANALYSIS. Goldman Sachs reviewed and compared selected
financial information relating to Trans World to corresponding financial
information, ratios and public market multiples for two publicly traded
corporations in the music retailing industry:

- Musicland Stores Corporation, and

- National Record Mart, Inc.

Goldman Sachs also reviewed and compared nine publicly traded corporations
in other retailing industries:

- Autozone, Inc.,

- Barnes & Noble, Inc.,

- Best Buy Co., Inc.,

- Borders Group, Inc.,

- Circuit City Stores, Inc.,

- Costco Companies, Inc.,

- Lowe's Companies, Inc.,

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<PAGE>
- The TJX Companies, Inc., and

- Williams-Sonoma, Inc.

The selected companies were chosen because they are publicly traded companies
with operations that for purposes of analysis may be considered similar to Trans
World and Camelot.

Goldman Sachs also calculated and compared various financial multiples and
ratios. The multiples of Trans World were calculated using the Trans World
closing price on October 22, 1998 and the multiples of Camelot were calculated
using the Camelot closing price on October 22, 1998. The multiples and ratios
for Trans World and Camelot were based on information provided by their
respective managements. The multiples for each of the selected music retailers
and the selected other retailers were based on the most recent publicly
available information. Goldman Sachs' analyses of the selected companies
compared the following to the results for Trans World and Camelot:

- levered market capitalization, which is the market value of common equity
PLUS the book value of debt LESS the book amount of cash, as a multiple of
latest twelve months sales,

- levered market capitalization as a multiple of latest twelve month
earnings before interest, taxes, depreciation and amortization, or EBITDA,
and

- levered market capitalization as a multiple of latest twelve month
earnings before interest and taxes, or EBIT.

The results of these analyses are summarized as follows:

<TABLE>
<CAPTION>
LEVERED MARKET SELECTED OTHER RETAILERS
CAPITALIZATION SELECTED MUSIC -------------------------
AS A MULTIPLE OF: RETAILERS RANGE MEDIAN TRANS WORLD CAMELOT
- ---------------------------------------- -------------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
LTM Sales 0.4x 0.5x-1.5x 0.9x 1.0x 0.5x
LTM EBITDA 6.9x-7.2x 9.7x-15.4x 13.2x 9.8x 5.2x
LTM EBIT 10.6x-13.6x 11.6x-24.7x 17.6x 13.4x 6.6x
</TABLE>

Goldman Sachs also compared the selected companies' estimated calendar year
1998 and 1999 price/earnings ratios, which were provided by Institutional
Brokers Estimate System, to the results for Trans World, Camelot and the S&P 500
index. The results of these analyses are summarized as follows:

<TABLE>
<CAPTION>
SELECTED OTHER RETAILERS
PRICE/EARNINGS SELECTED MUSIC -------------------------
RATIO RETAILERS RANGE MEDIAN S&P 500 TRANS WORLD CAMELOT
- --------------- --------------- ------------ ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
19.5x*
1998 14.8x 17.6-30.9x 25.9x 23.6x 17.1x** 8.9x
15.9x*
1999 13.2x 15.6x-24.2x 19.8x 22.4x 12.5x** 8.3x
</TABLE>

* Based on Institutional Brokers Estimate System estimates.

** Using earnings estimates based on Trans World management projections.

Goldman Sachs also considered latest twelve month EBITDA margins, latest
twelve month EBIT margins, five-year earnings per share growth rate provided by
Institutional Bankers Estimate System, and the ratio of 1998 price/earnings to
growth rate for each of Trans World, Camelot and the selected companies.

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<PAGE>
The results of these analyses are summarized as follows:

<TABLE>
<CAPTION>
SELECTED SELECTED OTHER RETAILERS
MUSIC ---------------------------
RETAILERS RANGE MEDIAN TRANS WORLD CAMELOT
-------------- -------------- ----------- --------------- ---------
<S> <C> <C> <C> <C> <C>
LTM EBITDA............................ 5.3%-6.3% 3.3%-15.1% 8.7% 10.3% 8.8%
LTM EBIT.............................. 2.8%-4.1% 2.1%-12.1% 6.2% 7.5% 6.9%
Five Year EPS Growth Rate............. 18% 15%-25% 20.0% 22.5% N/A*
1998 P/E to Growth Rate............... 0.8x 0.8x-1.8x 1.1x 0.9x N/A*
</TABLE>

* Institutional Brokers Estimate System does not report a five-year earnings
per share growth rate for Camelot.

CONTRIBUTION ANALYSIS. Goldman Sachs reviewed selected historical and
estimated future operating and financial information, including, among other
things, sales, gross profit, operating profit, and net income, for Trans World,
Camelot and the pro forma combined entity resulting from the merger based on
Trans World and Camelot managements' financial forecasts. Based on assumptions
regarding the exercise of outstanding Camelot stock options and the use of
options proceeds, the analysis indicated that the shareholders of Trans World
would receive 63.4% of the outstanding common equity of the combined companies
after the merger. Goldman Sachs also analyzed the relative income statement
contribution of Trans World and Camelot to the combined companies on a pro forma
basis before taking into account any of the possible benefits that may be
realized following the merger based on estimated years 1998 and 1999, based on
financial data and on the assumptions provided to Goldman Sachs by Trans World
and Camelot managements. Goldman Sachs also performed its analyses based on
Camelot management projections and net income and EBITDA for Trans World based
on Institutional Brokers Estimate System and Goldman Sachs research,
respectively, and excluding any of the possible benefits that may be realized
following the merger.

The results of these analyses are summarized as follows:

<TABLE>
<CAPTION>
CAMELOT CONTRIBUTION CAMELOT CONTRIBUTION
TO COMBINED NET INCOME TO COMBINED EBITDA
-------------------------------- --------------------------------
IMPLIED IMPLIED
PERCENTAGE EXCHANGE RATIO* PERCENTAGE EXCHANGE RATIO*
----------- ------------------- ----------- -------------------
<S> <C> <C> <C> <C>
1998**................................................ 40.2% 2.3x 40.1% 2.0x
1998***............................................... 43.4% 2.6x 43.8% 2.3x
1999**................................................ 34.8% 1.8x 36.5% 1.7x
1999***............................................... 40.4% 2.3x 42.4% 2.2x
</TABLE>

* Based on Camelot Shares to Trans World Shares, after adjusting for leverage.

** Based on financial data and on assumptions provided to Goldman Sachs by
Trans World and Camelot managements, respectively, and excluding any of the
possible benefits that may be realized following the merger.

*** Based on Camelot management projections and net income and EBITDA for Trans
World based on Institutional Brokers Estimate System and Goldman Sachs
research, respectively, and excluding any of the possible benefits that may
be realized following the merger.

SELECTED TRANSACTIONS ANALYSIS. Goldman Sachs analyzed certain information
relating to four selected transactions in the music retailing industry since
1997:

- Wherehouse Entertainment, Inc.'s acquisition of Blockbuster Music, a
subsidiary of National Amusements, Inc.,

- Camelot's acquisition of Spec's Music, Inc.,

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<PAGE>
- Camelot's acquisition of certain assets of The Wall Music, Inc., and

- Trans World's acquisition of 90 out of a total of 118 stores of
Strawberries, Inc.

Goldman Sachs concluded and advised the board of directors of Trans World that a
comparison of the merger to those selected transactions was not instructive, due
to the distressed and underperforming nature of the target companies in these
selected transactions.

DISCOUNTED CASH FLOW ANALYSIS. Goldman Sachs performed a discounted cash
flow analysis on Trans World using management projections. Goldman Sachs
calculated a net present value of free cash flows for the years 1998 through
2003 using discount rates ranging from 10.0% to 12.0%. Goldman Sachs calculated
implied per share values of the Trans World common stock, implied exchange
ratios and implied perpetuity growth rates of free cash flow based on multiples
ranging from 5.0x to 8.0x 2003 EBITDA. These terminal values were then
discounted to present value using discount rates from 10.0% to 12.0%. Goldman
Sachs also performed a discounted cash flow analysis on Camelot using management
projections (a) excluding any cost synergies expected to result from the merger
and (b) including such synergies. The discounted cash flow analysis for Camelot
was performed using the same range of discount rates.

The implied exchange ratio, including any cost synergies, ranged from 1.3x
to 1.4x. The results of the other analyses are summarized as follow:

<TABLE>
<CAPTION>
IMPLIED
IMPLIED PER PERPETUITY
SHARE VALUE GROWTH RATE
--------------- ------------
<S> <C> <C>
Trans World*...................................................................... $ 28.91-$44.64 0.0%-5.4%
Camelot (Including synergies)**................................................... $ 38.04-$55.06 1.9%-6.0%
Camelot (Excluding synergies)**................................................... $ 33.62-$48.96 2.4%-6.4%
</TABLE>

- ------------------------

* Using managment projections and terminal values in the year 2003 based on
multiples ranging from 5.0x EBITDA to 8.0x EBITDA and discounting these
terminal values to present value using discount rates ranging from 10.0% to
12.0%

** Using managment projections and terminal values in the year 2003 based on
multiples ranging from 5.0x EBITDA to 7.0x EBITDA and discounting these
terminal values to present value using discount rates ranging from 10.0% to
12.0%

PRO FORMA MERGER ANALYSIS. Goldman Sachs prepared pro forma analyses of the
financial impact of the merger using management estimates for Trans World and
Camelot and Institutional Brokers Estimate System estimates for Trans World and
management estimates for Camelot. For each for the years 1998 and 1999, Goldman
Sachs compared the EPS of Trans World common stock, on a standalone basis, to
the EPS of the common stock of the combined companies on a pro forma basis.
Goldman Sachs performed this analysis based on the closing price for Trans World
on October 22, 1998 and excluding any of the possible benefits that may be
realized following the merger. Based on such analyses, and without giving effect
to any potential synergies, the proposed transaction would be accretive to
shareholders of Trans World on an earnings per share basis in each of 1998 and
1999, using Institutional Brokers Estimate System estimates for Trans World and
management estimates for Camelot. Using more aggressive internal forecasts of
Trans World's management and management estimates for Camelot, the proposed
transaction would be accretive to shareholders of Trans World on an earnings per
share basis in 1998 and dilutive in 1999. The results of such analyses are
summarized as follow:

<TABLE>
<CAPTION>
STREET CASE MANAGEMENT CASE
----------- -----------------
<S> <C> <C>
1998 Estimates.................................................................... 12.1% 6.1%
1999 Estimates.................................................................... 6.3% (2.7%)
</TABLE>

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<PAGE>
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
Trans World or Camelot or the contemplated transaction.

The analyses were prepared solely for purposes of providing an opinion to
the Trans World board of directors as to the fairness of the exchange ratio from
a financial point of view to Trans World. The analyses do not purport to be
appraisals or necessarily reflect the prices at which businesses or securities
actually may be sold. Analyses based upon forecasts of future results are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors, and are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. Accordingly, future results
may be materially different from those forecast.

As described above, Goldman Sachs' opinion to the board of directors of
Trans World was one of many factors taken into consideration by the Trans World
board of directors in making its determination to approve the merger agreement.
The foregoing summary does not purport to be a complete description of the
analysis performed by Goldman Sachs. You should read in its entirety the written
opinion of Goldman Sachs attached as Annex G.

Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. Goldman Sachs is
familiar with Trans World, having provided certain investment banking services
to Trans World from time to time, including having acted as managing underwriter
of a public offering of Trans World common stock in April 1998 and having acted
as its financial advisor in connection with, and having participated in certain
of the negotiations leading to, the merger agreement. Trans World selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions similar
to the merger.

Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities including
derivative securities of Trans World and/or Camelot for its own account and for
the account of customers.

Pursuant to a letter agreement dated August 31, 1998, Trans World engaged
Goldman Sachs to act as its financial advisor in connection with the possible
acquisition of all or a portion of the stock or assets of Camelot. Pursuant to
the terms of this letter, Trans World agreed to pay Goldman Sachs a transaction
fee based on the outcome of the merger as follows:

- if Trans World purchases 50% or more of the common stock or assets, based
on the book value of such assets, of Camelot in one or a series of
transactions, Goldman Sachs will receive a transaction fee of $3,000,000;

- if Trans World purchases less than 50% of the outstanding common stock or
assets, based on the book value of such assets, of Camelot, Goldman Sachs
will receive a mutually acceptable transaction fee;

- if Trans World enters into an agreement to acquire Camelot providing for a
payment at any time to Trans World of a break up fee in the event the
contemplated transactions with Camelot are terminated or otherwise not
consummated, Goldman Sachs will receive a transaction fee equal

40
<PAGE>
to the lesser of 33% of the amount of any break up fee actually paid to
Trans World, and $3,000,000.

Trans World agreed to pay any fees owed Goldman Sachs in cash either upon
consummation of the merger or when payment of the break up fee is made to Trans
World. Moreover, Trans World offered Goldman Sachs the right to act as:

- lead manager or agent in the case of any offering or placement of
securities, or lead arranger, underwriter and syndication agent in the
case of a syndicated bank loan related to the financing of any transaction
in connection with the possible acquisition of all or a portion of the
stock or assets of Camelot;

- sole financial advisor in the case of any disposition of assets of Camelot
following the consummation of any such transaction or transactions; and/or

- principal or counterparty in the case of any interest rate swap or other
hedging transaction related to the financing of any transaction
contemplated by the merger.

Trans World has agreed to reimburse Goldman Sachs for its reasonable
out-of-pocket expenses, including attorney's fees, and to indemnify Goldman
Sachs against certain liabilities, including certain liabilities under the
federal securities laws.

OPINION OF FINANCIAL ADVISOR TO CAMELOT

In August 1998, Camelot engaged Merrill Lynch to act as its financial
advisor in connection with the merger. At a meeting of the Camelot board held on
October 25, 1998, the Camelot board considered the merger and approved the
merger agreement and the merger. At the meeting, Merrill Lynch rendered its
opinion that, as of such date and based upon and subject to the matters reviewed
with the Camelot board, the exchange ratio was fair from a financial point of
view to the holders of Camelot's common stock.

The full text of the written opinion of Merrill Lynch is attached as Annex
F. This description of the Merrill Lynch opinion is only a summary of the
complete Merrill Lynch opinion attached as Annex F. Camelot's stockholders are
urged to read the Merrill Lynch opinion in its entirety for a description of the
procedures followed, assumptions made, matters considered, and qualifications
and limitations on the review undertaken by Merrill Lynch in rendering its
opinion.

THE MERRILL LYNCH OPINION IS DIRECTED TO THE CAMELOT BOARD AND ADDRESSES
ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE EXCHANGE RATIO TO THE
HOLDERS OF CAMELOT'S COMMON STOCK. IT DOES NOT ADDRESS THE MERITS OF THE
UNDERLYING DECISION BY CAMELOT TO ENGAGE IN THE MERGER. IT ALSO DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY CAMELOT STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE ON THE MERGER AT ANY MEETING OF CAMELOT STOCKHOLDERS
HELD FOR THE PURPOSE OF CONSIDERING THE MERGER.

In arriving at the Merrill Lynch opinion, Merrill Lynch:

- reviewed certain publicly available business and financial information
relating to Camelot and Trans World that Merrill Lynch deemed to be
relevant;

- reviewed information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of
Camelot and Trans World, as well as the amount and timing of the cost
savings and related expenses and synergies expected to result from the
merger, furnished to Merrill Lynch by Camelot and Trans World,
respectively;

- conducted discussions with members of senior management and
representatives of Camelot and Trans World concerning the matters
described in the first and second bullet points above, as well as their
respective businesses and prospects before and after giving effect to the
merger and the expected synergies;

41
<PAGE>
- reviewed the market prices and valuation multiples for Trans World common
stock and compared them with those of publicly-traded companies that
Merrill Lynch deemed to be relevant;

- reviewed the results of operations of Camelot and Trans World and
compared them with those of publicly traded companies that Merrill Lynch
deemed to be relevant;

- compared the proposed financial terms of the merger with the financial
terms of other transactions that Merrill Lynch deemed to be relevant;

- participated in certain discussions and negotiations among
representatives of Camelot and Trans World and their financial and legal
advisors;

- reviewed the potential pro forma impact of the merger;

- reviewed a draft dated October 25, 1998 of the merger agreement; and

- reviewed other financial studies and analyses and took into account other
matters as Merrill Lynch deemed necessary, including Merrill Lynch's
assessment of general economic, market and monetary conditions.

In preparing the Merrill Lynch opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it or publicly available.
The Merrill Lynch opinion was necessarily based on market, economic and other
conditions as they existed and could be evaluated on, and the information made
available to Merrill Lynch, as of October 25, 1998. Merrill Lynch did not assume
any responsibility for independently verifying such information or undertake an
independent evaluation or appraisal of any of the assets or liabilities of
Camelot or Trans World nor was it furnished with any such evaluation or
appraisal. In addition, Merrill Lynch did not assume any obligation to conduct
any physical inspection of the properties or facilities of Camelot or Trans
World.

With respect to the financial forecasts information and the expected
synergies furnished to or discussed with Merrill Lynch by Camelot or Trans
World, Merrill Lynch assumed that they had been reasonably prepared and
reflected the best currently available estimates and judgment of the management
of Camelot's or Trans World's management as to the expected future financial
performance of Camelot or Trans World, as the case may be, and the expected
synergies.

In addition, Merrill Lynch assumed that the merger will be accounted for as
a pooling of interests under generally accepted accounting principles. Merrill
Lynch also assumed that the merger will qualify
as a tax-free reorganization for United States federal income tax purposes.
Merrill Lynch also assumed that the final form of the merger agreement would be
substantially similar to the last draft of the agreement reviewed by Merrill
Lynch. In addition, Merrill Lynch assumed that in the course of obtaining the
necessary regulatory or other consents or approvals, contractual or otherwise,
for the merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the merger.

In connection with the preparation of its opinion, Merrill Lynch was not
authorized by Camelot or the Camelot board to solicit, nor did it solicit, third
party indications of interest for the acquisition of all or any part of Camelot.

42
<PAGE>
In connection with rendering its opinion, Merrill Lynch performed a variety
of financial analyses. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
analysis and the application of these methods to the particular circumstances.
Therefore, a fairness opinion is not readily susceptible to a partial analysis
or summary description. Accordingly, although Merrill Lynch summarizes separate
analyses below, Merrill Lynch believes that its analyses must be considered as a
whole. Selecting portions of the analyses, without considering all of the
analyses, or attempting to ascribe relative weights to some or all of the
analyses, could create an incomplete view of the evaluation process underlying
Merrill Lynch's opinion. Some of the summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses performed by Merrill Lynch, the tables must be read together
with the text of each summary. The tables alone do not constitute a complete
description of the financial analyses. Considering the data set forth in the
tables without considering the full narrative description of the financial
analyses, including the methodologies and assumptions underlying the analyses,
could create a misleading or incomplete view of the financial analyses performed
by Merrill Lynch.

In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters. Many of these matters are beyond the control of Camelot or Trans
World. Actual values or actual future results may be significantly more or less
favorable than those suggested by Merrill Lynch's analyses. Merrill Lynch did
not assign any specific weight to any of the analyses described below. Merrill
Lynch also did not draw any specific conclusions from or with regard to any one
method of analysis. No public company utilized as a comparison in the analysis
of selected comparable companies and the analysis of selected recent music
retail and specialty retail merger transactions summarized below is identical to
Camelot or Trans World. In addition, no transaction is identical to the merger.
Accordingly, an analysis of publicly-traded comparable companies and comparable
business combinations is not mathematical. Rather, it involves complex
considerations and judgments concerning the differences in financial and
operating characteristics of the companies and other factors that could affect
the public trading values or announced merger transaction values of Camelot,
Trans World and the companies to which they were compared.

The analyses are not appraisals nor do they reflect the prices at which
Camelot might actually be sold or the prices at which any securities may trade
at the present time or at any time in the future. In addition, as described
above, Merrill Lynch's opinion was just one of many factors taken into
consideration by the Camelot board.

Merrill Lynch did not address in its written analyses the trading prices of
Camelot's common stock. Merrill Lynch did not address this issue in its written
analyses because of its belief that the limited liquidity in the market for
Camelot's common stock meant that trading values of Camelot's common stock did
not accurately reflect the true value of Camelot.

The following is a summary of the analyses presented by Merrill Lynch to the
Camelot board when Merrill Lynch gave its opinion.

SUMMARY OF PROPOSAL. Merrill Lynch reviewed:

- the terms of the merger, including the exchange ratio,

- the implied total equity value of Camelot, and

- the implied total enterprise value of Camelot.

The implied total equity value of Camelot was obtained by multiplying (1)
the merger exchange ratio of 1.90, (2) the closing price per share of Trans
World's common stock of $20.625 on October 22, 1998 and (3) 10.5 million shares,
which was the total number of outstanding shares of Camelot's common stock on a
fully diluted basis as of October 22, 1998. The implied total enterprise value
of Camelot was obtained by calculating the implied total equity value of Camelot
and adding Camelot's net debt.

43
<PAGE>
Based on the closing price of Trans World's common stock on October 22, 1998, of
$20.625, Merrill Lynch calculated:

- an implied price per share of Camelot's common stock of $39.19, which it
obtained by multiplying the merger exchange ratio by the closing price of
Trans World's common stock on October 22, 1998,

- an implied total equity value of $411.3 million, and

- an implied total enterprise value of $436.3 million.

Merrill Lynch also calculated the following:

- the implied total enterprise value of Camelot as a multiple of

- Latest twelve months sales,

- Latest twelve months EBITDA,

- Latest twelve months EBIT,

- 1998 estimated sales,

- 1998 estimated EBITDA,

- 1998 estimated EBIT,

- 1999 estimated sales,

- 1999 estimated EBITDA, and

- 1999 estimated EBIT; and

- the implied total equity value of Camelot as a multiple of

- Latest twelve months net income,

- 1998 estimated net income, and

- 1999 estimated net income.

This analysis showed:

<TABLE>
<CAPTION>
IMPLIED TOTAL ENTERPRISE
VALUE AS A MULTIPLE OF:
---------------------------------
SALES EBITDA EBIT
--------- ----------- ---------
<S> <C> <C> <C>
Latest twelve months............................................... 0.70x 7.9x 10.1x
1998 estimated..................................................... 0.68x 7.3x 9.2x
1999 estimated..................................................... 0.63x 6.5x 8.7x
</TABLE>

<TABLE>
<CAPTION>
IMPLIED TOTAL EQUITY
VALUE AS A MULTIPLE OF:
-----------------------
<S> <C>
Latest twelve months net income........................................ 15.6x
1998 estimated net income.............................................. 14.8x
1999 estimated net income.............................................. 13.8x
</TABLE>

In each case, estimates were based on the projections of Camelot's management.
In each case, the financial data for the latest twelve months refers to
Camelot's financial data for the twelve months ended July 1998 and for 1998
takes into account Camelot's acquisition of The Wall and Spec's Music.

PUBLIC MARKET COMPARABLES. Merrill Lynch compared selected operating and
stock market results of Trans World and selected operating results of Camelot to
the publicly available corresponding data

44
<PAGE>
of certain other retailers that Merrill Lynch deemed to be relevant. Such
retailers were comprised of the following companies:

<TABLE>
<S> <C>
MUSIC RETAILERS:

- Musicland

- Trans World

SPECIALTY RETAILERS:

- The Gap

- Just for Feet

- Abercrombie & Fitch

- Finish Line

- AnnTaylor

- Venator Group

- Limited

- Petco Animal Supplies

- Talbots

- Guitar Centers of America

- Intimate Brands

- Garden Ridge

- Footstar

- Hibbett Sporting Goods
</TABLE>

With respect to each of these companies, Merrill Lynch calculated the
following:

- the ratio of market capitalization of the company as of October 22, 1998,
which it defined as the market value of the company plus the liquidation
value of the company's preferred equity, including redeemable preferred
stock, plus debt and minority interests and less cash to:

1. Latest twelve months EBITDA,

2. Latest twelve months EBIT, and

3. Latest twelve months sales;

- the ratio of stock price of the company as of October 22, 1998 to:

1. 1998 and 1999 earnings per share based on the most recent First Call
reports for the music retailers, and

2. 1999 and 2000 earnings per share based on the most recent First Call
reports for the specialty retailers;

- the ratio of 1998 and 1999 estimated price/earnings multiples to five
years estimated earnings per share growth of the company for the music
retailers; and

- the ratio of 1999 and 2000 estimated price/earnings multiples to five
years estimated earnings per share growth of the company for the specialty
retailers.

For the music retailers, Trans World and Camelot, the analysis showed:

<TABLE>
<CAPTION>
STOCK PRICE AS OF
OCTOBER 22, 1998
MARKET CAPITALIZATION AS A MULTIPLE OF: ESTIMATED PRICE/EARNINGS
AS OF OCTOBER 22, 1998 ---------------------------- MULTIPLE TO
AS A MULTIPLE OF: 1998 1999 FIVE YEARS ESTIMATED
------------------------------------------- ESTIMATED ESTIMATED EARNINGS PER SHARE GROWTH
LATEST TWELVE LATEST TWELVE LATEST TWELVE EARNINGS PER EARNINGS PER ----------------------------
MONTHS EBITDA MONTHS EBIT MONTHS SALES SHARE SHARE 1998 1999
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mean........... 8.9x 12.6x 0.76x 17.3x 14.7x 0.94x 0.80x
Minimum........ 6.8x 10.6x 0.43x 14.8x 13.2x 0.87x 0.78x
Maximum........ 10.9x 14.5x 1.09x 19.6x 16.2x 0.98x 0.81x
Trans World.... 10.9x 14.5x 1.09x 19.6x 16.2x 0.98x 0.81x
Camelot........ 7.9x 10.1x 0.70x 14.8x 13.8x 1.48x 1.38x
</TABLE>

45
<PAGE>
The analysis for Camelot is based on an assumed price per share of Camelot's
common stock of $39.19, which is the merger exchange ratio multiplied by the
closing price per share of Trans World's common stock on October 22, 1998.

For the specialty retailers, the analysis showed:

<TABLE>
<CAPTION>
STOCK PRICE AS OF
OCTOBER 22, 1998
MARKET CAPITALIZATION AS A MULTIPLE OF: ESTIMATED PRICE/EARNINGS
AS OF OCTOBER 22, 1998 ---------------------------- MULTIPLE TO
AS A MULTIPLE OF: 1999 2000 FIVE YEARS ESTIMATED
------------------------------------------- ESTIMATED ESTIMATED EARNINGS PER SHARE GROWTH
LATEST TWELVE LATEST TWELVE LATEST TWELVE EARNINGS PER EARNINGS PER ----------------------------
MONTHS EBITDA MONTHS EBIT MONTHS SALES SHARE SHARE 1999 2000
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Mean........... 9.2x 12.8x 1.12x 14.3x 11.7x 0.72x 0.59x
Median......... 9.2x 13.7x 0.86x 13.7x 11.1x 0.64x 0.52x
Minimum........ 3.8x 4.6x 0.31x 7.9x 6.4x 0.33x 0.27x
Maximum........ 16.7x 21.4x 3.21x 26.1x 22.2x 1.40x 1.19x
</TABLE>

Based on Merrill Lynch's judgment, Merrill Lynch applied various multiple
ranges to the corresponding financial data and estimates of future financial
performance of Camelot to derive a valuation range for Camelot's common stock.
These results are as follows:

<TABLE>
<CAPTION>
VALUATION RANGE PER SHARE OF
CAMELOT'S COMMON STOCK ON A
FULLY
MULTIPLE RANGE APPLIED DILUTED BASIS
- ------------------------------------------------------------- -------------------------------
<S> <C>
10.0x to 12.0x 1999 estimated earnings per share............. $ 28.25 to $34.00
0.70x to 0.80x 1999 estimated price/earnings multiple to five
years estimated earnings per share growth.................. $ 19.75 to $22.75
</TABLE>

Based on Merrill Lynch's judgment, Merrill Lynch applied various multiple
ranges to the corresponding financial data and estimates of future financial
performance of Trans World to derive a valuation range for Trans World's common
stock. These results are as follows:

<TABLE>
<CAPTION>
VALUATION RANGE PER
SHARE OF TRANS WORLD'S VALUATION RANGE PER
COMMON STOCK ON A SHARE OF TRANS WORLD'S
FULLY COMMON STOCK ON A
DILUTED BASIS USING FULLY
WALL DILUTED BASIS USING
MULTIPLE RANGE APPLIED STREET ESTIMATES MANAGEMENT ESTIMATES
- --------------------------------------------- ---------------------- ----------------------
<S> <C> <C>
13.0x to 16.0x 1999 estimated earnings per
share...................................... $ 16.50 to $20.25 $ 21.00 to $25.75
0.70x to 0.80x 1999 estimated price/ earnings
multiple to five years estimated earnings
per share growth........................... $ 17.75 to $20.25 $ 31.50 to $36.00
</TABLE>

SELECTED COMPARABLE TRANSACTIONS. Merrill Lynch also reviewed publicly
available information on transactions in the music retail industry, all of which
were announced between August 1997 and August 1998. Merrill Lynch reviewed the
following transactions in the music retail industry:

- the acquisition of Strawberries by Trans World,

- the acquisition of The Wall by Camelot,

- the acquisition of HMV Music by Advent/HMV Media,

- the acquisition of Spec's Music by Camelot, and

- the acquisition of Blockbuster Music by Wherehouse Entertainment.

An analysis of the ratio of the transaction value, defined as offer value
plus the liquidation value of preferred equity including redeemable preferred
stock plus debt less cash and exercisable option

46
<PAGE>
proceeds, of the transactions in the music retail industry to latest twelve
months EBITDA, EBIT and sales yielded the following:

<TABLE>
<S> <C>
- Mean ratio of transaction value to latest twelve months EBITDA................. 5.5x
- Mean ratio of transaction value to latest twelve months EBIT................... 5.9x
- Mean ratio of transaction value to latest twelve months sales.................. 0.51x
</TABLE>

Merrill Lynch also reviewed publicly available information on several
transactions in the specialty retail industry, all of which were announced
between March 1996 and February 1998. Merrill Lynch reviewed the following
transactions in the specialty retail industry:

- the acquisition of Kay-Bee Toy & Hobby Shops by Consolidated Stores Corp.,

- the acquisition of CSK Auto by Investcorp,

- the acquisition of Hechinger Co. by Leonard Green Partners,

- the acquisition of Tuesday Morning Corp. by Madison Dearborn Partners,

- the acquisition of Crate and Barrel by Otto Versand, and

- the acquisition of Eye Care Centers of America by Thomas H. Lee.

An analysis of the ratio of the transaction value of the transactions in the
specialty retail industry to latest twelve months EBITDA, EBIT and sales yielded
the following:

<TABLE>
<CAPTION>
- Mean ratio of transaction value to latest twelve months EBITDA................. 9.1x

<S> <C>
- Mean ratio of transaction value to latest twelve months EBIT................... 12.9x

- Mean ratio of transaction value to latest twelve months sales.................. 0.82x
</TABLE>

Merrill Lynch also reviewed the ratio of the transaction value of the
merger. That analysis yielded the following:

<TABLE>
<S> <C>
- Ratio of transaction value to latest twelve months EBITDA...................... 7.9x
- Ratio of transaction value to latest twelve months EBIT........................ 10.1x
- Ratio of transaction value to latest twelve months sales....................... 0.70x
</TABLE>

Based on Merrill Lynch's judgment, Merrill Lynch applied a multiple range of
6.0x to 8.0x latest twelve months EBITDA to the corresponding financial data for
Camelot resulting in a valuation range of $29.00 to $39.50 per share of
Camelot's common stock on a fully diluted basis.

DISCOUNTED CASH FLOW ANALYSIS OF CAMELOT. Merrill Lynch performed a
discounted cash flow analysis of Camelot on a stand-alone basis, based upon
estimates of projected financial performance prepared by the management of
Camelot. Using these projections, Merrill Lynch calculated a range of aggregate
equity values for Camelot based upon the discounted present value of the sum of:

- the projected stream of unlevered free cash flows of Camelot from 1999
through 2003; and

- the projected terminal value of Camelot in 2003 calculated using a range
of multiples of Camelot's projected EBITDA in such year.

Merrill Lynch then subtracted from that sum the estimated net debt outstanding
as of August 1998. Merrill Lynch then calculated the implied equity value per
share of Camelot common stock:

<TABLE>
<CAPTION>
TERMINAL MULTIPLES OF RANGE OF IMPLIED EQUITY
PROJECTED EBITDA VALUE PER SHARE ON A
DISCOUNT RATES APPLIED APPLIED FULLY DILUTED BASIS
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
10.0% to 12.0% 5.0x to 7.0x $32.00 to $46.75
</TABLE>

DISCOUNTED CASH FLOW ANALYSIS OF TRANS WORLD. Merrill Lynch performed a
discounted cash flow analysis of Trans World on a stand-alone basis, based upon
estimates of projected financial performance prepared by the management of Trans
World and by Wall Street research analysts. Using these

47
<PAGE>
projections, Merrill Lynch calculated a range of aggregate equity values for
Trans World based upon the discounted present value of the sum of:

- the projected stream of unlevered free cash flows of Trans World from 1999
through 2003; and

- the projected terminal value of Trans World in 2003 calculated using a
range of multiples of Trans World projected EBITDA in such year.

Merrill Lynch then subtracted from that sum the estimated net debt outstanding
as of July 1998. Merrill Lynch then calculated the implied equity value per
share of Trans World's common stock:

<TABLE>
<CAPTION>
RANGE OF IMPLIED RANGE OF IMPLIED
EQUITY VALUE PER SHARE EQUITY VALUE PER SHARE
TERMINAL MULTIPLES OF ON A FULLY DILUTED ON A FULLY DILUTED
PROJECTED EBITDA BASIS USING WALL BASIS USING MANAGEMENT
DISCOUNT RATES APPLIED APPLIED STREET ESTIMATES ESTIMATES
- ---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
10.0% to 12.0% 5.0x to 7.0x $22.75 to $31.75 $29.25 to $41.00
</TABLE>

RELATIVE DISCOUNTED CASH FLOW ANALYSIS. Merrill Lynch used the discounted
cash flow methodology to calculate the implied exchange ratio derived from the
relative ranges of value for Camelot and Trans World. Merrill Lynch based this
analysis on estimates of projected financial performance prepared by (1) the
managements of Camelot and Trans World and (2) the management of Camelot for
Camelot's projections and Wall Street research analysts for Trans World's
projections. Merrill Lynch derived a range of implied exchange ratios by
dividing each per share value within the discounted cash flow analysis range for
Camelot's common stock by the corresponding discounted cash flow analysis per
share value for Trans World's common stock. This analysis yielded the following
ranges of exchange ratios:

<TABLE>
<CAPTION>
RANGE OF EXCHANGE RATIOS
----------------------------
<S> <C>
Using projections of the respective managements of Camelot and
Trans World................................................... 1.09x to 1.15x
Using projections of management for Camelot's projections and
projections of Wall Street research analysts for Trans World's
projection.................................................... 1.40x to 1.47x
</TABLE>

PRO FORMA CONTRIBUTION ANALYSIS. Merrill Lynch analyzed and compared the
respective contribution of:

- 1998 estimated sales, EBITDA and net income,

- 1999 estimated sales, EBITDA and net income, and

- 2000 estimated sales, EBITDA and net income

of Camelot and Trans World to the combined company following consummation of the
merger. In conducting its analysis, Merrill Lynch relied upon the data described
in the previous paragraph without taking into account any potential synergies
resulting from the merger.

Using projections of the respective managements of Camelot and Trans World,
Merrill Lynch calculated that Camelot would contribute the following percentages
of sales, EBITDA and net income to the combined company:

<TABLE>
<CAPTION>
SALES EBITDA NET INCOME
--------- ----------- -----------
<S> <C> <C> <C>
1998 estimated............................................... 46.9% 39.8% 39.8%
1999 estimated............................................... 44.4% 36.4% 34.2%
2000 estimated............................................... 42.1% 34.6% 31.8%
</TABLE>

48
<PAGE>
Using projections of management for Camelot's projections and Wall Street
research analysts for Trans World's projections Merrill Lynch calculated that
Camelot would contribute the following percentages of sales, EBITDA and net
income to the combined company:

<TABLE>
<CAPTION>
SALES EBITDA NET INCOME
--------- ----------- -----------
<S> <C> <C> <C>
1998 estimated............................................... 47.6% 43.0% 43.6%
1999 estimated............................................... 45.0% 41.0% 40.3%
2000 estimated............................................... 42.7% 39.7% 37.4%
</TABLE>

Merrill Lynch calculated the implied exchange ratio by comparing the
theoretical value of Camelot's common stock and Trans World's common stock using
the pro forma contribution analysis. The resulted in an implied exchange ratio
of 1.54x to 2.76x using the projections of the respective managements of Camelot
and Trans World and 1.98x to 2.84x using the projections of management for
Camelot's projections and Wall Street research analysts for Trans World's
projections.

Merrill Lynch is a nationally recognized investment banking firm which
regularly engages in the valuation of businesses and securities, in connection
with mergers and acquisitions. In addition, Merrill Lynch has, in the past,
provided financial advisory services to Camelot and has received customary fees
for the rendering of these services. In the ordinary course of its securities
business, Merrill Lynch and its affiliates may trade debt and/or equity
securities of Camelot or Trans World. These trades may be for its own account
and the account of its customers. Accordingly, Merrill Lynch may from time to
time hold a long or short position in these securities. Merrill Lynch currently
owns approximately 1.4 million shares of Camelot common stock. It obtained these
shares as a result of the conversion of Camelot's debt securities to equity in
Camelot's reorganization and emergence from bankruptcy.

Camelot and Merrill Lynch entered into engagement letter dated September 28,
1998. This letter covers the services to be provided by Merrill Lynch in
connection with the merger. The engagement letter provides that Camelot will pay
to Merrill Lynch upon completion of the merger an amount equal to the following:

- 0.45% of the aggregate purchase price paid if such purchase price paid is
less than $400 million;

- 0.51% of the aggregate purchase price paid if such purchase price paid is
greater than or equal to $400 million but less than $450 million; or

- 0.60% of the aggregate purchase price paid if such purchase price paid is
greater than or equal to $450 million.

For purposes of the Merrill Lynch engagement letter, the term "purchase
price" means an amount equal to the sum of:

- the aggregate fair market value of any securities issued;

- any other non-cash consideration delivered;

- any cash consideration paid to Camelot or its security holders in
connection with the merger; and

- the amount of all indebtedness of Camelot or any subsidiary of Camelot
which is assumed or acquired by Trans World or retired or defeased in
connection with the merger.

The fair market value of any securities issued and any other non-cash
consideration delivered or retained in connection with the merger will be the
value determined by Camelot and Merrill Lynch upon the closing of the merger. In
addition, Camelot agreed to reimburse Merrill Lynch for its reasonable
out-of-pocket expenses incurred in connection with its advisory work, including,
without limitation, the reasonable fees and disbursements of its legal counsel.
Camelot also agreed to indemnify Merrill Lynch against certain liabilities
related to or arising out of the merger, including liabilities arising under the
federal securities laws.

49
<PAGE>
CONFLICTS OF INTEREST

Members of Camelot's management have material interests in the merger in
addition to their interests as Camelot stockholders, as described below.

JAMES E. BONK EMPLOYMENT AGREEMENT. Mr. Bonk's employment agreement with
Camelot expires on December 31, 2000. The agreement entitles Mr. Bonk to receive
a base salary of $400,000 per year and to participate in Camelot's option and
bonus plans. This agreement also provides Mr. Bonk with severance payments and
continued benefits in the event that Camelot terminates his employment without
cause or Mr. Bonk resigns from employment due to constructive discharge,
including a change in control of Camelot. Following such a termination, Mr. Bonk
would be entitled to monthly base salary payments and benefits continuation over
the greater of two years and the balance of the employment term of the
agreement. Mr. Bonk also agrees in his employment agreement not to compete with
Camelot for a period of time following his termination.

The merger constitutes a change in control for purposes of Mr. Bonk's
employment agreement. If Mr. Bonk elects to terminate his employment in
connection with the merger, he will be entitled to receive aggregate cash salary
continuation payments of up to $800,000, together with continuation of benefits
for the period provided in his employment agreement.

SEVERANCE AGREEMENTS. Camelot has a written severance agreement with each of
its executive officers other than Mr. Bonk. These agreements provide severance
benefits in the event that the executive is terminated without cause at any time
prior to the executive's normal retirement date or resigns from his or her
employment and such resignation is preceded by, or reasonably contemporaneous
with, a change in control of Camelot.

The severance benefits provided under the agreements with the executive
officers, other than Mr. Rogers, are for 12 months. The agreement with Mr.
Rogers provides for severance benefits of 18 months. These benefits include
payment of monthly salary and the continuance of group medical, dental and
long-term disability insurance.

The merger would constitute a transaction entitling the executives to resign
their employment and receive the benefits described above under the severance
agreements. If Camelot's executive officers elect to resign their employment,
they will be entitled to receive up to the following aggregate amounts of salary
continuation payments: Mr. Rogers, $412,500; Ms. Thorn, $175,000; Larry K.
Mundorf, Vice President of Marketing, $200,000; Lewis S. Garrett, Vice President
of Buying and Merchandising, $175,000; and Charles R. Rinehimer III, Vice
President of Stores, $175,000; together, in each case, with continuation of
benefits as provided in the severance agreements.

If an executive officer, other than Mr. Bonk, elects to participate in the
employee retention program described below, he or she will be required to delay
his or her receipt of the salary and benefit continuation payments until the
earlier of the termination of his or her employment or the time he or she is
entitled to receive payment under the employee retention program. The executive
will also be obligated to agree not to compete with Camelot during the period in
which he or she is receiving salary and benefit continuation payments.

EMPLOYEE RETENTION PROGRAM. In connection with the merger, Camelot has
established an employee retention program. This program provides for a retention
pool of up to $3.75 million. Of this amount, $1.9 million has been allocated
among nine senior executives of Camelot, while approximately $1.25 million has
been allocated among approximately 175 employees of Camelot. Messrs. Bonk and
Rogers, in consultation with Mr. Higgins, have determined the allocation to each
participant in the program. Immediately following the merger, Trans World's
board will establish a special committee comprised of Mr. Higgins and Messrs.
Solow and Zoffinger, who are proposed to become Trans World directors subsequent
to the merger. This special committee will have the exclusive power and
authority to make all decisions with respect to the administration of the
program.

50
<PAGE>
Camelot will enter into contracts with each participant in the executive
pool, other than Mr. Bonk, setting forth the participant's retention
arrangements. Payment of funds to a participant in the executive pool, other
than Mr. Bonk, will be conditioned upon the executive's continued employment
through the effective time and thereafter through the period set forth in the
executive's contract unless earlier terminated without cause or constructively
terminated. For purposes of the employee retention program, the term
"constructive termination" will include:

- being required to relocate,

- Camelot's failure to pay compensation or benefits due and owing,

- Camelot's failure to honor any severance or other agreement, or

- any material reduction in aggregate compensation or benefits.

Upon expiration of this period or earlier if the participant's employment is
terminated without cause or constructively terminated, the entire amount of an
executive's allocated share of the executive pool will be paid to the executive
in a lump sum. For executives, other than Mr. Bonk, with written severance
agreements or employment agreements with Camelot, which includes all of the
executive officers of Camelot, participation in the executive pool also will be
conditioned upon their agreement

- to delay their right to receive payments under such severance agreements
until the earlier of the termination of their employment or the time when
they are entitled to receive payment under the program, and

- to a reasonable and customary non-competition agreement.

Mr. Bonk's retention arrangements will be different than those of the other
participants in the executive pool. Under an unwritten arrangement with Camelot,
Mr. Bonk will be entitled to receive a lump-sum payment of $100,000 at the
effective time if he continues employment with Camelot through that time. This
payment is not conditioned upon Mr. Bonk's continued employment after the
effective time or any other condition. In exchange for the $100,000 payment, Mr.
Bonk has agreed to be available after the effective time to provide consultation
and advice to Mr. Higgins upon Mr. Higgins' reasonable request.

Any amounts payable under the employee retention program will be in addition
to amounts pay-
able under the terms of any employment or severance agreement to which any
participant is a party. Each of Camelot's executive officers is eligible to
participate in the executive pool. The following list indicates the amount
payable under the program to each of Camelot's executive officers, other than
Mr. Bonk, and the period of time following the effective time each executive
officer must continue employment, unless earlier terminated without cause or
constructively terminated, to receive this amount: Mr. Rogers, $500,000 and 9
months; Ms. Thorn, $300,000 and 9 months, Mr. Mundorf, $300,000 and 9 months;
Mr. Garrett, $100,000 and 4 months; and Mr. Rinehimer, $100,000 and 4 months.

STOCK OPTION PLANS. The merger agreement provides that at the effective time
each outstanding and unexercised option to purchase shares of Camelot common
stock will become an equivalent right with respect to Trans World common stock.
At the effective time, the unvested stock options granted under the Camelot
stock option plans, including awards held by executive officers of Camelot, will
become fully vested and exercisable. The number of stock options to acquire
shares of Camelot common stock that are expected to be fully vested and
exercisable as a result of the merger held by each executive officer of Camelot
is as follows: Mr. Bonk, 110,000 shares; Mr. Rogers, 80,000 shares; Ms. Thorn,
40,000 shares; Mr. Mundorf, 30,000 shares; Mr. Garrett, 40,000 shares; and Mr.
Rinehimer, 40,000 shares.

EMPLOYEE BENEFITS. Under the merger agreement, Trans World has agreed to
cause Camelot and its subsidiaries to offer compensation and benefits to their
employees that are substantially equivalent in the aggregate to those offered to
such employees prior to the effective time. As a result of these

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arrangements, the executive officers of Camelot will continue to receive
compensation and benefits that are substantially equivalent in the aggregate to
those currently received by them.

INDEMNIFICATION AND INSURANCE. The merger agreement provides that, following
the merger, Trans World will, and will cause Camelot to, maintain and perform
Camelot's existing indemnification and expense advancement provisions and
arrangements, including, without limitation, Camelot's indemnity agreements with
directors and executive officers, with respect to present and former directors
and officers of Camelot for all losses, claims, damages, expenses or liabilities
arising out of actions or omissions or alleged actions or omissions occurring at
or prior to the effective time. The merger agreement also provides that for six
years following the effective time Camelot will maintain its current policies of
directors' and officers' liability insurance or comparable policies with respect
to claims arising from facts or events that occurred prior to or at the
effective time.

DIRECTORSHIPS ON THE TRANS WORLD BOARD. Trans World will increase the size
of the Trans World board at the effective time to add Messrs. Solow and
Zoffinger as Trans World directors. Messrs. Solow and Zoffinger were selected by
the Camelot board. As directors of Trans World, it is anticipated that Messrs.
Solow and Zoffinger will receive compensation consistent with that received by
other Trans World directors. See "Executive Compensation and Other Matters."

The Camelot board was aware of these interests and considered them, among
other matters, in approving the merger agreement, the merger and the
transactions contemplated by the merger agreement.

ACCOUNTING TREATMENT OF THE MERGER

Camelot and Trans World intend for the merger to qualify as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, the recorded assets and liabilities of Trans World and Camelot will
be carried forward to Trans World at their recorded amounts, and the operating
results of Trans World will include operating results of Trans World and Camelot
for the entire fiscal year in which the merger occurs and the reported operating
results of the separate companies for prior periods will be combined and
restated as the operating results of Trans World. It is a condition to
consummation of the merger that Trans World and Camelot receive a letter from
Trans World's independent certified public accountants, KPMG, regarding their
concurrence with the conclusions of management of Trans World that the
transactions contemplated by the merger agreement, if consummated, will qualify
for pooling of interests accounting treatment.

Pooling of interests accounting treatment requires the sharing of rights and
risks among the affiliates of each of the parties to a business combination.
Accordingly, sales of stock by affiliates cannot occur in the period commencing
30 days prior to the consummation of the merger and ending on the date on which
Trans World publicly announces financial results covering at least 30 days of
combined operations. Each of Trans World and Camelot has obtained written
agreements from its respective affiliates containing restrictions on sales of
stock during this period.

REGULATORY MATTERS

Under the Hart-Scott-Rodino Antitrust Improvements Act, the merger may not
be consummated until the following steps have been taken:

- premerger notification and report forms have been submitted and certain
information has been furnished to the FTC and the Antritrust Division of
the Department of Justice; and

- the required waiting period has expired or been terminated.

Trans World and Camelot each filed premerger notification and report forms
with the FTC and the Antitrust Division on November 18, 1998. On November 30,
1998 Trans World and Camelot were advised that the antitrust agencies had
granted early termination with respect to the waiting period.

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At any time before or after the consummation of the merger and
notwithstanding the expiration or termination of the HSR Act waiting period, any
federal or state antitrust authorities could take action under federal and state
antitrust laws as they deem necessary or desirable in the public interest. Such
action could seek to enjoin the consummation of the merger or seek divestiture
of all or part of the assets of Trans World or Camelot. Private parties or state
attorneys general may also seek to take legal action under the antitrust laws,
if circumstances permit.

If any federal or state antitrust authority were to challenge the merger,
the consummation of the merger could be postponed beyond April 30, 1999, in
which event, either Trans World or Camelot may terminate the merger agreement
pursuant to its terms.

OTHER REGULATORY APPROVALS

The merger agreement is subject to the satisfaction or waiver of certain
standard terms and conditions, including obtainment of consents and approvals of
securities or "blue sky" commissions or other governmental agencies that may
reasonably be deemed necessary for the consummation of the merger. While there
can be no assurance that any such consents or approvals, where needed, will be
obtained on a timely basis or will be obtained without certain conditions, we
believe that each of the necessary consents or approvals ultimately will be
obtained.

RESALE OF TRANS WORLD COMMON STOCK

All Trans World shares received by Camelot stockholders in connection with
the merger will be freely transferable, except that Trans World shares received
by persons who are deemed to be "affiliates" of Camelot within the meaning of
Rule 145 under the Securities Act at the time of the Camelot special meeting may
be resold by "affiliates" only in transactions permitted by:

- the resale provisions of Rule 145 under the Securities Act; or

- as otherwise permitted under the Securities Act.

Persons who may be deemed to be "affiliates" of Camelot or Trans World generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party.

Camelot has delivered to Trans World a list of names of those persons whom
it believes to be "affiliates" of Camelot within the meaning of Rule 145 under
the Securities Act, together with a letter from each person on the list in the
form attached to the merger agreement. Each person who delivered an affiliate
letter agreed not to sell, assign or transfer any Trans World shares received in
the merger except in compliance with applicable provisions of the Securities
Act.

Camelot has also delivered to Trans World lock-up agreements from its
affiliates. Each person who signed a Camelot lock-up agreement agreed not to:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option right
or warrant to purchase; or

- otherwise reduce his or her risk relative to any shares of

- Camelot common stock from December 15, 1998 through and including the
effective time, and

- Trans World common stock received in connection with the merger, from
and including the effective time until the day after Trans World
publicly reports revenues and earnings covering at least 30 days of
combined operations of Trans World and Camelot following the effective
time.

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Trans World has delivered to Camelot a lock-up agreement of its affiliates.
Each person who signed a Trans World lock-up agreement agreed not to:

- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option right
or warrant to purchase; or

- otherwise reduce his or her risk relative to any shares of Trans World
common stock for a period from December 15, 1998 until the day after Trans
World publicly reports revenues and earnings covering at least 30 days of
combined operations of Trans World and Camelot following the effective
time.

The Camelot lock-up agreements with the Camelot stockholders who are parties
to the Camelot stockholders' voting agreement terminate if Trans World fails to
publicly report revenues and earnings satisfying the foregoing requirements.
Trans World has agreed with the Camelot stockholders who are parties to the
Camelot stockholders voting agreement, solely for their benefit and not for the
benefit of any other Camelot stockholder, to publicly report revenues and
earnings satisfying the foregoing requirements. Trans World expects to make this
report publicly available on or before June 13, 1999.

Any person who may be deemed to be an "affiliate" of Camelot or Trans World
under the Securities Act cannot use this joint proxy statement/prospectus in
connection with resales of Trans World common stock received in the merger.

APPRAISAL RIGHTS OF CAMELOT STOCKHOLDERS

If the merger is completed, Camelot stockholders who do not vote for the
adoption of the merger agreement and who otherwise comply with the provisions of
Section 262 of the Delaware General Corporation Law summarized below will be
entitled to an appraisal by the Delaware Court of Chancery of the "fair value"
of their Camelot shares. To perfect their appraisal rights, Camelot stockholders
must strictly comply with the procedures in Section 262. Failure to strictly
comply with these procedures will result in the loss of appraisal rights.
Holders of options to acquire Camelot shares will not be entitled to appraisal
rights with respect their options.

THE FOLLOWING IS A SUMMARY OF THE MATERIAL ASPECTS OF SECTION 262. THE FULL
TEXT OF SECTION 262 IS REPRINTED AS ANNEX E TO THIS JOINT/PROXY STATEMENT
PROSPECTUS. YOU SHOULD READ ANNEX E IN ITS ENTIRETY.

To perfect appraisal rights under Section 262 with respect to his or her
Camelot shares, a Camelot stockholder:

1. must not vote for the adoption of the merger agreement; and

2. must deliver to Camelot a written demand for appraisal of his Camelot
shares before the vote on the proposal to adopt the merger agreement.

In order not to vote in favor of the adoption of the merger agreement, a
Camelot stockholder must either:

1. not return a proxy card and not vote in person in favor of the
adoption of the merger agreement;

2. return a proxy card with the "Against" or "Abstain" box checked;

3. vote in person against the adoption of the merger agreement; or

4. register in person an abstention from the proposal to adopt the
merger agreement.

A written demand for appraisal must reasonably inform Camelot of the
identity of the Camelot stockholder and his or her intent to demand appraisal of
his or her Camelot shares. This written demand for appraisal must be separate
from any proxy or vote in person against or abstaining from the adoption of the
merger agreement. A proxy or vote in person against the adoption of the merger
agreement will not, in and of itself, constitute a demand for appraisal.

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A Camelot stockholder wishing to assert appraisal rights must be the record
holder of his or her Camelot shares on the date the written demand for appraisal
is made. Only a holder of record of Camelot shares is entitled to assert
appraisal rights for the Camelot shares registered in that holder's name.
Moreover, to preserve his or her appraisal rights, a Camelot stockholder must
continue to hold his or her shares through the effective time. Accordingly, a
Camelot stockholder who is the record holder of Camelot shares on the date the
written demand for appraisal is made, but who subsequently transfers shares
prior to the effective time, will lose any right to appraisal in respect of
those shares.

ALL WRITTEN DEMANDS FOR APPRAISAL MUST BE MAILED OR DELIVERED TO:

CAMELOT MUSIC HOLDINGS, INC.
8000 FREEDOM AVENUE, N.W.
NORTH CANTON, OHIO 44720
ATTENTION: CORPORATE SECRETARY

OR SHOULD BE DELIVERED TO THE SECRETARY AT THE CAMELOT SPECIAL MEETING PRIOR TO
THE VOTE ON THE MERGER AGREEMENT.

Within ten days after the effective time, Camelot will notify each Camelot
stockholder who properly delivered to Camelot a written demand for appraisal and
has not voted for the adoption of the merger agreement of the effective time.

Within 120 days after the effective time, any Camelot stockholder who has
complied with the provisions will be entitled, within ten days after written
request, to receive from Camelot a statement of the aggregate number of Camelot
shares not voted in favor of the adoption of the merger agreement and with
respect to which demands for appraisal were received, and the number of holders
of those shares.

Within 120 days after the effective time, Camelot or any Camelot stockholder
who has complied with the above requirements may file a petition in the Delaware
Court of Chancery demanding a determination of the fair value of Camelot shares.
If no such petition is filed, appraisal rights will be lost for all Camelot
stockholders who had previously demanded appraisal of their shares. Camelot is
not under any obligation, and has no present intention, to file a petition with
respect to appraisal of the value of the Camelot shares.

Any Camelot stockholder who properly demands appraisal of his or her Camelot
shares but fails to perfect, or effectively withdraws or loses, his or her right
to appraisal, will then have the right to receive Trans World shares for his or
her shares in accordance with the terms of the merger.

If a petition for an appraisal is timely filed and a copy served upon
Camelot, Camelot will then be obligated within 20 days to file with the Delaware
Register in Chancery a list containing the names and addresses of the Camelot
stockholders who have demanded appraisal of their Camelot shares and with whom
agreements as to the value of their shares have not been reached. After notice
to the Camelot stockholders as required by the Delaware Court of Chancery, the
Delaware Court of Chancery may conduct a hearing on such petition to determine
those Camelot stockholders entitled to appraisal rights. The Delaware Court of
Chancery may require the Camelot stockholders who demanded appraisal rights of
their Camelot shares to submit their stock certificates to the Delaware Register
in Chancery for notation of the pendency of the appraisal proceeding. If any
Camelot stockholder fails to comply, the Delaware Court of Chancery may dismiss
the proceedings as to that Camelot stockholder.

After determining which Camelot stockholders are entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares of
Camelot common stock, any element of value arising from the accomplishment or
expectation of the merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Camelot stockholders
considering seeking appraisal should be aware that the fair value of their
shares as determined under Section 262 could be more than, the same as or less
than the consideration they are entitled to receive under the terms of the
merger if they did not seek appraisal of their Camelot shares, and that
investment banking

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opinions as to fairness from a financial point of view are not necessarily
opinions as to fair value under Section 262.

In determining "fair value" of shares, the Delaware Court of Chancery shall
take into account all relevant factors. In WEINBERGER v. UOP, INC., the Delaware
Supreme Court stated that these factors include "market value, asset value,
dividends, earnings prospects, the nature of the enterprise and any other facts
which were known or which could be ascertained as of the date of the merger
which throw any light on future prospects of the merged corporation." In
WEINBERGER, the Delaware Supreme Court stated, among other things, that "proof
of value by any techniques or methods generally considered acceptable in the
financial community and otherwise admissible in court" should be considered in
an appraisal proceeding. In addition, the Delaware Court of Chancery has decided
that the statutory appraisal remedy, depending on factual circumstances, may or
may not be a dissenter's exclusive remedy.

The costs of an appraisal action may be determined by the Delaware Court of
Chancery and charged to the parties as the Delaware Court of Chancery deems
equitable. The Delaware Court of Chancery may also order that all or a portion
of the expenses incurred by any Camelot stockholder in connection with an
appraisal be charged pro rata against the value of all of the shares entitled to
appraisal. In the absence of such determination or assessment, each party bears
its own expenses.

At any time within 60 days after the effective time, any Camelot stockholder
will have the right to withdraw his or her demand for appraisal and to accept
Trans World shares for Camelot shares in accordance with the terms of the
merger. After this period, a Camelot stockholder may withdraw his or her demand
for appraisal only with the written consent of Camelot. No petition timely filed
in the Delaware Court of Chancery demanding appraisal will be dismissed as to
any Camelot stockholder without the approval of the Delaware Court of Chancery,
which may be conditioned on terms the Delaware Court of Chancery deems just.

Any Camelot stockholder who has demanded and perfected an appraisal in
compliance with Section 262 will not, after the effective time of the merger, be
entitled to vote his or her shares for any purpose or be entitled to the payment
of dividends, except dividends payable to Camelot stockholders prior to the
effective time.

FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

In connection with the mailing of this joint proxy statement/prospectus and
as a condition to consummation of the merger, Cleary Gottlieb, counsel for
Camelot, and Cahill Gordon, counsel for Trans World and CAQ, have each delivered
an opinion to Camelot and Trans World, respectively, which each of them expects
to reaffirm at the closing, to the effect that, for federal income tax purposes:

- the merger will be treated as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code, and

- no gain or loss will be recognized by Camelot, CAQ, Trans World or Camelot
stockholders as a result of the merger other than with respect to any cash
received in lieu of fractional Trans World shares.

In rendering such opinions, each of Cleary Gottlieb and Cahill Gordon has
received and will receive and has relied and will rely upon representations
contained in certificates from Camelot and Trans World.

The opinions of Cleary Gottlieb and Cahill Gordon are based upon current
provisions of the Internal Revenue Code, currently applicable Treasury
regulations, and judicial and administrative decisions and rulings. There can be
no assurance that the IRS will not take a contrary view, and no ruling from the
IRS has been or will be sought. Legislative, judicial or administrative changes
to or interpretations of the tax laws could alter or modify the conclusions set
forth in these opinions, and, therefore,

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any such changes or interpretations could affect the tax consequences discussed
in this joint proxy statement/prospectus.

The opinions of Cleary Gottlieb and Cahill Gordon do not purport to address
all aspects of federal income taxation that may affect particular stockholders
in light of their individual circumstances, and are not intended for
stockholders subject to special treatment under the federal income tax law,
including:

- insurance companies;

- tax-exempt organizations;

- financial institutions;

- broker-dealers;

- securities traders who have elected mark-to-market treatment;

- foreign persons;

- stockholders who hold their stock as part of a hedge, appreciated
financial position or straddle or conversion transaction;

- stockholders who do not hold their stock as capital assets; and

- stockholders who have acquired their stock upon the exercise of employee
options or otherwise as compensation.

In addition, the opinions do not consider the effect of any applicable state,
local or foreign tax laws.

TAX CONSEQUENCES OF THE MERGER. Because the merger will be treated as a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code, no gain or loss will be recognized for federal income tax purposes by
Camelot, CAQ or Trans World as a result of the merger. In addition, a Camelot
stockholder will not recognize gain or loss on receipt of Trans World shares in
connection with the merger other than with respect to any cash received in lieu
of fractional Trans World shares. A Camelot stockholder who receives cash in
lieu of fractional Trans World shares will be treated as having received the
fractional shares in the merger and then as having exchanged the fractional
shares for the cash. Accordingly, the stockholder will recognize gain or loss
equal to the difference, if any, between the amount of cash received and the
stockholder's tax basis allocable to such fractional share. Any resulting gain
or loss will be capital gain or loss. If the stockholder has held Camelot shares
as a capital asset for more than one year at the effective time of the merger,
it will be long-term capital gain or loss. A Camelot stockholder will have a tax
basis in the Trans World shares received in the merger equal to the tax basis of
the stockholder's Camelot shares less the tax basis allocable to any fractional
share. The holding period for Trans World shares received in the merger will
include the holding period of the stockholder's Camelot shares.

REPORTING REQUIREMENTS AND BACKUP WITHHOLDING. Each Camelot stockholder
receiving Trans World shares as a result of the merger will be required to
retain certain records and file with its federal income tax return a statement
setting forth certain facts relating to the merger.

Backup withholding at the rate of 31% may apply with respect to certain
payments unless the recipient:

- is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or

- provides a correct taxpayer identification number, certifies as to no loss
of exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.

A Camelot stockholder who does not provide Trans World with its correct taxpayer
identification number may be subject to penalties imposed by the IRS. Any
amounts withheld under the backup

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withholding rules may be allowed as a refund or a credit against the
stockholder's federal income tax liability provided that certain required
information is furnished to the IRS.

YOU SHOULD CONSULT YOUR OWN TAX ADVISOR IN ORDER TO REVIEW YOUR SPECIFIC TAX
SITUATION AND TO MORE FULLY UNDERSTAND THE TAX CONSEQUENCES OF OUR MERGER AS
THEY APPLY TO YOU.

PUBLIC TRADING MARKETS; DELISTING OF CAMELOT COMMON STOCK

Trans World common stock is currently quoted on Nasdaq under the symbol
"TWMC." Trans World will apply for quotation on Nasdaq of the shares of Trans
World common stock issuable in connection with the merger. The approval for
quotation on Nasdaq of such shares of Trans World common stock, subject to
official notice of issuance, is a condition to the consummation of the merger.
Camelot common stock is currently quoted on OTC under the symbol "CMHDA." Upon
consummation of the merger, Camelot common stock will no longer be quoted on
OTC.

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THE MERGER AGREEMENT

THE FOLLOWING IS A SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER
AGREEMENT. A COPY OF THE MERGER AGREEMENT IS ATTACHED AS ANNEX A. YOU SHOULD
READ IT IN ITS ENTIRETY.

GENERAL; EFFECTIVE TIME AND EFFECTS OF THE MERGER

The merger agreement provides that CAQ will merge into Camelot, with Camelot
continuing as the surviving corporation and as a wholly owned subsidiary of
Trans World. The merger is conditioned on:

- the adoption of the merger agreement by the Camelot stockholders,

- the approval of the Trans World merger matters by the Trans World
stockholders, and

- the satisfaction or waiver of the other conditions to the merger.

Following satisfaction of the conditions to the merger, the merger will
become effective at the time of filing of a certificate of merger, in accordance
with Delaware law.

CONVERSION OF CAMELOT SHARES

SUMMARY: CAMELOT STOCKHOLDERS WILL RECEIVE 1.9 TRANS WORLD SHARES FOR EACH
CAMELOT SHARE.

The merger agreement provides that, as of the effective time each Camelot
share, except for dissenting shares, see "--Dissenting Shares," will be
cancelled and converted into the right to receive 1.9 Trans World shares.

DISSENTING SHARES

SUMMARY: CAMELOT STOCKHOLDERS MAY HAVE APPRAISAL RIGHTS.

Camelot stockholders who do not vote their shares in favor of adoption of
the merger agreement and who demand appraisal of their shares in accordance with
Section 262 of the Delaware General Corporation Law will not have their shares
converted into Trans World shares as described under "-- Conversion of Camelot
Shares." If a holder of dissenting shares fails to perfect or effectively
withdraws or loses such right to appraisal, then as of the effective time or the
occurrence of such event, whichever occurs last, such holder's dissenting shares
will be converted into the rights described under "--Conversion of Camelot
Shares."

NO FRACTIONAL TRANS WORLD SHARES

SUMMARY: CAMELOT STOCKHOLDERS WILL RECEIVE CASH IN LIEU OF FRACTIONAL TRANS
WORLD SHARES.

No fractional Trans World shares will be issued in the merger. Each holder
of Camelot shares who otherwise would be entitled to receive a fractional Trans
World share will be paid an amount in cash equal to such fraction multiplied by
the market value. "Market value" means, with respect to Trans World shares, the
mean between the high and low sale prices of the Trans World shares as reported
by Nasdaq on the trading day immediately prior to the effective time. The
fractional share interests of each Camelot stockholder will be aggregated, and
no Camelot stockholder will receive cash in an amount equal to or greater than
the market value of one full Trans World share.

EXCHANGE OF SHARES

SUMMARY: TRANS WORLD WILL SEND INSTRUCTIONS REGARDING EXCHANGE OF SHARES TO
CAMELOT STOCKHOLDERS.

At or prior to the effective time, Trans World will deposit with ChaseMellon
Shareholder Services L.L.C., as exchange agent, certificates representing the
number of Trans World shares and an estimated amount of cash payable in respect
of fractional shares, as may be issuable or payable, as the case may

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be, in exchange for outstanding Camelot shares. We refer to any cash and
certificates representing Trans World shares deposited with the exchange agent
as the "Exchange Fund."

Promptly after the effective time, Trans World will mail to each record
holder of Camelot shares a letter of transmittal and instructions for use in
effecting the surrender of the Camelot shares for exchange.

Upon surrender to the exchange agent of Camelot shares for cancellation,
together with a properly executed and completed letter of transmittal, the
holder of the Camelot shares will be entitled to receive the number of Trans
World shares determined by the exchange ratio and cash instead of any fractional
Trans World share.

Trans World will not pay any dividends or other distributions declared after
the effective time to the holder of any unsurrendered Camelot shares. Upon
surrender of any such Camelot shares, Trans World will pay to the holder, the
amount of any dividends or other distributions with a record date after the
effective time.

At the effective time, Camelot will close its stock transfer books and no
longer transfer Camelot shares. After the effective time, holders of Camelot
shares will cease to have any rights with respect to Camelot shares, except for
the right to convert their shares and as otherwise provided under
"--Dissenting Shares" or by law.

Any portion of the Exchange Fund that remains unclaimed by the Camelot
stockholders for six months after the effective time will be paid or delivered
to Trans World. Any Camelot stockholders who have not previously surrendered
their Camelot shares as described above must look only to Trans World for
payment of Trans World shares, cash instead of any fractional shares and unpaid
dividends and distributions on the Trans World shares deliverable in respect of
each Camelot share such stockholder holds, in each case, without any interest.

TREATMENT OF CAMELOT STOCK OPTIONS

SUMMARY: CAMELOT STOCK OPTIONS WILL BECOME TRANS WORLD STOCK OPTIONS.

As of the effective time, by virtue of the merger and without any action on
the part of the holders, all rights with respect to Camelot common stock
equivalents disclosed to Trans World and outstanding immediately prior to the
effective time, whether or not then exercisable, will become rights with respect
to Trans World common stock (each a "Trans World Exchange Option"). Trans World
will assume all of Camelot's obligations and liabilities under such Camelot
common stock equivalents in accordance with the terms of any stock option plan
under which they were issued and any stock option agreement by which they are
evidenced, except that:

- each Camelot common stock equivalent will be exercisable for the greatest
number of whole Trans World shares equal to the product of the number of
shares of Camelot common stock underlying such Camelot common stock
equivalent immediately prior to the effective time multiplied by the
exchange ratio, and

- the exercise price per Trans World share will be an amount equal to the
exercise price per share of Camelot common stock specified under such
Camelot common stock equivalent in effect immediately prior to the
effective time divided by the exchange ratio (rounded up to the nearest
whole cent).

Trans World will deliver to each holder of a Trans World Exchange Option a
notice stating

- the number of Trans World shares underlying the Trans World Exchange
Option,

- the exercise price per Trans World share, and

- an acknowledgment that all such Trans World Exchange Options are fully
vested and exercisable and, except as provided above, will continue to be
governed by the terms and conditions of the

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Camelot stock option plans under which the corresponding Camelot common
stock equivalents were originally granted and any applicable stock option
agreement evidencing such original grants.

All Camelot common stock equivalents granted under Camelot stock option plans
that are outstanding immediately prior to the effective time become
automatically fully vested and exercisable as of the effective time.

As of March 15, 1999, 705,000 Camelot shares were issuable upon the exercise
of outstanding Camelot common stock equivalents. Such Camelot common stock
equivalents, given the exchange ratio of 1.9 Trans World shares per Camelot
share, will be converted at the effective time into Trans World Exchange Options
to purchase an aggregate of 1,339,500 Trans World shares. Trans World will also
reserve 3,289 shares of Trans World common stock for issuance in respect of the
1,731 shares of Camelot common stock reserved for issuance in respect of
bankruptcy claims.

Trans World has agreed to file a registration statement with the Commission
before the effective time to register the Trans World shares issuable upon
exercise of the Trans World Exchange Options and to cause such registration
statement to remain effective until the exercise or expiration of all such
options.

EMPLOYEE BENEFITS

After the effective time, the surviving corporation will honor, pay and
perform all of Camelot's or any of its subsidiaries' liabilities and obligations
under or in respect of

- each employment, retention, severance, termination or similar agreement
with any director, officer or other employee of Camelot or any of its
subsidiaries, and

- each deferred compensation or other equity based plan or arrangement
covering any director, officer or other employee of Camelot or any of its
subsidiaries, in each case, in accordance with the terms in effect as of
the date of the merger agreement.

Trans World will cause the surviving corporation to offer compensation and
benefits to Camelot's employees that are substantially equivalent when taken as
a whole to the compensation and benefits that Camelot's employees enjoyed before
the effective time. However, nothing obligates the surviving corporation to
renew any employment agreements after their expiration or termination or
prohibits the surviving corporation from terminating at any time any employee
employed at will. Trans World will cause the surviving corporation to maintain
for one year following the effective time Camelot's severance policies in effect
immediately prior to the effective time.

REPRESENTATIONS AND WARRANTIES

The merger agreement contains the following material representations and
warranties of Camelot:

- the due organization, valid existence and good standing of Camelot and its
subsidiaries and the absence of any violation of any of their respective
certificates of incorporation, other applicable charter document or
by-laws;

- the authorization, execution, delivery and enforceability of the merger
agreement and the transactions contemplated thereby;

- the absence of any required permit, authorization, consent or approval of
any public body, except as provided in the merger agreement;

- the absence of any conflict between the execution and performance of the
merger agreement and Camelot's organizational documents, applicable law
and material contracts;

- the receipt of an opinion of Merrill Lynch as to the fairness of the
exchange ratio, from a financial point of view, to the Camelot
stockholders;

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- the approval and adoption of the merger agreement by the Camelot board and
the recommendation by the Camelot board to the Camelot stockholders of the
approval and adoption of the merger agreement and the merger;

- the granting of approvals and the taking of steps to exempt the merger
from the provisions of state antitakeover statutes;

- the absence of any brokerage, finder's or similar fee in connection with
the merger, except for fees to be paid to Merrill Lynch and Policano &
Manzo;

- the accuracy and completeness of information contained in this joint proxy
statement/prospectus, except for information provided by Trans World;

- Camelot's capital structure;

- the accuracy and completeness of Camelot's forms, reports, registration
statements and documents prepared for its securityholders generally since
January 27, 1998 or filed by Camelot with the Commission since January 27,
1998 and the financial statements contained therein;

- the absence of undisclosed liabilities;

- the absence of material changes or events;

- ownership of the outstanding capital stock of Camelot's subsidiaries;

- the absence of material pending or threatened litigation against Camelot;

- the existence of Camelot's insurance coverage;

- the enforceability of material contracts and the absence of material
breaches, violations or defaults thereunder;

- Camelot's labor relations and employment agreements;

- compliance with laws, ordinances, regulations, rules and orders;

- the right to use intellectual property;

- representations as to material tax matters and the payment of taxes;

- the absence of changes to, and the qualification, operation and liability
under, material employee benefit plans;

- representations as to material environmental matters;

- the absence of actions that would prevent the merger from constituting a
transaction qualifying under Section 368(a) of the Internal Revenue Code;
and

- Camelot's belief that the merger will qualify as a pooling of interests
for accounting purposes.

The merger agreement contains the following material representations and
warranties of Trans World and CAQ:

- the due organization, valid existence and good standing of Trans World and
CAQ and the ownership of CAQ's outstanding capital stock;

- the authorization, execution, delivery and enforceability of the merger
agreement and the transactions contemplated thereby;

- the absence of any required permit, authorization, consent or approval of
any public body, except as provided in the merger agreement;

- the absence of any conflict between the execution and performance of the
merger agreement and Trans World and CAQ's organizational documents,
applicable law and certain contracts;

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- the receipt of an opinion of Goldman Sachs as to the fairness of the
exchange ratio, from a financial point of view, to the Trans World
stockholders;

- the approval and adoption of the merger agreement by the Trans World board
and the recommendation by the Trans World board to the Trans World
stockholders of the Trans World merger matters;

- the absence of any brokerage, finder's or similar fee in connection with
the merger, except for fees to be paid to Goldman Sachs;

- the accuracy and completeness of information contained in this joint proxy
statement/prospectus and the registration statement of which this
prospectus is a part;

- the accuracy and completeness of Trans World's forms, reports,
registration statements and documents filed by Trans World with the
Commission since January 31, 1998 and the financial statements contained
therein;

- the absence of undisclosed liabilities;

- the absence of certain changes or events;

- Trans World's capital structure;

- the absence of material pending or threatened litigation against Trans
World or its subsidiaries;

- the absence of actions that would prevent the merger from constituting a
transaction qualifying under Section 368(a) of the Internal Revenue Code;

- representations as to material tax matters and the payment of taxes;

- Trans World's belief that the merger will qualify as a pooling of
interests for accounting purposes; and

- the granting of approvals and the taking of steps to exempt the merger and
related transactions from the provisions of state anti-takeover statutes.

CONDUCT OF BUSINESS OF CAMELOT

SUMMARY: CAMELOT HAS AGREED TO RESTRICTIONS THAT LIMIT ITS ABILITY TO
CONDUCT BUSINESS OUTSIDE THE ORDINARY COURSE.

Before the effective time, the operations of Camelot and its subsidiaries
will be conducted in the ordinary and usual course of business and consistent
with past practices. Camelot and its subsidiaries will use all commercially
reasonable efforts to:

- preserve intact their business organizations;

- keep available the services of their officers and employees; and

- preserve their current business relationships,

and will not voluntarily take any action that would result in a breach of a
representation or warranty that would adversely affect their ability to
consummate the merger or the other transactions contemplated thereby. Except as
otherwise provided in or contemplated by the merger agreement, prior to the
effective time, neither Camelot nor any of its subsidiaries will, without the
prior written consent of Trans World:

- amend its charter documents or by-laws;

- authorize, issue, sell or deliver any shares of any class of capital stock
of Camelot or any of its subsidiaries other than pursuant to Camelot
common stock equivalents disclosed to Trans World;

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- split, combine or reclassify any shares of its capital stock, declare, set
aside or pay any dividend or other distribution in respect of its capital
stock except dividends to Camelot or purchase, redeem or otherwise acquire
any shares of its own capital stock or that of any subsidiary of Camelot;

- except in the ordinary course of business and consistent with past
practice

- create or incur indebtedness for borrowed money,

- assume, guarantee, endorse or otherwise as an accommodation become
liable or responsible for the obligations of any other individual, firm
or corporation or make any loans, advances or capital contributions to
or investments in any other individual, firm or corporation, other than
between or among Camelot and any of its subsidiaries that are wholly
owned, or

- enter into any commitment or transaction material to Camelot and its
subsidiaries taken as a whole;

- increase in any manner the compensation of any of Camelot's or Camelot's
subsidiaries' directors or officers or employees, except in the case of
employees in the ordinary course of business and consistent with past
practice;

- pay or agree to pay any material employee benefit, or enter into any
agreement with any of its past or present employees providing for the
payment of any material employee benefit, except as required under
arrangements existing as of October 26, 1998 and disclosed to Trans World;

- except as required under arrangements existing as of October 26, 1998 and
disclosed to Trans World, grant any severance or termination pay to, or
enter into any employment, consulting or severance agreement with, any
person;

- except in the ordinary course of business and consistent with past
practice, enter into any understanding with any of its past or present
officers or other employees, except in the case of employees other than
officers in the ordinary course of business and consistent with past
practice;

- except in the ordinary course of business and consistent with past
practice or as required under arrangements existing as of October 26, 1998
and disclosed to Trans World, or as may be required to comply with
applicable law, become obligated under or amend any employee benefit plan
or similar plan or arrangement that was not in existence on or prior to
October 26, 1998 and disclosed to Trans World;

- enter into any employment, consulting, severance or termination agreement
with any director or officer of Camelot or Camelot's subsidiaries;

- transfer or agree to transfer any right with respect to any material
properties, real, personal or mixed, except

- in the ordinary course of business and consistent with past practice,

- in connection with the closing of certain stores disclosed to Trans
World,

- in connection with Camelot's credit agreement, and

- as otherwise expressly contemplated by the merger agreement;

- except in the ordinary course of business or as otherwise expressly
contemplated by the merger agreement, grant or acquire any material
licenses to use any intellectual property rights;

- except as otherwise expressly contemplated by the merger agreement, enter
into any other agreements, except agreements for the purchase, sale or
lease of goods or services in the ordinary course of business and
consistent with past practice and having a term of no more than one year;

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- except as provided under "--No Solicitation by Camelot," authorize,
recommend, propose or announce an intention to authorize, recommend or
propose, or enter into any agreement in principle or an agreement with any
other person with respect to

- any plan of liquidation or dissolution,

- any acquisition of a material amount of assets, other than in the
ordinary course of business, or securities,

- any disposition of a material amount of assets or securities,

- any material change in its capitalization,

- any entry into a material contract,

- any amendment or modification of any material contract, or

- any release or relinquishment of any material contract rights

except in each case in the ordinary course of business and consistent with
past practice or except as expressly contemplated by the merger agreement;

- except as previously approved by the Camelot board prior to the date of
the merger agreement and as identified to Trans World prior to the date of
the merger agreement, authorize or commit to make capital expenditures in
excess of $100,000;

- permit any insurance policy naming it as a beneficiary or a loss payee to
be cancelled, terminated or materially altered, except where such
insurance as altered, modified or replaced is materially equivalent, and
except in the ordinary course of business and consistent with past
practice and following written notice to Trans World;

- maintain its books and records in a manner not in the ordinary course of
business and consistent with past practice;

- enter into any hedging, option, derivative or other similar transaction;

- institute any change in its accounting methods, principles or practices
except insofar as may have been required by a change in United States
generally accepted accounting principles;

- pay, discharge or satisfy any material claims, liabilities or obligations,
other than the payment, discharge or satisfaction of liabilities in the
ordinary course of business and consistent with past practice, or collect,
or accelerate the collection of, any amounts owed other than the
collection in the ordinary course of business;

- take, cause or permit to be taken any action, whether before or after the
effective time, that could reasonably be expected to prevent the merger
from constituting a "reorganization" within the meaning of Section 368(a)
of the Internal Revenue Code or qualifying as a pooling of interests for
accounting purposes; or

- agree to do any of the foregoing.

CONDUCT OF BUSINESS OF TRANS WORLD

SUMMARY: TRANS WORLD HAS AGREED TO RESTRICTIONS THAT LIMIT ITS ABILITY TO
CONDUCT BUSINESS OUTSIDE THE ORDINARY COURSE.

Before the effective time, the operations of Trans World and its
subsidiaries will be conducted in the ordinary and usual course of business and
consistent with past practices. Trans World and its subsidiaries will use all
commercially reasonable efforts to

- preserve intact their business organizations;

- keep available the services of their officers and employees;

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- preserve their current business relationships,

and will not voluntarily take any action that would result in a breach of a
representation or warranty that would adversely affect their ability to
consummate the merger or the other transactions contemplated thereby. Except as
otherwise expressly provided in or contemplated by the merger agreement, prior
to the effective time, neither Trans World nor its subsidiaries will, without
the prior written consent of Camelot:

- with respect to Trans World, amend its certificate of incorporation;

- authorize, issue, sell or deliver any shares of any class of capital stock
of Trans World or any of its subsidiaries other than

- in accordance with the limitations of Trans World's stock option plans
and Trans World's restricted stock plan, and

- in connection with any acquisition with respect to which Trans World is
not required by the rules of Nasdaq to obtain stockholder approval;

- split, combine or reclassify any shares of its capital stock, declare, set
aside or pay any dividend or other distribution in respect of its capital
stock except dividends to Trans World or purchase, redeem or otherwise
acquire any shares of its own capital stock or that of any of its
subsidiaries;

- except as provided in "--No Solicitation by Trans World," authorize,
recommend, propose or announce an intention to authorize, recommend or
propose, or enter into any agreement in principle or an agreement with any
other person with respect to:

- any plan of liquidation or dissolution,

- any acquisition of a material amount of assets other than in the
ordinary course of business or securities,

- any disposition of a material amount of assets or securities,

- any material change in its capitalization,

- any entry into a material contract,

- any amendment or modification of any material contract, or

- any release or relinquishment of any material contract rights,

except in each case in the ordinary course of business and consistent with
past practice or as expressly contemplated by the merger agreement;

- maintain its books and records in a manner not in the ordinary course of
business and consistent with past practice;

- enter into any hedging, option, derivative or other similar transaction;

- institute any change in its accounting methods, principles or practices
except insofar as may have been required by a change in U.S. generally
accepted accounting principles;

- agree to do any of the foregoing.

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NO SOLICITATION BY CAMELOT

SUMMARY: CAMELOT HAS AGREED NOT TO ENCOURAGE OR EXPLORE ANY COMPETING
TRANSACTION.

Camelot has agreed that, prior to the effective time, it will not, and will
not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives to:

- solicit, initiate, facilitate or encourage any inquiries or the making of
any proposal with respect to any merger, consolidation or other business
combination involving Camelot or any of its subsidiaries or any
acquisition of any kind of a material portion of the assets or capital
stock of Camelot and its subsidiaries taken as a whole (an "Acquisition
Transaction");

- negotiate, explore or otherwise communicate in any way with any third
party with respect to any Acquisition Transaction; or

- enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the merger or any other
transactions contemplated by the merger agreement.

However, Camelot may, prior to the date of the Camelot special meeting, in
response to an unsolicited written proposal with respect to an Acquisition
Transaction involving the acquisition of all of the outstanding shares of
Camelot common stock or all or substantially all of the assets of Camelot and
its subsidiaries from a third party:

- furnish or disclose non-public information to such third party, and

- negotiate, explore or otherwise communicate with such third party.

Camelot may do this only if, after being advised by its outside counsel with
respect to its fiduciary obligations and Merrill Lynch with respect to the
financial terms of any proposed Acquisition Transaction, the Camelot board
determines reasonably and in good faith by a majority vote that taking such
action is necessary in the exercise of its fiduciary obligations under
applicable law.

NO SOLICITATION BY TRANS WORLD

SUMMARY: TRANS WORLD HAS AGREED NOT TO ENCOURAGE OR EXPLORE ANY COMPETING
TRANSACTION.

Trans World has agreed that, prior to the effective time, it will not, and
will not authorize or permit any of its subsidiaries or any of its or its
subsidiaries' directors, officers, employees, agents or representatives to:

- solicit, initiate, facilitate or encourage any inquiries or the making of
any proposal with respect to any Acquisition Transaction involving Trans
World and its subsidiaries;

- negotiate, explore or otherwise communicate in any way with any third
party with respect to any Acquisition Transaction; or

- enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the merger or any other
transactions contemplated by the merger agreement.

However, Trans World may, prior to the date of the Trans World special meeting,
in response to an unsolicited written proposal with respect to an Acquisition
Transaction involving the acquisition of all of the outstanding shares of Trans
World common stock or all or substantially all of the assets of Trans World and
its subsidiaries from a third party:

- furnish or disclose non-public information to such third party; and

- negotiate, explore or otherwise communicate with such third party.

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Trans World may do this only if, after being advised by its outside counsel with
respect to its fiduciary obligations and Goldman Sachs with respect to the
financial terms of any proposed Acquisition Transaction, the Trans World board
determines reasonably and in good faith by a majority vote that taking such
action is necessary in the exercise of its fiduciary obligations under
applicable law.

BOARD REPRESENTATION

Trans World will increase its board size to add two additional directors,
who have been selected by the Camelot board prior to the effective time, at
least one of whom will not have a term that is scheduled for re-election at the
next annual meeting of stockholders of Trans World.

CONDITIONS

SUMMARY: THE OBLIGATIONS OF TRANS WORLD, CAQ AND CAMELOT ARE CONTINGENT UPON
THE SATISFACTION OR WAIVER OF CONDITIONS.

In addition to the requisite approvals of the merger agreement by the
Camelot stockholders and of the Trans World merger matters by the Trans World
stockholders, the respective obligations of Trans World, CAQ and Camelot to
consummate the merger are conditioned on:

- the registration statement of which this prospectus is a part must have
become effective under the Securities Act;

- all necessary state securities and blue sky authorizations must have been
received;

- the Trans World shares issuable in the merger must have been approved for
quotation on Nasdaq;

- no order of a court or governmental entity may prohibit the consummation
of the merger, and any waiting period applicable to the consummation of
the merger under the HSR Act must have expired or been terminated;

- all authorizations and approvals that may be required in any foreign
jurisdiction for the purposes of applicable anti-trust or similar
legislation in connection with the consummation of the merger must have
been received;

- the receipt by Trans World of an opinion of Cahill Gordon and the receipt
by Camelot of an opinion of Cleary Gottlieb, each dated as of the
effective date, each to the effect that

- the merger will be treated as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code, and

- except for cash received for fractional Trans World shares, no gain or
loss will be recognized by a Camelot stockholder as a result of the
merger with respect to the Camelot shares converted into Trans World
shares; and

- Camelot and Trans World must have received a letter from Trans World's
independent certified public accountants stating that they concur with the
conclusion of Trans World's management that no conditions exist with
respect to Trans World that would preclude Trans World from being a party
to a merger accounted for as a pooling of interests.

The obligations of Camelot to effect the merger are also conditioned on:

- the representations and warranties of Trans World and CAQ must be true and
correct in all respects, except

- for those untruths or inaccuracies that would not either impair Trans
World's or CAQ's ability to consummate the merger or have a material
adverse effect on Trans World, and

- for changes permitted or contemplated by the merger agreement;

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- Trans World and CAQ must have performed and complied in all material
respects with their obligations under the merger agreement except for
those failures to so perform or comply that would not either impair Trans
World's or CAQ's ability to consummate the merger or have a material
adverse effect on Trans World;

- Camelot must have received certificates of certain officers of Trans World
and CAQ evidencing compliance with certain conditions set forth in the
merger agreement;

- there must not have occurred or become known since October 26, 1998 any
material adverse change in Trans World and its subsidiaries taken as a
whole; and

- all necessary consents and approvals of, and notifications and disclosures
to, and filings and registration with, any governmental authority or any
other third party required on the part of Trans World and CAQ for the
consummation of the merger must have been obtained or accomplished.

The obligations of Trans World and CAQ to effect the merger are further
conditioned on:

- the representations and warranties of Camelot must be true and correct in
all respects, except

- for those untruths or inaccuracies that would not either impair
Camelot's ability to consummate the merger or have a material adverse
effect on Camelot, and

- for changes permitted or contemplated by the merger agreement;

- Camelot must have performed and complied in all material respects with its
obligations under the merger agreement except for those failures to so
perform or comply that would not either impair Camelot's ability to
consummate the merger or have a material adverse effect on Camelot;

- Trans World and CAQ must have received certificates of certain officers of
Camelot evidencing compliance with certain conditions set forth in the
merger agreement;

- there must not have occurred or become known since October 26, 1998 any
material adverse change in Camelot and its subsidiaries taken as a whole;
and

- all the consents, approvals, notifications, disclosures, filings and
registrations required by the merger agreement must have been obtained.

TERMINATION

SUMMARY: THE MERGER AGREEMENT MAY ALLOW TRANS WORLD OR CAMELOT TO TERMINATE
THE AGREEMENT.

The merger agreement may be terminated:

- by mutual consent of the Trans World board and the Camelot board;

- by either Trans World or Camelot if, without fault of such terminating
party, the merger has not been consummated on or before April 30, 1999,
which may be extended by mutual consent of Trans World and Camelot;

- by either Trans World or Camelot if any court or other governmental body
has prohibited the merger; and

- by either Trans World or Camelot if either the Camelot stockholders have
not adopted the merger agreement or the Trans World stockholders have not
approved the Trans World merger matters.

The merger agreement may be terminated by Trans World if:

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- Camelot has failed to comply in any respect with any of its agreements
contained in the merger agreement except for those failures to so perform
or comply that would not either impair Camelot's ability to consummate the
merger or have a material adverse effect on Camelot;

- there exists an uncured breach of any representation or warranty of
Camelot contained in the merger agreement such that the related closing
condition would not be satisfied;

- the Camelot board

- fails to recommend the adoption of the merger agreement to the Camelot
stockholders,

- withdraws or amends or modifies in a manner adverse to Trans World its
recommendation or approval in respect of the merger, or

- makes any recommendation with respect to an Acquisition Transaction
other than a recommendation to reject such Acquisition Transaction;

- Camelot or its representatives disclose non-public information or
communicate in any way with a third party regarding an Acquisition
Transaction; or

- the number of dissenting shares exceeds the lesser of

- 10% of the total number of shares of Camelot common stock outstanding
immediately prior to the effective time, and

- the number of dissenting shares as Trans World is advised by its
independent certified public accountants will prevent the merger from
being treated as a pooling of interests for accounting purposes.

The merger agreement may be terminated by Camelot if:

- Trans World or CAQ fails to comply in any respect with any of their
agreements contained in the merger agreement except for those failures to
so perform or comply that would not either impair Trans World's ability to
consummate the merger or have a material adverse effect on Trans World;

- there exists an uncured breach of any representation or warranty of Trans
World or CAQ contained in the merger agreement such that the related
closing condition would not be satisfied; or

- the Trans World board

- fails to recommend the approval of the Trans World merger matters to
the Trans World stockholders,

- withdraws or amends or modifies in a manner adverse to Camelot its
recommendation or approval in respect of the Trans World merger
matters, or

- makes any recommendation with respect to an Acquisition Transaction
other than a recommendation to reject such Acquisition Transaction.

FEES AND EXPENSES

Each of Trans World and CAQ, on the one hand, and Camelot, on the other
hand, will bear its respective expenses incurred in connection with the merger
agreement and the merger.

If the merger agreement is terminated, no party will have any liability or
further obligation to any other party, except as described below and except for
any liability or further obligation arising from or in connection with any
willful breach of its obligations under the merger agreement.

If the merger agreement is terminated by Camelot pursuant to the third
bullet point of the third paragraph under "--Termination" or because the Trans
World stockholders have not approved the

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Trans World merger matters, Trans World must within two business days of such
termination pay Camelot:

- up to $3 million to reimburse Camelot for its documented fees and expenses
incurred in connection with the merger agreement; and

- a cash fee of $18 million.

If the merger agreement is terminated by Trans World pursuant to the third
or fourth bullet point of the second paragraph under "--Termination" or because
the Camelot stockholders have not adopted the merger agreement, Camelot must
within two business days of such termination pay Trans World:

- up to $3 million to reimburse Trans World for its documented fees and
expenses incurred in connection with the merger agreement; and

- a cash fee of $18 million.

INDEMNIFICATION; INSURANCE

Trans World has agreed to maintain and perform to the greatest extent
permitted under Camelot's existing indemnification and expense advancement
provisions and arrangements with respect to present and former directors and
officers of Camelot for all losses arising out of actions or omissions or
alleged actions or omissions occurring at or prior to the effective time, to the
extent permitted or required under applicable law, and the certificate of
incorporation and by-laws of Camelot in effect as of October 26, 1998.

For a period of six years after the effective time, Trans World has agreed
to cause Camelot to maintain in effect its current policies of directors' and
officers' liability insurance with respect to claims arising from facts or
events that occurred at or before the effective time. However, Camelot will not
be obligated to make annual premium payments for such insurance to the extent
such premiums exceed 200% of the annual premiums paid as of October 26, 1998 by
Camelot for such insurance.

AMENDMENT

The merger agreement may be amended, modified or supplemented only by
written agreement of Trans World, CAQ and Camelot at any time prior to the
effective time with respect to any of its terms. However, after the merger
agreement is adopted by the Camelot stockholders, no such amendment or
modification may change the amount or form of the consideration to be paid.

WAIVERS; CONSENTS

Any party to the merger agreement may waive a failure by another party to
comply with any of its obligations under the merger agreement only by a written
instrument signed by the party granting such waiver. However, such waiver, or
any failure to insist upon strict compliance with such obligation, will not
operate as a waiver of any subsequent or other failure. Whenever the merger
agreement requires or permits consent by or on behalf of any party, such consent
must be given in writing.

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OTHER AGREEMENTS

THE FOLLOWING IS A SUMMARY OF THE:

- VOTING AGREEMENT, DATED AS OF OCTOBER 26, 1998, AMONG TRANS WORLD, VAN
KAMPEN-MERRITT PRIME RATE INCOME TRUST, FERNWOOD ASSOCIATES, L.P.,
FERNWOOD RESTRUCTURING, LTD., FERNWOOD FOUNDATION FUND, FERNWOOD TOTAL
RETURN HOLDINGS, LTD., MERRILL LYNCH AND OAKTREE CAPITAL MANAGEMENT, LLC
(COLLECTIVELY, THE "CAMELOT PRINCIPAL STOCKHOLDERS");

- VOTING AGREEMENT, DATED AS OF OCTOBER 26, 1998, AMONG CAMELOT AND ROBERT
J. HIGGINS; AND

- REGISTRATION RIGHTS AGREEMENT, DATED OCTOBER 26, 1998, BY AND AMONG TRANS
WORLD AND THE CAMELOT PRINCIPAL STOCKHOLDERS.

COPIES OF THE CAMELOT VOTING AGREEMENT AND THE HIGGINS VOTING AGREEMENT ARE
ATTACHED HERETO AS ANNEX B AND C. THE REGISTRATION RIGHTS AGREEMENT HAS BEEN
FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY
STATEMENT/PROSPECTUS IS A PART. YOU SHOULD READ EACH OF THE CAMELOT VOTING
AGREEMENT, THE HIGGINS VOTING AGREEMENT AND THE REGISTRATION RIGHTS AGREEMENT IN
ITS ENTIRETY.

THE CAMELOT VOTING AGREEMENT

SUMMARY: THE CAMELOT PRINCIPAL STOCKHOLDERS HAVE AGREED TO VOTE THEIR SHARES
REPRESENTING 58.4% OF THE OUTSTANDING CAMELOT SHARES "FOR" THE ADOPTION OF THE
MERGER AGREEMENT AND AGAINST ANY COMPETING TRANSACTION.

As a condition to the willingness of Trans World to enter into the merger
agreement, the Camelot Principal Stockholders entered into the Camelot voting
agreement.

VOTING OF SHARES; PROXY. Each of the Camelot Principal Stockholders has
agreed to vote its Camelot shares at the Camelot special meeting:

- in favor of the merger agreement; and

- against any competing Acquisition Transaction and any action or agreement
contrary to the obligations under the Camelot voting agreement or the
merger agreement.

The obligations of the Camelot Principal Stockholders under the Camelot voting
agreement will terminate at the earliest of:

- the termination of the merger agreement in accordance with its terms;

- the effective time;

- the termination of the Camelot voting agreement by the mutual written
agreement of those parties or by Trans World; or

- April 30, 1999, unless extended.

Each Camelot Principal Stockholder has irrevocably appointed Trans World as
its attorney and proxy with full power of substitution, to vote its Camelot
shares at the Camelot special meeting.

COVENANTS OF THE CAMELOT PRINCIPAL STOCKHOLDERS. Each Camelot Principal
Stockholder has agreed that such Camelot Principal Stockholder will not:

- dispose of or encumber the Camelot shares held by it unless the transferee
executes a comparable voting agreement;

- solicit or encourage other proposals or negotiate or communicate in any
way with any third party with respect to any competing Acquisition
Transaction; and

72
<PAGE>
- enter into any agreement requiring it to abandon, terminate or fail to
perform as contemplated by the Camelot voting agreement.

The Camelot voting agreement covers 58.4% of the Camelot shares outstanding
as of March 15, 1999.

THE HIGGINS VOTING AGREEMENT

SUMMARY: ROBERT J. HIGGINS HAS AGREED TO VOTE HIS SHARES REPRESENTING 35.7%
OF THE OUTSTANDING TRANS WORLD SHARES "FOR" THE TRANS WORLD MERGER MATTERS AND
AGAINST ANY COMPETING TRANSACTION.

As a condition to the willingness of Camelot to enter into the merger
agreement, Robert J. Higgins entered into a voting agreement.

VOTING OF SHARES. Mr. Higgins has agreed to vote his Trans World shares at
the Trans World special meeting:

- in favor of the Trans World merger matters; and

- against any competing Acquisition Transaction and any action contrary to
the obligations under the Higgins voting agreement or the merger
agreement.

Mr. Higgins' obligations under the Higgins voting agreement will terminate at
the earliest of:

- the termination of the merger agreement in accordance with its terms;

- the effective time;

- the termination of the Higgins voting agreement by the mutual written
agreement of the parties or by Camelot; or

- April 30, 1999, unless extended.

COVENANTS OF MR. HIGGINS. Mr. Higgins has agreed that he:

- will not dispose of or encumber his Trans World shares unless the
transferee executes a comparable voting agreement;

- will not solicit or encourage other proposals or negotiate or communicate
in any way with any third party with respect to any competing Acquisition
Transaction; and

- will not enter into any agreement requiring him to abandon, terminate or
fail to perform as contemplated by the Higgins voting agreement.

The Higgins voting agreement covers 35.7% of the Trans World shares
outstanding as of March 3, 1999. Mr. Higgins received no compensation for
entering into the Higgins voting agreement.

THE REGISTRATION RIGHTS AGREEMENT

SUMMARY: TRANS WORLD HAS GIVEN THE CAMELOT PRINCIPAL STOCKHOLDERS THE RIGHT
TO DEMAND REGISTRATION OF THEIR TRANS WORLD SHARES UNDER THE SECURITIES ACT AND
THE RIGHT TO INCLUDE THEIR SHARES IN OTHER TRANS WORLD REGISTRATION STATEMENTS.

From the effective time until the earlier of:

- the first anniversary of the effective time; and

- the date when the holders of shares that may be registered under the
registration rights agreement no longer own any registrable shares,

73
<PAGE>
the registration rights agreement gives the holders of at least 40% of the
registrable shares the right to demand that Trans World register pursuant to the
Securities Act all or any portion of registrable shares held by them. However,
the aggregate number of registrable shares requested to be registered pursuant
to any demand must be at least the number of shares that would yield $40 million
in aggregate gross proceeds in any public offering. The Camelot Principal
Stockholders and certain of their transferees, as a group, will be entitled to
two demand registrations.

During the registration period, if Trans World seeks to register, in a
proposed firm commitment underwritten offering solely for cash for its own
account or for the account of any holder of securities of the same type as the
registrable shares, each holder of registrable shares also will have the right
to request that Trans World include any or all of their registrable shares in
the proposed offering. The registration rights agreement limits the ability of
each holder of registrable shares to effect a public sale or distribution of
registrable shares during certain periods if the managing underwriter of an
underwritten offering determines that a public sale or distribution of such
shares would have a material adverse impact on an offering of Trans World shares
or similar securities for which Trans World has filed a registration statement.

74
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined financial statements
are presented assuming the merger will be accounted for as a pooling of
interests. Accordingly, the accompanying unaudited pro forma condensed combined
financial statements give retroactive effect to the merger and include the
combined operations of Trans World for all periods presented and for Camelot for
periods subsequent to its adoption of fresh-start reporting on January 31, 1998.
For a description of pooling of interests accounting with respect to the merger,
see "The Merger--Accounting Treatment of the Merger."

The unaudited pro forma condensed combined income statements reflect the
combination of the historical operating results of Trans World for the years
ended January 31, 1998, February 1, 1997 and February 3, 1996, and for the
thirty-nine week periods ended October 31, 1998 and November 1, 1997 with the
historical results of Camelot for the one-month period ended February 28, 1998,
and for the thirty-nine week period ended November 28, 1998. FINANCIAL DATA FOR
CAMELOT FOR PERIODS PRIOR TO THE ADOPTION OF FRESH-START REPORTING ON JANUARY
31, 1998 IS NOT INCLUDED IN THE PRO FORMA INFORMATION BECAUSE AN ENTITY ADOPTING
FRESH-START REPORTING IS ANALOGOUS TO A NEWLY INCORPORATED ENTERPRISE FOR
FINANCIAL REPORTING PURPOSES. ACCORDINGLY, FOR PRO FORMA PURPOSES, CAMELOT DID
NOT EXIST PRIOR TO JANUARY 31, 1998. The unaudited pro forma condensed combined
balance sheet reflects the combination of the historical balance sheet of Trans
World at October 31, 1998 with the historical balance sheet of Camelot at
November 28, 1998.

For all applicable periods in the unaudited pro forma condensed combined
income statements, shares used in the computation of basic and diluted earnings
per share assume an exchange ratio of 1.9 Trans World shares for each Camelot
share. Outstanding shares for Camelot for periods prior to January 31, 1998 were
not used in the computation for periods prior to February 1, 1998.

The unaudited pro forma condensed combined financial statements are not
necessarily indicative of the results of operations or the financial position of
the combined companies that actually would have occurred had the merger been
consummated on the dates indicated or that may be obtained in the future. These
unaudited pro forma condensed combined financial statements should be read in
conjunction with the related historical financial statements of Trans World and
Camelot included in this joint proxy statement/prospectus.

75
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
OCTOBER 31, 1998

<TABLE>
<CAPTION>
TRANS WORLD
--------------- CAMELOT
OCTOBER 31, ----------------- PRO FORMA
1998 NOVEMBER 28, 1998 ADJUSTMENTS TOTAL
--------------- ----------------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 33,164 $ 9,496 $ -- $ 42,660
Merchandise inventory............................. 228,514 270,831 -- 499,345
Deferred tax asset................................ -- 7,205 -- 7,205
Prepaid income taxes.............................. -- -- 2,648(1) 2,648
Prepaid expenses and other........................ 5,181 9,700 (116)(2) 14,765
--------------- -------- ----------- ----------
Total current assets............................ 266,859 297,232 2,532 566,623
--------------- -------- ----------- ----------
VIDEO CASSETTE RENTAL INVENTORY, net................ 3,672 -- -- 3,672
DEFERRED TAX ASSET.................................. 3,787 20,969 -- 24,756
PROPERTY, PLANT AND EQUIPMENT, net.................. 86,549 58,317 -- 144,866
INTANGIBLES, net.................................... -- 12,021 -- 12,021
GOODWILL............................................ 768 33,393 -- 34,161
OTHER ASSETS........................................ 2,160 598 -- 2,758
--------------- -------- ----------- ----------
TOTAL ASSETS...................................... $ 363,795 $ 422,530 $ 2,532 $ 788,857
--------------- -------- ----------- ----------
--------------- -------- ----------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 144,471 $ 119,886 $ -- $ 264,357
Notes payable..................................... -- 23,800 -- 23,800
Income taxes payable.............................. 911 1,872 (5,431)(2) --
2,648(1)
Accrued expenses and other........................ 10,914 29,572 13,809(2) 54,295
Store closing reserve............................. 6,581 -- -- 6,581
Current deferred taxes............................ 2,062 -- -- 2,062
Current portion of long-term debt and capital
leases.......................................... 2,279 5,000 -- 7,279
--------------- -------- ----------- ----------
Total current liabilities....................... 167,218 180,130 11,026 358,374
--------------- -------- ----------- ----------
LONG-TERM DEBT, less current portion................ -- 20,000 -- 20,000
CAPITAL LEASE OBLIGATIONS, less current portion..... 15,938 -- -- 15,938
OTHER LIABILITIES................................... 6,982 17,395 -- 24,377
--------------- -------- ----------- ----------
TOTAL LIABILITIES................................. 190,138 217,525 11,026 418,689
--------------- -------- ----------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock................................... -- -- -- --
Common stock...................................... 328 102 92(3) 522
Additional paid-in capital........................ 64,773 199,894 (92)(3) 264,575
Unearned compensation-restricted stock............ (142) -- -- (142)
Unearned compensation-stock option plans.......... -- (1,627) -- (1,627)
Treasury stock at cost............................ (390) -- -- (390)
Retained earnings................................. 109,088 6,636 (8,494)(2) 107,230
--------------- -------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY...................... 173,657 205,005 (8,494) 370,168
--------------- -------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...... $ 363,795 $ 422,530 $ 2,532 $ 788,857
--------------- -------- ----------- ----------
--------------- -------- ----------- ----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

76
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THIRTY-NINE WEEK PERIOD ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE THIRTY-NINE
WEEK PERIOD ENDED
------------------------------
<S> <C> <C> <C> <C>
TRANS WORLD CAMELOT
OCTOBER 31, NOVEMBER 28, PRO FORMA
1998 1998 ADJUSTMENTS TOTAL
-------------- -------------- ----------- ----------
Sales............................................. $ 430,658 $ 377,744 $ -- $ 808,402
Cost of sales..................................... 269,532 238,623 -- 508,155
-------------- -------------- ----------- ----------
Gross profit...................................... 161,126 139,121 -- 300,247
Selling, general and administrative expenses...... 143,694 124,863 1,096(4) 269,653
Special items..................................... -- 1,096 (1,096)(4) --
-------------- -------------- ----------- ----------
Income from operations............................ 17,432 13,162 -- 30,594
Interest expense.................................. 2,264 1,299 196(5) 3,759
Other expenses (income), net...................... (541) (145) (196)(5) (882)
-------------- -------------- ----------- ----------
Income before income taxes........................ 15,709 12,008 -- 27,717
Income tax expense................................ 6,126 5,846 -- 11,972
-------------- -------------- ----------- ----------
Net income........................................ $ 9,583 $ 6,162 $ -- $ 15,745
-------------- -------------- ----------- ----------
-------------- -------------- ----------- ----------
Basic earnings per share(6)....................... $ 0.30 $ 0.61 $ 0.31
-------------- -------------- ----------
-------------- -------------- ----------
Weighted average number of shares outstanding..... 31,653 10,178 50,991
-------------- -------------- ----------
-------------- -------------- ----------
Diluted earnings per share(6)..................... $ 0.29 $ 0.60 $ 0.30
-------------- -------------- ----------
-------------- -------------- ----------
Adjusted weighted average number of shares
outstanding..................................... 33,565 10,353 53,236
-------------- -------------- ----------
-------------- -------------- ----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

77
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THIRTY-NINE WEEK PERIOD ENDED NOVEMBER 1, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE THIRTY-NINE
WEEK PERIOD ENDED
-----------------------------------
TRANS WORLD CAMELOT PRO FORMA
NOVEMBER 1, 1997 NOVEMBER 29, 1997 ADJUSTMENTS TOTAL
---------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Sales..................................... $ 329,273 $ -- $ -- $ 329,273
Cost of sales............................. 206,821 -- -- 206,821
-------- -------- ----------- ----------
Gross profit.............................. 122,452 -- -- 122,452
Selling, general and administrative
expenses................................ 119,284 -- -- 119,284
-------- -------- ----------- ----------
Income from operations.................... 3,168 -- -- 3,168
Interest expense.......................... 4,505 -- -- 4,505
Other expenses (income), net.............. (151) -- -- (151)
-------- -------- ----------- ----------
Income (loss) before income taxes......... (1,186) -- -- (1,186)
Income tax expense (benefit).............. (470) -- -- (470)
-------- -------- ----------- ----------
Net income (loss)......................... $ (716) $ -- $ -- $ (716)
-------- -------- ----------- ----------
-------- -------- ----------- ----------
Basic earnings (loss) per share(6)........ $ (0.02) $ -- $ (0.02)
-------- -------- ----------
-------- -------- ----------
Weighted average number of shares
outstanding............................. 29,443 -- 29,443
-------- -------- ----------
-------- -------- ----------
Diluted earnings (loss) per share(6)...... $ (0.02) $ -- $ (0.02)
-------- -------- ----------
-------- -------- ----------
Adjusted weighted average number of shares
outstanding............................. 29,443 -- 29,443
-------- -------- ----------
-------- -------- ----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

78
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE FISCAL YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
TRANS WORLD
FOR THE FISCAL CAMELOT
YEAR ENDED FEBRUARY 1, 1998
JANUARY 31, TO FEBRUARY 28, PRO FORMA
1998 1998 ADJUSTMENTS TOTAL
--------------- ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Sales......................................... $ 571,314 $ 27,842 $ -- $ 599,156
Cost of sales................................. 361,422 18,009 -- 379,431
--------------- -------- ----------- ----------
Gross profit.................................. 209,892 9,833 -- 219,725
Selling, general and administrative
expenses.................................... 170,834 9,527 -- 180,361
--------------- -------- ----------- ----------
Income from operations........................ 39,058 306 -- 39,364
Interest expense.............................. 5,148 12 7(5) 5,167
Other expenses (income), net.................. (153) (295) (7)(5) (455)
--------------- -------- ----------- ----------
Income before income taxes.................... 34,063 589 -- 34,652
Income tax expense............................ 13,489 115 -- 13,604
--------------- -------- ----------- ----------
Net income.................................... $ 20,574 $ 474 $ -- $ 21,048
--------------- -------- ----------- ----------
--------------- -------- ----------- ----------
Basic earnings per share(6)................... $ 0.70 $ 0.05 $ 0.68
--------------- -------- ----------
--------------- -------- ----------
Weighted average number of shares
outstanding(7).............................. 29,483 10,176 30,966
--------------- -------- ----------
--------------- -------- ----------
Diluted earnings per share(6)................. $ 0.66 $ 0.05 $ 0.65
--------------- -------- ----------
--------------- -------- ----------
Adjusted weighted average number of shares
outstanding(7).............................. 31,032 10,176 32,515
--------------- -------- ----------
--------------- -------- ----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

79
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
------------------------------
<S> <C> <C> <C> <C>
TRANS WORLD
FEBRUARY 1, CAMELOT PRO FORMA
1997 MARCH 1, 1997 ADJUSTMENTS TOTAL
--------------- ------------- ----------- ----------
Sales............................................... $ 481,657 $ -- $ -- $ 481,657
Cost of sales....................................... 308,952 -- -- 308,952
--------------- ------------- ----------- ----------
Gross profit........................................ 172,705 -- -- 172,705
Selling, general and administrative expenses........ 150,218 -- -- 150,218
--------------- ------------- ----------- ----------
Income from operations.............................. 22,487 -- -- 22,487
Interest expense.................................... 12,110 -- -- 12,110
Other expenses (income), net........................ (1,343) -- -- (1,343)
--------------- ------------- ----------- ----------
Income before income taxes.......................... 11,720 -- -- 11,720
Income tax expense.................................. 4,618 -- -- 4,618
--------------- ------------- ----------- ----------
Net income.......................................... $ 7,102 $ -- $ -- $ 7,102
--------------- ------------- ----------- ----------
--------------- ------------- ----------- ----------
Basic earnings per share(6)......................... $ 0.24 $ -- $ 0.24
--------------- ------------- ----------
--------------- ------------- ----------
Weighted average number of shares outstanding....... 29,271 -- 29,271
--------------- ------------- ----------
--------------- ------------- ----------
Diluted earnings per share(6)....................... $ 0.24 $ -- $ 0.24
--------------- ------------- ----------
--------------- ------------- ----------
Adjusted weighted average number of shares
outstanding....................................... 29,697 -- 29,697
--------------- ------------- ----------
--------------- ------------- ----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

80
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
------------------------------
<S> <C> <C> <C> <C>
TRANS WORLD
FEBRUARY 3, CAMELOT PRO FORMA
1996 MARCH 2, 1996 ADJUSTMENTS TOTAL
--------------- ------------- ----------- -----------
Sales............................................ $ 517,046 $ -- $ -- $ 517,046
Cost of sales.................................... 347,554 -- -- 347,554
--------------- ------------- ----------- -----------
Gross profit..................................... 169,492 -- -- 169,492
Selling, general and administrative expenses..... 168,313 -- -- 168,313
Restructuring charge............................. 24,204 -- -- 24,204
--------------- ------------- ----------- -----------
Income (loss) from operations.................... (23,025) -- -- (23,025)
Interest expense................................. 15,201 -- -- 15,201
Other expenses (income), net..................... (979) -- -- (979)
--------------- ------------- ----------- -----------
Income (loss) before income taxes................ (37,247) -- -- (37,247)
Income tax expense (benefit)..................... (13,431) -- -- (13,431)
--------------- ------------- ----------- -----------
Net income (loss)................................ $ (23,816) $ -- $ -- $ (23,816)
--------------- ------------- ----------- -----------
--------------- ------------- ----------- -----------
Basic earnings (loss) per share(6)............... $ (0.82) $ -- $ (0.82)
--------------- ------------- -----------
--------------- ------------- -----------
Weighted average number of shares outstanding.... 29,178 -- 29,178
--------------- ------------- -----------
--------------- ------------- -----------
Diluted earnings (loss) per share(6)............. $ (0.82) $ -- $ (0.82)
--------------- ------------- -----------
--------------- ------------- -----------
Adjusted weighted average number of shares
outstanding.................................... 29,178 -- 29,178
--------------- ------------- -----------
--------------- ------------- -----------
</TABLE>

See accompanying notes to the unaudited pro forma condensed combined financial
statements.

81
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS

NOTE A--BASIS OF PRESENTATION

For accounting purposes, the merger will be treated as a pooling of
interests. Accordingly, the accompanying unaudited pro forma condensed combined
financial statements give retroactive effect to the merger and include the
operations of Trans World for all periods presented and Camelot for the periods
from Febuary 1, 1998 to February 28, 1998 and from March 1, 1998 to November 28,
1998.

On January 27, 1998, Camelot's plan of reorganization under Chapter 11 of
the U.S. Bankruptcy Code became effective. In accordance with Statement of
Position 90-7 issued by the American Institute of Certified Public Accountants,
Camelot adopted "fresh-start reporting" whereby the reorganization value of
Camelot's predecessor company, CM Holdings, Inc., was allocated to Camelot's
assets on the basis of the purchase method of accounting.

NOTE B--PRO FORMA ADJUSTMENTS

The pro forma adjustments to the historical financial information are as
follows:

PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS

(1) To reclassify negative balance of income taxes payable of $2,648 to
prepaid income taxes.

(2) To reflect the estimated costs for the transaction of $13,925, including
financial advisory fees and expenses ($6,600), professional fees and
expenses ($2,700), printing, mailing and other costs ($1,075), and
compensation expense incurred as a result of the acceleration of vesting
of severance benefits ($3,550), by decreasing prepaid expenses by $116
and increasing accrued expenses by $13,809, reducing retained earnings by
$8,494 and recording the tax effect at the estimated effective tax rate
(39.0%) of $5,431. In connection with the merger, Camelot has established
an employee retention program for nine executive officers and
approximately 175 of its other employees. Payment of funds to
participants is conditioned upon continued employment through the period
set forth for each participant in the program. The estimated cost
associated with the employee retention program ($3,750) is not included
in this reclassification. It will be accrued over the retention period
from the closing date until termination.

(3) To reclassify $0.01 per share from additional paid-in capital to common
stock for the issuance of 1.9 shares of Trans World common stock (19,344
shares) for each share of Camelot common stock outstanding at October 31,
1998 (10,181 shares), resulting in a net pro forma adjustment of $92 (the
difference of 19,344 shares minus 10,181 shares multiplied by $0.01 par
value) from additional paid-in capital to common stock. Outstanding
options to acquire Camelot common stock have not been considered in the
computation of this reclassification because they will be exchanged for
options to acquire Trans World common stock.

PRO FORMA INCOME STATEMENT ADJUSTMENTS

(4) To reclassify special items to selling general and administrative
expenses for comparative purposes: thirty-nine weeks ended October 31,
1998, $1,096 that is comprised of $926 for the costs of filing a
registration statement which was subsequently withdrawn and $170 for
legal fees related to open reorganization claims.

(5) To reclassify amortization of financing fees from other expenses to
interest expense for comparative purposes: thirty-nine weeks ended
October 31, 1998, $196; and fiscal 1997, $7.

82
<PAGE>
NOTE B--PRO FORMA ADJUSTMENTS (CONTINUED)
PRO FORMA COMBINED SHARE AND PER SHARE DATA

(6) The pro forma combined net income per share data is presented in
accordance with SFAS No. 128 and assumes that the shares of Camelot
common stock issued or issuable under Camelot's plan of reorganization
were issued on January 31, 1998.

(7) For the fiscal year ended January 31, 1998, weighted average number of
shares outstanding and adjusted weighted average number of shares
outstanding are calculated giving weight to Camelot based upon the 28
days such shares were outstanding.

NOTE C--ACQUISITIONS

Effective February 28, 1998, Camelot acquired substantially all of the
assets and assumed selected liabilities of The Wall pursuant to an asset
purchase agreement dated December 10, 1997 which closed on March 2, 1998. The
acquired assets consisted of inventory, retail store fixtures and improvements
and cash in stores, and did not include cash at corporate headquarters. The
assumed liabilities and commitments consisted of retail store lease obligations,
customer related liabilities such as gift certificates outstanding, customer
credits outstanding and lifetime guarantee, and liabilities related to store
employees such as the vacation accrual. Liabilities not acquired included
accounts payable and accrued expenses. The total purchase price was $89.2
million, net of store cash acquired, including a cash payment of $72.2 million,
assumption of liabilities aggregating $14.7 million and acquisition costs of
$2.3 million. The Wall is a mall-based music store chain operating 150 stores in
the Mid-Atlantic region of the United States. Camelot acquired all of those
stores, of which 11 stores were closed as part of Camelot's acquisition
strategy. For the nine months ended February 28, 1998 and the fiscal year ended
June 1, 1997, The Wall had net sales of $141,314 and $161,236, respectively, and
net income (loss) of $6,205 and $(23,673), respectively. The net loss for the
fiscal year ended June 1, 1997 included a write-down of long-lived assets of
$27,323.

Effective July 29, 1998, Camelot acquired all of the outstanding common
stock of Spec's under the terms of an agreement and plan of merger dated June 3,
1998. The total purchase price was $43.0 million, net of cash acquired,
including a cash payment of $18.6 million, repayment of Spec's indebtedness of
$9.2 million, assumption of liabilities aggregating $14.3 million and
acquisition costs of $0.9 million. Spec's is a Miami, Florida-based retailer of
prerecorded music operating 41 stores in south Florida and Puerto Rico. As of
July 29, 1998, Spec's operated 16 mall-based stores and 25 stores in shopping
centers and freestanding locations. For the nine months ended April 30, 1998 and
the fiscal year ended July 31, 1997, Spec's had total revenues of $50,614 and
$68,536, respectively, and net losses of $(265) and $(9,135), respectively. The
net loss for the fiscal year ended July 31, 1997 included a write-down of
long-lived assets of $1,500.

Both acquisitions were accounted for using the purchase method of
accounting. As such, results of operations for both The Wall and Spec's are only
included in the unaudited pro forma condensed combined income statement since
the effective date of each acquisition.

NOTE D--TRANSACTION COSTS AND EXPENSES

All transaction costs and expenses incurred to date have been deferred and
are not included in the historical income statements presented. These costs,
which are expected to total $13,925, will be expensed upon consummation of the
merger.

83
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA

The accompanying unaudited pro forma condensed consolidated statement of
operations for Fiscal 1997 reflects the historical statement of operations of
Camelot adjusted to reflect the effects of fresh-start reporting, The Wall
acquisition, and the Spec's acquisition as if each had occurred as of the
beginning of the period presented.

Camelot's plan of reorganization was confirmed by the Bankruptcy Court on
December 12, 1997 and became effective on January 27, 1998. Under the plan of
reorganization, administrative and priority claims of $5.6 million were fully
paid in cash. In addition, substantially all of the claims against Camelot
existing as of the petition date were exchanged for shares of Camelot common
stock. Approximately $381.5 million of unsecured claims were exchanged for
7,965,051 shares of Camelot common stock valued at an amount equal to one share
for each $47.95 of claim, and approximately $41.5 million of secured claims were
exchanged for 2,211,111 shares of Camelot common stock valued at an amount equal
to one share for each $18.75 of claim. All pre-petition ownership interests in
Camelot were cancelled.

Camelot adopted the American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code." Pursuant to the guidance provided by this statement,
Camelot adopted fresh-start reporting for its Consolidated Financial Statements
effective as of January 31, 1998, the last day of Camelot's fiscal month end.
Under fresh-start reporting, the reorganization value of Camelot has been
allocated to Camelot's assets on the basis of the purchase method of accounting.
All of the reorganization value was attributable to specific tangible assets of
Camelot and no amount has been recorded as intangible assets or as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets."

Under the Plan of Reorganization the fresh-start reporting entity value was
determined to be $194,368. This value includes an estimated terminal value of
Camelot and results in a per share common stock value of $18.75 and was
determined by the Company with the assistance of its special financial advisor
during the Chapter 11 reorganization. The significant factors used in the
determination of this value were a four year analysis of the Company's
forecasted cash flows discounted at 14.0% to a present value, an assumed tax
rate of 40%, and certain additional financial analyses and forecasts prepared by
management focusing on the capital structure of the new entity.

Effective February 28, 1998, Camelot acquired substantially all of the
assets and assumed selected liabilities of The Wall from WH Smith Group Holdings
USA. The acquired assets consisted of inventory, retail store fixtures and
improvements and cash in stores. The only asset not purchased was cash at
corporate headquarters. The assumed liabilities and commitments consisted of
retail store lease obligations, customer related liabilities such as gift
certificates outstanding, customer credits outstanding and lifetime guarantee,
and liabilities related to store employees such as the vacation accrual.
Liabilities not acquired include accounts payable and accrued expenses. The
total purchase price was $87.4 million, net of store cash acquired, including a
cash payment of $72.2 million, assumption of liabilities aggregating $12.9
million and acquisition costs of $2.3 million.

On July 29, 1998, Camelot completed its acquisition of all of the issued and
outstanding shares of Spec's common stock. The total purchase price in
connection with the Spec's acquisition, net of cash acquired, was $43.0 million,
including a cash payment of $18.6 million, repayment of bank debt of $9.2
million, assumption of liabilities aggregating $14.3 million and acquisition
costs of $0.9 million.

The unaudited pro forma condensed consolidated financial data and
accompanying notes should be read in conjunction with the Consolidated Financial
Statements and related notes of Camelot and the financial statements and related
notes of The Wall and Spec's, all of which are included elsewhere in this joint
proxy statement/prospectus. Camelot believes that the assumptions used in the
following statements provide a reasonable basis on which to present the pro
forma financial data. The unaudited pro forma condensed consolidated financial
data is provided for informational purposes only and should not be construed to
be indicative of Camelot's results of operations had The Wall and Spec's
acquisitions been consummated and fresh-start reporting adopted on the dates
assumed and are not intended to constitute projections with regard to Camelot's
results of operations for any future period.

84
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL HISTORICAL
------------- ------------ ------------
PREDECESSOR CAMELOT THE WALL
(PERIOD (PERIOD (PERIOD
MARCH 2, 1997 FEBRUARY 1, MARCH 3,
TO JANUARY PRO FORMA 1998 TO PRO FORMA 1997 TO PRO FORMA
31, ADJUSTMENTS FEBRUARY 28, FRESH START FEBRUARY 28, ADJUSTMENTS
1998) (FRESH-START) 1998) COMBINED 1998) (THE WALL)
------------- ------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............................ $ 372,561 $ (4,195)(1) $ 27,842 $ 396,208 $ 172,212 $ (14,300)(9)
Cost of sales........................ 248,655 (2,740)(1) 18,009 262,774 104,175 (9,000)(9)
(1,150)(2)
------------- ------------ ------------ ----------- ------------ -----------
Gross profit....................... 123,906 (305) 9,833 133,434 68,037 (5,300)
Selling general and administrative
expenses............................ 114,491 (1,500)(1) 9,527 108,865 61,230 (5,700)(9)
544(3) (370)(10)
(14,197)(4) (2,681)(11)
Special items........................ (4,443) -- -- (4,443) 4,164 --
------------- ------------ ------------ ----------- ------------ -----------
Income before interest expense, other
expenses (income) net,
reorganization income expense and
income taxes........................ 13,858 14,848 306 29,012 2,643 3,451
Interest expense (income)............ 221 (88)(5) 12 145 -- 410(12)
Other expenses (income), net......... 185 (218)(6) (295) (328) -- --
------------- ------------ ------------ ----------- ------------ -----------
Income before reorganization expenses
(income) and income taxes........... 13,452 15,154 589 29,195 2,643 3,041
Reorganization expenses
(income)(18)........................ (26,501) 26,501(7) -- -- -- --
------------- ------------ ------------ ----------- ------------ -----------
Income (loss) before income taxes.... 39,953 (11,347) 589 29,195 2,643 3,041
Income tax expense (benefit)......... 289 10,982(8) 115 11,386 2,206 11(13)
------------- ------------ ------------ ----------- ------------ -----------
Net income (loss).................... $ 39,664 $ (22,329) $ 474 $ 17,809 $ 437 $ 3,030
------------- ------------ ------------ ----------- ------------ -----------
------------- ------------ ------------ ----------- ------------ -----------
Earnings per shares(19)..............
Weighted average shares outstanding..

<CAPTION>
HISTORICAL
------------
SPEC'S
(PERIOD
FEBRUARY 1,
PRO FORMA 1997 TO PRO FORMA
COMBINED JANUARY 31, ADJUSTMENTS PRO FORMA
(THE WALL) 1998) (SPEC'S) COMBINED
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $ 554,120 $ 66,213 -- $ 620,333
Cost of sales........................ 357,949 44,492 -- 402,441

----------- ------------ ----------- -----------
Gross profit....................... 196,171 21,721 -- 217,892
Selling general and administrative
expenses............................ 161,344 25,858 (769) 14) 186,586
153 (15

Special items........................ (279) 2,093 -- 1,814
----------- ------------ ----------- -----------
Income before interest expense, other
expenses (income) net,
reorganization income expense and
income taxes........................ 35,106 (6,230) 616 29,492
Interest expense (income)............ 555 954 773 16 2,282
Other expenses (income), net......... (328) (68) -- (396)
----------- ------------ ----------- -----------
Income before reorganization expenses
(income) and income taxes........... 34,879 (7,116) (157) 27,606
Reorganization expenses
(income)(18)........................ -- -- -- --
----------- ------------ ----------- -----------
Income (loss) before income taxes.... 34,879 (7,116) (157) 27,606
Income tax expense (benefit)......... 13,603 545 (3,381) 17) 10,767
----------- ------------ ----------- -----------
Net income (loss).................... $ 21,276 $ (7,661) $ 3,224 $ 16,839
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Earnings per shares(19).............. $ 1.65
Weighted average shares outstanding.. 10,176
</TABLE>

See accompanying notes to unaudited pro forma condensed consolidated statement
of operations.

85
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FRESH-START REPORTING PRO FORMA ADJUSTMENTS NOTES

(1) To eliminate operating results of ten stores closed in conjunction with
Camelot's reorganization as follows: sales ($4,195), cost of sales ($2,740),
and selling, general and administrative expenses of ($1,500), including
depreciation and amortization ($377).

(2) During the reorganization period certain trade vendors denied Camelot the
right to take prompt payment discounts. The amounts and period of denial
varied by vendor. In connection with Camelot's emergence from bankruptcy,
each of its six major vendors signed an agreement to provide Camelot with a
credit on future purchases equal to the value of any customary discounts
(including prompt payment discounts) that they had denied to Camelot during
reorganization. The reduction in cost of sales of ($1,150) reinstates cash
discounts to normal and customary trade payment terms, which was calculated
based on actual payments made to specific vendors during the period of
denial.

(3) To increase S,G&A expenses $544 by: recording the amortization of fair value
adjustments totalling $2,156 to be expensed over the remaining lease terms,
ranging from less than one to up to ten years, for favorable and unfavorable
lease values of $578, recording the effects on rent expense of restarting
lease lives as of the effective date of emergence to be recognized over the
remaining minimum lease terms of $1,011 and recording the effects of
capitalizing internal use software costs (SOP 98-1) of ($1,045).

(4) To reduce depreciation and amortization expense ($14,197) by eliminating
predecessor company goodwill amortization of ($1,840), recording
amortization on capitalized internal software costs of $1,045 over ten years
(SOP 98-1), eliminating predecessor company depreciation expense of
($18,644) and recording depreciation expense of $6,182 based on a weighted
average historical life of six years. The depreciation expense adjustment
relating to fixed asset additions occurring during fiscal 1997 reflected the
use of the half-year convention.

(5) To eliminate historical commitment fee expense of ($221) and record new
commitment fee expense of $133 based on the terms of Camelot's new revolving
credit agreement. Camelot's new revolving credit agreement provides for
loans up to $50 million during the peak period (October through December)
and up to $35 million during the non-peak period. The term of the revolving
credit agreement is four years. Commitment fees are paid annually and the
amount is calculated as 0.375% of 100% of the applicable peak or non-peak
period available commitment.

(6) To reduce other expenses ($218) by eliminating historical deferred financing
fee amortization of ($424) and recording new amortization of $206 on $695 of
fees paid in connection with the new revolving credit agreement. The
amortization adjustment is for 11 months and is calculated on a
straight-line basis over the four-year facility term and includes an annual
agent's fee of $50. The straight-line method approximates the interest
method because the revolving credit agreement often has no outstanding
borrowings.

(7) To eliminate reorganization income of $26,501 which will not be incurred
subsequent to the effective date of the plan of reorganization.

(8) To reverse the income tax effect of fresh-start reporting adjustments and
record the income tax effect of pro forma adjustments for items that are
deductible for income tax purposes, using Camelot's incremental tax rate
that would be applicable to the pro forma adjustments. The amount

86
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS (CONTINUED)

of the adjustment was calculated as that amount necessary to make income tax
expense in the "Pro Forma Fresh Start Combined" column equal to 39% of
"Income (loss) before income taxes."

THE WALL ACQUISITION PRO FORMA ADJUSTMENTS NOTES

(9) To reflect adjustment for operating results of 18 stores closed by The Wall
prior to the acquisition by Camelot for sales ($3,600), cost of sales
($2,300), and SG&A expenses ($1,900) and to adjust operating results for 11
stores acquired which were identified for closure prior to the closing of
the acquisition by Camelot as follows: sales ($10,700), cost of sales
($6,700) and selling, general and administrative expenses ($3,800).

(10) To reduce SG&A expenses ($370) by recording the amortization of fair value
adjustments totalling ($3,288) to be expensed over the remaining lease
terms, ranging from less than one to up to ten years, for favorable and
unfavorable lease values amortization of ($1,120) and recording the effects
on rent expense of restarting lease lives as of the effective date of the
purchase to be recognized over the remaining minimum lease terms of $750.

(11) To reduce depreciation and amortization expense ($2,681), by eliminating
historical depreciation and amortization of ($6,725), recording new goodwill
amortization of $1,255 (based on straight-line amortization of total
goodwill of $25,090 over a 20-year period), recording trade name
amortization of $380 (based on straight-line amortization of $760 over a
two-year period) and recording new depreciation expense of $2,409 for
revalued property, plant and equipment of $14,451 on a straight-line basis
based on Camelot's weighted average historical life of six years.

(12) To reflect incremental interest expense of $410 as a result of incremental
borrowings under the new revolving credit agreement needed to finance The
Wall acquisition using the interest rate in effect in February 1998 of 8.5%.
Interest expense already includes $232 related to the acquisition of The
Wall. Incremental borrowings were determined based upon actual cash flows of
Camelot, and the amount of borrowing under the revolving credit agreement
occuring subsequent to closing of The Wall acquisition that would not have
been necessary had the acquisition not taken place. Average incremental
borrowings were determined to be $9,965 and to have been outstanding for 273
days. Interest rates can vary. The effect of a 1/8% change in the interest
rate would be approximately $9.

(13) To eliminate historical income taxes of $2,206 and record the income tax
effect of pro forma adjustments using Camelot's incremental tax rate that
would be applicable to the pro forma adjustments. The amount of the
adjustment was calculated as that amount necessary to make income tax
expense in the "Pro Forma Combined (The Wall)" column equal to 39% of
"Income (loss) before income taxes."

SPEC'S ACQUISITION PRO FORMA ADJUSTMENTS NOTES

(14) To reduce SG&A expenses ($769) by recording the amortization of fair value
adjustments of ($1,086) to be expensed over the remaining lease terms,
ranging from less than one to up to 12 years, for favorable and unfavorable
lease values amortization of ($330), and recording the effects of restarting
lease lives as of the effective date of the purchase to be recognized over
the remaining minimum lease terms for average rent expense of ($439).

(15) To increase depreciation and amortization expense $153 by eliminating
historical depreciation and amortization of ($1,816), recording new goodwill
amortization of $472 (based on straight-line

87
<PAGE>
CAMELOT MUSIC HOLDINGS, INC.

NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS (CONTINUED)

amortization of total goodwill of $9,442 over a 20-year period), recording
trade name amortization of $133 (based on straight-line amortization of $265
over a two-year period), recording amortization of a one-year non compete
contract of $100 and recording new depreciation expense of $1,264 for
revalued property, plant and equipment of $11,990 on a straight-line basis
based on an estimated useful life of ten years for buildings of $4,704 and
on Camelot's weighted average historical life of six years for all other
items.

(16) To record additional interest expense of $773 eliminating historical
interest expense of $954 on debt which was required to be repaid at the
acquisition date and recording interest on $25,000 of incremental term notes
used to finance the acquisition that was outstanding for six months and
$22,000 that was outstanding for six months. Interest expense of $1,727 was
calculated using the interest rate in effect in July 1998 of 7.35%. Interest
rates can vary. The effect of a 1/8% change in the interest rate would be
approximately $24.

(17) To eliminate historical income taxes of $545 and record the income tax
effect of pro forma adjustments using Camelot's incremental tax rate that
would be applicable to the pro forma adjustments. The amount of the
adjustment was calculated as that amount necessary to make income tax
expense in the "Pro Forma Combined" column equal to 39% of "Income (loss)
before income taxes."

REORGANIZATION EXPENSES

(18) Net reorganization income incurred as a result of the Chapter 11 filings
and subsequent reorganization have been segregated from ordinary operations.
See Note 5 to Camelot's Consolidated Financial Statements.

PRO FORMA COMBINED PER SHARE DATA

(19) The pro forma combined net income per share data is presented in accordance
with SFAS No. 128 and assumes: Camelot emerged from bankruptcy and adopted
fresh-start reporting on March 2, 1997, The Wall acquisition occurred on
March 2, 1997 and Camelot's 1998 Stock Option Plan and Outside Directors
Stock Option Plan were established on March 2, 1997. Awards of options under
these plans are not dilutive on a pro forma basis and, therefore, basic and
diluted data are the same. With respect to historical combined net income
per share, see Note 3 to Camelot's Consolidated Financial Statements.

88
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION FOR TRANS WORLD

The following table sets forth selected consolidated financial data and
other operating information of Trans World. The selected income statement and
balance sheet data for the three fiscal years ended January 31, 1998 and the two
thirty-nine week periods ended November 1, 1997 and October 31, 1998 set forth
below are derived from the audited consolidated financial statements and
unaudited interim condensed consolidated financial statements of Trans World.
Each fiscal year of Trans World consisted of 52 weeks except the fiscal year
ended February 3, 1996 which consisted of 53 weeks. All share and per share
amounts have been adjusted for all periods to reflect a two-for-one stock split
and a three-for-two stock split effected on December 15, 1997 and September 15,
1998, respectively. The selected consolidated financial data should be read in
conjunction with the Trans World audited and unaudited consolidated financial
statements and other financial information included herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Trans World."

<TABLE>
<CAPTION>
AS OF AND FOR
THE THIRTY-NINE
AS OF AND FOR THE FISCAL YEAR ENDED WEEK PERIOD ENDED
------------------------------------- ------------------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales..................................................... $ 517,046 $ 481,657 $ 571,314 $ 329,273 $ 430,658
Cost of sales (1)......................................... 347,554 308,952 361,422 206,821 269,532
----------- ----------- ----------- ----------- -----------
Gross profit.............................................. 169,492 172,705 209,892 122,452 161,126
Selling, general & administrative......................... 168,313 150,218 170,834 119,284 143,694
Restructuring charge, net (1)............................. 24,204 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) from operations............................. (23,025) 22,487 39,058 3,168 17,432
Interest expense.......................................... 15,201 12,110 5,148 4,505 2,264
Other expenses (income), net.............................. (979) (1,343) (153) (151) (541)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes......................... (37,247) 11,720 34,063 (1,186) 15,709
Income tax expense (benefit).............................. (13,431) 4,618 13,489 (470) 6,126
----------- ----------- ----------- ----------- -----------
Net income (loss)......................................... $ (23,816) $ 7,102 $ 20,574 $ (716) $ 9,583
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Basic earnings (loss) per
share................................................... $ (0.82) $ 0.24 $ 0.70 $ (0.02) $ 0.30
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Weighted average number of shares outstanding............. 29,178 29,271 29,483 29,443 31,653
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

Diluted earnings (loss) per
share................................................... $ (0.82) $ 0.24 $ 0.66 $ (0.02) $ 0.29
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Adjusted weighted average number of shares
outstanding............................................. 29,178 29,697 31,032 29,443 33,565
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------

BALANCE SHEET DATA: (AT END OF PERIOD)
Working capital........................................... 78,773 81,247 89,853 67,330 99,641
Total assets.............................................. 391,888 311,610 373,140 316,829 363,795
Current portion of long-term obligations.................. 3,420 9,557 99 96 2,279
Long-term obligations..................................... 60,364 50,490 41,409 41,435 15,938
Shareholders' equity...................................... 95,661 102,919 124,522 102,739 173,657

OPERATING DATA:
Store count: (open at end of period)
Mall.................................................... 379 357 340 347 332
Non-mall................................................ 163 122 199 204 190
----------- ----------- ----------- ----------- -----------
Total................................................... 542 479 539 551 522
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Comparable store sales
change (2).............................................. (3.5%) 3.6% 10.2% 8.4% 8.6%

Total square footage (in thousands)....................... 2,140 2,008 2,442 2,415 2,510
</TABLE>

- ------------------------------
(1) The restructuring charge includes the write-down of assets, estimated cash
payments to landlords for early termination of operating leases, and
employee termination benefits. The charge also includes estimated
professional fees. Inventory related costs, including the cost of returning
merchandise after the store closes, are included in cost of sales. The
restructuring charge for the year ended February 3, 1996 has been restated.
See note 12 to Trans World's consolidated financial statements on page F-29.

(2) A store is included in comparable store sales calculations at the beginning
of its 13th full month of operation.

89
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF TRANS WORLD

In the early 1990's, music retailers aggressively expanded their store base,
which led to an overcapacity of music and video product selling space in the
United States. Furthermore, entry into this category by mass-merchants and
consumer electronics stores, which enacted loss-leader pricing strategies to
increase store traffic, adversely impacted sales and gross margins of music
specialty retailers.

In the fourth quarter of 1994, management concluded that these events were
adversely affecting Trans World's operations. Management's ability to identify
these trends at an early stage enabled Trans World to undertake a restructuring
program, which included closing and relocating underperforming stores, opening
profitable new stores, improving operating efficiencies and reducing debt
levels. In order to reduce its portfolio of stores to a strong core of
profitable locations in desirable markets, Trans World closed a total of 401
stores through October 31, 1998, 356 of which related to the restructuring. An
additional 34 stores, 14 of which are related to the restructuring program, are
forecasted to be closed in 1998. In conjunction with the restructuring Trans
World increased sales and net income by 18.6% and 189.7%, respectively, in 1997
over 1996. As a result, Trans World is now in a stronger financial condition and
is well-positioned to continue to execute its business strategy.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain income
and expense items as a percentage of sales:

<TABLE>
<CAPTION>
THIRTY-NINE
FISCAL YEAR ENDED WEEKS ENDED
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
FEBRUARY 3, FEBRUARY 1, JANUARY 31, NOVEMBER 1, OCTOBER 31,
1996 1997 1998 1997 1998
------------- ------------- ------------- ------------- -------------
Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Gross profit.................................... 32.8 35.9 36.7 37.2 37.4
Selling, general and administrative expenses.... 32.6 31.2 29.9 36.2 33.4
Restructuring charge............................ 4.7 -- -- -- --
----- ----- ----- ----- -----
Income (loss) from operations................... (4.5) 4.7 6.8 1.0 4.0
Interest expense................................ 2.9 2.5 0.9 1.4 0.5
Other expenses (income), net.................... (0.1) (0.3) (0.0) (0.0) (0.1)
----- ----- ----- ----- -----
Income (loss) before income taxes............... (7.2) 2.5 6.0 (0.4) 3.6
Income tax expense (benefit).................... (2.6) 1.0 2.4 (0.1) 1.4
----- ----- ----- ----- -----
Net income (loss)............................... (4.6)% 1.5% 3.6% (0.2 )% 2.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Comparable Sales Change......................... (3.5 )% 3.6% 10.2% 8.4% 8.6%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>

THIRTY-NINE WEEKS ENDED NOVEMBER 28, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 29, 1997

SALES. Trans World's total sales increased 30.8% to $430.7 million for the
thirty-nine weeks ended October 31, 1998 compared to $329.3 million for the same
period last year. The increase in sales is due to an overall improvement in the
music and video specialty retail industry, a comparable store sales increase of
9% and the acquisition of 90 Strawberries stores in October 1997. Management
attributes the increase in comparable store sales primarily to its focus on
customer service, superior retail locations, inventory management and
merchandise presentation.

90
<PAGE>
Comparable sales in the music category increased approximately 8.3% while
comparable sales in the video category increased 12.3%.

GROSS PROFIT. Gross profit as a percentage of sales improved to 37.4% from
37.2% in the thirty-nine weeks ended October 31, 1998 as compared to the same
period in 1997. Management attributes the increase to an improved competitive
environment and the leveraging of expenses in Trans World's distribution center.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses, as a
percentage of sales, decreased to 33.4% in the first thirty-nine weeks of 1998
from 36.2% in the first thirty-nine weeks of 1997. The improvement was primarily
due to the leveraging of store occupancy, depreciation and amortization, and
operating costs against sales. Trans World continues to leverage expenses
against sales.

INTEREST EXPENSE. Net interest expense was reduced to $2.3 million in the
thirty-nine week period ended October 31, 1998 from $4.5 million for the
thirty-nine week period ending November 1, 1997. The decrease is due to a
reduction of long-term debt, offset by an increase in capital leases.

NET INCOME. Trans World increased its net income to $9.6 million in the
thirty-nine weeks ended October 31, 1998 from a net loss of $0.7 million during
the same period last year. The improved bottom line performance can be
attributed to the comparable store sales increase, improved gross margin rates,
leverage of SG&A expenses and lower interest expense.

FISCAL YEAR ENDED JANUARY 31, 1998 ("1997") COMPARED TO FISCAL YEAR ENDED
FEBRUARY 1, 1997 ("1996")

SALES. Trans World's sales increased $89.7 million, or 18.6%, from 1996.
The increase was primarily attributable to a comparable store sales increase of
10.2%, a sales increase of 8.4% resulting from the acquisition of 90
Strawberries stores in October 1997, and the opening of 48 stores which was
partially offset by the closing of 78 stores. Management attributes the
comparable store sales increase primarily to its strategic decision to eliminate
unprofitable stores and focus on customer service, superior retail locations,
inventory management and merchandise presentation. Sales by product
configuration are shown in the following table:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
<S> <C> <C> <C>
FEBRUARY 3, FEBRUARY 1, JANUARY 31,
1996 1997 1998
------------- ------------- -------------
CDs........................................................................ 49.2% 50.1% 55.5%
Prerecorded audio cassettes................................................ 25.5 22.2 18.9
Prerecorded video.......................................................... 16.7 18.6 16.3
Other...................................................................... 8.6 9.1 9.3
----- ----- -----
Total.................................................................. 100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>

For 1997, comparable store sales increased 11.0% for mall stores and 9.6%
for non-mall stores. By product configuration, comparable store sales increased
11.4% in music and 2.6% in video.

GROSS PROFIT. Gross profit, as a percentage of sales, increased to 36.7% in
1997 from 35.9% in 1996 as a result of reduced merchandise shrinkage and
increased purchase discounts combined with a strong performance from higher
margin catalog sales.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A, as a percentage of
sales, decreased to 29.9% in 1997 from 31.2% in 1996. The 1.1% decrease can be
attributed to the leverage of SG&A expenses on the 10.2% comparable store sales
increase, as well as the overall sales increase.

91
<PAGE>
INTEREST EXPENSE. Interest expense decreased 57.5% to $5.1 million in 1997
from $12.1 in 1996. The decrease is due to lower average outstanding borrowings
and lower interest rates due to the refinancing completed during the year.

INCOME TAX EXPENSE. The effective income tax rate was 39.6% in 1997. See
Note 4 of Notes to Consolidated Financial Statements for a reconciliation of the
statutory tax rate to Trans World's effective tax rate.

NET INCOME. In 1997, Trans World's net income increased to $20.6 million
compared to a net income of $7.1 million in 1996. The improved bottom line
performance can be attributed to the profitability of the additional stores and
the ongoing success of Trans World's restructuring plan. Additionally, Trans
World benefited from a comparable store sales increase, higher gross margin rate
and improved leverage of SG&A expenses.

FISCAL YEAR ENDED FEBRUARY 1, 1997 ("1996") COMPARED TO FISCAL YEAR ENDED
FEBRUARY 3, 1996 ("1995")

SALES. Trans World's sales decreased $35.4 million, or 6.8%, from 1995
while the number of stores in operation decreased by 12%. The decrease was
primarily attributable to a net decrease of approximately 151,000 square feet,
which resulted from the closing of 85 stores offset slightly by the opening of
22 stores. In 1995 there were 53 weeks in the fiscal year, with the extra week
contributing $6.9 million in sales. Comparable store sales for 1996 increased by
3.6%. Management attributes the comparable store sales increase to its strategic
decision to eliminate unprofitable stores and focus on customer service,
superior retail locations, inventory management and merchandise presentation.

Trans World's comparable store formats showed positive growth in 1996
compared to 1995. Comparable store sales increased 2.8% for mall stores and 7.4%
for non-mall stores. By product configuration, comparable store sales increased
1.9% in music and 12.4% in video, as video benefitted from continued growth of
the video sell-through market.

GROSS PROFIT. Gross profit, as a percentage of sales, increased to 35.9% in
1996 from 32.8% in 1995 as a result of a $6.8 million non-recurring charge in
1995 for inventory-related costs as part of closing stores under Trans World's
restructuring plan. Also contributing to the increase was increased purchase
discounts combined with a strong performance from higher margin catalog sales.

EXPENSES. SG&A, as a percentage of sales, decreased to 31.2% in 1996 from
32.6% in 1995. The 1.4% decrease can be attributed to the closing of
underperforming stores, a 3.6% increase in comparable store sales and the
receipt of $2.5 million upon termination of a business agreement in the second
quarter 1996. Trans World had an agreement with a third party to provide data
for the purpose of assessing the marketability of sales information of
prerecorded music, prerecorded video and other home entertainment related
products. In return for providing this data, Trans World was compensated to
recover the expenses it incurred. In exchange for terminating the agreement,
Trans World received $2.5 million in additional compensation. Trans World
recorded the fee in the same manner that the annual fee had been recorded. Also
contributing to the decrease was $1.6 million non-recurring fees paid to lenders
in 1995 for the waiver of debt covenant violations. Interest expense decreased
20% to $12.1 million in 1996 from $15.2 million in 1995. The decrease was due to
lower average outstanding borrowings offset in part by increased weighted
average interest rates. The effective income tax rate was 39.4% in 1996.

NET INCOME. In 1996, Trans World's net income increased to $7.1 million
compared to a net loss of $23.8 million in 1995. The improved bottom line
performance can be attributed to the success of Trans World's restructuring
plan. Additionally, Trans World benefited from a comparable store sales
increase, higher gross margin rate and lower SG&A.

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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Cash generated from operations are Trans World's primary sources of
liquidity. During the thirty-nine weeks ended October 31, 1998, cash used by
operations was $47.4 million compared to $27.0 million for the thirty-nine weeks
ended November 1, 1997.

At October 31, 1998, Trans World had cash balances of approximately $33.2
million compared to November 1, 1997 when Trans World had cash balances of $4.6
million. In both years, Trans World had no short term borrowings other than
capital lease obligations.

On July 9, 1997, Trans World entered into a $100 million secured revolving
credit facility with Congress Financial Corporation. The revolving credit
facility combined Trans World's long-term debt with its revolving credit line to
create a $100 million credit facility with a three year term at interest rates
averaging below the prime rate. The revolving credit facility, combined with
lower borrowing needs, was responsible for Trans World's reduction in interest
expense from $4.5 million for the thirty-nine weeks ended November 1, 1997 to
$2.3 million for the thirty-nine weeks ended October 31, 1998.

The revolving credit facility contains certain restrictive provisions,
including provisions governing cash dividends and acquisitions, is secured by
merchandise inventory and has a minimum net worth covenant. On October 31, 1998,
Trans World had unused lines of credit aggregating $100 million.

Trans World's working capital at October 31, 1998 was $99.6 million and its
ratio of current assets to current liabilities was 1.6 to 1. During the first
thirty-nine weeks of 1998, Trans World's net cash used by operations was $47.4
million, compared to $27.0 million used in the same period in 1997. The most
significant uses of cash during the period were $18.5 million in the normal
reduction of accounts payable.

CAPITAL EXPENDITURES. Most of Trans World's capital expenditures are for
new store expansion and relocation of existing stores. Trans World typically
finances its capital expenditures through internally generated cash and
borrowings under the revolving credit facility. In addition, Trans World
typically receives financing from landlords in the form of construction
allowances or rent concessions for a portion of the capital expenditure. Total
capital expenditures were approximately $15.5 million in 1997 with significantly
all of this amount being related to new stores and store remodels. Included in
this figure was approximately $2 million related to the development and pilot of
a new point-of-sale ("POS") system.

In fiscal 1998, Trans World plans to spend approximately $40 million, net of
construction allowances, in capital expenditures. Included in such $40 million
is $10.5 million for a new POS system rolled out to all stores during the summer
of 1998.

During the thirty-nine weeks ended October 31, 1998, Trans World had capital
expenditures of $30.9 million. For the thirty-nine weeks ended October 31, 1998,
Trans World has opened or relocated 42 stores and closed 59 stores while total
retail selling space has increased slightly.

PROVISION FOR BUSINESS RESTRUCTURING

During the fourth quarter of 1994, Trans World undertook a comprehensive
examination of store profitability. Management concluded that select retail
entertainment markets had begun to reflect an overcapacity of retail outlets,
and large discount-priced electronics stores and other superstores were having
an adverse impact on certain of Trans World's retail stores. As a result Trans
World recorded a pre-tax restructuring charge of $21 million in 1994 to reflect
the anticipated costs associated with a program to close 143 stores and to
restructure its debt agreements. The restructuring charge included the
write-down of fixed assets, estimated cash payments to landlords for the early
termination of operating leases, inventory-related costs (including the cost for
returning all remaining merchandise after the store was closed), and employee
termination benefits. The charge also included estimated

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professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs were included in cost of sales.

An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:

<TABLE>
<CAPTION>
BALANCE
AS OF CHARGES
JANUARY 28, AGAINST REMAINING
1995 RESERVE BALANCE
--------------- --------- -------------
<S> <C> <C> <C>
Lease obligations......................................................... $ 4,250 $ 3,436 $ 814
Inventory-related costs................................................... 4,249 3,581 668
Termination benefits...................................................... 200 200 --
Professional fees......................................................... 3,986 3,328 658
Other costs............................................................... 827 154 673
------- --------- -------------
Total cash outflows..................................................... $ 13,512 $ 10,699 $ 2,813
------- --------- -------------
------- --------- -------------
</TABLE>

Trans World completed the 1994 restructuring in 1995, resulting in the
closure of 179 stores (versus an original plan of 143 stores). The remaining
balance in the 1994 restructuring reserve of $2.8 million was credited to
operations in the 4th quarter of 1995.

Trans World recorded a second restructuring charge of $33.8 million in 1995
to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this second charge were similar to
those recorded in 1994, and also included a provision for exiting the rental
video store format, the write-off of goodwill related to a previous acquisition
and a provision for closing Trans World's fixture manufacturing operation.

An analysis of the amounts comprising the 1995 restructuring charge and the
charges against the related reserve through October 31, 1998 are outlined below:
<TABLE>
<CAPTION>
CHARGES BALANCE AS CHARGES BALANCE AS CHARGES BALANCE AS CHARGES
1995 AGAINST OF FEBRUARY AGAINST OF FEBRUARY AGAINST OF JANUARY AGAINST
RESERVE RESERVE 3, 1996 RESERVE 1, 1997 RESERVE 31, 1998 RESERVE
--------- ----------- ----------- ----------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Leasehold improvements.... $ 6,660 $ 6,660 -- -- -- -- -- --
Furniture and fixtures.... 3,228 3,228 -- -- -- -- -- --
Video rental assets 4,174 -- 4,174 1,078 3,096 25 3,071 381
Goodwill.................. 339 339 -- -- -- -- -- --
Non cash write-offs 14,401 10,227 4,174 1,078 3,096 25 3,071 381
Lease obligations 7,540 -- 7,540 2,627 4,913 905 4,008 1,236
Inventory-related costs... 6,800 -- 6,800 3,421 3,379 2,769 610 454
Termination benefits 976 69 907 88 819 16 803 --
Professional Fees......... 2,500 -- 2,500 1,632 868 711 157 18
Other costs............... 1,600 806 794 122 672 629 43 22
--------- ----------- ----------- ----------- ----------- --------- ----------- -----------
Cash outflows......... 19,416 875 18,541 7,890 10,651 5,030 5,621 1,730
--------- ----------- ----------- ----------- ----------- --------- ----------- -----------
Total................. $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055 $ 8,692 $ 2,111
--------- ----------- ----------- ----------- ----------- --------- ----------- -----------
--------- ----------- ----------- ----------- ----------- --------- ----------- -----------

<CAPTION>
BALANCE AS
OF OCTOBER
31, 1998
-----------

<S> <C>
Leasehold improvements.... --
Furniture and fixtures.... --
Video rental assets 2,690
Goodwill.................. --
Non cash write-offs 2,690
Lease obligations 2,772
Inventory-related costs... 156
Termination benefits 803
Professional Fees......... 139
Other costs............... 21
-----------
Cash outflows......... 3,891
-----------
Total................. $ 6,581
-----------
-----------
</TABLE>

In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, Trans World considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for

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<PAGE>
both plans), and the negotiations with landlords related to the termination of
leases ($2.3 million in total). Payments to lenders for the waiver of covenant
violations totalling $1.6 million are included in selling, general and
administrative expenses in the 1995 consolidated statement of income.

The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Trans World's ability to negotiate
reasonable lease termination agreements.

The restructuring reserve balances are included in the accompanying balance
sheets under the caption "store closing reserve."

Trans World closed 14 stores and 51 stores that were related to the
restructuring reserve during the thirty-nine week periods ended October 31, 1998
and November 1, 1997, respectively. Sales related to stores that were closed
were $3.8 million and $17.4 million during the thirty-nine week periods ended
October 31, 1998 and November 1, 1997, respectively. Store operating losses
related to stores that were closed were $278,000 and $209,000 during the
thirty-nine week periods ended October 31, 1998 and November 1, 1997,
respectively.

Trans World closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995,
respectively. Sales related to stores that were closed were $39 million, $20
million and $40 million in fiscal 1997, 1996 and 1995, respectively. Store
operating losses (income) related to stores that were closed were $(1.5)
million, $1.0 million and $4.1 million in fiscal 1997, 1996 and 1995.

The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through October 31, 1998, 75 employees had been terminated and Trans World
expects to terminate an additional 14 employees in the fourth quarter of fiscal
1998. Trans World has not terminated as many employees as originally planned
because higher than normal levels of attrition occurring after the announcement
of the restructurings resulted in a reduced need for involuntary terminations.

Subsequent to the adoption of the restructuring programs, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led
Trans World to keep open certain stores that were originally expected to be
closed. During the three-year period ended January 31, 1998, a total of 36
stores were removed from the list of stores expected to be closed. An additional
21 stores were removed from the list during the thirty-nine week period ended
October 31, 1998. Conversely, deteriorating economic conditions and store
performance in certain markets have led Trans World to close certain stores that
were not originally expected to be closed. During the three-year period ended
January 31, 1998, a total of 85 stores were added to the list of stores to be
closed. In addition, the timing of store closures has also been affected by the
ability or inability to negotiate reasonable lease termination agreements. The
net effect of changes made to the timing of store closures and the stores to be
closed under the 1995 restructuring program has not been material. Through
October 31, 1998, Trans World has closed 356 stores in connection with the
restructuring programs, compared to the originally planned closures of 306
stores. During the quarter ending January 30, 1999, Trans World plans to close
an additional 14 stores as it completes the restructuring programs. Any
remaining balance in the restructuring reserve at January 30, 1999 will be
credited to operations.

Trans World started realizing improved earnings and cash flow benefits in
1995 as a result of the restructuring program and expects continued improvement
as the remaining store closings are completed throughout the remainder of 1998.
Trans World estimates the fiscal 1998 pretax profit improvement realized from
the restructuring program to be in excess of $25 million without incurring any
increased expenses. This is in excess of Trans World's original estimates, of
$12 million, made when the restructuring was undertaken.

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<PAGE>
IMPACT OF INFLATION

Although Trans World cannot accurately determine the precise effect of
inflation on its operations, management does not believe inflation has had a
material effect on the results of operations in the last three fiscal years.
When the cost of merchandise items has increased, Trans World has generally been
able to pass the increase on to its customers.

SEASONALITY

Trans World's business is highly seasonal, with the highest sales and
earnings occurring in the fourth fiscal quarter. The following table shows
certain unaudited quarterly financial information for Trans World.

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998
----------------------------------------------
FEB.-APRIL MAY-JULY AUG.-OCT. TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales............................................................ $ 145,062 $ 142,198 $ 143,398 $ 430,658
Gross profit..................................................... 52,457 53,464 55,205 161,126
Net income (loss)................................................ 2,612 2,658 4,313 9,583
Basic earnings (loss) per share.................................. 0.09 0.08 0.13 0.30
Diluted earnings (loss) per share................................ 0.08 0.08 0.13 0.29
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEB.-APRIL MAY-JULY AUG.-OCT. NOV.-JAN. FISCAL YEAR
---------- ---------- ---------- ---------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales............................................... $ 109,512 $ 105,024 $ 114,737 $ 242,041 $ 571,314
Gross profit........................................ 39,264 39,527 43,662 87,439 209,892
Net income (loss)................................... (862) (834) 979 21,291 20,574
Basic earnings (loss) per share..................... (0.03) (0.03) 0.03 0.72 0.70
Diluted earnings (loss) per share................... (0.03) (0.03) 0.03 0.67 0.66
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 1, 1997
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FEB.-APRIL MAY-JULY AUG.-OCT. NOV.-JAN. FISCAL YEAR
---------- ---------- --------- ---------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Sales................................................. $ 106,622 $ 96,717 $ 97,583 $ 180,735 $ 481,657
Gross profit.......................................... 37,169 34,616 36,217 64,703 172,705
Net income (loss)..................................... (2,739) (2,392) (2,477) 14,710 7,102
Basic earnings (loss) per share....................... (0.09) (0.08) (0.09) 0.50 0.24
Diluted earnings (loss) per share..................... (0.09) (0.08) (0.09) 0.49 0.24
</TABLE>

YEAR 2000 COMPLIANCE

Trans World has completed an assessment of the business risks related to the
Year 2000 issue. The results of the assessment indicate that:

- awareness of Year 2000 issues is well known throughout Trans World;

- the assessment of Year 2000 sensitive items is complete;

- a list of items and business relationships sensitive to the Year 2000
issue has been compiled;

- renovation of the core information technology ("IT") systems has been
completed;

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<PAGE>
- third-party compliance tracking has begun; and

- verification of embedded chip ("non-IT") system readiness for Year 2000
compliance is ready to begin.

Trans World's Year 2000 issue remediation process includes the following
phases: Awareness, Assessment, Renovation, Validation, and Implementation. As
indicated above, the Awareness and Assessment phases are complete. The Awareness
phase included establishing an internal Year 2000 committee, interviewing key
Trans World personnel at all levels, including those at the stores, distribution
center and home office, and vendor compliance tracking. Activities in the
Assessment phase included contacting merchandise vendors regarding their Year
2000 remediation activities, discussions with Trans World's software vendors and
service providers, identification of all source code and all imbedded chip logic
that could contain date logic, analyzing source codes for Trans World systems
identifying each individual occurrence of date logic, and simulating the Year
2000 environment by rolling forward the date in test files of its principal IT
systems. Renovation and Validation and Implementation efforts are underway. For
the Renovation phase, all core IT system programming modifications have been
completed by Trans World's internal systems development staff. The system
programming modifications include upgrading the distribution, inventory
management and accounting systems and converting the POS registers to a Year
2000 compliant system. Replacements for the other (non-core) IT systems are
being implemented on schedule. The non core IT Systems being replaced include a
product return system, a system for tracking the opening of new stores and
managing lease payments. For the Validation and Implementation phases, formal
systems testing for both IT and non-IT systems is expected to be completed by
the end of the second quarter of fiscal 1999. In order to complete the
Validation and Implementation phases, Trans World will process daily, weekly and
monthly transactions on the main corporate IT systems platform, IBM AS/400. The
compliance testing will be completed in a dedicated environment within the
AS/400 to assure acceptance of all transactions in the year 2000.

Trans World is exposed to both internal and external Year 2000 risks.
Internal risks exist due to Trans World's dependence on its IT and non-IT
systems. Trans World is dependent on its IT and non-IT systems for many of its
everyday operations including inventory management, product distribution, cash
management, accounting and financial reporting. Trans World utilizes a variety
of vendors for its system needs. Trans World has initiated discussions with its
vendors and monitored their Year 2000 compliance programs and the compliance of
their products or services with required standards. Although the majority of
these vendors represent that their products are Year 2000 compliant, Trans World
will perform testing to validate the vendor representations no later than the
second quarter of fiscal 1999. In the normal course of business, Trans World
replaced its POS register system with a Year 2000 compliant system during fiscal
1998. Additionally, Trans World plans to replace its product return center's
processing system no later than the end of the second quarter of fiscal 1999.
The replacement system will be Year 2000 compliant. Preliminary contingency
plans for failure of internal systems include implementing manual procedures
such as the use of manual merchandise picking and shipping to replace automated
distribution center equipment.

External risks are represented by the fact that Trans World utilizes
approximately 2,500 different suppliers in the normal course of its business.
Six major merchandise vendors account for more than 60% of all purchases.
Additionally, 50 other merchandise vendors account for nearly 15% of purchases.
Trans World is also dependent on financial institutions for consolidation of
cash collections, and for cash payments. Although Trans World uses its own
trucks for shipment of product to approximately 36% of its stores, Trans World
does rely on a number of trucking companies for the remainder of its product
distribution. Evaluation of Trans World's vendors' Year 2000 readiness began in
the fourth quarter of fiscal 1998, and is expected to be completed by the end of
the first quarter of fiscal 1999. Upon completion of the assessment of vendor
readiness, contingency plans will be developed for all third-parties where Year
2000 compliance appears to be at risk.

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<PAGE>
Trans World presently believes that its most likely worst-case Year 2000
scenarios would relate to the possible failure in one or more geographic regions
of third party systems over which Trans World has no control and for which Trans
World has no ready substitute, such as, but not limited to, power and
telecommunications services. Trans World has in place a disaster recovery plan
that addresses recovery from various kinds of disasters, including recovery from
significant interruptions to data flows and distribution capabilities at Trans
World's data systems center and distribution center. The Trans World disaster
recovery plan provides specific routines for actions, personnel assignments and
back-up arrangements to ensure effective response to a disaster affecting key
business functions including merchandise replenishment, cash management and
distribution center operations. Common routines and back up arrangements include
off-site storage of information, manual processing of critical applications and
the establishment of a chain of communication for key personnel. Trans World is
using that plan to further develop specific Year 2000 contingency plans
identified by our third-party assessment phase which will emphasize locating
alternate sources of supply, methods of distribution and ways of processing
information.

Trans World's direct costs for its Year 2000 remediation efforts total
$757,000 to date. Anticipated future costs include an additional $1 million to
address Year 2000 issues identified as a result of remediation testing and a new
product return center processing system. Future costs will be funded by cash
flows generated from operations.

Trans World's estimates of the costs of achieving Year 2000 compliance and
the date by which Year 2000 compliance will be achieved are based on
management's best estimates, which were derived using numerous assumptions about
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no assurance
that these estimates will be achieved, and actual results could differ
materially from these estimates. Specific facts that might cause such material
differences include the availability and cost of personnel trained in Year 2000
remediation work, the ability to locate and correct all relevant computer codes,
the success achieved by Trans World's customers and suppliers in reaching Year
2000-readiness, the timely availability of necessary replacement items and
similar uncertainties.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

During fiscal year 1997, Trans World adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share," which requires
that Trans World disclose both basic earnings per share and diluted earnings per
share. Trans World adopted this statement retroactively for 1996 and 1995, as
required.

Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income," issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive income (loss) or within the statement of changes of
stockholder's equity. Trans World has no items of other comprehensive income.

Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, will change the
way companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. Management has evaluated the impact of the
application of the new rules on Trans World's Consolidated Financial Statements
and the new rules will not change its financial presentation.

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<PAGE>
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has evaluated
the impact of the application of the new rules on Trans World's Consolidated
Financial Statements and concluded that there will be no impact on its results
of operations or its financial position.

The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998 with earlier application permitted, provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. Trans World will adopt this statement for the fiscal year beginning
February 1, 1999. Management has evaluated the impact of the application of the
new rules on Trans World's Consolidated Financial Statements and concluded that
there will be no impact on its results of operations or its financial position.

The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities," issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. Trans World will adopt this statement for the
fiscal year beginning February 1, 1999. Management has evaluated the impact of
the application of the new rules on Trans World's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.

DIVIDEND POLICY

Trans World has never declared or paid cash dividends on its common stock.
The revolving credit facility sets certain restrictions on the payment of cash
dividends. See Note 1 to Trans World's Consolidated Financial Statements. Any
future determination as to the payment of dividends would depend upon capital
requirements and limitations imposed by the revolving credit facility and such
other factors as the Trans World board may consider.

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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION FOR CAMELOT

(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)

The selected consolidated financial data as of and for the fiscal year ended
August 31, 1993 and the 30 days ended September 30, 1993 have been derived from
the audited and internal financial statements of Camelot's pre-predecessor
entity prior to the 1993 leveraged buyout. The selected consolidated financial
data as of and for the period from October 1, 1993 to February 26, 1994 and the
fiscal years ended February 25, 1995, March 2, 1996 and March 1, 1997, and the
period March 2, 1997 to January 31, 1998 have been derived from the audited
financial statements of Camelot's predecessor entity prior to the emergence from
bankruptcy on January 27, 1998. The selected consolidated financial data of
Camelot as of and for the period February 1, 1998 to February 28, 1998 has been
derived from the audited financial statement of Camelot. The selected
consolidated financial data of Camelot for the period March 2, 1997 to November
29, 1997 and March 1, 1998 to November 28, 1998 and as of November 29, 1997 and
November 28, 1998 has been derived from the unaudited financial statements of
Camelot. The selected financial data set forth below should be read in
conjuction with the audited and unaudited historical financial statements of
Camelot and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Camelot" that appear elsewhere in this joint proxy
statement/prospectus. As a result of the implementation of fresh-start
reporting, the consolidated financial data for Camelot is not comparable to that
of the predecessor or the pre-predecessor. As a result of implementing purchase
accounting for the 1993 leveraged buyout, the consolidated financial data of the
pre-predecessor is not comparable to that of the predecessor.
<TABLE>
<CAPTION>
PREDECESSOR
PRE-PREDECESSOR ----------------------------------------------------------
-------------------------- PERIOD PERIOD
FISCAL YEAR 30 DAYS OCTOBER 1, MARCH 2,
ENDED ENDED 1993 TO 1997 TO
AUGUST 31, SEPTEMBER 30, FEBRUARY 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993 1994 1994 1995 1996 1998
----------- ------------- ------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................. $ 421,467 $ 28,958 $ 206,246 $ 459,077 $ 455,652 $ 396,502 $ 372,561
Cost of sales......................... 264,271 18,338 125,967 297,248 309,847 269,401 248,655
----------- ------------- ------------ --------- --------- --------- -----------
Gross profit.......................... 157,196 10,620 80,279 161,829 145,805 127,101 123,906
Selling, general and administrative
expenses............................ 121,786 10,145 57,974 141,943 154,645 134,519 114,491
Special items (1)..................... -- -- 8,330 -- 211,520 6,523 (4,443)
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before interest expense,
other expense (income), net,
reorganization expense (income),
income taxes and extraordinary
item................................ 35,410 475 13,975 19,886 (220,360) (13,941) 13,858
Interest expense...................... 2,022 188 10,693 30,655 38,319 17,418 221
Other expenses (income), net.......... 1,210 93 1,548 5,026 4,978 1,160 185
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before reorganization
expense (income), income taxes and
extraordinary item.................. 32,178 194 1,734 (15,795) (263,657) (32,519) 13,452
Reorganization expense (income)(2).... -- -- -- -- -- 31,845 (26,501)
----------- ------------- ------------ --------- --------- --------- -----------
Income (loss) before income taxes and
extraordinary item.................. 32,178 194 1,734 (15,795) (263,657) (64,364) 39,953
Income tax expense.................... 10,949 34 2,678 3,070 474 -- 289
Extraordinary item, net of tax(3)..... -- -- -- -- -- -- (228,911)
----------- ------------- ------------ --------- --------- --------- -----------
Net income (loss)..................... $ 21,229 $ 160 $ (944) $ (18,865) $(264,131) $ (64,364) $ 268,575
----------- ------------- ------------ --------- --------- --------- -----------
----------- ------------- ------------ --------- --------- --------- -----------
Basic earnings (loss) per share....... $ 58.48 $ 0.44 $ (0.94) $ (18.87) $ (264.13) $ (64.36) 268.58
Diluted earnings (loss) per share..... $ 58.48 $ 0.44 $ (0.94) $ (18.87) $ (264.13) $ (64.36) 268.58
Weighted average number of common
shares outstanding-basic............ 363 363 1,000 1,000 1,000 1,000 1,000
Weighted average number of common
shares outstanding-diluted.......... 363 363 1,000 1,000 1,000 1,000 1,000

<CAPTION>
CAMELOT PREDECESSOR CAMELOT
------------ ------------- ------------
PERIOD PERIOD PERIOD
FEBRUARY 1, MARCH 2, MARCH 1,
1998 TO 1997 TO 1998 TO
FEBRUARY 28, NOVEMBER 29, NOVEMBER 28,
1998 1997 1998
------------ ------------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Net sales............................. $ 27,842 $ 260,249 $ 377,744
Cost of sales......................... 18,009 175,700 238,623
------------ ------------- ------------
Gross profit.......................... 9,833 84,549 139,121
Selling, general and administrative
expenses............................ 9,527 92,031 124,863
Special items (1)..................... -- (4,443) 1,096
------------ ------------- ------------
Income (loss) before interest expense,
other expense (income), net,
reorganization expense (income),
income taxes and extraordinary
item................................ 306 (3,039) 13,162
Interest expense...................... 12 186 1,299
Other expenses (income), net.......... (295) 97 (145)
------------ ------------- ------------
Income (loss) before reorganization
expense (income), income taxes and
extraordinary item.................. 589 (3,322) 12,008
Reorganization expense (income)(2).... -- 3,273 --
------------ ------------- ------------
Income (loss) before income taxes and
extraordinary item.................. 589 (6,595) 12,008
Income tax expense.................... 115 -- 5,846
Extraordinary item, net of tax(3)..... -- -- --
------------ ------------- ------------
Net income (loss)..................... $ 474 $ (6,595) $ 6,162
------------ ------------- ------------
------------ ------------- ------------
Basic earnings (loss) per share....... $ 0.05 $ (6.60) $ 0.61
Diluted earnings (loss) per share..... $ 0.05 $ (6.60) $ 0.60
Weighted average number of common
shares outstanding-basic............ 10,176 1,000 10,178
Weighted average number of common
shares outstanding-diluted.......... 10,176 1,000 10,353
</TABLE>

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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION FOR CAMELOT

(IN THOUSANDS, EXCEPT PER SHARE, SELECTED STORE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
PREDECESSOR
PRE-PREDECESSOR ----------------------------------------------------------
-------------------------- PERIOD PERIOD
FISCAL YEAR 30 DAYS OCTOBER 1, MARCH 2,
ENDED ENDED 1993 TO 1997 TO
AUGUST 31, SEPTEMBER 30, FEBRUARY 26, FISCAL FISCAL FISCAL JANUARY 31,
1993 1993 1994 1994 1995 1996 1998
----------- ------------- ------------ --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STORE DATA
Number of stores:
Open at beginning of period......... 324 365 366 392 401 388 315
Open during period.................. 20 1 7 21 14 -- --
Closed during period................ 5 -- -- 12 27 73 10
Acquired during period.............. 26 -- 19 -- -- -- --
----------- ------------- ------------ --------- --------- --------- -----------
Open at end of period............... 365 366 392 401 388 315 305
----------- ------------- ------------ --------- --------- --------- -----------
----------- ------------- ------------ --------- --------- --------- -----------
SELECTED OPERATING DATA
Gross square footage
(000's)............................. 1,273 1,281 1,393 1,511 1,563 1,329 1,309
Sales per square foot................. $ 331 -- -- $ 304 $ 292 $ 298 --
Comparable store sales
increase (decrease) (4)............. -- -- -- (2.6%) (5.6%) (3.5%) --
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital....................... $ 73,263 $ 73,329 $ 30,448 $ 58,127 $(167,129) $ 125,329 $ 149,018
Total assets.......................... 227,720 236,052 545,484 551,370 308,670 258,648 260,319
Current portion of long-term debt..... 578 9,203 2,555 12,565 285,878 -- --
Revolving credit agreement............ -- -- -- -- -- -- --
Long-term debt, net of current
portion............................. 21,283 21,283 328,845 354,235 110,882 -- --
Liabilities subject to compromise..... -- -- -- -- -- 484,811 --
Stockholders' equity (deficit)........ 130,418 130,579 75,643 56,778 (203,940) (268,304) 194,368

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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CAMELOT

GENERAL

Camelot was founded in 1956 as a third-party supplier of music to general
merchandise retailers such as regional drug, grocery, variety and discount
stores. In 1965, Camelot opened its first retail outlet as a leased department
in a Canton, Ohio area discount store. Over the next several years, Camelot
began to operate mall-based prerecorded music stores and leased music
departments in discount stores. Camelot has been privately held since its
founding.

On November 12, 1993, Investcorp S.A., an international investment banking
firm, arranged for certain of its affiliates, other non-U.S. investors and
Camelot senior management to purchase the stock of Camelot Music, Inc. for
approximately $420.0 million in a leveraged buyout. This purchase price was
funded with $80.0 million in cash, approximately $240.0 million of borrowings by
Camelot's predecessor from institutional lenders provided under the terms of a
credit agreement, $50.0 million of subordinated debentures and $50.0 million of
Camelot Music, Inc.'s preferred stock.

During the 1980s the music retail industry experienced rapid growth
primarily fueled by three factors: the introduction of new products such as the
CD; a relatively large number of popular new releases which increased customer
traffic and sales; and the rapid expansion of mall-based music retailers. These
factors led, in the early 1990s, to the competitive intrusion of non-traditional
music retailers, such as consumer electronics stores and discount stores, and to
increasing price competition. By mid-1994 these competitive factors, combined
with the contraction of the replacement CD market and a comparative lack of
successful new releases, led to deteriorating profitability in the music retail
industry.

The significant debt service burden resulting from the 1993 leveraged buyout
along with the industry's deteriorating profitability described above impaired
Camelot's operating and financial condition. In August 1996 Camelot filed a
voluntary bankruptcy petition to reorganize under the protection of the
bankruptcy court. The plan of reorganization, which accomplished a comprehensive
financial restructuring, was confirmed by the bankruptcy court and became
effective on January 27, 1998.

Beginning in mid-1997, conditions in the music retail industry began to
improve as a result of:

- the significant reduction in competitive square footage resulting from the
reduction in the total number of traditional music retail stores from
approximately 5,000 in 1995 to approximately 4,200 in 1997, including a
net reduction of 600 retail stores by the top five traditional music
retailers, based on store count;

- an improvement in retail pricing as music vendors, beginning in 1996,
strengthened minimum advertised pricing guidelines, which Camelot believes
decreased the intensity levels of price-based competition for prerecorded
music; and

- a resurgence in popular new releases.

Camelot has recently completed two acquisitions. See "Camelot's
Business--Recent Acquisitions." Effective February 28, 1998 Camelot acquired
certain assets and assumed certain liabilities and operating lease commitments
of The Wall pursuant to an asset purchase agreement. Prior to its acquisition by
Camelot, The Wall was a mall-based music store chain that operated 150 stores in
the Mid-Atlantic region of the United States. The total purchase price paid by
Camelot for the business of The Wall was $87.4 million, net of cash acquired,
including a cash purchase price of $72.2 million, net of cash acquired,
assumption of liabilities aggregating $12.9 million, and acquisition costs of
$2.3 million. Camelot paid approximately $1.8 million of the purchase price and
$1.0 million of acquisition costs for The Wall in Fiscal 1997 and paid the
balance in Fiscal 1998. On July 29, 1998, Camelot completed its acquisition of
all of the issued and outstanding shares of Spec's common stock. Spec's operates
41

102
<PAGE>
stores in south Florida and Puerto Rico, including 16 mall stores and 25 stores
in shopping centers and free standing locations. The total purchase price
payable in connection with the Spec's acquisition was approximately $43.0
million, including a cash purchase price of approximately $18.6 million, net of
cash acquired, repayment of bank debt of approximately $9.2 million, assumption
of liabilities aggregating $14.3 million, and acquisition costs of approximately
$0.9 million.

Camelot's fiscal year ends on the Saturday closest to February 28. Each
fiscal year and period is designated by the calendar year in which the fiscal
year commences. Camelot's emergence from bankruptcy required Camelot, in
accordance with SOP 90-7, to adopt "fresh-start reporting" as of January 31,
1998. See Note 2 to Camelot's Consolidated Financial Statements. Due to a
revaluation of assets and liabilities and the adoption of a new basis of
accounting resulting from fresh-start reporting, the results of operations for
periods subsequent to January 31, 1998 are not comparable to the results of
operations for prior periods.

Camelots' discussion and analysis of its financial condition and results of
operations includes:

- Camelot's results of operations for the thirty-nine weeks ended November
28, 1998 compared with the results of operations for the thirty-nine weeks
ended November 29, 1997;

- Camelot's results of operations for the 48 week period March 2, 1997 to
January 31, 1998 ("Short Fiscal 1997") compared with the results of
operations for the 52-week period ended March 1, 1997 ("Fiscal 1996");

- a discussion of Camelot's results of operations for the period February 1,
1998 to February 28, 1998 ("February 1998"); and

- Camelot's results of operations for Fiscal 1996 compared with the results
of operations for the 53-week period ended March 2, 1996 ("Fiscal 1995").

The following discussion and analysis should be read in conjunction with the
Selected Historical Financial and Operating Data and the Consolidated Financial
Statements of Camelot and accompanying notes included elsewhere in this joint
proxy statement/prospectus.

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<PAGE>
RESULTS OF OPERATIONS

The following table shows certain statement of operations line items as a
percentage of net sales during the two most recent complete fiscal years, Short
Fiscal 1997, February 1998 and for the first thirty-nine weeks of Fiscal 1998
and Fiscal 1997.

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THIRTY-NINE THIRTY-NINE
SHORT WEEKS WEEKS
FISCAL FISCAL FISCAL FISCAL FISCAL
1995 1996 1997 FEBRUARY 1998 1997 1998
--------- --------- --------- --------------- ------------- -------------
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 68.0 67.9 66.8 64.7 67.5 63.2
--------- --------- --------- ----- ----- -----
Gross profit........................ 32.0 32.1 33.2 35.3 32.5 36.8
Selling, general and administrative
expenses.......................... 33.9 34.0 30.7 34.2 35.4 33.0
Special items(1).................... 46.4 1.6 (1.2) -- (1.7) 0.3
--------- --------- --------- ----- ----- -----
Income (loss) before interest
expense, other expenses (income),
net, reorganization expenses
(income), taxes and extraordinary
item.............................. (48.3) (3.5) 3.7 1.1 (1.2) 3.5
Interest expense.................... 8.4 4.4 0.1 0.0 0.1 0.3
Other expense (income), net......... 1.1 0.3 0.0 (1.0) 0.0 0.0
--------- --------- --------- ----- ----- -----
Income (loss) before reorganization
expense (income), taxes and
extraordinary item................ (57.8) (8.2) 3.6 2.1 (1.3) 3.2
Reorganization expense (income)..... -- 8.0 (7.1) -- 1.2 --
--------- --------- --------- ----- ----- -----
Income (loss) before income taxes
and extraordinary item............ (57.8) (16.2) 10.7 2.1 (2.5) 3.2
Income tax expense (benefit)........ 0.1 -- 0.1 0.4 -- 1.6
Extraordinary item, net of tax...... -- -- (61.5) -- -- --
--------- --------- --------- ----- ----- -----
Net income (loss)................... (57.9)% (16.2)% 72.1% 1.7% (2.5 )% 1.6%
--------- --------- --------- ----- ----- -----
--------- --------- --------- ----- ----- -----
</TABLE>

- ------------------------

(1) Includes certain items, including the reversal of program reward redemption
reserves aggregating $4.4 million (income) in Short Fiscal 1997 when Camelot
discontinued its manual "punch card" version of its customer loyalty program
and replaced it with a more limited automated customer loyalty program, the
write-down of the fair value of long-lived assets in Fiscal 1996 resulting
in a charge of $6.5 million and an impaired asset write-down of $202.9
million for Fiscal 1995, including $201.1 million associated with the
write-down of goodwill, principally related to the 1993 leveraged buyout.
Amounts recorded as special items for the thirty-nine weeks ended November
28, 1998 reflect expenses associated with Camelot's proposed public offering
and legal fees related to open reorganization claims. Camelot has applied
for permission to withdraw the registration statement associated with the
proposed public offering.

104
<PAGE>
THIRTY-NINE WEEKS ENDED NOVEMBER 28, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 29, 1997.

NET SALES. Net sales increased 45.1% to $377.7 million for the thirty-nine
weeks ended November 28, 1998 compared to $260.2 million for the same period of
Short Fiscal 1997. Camelot acquired 150 stores on February 28, 1998 as a result
of the acquisition of The Wall and 41 additional stores on July 29, 1998 as a
result of the acquisition of Spec's. The increase in sales was primarily a
result of The Wall acquisition, which added $105.6 million to net sales, and the
Spec's acquisition, which added $17.5 million to net sales. Comparable stores
sales decreased 0.5%. Comparable store sales for the period for The Wall
increased by approximately 9.5% and for Spec's decreased by approximately 5.4%
compared to the same period of the prior year, when Camelot did not own The Wall
or Spec's. During that period, Camelot opened nine new stores and closed seven
stores. As of November 28, 1998 Camelot operated 498 stores compared to the 307
stores it operated as of November 29, 1997.

GROSS PROFIT. Gross profit increased 64.6% to $139.1 million for the
thirty-nine weeks ended November 28, 1998 compared to $84.5 million for the same
period of the prior year. Gross profit as a percentage of net sales improved to
36.8% from 32.5% for the thirty-nine weeks ended November 28, 1998 as compared
to the same period of 1997. The increase in gross profit was a result of lower
promotional retail pricing, an increased mix of higher margin catalog sales, the
resumption of normal trade terms, including the availability of prompt payment
discounts and the acquisition of The Wall and Spec's stores. The Wall
acquisition and the Spec's acquisition accounted for $38.3 million and $6.9
million, respectively, of the 1998 increase in gross profit.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased 35.8% to
$124.9 million in the thirty-nine weeks ended November 28, 1998 compared to
$92.0 million for the same period in Short Fiscal 1997. SG&A as a percentage of
net sales decreased to 33.0% from 35.4% in the thirty-nine weeks ended November
28, 1998 as compared to the same period of 1997. The improvement in SG&A
expenses as a percentage of net sales was principally due to the reduction in
depreciation and amortization as a result of fresh-start accounting and of
purchase accounting adjustments that significantly decreased the depreciable
basis of property, plant and equipment. Compensation expense of $3.3 million was
recognized during the thirty-nine weeks ended November 28, 1998 on options
issued at January 27, 1998 at grant prices below the average fair value at date
of grant.

SPECIAL ITEMS. In the thirty-nine weeks ended November 28, 1998, Camelot
incurred $1.1 million of expenses related to two special items: the filing of a
registration statement with the Commission relating to the proposed public
offering; and legal fees related to open reorganization claims. Camelot has
applied for permission to withdraw the registration statement. Special items in
the thirty-nine weeks ended November 29, 1997 were $4.4 million related to the
reversal of the remaining reserve for the discontinued "punch card" version of
Camelot's customer loyalty program once all customer redemptions ceased.

INCOME (LOSS) BEFORE INTEREST EXPENSE, OTHER EXPENSES (INCOME), NET,
REORGANIZATION EXPENSES, AND INCOME TAXES. As a result of the foregoing items,
income (loss) before interest expense, other expenses (income), net,
reorganization expenses, and income taxes, as a percentage of net sales,
increased to 3.5% or $13.2 million in the thirty-nine weeks ended November 28,
1998 as compared to a loss of $3.0 million or 1.2% as a percentage of net sales
in the same period of Short Fiscal 1997.

OTHER EXPENSES (INCOME), NET. Camelot's other expenses (income), net,
increased to $1.2 million of expenses in the thirty-nine weeks ended November
28, 1998 from $0.3 million of expenses in the same period of Short Fiscal 1997.
Other expenses (income), net includes Camelot's interest income, interest
expense and financing charges. Interest income in the third quarter of 1997 was
netted against reorganization expenses as required during the bankruptcy
proceedings.

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<PAGE>
REORGANIZATION EXPENSES. Camelot recorded no reorganization expenses in the
thirty-nine weeks ended November 28, 1998 compared to reorganization expenses of
$3.3 million in the same period of Short Fiscal 1997. During 1997, the
reorganization expenses primarily reflected professional fees and other expenses
related to the bankruptcy proceedings. No expense has been incurred in Fiscal
1998 due to Camelot's emergence from the bankruptcy proceedings on January 31,
1998.

INCOME TAXES. Camelot's provision for income taxes for the thirty-nine
weeks ended November 28, 1998 was $5.8 million compared to no income tax
recorded during the third quarter of Short Fiscal 1997. Camelot believes that it
is more likely than not that it will be able to use the deferred tax assets at
February 28, 1998. Under the provisions of the Internal Revenue Code, no net
operating losses remain to offset Camelot's future operating income. In
addition, the write-off of unprofitable stores as part of the bankruptcy plan of
reorganization; the forgiveness of debt and the related reduction in future
interest expense; and the write-off of reorganization expense as part of
emergence from bankruptcy will all contribute to future taxable income.
Therefore, no valuation allowance has been established to offset these deferred
tax assets.

NET INCOME. As a result of the foregoing items, Camelot recognized net
income of $6.2 million during the thirty-nine weeks ended November 28, 1998 as
compared to a loss of ($6.6) million in the same period of Fiscal 1997.

SHORT FISCAL 1997 COMPARED TO FISCAL 1996

The following discussion compares Short Fiscal 1997, an eleven month period,
with Fiscal 1996, a twelve month period. Since Camelot adopted a new accounting
method resulting from fresh-start reporting as of January 31, 1998, the results
of operations other than net sales and gross profit for Fiscal 1997 are not
comparable to Fiscal 1996. The remaining statement of operations line items are
comparable to Fiscal 1996 for only the first eleven months of Fiscal 1997
represented by Short Fiscal 1997. As noted below, certain increases and
decreases in the results of operations for Short Fiscal 1997 may be due to the
one month difference in periods. The results of operations for February 1998 are
discussed separately under the heading "--February 1998."

NET SALES. Net sales for Short Fiscal 1997 were $372.6 million and net
sales for February 1998 were $27.8 million. Net sales increased 1.0% to $400.4
million for all of Fiscal 1997 compared to $396.5 million in Fiscal 1996.
Comparable store sales increased 6.8%, primarily as a result of retail price
increases on selected catalog titles resulting from the institution of minimum
advertised pricing and decreased competition in the marketplace and secondarily
due to a comparably stronger new release schedule. Camelot operated 455 stores
at the end of Fiscal 1997 compared to 315 stores at the end of Fiscal 1996.

GROSS PROFIT. Gross profit for Short Fiscal 1997 was $123.9 million and
gross profit for February 1998 was $9.8 million. Gross profit increased 5.2% to
$133.7 million for all of Fiscal 1997 compared to $127.1 million in Fiscal 1996.
Gross profit as a percentage of net sales improved to 33.4% for all of Fiscal
1997 from 32.1% in Fiscal 1996. For purposes of determining Camelot's gross
profit, costs of sales is comprised of product costs, distribution overhead and
depreciation costs, freight, inventory shrink and prompt payment discounts. The
increase in gross profit was the result of decreased competition and an
increasing mix of higher margin catalog sales and the resumption of normal trade
terms including the availability of prompt payment discounts, offset in part by
lower margins earned on non-music products such as laser video and software
products that Camelot was in the process of discontinuing. Camelot recorded a
charge of $2.0 million for all of Fiscal 1997 for the discontinuance of these
products lines. Gross margins were also impacted negatively as a result of a
recent industry-wide trend in which vendors have implemented policies
prohibiting the return of open products for credit. Camelot expects the trend to
continue in Fiscal 1998. Camelot has modified its inventory distribution systems
in response to this trend. Opened products returned by customers are segregated
from other returns and

106
<PAGE>
sent to liquidators for resale. Camelot has also begun a program of repackaging
certain opened product and selling it as used product at selected stores. In
addition, Camelot has modified its return policies to more closely monitor
customer returns in an effort to reduce returns of opened product. The costs
associated with this effort have not been material.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 14.9%
to $114.5 million in Short Fiscal 1997 from $134.5 million in Fiscal 1996. SG&A
expenses, as a percentage of net sales, decreased to 30.7% in Short Fiscal 1997
compared to 34.0% in Fiscal 1996. SG&A expenses include payroll, occupancy and
net advertising costs, utilities, general and administrative costs and
depreciation and amortization. The improvement in SG&A expenses as a percentage
of net sales was principally due to four factors: temporary rent concessions
negotiated during the reorganization which have reduced store occupancy costs as
a percentage of net sales, increases in cooperative advertising support from
vendors, cost savings associated with restructuring and automating Camelot's
customer loyalty program, and the reduction of depreciation and amortization,
which was primarily attributed to store closings during Fiscal 1996 and Short
Fiscal 1997. Each temporary rent concession was negotiated individually.
Consistent with Camelot's policy for recording reductions in rental expense,
each temporary rent concession is recorded over the life of the lease on a
straight-line basis. Upon the adoption of fresh-start reporting, Camelot
recognized the effect of these concessions on a straight-line basis over the
remaining term of the lease.

SPECIAL ITEMS. In Short Fiscal 1997 Camelot discontinued the manual "punch
card" version of its customer loyalty program and replaced it with an automated
program targeted to its most frequent and highest spending customers. The
reduction in the program resulted in the reversal of the remaining program
reward redemption reserves aggregating $4.4 million (income) once customer
redemptions ceased. In Fiscal 1996 Camelot wrote down the fair value of
long-lived assets resulting in a charge of $6.5 million.

INCOME (LOSS) BEFORE INTEREST EXPENSE, OTHER EXPENSES (INCOME), NET,
REORGANIZATION EXPENSES (INCOME), INCOME TAXES AND EXTRAORDINARY ITEM. As a
result of the foregoing, income (loss) before interest expense, other expenses
(income), net, reorganization expenses (income), income taxes and extraordinary
item as a percentage of net sales increased to 3.7% or $13.9 million in Short
Fiscal 1997 as compared to a loss of $13.9 million or a loss of 3.5% as a
percentage of net sales in Fiscal 1996.

INTEREST EXPENSE. Camelot's interest expense declined to $0.2 million in
Short Fiscal 1997 from $17.4 million in Fiscal 1996. The decline in interest
expense was primarily attributable to the cessation of accruals on prepetition
indebtedness upon the filing of Camelot's bankruptcy petition.

OTHER EXPENSES (INCOME), NET. Camelot's other expenses (income), net
decreased to $0.2 million in Short Fiscal 1997 compared to $1.2 million in
Fiscal 1996. Other expenses (income), net includes Camelot's financing charges.
Financing costs decreased to $0.4 million in Short Fiscal 1997 from $1.9 million
in Fiscal 1996.

REORGANIZATION EXPENSES (INCOME). Camelot realized reorganization income of
$26.5 million in Short Fiscal 1997 compared to reorganization expense of $31.8
million in Fiscal 1996. During Short Fiscal 1997, the reorganization income
related principally to adjustments to prepetition claims that were discharged or
received no amount of recovery, offset by net adjustments to fair values, and
professional fees and other expenses related to the bankruptcy proceedings.
During Fiscal 1996, the reorganization expense primarily reflected a provision
for store closings, including related lease rejection damage claims, and the
write-off of financing costs associated with prepetition indebtedness, as well
as professional fees.

INCOME TAXES. Camelot's provision for income taxes during Short Fiscal 1997
was $0.3 million compared to no income tax recorded during Fiscal 1996.
Differences between the effective tax rate and

107
<PAGE>
the statutory tax rate are due primarily to the recording of valuation
allowances against deferred tax assets. Camelot anticipates an effective tax
rate of approximately 40% with respect to Fiscal 1998 pre-tax income.

EXTRAORDINARY ITEM. As a result of Camelot's reorganization, in Short
Fiscal 1997 Camelot recorded a one-time gain of $228.9 million associated with
the extinguishment of its prepetition claims of approximately $428 million.

NET INCOME. As a result of the foregoing, Camelot recognized net income of
$268.6 million during Short Fiscal 1997, as compared to a net loss of $64.4
million in Fiscal 1996. Excluding special items, reorganization expenses
(income) and extraordinary item, Camelot recognized net income in Short Fiscal
1997 of $8.7 million, as compared to a net loss of $26.0 million in Fiscal 1996.

FEBRUARY 1998

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses were $9.5
million in February 1998, which included depreciation and amortization of $0.5
million.

INCOME (LOSS) BEFORE INTEREST EXPENSE, OTHER EXPENSES (INCOME), NET,
REORGANIZATION EXPENSES (INCOME), INCOME TAXES AND EXTRAORDINARY ITEM. Income
(loss) before interest expense, other expenses (income), net, reorganization
expenses (income), income taxes and extraordinary item was $0.3 million in
February 1998.

INTEREST EXPENSE. Camelot's interest expense was less than $0.1 million in
February 1998.

OTHER EXPENSES (INCOME), NET. Camelot's other expenses (income), net was
($0.3) million in February 1998.

INCOME TAXES. Camelot's provision for income taxes in February 1998 was
$0.1 million.

NET INCOME. As a result of the foregoing items, Camelot recognized net
income of $0.5 million in February 1998.

FISCAL 1996 COMPARED TO FISCAL 1995

NET SALES. Net sales decreased 13.0% to $396.5 million in Fiscal 1996 from
$455.7 million in Fiscal 1995. Comparable store sales declined 3.2% in Fiscal
1996 due to the comparative lack of strong product releases, a decline in CD
replacement sales and increased price-based competition led by price decreases
by non-traditional music retailers, such as consumer electronics retailers. The
decrease in total sales was primarily due to the closing of 73 stores in Fiscal
1996, a decrease in comparable store sales and the impact of one fewer week of
sales in Fiscal 1996. Camelot opened no new stores in Fiscal 1996.

GROSS PROFIT. Gross profit decreased 12.8% to $127.1 million in Fiscal 1996
compared to $145.8 million in Fiscal 1995. Gross profit as a percentage of net
sales remained relatively constant at 32.1% in Fiscal 1996 and 32.0% in Fiscal
1995. The decrease in gross profit was primarily due to the effects of increased
price-based competition and the comparative lack of strong new releases.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 13.0%
to $134.5 million in Fiscal 1996 from $154.6 million in Fiscal 1995. SG&A
expenses, as a percentage of net sales, remained constant at 34.0% in Fiscal
1996 and 33.9% in Fiscal 1995. The decrease in SG&A expenses was principally due
to the reduction in the number of stores operated by Camelot from 388 to 315 and
a related reduction in corporate and store operating costs.

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<PAGE>
SPECIAL ITEMS. Special items in Fiscal 1996 consist of an impaired asset
write-down of $6.5 million. This write-down, as required by Financial Accounting
Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", was based upon a review by
management of the carrying values of long-lived assets, primarily goodwill and
property, plant and equipment. The business climate in Fiscal 1996 was a
continuation from the prior year and was characterized by declining sales
volumes resulting from lower customer traffic in malls, an increase in non-mall,
high volume, low-priced superstores and the lack of strong music product
releases. While Camelot's mall-based music stores reacted with increased
promotional pricing, Camelot's higher cost structure relative to these non-mall
superstores, which was principally related to occupancy costs, limited Camelot's
ability to compete effectively.

Special items of $211.5 million in Fiscal 1995 consist primarily of a $202.9
million impairment write-down, $201.1 million of which was for goodwill related
to the 1993 leveraged buyout. The cause of this write-down was the deterioration
in business conditions described in the previous paragraph. The remaining $1.8
million relates to strategic decisions made by Camelot to close 27 stores
throughout Fiscal 1995. These closings occurred shortly after the initial
decision to close the stores was made. Upon closing, leasehold improvements that
were immobile or worthless if removed from stores were deemed to be impaired.
Charges were taken for the net book value of these assets in accordance with
Statement No. 121. In addition, special items in Fiscal 1995 include
restructuring charges of $5.2 million and the expiration of a put agreement of
$3.4 million, which had been issued in November 1993 as part of the 1993
leveraged buyout. The $5.2 million restructuring charge is primarily composed of
$1.6 million for costs incurred to dispose of excess inventory and $2.3 million
for costs associated with lease breakages.

INCOME (LOSS) BEFORE INTEREST EXPENSE, OTHER EXPENSES (INCOME), NET,
REORGANIZATION EXPENSES (INCOME), INCOME TAXES AND EXTRAORDINARY ITEM. As a
result of the foregoing factors, income (loss) before interest expense, other
expenses (income), net, reorganization expenses (income), income taxes and
extraordinary item decreased to $13.9 million in Fiscal 1996 from $220.4 million
in Fiscal 1995.

INTEREST EXPENSE. Camelot's interest expense declined to $17.4 million in
Fiscal 1996 from $38.3 million in Fiscal 1995. In connection with the bankruptcy
proceedings, Camelot did not record interest on its prepetition debt subsequent
to the filing of its voluntary bankruptcy petition. During the bankruptcy
proceedings, Camelot entered into an agreement with various lenders to obtain
debtor-in-possession financing (the "DIP Agreement"). Borrowings under the DIP
Agreement were significantly lower than the prepetition debt obligations.
Therefore, Camelot's financing costs in Fiscal 1996 were significantly lower
than in Fiscal 1995.

OTHER EXPENSES (INCOME), NET. Other expenses (income), net decreased to
$1.2 million in Fiscal 1996 from $5.0 million in Fiscal 1995. Other expenses
included the net costs of corporate owned life insurance programs of $1.3
million in Fiscal 1996 and $1.5 million in Fiscal 1995. The Fiscal 1996 expenses
also reflect the receipt of $1.9 million upon the termination of a business
development agreement.

REORGANIZATION EXPENSES (INCOME). Reorganization expenses (income) was
$31.8 million in Fiscal 1996 as a result of the bankruptcy proceedings,
including professional fees of $4.9 million, the write-off of financing fees
from the 1993 leveraged buyout of $16.0 million, a provision for store closing
costs of $4.9 million and related lease rejection claims of $6.0 million.

INCOME TAXES. There was no provision for income taxes during Fiscal 1996.
In Fiscal 1995, Camelot's provision for income taxes was $0.5 million.

NET INCOME. As a result of the foregoing factors, Camelot recognized a net
loss of $64.3 million in Fiscal 1996 and a net loss of $264.1 million in Fiscal
1995. Excluding special items and reorganization

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expense, Camelot recognized a net loss of $26.0 million in Fiscal 1996, as
compared to a net loss of $52.6 million in Fiscal 1995.

LIQUIDITY AND CAPITAL RESOURCES

Camelot's cash needs fluctuate during the course of the fiscal year. During
its first three quarters, Camelot's cash flow from operations typically is
consumed by payments to suppliers and store maintenance, renovation expenditures
and opening new stores, including relocations. During the third quarter, Camelot
has historically relied on borrowings under its credit facilities to provide it
with liquidity to purchase inventory for sale during the holiday season.

Pursuant to the plan of reorganization, a wholly owned subsidiary of
Camelot, Camelot Music, Inc., entered into a revolving credit agreement dated
January 27, 1998 with a number of financial institutions. This working capital
facility provided Camelot with advances of up to $50.0 million during peak
periods of October to December and $35.0 million during the non-peak periods of
January to September, bore interest at floating rates and matured on January 27,
2002. The aggregate availability under the working capital facility was limited
to a borrowing base equal to 35.0% of inventory during peak periods and 30.0% of
inventory during non-peak periods.

On June 12, 1998, Camelot signed the first amendment and waiver to the
working capital facility. The amended credit facility increases the borrowing
base to 60.0% of inventory during all periods, modifies existing limitations on
capital expenditures, waives certain covenants in order to permit the Spec's
acquisition and provided a $25.0 million term loan to finance the Spec's
acquisition. The term loan under the amended credit facility will be amortized
in semi-annual installments over a three year period beginning January 31, 1999.
The amortization payments will be $3.0 million, $2.0 million, $6.0 million, $4.0
million, $6.0 million and $4.0 million.

The obligations of Camelot's subsidiaries under the amended credit facility
are guaranteed by Camelot and all of its other subsidiaries and are
collateralized by substantially all of Camelot's and its subsidiaries' assets.
Camelot and its subsidiaries are currently subject to certain customary negative
covenants under the amended credit facility which, under certain circumstances,
limit their ability to incur additional indebtedness, pay dividends, make
capital expenditures and engage in certain extraordinary corporate transactions.
The amended credit facility also requires Camelot to maintain minimum
consolidated levels of EBITDA. Camelot is currently in compliance with all of
these covenants. As of November 28, 1998, Camelot had $25.0 million outstanding
under the term loan portion of the amended credit facility and $23.8 million
under its revolving line of credit.

On July 29, 1998, Camelot acquired Spec's for a cash purchase price of $3.30
per share. Net cash of $28.7 million was required to fund the payment of the
purchase price and the repayment of Spec's outstanding indebtedness and
acquisition costs. Camelot funded the Spec's acquisition with the $25.0 million
term loan provided under the amended credit facility and accumulated cash
balances. Management believes the principal effects of the Spec's acquisition on
its financial position will be the debt service and amortization requirements
associated with the term loan. Camelot recorded $9.4 million in goodwill as a
result of the Spec's acquisition, which will be amortized over a 20-year period.

Camelot's cash flow from operating activities increased to $53.8 million in
Short Fiscal 1997 compared to cash flow from operating activities of $16.3
million in Fiscal 1996. The increase in cash generated from operating activities
primarily reflects Camelot's net income of $268.6 million in Short Fiscal 1997
as compared to a net loss of $64.4 million in Fiscal 1996, together with
increases in trade payables resulting from improved credit terms, increases in
accrued expenses and amounts payable in connection with The Wall acquisition.
Camelot's operating activities used cash of $8.3 million during the thirty-nine
weeks ended November 28, 1998 compared to cash generated by operating activities
of $9.8 million during the prior comparable period.

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Net cash used in investing activities increased to $7.9 million in Short
Fiscal 1997, as compared to $4.0 million in Fiscal 1996, primarily as a result
of Camelot's higher level of capital expenditures during Short Fiscal 1997. Net
cash used in investing activities increased to $113.4 million for the
thirty-nine weeks ended November 28, 1998 compared to net cash used in investing
activities of $5.3 million for the prior comparable period, as a result of
$100.4 million, net of cash acquired, invested in connection with Camelot's
acquisitions of The Wall and Spec's. Camelot made capital expenditures of $8.0
million during Short Fiscal 1997 as compared with capital expenditures of $4.3
million in Fiscal 1996. Capital expenditures during Short Fiscal 1997 were
comprised of $2.1 million in enhancements to information systems, including
enhancements associated with the anticipated integration of The Wall's
operations and $5.9 million in store remodeling, maintenance and expansions.
Fiscal 1996 capital expenditures were primarily attributable to store
remodeling, maintenance and expansions. Camelot made capital expenditures of
$13.0 million for the thirty-nine weeks ended November 28, 1998 compared to
capital expenditures of $5.3 million for the prior comparable period. Capital
expenditures for both periods were primarily attributable to store remodeling,
maintenance, expansions, and enhanced information systems.

Net cash used in financing activities increased to $0.8 million in Short
Fiscal 1997, as compared to $0.6 million in Fiscal 1996. Net cash used in
financing activities in Fiscal 1997 primarily related to the payment of
financing fees, while net cash used in financing activities in Fiscal 1996
related to repayment of borrowings under Camelot's then-existing credit
agreement and the payment of financing fees, offset in part by the proceeds of
such borrowings and other long term debt. Financing activities provided cash of
$48.7 million, including the $25.0 million term loan provided under the amended
credit facility, during the thirty-nine weeks ended November 28, 1998. The
remainder was primarily net activity related to normal seasonal working capital
requirements.

Camelot currently anticipates that capital expenditures aggregating
approximately $12.5 million were incurred in Fiscal 1998, of which $9.8 million
relates to new, relocated and remodeled stores, $1.9 million relates to an
upgraded store POS system, and the balance of which relates to general corporate
purposes. Camelot anticipates making the normal amount of capital expenditures
during Fiscal 1999, substantially all of which is anticipated to relate to new,
relocated and remodeled stores. Camelot expects that the total investment for
each new store will be approximately $0.6 million, including inventory,
leasehold improvements, signage, and furniture, fixtures and equipment and
excluding pre-opening expenses. Pre-opening expenses, which consist primarily of
non-recurring costs such as employee recruiting and training, supplies and
various miscellaneous expenditures, are expected to average approximately
$15,000 per store and will be expensed as incurred. The cost of opening a new
store can vary based on the size of the particular store, construction costs in
various markets and other factors. Camelot generally is able to determine
whether a new store will be profitable after the store has been open for a
period of 12 months. New stores typically become profitable after 12 months of
operation, although the actual period of operations prior to achieving
profitability depends on when the store in question opens. Stores opened during
periods close to the holiday selling season may become profitable over a shorter
period.

The IRS asserted in the bankruptcy proceedings a priority tax claim against
Camelot of approximately $7.9 million. Under the bankruptcy plan of
reorganization, any allowed priority tax claim of the IRS would be paid over six
years, with quarterly amortization of interest and principal, at an interest
rate of 9.0%. Camelot has acknowledged and paid a priority tax obligation to the
IRS of approximately $0.8 million. Camelot disputes the validity of the balance
of the IRS claim. In the event that a judgment is rendered against Camelot for
significantly more than the $0.8 million that Camelot has paid already,
Camelot's results of operations would be materially adversely affected. Such a
judgment, unless paid or bonded for appeal, would be an event of default under
Camelot's amended credit facility.

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As of November 28, 1998, Camelot had cash and working capital of
approximately $9.5 million and $115.3 million, respectively, compared to cash of
$82.5 million and working capital of $110.1 million at February 28, 1998.
Approximately $71.7 million in cash was used subsequent to year-end to pay the
purchase price for The Wall acquisition. Approximately $28.7 million was
required to fund the payment of the purchase price and repayment of outstanding
indebtedness and acquisition costs for the Spec's acquisition. Camelot funded
the Spec's acquisition with a $25.0 million term loan provided under the amended
credit facility and accumulated cash balances.

Camelot's primary ongoing cash requirements will be to finance working
capital, primarily inventory purchases, and to make capital expenditures for
store relocations, new store openings and continuing information systems
maintenance. Management believes that cash flows from its operations and
available working capital, supplemented by the borrowings under the amended
credit facility, will enable Camelot to meet its working capital expenditure
needs in Fiscal 1999.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly statement of
operations data for the period from March 3, 1996 to November 28, 1998. This
data has been derived from unaudited Consolidated Financial Statements that, in
the opinion of Camelot, include all adjustments necessary for fair presentation
of such information when read in conjunction with Camelot's audited Consolidated
Financial Statements. Camelot's business is seasonal in nature. In Fiscal 1997,
approximately 35% of its revenues, and all of its income (loss) before interest
expense, other expenses (income) net, reorganization expenses (income) net,
income taxes and extraordinary item and its net income before extraordinary item
was generated in Camelot's fiscal fourth quarter. Quarterly results are affected
by, among other things, new product offerings, store openings and closings, and
sales performance of existing stores.

<TABLE>
<CAPTION>
FISCAL 1996
($ IN THOUSANDS)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER TOTAL
------------ -------------- ------------- -------------- ----------
Net sales............................. $ 90,704 $ 90,132 $ 83,600 $ 132,066 $ 396,502
Gross profit.......................... 29,732 28,855 26,527 41,987 127,101
Operating income (loss) (1)........... (6,398) (6,642) (7,352) 6,451 (13,941)
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1997
($ IN THOUSANDS)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST
QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER(2) TOTAL
------------ -------------- ------------- ----------------- ----------
Net sales........................... $ 82,815 $ 89,257 $ 88,178 $ 140,153 $ 400,403
Gross profit........................ 27,498 29,997 27,056 49,188 133,739
Operating income (loss) (1)......... (2,866) (352) 183 N.A. 14,164
</TABLE>

<TABLE>
<CAPTION>
FISCAL 1998
($ IN THOUSANDS)
-------------------------------------------
<S> <C> <C> <C>
FIRST
QUARTER SECOND QUARTER THIRD QUARTER
------------ -------------- -------------
Net sales.......................................................... $ 113,456 $ 128,189 $ 136,099
Gross profit....................................................... 40,951 44,592 53,578
Operating income................................................... 1,210 2,066 9,886
</TABLE>

- ------------------------

(1) For purposes of this presentation, operating income (loss) means Camelot's
income (loss) before interest expense, other expenses (income) net,
reorganization expenses (income) net, income taxes and extraordinary item
for each of the periods presented.

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(2) Net sales and gross profit for the fourth quarter of Fiscal 1997 are
presented on a combined basis reflecting a summation of two months of
operations prior to Camelot's emergence from the bankruptcy proceeding and
its operations in February 1998. See "--General."

INFLATION

Camelot believes that the inflationary environment in Camelot's markets in
the past several years has not had a material impact on Camelot's revenues or
results of operations. Borrowings under the amended credit facility, however,
will be at variable rates of interest and increases in such interest rates, if
not mitigated by other Camelot actions, could adversely impact Camelot's results
of operations.

YEAR 2000 READINESS DISCLOSURE

Beginning in early 1996 Camelot began upgrading all of its systems and old
hardware to address the Year 2000 issue and to upgrade functionality to aid in
executing our daily business. An internal Year 2000 Action Committee was formed
with representatives from each business area. The Committee met regularly to
review Camelot's progress toward becoming Year 2000 compliant.

The five major phases of Camelot's Year 2000 Project are Awareness,
Assessment, Renovation, Testing and Implementation. The Awareness phase was
completed in 1996 and the Assessment phase was completed in the second quarter
of 1998. In the Awareness phase Camelot identified all source code and all
imbedded chip logic that could contain date logic. In the Assessment phase of
the Project, Camelot retained the services of Data Dimensions, a consulting
company specializing in Year 2000 assessments and remediation. Over the course
of several months, Data Dimensions analyzed the source codes for Camelot's
systems identifying each individual occurrence of date logic in the source code.
Also as part of the Assessment Phase, Camelot met with and sent letters to
representatives of the respective companies of the imbedded chip logic
identified in the Awareness Phase to verify Year 2000 readiness of each imbedded
chip device. The results of the assessment indicate that:

- Camelot is aware of the Year 2000 issue,

- an assessment is complete of IT and non-IT related systems as they relate
to the Year 2000 issue,

- a list of every occurrence of possible date logic has been identified for
testing,

- all external business relationships have been documented,

- remediation of all major critical systems has been completed, and

- contact has been made with manufacturers of distribution center non-IT
related systems and no issues have been identified.

The Renovation, Testing and Implementation phases occurred on an individual
basis as each new system was installed and/or system upgrades were completed.
For example, Camelot installed a product replenishment system, upgraded its
payroll system and replaced a merchandising system with a new system that
handles purchasing, sales processing and inventory. The suppliers of these
systems have stated that the systems are Year 2000 compliant. Due to the merger,
Camelot is not currently testing the remaining possible occurrences of date
logic.

As part of the Year 2000 Project phases, Camelot conducted an extensive
vendor review program, mailing surveys to all vendors with whom Camelot conducts
business. The results of these surveys indicate that none of Camelot's major
vendors identify significant Year 2000 exposures. Electronic data interfaces
with vendors and banks are being improved by the installation of the Year 2000
compliant version of Camelot's EDI software.

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Since many systems will not be utilized after the merger and Camelot's staff
is performing interface work with Trans World, Camelot has halted the project to
perform a full Year 2000 status test.

Camelot will have a difficult time completing the final stages of
implementation of the Year 2000 compliance program if the merger does not occur.
While the point of sale system conversion is complete and installed in
approximately 50 stores, 440 stores remain to be upgraded.

Camelot presently believes that its most likely worst-case Year 2000
scenario relates to the possible failure in one or more geographic regions of
third party systems over which Camelot has no control and for which Camelot has
no ready substitute, such as, but not limited to, power and telecommunications
services. Camelot has in place a disaster recovery plan that addresses recovery
from various kinds of disasters, including recovery from significant
interruptions to data flows and distribution capabilities at Camelot's data
systems center and distribution center. Camelot is using that plan to further
develop specific Year 2000 contingency plans which will emphasize locating
alternate sources of supply, methods of distribution and ways of processing
information.

Under its disaster recovery plan, Camelot is equipped to replace a store's
systems within 24 hours in the event that store's systems are severely damaged.
In the event Camelot's data center is damaged, Camelot is prepared to replenish
products in individual stores by manually writing and faxing purchase orders to
vendors. Merchandise will then be sent directly to Camelot's stores, by-passing
the distribution center temporarily and ensuring that the flow of merchandise to
stores will not be severely inhibited. Once merchandise flow is reestablished,
Camelot will focus on reestablishing a normal operating environment. Camelot is
also prepared to replace a portion or all of our data center in no more than a
few weeks; all the hardware is readily available in the open market and all
applications and data are routinely backed up.

To date Camelot has spent approximately $0.3 million on Year 2000
remediation efforts. Future costs are anticipated to amount to an additional
$1.5 million. Funding for the future costs related to Year 2000 remediation
efforts will be provided from cash flows from operations.

The estimated costs of achieving Year 2000 compliance and the date by which
Year 2000 compliance will be achieved are based on Camelot's management's best
estimates, which management derived using numerous assumptions about future
events including the continued availability of certain resources, third party
modification plans and other factors. Management cannot assure that these
estimates will be achieved, and actual results could differ materially from
these estimates. Specific facts that might cause material differences in the
estimates include the availability and cost of personnel trained in Year 2000
remediation work, the ability to locate and correct all relevant computer codes,
the success achieved by Camelot's customers and suppliers in reaching Year
2000-readiness, the timely availability of necessary replacement items and
similar uncertainties.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board Statement No. 128, "Earnings per
Share," issued in February 1997 and effective for fiscal years ending after
December 15, 1997, establishes and simplifies standards for computing and
presenting EPS. Camelot has complied with this statement.

Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income," issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive income (loss) or within the statement of changes of
stockholder's equity. Camelot has had no significant items of other
comprehensive income.

Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," issued in June 1997 and
effective for fiscal years beginning after

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December 15, 1997, will change the way companies report selected segment
information in annual financial statements and also requires those companies to
report selected segment information in interim financial statements. Camelot has
evaluated the impact of the application of the new rules on Camelot's
Consolidated Financial Statements and the new rules will not change its
financial presentation.

Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities," issued in June, 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Camelot has evaluated the
impact of the application of the new rules on Camelot's Consolidated Financial
Statements and the new rules have no impact on its financial condition or
results of operations.

The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998 and effective for fiscal years beginning
after December 15, 1998 with earlier application permitted, provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. Camelot has adopted this statement as of the date of emergence from
bankruptcy as required by fresh-start reporting. See Note 4 to Camelot's
Consolidated Financial Statements.

The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities," issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. Camelot has adopted this statement as of the date
of emergence from bankruptcy as required by fresh-start reporting. See Note 4 to
Camelot's Consolidated Financial Statements.

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TRANS WORLD'S BUSINESS

GENERAL

Trans World is one of the largest music and video specialty retailers in the
United States. Trans World offers a wide selection of entertainment products,
including CDs, audio cassettes and videocassettes, DVDs and related accessories.
At October 31, 1998, Trans World operated 522 stores in 34 states, the District
of Columbia and the U.S. Virgin Islands, with the majority of its stores
concentrated in the Eastern half of the United States. Trans World operates its
stores under two real estate categories: mall and non-mall. Mall stores include
"Record Town," "Saturday Matinee" and "F.Y.E. For Your Entertainment." Non-mall
stores include "Coconuts," "Strawberries" and "Planet Music."

In the early 1990s, music retailers aggressively expanded their store base,
which led to an overcapacity of music and video product selling space in the
United States. Furthermore, entry into this category by mass-merchants and
consumer electronics stores, which enacted loss-leader pricing strategies to
increase store traffic, adversely impacted sales and gross margins of music
specialty retailers.

- closing and relocating underperforming stores,

- opening profitable new stores,

- improving operating efficiencies and

- reducing debt levels.

In order to reduce its portfolio of stores to a strong core of profitable
locations in desirable markets, Trans World closed a total of 401 stores through
October 31, 1998. An additional 34 stores, 14 of which are related to Trans
World's restructuring program, are forecasted to be closed in 1998. In
conjunction with repositioning itself, Trans World increased sales and net
income 18.6% and 189.7%, respectively, in 1997 over 1996. As a result, Trans
World is now in a stronger financial condition and is well-positioned to
continue to execute its business strategy.

BUSINESS STRATEGY

Trans World's strategy is to increase sales and net income through a
combination of new store openings, relocation of existing stores, merchandising
and marketing initiatives and strategic acquisitions.

MALL STORES. Trans World's mall stores are designed to offer consumers a
fun and exciting shopping experience. In the mall stores, Trans World puts an
emphasis on strong in-store presentation, broad product selection and
competitive pricing to attract the casual impulse buyer. Trans World's strategy
for mall stores is to operate profitable stores in high traffic locations while
controlling occupancy costs. Trans World intends to concentrate on combination
music/video stores which offer the customer a more extensive product selection
as well as an entertaining shopping environment. Larger Record Town/Saturday
Matinee combination stores and the F.Y.E. multimedia superstores are Trans
World's primary vehicles for growth in mall stores. Trans World believes that
the economies of scale and greater merchandising opportunities provided by large
multimedia stores will permit Trans World to achieve greater sales and profits
than it could in smaller store formats.

NON-MALL STORES. Trans World's non-mall stores target the serious music
shopper and offer a broad and deep product selection. Trans World believes there
is still significant growth potential in certain markets where it already has
substantial market share. Such markets include New England, the Mid-Atlantic
states, the Midwest, specifically Ohio and Illinois, and the New York
metropolitan area.

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By clustering non-mall stores in those markets, Trans World is able to take
advantage of economies of scale in advertising, distribution and other overhead
expenses.

REAL ESTATE. Trans World believes that it has favorable relationships with
the real estate developer community at both the local and national levels, and
that it is known for delivering exciting retail stores that add value to any
retail environment. Trans World will continue to capitalize on its financial
strengths and on its dominant market position within its target markets to
negotiate favorable lease terms in prime store locations.

MERCHANDISING AND MARKETING INITIATIVES. Trans World's primary goal in
merchandising and marketing is to provide its customers a fun and exciting
shopping experience. Trans World continuously develops merchandising and
marketing programs to attract both the casual impulse shopper as well as the
serious music shopper. Examples of these initiatives include in-store artist
appearances, exclusive product offerings and a music selection tailored to the
local market.

ACQUISITIONS. Trans World believes that its experienced management team and
financial strength have positioned it to be a leader in any consolidation of the
music specialty retail industry. Trans World's acquisition strategy focuses on
acquiring those music specialty retailers that allow Trans World to leverage its
strengths and that can be acquired on terms consistent with its financial
objectives. In October 1997, Trans World acquired 90 out of a total of 118
stores owned by Strawberries, Inc., a privately held non-mall music specialty
retailer operating primarily in New England.

STORE CONCEPTS

Trans World's strategy is to offer customers a broad selection of music and
video titles at competitive prices in convenient, attractive stores. Trans World
has developed a number of distinct store concepts to take advantage of real
estate opportunities and to satisfy varying consumer demands.

MALL STORES

Trans World's mall stores include five concepts, all of which have been
designed to offer consumers a fun and exciting shopping experience. In the mall
stores, Trans World puts an emphasis on a strong in-store presentation, broad
product selection and competitive pricing to attract the casual impulse buyer.

FULL-LINE MUSIC STORES. Trans World's full-line mall stores are located in
large, regional shopping malls and are generally named Record Town. There were
167 such stores at October 31, 1998. This store concept utilizes an average
space of approximately 3,500 square feet with certain stores ranging in excess
of 7,000 square feet depending on the availability of preferred space and the
expected volume of the store.

SATURDAY MATINEE STORES. These stores are dedicated to the sale of
prerecorded video products. These stores are located in large, regional shopping
malls and average 2,200 square feet in size. There were 40 such stores in
operation at October 31, 1998. Trans World's strategy is to combine this store
with a Record Town in its combination store concept whenever possible.

COMBINATION STORES. At October 31, 1998, Trans World operated 87
combination Record Town/ Saturday Matinee stores. The combination store concept
occupies an average of 7,800 square feet. These stores share common storefronts
and offer the consumer an exciting combination of music and video products in
one store location. Trans World believes that the combination of the two
concepts creates a marketing synergy by attracting different target customers.

FOR YOUR ENTERTAINMENT STORES. At October 31, 1998, Trans World operated
six F.Y.E. stores. These stores combine a broad assortment of music and video
products with a game arcade and an extensive

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selection of games, portable electronics, accessories and boutique items. This
format makes the traditional superstore experience available to shopping mall
consumers. F.Y.E. is designed to be a semi-anchor or destination retailer in
major regional malls. The prototype F.Y.E. store is 25,000 square feet.

SPECIALTY MUSIC STORES. The specialty music concept is also located in
large, regional shopping malls, but contrasts with full-line music stores in
that they carry a less diverse product selection. These stores, 25 of which were
in operation at October 31, 1998, are generally operated under the name Tape
World. The specialty mall stores operate in approximately 1,300 square feet.
Trans World's strategy is to reposition and expand these stores into Record Town
stores or combination stores as opportunities become available.

NON-MALL STORES

Trans World's non-mall concepts accounted for 190 stores in operation at
October 31, 1998, which primarily operate under the names Coconuts and
Strawberries. These stores are designed for freestanding, strip center and
downtown locations in areas of high population density. The majority of the non-
mall stores range in size from 3,000 to 8,000 square feet. Non-mall stores carry
an extensive product assortment and have an emphasis on competitive pricing.
Trans World's non-mall stores include 12 video rental stores. These stores
operate under the tradename "Movies Plus" and average approximately 5,400 square
feet.

On October 27, 1997, Trans World acquired Planet Music, a 31,000 square
foot, freestanding superstore in Virginia Beach, Virginia. The store operates in
a strip center and offers an extensive catalog of predominantly music. The store
also has a video department and sells other non-music related products, similar
to what would be carried in a large Coconuts store. The acquisition also
included the rights to the Planet Music name and trademark, which offers Trans
World potential expansion opportunities.

INDUSTRY AND COMPETITIVE ENVIRONMENT

According to industry sources, the U.S. retail market for music and video
products was approximately $20 billion in 1997. Prerecorded music amounted to
$12.2 billion of that total, and this segment of the market has grown at an
annual rate of 9.5% over the past 10 years. Fueled in part by this growth, in
the early 1990's music retailers began aggressive expansion programs which grew
total square footage at a rate that outpaced consumer demand, resulting in an
overcapacity of selling space in the U.S. Furthermore, new music retailing
entrants, including mass merchants such as Wal-Mart, K-Mart, and Target, and
consumer electronics stores such as Best Buy and Circuit City, promoted
aggressive loss-leader pricing strategies in an effort to increase store
traffic. The additional retailing square footage and the loss-leader pricing
strategy forced music specialty retailers to reduce prices, resulting in
decreased sales and gross margins of music specialty retailers. As a result,
many music specialty retailers experienced financial difficulties which led to
corporate restructurings and bankruptcies. During 1996, many of the major music
vendors began to enforce programs such as the minimum advertised pricing program
to eliminate loss-leader pricing strategies. These programs penalize sellers
that fail to comply with vendor pricing programs by limiting advertising
support. The enforcement of the minimum advertised pricing program has been
successful in stabilizing prices in the industry. Non-traditional music
retailers have since reduced their music and video selections and maintained
less aggressive pricing policies.

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PRODUCTS

Trans World's stores offer a full assortment of CDs, prerecorded audio
cassettes, prerecorded video and related accessories. Sales by category as a
percentage of total sales over the past three fiscal years and the twenty-six
weeks ended October 31, 1998 were as follows:

<TABLE>
<CAPTION>
FOR THE
THIRTY-NINE
FOR THE FISCAL YEAR ENDED WEEKS ENDED
------------------------------------------- -------------
FEBRUARY 3, FEBRUARY 1, JANUARY 31, OCTOBER 31,
1996 1997 1998 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CDs........................................................... 49.2% 50.1% 55.5% 58.2%
Prerecorded audio cassettes................................... 20.3 16.9 14.2 13.7
Singles....................................................... 4.3 4.8 4.3 4.4
Prerecorded video............................................. 16.7 18.6 16.3 14.4
Other......................................................... 9.5 9.6 9.7 9.3
----- ----- ----- -----
TOTAL......................................................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

PRERECORDED MUSIC. Trans World's music stores offer a full assortment of
CDs and prerecorded audio cassettes purchased primarily from six major
manufacturers. Music categories include rock, pop, rap, soundtracks,
alternative, Latin, urban, heavy metal, country, dance, vocals, jazz, and
classical. Merchandise inventory is generally classified for inventory
management purposes in three groups: "hits", which are the best selling new
releases, "fast moving" titles, which generally constitute the top 1,000 titles
with the highest rate of sale in any given month, and "catalog" items that
customers purchase to build their collections.

VIDEO PRODUCTS. Trans World offers prerecorded videocassettes for sale in a
majority of its stores. DVD, a new technology, was introduced to the retail
consumer in 1997. DVD offers a quality that exceeds both the current VHS and CD
formats and also offers the consumer more storage than the current CD. Trans
World believes that the DVD player will gradually replace the sales of laser
disc players and VCRs as the DVD technology becomes more affordable and
accessible. Trans World is anticipating the increased availability of DVD
players and plans to capitalize on this new technology by making software
increasingly available as this technology becomes more widely accepted by the
consumer. DVD sales were less than 1% of Trans World's retail sales in 1997.

OTHER PRODUCTS. Trans World stocks and promotes brand name blank audio
cassette and videocassette tapes as well as accessory products for CDs, audio
cassettes and videocassettes. These accessories include maintenance and cleaning
products, portable electronics, storage cases, headphones and video games.

ADVERTISING

Trans World makes extensive use of in-store advertising circulars and signs
and also pursues a mass-media marketing program for its stores through
advertisements in newspapers, radio, and television. Most of the vendors from
whom Trans World purchases merchandise offer their customers advertising
allowances to promote their products.

SUPPLIERS AND PURCHASING

Trans World purchases inventory for its stores from approximately 450
suppliers. Approximately 68% of purchases in 1997 were made from the six largest
suppliers: BMG Distribution, Sony Music Entertainment, Inc., Universal Music and
Video Distribution, Inc., Warner/Electra/Atlantic Corporation, Polygram Group
Distribution, Inc., and EMI Music Distribution. As is typical in this industry,
Trans World has no material long-term purchase contracts and deals with its
suppliers principally on an order-by-order basis. In the past, Trans World has
not experienced difficulty in obtaining satisfactory

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<PAGE>
sources of supply, and management believes that it will retain access to
adequate sources of supply. Trans World also expects to continue to pass on to
customers any price increases imposed by the suppliers of prerecorded music and
videocassettes.

Trans World produces store fixtures for all of its new stores and remodeled
stores in its manufacturing facility located in Johnstown, New York. Trans World
believes that the costs of production are lower than the costs of purchasing
from an outside manufacturer.

TRADE CUSTOMS AND PRACTICES

Under current trade practices, retailers of prerecorded CDs and audio
cassettes are entitled to return products they have purchased from major vendors
for other titles carried by these vendors; however, the returns are subject to
merchandise return penalties. This industry practice permits Trans World to
carry a wider selection of music titles and at the same time reduce the risk of
obsolete inventory. Most manufacturers and distributors of prerecorded
videocassettes offer return privileges comparable to those with prerecorded
music, but with no merchandise return penalties. Video rental products are not
eligible for return to the manufacturers. The merchandise return policies have
not changed significantly during the past five years, but any future changes in
these policies could impair the value of Trans World's inventory. Trans World
generally has adapted its purchasing policies to changes in the policies of its
suppliers.

DISTRIBUTION AND MERCHANDISE OPERATIONS

Trans World's distribution facility uses automated and computerized systems
designed to manage product receipt, storage and shipment. Store inventories of
regular product are replenished in response to detailed product sale information
that is transmitted to the central computer system from each outlet after the
close of the business day. Shipments from the facility to each of Trans World's
stores are made at least once a week and currently provide Trans World's stores
with approximately 78% of their product requirements. The balance of the stores'
requirements are satisfied through direct shipments from manufacturers or other
distribution sources.

Trans World-owned trucks service approximately 36% of Trans World's stores;
the balance is serviced by several common carriers chosen on the basis of
geographic and rate considerations. No contractual arrangements exist between
Trans World and any common carriers. Trans World's sales volume and centralized
product distribution facility enable it to take advantage of transportation
economies.

Trans World believes that the existing distribution center, together with
Camelot's distribution center are adequate to meet the combined company's
planned business needs, and additional improvements will be completed primarily
for operational efficiency.

RETAIL INFORMATION SYSTEMS

All stores sales data and product purchasing information is collected
centrally utilizing the IBM AS/400 midrange configuration. Trans World's
information systems manage a database of over 150,000 active SKUs in prerecorded
music, video and accessory products. The system processes inventory, accounting,
payroll, telecommunications and other operating information for all of Trans
World's operations. Trans World has piloted a new POS system that was rolled out
chain-wide during the summer of 1998. This new system is expected to improve
customer service while increasing the accuracy of perpetual inventories at the
store level.

SEASONALITY

Trans World's business is highly seasonal. The fourth quarter constitutes
Trans World's peak selling period. In 1997, the fourth quarter accounted for
approximately 42% of annual sales and substantially

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all of net income. In anticipation of increased sales activity during these
months, Trans World purchases substantial amounts of inventory and hires a
significant number of temporary employees to bolster its permanent store staff.
If for any reason Trans World's net sales were below seasonal norms during the
fourth quarter, including as a result of merchandise delivery delays due to
receiving or distribution problems, Trans World's operating results,
particularly operating and net income, could be adversely affected. The fourth
quarter percentage of annual sales in 1997 was higher than normal due to the
Strawberries acquisition in October 1997. Quarterly results are affected by the
timing and strength of new releases, the timing of holidays, new store openings
and sales performance of existing stores. There can be no assurance that
economic conditions will not adversely affect Trans World's sales and earnings,
particularly during the fourth quarter of the year.

EMPLOYEES

As of October 31, 1998, Trans World employed approximately 6,000 people, of
whom 800 were employed on a full-time salaried basis, 2,400 were employed on a
full-time hourly basis, and the remainder were employed on a part-time hourly
basis. Trans World hires temporary sales associates during peak seasons to
assure continued levels of customer service. Store managers report to district
managers, each of whom, in turn, reports to a regional manager. In addition to
their salaries, store managers, district managers and regional managers have the
potential to receive incentive compensation based on profitability. None of
Trans World's employees are covered by collective bargaining agreements, and
management believes that Trans World enjoys favorable relations with its
employees.

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CAMELOT'S BUSINESS

GENERAL

Camelot is a leading mall-based retailer of prerecorded music and
accessories and is one of the largest music retailers in the United States, in
each case based on store count. As of January 2, 1999, Camelot operated 498
stores in 38 states nationwide and in Puerto Rico under three brand names:
Camelot Music, founded in 1956, operating 311 stores with a significant store
base concentration in the Midwest and Southeast regions of the United States;
The Wall, operating 146 stores primarily in the Mid-Atlantic and Northeast
regions of the United States; and Spec's, operating 41 stores in South Florida
and Puerto Rico. Camelot acquired certain assets and assumed certain liabilities
and operating lease commitments of The Wall effective February 28, 1998 and it
acquired Spec's on July 29, 1998. Camelot believes that each chain benefits from
name recognition and a loyal customer base in their primary markets of
operation.

Camelot offers a broad range of prerecorded music, including CDs, cassettes,
prerecorded video cassettes, DVDs and accessories such as blank audio and video
cassettes and music and tape care products. Camelot seeks to position itself as
the mall-based music specialist for prerecorded music, and advertises under the
motto "No One Knows Your Music Better." Camelot's stores average 4,450 square
feet in size and typically offer over 20,000 SKUs, including both high-volume
hits and Camelot's catalog. Camelot believes its product offering enables it to
attract a diverse customer base thereby reducing its dependence on any one genre
of music. In Fiscal 1997, Camelot's average sales per square foot was
approximately $293, including The Wall, which Camelot believes is among the
highest for mall-based retailers of prerecorded music. Camelot believes its
broad product offering, supported by a high level of customer service from its
knowledgeable sales force, combined with its competitive pricing strategy and
attractive locations within regional malls, positions Camelot to benefit from
the favorable trends occurring in the prerecorded music industry.

Camelot believes that the total market for prerecorded music and music
videos in the United States amounted to $12.2 billion in 1997. Camelot believes
that revenues in the music and music video market in the United States have
doubled over the last ten years and have grown at a compounded annual rate of
8.2% during such period. Industry growth rates do not reflect Camelot's
historical growth and are not necessarily indicative of its growth during future
periods. Camelot's revenues have grown at a 7.8% compounded annual rate over the
last ten years, although its revenues grew over the past five years at a
compounded annual rate of 2.3%. During the 1980s the music retail industry
experienced rapid growth fueled by:

- the introduction of new products such as the CD;

- a relatively large number of popular new releases which increased customer
traffic and sales; and

- the rapid expansion of mall-based music retailers.

These factors led, in the early 1990s, to the competitive intrusion of
non-traditional music retailers such as consumer electronics stores and discount
stores and to increasing price competition. By mid-1994, these competitive
factors, combined with the contraction of the replacement CD market and a
comparative lack of successful new releases led to deteriorating profitability
in the music retail industry. Beginning in mid-1997, conditions in the music
retail industry began to improve as a result of:

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- an improvement in retail pricing as music vendors, beginning in 1996,
strengthened minimum advertised pricing guidelines, which Camelot believes
decreased the intensity levels of price-based competition for prerecorded
music; and

- a resurgence in popular new releases.

REORGANIZATION

Camelot has historically been privately held. In 1993, Camelot was acquired
in a highly leveraged transaction by an investor group led by a private
investment firm and members of Camelot's current management. The leveraged
buyout resulted in significant debt service obligations. This significant debt
service along with the industry's deteriorating profitability impaired Camelot's
operating and financial condition and led Camelot to file a voluntary petition
for protection under Chapter 11 of the Bankruptcy Code in August 1996. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations of Camelot." Camelot's plan of reorganization was confirmed by the
Bankruptcy Court on December 12, 1997 and became effective on January 27, 1998.
Under the plan of reorganization, administrative and priority claims of $5.6
million were fully paid in cash. In addition, substantially all of the claims
against Camelot existing as of the petition date were exchanged for shares of
Camelot common stock. Approximately $381.5 million of unsecured claims were
exchanged for 7,965,051 shares of Camelot common stock valued at an amount equal
to one share for each $47.95 of claim, and approximately $41.5 million of
secured claims were exchanged for 2,211,111 shares of Camelot common stock
valued at an amount equal to one share for each $18.75 of claim. All
pre-petition ownership interests in Camelot were cancelled. Also under the terms
of the plan of reorganization, all authorized capital stock of Camelot existing
immediately prior to the plan effective date, whether issued or unissued, and
including any right to receive capital stock pursuant to any agreement,
arrangement, or understanding, or upon exercise of conversion rights, exchange
rights, warrants, options or other rights, was deemed canceled and of no further
force or effect without any action on the part of the Camelot board. The holders
of such canceled capital stock and any canceled right to acquire such stock did
not receive any compensation under the plan of reorganization. See Note 2 in
Notes to Camelot's Consolidated Financial Statements.

Prior to and during its reorganization under the protection of the
Bankruptcy Court, Camelot was able to substantially improve the competitive
positioning of its business and significantly improve its financial position.
These improvements included:

- closing 96 underperforming stores;

- renegotiating unfavorable leases on certain of its remaining stores;

- returning overstock inventory to its vendors; and

- eliminating its liabilities totaling approximately $485 million, including
indebtedness of approximately $412 million.

In addition, during the same period, Camelot invested $7.5 million to upgrade,
develop and implement sophisticated merchandising, distribution, replenishment,
and financial software packages, all of which were fully operational by the end
of Fiscal 1997. Camelot's new and upgraded information systems enable management
to

- allocate specific merchandise to a specific store, improving sell-through
rates and reducing returns to vendors;

- improve the efficiency of its replenishment system to reduce stock-outs
and lower distribution center operating costs;

- better track profitability by SKU, store and region; and

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- automate invoice matching to reduce corporate labor costs.

Camelot also developed and implemented a new marketing and data warehousing
system, which became fully operational in April 1998, to better capture
transaction-specific data to facilitate the further development of Camelot's
customer loyalty programs and improve the effectiveness of its advertising
programs by targeting specific customers with promotional material tailored to
their buying patterns.

RECENT ACQUISITIONS

Camelot has completed two acquisitions since the January 27, 1998 plan
effective date and has no current plans to pursue any material acquisitions.
Effective February 28, 1998, Camelot acquired certain assets and assumed certain
liabilities and operating lease commitments of The Wall pursuant to an asset
purchase agreement dated December 10, 1997. Prior to its acquisition by Camelot,
The Wall was a mall-based music store chain owned by W.H. Smith (USA), Inc. that
operated 150 stores in the Mid-Atlantic region of the United States. The total
purchase price paid by Camelot for the business of The Wall was $87.4 million,
net of cash acquired, including a cash purchase price of $72.2 million, net of
cash acquired, assumption of liabilities aggregating $12.9 million, and
acquisition costs of $2.3 million. Camelot paid approximately $1.8 million of
the purchase price and $1.0 million of acquisition costs in Fiscal 1997 and paid
the balance in Fiscal 1998.

On July 29, 1998, Camelot completed its acquisition of all of the issued and
outstanding shares of common stock of Spec's. Spec's operates 41 stores in south
Florida and Puerto Rico, including 16 mall stores and 25 stores in shopping
centers and free standing locations. Prior to the acquisition, Spec's was a
public company and its common stock was traded on the Nasdaq SmallCap Market.
Under the terms of an agreement and plan of merger dated June 3, 1998, SM
Acquisition, Inc., a wholly owned subsidiary of Camelot merged into Spec's. Upon
consummation of the Spec's merger, each share of Spec's common stock outstanding
prior to the Spec's merger was converted into the right to receive $3.30 per
share in cash, and each outstanding option to purchase shares of Spec's common
stock was surrendered in exchange for a cash payment equal to the excess, if
any, of $3.30 per share over the exercise price of such option. The total
purchase price payable in connection with the Spec's acquisition was $43.0
million, net of cash acquired, including a cash purchase price of $18.6 million,
net of cash acquired, repayment of bank debt of $9.2 million, assumption of
liabilities aggregating $14.3 million and acquisition costs of $0.9 million. In
addition, Ann Spector Lieff, Spec's President and Chief Executive Officer,
entered into a consulting and non-competition agreement under the terms of which
she agreed to be available to consult with Camelot's Chief Executive Officer for
a period beginning 60 days after the date of the Spec's merger and ending on the
first anniversary of the Spec's merger. Under the terms of this agreement, Ms.
Lieff will be entitled to continue to receive salary payments for 60 days after
the Spec's merger and will receive a severance payment of $58,000 at the end of
such period. Thereafter, Ms. Lieff will receive consulting fees aggregating
$100,000 during the term of the agreement. The agreement also provides that Ms.
Lieff may not directly or indirectly engage in the specialty music business in
any area in which Camelot conducts business during the term of the agreement.

STORE FORMAT

Camelot operates its stores under the "Camelot Music," "The Wall" and
"Spec's" names. Camelot's stores provide a broad selection of CDs, tapes and
video and related products in a customer friendly environment. Substantially all
of Camelot's stores are located in shopping malls and range in size from 1,500
to 23,500 square feet, averaging 4,450 square feet. As of January 2, 1999, 273
of Camelot's 498 stores were less than 4,000 square feet in size compared to its
current prototype store of 5,000-6,000 square feet in size. The larger stores
are in more prominent mall locations and carry a broader inventory of catalog
products in order to appeal to the high-volume purchaser. Camelot emphasizes
in-store presentation, broad product selection and competitive pricing to
attract the casual

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buyer. At January 2, 1999, Camelot operated 311 Camelot Music stores in 34
states, 146 The Wall stores in the Mid-Atlantic and Northeastern regions of the
United States and 41 Spec's stores in south Florida and Puerto Rico. As a result
of The Wall's name recognition and loyal customer base in its primary markets,
Camelot has determined to maintain separate identities for its stores.

The following table sets forth information regarding the size ranges of
Camelot's stores and the number of stores within each range as of January 2,
1999.

<TABLE>
<CAPTION>
STORE SIZE NUMBER
(SQUARE FOOTAGE) OF STORES
- ------------------------------------------------------------------------------------ -------------
<S> <C>
Over 5,000.......................................................................... 138
4,000 to 4,999...................................................................... 88
Under 3,999......................................................................... 272
---
Total............................................................................. 498
</TABLE>

Camelot's strategy for its mall stores is to operate profitable stores in
high-traffic locations while controlling occupancy costs. Camelot's site
selection strategy focuses on using the more favorable leasing environment to
establish dominant positions in key regional malls.

PRODUCTS

Camelot's stores focus on providing a broad selection of prerecorded music,
but also carry a limited selection of prerecorded videocassettes, blank audio
and videocassettes, music and tape care products, carrying cases, storage units,
sheet music and personal electronics. During the past several years, sales of
prerecorded music have accounted for approximately 88% of Camelot's revenues.

Camelot Music, The Wall and Spec's stores offer a wide array of CDs and
prerecorded audio cassettes. Sales of CDs are expected to continue to become a
larger portion of total prerecorded music sales, while sales of prerecorded
audio cassettes are expected to decline as a proportion of such sales. Camelot's
strategy is to provide a greater number of titles to choose from than its
mall-based rivals. Camelot's stores typically carry between approximately 18,000
and 25,000 titles of prerecorded music, depending on store size and location.
These titles include "hits," which represent the best-selling newer releases,
and catalog items, representing older but still popular releases that customers
purchase to build their collections.

Camelot's stores offer a full assortment of CDs, prerecorded audio
cassettes, prerecorded video cassettes and related accessories. Sales by
category as a percentage of net sales were as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE THIRTY-
COMBINED NINE WEEKS ENDED
PRODUCT FISCAL 1995 FISCAL 1996 FISCAL 1997 NOVEMBER 28, 1998
- ------------------------------------- ------------- ------------- ------------- -------------------
CDs.................................. 57.4% 63.3% 67.0% 71.4%
Prerecorded audio cassettes.......... 20.7 17.3 14.8 14.1
Singles.............................. 5.3 5.7 5.8 4.3
Prerecorded video.................... 8.7 6.3 5.5 4.7
Other................................ 7.9 7.4 6.9 5.5
----- ----- ----- -----
Total.............................. 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

Camelot seeks to have the most popular hits available at all times while
maximizing the selection of popular catalog titles. Store management works with
corporate merchandise allocators to tailor product offerings to local customer
tastes and to maximize the availability of the most popular items at each store
relative to store size and location.

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Typically, Camelot's stores carry approximately 1,500 titles of prerecorded
videocassettes. Camelot has discontinued sales of lower margin laserdiscs and
computer software products in an effort to focus on higher margin prerecorded
music products.

DISTRIBUTION

Central to Camelot's strategy of providing broad merchandise selection to
its customers is its ability to distribute products quickly and cost-effectively
to its stores. Camelot's distribution center, located adjacent to the corporate
headquarters in North Canton, Ohio, receives and ships the vast majority of
Camelot's merchandise although many new releases are shipped directly to the
stores from suppliers. Distribution center employees pick, pack and ship over 37
million units annually. Camelot's distribution center currently operates at
between 30% and 40% of total capacity, providing sufficient excess capacity to
support significant future store growth and distribution requirements of
potential acquisitions.

Inventory is shipped to each store at least once a week via several common
carriers, supplemented with expedited shipments as required by individual store
sales velocity analysis. All carriers are "less-than-load" carriers enabling
Camelot to maximize transportation efficiencies while minimizing costs.
"Less-than-load" carriers refers to carriers with whom Camelot contracts for
less than all available storage space. Camelot's sophisticated inventory
management system links together store POS merchandising and distribution
systems, enabling the distribution center to replenish inventory in stores
within two to four days of sale, depending upon geographic proximity to the
distribution facility. Enhancements to this system implemented at Camelot stores
in the early part of Fiscal 1998 permit Camelot to manage the replacement of
individual SKUs on an automated basis, based on model stocks calculated by
reference to sales information. These enhancements enable Camelot to react more
quickly to increasing sales velocities for specific titles resulting from
promotions, concert tours or other media events, and also permit it to ramp down
replenishment as sales of specific titles decline.

MARKETING

Camelot employs marketing and advertising programs to increase customer
awareness of Camelot as the mall music specialist. The programs include regular
use of local, regional and national media outlets such as radio, television,
newspaper, magazines, freestanding inserts, direct mail and Camelot's Internet
site. While emphasizing Camelot's music specialist position, Camelot's marketing
programs also promote the immediate availability of new hit music releases as
well as Camelot's extensive catalog selection.

In the retail entertainment industry, music and video companies generally
provide funds on a title-by-title basis to promote new releases and,
occasionally, on a label-wide basis. When Camelot runs pre-authorized
advertising with respect to a specific title or label, the related supplier
generally reimburses Camelot for 100% of the cost of such advertising as well as
the associated costs of production and development of the creative concept. A
significant portion of Camelot's total advertising costs has been funded by
suppliers through these programs. See Note 3 to Consolidated Financial
Statements of Camelot.

Customer-specific relationship marketing programs are a key component of
Camelot's marketing effort. Camelot discontinued the manual "punch card" version
of its "Repeat Performer" frequent buyer program in mid-1997. Camelot's new
marketing information system has permitted it to replace the manual version of
the Repeat Performer program with a more limited electronic, automated frequent
buyer program targeting Camelot's most frequent and highest spending customers.
Camelot initiated a limited chainwide roll-out of this program to its most
frequent and highest spending customers during 1997, and significantly expanded
the program in 1998. The manual version of the program

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was not capable of tracking sales or providing customer-specific or
transaction-specific data. The automated Repeat Performer program captures
demographic and music preference data upon customer sign-up as well as
item-specific transaction data each time Repeat Performer customers make a
purchase. Camelot also collects e-mail addresses of its customers to which it
can send promotional materials. Customers are rewarded for attaining specific
purchase levels by receiving discounts on merchandise. The rewards encourage
loyalty and promote use of the bar-coded Repeat Performer card at each
transaction. Camelot thereby obtains valuable information about the buying
preferences of its most loyal customers. The collected data is used to develop
customer-specific direct mail programs that are designed to generate increased
sales levels and purchase frequency. The customer-specific information obtained
through the Repeat Performer program allows Camelot to better understand its
customers and to tailor direct mail marketing programs to individual customer
preferences. The direct mail programs generally are funded by music and video
companies who wish to promote their products directly to Camelot customers who
are known to purchase items similar to the advertised titles.

The capabilities of Camelot's new marketing system also permit it to measure
the effectiveness of individual promotional efforts, including radio, television
and direct mail programs, internal merchandising changes, new signage and visual
marketing presentations, new store configurations, changed inventory mix and
other in-store initiatives. The ability to measure the effectiveness of these
programs will permit Camelot to modify marketing efforts based on the
effectiveness of these campaigns.

SUPPLIERS

Camelot purchases its prerecorded music directly from a large number of
manufacturers. During Fiscal 1997, approximately 77% of purchases, net of
returns, were made from the big six vendors. Twenty other vendors accounted for
an additional 13% of purchases during such period. Historically, Camelot has
enjoyed trade terms that have generally included

- the ability to return unsold current releases at invoice cost less
customary merchandise return charges,

- a 2% discount for payments made within 60 days of invoice and

- credit limits sufficient to permit at least 60 days dating on inventory
purchases.

Return privileges enable Camelot to ensure that it will have sufficient product
in stock to meet customer demand without subjecting Camelot to extensive risk
that a particular item will not meet sales expectations. During the bankruptcy
proceedings, Camelot's access to these customary trade terms was severely
limited. After the effective date, Camelot was once again able to negotiate
customary trade terms with most of its suppliers, including the big six vendors.
Recently, a number of vendors have implemented policies prohibiting the return
of opened product for credit.

INFORMATION SYSTEMS

Camelot has invested approximately $8 million in its information systems
during the past three years, including the installation of new merchandising and
marketing systems, which were implemented throughout its stores during Fiscal
1998. Camelot's merchandising systems provide it with the ability to monitor
inventory levels, analyze changes in inventory and replenish inventory on an
automated basis, based on model stocks calculated by reference to sales
information. These capabilities permit Camelot to react quickly to changes in
sales velocities for specific titles or products and to better measure the
effectiveness of advertising, promotional and merchandising programs. Camelot's
marketing system provides it with the ability to collect a variety of customer
and transaction specific data from participants in its relationship marketing
programs, which allows it to tailor relationship marketing efforts to each
customer's purchase patterns and music preferences. This system is part of
Camelot's larger Data Warehouse/COREMA system, which enables it to record and
preserve two years of transaction-specific

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information for every store. Prior to signing the merger agreement with Trans
World, Camelot was also in the process of replatforming its back-office POS
system. The new system will enable Camelot to standardize its POS systems and
bring those systems into Year 2000 compliance. Approximately $1.9 million of the
estimated $4.5 million cost to replace the back-office POS system has already
been spent. Camelot has halted the replatforming of its back-office POS system
in anticipation of the merger with Trans World.

EMPLOYEES

As of January 2, 1999, Camelot employed 1,949 full-time employees and 6,362
part-time employees. As of such date, Camelot employed 237 individuals at its
corporate headquarters, 262 at its distribution center, and 7,812 at its stores.
None of Camelot's employees is represented by a union. Camelot believes that its
employee relations are good.

COMPETITION

The prerecorded music market is highly competitive. Competition is based on
breadth of product offering, price, location of stores, convenience and customer
service. Consumers have numerous options in purchasing prerecorded music and
other home entertainment products, including chain retailers specializing in
prerecorded music, consumer electronic superstores, non-mall multimedia
superstores, discount stores, grocery, convenience and drug stores, direct-mail
programs via telephone, the Internet or television and local music retailers.
Additionally, consumers have more home entertainment options available with the
increasing use of personal computers in homes. The impact of these trends in
recent years has been a reduction in customer traffic and revenues for
mall-based music retailers such as Camelot.

While several major retail chains have recently opened and expanded their
store presence in the markets in which Camelot operates, there has been some
easing in the competitive environment in the past two fiscal years as a result
of the closing of under-performing stores by several mall-based competitors and
the downsizing of music departments within certain non-mall competitors. Pricing
pressures have also eased as a result of less near- or below-cost pricing by
certain non-mall competitors. Several major suppliers of prerecorded music have
begun to enforce minimum advertised pricing guidelines, which provide incentives
for retailers to comply with the terms of the programs. Enforcement of the
minimum advertised pricing guidelines has contributed to stabilizing retail
prices of prerecorded music in 1997. However, the FTC is currently investigating
the minimum advertised pricing guidelines, and there can be no assurance that
the guidelines will continue in the future. There can be no assurance that
deep-discount pricing practices will not return, or that if they do, that
Camelot will be able to remain competitive without a material adverse effect on
its results of operations and financial condition.

Camelot expects that the retail sales environment will continue to present
challenges into the foreseeable future. In response to these challenges, Camelot
will focus on securing and maintaining the most desirable locations within
quality regional malls, efficient inventory management, and offering broad,
market-specific merchandise selections at competitive prices.

Camelot also competes for consumer entertainment dollars with leisure time
activities such as movie theaters, television, home computer and Internet use,
live theater, sporting events, travel, amusement parks and other entertainment
centers.

SEASONALITY

Camelot's business is seasonal in nature. In Fiscal 1997, approximately 35%
of revenues and all of its income (loss) before interest expense, other expenses
(income) net, reorganization expenses (income) net, income taxes and
extraordinary item, and net income before extraordinary item was

128
<PAGE>
generated in Camelot's fiscal fourth quarter. Quarterly results are affected by,
among other things, new product offerings, store openings and closings, and
sales performance of existing stores. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Camelot--Results of
Operations."

TRADEMARKS AND SERVICE MARKS

Camelot operates its stores under the "Camelot Music," "The Wall" and
"Spec's" names, which have become important to Camelot's business as a result of
its advertising and promotional activities. These names and other names used in
Camelot's business have been registered with the United States Patent and
Trademark Office. Camelot has not experienced any significant patent
infringement in recent years.

PROPERTIES

Camelot owns its headquarters facility and distribution center in North
Canton, Ohio. All stores operated by Camelot and The Wall are under operating
leases with various remaining terms through the year 2009. The leases have terms
ranging from one to 20 years. In most instances, Camelot pays, in addition to
minimum rent, real estate taxes, utilities, common area maintenance costs and
percentage rents which are based upon sales volume. Certain store leases provide
Camelot with an early cancella-
tion option if sales for a designated period do not reach a specified level as
defined in the lease. The following table lists, as of January 2, 1999, the
number of leases due to expire or terminate in each fiscal year based on fixed
lease term, giving effect to early cancellation options and excluding renewal
options.

<TABLE>
<CAPTION>
EXPIRATION DATES CAMELOT MUSIC THE WALL SPEC'S COMPANY TOTAL
- ------------------------------------------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1998............................................. 31 9 4 44
1999............................................. 27 12 6 45
2000............................................. 34 12 8 54
2001............................................. 50 24 3 77
2002............................................. 26 21 1 48
2003............................................. 35 17 4 56
2004............................................. 45 25 11 81
2005 and thereafter.............................. 63 26 4 93
--- --- --- ---
311 146 41 498
--- --- --- ---
--- --- --- ---
</TABLE>

Camelot's leases generally do not contain renewal options. Although Camelot
has historically been successful in renewing most of its store leases when they
have expired, there can be no assurance that Camelot will continue to be able to
do so on acceptable terms or at all. Many of Camelot's current landlords were
landlords under leases with respect to which Camelot's obligations were
terminated during the bankruptcy proceedings. If Camelot is unable to renew
leases for its stores as they expire, or find favorable locations on acceptable
terms, there can be no assurance that such failures will not have a material
adverse effect on Camelot's financial condition and results of operations.

Camelot is subject to extensive regulation under environmental and
occupational health and safety laws and regulations. In addition, the
Comprehensive Environmental Response, Compensation and Liability Act generally
imposes joint and several liability for clean-up and enforcement costs, without
regard to fault, on parties allegedly responsible for contamination at a site.
While Camelot is not aware of any current environmental liability, no assurance
can be given that Camelot will not be liable in the future.

129
<PAGE>
LEGAL PROCEEDINGS

Camelot is involved from time to time in various routine legal and
administrative proceedings and threatened legal and administrative proceedings
incidental to the ordinary course of its business. Except as described below,
Camelot is not now involved in any litigation, individually or in the aggregate,
which could have a material adverse effect on Camelot's business, financial
condition, results of operations or cash flows.

The IRS asserted in the bankruptcy proceedings a priority tax claim against
Camelot of approximately $7.9 million on January 10, 1997. Under the plan of
reorganization, any allowed priority tax claim of the IRS would be paid over six
years, with quarterly amortization of interest and principal, at an interest
rate of 9.0%. Camelot has acknowledged and paid a priority tax obligation to the
IRS of approximately $0.8 million, and disputes the validity of the balance of
the IRS Claim, the large majority of which relates to a proposed disallowance by
the IRS of the Company Owned Life Insurance ("COLI") Deductions. On October 15,
1997, the Debtors filed the COLI Objection to the IRS Claim to the extent that
the IRS seeks to disallow the COLI Deductions. In response to the COLI
Objection, on November 21, 1997 the IRS filed the Withdrawal Motion with the
District Court seeking to have the COLI Objection resolved by the District Court
rather than the Bankruptcy Court. On May 29, 1998, the District Court granted
the Withdrawal Motion, and the proceeding is now before the District Court as
Civil Action No. 97-695 (MMS). The District Court approved a joint discovery
plan on July 6, 1998. The joint discovery plan mandates that all discovery be
served or issued so as to be completed on or before June 30, 1999. If a judgment
is rendered against Camelot in an amount exceeding the amount it has already
paid with respect to this matter, Camelot's results of operations would be
materially adversely affected in the fiscal period in which such judgment is
rendered. Such a judgment, unless paid or bonded for appeal, would also be an
event of default under Camelot's amended credit facility.

130
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF TRANS WORLD

The following table presents the beneficial ownership determined pursuant to
the Exchange Act of Trans World common stock as of March 3, 1999, by each
director and named executive officer of Trans World and all directors and
executive officers as a group and each person known to Trans World to be the
beneficial owner of more than 5% of Trans World common stock.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
OWNED
AS A PERCENTAGE
SHARES THAT MAY OF
BE ACQUIRED TOTAL SHARES TRANS WORLD
DIRECT WITHIN 60 DAYS BENEFICIALLY SHARES
NAME OF BENEFICIAL OWNERSHIP OWNERSHIP OF MARCH 3, 1999 OWNED OUTSTANDING
- ------------------------------------------------------------ ------------ -------------------- ------------ -----------------
<S> <C> <C> <C> <C>
Robert J. Higgins........................................... 11,693,150(1) 225,000 11,918,150 36.4%
Matthew H. Mataraso......................................... 14,406 83,094 97,500 *
Dean S. Adler............................................... -- 15,563 15,563 *
George W. Dougan............................................ 22,500 73,688 96,188 *
Charlotte G. Fischer........................................ -- 31,688 31,688 *
Martin E. Hanaka............................................ 1,500 -- 1,500 *
Issac Kaufman............................................... 7,500 54,188 61,688 *
Dr. Joseph G. Morone........................................ 7,500 8,063 15,563 *
James A. Litwak............................................. 45,023 178,125 223,148 *
Bruce J. Eisenberg.......................................... 115,032 241,875 356,907 1.1
John J. Sullivan............................................ 109,206 256,875 366,081 1.1
All directors and officers as a group (11 persons).......... 12,015,817 1,168,159 13,183,976 40.3%
</TABLE>

- ------------------------

* Less than 1%.

(1) Includes 50,550 shares owned by the wife of Robert J. Higgins and 37,500
owned by a foundation controlled by Robert J. Higgins, and excludes 889,651
shares owned by certain other family members of Robert J. Higgins who do not
share his residence. Mr. Higgins disclaims beneficial ownership with respect
to those shares owned by family members other than his wife.

131
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF CAMELOT

The following table presents certain information with respect to beneficial
ownership determined pursuant to the Exchange Act of the Camelot common stock as
of January 2, 1999 by each director of Camelot, each executive officer of
Camelot, all directors and executive officers of Camelot as a group, and each
person known by Camelot to be the beneficial owner of more than 5% of Camelot
common stock.

<TABLE>
<CAPTION>
SHARES THAT SHARES
MAY BE BENEFICIALLY
ACQUIRED TOTAL OWNED AS A
WITHIN 60 DAYS SHARES PERCENTAGE OF
NAME AND ADDRESS DIRECT OF JANUARY 2, BENEFICIALLY CAMELOT SHARES
OF BENEFICIAL OWNER OWNERSHIP 1999 OWNED OUTSTANDING
- ------------------------------------------------------ ---------- -------------- ----------- -----------------
<S> <C> <C> <C> <C>
5% SHAREHOLDERS:

Van Kampen-Merritt Prime Rate Income Trust............ 1,994,717 -- 1,994,717 19.6%
1 Parkview Plaza
Oakbrook Terrace, Illinois 60180

Fernwood Associates, L.P.............................. 1,549,596 -- 1,549,596 15.2
667 Madison Avenue, 20th Floor
New York, New York 10021

Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................... 1,435,782 -- 1,435,782 14.1
Debt & Equity Market Group
World Financial Center, North Tower
New York, New York 10281

Oaktree Capital Management, LLC....................... 968,415 -- 968,415 9.5
(in its capacity as general partner and investment
manager of OCM
Opportunities Fund, L.P. and Columbia/HCA Master
Retirement Trust (separate account I))
550 South Hope Street, 22nd Floor
Los Angeles, California 90071

Daystar Partners LLC.................................. 750,892 -- 750,892 7.4
411 Theodore Fremd Avenue
Rye, New York 10580

First Union National Bank............................. 602,952 -- 602,952 5.9
301 South College Street TW-5
Charlotte, North Carolina 28288-0737

Yale University....................................... 549,944 -- 549,944 5.4
c/o Daystar Partners LLC
411 Theodore Fremd Avenue
Rye, New York 10580

DIRECTORS AND NAMED EXECUTIVE OFFICERS:

James E. Bonk......................................... -- 55,000 55,000 *
Jack K. Rogers........................................ -- 40,000 40,000 *
Lee Ann Thorn......................................... -- 20,000 20,000 *
Lewis S. Garrett...................................... -- 20,000 20,000 *
</TABLE>

132
<PAGE>
<TABLE>
<CAPTION>
SHARES THAT SHARES
MAY BE BENEFICIALLY
ACQUIRED TOTAL OWNED AS A
WITHIN 60 DAYS SHARES PERCENTAGE OF
NAME AND ADDRESS DIRECT OF JANUARY 2, BENEFICIALLY CAMELOT SHARES
OF BENEFICIAL OWNER OWNERSHIP 1999 OWNED OUTSTANDING
- ------------------------------------------------------ ---------- -------------- ----------- -----------------
<S> <C> <C> <C> <C>
Charles R. Rinehimer III.............................. -- 20,000 20,000 *
Larry K. Mundorf...................................... -- 15,000 15,000 *
George R. Zoffinger................................... 3,000(1) 2,500 5,500 *
Stephen H. Baum....................................... -- 2,500 2,500 *
Herbert J. Marks...................................... -- 2,500 2,500 *
Marc L. Luzzatto...................................... -- 2,500 2,500 *
Michael B. Solow...................................... -- 2,500 2,500 *
All Directors and Executive Officers as a Group
(11 persons).......................................... 3,000 182,500 185,500 1.8%
</TABLE>

- ------------------------

* Less than 1%.

(1) Includes 3,000 shares owned by Mr. Zoffinger's wife. Mr. Zoffinger disclaims
beneficial ownership of these 3,000 shares.

133
<PAGE>
MANAGEMENT OF THE COMBINED COMPANIES

EXECUTIVE OFFICERS AND DIRECTORS

The following table presents the names, ages and positions of the executive
officers and directors of Trans World as of January 15, 1999:

<TABLE>
<CAPTION>
NAME POSITIONS WITH TRANS WORLD AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Robert J. Higgins.................................... Chairman of the Board, President, Chief Executive
Officer and a Director 57
James A. Litwak...................................... Executive Vice President-Merchandising and Marketing 45
Bruce J. Eisenberg................................... Senior Vice President-Real Estate 38
John J. Sullivan..................................... Senior Vice President-Finance, Chief Financial
Officer and Treasurer 46
Matthew H. Mataraso.................................. Secretary and a Director 69
Dean S. Adler........................................ Director 41
George W. Dougan..................................... Director 59
Charlotte G. Fischer................................. Director 49
Martin E. Hanaka..................................... Director 48
Isaac Kaufman........................................ Director 51
Dr. Joseph G. Morone................................. Director 45
</TABLE>

In addition, assuming approval of the Trans World merger matters, the
following table presents the names and ages as of January 15, 1999 of persons
who will become directors of Trans World.

<TABLE>
<CAPTION>
NAME POSITIONS WITH TRANS WORLD AGE
- ----------------------------------------------------- ----------------------------------------------------- ---
<S> <C> <C>
Michael B. Solow..................................... Director 40
George R. Zoffinger.................................. Director 50
</TABLE>

Robert J. Higgins, Chairman of the Board, founded Trans World in 1972, and
he has participated in its operations since 1973. Mr. Higgins has served as
President, Chief Executive Officer and a director of Trans World for more than
the past five years. He is also Trans World's principal stockholder.

James A. Litwak joined Trans World in May 1996 as Executive Vice President
of Merchandising and Marketing. Prior to joining Trans World, Mr. Litwak served
as Senior Vice President and General Merchandise Manager of DFS Group Limited,
an international operator of in-airport duty free shops. Prior to joining DFS
Group Limited, Mr. Litwak held several executive positions in his fourteen year
career at R.H. Macy's Company with the most recent being President of
Merchandising for Macy's West responsible for developing marketing,
merchandising and product launch programs to fuel growth for the 50 store
division.

Bruce J. Eisenberg has been Senior Vice President of Real Estate at Trans
World since May of 1995. He joined Trans World in August of 1993 as Vice
President of Real Estate. Prior to joining Trans World, Mr. Eisenberg was
responsible for leasing, finance and construction of new regional mall
development at The Pyramid Companies.

John J. Sullivan has been Senior Vice President, Treasurer and Chief
Financial Officer of Trans World since May 1995. Mr. Sullivan joined Trans World
in June 1991 as the Corporate Controller and was named Vice President of Finance
and Treasurer in June of 1994. Prior to joining Trans World, Mr. Sullivan was
Vice President and Controller for Ames Department Stores, a discount department
store chain.

134
<PAGE>
Matthew H. Mataraso has served as Secretary and a director of Trans World
for more than the past five years, and has practiced law in Albany, New York
during the same period.

Dean S. Adler has been a principal of Lubert/Adler Partners, LP, a limited
partnership investing primarily in under-valued and opportunistic real estate
and real estate-related ventures since March 1997. For ten years prior thereto,
Mr. Adler was a principal and co-head of the private equity group of CMS
Companies, which specialized in acquiring operating businesses and real estate
within the private equity market. Mr. Adler was also an instructor at The
Wharton School of the University of Pennsylvania. Mr. Adler serves on the boards
of directors of Electronics Boutique, The Lane Company, US Franchise Systems,
Inc. and Developers Diversified Realty Corporation.

George W. Dougan has been Vice Chairman and a member of the board of
directors of Banknorth Group, Inc. since January 1, 1999. Mr. Dougan was Chief
Executive Officer and a member of the board of directors of Evergreen Bancorp
Inc. from March 1994 to December 1998, and Chairman of the Board from May 1994
to December 1998. Mr. Dougan was the Chairman of The Board and Chief Executive
Officer of The Bank of Boston-Florida from June 1992 to March 1994, was the
Senior Vice President and Director of Retail Banking of The Bank of Boston
Massachusetts from February 1990 to June 1992.

Charlotte G. Fischer has been Chairman of the Board, President and Chief
Executive Officer of Paul Harris Stores, Inc., a publicly held specialty
retailer of women's apparel, since January 1995. Mrs. Fischer was the Vice
Chairman of the Board and Chief Executive Officer-designate from April 29, 1994
through January 1995. Mrs. Fischer has also served as a consultant to retail
organizations, including Trans World. Mrs. Fischer was President and Chief
Executive Officer of Claire's Boutiques, Inc. from September 1989 until October
1991, and was on the board of directors of Claire's Stores Inc., the
publicly-held parent company.

Martin E. Hanaka has served as a director of The Sports Authority, Inc.
since February 1998 and as its Chief Executive Officer since September 1998.
From August 1994 until October 1997, Mr. Hanaka served as President and Chief
Operating Officer of Staples, Inc., an office supply superstore retailer. Mr.
Hanaka's extensive retail career has included serving as Executive Vice
President of Marketing and as President and Chief Operating Officer of Lechmere,
Inc. from September 1992 through July 1994, and serving in various capacities
for 20 years at Sears Roebuck & Co., most recently as Vice President in charge
of Sears Brand Central. Mr. Hanaka is also a director of Wil-Mar Industries,
Inc. (marketing and distributing repair and maintenance products) and Nature's
Heartland (food retailing).

Isaac Kaufman has been Chief Financial Officer of Advanced Medical
Management, Inc. since September 1998. Mr. Kaufman was Executive Vice President
and Chief Financial Officer of Bio Science Contract Production Corp., a contract
manufacturer of biologics and pharmaceutical products, from February 1998 to
September 1998. From November 1996 to February 1998, he was Chief Financial
Officer of VSI Group, Inc., a provider of contract staffing and management
services. Mr. Kaufman was an Executive Vice President of Merry-Go-Round
Enterprises, Inc., a publicly held specialty retailer, and on its board of
directors from April 1991 to February 1996 and had been its Chief Financial
Officer, Secretary and Treasurer since 1983. Merry-Go-Round filed for protection
from its creditors under Chapter 11 of the U.S. Bankruptcy Code on January 11,
1994 and is currently in a Chapter 7 liquidation.

Dr. Joseph G. Morone has been President of Bentley College since August
1997. Previously, Dr. Morone was Dean of Rensselaer Polytechnic Institute's
Lally School of Management and Technology and held that position since July
1993. Prior to his appointment as dean, Dr. Morone held the Andersen Consulting
Professorship of Management and was Director of the School of Management's
Center for Science and Technology Policy. Before joining the School of
Management in 1988,

135
<PAGE>
Dr. Morone was a senior associate for the Keyworth Company, a consulting firm
specializing in technology management and science policy. Dr. Morone also spent
7 years at General Electric Company's Corporate Research and Development. Dr.
Morone serves on the boards of directors of Albany Medical Center, Albany
International Corp. and NView Corporation.

Michael B. Solow has served as a director of Camelot since March 1998. Mr.
Solow is currently a partner and Practice Manager for Financial Services
Practice at Hopkins & Sutter, a Chicago, Illinois law firm where he has
practiced since 1985. Mr. Solow is also a member of the board of directors for
Chrisken Residential Trust, Inc. and Edwards Arts Products, and has previously
served on other corporate boards.

George R. Zoffinger has served as a director of Camelot since January 1998.
He has been President and Chief Executive Officer of Constellation Capital Corp.
since March 1998. Mr. Zoffinger served as President, Chief Executive Officer and
director of Value Property Trust from 1995 until that company was purchased by
Wellsford Real Properties, Inc. in March 1998. Mr. Zoffinger served as Chairman
of the Board of CoreStates New Jersey National Bank from 1994 through its merger
into CoreStates Bank, N.A. in 1996. From 1991 through 1994, he served as
President and Chief Executive Officer of Constellation Bancorp and its principal
subsidiary, Constellation Bank, N.A. Mr. Zoffinger is also a member of the board
of directors of NJ Resources, Inc.

Directors of Trans World hold currently office until the next annual meeting
of Stockholders or until his or her respective successor has been elected and
qualified. Officers of Trans World serve at the discretion of the Trans World
board. See "The Trans World Special Meeting--Purpose of the Trans World Special
Meeting."

TRANS WORLD BOARD MEETINGS AND ITS COMMITTEES

Trans World's board held six meetings during the 1997 fiscal year. All of
the directors except Mrs. Fischer, Mr. Dougan, and Dr. Morone attended greater
than 75% of the aggregate of: (1) the total number of meetings of the board of
directors, and (2) the total number of meetings held by all committees of the
board on which such director served.

Trans World has an audit committee of the Trans World board, consisting of a
majority of independent directors, whose members during the 1997 fiscal year
were: Isaac Kaufman (Chairman), Charlotte G. Fischer and Joseph G. Morone. The
audit committee held two meetings during the 1997 fiscal year. The audit
committee's responsibilities consist of recommending the selection of
independent auditors, reviewing the scope of the audit conducted by such
auditors, as well as the audit itself, and reviewing Trans World's audit
activities and activities and matters concerning financial reporting, accounting
and audit procedures, related party transactions and policies generally.

Trans World has a compensation committee of the Trans World board,
consisting solely of independent directors, whose members during the 1997 fiscal
year were: Dean S. Adler (Chairman), Isaac Kaufman and George W. Dougan. The
compensation committee held two meetings during the 1997 fiscal year. The
compensation committee formulates and gives effect to policies concerning
salary, compensation, stock options and other matters concerning employment with
Trans World.

Trans World has no standing nominating committee. Mr. Higgins, the Chairman
of the Board, Chief Executive Officer and principal shareholder, was actively
involved in the recruitment of all of the current directors.

136
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

COMPENSATION AND PURPOSE OF THE COMPENSATION COMMITTEE. The Trans World
compensation committee was comprised during fiscal 1997 of three non-employee
directors of Trans World. It is Trans World's policy to constitute the
compensation committee with directors that qualify as outside directors under
the 1993 amendments to the federal income tax law.

The compensation committee's purpose is to hire, develop and retain the
highest quality managers possible. It is principally responsible for
establishing and administering the executive compensation program of Trans
World. These duties include approving salary increases for Trans World's key
executives and administering both the annual incentive plan and stock option
plans.

COMPENSATION PHILOSOPHY AND OVERALL OBJECTIVES. The components of the
executive compensation program are salary, annual incentive awards and stock
options. This program is designed to attract and retain competent people with
competitive salaries, provide incentives for increased profitability, and align
the long-term interests of management with the interests of shareholders by
encouraging executive ownership of common stock of Trans World.

SALARY AND ANNUAL INCENTIVE COMPENSATION

SALARIES. The compensation committee believes that it is necessary to pay
salaries that are competitive within the industry and geographic region in order
to attract the types of executives needed to manage the business. In 1994, the
compensation committee engaged KPMG to assist the compensation committee in
evaluating and modifying its executive compensation program and in developing a
peer group of specialty retailers that are comparable to Trans World in terms of
annual revenues. A majority of the 14 companies in such peer group are traded on
Nasdaq, and are incorporated into the peer index used in the performance graph.
See "Five Year Performance Graph."

Annual salary recommendations for Trans World's executive officers, other
than the Chief Executive, are made to the compensation committee by the Chief
Executive. The compensation committee reviews and then approves, with any
modifications it deems appropriate, such recommendations. Factors such as
increased management responsibility and achievement of operational objectives
are considered, but not formally weighted, in determining an increase. The
compensation committee also used a compensation study prepared by KPMG along
with the compensation committee members' experience in the retail industry, in
evaluating the executive salary levels. The compensation committee believes that
it must keep the base pay component at or above the median range to remain
competitive in attracting competent management.

ANNUAL PERFORMANCE INCENTIVES. Key executives, including the named
executive officers, were eligible for annual incentive awards based on the
performance of Trans World against predetermined targets.

For fiscal 1997, the compensation committee established as the principal
goal a targeted level of pre-tax earnings before bonuses would be paid to
executive officers. Each named executive officer, other than the Chief
Executive, was eligible to earn 25% to a maximum of 100% of his salary in
incentive payments if the targets were achieved by Trans World. The Chief
Executive Officer was eligible to earn a maximum of 160% of his salary under
these incentive payments. If the targets were not achieved then the incentives
would be reduced to lower levels. Below a certain target level no incentives
were to be paid. Because Trans World's pre-tax earnings exceeded predetermined
targets each of the named executives received annual incentive payments as
outlined in the "Summary Compensation Table."

137
<PAGE>
LONG-TERM INCENTIVES

The compensation committee uses a broad-based stock option plan, with over
275 participants, as the principal long-term incentive for executives. The stock
option plan is designed to encourage executive officers to become shareholders
and to achieve meaningful increases in shareholder value. The compensation
committee normally grants stock options to executive officers annually. The
level of stock option grants is determined using a matrix that considers the
executive's position, salary level, and the performance of the executive as
measured by the individual's performance rating.

Trans World also has a restricted stock plan which the compensation
committee may use to grant awards of common stock to officers and other key
employees of Trans World. The compensation committee believes that Trans World's
long term goals are best achieved through long-term stock ownership. The level
of awards are granted at the discretion of the compensation committee.

CHIEF EXECUTIVE OFFICER'S COMPENSATION

In fiscal 1997, the Chief Executive was compensated under a three year
employment agreement, which was approved by the compensation committee. The
employment term of the agreement was set to end on January 30, 1999. Effective
May 1, 1998, Mr. Higgins is being compensated pursuant to a new employment
agreement, which provides for his participation in Trans World's executive bonus
plan up to a maximum of 150% of his salary if certain targets are achieved by
Trans World.

DEDUCTIBILITY OF COMPENSATION EXPENSES

Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a public corporation for compensation over $1 million for its chief
executive officer or any of its four other highest paid officers. Qualifying
performance based compensation will not be subject to the deduction limit if
certain requirements are met. The compensation committee believes that it is
necessary to pay salaries that are competitive within the industry and
geographic region in order to attract the types of executives needed to manage
the business. Executive compensation is structured to avoid limitations on
deductibility where this result can be achieved consistent with Trans World's
compensation goals.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

There were no compensation committee interlocks during fiscal 1997. None of
these members was an officer or employee of Trans World, a former officer of
Trans World, or a party to any relationship requiring disclosure under Item 404
of Regulation S-K under the Exchange Act.

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
DEAN S. ADLER, CHAIRMAN
GEORGE W. DOUGAN
ISAAC KAUFMAN

EXECUTIVE OFFICERS AND COMPENSATION

Trans World's executive officers are identified below. At year end, four
officers met the definition of "executive officer" under applicable regulations
for the fiscal year 1997, including the Chief Executive. Executive officers of
Trans World currently hold the same positions with Record Town, Inc., Trans
World's wholly owned subsidiary through which all retail operations are
conducted. The Summary Compensation Table sets forth the compensation paid by
Trans World and its subsidiaries for services rendered in all capacities during
the last three fiscal years to each of the four executive officers of Trans
World whose cash compensation for that year exceeded $100,000.

138
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------------------------ --------- --------- --------- ------------- ----------- ------------- ---------------
Robert J. Higgins................... 1997 575,000 920,000 37,518(1) -- 900,000 46,489(1)
Chairman, President and 1996 575,000 575,000 28,223(1) -- -- 72,590(1)
Chief Executive Officer 1995 550,000 -- 68,653(1) -- -- 95,161(1)

James A. Litwak..................... 1997 289,808 228,000 --(2) -- 45,000 5,109(3)
Executive Vice President- 1996 190,144 150,000 217,668(5) -- 300,000 ----
Merchandising & Marketing 1995 -- -- --(2) -- --

Bruce J. Eisenberg.................. 1997 195,154 180,000 --(2) -- 60,000 4,802(3)
Senior Vice President- 1996 174,933 127,400 --(2) -- 150,000 4,037(3)
Real Estate 1995 137,340 100,000 --(2) 100,000(4) 45,000 2,772(3)

John J. Sullivan.................... 1997 195,154 180,000 --(2) -- 60,000 4,802(3)
Senior Vice President and 1996 179,981 127,400 --(2) 118,750(4) 150,000 4,750(3)
Chief Financial Officer 1995 161,009 -- --(2) -- 45,000 4,903(3)
</TABLE>

- ------------------------

(1) "Other Annual Compensation" in fiscal 1997, 1996 and 1995 for Mr. Higgins
includes $29,140, $17,400, and $58,335, respectively, in payments for, or
reimbursement of, life insurance premiums made on behalf of Mr. Higgins or
his beneficiaries, pursuant to his employment agreement. "All Other
Compensation" in fiscal 1997, 1996 and 1995 for Mr. Higgins consists of
maximum dollar value of premiums paid by Trans World with respect to split
dollar life insurance policies that Trans World owns on the lives of Mr.
Higgins and his wife. It also includes employer matching contributions for
the 401(k) Savings Plan in fiscal 1997, 1996 and 1995 of $4,750, $4,750 and
$0. Trans World will recoup most or all of such premiums upon maturity of
the policies, but the maximum potential value is calculated in accordance
with current Commission instructions as if the premiums were advanced
without interest until the time that Trans World expects to recover the
premium.

(2) "Other Annual Compensation" for the named executive was less than $50,000
and also less than 10% of the total annual salary and bonus reported.

(3) "All Other Compensation" for the named executive consists of employer
matching contributions for the 401(k) Savings Plan.

(4) "Restricted Stock Award(s)" for the named executives represents the dollar
value at the date of the award and is calculated using the closing sale
price of Trans World shares on the date of grant. Mr. Sullivan received
75,000 shares of restricted stock of which 60% shall vest on April 30, 1999;
an additional 20% shall become vested on April 30, 2000, and the final 20%
shall become vested on April 30, 2001. Mr. Eisenberg received 75,000 shares
of qrestricted stock of which 20% vested on April 30, 1998; an additional
20% shall become vested on April 30, 1999, and the final 60% shall become
vested on April 30, 2000. The aggregate value of the 150,000 shares of
restricted stock outstanding on August 1, 1998 was $2,625,000

(5) "Other Annual Compensation" for Mr. Litwak consists of reimbursement for
relocation expenses and a tax gross-up on the taxable but non-deductible
component of the reimbursement.

STOCK OPTION PLANS

Trans World has three employee stock option plans in place, the 1986
Incentive and Non-Qualified Stock Option Plan, with an aggregate of 3,300,000
shares authorized for issuance, the 1994 Stock Option Plan, with an aggregate of
3,000,000 shares and the 1998 Stock Option Plan, with an aggregate of 1,500,000,
shares. The following tables contain, as to each of the named executive
officers, certain information about options granted or exercised for the fiscal
year ended January 31, 1998, under these stock option plans.

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STOCK OPTION GRANTS IN LAST FISCAL YEAR(1)

The following table contains information concerning individual grants of
stock options made during the fiscal year ended January 31, 1998 to each of the
named officers of Trans World. The number of shares and per share information
has been adjusted to reflect the three-for-two stock split effected on September
15, 1998.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER OF TOTAL ANNUAL
SECURITIES OPTIONS RATES OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES OR OPTION TERM (3)
GRANTED (#) IN BASE PRICE EXPIRATION --------------------
NAME (1)(2) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($)
- ------------------------------------------------- ------------- --------------- ----------- ------------- --------- ---------
Mr. Higgins...................................... 900,000 58.9% $ 11.20 2007 6,339,258 16,064,924
Mr. Sullivan..................................... 60,000 3.9% $ 3.96 2007 149,375 378,546
Mr. Eisenberg.................................... 60,000 3.9% $ 3.96 2007 149,375 378,546
Mr. Litwak....................................... 45,000 2.9% $ 3.96 2007 112,031 283,909
</TABLE>

- ------------------------

(1) No SARs were granted.

(2) Stock options are exercisable annually in four equal installments,
commencing on the first anniversary of the date of the grant, and vest
earlier upon the officer's death or disability. The stock options have a
term of ten years. All options granted under the stock option plans may
become immediately exercisable upon the occurrence of certain business
combinations. The compensation committee may accelerate or extend the
exercisability of any options subject to such terms and conditions as the
compensation committee deems appropriate. The option exercise price was set
at the fair market value (last reported sale price) on the date of grant.

(3) These amounts are based on assumed appreciation rates of 5% and 10% as
prescribed by the Commission rules, and are not intended to forecast
possible future appreciation, if any, of Trans World's stock price. Trans
World's stock price was $18.00 at January 31, 1998, the fiscal year end.

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AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES (1)

The following table contains information concerning each exercise of stock
options made during the fiscal year ended January 31, 1998, by each of the named
executive officers of Trans World, and the value of unexercised stock options
held by such person as of January 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END
(#)(3) ($)
--------------------- ---------------------
SHARES ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE) UNEXERCISABLE(2)
- --------------------------------- ----------------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Mr. Higgins...................... -- -- 0/900,000 0/6,120,000
Mr. Sullivan..................... -- -- 97,500/232,500 1,526,400/3,710,000
Mr. Eisenberg.................... -- -- 82,500/232,500 1,182,655/3,682,285
Mr. Litwak....................... -- -- 75,000/270,000 1,200,000/4,231,860
</TABLE>

- ------------------------

(1) There have been no SARs issued and there are no SARs outstanding.

(2) Calculated on the basis of the fair market value of the underlying
securities as of January 31, 1998 minus the exercise price.

(3) Option amounts are adjusted for the three-for-two stock split on September
15, 1998.

EMPLOYMENT AGREEMENTS

As founder and Chief Executive Officer of Trans World, Robert J. Higgins has
been instrumental in the operations of Trans World. During fiscal 1997, Mr.
Higgins was employed as President and Chief Executive Officer of Trans World
pursuant to a three year employment agreement that commenced on February 4,
1996. For the fiscal year ended January 31, 1998, Mr. Higgins earned $920,000 in
incentive compensation under the employment agreement. The agreement was
replaced effective May 1, 1998 by a new five year employment agreement. Pursuant
to its terms, Mr. Higgins earns a minimum annual salary of $600,000, is
reimbursed for two club memberships, is entitled to payment of or reimbursement
for life insurance premium of up to $150,000 per year on insurance policies for
the benefit of persons designated by Mr. Higgins and is entitled to participate
in all incentive, savings retirement, welfare and other employee benefit plans,
practices, policies and other fringe benefit programs that Trans World may
provide for the benefit of its executive employees.

James A. Litwak has a severance agreement in effect that provides, under
certain conditions, payment of severance equal to one year of annual
compensation, at a level not less than his current salary of $290,000 upon his
termination following severance without cause. Mr. Litwak's severance agreement
contains an "evergreen" provision for automatic renewal each year.

COMPENSATION OF DIRECTORS

CASH COMPENSATION. Each director who is not a salaried employee of Trans
World receives a $15,000 retainer per annum plus a $1,000 attendance fee for
each committee meeting and board meeting attended, except that the compensation
for telephone conference meetings is $500. A Committee chairperson earns an
additional $1,000 retainer per year.

Matthew H. Mataraso received $58,000 in cash compensation and $1,740 in
401(k) contributions from Trans World in fiscal 1997 for his services as
Secretary of Trans World and as counsel. Messrs. Higgins and Mataraso are the
only directors eligible to participate in Trans World's employee stock option
plans.

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<PAGE>
DIRECTOR STOCK OPTION PLAN. Each outside director is entitled to
participate in Trans World's 1990 Stock Option Plan for Non-Employee Directors.
Currently, Mrs. Fischer and Messrs. Dougan, Kaufman, Adler and Morone
participate in this plan. A total of 750,000 shares of Trans World common stock
are reserved for issuance pursuant to non-qualified stock options issued under
the plan, and options covering 378,000 shares of common stock have been granted.
Stock options issuable under this plan are granted at an exercise price equal to
85% of the fair market value of Trans World common stock on the date of grant.

An initial grant of 10,000 options is made to each new director. In
addition, options to purchase 1,500 shares of Trans World common stock are
granted annually on May 1 of any year to any eligible director. All options vest
ratably over four years. During fiscal 1997, annual grants to outside directors
of 4,500 options were made at an exercise price of $3.36 per share, compared to
the market value on the date of grant of $3.96. Accordingly, compensation
expense in the aggregate of $5,340 will be amortized over a 48-month period by
Trans World for the 1997 grants.

The plan is administered by the Trans World board which is authorized to
grant additional options on such date, in such number and at such exercise price
as they determine.

RETIREMENT PLAN. Trans World provides the Trans World board with a
noncontributory, unfunded retirement plan that pays a retired director a
retirement benefit of $15,000 per year for up to ten years depending on the
length of service, or the life of the director and his or her spouse, whichever
period is shorter. To become vested in the retirement plan a director must reach
age 62 and have served on the Trans World board for a minimum of five
consecutive years.

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FIVE-YEAR PERFORMANCE GRAPH

The following line graph reflects a comparison of the cumulative total
return of Trans World's common stock from January 29, 1993 through January 30,
1998 with the Nasdaq Index (U.S. Stocks) and with the Nasdaq National Market
Retail Trade Stocks Index. Because only one of the Trans World's leading
competitors has been an independent publicly traded company over the period,
Trans World has elected to compare shareholder returns with the published index
of retail companies compiled by Trans World. All values assume a $100 investment
on January 29, 1993, and that all dividends were reinvested.
[LOGO]

<TABLE>
<CAPTION>
1993 1994 1995 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Trans World............................................................. 100 95 39 25
Nasdaq (U.S.)........................................................... 100 116 109 154
Nasdaq Retail Trade Stocks.............................................. 100 107 95 107

<CAPTION>
1997 1998
----- -----
<S> <C> <C>
Trans World............................................................. 47 379
Nasdaq (U.S.)........................................................... 201 237
Nasdaq Retail Trade Stocks.............................................. 131 154
</TABLE>

As of January 31, 1999, the cumulative total return of a $100 investment in
Trans World's common stock on January 29, 1993 was $305. The cumulative total
return of the same investment in the Nasdaq Index over the same period was $260
and the cumulative total return of the same investment in the Nasdaq National
Market Retail Trade Stocks Index over the same period was $188.

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<PAGE>
TRANSACTIONS WITH RELATED PARTIES

Trans World leases its 178,000 square foot distribution center/office
facility in Albany, New York from Robert J. Higgins, its Chairman, Chief
Executive Officer and principal shareholder, under three capitalized leases that
expire in the year 2015. The original distribution center/office facility was
constructed in 1985. A 77,135 square foot distribution center expansion was
completed in October 1989 on real property adjoining the existing facility. An
additional 19,000 square feet of office space and a parking area were
constructed and leased to Trans World effective September 1, 1998.

Under the capitalized leases dated April 1, 1985 and November 1, 1989, Trans
World paid Mr. Higgins an annual rent of $1,346,682 in fiscal 1997. On January
1, 1998, the aggregate rental payment increased in accordance with the biennial
increase in the Consumer Price Index, based on the provisions of each lease.
Under the capitalized lease dated August 11, 1998, Trans World will pay Mr.
Higgins an annual rent of $315,000. Effective January 1, 2000, and every two
years thereafter, the rental payment will increase in accordance with the
biennial increase in the Consumer Price Index, based on the provisions of the
lease. None of the leases contains any real property purchase option at the
expiration of its term. Under the terms of all three leases, Trans World pays
all property taxes, insurance and other operating costs with respect to the
premises. Mr. Higgins' obligation for principal and interest on his underlying
indebtedness relating to the real property approximates $90,000 per month.

Trans World leases two of its retail stores from Mr. Higgins under long-term
leases, each at annual rental of $35,000 plus property taxes, maintenance and a
contingent rental if a specified sales level is achieved. In fiscal 1997, Trans
World paid Mr. Higgins $30,000 for a one year lease expiring on October 31,
1997, for certain parking facilities contiguous to Trans World's distribution
center/office facility. The lease was renewed through October 31, 1998, after
approval by the audit committee. Upon expiration of the lease on October 31,
1998, the lease was not renewed. The parking facilities are included in the
August 11, 1998 capital lease discussed above.

Trans World regularly utilizes privately-chartered aircraft for its
executives, primarily those owned or partially owned by Mr. Higgins. During
fiscal 1997, Trans World chartered an airplane under an unwritten agreement with
Quail Aero Services of Syracuse, Inc., a corporation in which Mr. Higgins is a
one-third shareholder. Payments made by Trans World during fiscal 1997 were
$59,817. Trans World also chartered an aircraft from Crystal Jet, a corporation
wholly owned by Mr. Higgins. During fiscal 1997, payments to Crystal Jet, under
an unwritten agreement, aggregated $199,069. Trans World believes that the
charter rates and terms are as favorable to Trans World as those generally
available to it from other commercial carriers.

The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Trans World board,
either by the audit committee or at a meeting of the Trans World board. The
Trans World board believes that the leases and other provisions are at rates and
on terms that are at least as favorable as those that would have been available
to Trans World from unaffiliated third parties under the circumstances.

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<PAGE>
DESCRIPTION OF TRANS WORLD CAPITAL STOCK

Assuming the approval by Trans World's stockholders of the Trans World
merger matters, Trans World will be authorized to issue 200,000,000 shares of
common stock, $.01 par value per share, and 5,000,000 shares of preferred stock,
$.01 par value per share. As of March 3, 1999, there were outstanding 32,754,236
shares of Trans World common stock. No shares of preferred stock are
outstanding.

COMMON STOCK

Each outstanding share of Trans World common stock is entitled to one vote
on all matters submitted to a vote of stockholders, including the election of
directors. All stockholder action may be effected at a duly called meeting at
which a quorum is present, except as otherwise provided by law. A majority of
votes cast by stockholders is required for any action to which stockholders are
entitled to vote, except as otherwise provided by law and except that directors
are elected by a plurality of votes cast. The holders of Trans World common
stock do not have cumulative voting rights. Dividends may be paid to holders of
Trans World common stock when and if declared by the board of directors out of
legally available funds.

Holders of Trans World common stock have no conversion, redemption or
preemptive rights. All outstanding shares of Trans World common stock are fully
paid and nonassessable. In the event of any liquidation, dissolution or
winding-up of the affairs of Trans World, holders of Trans World common stock
will be entitled to share ratably in the assets of Trans World remaining after
payment of creditors and after the liquidation preference, if any, of preferred
stock outstanding at the time.

PREFERRED STOCK

No shares of preferred stock have been issued. Trans World's board may,
without further action by Trans World's stockholders, from time to time
authorize the issuance of up to 5,000,000 shares of preferred stock in series
and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding preferred stock would reduce the amount of funds available for the
payment of dividends on Trans World common stock. Also, holders of preferred
stock would normally be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of Trans World before any payment is
made to the holders of Trans World common stock. In addition, under certain
circumstances, the issuance of such preferred stock may render more difficult or
tend to discourage a merger, tender offer or proxy contest, the assumption of
control by a holder of a large block of Trans World's securities or the removal
of incumbent management. Although Trans World presently has no plans to issue
any shares of preferred stock, the Trans World board, without stockholder
approval, may issue preferred stock with voting and conversion rights that could
adversely affect the holders of Trans World common stock.

NEW YORK ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

NEW YORK BUSINESS CORPORATION LAW. Section 912 of New York Business
Corporation Law prohibits a New York corporation from engaging in a "business
combination" with an "interested shareholder" for a period of five years from
the date that such interested shareholder acquired its stock unless such
acquisition or the business combination was approved by the corporation's board
of directors prior to the interested shareholder's becoming such. After such
five-year period, the business combination must be approved by a majority of
shareholders other than the interested shareholder or the price paid to all
shareholders must meet certain conditions relating to the type and minimum
amount of consideration to be paid to shareholders other than the interested
shareholder. Because Robert J. Higgins owned his shares of Trans World common
stock prior to the enactment of Section 912, Section 912 would not apply to a
business combination with Mr. Higgins.

145
<PAGE>
For purposes of Section 912, a "business combination" includes:

- a merger or consolidation,

- a sale, lease, pledge or other disposition of assets,

- a stock issuance or transfer,

- a liquidation or dissolution,

- a reclassification of securities,

- a recapitalization, or

- any transaction in which an interested shareholder benefits
disproportionately in relation to any other shareholder.

An "interested shareholder" is defined as any person or entity that
currently owns , directly or indirectly, or in the case of affiliates and
associates of the corporation, that owned at any time during the past five
years, more than 20% of the outstanding voting stock of the corporation.

These provisions may discourage open market purchases or a non-negotiated
tender or exchange offers for the stock of a New York corporation such as Trans
World, and, accordingly, may be adverse to the interests of a shareholder who
would desire to participate in such a transaction.

CLASSIFIED BOARD AMENDMENT. If adopted, the classified board amendment could
have the effect of entrenching incumbent management and discouraging hostile
changes of control which might be beneficial to Trans World and the Trans World
stockholders.

TRANSFER AGENT AND REGISTRAR

ChaseMellon Shareholder Services, L.L.C. is the transfer agent and registrar
for Trans World common stock.

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<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS

The rights of Camelot stockholders are governed by Camelot's certificate of
incorporation, its amended and restated by-laws and Delaware law. The rights of
Trans World stockholders are governed by the Trans World certificate of
incorporation, its by-laws and New York law. Upon consummation of the merger,
the rights of Camelot stockholders who become Trans World stockholders will be
governed by Trans World's certificate of incorporation, Trans World's by-laws
and New York law.

The following discussion is intended only to highlight certain material
differences between the rights of stockholders under Delaware law and New York
law, generally, and between the rights of Camelot stockholders and Trans World
stockholders, specifically, under each company's certificate of incorporation
and by-laws. This summary is not intended to be complete. You should read the
applicable provisions of Delaware law and New York law and the certificate of
incorporation and by-laws of each of Trans World and Camelot. See "Where You Can
Find More Information."

AUTHORIZED CAPITAL STOCK

Camelot's certificate of incorporation authorizes 30,000,000 shares of
common stock, par value $.01 per share.

Trans World's certificate of incorporation authorizes 50,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of preferred stock,
par value $.01 per share. At the Trans World special meeting, Trans World
stockholders will be asked to consider and vote upon a proposal to amend Trans
World's certificate of incorporation to increase the number of authorized shares
of Trans World common stock from 50,000,000 to 200,000,000 in connection with
the merger.

BUSINESS COMBINATIONS

Delaware law generally requires the affirmative vote of a majority of the
board of directors of a Delaware corporation and at least a majority of the
corporation's outstanding shares entitled to vote to authorize a merger or
consolidation or sale, lease or exchange of all or substantially all of the
corporation's assets. Camelot's certificate of incorporation does not contain
any provisions relating to stockholder approval of business combinations.

New York law generally provides that the consummation of a merger,
consolidation, dissolution or disposition of substantially all of the assets of
a New York corporation requires:

- the approval of the corporation's board of directors;

- the affirmative vote of the holders of two-thirds of all outstanding
shares entitled to vote, unless

-- the corporation's certificate of incorporation requires only the
affirmative vote of a majority of all outstanding shares entitled to
vote thereon, or

-- the corporation was incorporated after February 22, 1998; and

- in certain situations, the affirmative vote by the holders of a majority
of all outstanding shares of each class or series of shares.

Trans World's certificate of incorporation does not contain any provisions
relating to stockholder approval of business combinations.

STATE ANTI-TAKEOVER LEGISLATION

DELAWARE BUSINESS COMBINATION LAW. Section 203 of the Delaware General
Corporation Law generally prohibits any business combination between a Delaware
corporation and any interested stockholder for a period of three years after the
date on which the interested stockholder became an

147
<PAGE>
interested stockholder. The term "business combination" is defined to include a
variety of transactions, including:

- mergers and consolidations;

- sales or dispositions of assets having an aggregate market value equal to
10% or more of the aggregate market value of the corporation determined on
a consolidated basis;

- issuances of stock except for certain pro rata and other issuances; and

- disproportionate benefits from the corporation including loans and
guarantees.

The term "interested stockholder" is defined generally as any person who,
directly or indirectly, beneficially owns 15% or more of the outstanding voting
stock of the corporation.

The restrictions of Section 203 do not apply, however:

- if, before such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in a
stockholder becoming an interested stockholder;

- if, upon consummation of the transaction resulting in a stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation at the time the
transaction was commenced, except, for the purposes of determining the
number of shares outstanding, shares owned by persons who are directors
and also officers and by certain employee plans of the corporation;

- if, on or subsequent to such date, the business combination is approved by
the board of directors and the holders of at least two-thirds of the
shares not involved in the transaction; or

- under certain other circumstances.

In addition, a Delaware corporation may adopt an amendment to its
certificate of incorporation or by-laws expressly electing not to be governed by
Section 203 if, in addition to any other vote required by law, the amendment is
approved by the affirmative vote of a majority of the shares entitled to vote.
However the amendment, except under certain circumstances, will not be effective
until 12 months after the stockholder vote and will not apply to any business
combination with an interested stockholder before the effective date of such
amendment. In its certificate of incorporation, Camelot expressly elects to be
governed by Section 203.

NEW YORK BUSINESS COMBINATION LAW. Section 912 of the New York Business
Corporation Law prohibits any business combination with, involving or proposed
by any interested stockholder for a period of five years after the date on which
the interested stockholder became an interested stockholder. After the five-year
period, a business combination between a resident domestic New York corporation
and an interested stockholder is prohibited unless either certain "fair price"
provisions are complied with or the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested stockholder or its affiliates. The term "business combination" is
defined to include a variety of transactions, including:

- mergers, sales or dispositions of assets;

- issuances of stock, liquidations, reclassifications; and

- benefits from the corporation, including loans or guarantees.

The term "interested stockholder" is defined generally as any person who,
directly or indirectly, beneficially owns 20% or more of the outstanding voting
stock of a resident domestic New York corporation.

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<PAGE>
The restrictions of Section 912 do not apply to any business combination
with an interested stockholder if the business combination or the purchase of
stock by the interested stockholder is approved by the board of directors of the
resident domestic New York corporation. Trans World will be considered a
resident domestic New York corporation as long as at least 10% of its voting
stock is owned beneficially by residents of, or organizations having their
principal offices in, the State of New York.

A resident domestic New York corporation may adopt an amendment to its
by-laws expressly electing not to be governed by Section 912. The amendment must
be approved by the affirmative vote of the holders, other than interested
stockholders and their affiliates and associates, of a majority of the
outstanding voting stock, excluding the voting stock of interested stockholders
and their affiliates and associates. Such amendment will not, however, be
effective until 18 months after such stockholder vote and will not apply to any
business combination with an interested stockholder who was such on or before
the effective date of such amendment. Trans World has not amended its by-laws
and remains governed by Section 912.

APPRAISAL RIGHTS

Under Delaware law, a stockholder who is entitled to vote and does not vote
in favor of a statutory merger or consolidation may demand appraisal of his
shares by the Delaware Court of Chancery. Unless the corporation's certificate
of incorporation provides otherwise, such dissenters' rights are not available
in certain circumstances, including:

- to stockholders of a corporation whose shares are either

-- listed on a national securities exchange or designated as a national
market security by Nasdaq, or

-- held of record by more than 2,000 holders; and

- to stockholders of a corporation surviving a merger if no vote of
stockholders of the surviving corporation is required to approve the
merger.

Notwithstanding the previous sentence, appraisal rights are available to any
stockholder required to accept for his shares anything except:

- shares of stock of the surviving corporation;

- shares of any other corporation which shares are listed on a national
securities exchange or designated as a national market security by Nasdaq
or held of record by more than 2,000 holders;

- cash in lieu of fractional shares; or

- any combination of the foregoing.

Camelot stockholders have dissenters' rights of appraisal in the merger.

Stockholders of a New York corporation have the right to dissent and receive
payment of the fair value of their shares, except as otherwise provided by New
York law, in the event of certain amendments or changes to the certificate of
incorporation adversely affecting their shares, certain mergers or
consolidations, certain sales, leases, exchanges or other dispositions of all or
substantially all the corporation's assets and certain share exchanges. Trans
World stockholders do not have dissenters' rights of appraisal in the merger.

AMENDMENTS TO CERTIFICATES OF INCORPORATION

Generally, under Delaware law, proposed amendments to a corporation's
certificate of incorporation must be adopted by:

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<PAGE>
- a resolution of the board of directors;

- the affirmative vote of the holders of a majority of the outstanding stock
entitled to vote thereon; and

- the affirmative vote of the holders of a majority of the outstanding stock
of each class entitled to vote thereon as a class.

If the amendment would adversely affect the rights of any holders of shares
of a class or series, the vote of the holders of a majority of all outstanding
shares of such class or series, voting as a class, is also necessary to
authorize the amendment. Camelot's certificate of incorporation provides that
the affirmative vote of at least a majority in voting power of the stock of
Camelot entitled to vote generally in the election of directors is required in
order to alter, amend or repeal any provision of the certificate of
incorporation.

Generally, under Delaware law, proposed amendments to a corporation's
certificate of incorporation may be authorized by a vote of the board of
directors followed by the vote of a majority of all outstanding shares. If the
amendment would adversely affect the rights of any holders of shares of a class
or series, the vote of the holders of a majority of all outstanding shares of
that class or series, voting as a class, is also necessary to authorize the
amendment even though they ordinarily would not have voting rights. Trans
World's certificate of incorporation does not contain any provisions relating to
its amendment.

AMENDMENTS TO BY-LAWS

Delaware law provides that a corporation's by-laws may be adopted, amended
or repealed by the stockholders, and if authorized in the corporation's
certificate of incorporation, by the board of directors. Camelot's certificate
of incorporation provides that the board of directors is authorized to amend,
alter, change, add to or repeal Camelot's by-laws, limited by the power of the
stockholders to amend, alter, change, add or repeal the by-laws made by the
board of directors. Camelot's by-laws provide that the affirmative vote of the
holders of at least a majority in voting power of all shares of Camelot entitled
to vote generally in the elections of directors, voting together as a single
class, is required in order for the stockholders to alter, amend or repeal
Camelot's by-laws or to adopt a provision inconsistent with the by-laws.

Under New York law, except as otherwise provided in its certificate of
incorporation, a corporation's by-laws may be amended, repealed or adopted by a
majority of the votes cast by the shares at the time entitled to vote in the
election of any directors. When so provided in its certificate of incorporation
or a by-law adopted by the stockholders, a corporation's by-laws also may be
amended, repealed or adopted by the board but any by-law adopted by the board
may be amended or repealed by the stockholders entitled to vote on the by-law as
provided by New York law. Trans World's by-laws provide that the board of
directors may make, alter or repeal Trans World's by-laws, but that any by-law
adopted by the board of directors may be amended or repealed by the stockholders
and the stockholders may at any time limit the power of the board of directors
to amend, alter or repeal any by-law adopted by the stockholders.

PREEMPTIVE RIGHTS

Under Delaware law, a stockholder does not possess preemptive rights unless
the rights are specifically granted in the certificate of incorporation.
Camelot's certificate of incorporation does not provide for preemptive rights.

Under New York law, except as otherwise provided by New York law or in its
certificate of incorporation, the holders of equity shares of a corporation
incorporated prior to February 22, 1998 are granted certain preemptive rights.
Trans World was incorporated prior to February 22, 1998. However,

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Trans World's certificate of incorporation provides that no holder of Trans
World common stock has any preemptive rights with respect to any shares or other
securities of Trans World.

REDEMPTION OF CAPITAL STOCK

Under Delaware law, with certain limitations, a corporation's stock may be
made redeemable by the corporation at its option, at the option of the holders
of the stock or upon the happening of a specified event. The Camelot certificate
of incorporation does not provide for the redemption of common stock.

Under New York law, with certain limitations, a corporation's certificate of
incorporation may provide for one or more classes or series of shares to be
redeemable, in whole or in part, at the option of the corporation, the holder or
another person or upon the happening of a specified event, within such times and
under such conditions as are stated in the certificate of incorporation. Trans
World's certificate of incorporation does not provide for the redemption of any
stock.

DIVIDEND SOURCES

Under Delaware law, a board of directors may authorize a corporation to make
distributions to its stockholders, limited by any restrictions in its
certificate of incorporation, either:

- out of surplus; or

- if there is no surplus, out of net profits for the fiscal year in which
the dividend is declared and/ or the preceding fiscal year.

Under Delaware law, no distribution out of net profits is permitted, however, if
the corporation's capital is less than the amount of capital represented by the
issued and outstanding stock of all classes having a preference upon the
distribution of assets, until such deficiency has been repaired.

Under New York law, except as otherwise provided by New York law, a
corporation may declare and pay dividends or make other distributions out of
surplus only, so that the net assets of the corporation remaining after the
declaration, payment or distribution must at least equal the amount of its
stated capital. A corporation may declare and pay dividends or make other
distributions, except when the corporation is insolvent or would thereby be made
insolvent, or when the declaration, payment or distribution would be contrary to
any restrictions contained in the corporation's certificate of incorporation.

DURATION OF PROXIES

Under Delaware law, no proxy is valid more than three years after its date
unless otherwise provided in the proxy. A proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally.

Under New York law, no proxy is valid more than 11 months after its date
unless otherwise provided in the proxy. Irrevocable proxies may be created for:

- a pledgee;

- a person who has purchased or agreed to purchase the shares;

- a creditor or creditors of the corporation who extend or continue credit
to the corporation in consideration of the proxy provided the proxy so
states;

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- a person who has contracted to perform services as an officer of the
corporation if a proxy is required by the employment contract; or

- a person designated under a voting agreement.

STOCKHOLDER ACTION

Under Delaware law, unless otherwise provided in a corporation's certificate
of incorporation, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a written consent or consents describing the action taken is signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize the action at a meeting. Camelot's
certificate of incorporation expressly authorizes stockholder action by majority
written consent.

Under New York law, unless otherwise provided in a corporation's certificate
of incorporation, any action required or permitted to be taken by stockholder
vote may be taken without a meeting on written consent signed by the holders of
all outstanding shares entitled to vote or, if the certificate of incorporation
so permits, signed by the holders of outstanding shares having not less than the
minimum number of votes that would be necessary to authorize such action at a
meeting. Trans World's certificate of incorporation does not contain any
provisions relating to stockholder action by written consent.

SPECIAL STOCKHOLDER MEETINGS

Delaware law provides that special meetings of stockholders may be called by
the board of directors or by the persons authorized by the certificate of
incorporation or by the by-laws. Delaware law further provides if an annual
meeting is not held within 30 days of the date designated for the meeting, or is
not held for a period of 13 months after the last annual meeting, the Delaware
Court of Chancery may summarily order a meeting to be held if requested by any
stockholder or director. Camelot's certificate of incorporation and by-laws
provide that special meetings of stockholders may be called only by the Chief
Executive Officer, by the board of directors or by holders of record of at least
33 1/3% of the voting power of all stock issued and outstanding entitled to vote
generally in the election of directors.

New York law provides that special meeting of stockholders may be called by
the board and by the persons authorized by the certificate of incorporation or
the by-laws. New York law further provides that if, for a period of one month
after the date fixed by or under the by-laws for the annual meeting of
stockholders or, if no date has been so fixed, for a period of 13 months after
the last annual meeting, there is a failure to elect a sufficient number of
directors to conduct the business of the corporation, the board shall call a
special meeting for the election of directors. If the special meeting is not
called by the board within two weeks after the expiration of the period or if it
is called but there is a failure to elect the directors for a period of two
months after the expiration of the period, holders of 10% of the votes of the
shares entitled to vote in an election of directors may, demand a special
meeting for the election of directors. Trans World's by-laws provide that
special meetings of stockholders may be called by the Chairman of the Board, if
any, the President or a majority of the board of directors. In addition, the
President must call a special meeting of stockholders upon the written request
of stockholders who together own of record 50% of the outstanding stock of all
classes entitled to vote at the meeting.

CUMULATIVE VOTING

Under Delaware law, the certificate of incorporation of a corporation may
provide for cumulative voting in the election of directors or at elections held
under specified circumstances. Camelot's certificate of incorporation does not
provide for cumulative voting.

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Under New York law, the certificate of incorporation of a corporation may
provide for cumulative voting in the election of directors. Trans World's
certificate of incorporation does not provide for cumulative voting.

NUMBER AND ELECTION OF DIRECTORS

Delaware law permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, the number may not be changed without amending the
certificate of incorporation. Delaware law also permits the certificate of
incorporation of a corporation or a by-law adopted by the stockholders to
provide that directors be divided into one, two or three classes. The term of
office of one class of directors shall expire each year with the terms of office
of no two classes expiring the same year.

Camelot's certificate of incorporation and by-laws provide that the board of
directors shall consist of such number of directors, not less than three nor
more than 12, as shall be fixed from time to time by resolution adopted by
affirmative vote of a majority of the board of directors. Camelot's certificate
of incorporation provides that the initial number of directors shall be seven.
Camelot currently has seven directors. The board of directors of Camelot is not
classified.

Subject to certain limitations, New York law permits the number of directors
of a corporation to be fixed by its by-laws, by action of the stockholders or by
action of the board under the specific provision of a by-law adopted by the
stockholders. At each annual meeting of the stockholders, directors are to be
elected to hold office until the next annual meeting, except for corporations
with classified boards. New York law permits the certificate of incorporation or
the specific provisions of a by-law adopted by the stockholders to provide that
directors be divided into either two, three or four classes. All classes must be
as nearly equal in number as possible. The term of office of one class of
directors shall expire each year, with the terms of office of no two classes
expiring the same year.

Trans World's by-laws provide that the number of directors constituting the
entire board of directors shall be not fewer than three nor more than 11, as
fixed from time to time by resolution of the entire board of directors or by the
stockholders. However, no decrease in the number of directors will shorten the
term of any incumbent director. Trans World currently has eight directors. The
board of directors of Trans World currently is not classified. At the Trans
World special meeting, Trans World stockholders will be asked to consider and
vote upon a proposal to, among other things, elect two new directors and a
proposal to amend Trans World's certificate of incorporation to adopt a
classified board of directors divided into three classes, each of which, after a
transitional arrangement, will serve for three years, with one class being
elected each year.

REMOVAL OF DIRECTORS

Delaware law provides that a director or directors may be removed with or
without cause by the holders of a majority of the shares then entitled to vote
at an election of directors, except that:

- members of a classified board may be removed only for cause, unless the
certificate of incorporation provides otherwise; and

- in the case of a corporation having cumulative voting, if less than the
entire board is to be removed, no director may be removed without cause if
the votes cast against the director's removal would be sufficient to elect
the director if then cumulatively voted at an election of the entire board
of directors or of the class of directors of which the director is a part.

In accordance with Delaware law, Camelot's certificate of incorporation
provides that any Camelot director may be removed, with or without cause, by the
affirmative vote of a majority of the voting power of all shares of Camelot
common stock entitled to vote generally in the election of directors.

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New York law provides that any or all of the directors may be removed for
cause by vote of the stockholders. The certificate of incorporation or the
specific provisions of a by-law adopted by the stockholders may provide for the
removal by action of the board, except in the case of any director elected by
cumulative voting, or by the holders of the shares of any class or series, or
holders of bonds, voting as a class, when so entitled by the certificate of
incorporation. If the certificate of incorporation or the by-laws so provide,
any or all of the directors may be removed without cause by vote of the
stockholders.

The removal of directors, with or without cause, is subject to the
following:

- in the case of a corporation having cumulative voting, no director may be
removed when the votes cast against the director's removal would be
sufficient to elect the director if voted cumulatively; and

- if a director is elected by the holders of shares of any class or series,
the director may be removed only by the applicable vote of the holders of
the shares of that class or series voting as a class.

An action to procure a judgment removing a director for cause may be brought by
the attorney general or by the holders of 10% of the outstanding shares, whether
or not entitled to vote.

Trans World's certificate of incorporation provides that the board of
directors may remove with cause any director and that the holders of a majority
of the shares entitled at the time to vote at an election of directors may
remove any directors with or without cause.

VACANCIES

Under Delaware law, unless otherwise provided in the certificate of
incorporation or the by-laws, vacancies on the board of directors and newly
created directorships resulting from an increase in the authorized number of
directors may be filled by a majority of the directors then in office, although
less than a quorum, or by the sole remaining director. In the case of a
classified board, such vacancies and newly created directorships may be filled
by a majority of the directors elected by the class, or by the sole remaining
director so elected. In the case of a classified board, directors elected to
fill vacancies or newly created directorships hold office until the next
election of the class for which they have been chosen, and until their
successors have been duly elected and qualified. In addition, the Delaware Court
of Chancery may summarily order an election to fill any such vacancy or newly
created directorship, or replace the directors chosen by the directors then in
office, if:

- at the time of the filling of any such vacancy or newly created
directorship, the directors in office constitute less than a majority of
the whole board as constituted immediately before the increase; and

- any stockholder or stockholders holding at least 10% of the total number
of outstanding shares entitled to vote for the directors applies to the
Delaware Court of Chancery for the order.

Camelot's certificate of incorporation and by-laws provide that any newly
created directorship that results from an increase in the number of directors
and any vacancy may be filled only by a vote of a majority of the directors then
in office, though less than a quorum, or by a sole remaining director. Any
director elected in accordance with the proceeding sentence will hold of office
until the next annual meeting of Camelot and until his successor is elected and
qualified.

Under New York law, newly created directorships resulting from an increase
in the number of directors and vacancies occurring in the board for any reason
except the removal of directors without cause may be filled by vote of the board
of directors then in office, though less than a quorum. However, the certificate
of incorporation or by-laws may provide that such newly created directorships or
vacancies are to be filled by vote of the stockholders. Unless the certificate
of incorporation or the

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specific provisions of a by-law adopted by the stockholders provide that the
board may fill vacancies occurring on the board by reason of the removal of
directors without cause, such vacancies may be filled only by vote of the
stockholders.

A director elected to fill a vacancy, unless elected by the stockholders,
will hold office until the next meeting of stockholders at which the election of
directors is in the regular order of business and until his or her successor is
elected and qualified. Unless otherwise provided in the certificate of
incorporation or by-laws, notwithstanding the above, whenever the holders of any
class or classes of shares or series are entitled to elect one or more directors
by the certificate of incorporation, any vacancy that may be filled by the board
or a majority of the directors then in office will be filled by a majority of
the directors then in office elected by the class or classes or series. However,
if no such director is in office, then the vacancy may be filed as provided
above.

Trans World's by-laws provide that any vacancy in the office of any
directors of officer occurring for any reason, including a removal without
cause, and any additional directorship resulting from an increase in the number
of directors, may be filled:

- at any time by a majority of the directors then in office, even though
less than a quorum remains; or

- in the case of any vacancy in the office of any directors, by stockholders
and the person chosen will hold office until his successor is elected and
qualified.

However, if the person chosen is a director elected to fill a vacancy, he will
hold office for the unexpired term of his predecessor, if elected by the
stockholders, and will hold office until the next meeting of stockholders at
which time election of directors is in the regular order of business, and until
his successor is elected and qualified, if elected by the directors.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Delaware law, a corporation may indemnify any director, officer,
employee or agent made or threatened to be made party to any threatened, pending
or completed proceeding if the person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal proceeding, had no reasonable
cause to believe that his or her conduct was unlawful. Camelot's certificate of
incorporation contains provisions which require Camelot to indemnify the persons
to the full extent permitted by Delaware law.

Delaware law also establishes several mandatory rules for indemnification.
In the case of a proceeding by or in the right of the corporation to procure a
judgment in its favor, a corporation may indemnify an officer, director,
employee or agent if the person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation. However, no person found to be liable to the corporation may be
indemnified unless the court in which the action or suit was brought determines
that the person is fairly and reasonably entitled to indemnity for such
expenses. A director or officer who is successful, on the merits or otherwise,
in defense of any proceeding subject to the indemnification provisions of
Delaware law must be indemnified by the corporation for reasonable expenses
incurred, including attorneys' fees. Delaware law states that a determination
must be made that a director or officer has met the required standard of conduct
before the director or officer may be indemnified. The determination may be made
by:

- a majority vote of a quorum of disinterested directors,

- by independent legal counsel in a written opinion if a majority of
disinterested directors so directs, or

- by the stockholders.

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Delaware law also provides that a corporation may advance expenses to an
officer or director upon receipt of an undertaking by or on behalf of the
officer or director to repay the corporation if it is determined that the
required standard of conduct has not been met. The right to indemnification
conferred by Camelot's certificate of incorporation includes the right to
advancement of expenses incurred in defending or otherwise participating in any
proceeding. In addition, Camelot's certificate of incorporation permits Camelot
to advance expenses to other employees and agents in a similar manner.

Camelot's certificate of incorporation expressly provides that Camelot shall
not be obligated to indemnify any director or officer in connection with any
proceeding initiated by the person unless such proceeding was authorized by the
Camelot board.

Under New York law, a corporation may indemnify its directors and officers
made, or threatened to be made, a party to any action or proceeding, except for
stockholder derivative suits, if the director or officer acted in good faith,
for a purpose which he or she reasonably believed to be in or, in the case of
service to another corporation or enterprise, not opposed to the best interests
of the corporation, and, in criminal proceedings, had no reasonable cause to
believe his or her conduct was unlawful. In the case of stockholder derivative
suits, the corporation may indemnify a director or officer if he or she acted in
good faith for a purpose which he or she reasonably believed to be in or, in the
case of service to another corporation or enterprise, not opposed to the best
interests of the corporation. However, no indemnification may be made in respect
of

- a threatened action, or a pending action which is settled or otherwise
disposed of, or

- any claim, issue or matter as to which the person has been adjudged to be
liable to the corporation,

unless and only to the extent that the court in which the action was brought,
or, if no action was brought, any court of competent jurisdiction, determines
upon application that, in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for the portion of the settlement
amount and expenses as the court deems proper.

Any person who has been successful on the merits or otherwise in the defense
of a civil or criminal action or proceeding will be entitled to indemnification.
Except as provided in the preceding sentence, unless ordered by a court pursuant
to New York law, any indemnification under New York law pursuant to the above
paragraph may be made only if authorized in the specific case and after a
finding that the director or officer met the requisite standard of conduct by:

- the disinterested directors if a quorum is available,

- by the board upon the written opinion of independent legal counsel, or

- by the stockholders.

The indemnification described above under New York law is not exclusive of
other indemnification rights to which a director or officer may be entitled by:

- the certificate of incorporation or by-laws;

- a resolution of stockholders;

- a resolution of directors; or

- an agreement providing for such indemnification.

However, no indemnification may be made to or on behalf of any director or
officer if a judgment or other final adjudication adverse to the director or
officer establishes that his or her acts were committed in bad faith or were the
result of active and deliberate dishonesty and were material to the cause of

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action so adjudicated, or that he or she personally gained in fact a financial
profit or other advantage to which he or she was not legally entitled.

Trans World's by-laws provide that, except to the extent expressly
prohibited by New York law, Trans World shall indemnify each person made or
threatened to be made a party to any action or proceedings, whether civil or
criminal, by reason of the fact that such person is or was a director or officer
of Trans World, or serves or served at the request of Trans World any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against liabilities or losses, incurred in
connection with the action or proceedings, or any appeal. However, no
indemnification will be made if a judgment or other final determination adverse
to the person establishes that his or her acts were committed in bad faith or
were the result of active and deliberate dishonesty and were material to the
cause of action, or that he or she personally gained in fact a financial profit
or other advantage to which he or she was not legally entitled. Moreover, no
indemnification will be required with respect to any settlement or other
nonadjudicated disposition of any threatened or pending action or proceedings
unless Trans World has given its prior consent. Trans World's by-laws require
advances of reasonable expenses incurred in defending or otherwise participating
in a proceeding to persons entitled to indemnification in connection with such
proceeding, upon receipt of an undertaking by or on behalf of such person to
repay such amounts if such person is ultimately found not to be entitled to
indemnification or, where indemnification is granted, to the extent those
advances exceed the amount to which the person is entitled.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Trans World or
Camelot pursuant to the foregoing provisions, Trans World and Camelot have been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.

LIMITATION OF PERSONAL LIABILITY OF DIRECTORS

Delaware law provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. However, the provision can eliminate or limit the liability
of a director for:

- any breach of the director's duty of loyalty to the corporation or its
stockholders;

- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;

- violation of certain provisions of Delaware law;

- any transaction from which the director derived an improper personal
benefit; or

- any act or omission prior to the adoption of the provision in the
certificate of incorporation.

Camelot's certificate of incorporation contains a provision eliminating the
personal liability for monetary damages of its directors for breach of fiduciary
duty as a director, except to the extent the elimination of liability is not
permitted under Delaware law.

New York law provides that a corporation's certificate of incorporation may
contain a provision eliminating or limiting the personal liability of directors
to the corporation or its stockholders for damages for any breach of duty in
such capacity. However, no such provision can eliminate or limit the liability
of any director:

- if a judgment or other final adjudication adverse to such director
establishes that such director's acts or omissions were in bad faith, or
involved intentional misconduct or a knowing violation of law, or that the
director personally gained in fact a financial profit or other advantage
to which

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such director was not legally entitled or that the director's acts
violated certain provisions of New York law; or

- for any act or omission prior to the adoption of such a provision in the
certificate of incorporation.

Trans World's certificate of incorporation contains a provision, eliminating the
personal liability of directors to the corporation and the shareholders for
damages for any breach of duty in such capacity except to the extent that such
elimination of liability is not permitted under New York law.

RIGHTS PLANS

Delaware law has no express statutory provision permitting adoption of a
rights plan. Delaware courts have determined, however, that Delaware law permits
valid adoption of a rights plan by a company's board of directors. Delaware
courts have not determined that a minimum percentage of shares must be owned by
a person before rights are triggered under a rights plan.

New York law expressly authorizes the adoption of a rights plan by a
company's board of directors; provided, however, that under New York law, 20%
stock ownership is the required minimum ownership to trigger the right under
such rights plan.

FUTURE STOCKHOLDER PROPOSALS

Trans World stockholders wishing to include proposals in the proxy materials
relating to the annual meeting of Trans World to be held in 1999 should have
submitted the same in writing to the executive offices of Trans World on or
before February 14, 1999. No stockholder proposals were received.

Camelot expects to consummate the merger prior to its 1999 annual meeting of
stockholders. The Commission rules establish standards as to what stockholder
proposals are required to be included in a proxy statement. All proposals from
Camelot stockholders for inclusion in the proxy materials for the 1999 annual
meeting of Camelot should have been submitted to the Secretary of Camelot by
March 31, 1999. No stockholder proposals were received.

LEGAL MATTERS

The validity of the Trans World shares to be issued in connection with the
merger will be passed upon for Trans World by Cahill Gordon & Reindel (a
partnership including a professional corporation), counsel to Trans World.
Cleary, Gottlieb, Steen & Hamilton, counsel to Camelot, and Cahill Gordon will
each deliver opinions concerning certain federal income tax consequences of the
merger.

EXPERTS

The consolidated financial statements of Trans World as of January 31, 1998
and February 1, 1997 and for each of the fiscal years in the three-year period
ended January 31, 1998 included in this joint proxy statement/prospectus have
been audited by KPMG LLP, independent auditors, as set forth in their report
thereon included herein. Such consolidated financial statements are included
herein in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.

The consolidated financial statements of Camelot Music Holdings, Inc. as of
February 28, 1998 and for the period February 1, 1998 to February 28, 1998 and
of CM Holdings, Inc. as of March 1, 1997 and for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996, appearing in this joint proxy statement/prospectus have
been audited by PricewaterhouseCoopers LLP, independent accountants, as set
forth in their report thereon included herein. Such consolidated financial
statements are included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.

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The financial statements of The Wall Music, Inc. for the year ended June 1,
1997 included in this joint proxy statement/prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and have been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.

The consolidated financial statements of Spec's Music, Inc. as of July 31,
1997 and for the year then ended included in this joint proxy
statement/prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

Trans World has filed with the Commission a registration statement under the
Securities Act of 1933 that registers the distribution to Camelot's stockholders
of the Trans World common stock to be issued in connection with the merger. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about Trans World and the Trans World common
stock. The rules and regulations of the Commission allow us to omit certain
information included in the registration statement from this joint proxy
statement/prospectus.

In addition, Trans World files reports, proxy statements and other
information with the Commission under the Securities Exchange Act of 1934. You
may read and copy this information at the following locations of the Commission:

<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>

You may also obtain copies of this information by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at prescribed rates. Further information on the
operation of the Commission's Public Reference Room in Washington, D.C. can be
obtained by calling the Commission at 1-800-SEC-0330.

The Commission also maintains an Internet World Wide Web site that contains
reports, proxy statements and other information about issuers, such as Trans
World, who file electronically with the Commission. The address of that site is
http://www.sec.gov.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE PROPOSALS WHICH ARE THE SUBJECT OF THIS
JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS.

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INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
TRANS WORLD ENTERTAINMENT CORPORATION
Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 1998 and November
1, 1997............................................................................ F-3
Condensed Consolidated Statements of Income (Unaudited) for the Thirty-Nine Weeks
Ended October 31, 1998 and November 1, 1997........................................ F-4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Thirty-Nine Weeks
Ended October 31, 1998 and November 1, 1997........................................ F-5
Notes to Condensed Consolidated Financial Statements................................. F-6
Independent Auditors' Report......................................................... F-11
Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.............. F-12
Consolidated Statements of Income--Fiscal years ended January 31, 1998, February 1,
1997 and February 3, 1996.......................................................... F-13
Consolidated Statements of Shareholders' Equity--Fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996.............................................. F-14
Consolidated Statements of Cash Flows--Fiscal years ended January 31, 1998, February
1, 1997 and February 3, 1996....................................................... F-15
Notes to Consolidated Financial Statements........................................... F-16

CAMELOT MUSIC HOLDINGS, INC. AND ITS PREDECESSOR
Condensed Consolidated Balance Sheet (Unaudited) as of November 28, 1998............. F-30
Condensed Consolidated Statements of Operations (Unaudited) for the period March 1,
1998 to November 28, 1998 and the period March 2, 1997 to November 29, 1997........ F-31
Condensed Consolidated Statements of Cash Flows (Unaudited) for the period March 1,
1998 to November 28, 1998 and the period March 2, 1997 to November 29, 1997........ F-32
Notes to Condensed Consolidated Financial Statements................................. F-33
Report of Independent Accountants.................................................... F-38
Consolidated Balance Sheets as of February 28, 1998 and March 1, 1997................ F-39
Consolidated Statements of Operations for the period February 1, 1998 to February 28,
1998, the period March 2, 1997 to January 31, 1998, the 52-week period ended March
1, 1997 and the 53-week period ended March 2, 1996................................. F-40
Consolidated Statements of Stockholders' Equity (Deficit) for the period February 1,
1998 to February 28,1998, the period March 2, 1997 to January 31, 1998, the 52-week
period ended March 1, 1997 and the 53-week period ended March 2, 1996.............. F-41
Consolidated Statements of Cash Flows for the period February 1, 1998 to February 28,
1998, the period March 2, 1997 to January 31, 1998, the 52-week period ended March
1, 1997 and the 53-week period ended March 2, 1996................................. F-42
Notes to Consolidated Financial Statements........................................... F-43

THE WALL MUSIC, INC.
Independent Auditor's Report......................................................... F-70
Statements of Operations for the nine months ended February 28, 1998 (unaudited) and
March 1, 1997 (unaudited) and for the year ended June 1, 1997...................... F-71
Statements of Stockholders' Equity for the nine months ended February 28, 1998
(unaudited) and for the year ended June 1, 1997.................................... F-72
Statements of Cash Flows for the nine months ended February 28, 1998 (unaudited) and
March 1, 1997 (unaudited) and for the year ended June 1, 1997...................... F-73
Notes to Financial Statements........................................................ F-74
</TABLE>

F-1
<PAGE>
<TABLE>
<S> <C>
SPEC'S MUSIC, INC.
Condensed Consolidated Balance Sheet (unaudited) as of April 30, 1998 and
Consolidated Balance Sheet as of July 31, 1997..................................... F-77
Condensed Consolidated Statements of Operations (unaudited) for the period August 1,
1997 to April 30, 1998 and the period August 1, 1996 to April 30, 1997............. F-78
Condensed Consolidated Statements of Cash Flows (unaudited) for the period August 1,
1997 to April 30, 1998 and the period August 1, 1996 to April 30, 1997............. F-79
Notes to Condensed Consolidated Financial Statements................................. F-80
Report of Independent Accountants.................................................... F-83
Consolidated Balance Sheet as of July 31, 1997....................................... F-84
Consolidated Statement of Operations for the period August 1, 1996 to July 31,
1997............................................................................... F-85
Consolidated Statement of Stockholders' Equity for the period August 1, 1996 to July
31, 1997........................................................................... F-86
Consolidated Statement of Cash Flows for the period August 1, 1996 to July 31,
1997............................................................................... F-87
Notes to Consolidated Financial Statements........................................... F-88
</TABLE>

F-2
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
NOVEMBER 1, OCTOBER 31,
1997 1998
----------- -----------

<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................ $ 4,590 $ 33,164
Merchandise inventory................................................................ 216,659 228,514
Refundable income taxes.............................................................. 2,338 --
Other current assets................................................................. 9,844 5,181
----------- -----------
Total current assets............................................................... 233,431 266,859
----------- -----------
VIDEOCASSETTE RENTAL INVENTORY, net.................................................... 4,060 3,672
DEFERRED TAX ASSET..................................................................... 3,047 3,787
FIXED ASSETS, net...................................................................... 72,180 86,549
OTHER ASSETS........................................................................... 4,111 2,928
----------- -----------
TOTAL ASSETS....................................................................... $ 316,829 $ 363,795
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 135,454 $ 144,471
Notes payable........................................................................ 10,707 --
Accrued expenses and other........................................................... 9,970 10,914
Store closing reserve................................................................ 9,874 6,581
Current portion of long-term debt and capital lease obligations...................... 96 2,279
Income taxes payable................................................................. -- 911
Deferred tax liability............................................................... -- 2,062
----------- -----------
Total current liabilities.......................................................... 166,101 167,218
LONG-TERM DEBT, less current portion................................................... 35,000 --
CAPITAL LEASE OBLIGATIONS, less current portion........................................ 6,435 15,938
OTHER LIABILITIES...................................................................... 6,554 6,982
----------- -----------
TOTAL LIABILITIES.................................................................. 214,090 190,138
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued)........... -- --
Common stock ($.01 par value; 50,000,000 shares authorized; 29,695,434 and 32,825,552
shares issued, respectively)........................................................ 297 328
Additional paid-in capital........................................................... 24,812 64,773
Treasury stock, at cost (106,182 and 105,432 shares, respectively)................... (394) (390)
Unearned compensation--restricted stock.............................................. (193) (142)
Retained earnings.................................................................... 78,217 109,088
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................................................. 102,739 173,657
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................................. $ 316,829 $ 363,795
----------- -----------
----------- -----------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS
ENDED
------------------------
NOVEMBER 1, OCTOBER 31,
1997 1998
----------- -----------
<S> <C> <C>
Sales.................................................................................. $ 329,273 $ 430,658
Cost of sales.......................................................................... 206,821 269,532
----------- -----------
Gross profit........................................................................... 122,452 161,126
Selling, general and administrative expenses........................................... 119,284 143,694
----------- -----------
Income from operations................................................................. 3,168 17,432
Interest expense....................................................................... 4,505 2,264
Other expenses (income), net........................................................... (151) (541)
----------- -----------
Income (loss) before income taxes...................................................... (1,186) 15,709
Income tax expense (benefit)........................................................... (470) 6,126
----------- -----------
NET INCOME (LOSS)...................................................................... $ (716) $ 9,583
----------- -----------
----------- -----------
BASIC EARNINGS (LOSS) PER SHARE........................................................ $ (0.02) $ 0.30
----------- -----------
----------- -----------
Weighted average number of common shares outstanding................................... 29,443 31,653
----------- -----------
----------- -----------
DILUTED EARNINGS (LOSS) PER SHARE...................................................... $ (0.02) $ 0.29
----------- -----------
----------- -----------
Adjusted weighted average number of common shares outstanding.......................... 29,443 33,565
----------- -----------
----------- -----------
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
------------------------
NOVEMBER 1, OCTOBER 31,
1997 1998
----------- -----------
<S> <C> <C>
NET CASH USED BY OPERATING ACTIVITIES $ (26,951) $ (47,386)
----------- -----------

INVESTING ACTIVITIES:
Acquisition of property and equipment.............................................. (16,616) (30,873)
Disposal of rental inventory, net.................................................. 724 427
----------- -----------
Net cash used by investing activities.............................................. (15,892) (30,446)
----------- -----------

FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................................... 35,000 --
Proceeds from capital lease........................................................ -- 12,608
Payments of long-term debt and capital lease obligations........................... (53,516) (35,899)
Net increase in revolving line of credit........................................... 10,707 --
Proceeds from issuance of common stock............................................. -- 36,772
Proceeds from exercise of stock options............................................ 471 2,783
----------- -----------
Net cash provided (used) by financing activities................................... (7,338) 16,264
----------- -----------
Net decrease in cash and cash equivalents.......................................... (50,181) (61,568)
Cash and cash equivalents, beginning of period..................................... 54,771 94,732
----------- -----------
Cash and cash equivalents, end of period........................................... $ 4,590 $ 33,164
----------- -----------
----------- -----------

Supplemental disclosure of non-cash investing and financing activities:
Issuance of treasury stock under incentive stock programs.......................... $ 4 $ 13
Income tax benefit resulting from exercise of stock options........................ 348 6,155
</TABLE>

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT.

F-5
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997

(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
consist of Trans World Entertainment Corporation and its subsidiaries, (the
"Company"), all of which are wholly owned. All significant intercompany accounts
and transactions have been eliminated.

These 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 condensed consolidated financial statements
reflects all normal, recurring adjustments which, in the opinion of management,
are necessary for a fair presentation of such financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to rules and regulations applicable to interim
financial statements.

These unaudited condensed consolidated financial statements should be read
in conjunction with the audited financial statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 1998.

NOTE 2. RESTRUCTURING CHARGE

The Company recorded a pre-tax restructuring charge of $21 million in 1994
to reflect the anticipated costs associated with a program to close 143 stores
and to restructure the Company's debt agreements. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining merchandise after the store was
closed), and employee termination benefits. The charge also included estimated
professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs were included in cost of sales.

An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:

<TABLE>
<CAPTION>
CHARGES
BALANCE AS OF AGAINST REMAINING
JANUARY 28, 1995 RESERVE BALANCE
------------------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations.................................. $ 4,250 $ 3,436 $ 814
------- --------- -----------
Inventory-related costs............................ 4,249 3,581 668
Termination benefits............................... 200 200 --
Professional fees.................................. 3,986 3,328 658
Other costs........................................ 827 154 673
------- --------- -----------
Total cash outflows.............................. $ 13,512 $ 10,699 $ 2,813
------- --------- -----------
------- --------- -----------
</TABLE>

The Company completed the 1994 restructuring in 1995, resulting in the
closure of 179 stores (versus an original plan of 143 stores). The remaining
balance in the 1994 restructuring reserve of $2.8 million was credited to
operations in the 4th quarter of 1995.

The Company recorded a second restructuring charge of $33.8 million in 1995
to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this

F-6
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)

(UNAUDITED)

NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
second charge were similar to those recorded in 1994, and also included a
provision for exiting the rental video store format, the write-off of goodwill
related to a previous acquisition and a provision for closing the Company's
fixture manufacturing operation.

An analysis of the charges against the 1995 reserve for the thirty-nine week
period ended October 31, 1998 is as follows:

<TABLE>
<CAPTION>
CHARGES AGAINST
BALANCE THE RESERVE BALANCE
AS OF ------------------------------------- AS OF
01/31/98 1ST QTR 2ND QTR 3RD QTR 10/31/98
--------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Video rental assets...................... $ 3,071 $ 8 $ 352 $ 21 $ 2,690
--------- ----- ----------- ----------- -----------
Non cash write-offs.................... 3,071 8 352 21 2,690
--------- ----- ----------- ----------- -----------
Lease obligations........................ 4,008 149 408 679 2,772
Inventory-related costs.................. 610 319 55 80 156
Termination benefits..................... 803 -- -- -- 803
Professional fees........................ 157 7 5 6 139
Other costs.............................. 43 (12) 33 1 21
--------- ----- ----------- ----------- -----------
Cash outflows.......................... 5,621 463 501 766 3,891
--------- ----- ----------- ----------- -----------
Total.................................. $ 8,692 $ 471 $ 853 $ 787 $ 6,581
--------- ----- ----------- ----------- -----------
--------- ----- ----------- ----------- -----------
</TABLE>

In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, the Company considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for both plans), and the negotiations with landlords related to the
termination of leases ($2.3 million in total).

The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements.

The restructuring reserve is included in the accompanying balance sheet
under the caption "store closing reserve."

F-7
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)

(UNAUDITED)

NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
The Company closed 14 stores during the thirty-nine week period ended
October 31, 1998 that were related to the restructuring reserve. A summary of
store closures related to each restructuring is as follows:

<TABLE>
<CAPTION>
1994 1995
RESTRUCTURING RESTRUCTURING TOTAL
----------------- ----------------- -----
<S> <C> <C> <C>
Number of stores originally expected to close............ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through October 31, 1998......... 179 177 356
--- --- ---
--- --- ---
Number of stores to be closed subsequent to October 31,
1998................................................... -- 14 14
--- --- ---
--- --- ---
</TABLE>

Sales related to stores that were closed were $3.8 million (unaudited) and
$17.4 million (unaudited) during the thirty-nine week period ended October 31,
1998 and November 1, 1997, respectively. Store operating losses related to
stores that were closed were $278,000 (unaudited) and $209,000 (unaudited)
during the thirty-nine week period ended October 31, 1998 and November 1, 1997,
respectively.

The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through October 31, 1998, 75 employees had been terminated and the Company
expects to terminate an additional 14 employees in fourth quarter of fiscal
1998. The Company has not terminated as many employees as originally planned
because higher than normal levels of attrition occurring after the announcement
of the restructurings resulted in a reduced need for involuntary terminations.

Subsequent to the adoption of the restructuring programs, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led the
Company to keep open certain stores that were originally expected to be closed.
During the thirty-nine week period ended October 31, 1998, 21 stores were
removed from the list of stores expected to be closed. Conversely, deteriorating
economic conditions and store performance in certain markets have led the
Company to close certain stores that were not originally expected to be closed.
In addition, the timing of store closures has also been affected by the ability
or inability to negotiate reasonable lease termination agreements. The net
effect of changes made to the timing of store closures and the stores to be
closed under the 1995 restructuring program has not been material. Through
October 31, 1998, the Company has closed 356 stores in connection with the
restructuring programs, compared to the originally planned closures of 306
stores. During the quarter ending January 30, 1999, the Company plans to close
an additional 14 stores as it completes the restructuring programs. Any
remaining balance in the restructuring reserve at January 30, 1999 will be
credited to operations.

NOTE 3. SEASONALITY

The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the fourth fiscal quarter.

F-8
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)

(UNAUDITED)

NOTE 4. DEPRECIATION AND AMORTIZATION

Depreciation and amortization of videocassette rental inventory included in
cost of sales totalled $1,011,000 and $1,602,000 for the thirty-nine week
periods ended November 1, 1997 and October 31, 1998, respectively.

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

<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
------------------------
NOVEMBER 1, OCTOBER 31,
1997 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cost of sales.......................................................................... $ 810 $ 933
----------- -----------
----------- -----------
Selling, general and administrative expenses........................................... $ 11,035 $ 13,282
----------- -----------
----------- -----------
</TABLE>

NOTE 5. EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which was
effective for the Company for the fiscal year ended January 31, 1998. This
standard requires the Company to disclose basic earnings per share and diluted
earnings per share. Basic earnings per share is calculated by dividing net
income by the weighted average common shares outstanding. Diluted earnings per
share is calculated by dividing net income by the sum of the weighted average
shares that would have been outstanding if the dilutive potential common shares
had been issued for the Company's common stock options from the Company's stock
option plans. For the thirty-nine weeks ended October 31, 1998 and November 1,
1997 the additional potentially dilutive common shares included in the diluted
earnings per share calculation were 1,912,000 and zero, respectively. Total
stock options to purchase zero and 3,669,000 shares of common stock outstanding
during the thirty-nine weeks ended October 31, 1998 and November 1, 1997,
respectively, were not included in the computation of diluted earnings per share
because to do so would have been anti-dilutive. The quarterly amounts for the
thirty-nine weeks ended November 1, 1997 have been restated to adopt this
statement. Share amounts and per share amounts have been adjusted for the
three-for-two stock split effected as a stock dividend on September 15, 1998.

NOTE 6. COMMON STOCK OFFERING

At the end of the first quarter of 1998 the Company sold an additional 1.5
million shares of its Common Stock in a public offering for approximately $37
million net of issuance costs. A portion of the proceeds was used to repay
long-term debt and the balance of the proceeds was used for general corporate
purposes including investments in additional stores, fixtures and inventory.

NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Financial Accounting Standards Board Statement No. 130, "Reporting
Comprehensive Income", issued in June 1997 and effective for fiscal years ending
after December 15, 1997, establishes standards for reporting and display of the
total net income and the components of all other non-owner changes in equity, or
comprehensive income (loss) in the statement of operations, in a separate
statement of comprehensive

F-9
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998 AND NOVEMBER 1, 1997 (CONTINUED)

(UNAUDITED)

NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
income (loss) or within the statement of changes of stockholder's equity. Trans
World has no items of other comprehensive income.

Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", issued in June 1997 and
effective for fiscal years beginning after December 15, 1997, will change the
way companies report selected segment information in annual financial statements
and also requires those companies to report selected segment information in
interim financial statements. Management has evaluated the impact of the
application of the new rules on Trans World's Consolidated Financial Statements
and the new rules will not change its financial presentation.

Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", issued in June, 1998 and
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application permitted, requires companies to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Management has evaluated
the impact of the application of the new rules on Trans World's Consolidated
Financial Statements and concluded that there will be no impact on its results
of operations or its financial position.

The Accounting Standards Executive Committee Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use", issued in March 1998 and effective for fiscal years beginning
after December 15, 1998 with earlier application permitted, provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. Trans World will adopt the statement for the fiscal year beginning February
1, 1999. Management has evaluated the impact of the application of the new rules
on Trans World's Consolidated Financial Statements and concluded that there will
be no impact on its results of operations or its financial position.

The Accounting Standards Executive Committee Statement of Position 98-5,
"Accounting for the Costs of Start-up Activities", issued in April 1998 and
effective for fiscal years beginning after December 15, 1998 with earlier
application permitted, provides guidance on the financial reporting of start-up
costs and organization costs. Trans World will adopt the statement for the
fiscal year beginning February 1, 1999. Management has evaluated the impact of
the application of the new rules on Trans World's Consolidated Financial
Statements and concluded that there will be no impact on its results of
operations or its financial position.

F-10
<PAGE>
REPORT OF KPMG LLP
INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Trans World Entertainment Corporation:

We have audited the accompanying consolidated balance sheets of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the fiscal years in the three-year period ended
January 31, 1998. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Trans World
Entertainment Corporation and subsidiaries as of January 31, 1998 and February
1, 1997, and the results of their operations and their cash flows for each of
the fiscal years in the three-year period ended January 31, 1998, in conformity
with generally accepted accounting principles.

As discussed in note 12, the Company restated its consolidated financial
statements as of and for the year ended February 3, 1996.

/s/ KPMG LLP

Albany, New York
March 13, 1998, except as to
note 12, which is as
of March 26, 1999

F-11
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 94,732 $ 54,771
Accounts receivable................................................................... 3,105 8,826
Merchandise inventory................................................................. 189,394 163,509
Refundable income taxes............................................................... -- 564
Deferred tax asset.................................................................... -- 1,895
Prepaid expenses and other............................................................ 3,119 2,490
----------- -----------
Total current assets................................................................ 290,350 232,055
----------- -----------
VIDEOCASSETTE RENTAL INVENTORY, net..................................................... 4,099 4,784
DEFERRED TAX ASSET...................................................................... 4,726 3,098
FIXED ASSETS:
Buildings............................................................................. 7,774 7,774
Fixtures and equipment................................................................ 87,214 76,932
Leasehold improvements................................................................ 74,997 64,102
----------- -----------
169,985 148,808
Less: Allowances for depreciation and amortization.................................... 97,917 81,398
----------- -----------
72,068 67,410
----------- -----------
OTHER ASSETS............................................................................ 2,776 4,263
----------- -----------
TOTAL ASSETS........................................................................ $ 374,019 $ 311,610
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 162,981 $ 118,980
Income taxes payable.................................................................. 11,155 --
Accrued expenses and other............................................................ 17,346 9,403
Store closing reserve................................................................. 8,692 13,747
Current deferred taxes................................................................ 1,103 --
Current portion of long-term debt and capital lease obligations....................... 99 9,557
----------- -----------
Total current liabilities........................................................... 201,376 151,687
----------- -----------
LONG-TERM DEBT, less current portion.................................................... 35,000 43,983
CAPITAL LEASE OBLIGATIONS, less current portion......................................... 6,409 6,507
OTHER LIABILITIES....................................................................... 6,712 6,514
----------- -----------
TOTAL LIABILITIES................................................................... 249,497 208,691
----------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock ($.01 par value; 5,000,000 shares authorized; none issued.)........... -- --
Common stock ($.01 par value; 50,000,000 shares authorized; 29,723,036 shares and
29,428,782 shares issued and outstanding in 1997 and 1996, respectively)............ 297 294
Additional paid-in capital............................................................ 25,287 24,344
Unearned compensation--restricted stock............................................... (175) (245)
Treasury stock at cost (106,182 and 109,182 shares in 1997 and 1996, respectively).... (394) (407)
Retained earnings, as restated (note 12).............................................. 99,507 78,933
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.......................................................... 124,522 102,919
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......................................... $ 374,019 $ 311,610
----------- -----------
----------- -----------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-12
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
<S> <C> <C> <C>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
Sales...................................................................... $ 571,314 $ 481,657 $ 517,046
Cost of sales.............................................................. 361,422 308,952 347,554
----------- ----------- -----------
Gross profit............................................................... 209,892 172,705 169,492
Selling, general and administrative expenses............................... 170,834 150,218 168,313
Restructuring charges, net................................................. -- -- 24,204
----------- ----------- -----------
Income (loss) from operations.............................................. 39,058 22,487 (23,025)
Interest expense........................................................... 5,148 12,110 15,201
Other expenses (income), net............................................... (153) (1,343) (979)
----------- ----------- -----------
Income (loss) before income taxes.......................................... 34,063 11,720 (37,247)
Income tax expense (benefit)............................................... 13,489 4,618 (13,431)
----------- ----------- -----------
NET INCOME (LOSS).......................................................... $ 20,574 $ 7,102 $ (23,816)
----------- ----------- -----------
----------- ----------- -----------

BASIC EARNINGS (LOSS) PER SHARE............................................ $ 0.70 $ 0.24 $ (0.82)
----------- ----------- -----------
----------- ----------- -----------

Weighted average number of common shares outstanding....................... 29,483 29,271 29,178
----------- ----------- -----------
----------- ----------- -----------

DILUTED EARNINGS (LOSS) PER SHARE.......................................... $ 0.66 $ 0.24 $ (0.82)
----------- ----------- -----------
----------- ----------- -----------
Adjusted weighted average number of common shares outstanding.............. 31,032 29,697 29,178
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-13
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND OPTION AMOUNTS)

<TABLE>
<CAPTION>
TOTAL UNEARNED
ADDITIONAL COMPENSATION
COMMON PAID IN RESTRICTED TREASURY RETAINED SHAREHOLDERS'
STOCK CAPITAL STOCK STOCK EARNINGS EQUITY
----------- ----------- --------------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 28, 1995, restated to
reflect a two-for-one stock split in 1997 and
a three-for-two stock split in 1998
(29,193,624 shares issued)..................... $ 292 $ 24,041 $ -- $ (503) $ 95,647 $ 119,477
Net loss....................................... -- -- -- -- (23,816) (23,816)
----- ----------- ----- ----- ---------- -------------
Balance as of February 3, 1996
(29,193,624 shares issued)..................... 292 24,041 -- (503) 71,831 95,661
Issuance of 21,000 shares of treasury stock
under incentive stock programs............... -- (59) -- 96 -- 37
Issuance of 225,000 shares of common
stock--restricted stock plan, net............ 2 350 (245) -- -- 107
Exercise of 10,158 stock options............... -- 12 -- -- -- 12
Net income..................................... -- -- -- -- 7,102 7,102
----- ----------- ----- ----- ---------- -------------
Balance as of February 1, 1997
(29,428,782 shares issued)..................... 294 24,344 (245) (407) 78,933 102,919
Issuance of 3,000 shares of treasury stock
under incentive stock programs............... -- -- -- 13 -- 13
Amortization of unearned compensation--
restricted stock plan........................ -- -- 70 -- -- 70
Exercise of 294,254 stock options.............. 3 543 -- -- -- 546
Income tax benefit arising from exercise of
employee stock options....................... -- 400 -- -- -- 400
Net income..................................... -- -- -- -- 20,574 20,574

Balance as of January 31, 1998
----- ----------- ----- ----- ---------- -------------
(29,723,036 shares issued)..................... $ 297 $ 25,287 $ (175) $ (394) $ 99,507 $ 124,522
----- ----------- ----- ----- ---------- -------------
----- ----------- ----- ----- ---------- -------------
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-14
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).......................................................... $ 20,574 $ 7,102 $ (23,816)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization............................................ 16,257 15,225 17,145
Fixed asset write-down................................................... -- -- 9,888
Store closing reserve.................................................... -- -- 21,116
Stock compensation programs.............................................. 83 144 --
Deferred tax expense (benefit)........................................... 1,370 3,023 (4,567)
Changes in operating assets and liabilities:
Accounts receivable...................................................... 5,868 (747) 1,097
Merchandise inventory.................................................... (9,872) 31,068 27,781
Refundable income taxes.................................................. 564 7,744 (8,308)
Prepaid expenses and other............................................... (408) 439 1,478
Other assets............................................................. 2,481 (381) (53)
Accounts payable......................................................... 42,751 (12,322) (4,191)
Income taxes payable..................................................... 11,555 -- (1,961)
Accrued expenses and other............................................... 7,344 3,137 576
Store closing reserve.................................................... (5,056) (10,528) (11,913)
Other liabilities........................................................ 198 1,174 (136)
----------- ----------- -----------
Net cash provided by operating activities.................................. 93,709 45,078 24,136
----------- ----------- -----------

INVESTING ACTIVITIES:
Acquisition of property and equipment.................................... (15,538) (10,198) (10,006)
Acquisition of businesses, net........................................... (20,901) -- --
Proceeds from sale of fixed assets....................................... -- -- 929
Disposal of videocassette rental inventory, net.......................... 685 1,938 750
----------- ----------- -----------
Net cash used in investing activities...................................... (35,754) (8,260) (8,327)
----------- ----------- -----------

FINANCING ACTIVITIES:
Net decrease in revolving line of credit................................. -- (65,260) (9,687)
Payments of long-term debt............................................... (18,440) (3,661) (8,902)
Payments of capital lease obligations.................................... (99) (76) (373)
Proceeds from exercise of stock options.................................. 545 12 --
----------- ----------- -----------
Net cash used by financing activities...................................... (17,994) (68,985) (18,962)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 39,961 (32,167) (3,153)
Cash and cash equivalents, beginning of year............................... 54,771 86,938 90,091
----------- ----------- -----------
Cash and cash equivalents, end of year..................................... $ 94,732 $ 54,771 $ 86,938
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosure of non-cash investing and financing activities:
Issuance of treasury stock under incentive stock programs................ $ 13 $ 37 --
Income tax benefit resulting from exercises of stock options............. 400 -- --
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-15
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS: Trans World Entertainment Corporation is one of the
largest specialty retailers of music, video and related accessories in the
United States. The Company operates in a single industry segment, the operation
of a chain of retail entertainment stores. At January 31, 1998, the Company
operated 539 stores in 34 states, the District of Columbia and the U.S. Virgin
Islands, with a majority of the stores concentrated in the Eastern half of the
United States.

BASIS OF PRESENTATION: The consolidated financial statements consist of
Trans World Entertainment Corporation and its subsidiaries, all of which are
wholly owned. All significant intercompany accounts and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FISCAL YEAR: The Company's fiscal year is a 52- or 53-week period ending on
the Saturday nearest to January 31. Fiscal years 1997 and 1996 ended January 31,
1998 and February 1, 1997, respectively, and consisted of 52 weeks. Fiscal year
1995, which ended February 3, 1996, consisted of 53 weeks.

DIVIDEND POLICY: The Company has never declared or paid cash dividends on
its Common Stock. The Company's credit agreement currently allows the Company to
pay a cash dividend once in each calendar year. These dividends are restricted
to ten percent of the most recent fiscal year's consolidated net income and can
only be paid if, after the dividend payment, the Company maintains $25 million
of available borrowing under the credit agreement. Any future determination as
to the payment of dividends would depend upon capital requirements and
limitations imposed by the Company's credit agreement and such other factors as
the Board of Directors of the Company may consider.

REVENUE RECOGNITION: Revenue from sales of merchandise is recognized at the
point of sale to the consumer, at which time payment is tendered. There are no
provisions for uncollectible amounts since payment is received at the time of
sale.

CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amounts reported in the balance sheet for cash and
cash equivalents are at fair value.

MERCHANDISE INVENTORY AND RETURN COSTS: Inventory is stated at the lower of
cost (first-in, first-out) or market as determined principally by the retail
inventory method. The Company is entitled to return merchandise purchased from
major vendors for credit against other purchases from these vendors. The vendors
often reduce the credit with a merchandise return charge ranging from 0% to 20%
of the original product purchase price depending on the type of product being
returned. The Company records the merchandise return charges in cost of sales.

VIDEOCASSETTE RENTAL INVENTORY: The cost of videocassette rental tapes is
capitalized and amortized on a straight-line basis over their estimated economic
life with a provision for salvage value. Major movie release additions, which
have a relatively short economic life due to the frequency of rental, are
amortized over twelve months while other titles are amortized over thirty-six
months.

FIXED ASSETS: Fixed assets are stated at cost. Major improvements and
betterments to existing facilities and equipment are capitalized. Expenditures
for maintenance and repairs, which do not extend the life of the applicable
asset, are charged to expense as incurred. Buildings are amortized over a
30-year term. Fixtures and equipment are depreciated using the straight-line
method over their estimated useful lives, which range from three to seven years.
Leasehold improvements are amortized over the shorter of

F-16
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
their estimated useful life or the related lease term. Primarily all of the
Company's operating leases are ten years in term. Amortization of capital lease
assets is included in depreciation and amortization expense.

Depreciation and amortization expense related to the Company's videocassette
rental inventory totalling $2,215,000, $2,477,000 and $3,395,000 in 1997, 1996
and 1995, respectively, is included in cost of sales. Also included in cost of
sales is depreciation and amortization expense related to the Company's
distribution center facility and equipment of $1,101,000, $865,000 and $803,000
in 1997, 1996 and 1995, respectively. All other depreciation and amortization of
fixed assets is included in selling, general and administrative expenses.

ADVERTISING COSTS: The costs of advertising are expensed in the first
period in which such advertising takes place. Total advertising expense was
$8,366,000, $8,951,000 and $7,010,000 in 1997, 1996 and 1995, respectively.

STORE OPENING AND CLOSING COSTS: Costs associated with opening a store are
expensed as incurred. When a store is closed, estimated unrecoverable costs are
charged to expense. Such costs include the net book value of abandoned fixtures,
equipment, leasehold improvements and a provision for lease obligations, less
estimated sub-rental income. The residual value of any fixed asset moved to a
store as part of a relocation is transferred to the relocated store.

INCOME TAXES: The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the asset and liability method of Statement 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

EARNINGS (LOSS) PER SHARE: In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings per Share," which was effective for the Company for fiscal year
1997. This standard requires the Company to disclose basic earnings per share
and diluted earnings per share. Basic earnings per share is calculated by
dividing net income by the weighted average common shares outstanding. Diluted
earnings per share is calculated by dividing net income, by the sum of the
weighted average shares and additional common shares that would have been
outstanding if the dilutive potential common shares, adjusted in 1997 for the
$400,000 tax benefit resulting from stock option exercise activity, had been
issued for the Company's common stock options from the Company's Stock Option
Plans (see Note 6). In fiscal years 1997, 1996 and 1995, the additional dilutive
potential common shares included in the diluted earnings per share calculation
were 1,549,000, 426,000 and 0, respectively. The weighted average number of
outstanding stock options not included in the computation of diluted earnings
per share during fiscal years 1997, 1996 and 1995 were 192,000, 1,335,000 and
2,927,000, respectively. To include these options in the computation would have
been antidilutive. As required by SFAS No. 128, all outstanding common stock
options were included even though their exercise may be contingent upon vesting.
The Company has presented 1997 earnings per share data and restated all
prior-period earnings per share data in accordance with SFAS No. 128. See
Consolidated Statement of Income for the required disclosures.

All earnings and loss per share information has been restated for the
two-for-one stock split effected in the form of a stock dividend on December 15,
1997 and a three-for-two stock split effected in the form

F-17
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of a stock dividend on September 15, 1998. All references to number of shares,
per share amounts, stock option data and market prices of the Company's common
stock have been restated. See Note 7, "Shareholders' Equity."

RECLASSIFICATIONS: Certain amounts in prior years' financial statements
have been reclassified to conform with the current year presentations.

NOTE 2. RESTRUCTURING CHARGE

The Company recorded a pre-tax restructuring charge of $21 million in 1994
to reflect the anticipated costs associated with a program to close 143 stores
and to restructure the Company's debt agreements. The restructuring charge
included the write-down of fixed assets, estimated cash payments to landlords
for the early termination of operating leases, inventory-related costs
(including the cost for returning all remaining product after the store was
closed), and employee termination benefits. The charge also included estimated
professional fees related to the development of the store closing plan and the
negotiations with landlords related to the termination of leases.
Inventory-related costs have been included in cost of sales in the accompanying
consolidated staements of income.

An analysis of the January 28, 1995 balance in the 1994 restructuring
reserve and 1995 charges against the reserve is as follows:

<TABLE>
<CAPTION>
BALANCE AS OF CHARGES
JANUARY 28, AGAINST REMAINING
1995 RESERVE BALANCE
--------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations........................................................ $ 4,250 $ 3,436 $ 814
Inventory-related costs.................................................. 4,249 3,581 668
Termination benefits..................................................... 200 200 --
Professional fees........................................................ 3,986 3,328 658
Other costs.............................................................. 827 154 673
------- --------- -----------
Total cash outflows.................................................. $ 13,512 $ 10,699 $ 2,813
------- --------- -----------
------- --------- -----------
</TABLE>

The Company recorded a second restructuring charge of $33.8 million in 1995
to reflect the anticipated costs associated with a program to close an
additional 163 stores. The components of this second charge were similar to
those recorded in 1994, and also included a provision for exiting the rental
video store format, the write-off of goodwill related to a previous acquisition
and a provision for closing the Company's fixture manufacturing operation.

F-18
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
An analysis of the amounts comprising the 1995 restructuring charge and the
charges against the related reserve for each year in the three-year period ended
January 31, 1998 are outlined below:
<TABLE>
<CAPTION>
CHARGES BALANCE CHARGES BALANCE CHARGES
1995 AGAINST AS OF AGAINST AS OF AGAINST
RESERVE THE RESERVE 2/3/96 THE RESERVE 2/1/97 THE RESERVE
----------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Leasehold improvements........................ $ 6,660 $ 6,660 -- -- -- --
Furniture and fixtures........................ 3,228 3,228 -- -- -- --
Video rental assets........................... 4,174 -- $ 4,174 1,078 3,096 25
Goodwill...................................... 339 339 -- -- -- --
----------- ----------- ----------- ------ ----------- ------
Non cash write-offs......................... 14,401 10,227 4,174 1,078 3,096 25
----------- ----------- ----------- ------ ----------- ------
Lease obligations............................. 7,540 -- 7,540 2,627 4,913 905
Inventory-related costs....................... 6,800 -- 6,800 3,421 3,379 2,769
Termination benefits.......................... 976 69 907 88 819 16
Professional fees............................. 2,500 -- 2,500 1,632 868 711
Other costs................................... 1,600 806 794 122 672 629
----------- ----------- ----------- ------ ----------- ------
Cash outflows............................... 19,416 875 18,541 7,890 10,651 5,030
----------- ----------- ----------- ------ ----------- ------
Total....................................... $ 33,817 $ 11,102 $ 22,715 $ 8,968 $ 13,747 $ 5,055
----------- ----------- ----------- ------ ----------- ------
----------- ----------- ----------- ------ ----------- ------

<CAPTION>
BALANCE
AS OF
1/31/98
-----------

<S> <C>
Leasehold improvements........................ --
Furniture and fixtures........................ --
Video rental assets........................... 3,071
Goodwill...................................... --
-----------
Non cash write-offs......................... 3,071
-----------
Lease obligations............................. 4,008
Inventory-related costs....................... 610
Termination benefits.......................... 803
Professional fees............................. 157
Other costs................................... 43
-----------
Cash outflows............................... 5,621
-----------
Total....................................... $ 8,692
-----------
-----------
</TABLE>

In determining the components of the reserves, management analyzed all
aspects of the restructuring plan and the costs that would be incurred. The
write-off of leasehold improvements, and furniture and fixtures represented the
estimated net book value of these items at the forecasted closing date. In
determining the provision for lease obligations, the Company considered the
amount of time remaining on each store's lease and estimated the amount
necessary for either buying out the lease or continued rent payments subsequent
to store closure. Inventory-related costs include the cost to pack and ship the
inventory on hand after the closing of the store as well as the penalty paid to
the vendor for additional product returns resulting from the restructurings.
Termination benefits represented the severance payments expected to be made to
terminated employees. Professional fees represented amounts expected to be paid
to advisors related to the development of the store closing plan ($3.5 million
in total for both plans) and the negotiations with landlords related to the
termination of leases ($2.3 million in total). Payments to lenders for the
waiver of covenant violations totalling $1.6 million have been included in
selling, general and administrative expenses in the 1995 consolidated statement
of income.

The cash outflows for both restructurings were financed from operating cash
flows and the liquidation of merchandise inventory from the stores closed. The
timing of store closures depended on the Company's ability to negotiate
reasonable lease termination agreements.

The restructuring reserve balances are included in the accompanying balance
sheets under the caption "store closing reserve."

The Company closed 78, 85 and 151 stores in fiscal 1997, 1996 and 1995,
respectively. A summary of store closures related to each restructuring is as
follows:

<TABLE>
<CAPTION>
1994 1995
RESTRUCTURING RESTRUCTURING TOTAL
----------------- ----------------- -----
<S> <C> <C> <C>
Number of stores originally expected to be closed........ 143 163 306
--- --- ---
--- --- ---
Number of stores closed through January 31, 1998......... 179 163 342
--- --- ---
--- --- ---
Number of stores to be closed subsequent to January 31,
1998................................................... -- 49 49
--- --- ---
--- --- ---
</TABLE>

F-19
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2. RESTRUCTURING CHARGE (CONTINUED)
Sales related to stores that were closed were $39 million (unaudited), $20
million (unaudited) and $40 million (unaudited) in fiscal 1997, 1996 and 1995,
respectively. Store operating losses (income) related to stores that were closed
were $(1.5) million (unaudited), $1.0 million (unaudited) and $4.1 million
(unaudited) in fiscal 1997, 1996 and 1995.

The provision for termination benefits was based on the expectation that 338
employees would be terminated in connection with the restructuring programs.
Through January 31, 1998, 75 employees had been terminated and the Company
expects to terminate an additional 49 employees in fiscal 1998. Trans World has
not terminated as many employees as originally planned because higher than
normal levels of attrition occurring after the announcement of the
restructurings resulted in a reduced need for involuntary terminations.

Subsequent to the adoption of the restructuring programs, improving economic
conditions in certain markets, improvement in individual store performance and
the inability to negotiate reasonable lease termination agreements have led the
Company to keep open certain stores that were originally expected to be closed.
During the three-year period ended January 31, 1998, a total of 36 stores were
removed from the list of stores expected to be closed. Conversely, deteriorating
economic conditions and store performance in certain markets have led the
Company to close certain stores that were not originally expected to be closed.
During the three-year period ended January 31, 1998, a total of 85 stores were
added to the list of stores to be closed. In addition, the timing of store
closures has also been affected by the ability or inability to negotiate
reasonable lease termination agreements. The net effect of changes made to the
timing of store closures and the stores to be closed under the 1995
restructuring program has not been material. Through January 31, 1998, the
Company has closed 342 stores in connection with the restructuring programs,
compared to the originally planned closures of 306 stores. During the year
ending January 30, 1999, the Company plans to close an additional 49 stores as
it completes the restructuring programs. Any remaining balance in the
restructuring reserve at January 30, 1999 will be credited to operations.

NOTE 3. DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Senior unsecured notes.................................................................. $ -- $ 53,077
Long-term portion of revolving credit facility.......................................... 35,000 --
Installment notes and other obligations................................................. -- 375
----------- -----------
35,000 53,452
Less current portion.................................................................... -- 9,469
----------- -----------
Long-term debt.......................................................................... $ 35,000 $ 43,983
----------- -----------
----------- -----------
</TABLE>

In July 1997, the Company replaced its existing $65.3 million revolving
credit facility and $56.5 million note agreement with a $100.0 million secured
revolving credit facility with a bank. The facility matures in July 2000, and
bears interest at the prime interest rate or the Eurodollar interest rate plus
1.75% (7.69% at January 31, 1998). The facility is secured by the Company's
assets allowing the Company to borrow up to 65% of its eligible merchandise
inventory to a maximum of $100.0 million.

During Fiscal years 1997, 1996, and 1995, the highest aggregate balances
outstanding under the revolver were $45.9 million, $65.3 million and $74.9
million, respectively. The weighted average interest

F-20
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. DEBT (CONTINUED)
rates during Fiscal years 1997, 1996 and 1995 based on average daily balances,
were 8.58%, 11.01% and 10.40%, respectively. The balances outstanding under the
Company's revolving credit agreements at Fiscal years ended 1997, 1996 and 1995
were $35.0 million, $0.0 and $65.3 million, respectively. The Company's policy
is to classify $35.0 million of borrowing under its new revolving credit
facility as long-term, since the Company has the intent and ability to maintain
these obligations for longer than one year, or to refinance them on a long-term
basis.

At January 31, 1998, the fair market value of this revolving credit facility
approximates the carrying value.

Interest paid during Fiscal years 1997, 1996 and 1995 was approximately $5.8
million, $11.8 million and $16.0 million, respectively.

NOTE 4. INCOME TAXES

Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ----------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Federal--current................................................................. $ 10,813 $ 1,364 $ (9,117)
State--current................................................................... 1,306 231 253
Deferred......................................................................... 1,370 3,023 (4,567)
--------- --------- ----------
$ 13,489 $ 4,618 $ (13,431)
--------- --------- ----------
--------- --------- ----------
</TABLE>

A reconciliation of the Company's effective tax rates with the federal
statutory rate is as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
Federal statutory rate..................................................................... 35.0% 35.0% (35.0)%
State income taxes (benefit), net of Federal income tax effect............................. 3.0 4.7 (1.5)
Other...................................................................................... 1.6 (0.3) 0.4
--- --- ---------
Effective income tax rate.................................................................. 39.6% 39.4% (36.1)%
--- --- ---------
--- --- ---------
</TABLE>

F-21
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
CURRENT DEFERRED TAX ASSETS
Restructuring reserve................................................................... $ 4,326 $ 7,677
----------- -----------
Total Current Deferred Tax Assets....................................................... 4,326 7,677
----------- -----------
CURRENT DEFERRED TAX LIABILITIES
Inventory valuation..................................................................... 5,177 5,463
Other................................................................................... 252 319
----------- -----------
Total Current Deferred Tax Liabilities.................................................. 5,429 5,782
----------- -----------
Net Current Deferred Tax Assets (Liabilities)........................................... $ (1,103) $ 1,895
----------- -----------
----------- -----------
NON-CURRENT DEFERRED TAX ASSETS
Accrued rent, lease accounting.......................................................... $ 3,046 $ 2,824
Capitalized leases...................................................................... 895 829
Book over tax depreciation.............................................................. 623 --
Other................................................................................... 254 148
----------- -----------
Total Non-Current Deferred Tax Assets................................................... 4,818 3,801
----------- -----------
NON-CURRENT DEFERRED TAX LIABILITIES
Tax over book depreciation.............................................................. -- 588
Other................................................................................... 92 115
----------- -----------
Total Non-Current Deferred Tax Liabilities.............................................. 92 703
----------- -----------
Net Non-Current Deferred Tax Asset...................................................... $ 4,726 $ 3,098
----------- -----------
----------- -----------
TOTAL NET DEFERRED TAX ASSET............................................................ $ 3,623 $ 4,993
----------- -----------
----------- -----------
</TABLE>

In assessing the propriety of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and the taxable income in
the three previous tax years to which tax loss carryback can be applied.
Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of projected future taxable income over the
periods in which the deferred tax assets are deductible management believes it
is more likely than not that the Company will realize the benefits of those
deductible differences. The amount of the deferred tax asset considered
realizable could be reduced if estimates of future taxable income during the
carryforward period are reduced.

The Company paid income taxes of approximately $0.3 million, $0.3 million
and $2.2 million during Fiscal years 1997, 1996 and 1995, respectively.

F-22
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. LEASES

The Company leases its distribution center and administrative offices, under
two capital leases, from its Chief Executive Officer and principal shareholder.
The significant terms of the leases are discussed in Note 11 "Related Party
Transactions" to the consolidated financial statements.

Fixed asset amounts for all capitalized leases are as follows:

<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Buildings............................................................................... $ 7,105 $ 7,105
Fixtures and equipment.................................................................. 1,625 1,625
----------- -----------
8,730 8,730
Allowances for depreciation and amortization............................................ 4,291 4,034
----------- -----------
$ 4,439 $ 4,696
----------- -----------
----------- -----------
</TABLE>

The Company leases substantially all of its stores, many of which contain
renewal options, for periods ranging from five to twenty-five years, with the
majority being ten years. Most leases also provide for payment of operating
expenses, real estate taxes, and for additional rent based on a percentage of
sales.

Net rental expense was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------

<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals.................................................................. $ 50,237 $ 49,653 $ 57,420
Contingent rentals............................................................... 719 274 246
--------- --------- ---------
$ 50,956 $ 49,927 $ 57,666
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-23
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. LEASES (CONTINUED)
Future minimum rental payments required under all leases that have initial
or remaining noncancelable lease terms in excess of one year at January 31, 1998
are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
---------- -----------
<S> <C> <C>
(IN THOUSANDS)
1998..................................................................................... $ 43,486 $ 1,294
1999..................................................................................... 49,865 1,294
2000..................................................................................... 47,404 1,294
2001..................................................................................... 43,920 1,294
2002..................................................................................... 38,174 1,294
Thereafter............................................................................... 118,663 16,473
---------- -----------
Total minimum payments required.......................................................... $ 341,512 22,943
---------- -----------
---------- -----------
Amounts representing interest............................................................ 16,435
-----------
Present value of minimum lease payments.................................................. 6,508
Less current portion..................................................................... 99
-----------
Long-term capital lease obligations...................................................... $ 6,409
-----------
-----------
</TABLE>

NOTE 6. BENEFIT PLANS

STOCK OPTION PLANS: Under the Company's 1986 Stock Option Plan and 1994
Stock Option Plan (the "Plans"), the Compensation Committee of the Board of
Directors may grant options to acquire shares of common stock to employees of
the Company and its subsidiaries at the fair market value of the common stock on
the date of grant. Under the Plans, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with a
maximum term of ten years. Shares authorized for issuance under the 1986 and
1994 Stock Option Plans were 3,300,000 and 3,000,000 (adjusted), respectively.
As of June 1, 1995, the Company stopped issuing stock options under the 1986
Stock Option Plan. At January 31, 1998, of the 6,300,000 options authorized for
issuance under the Plans, 4,219,112 have been granted and are outstanding,
858,970 of which were vested and exercisable. Shares available for future grants
at January 31, 1998 and February 1, 1997 were 766,461 and 2,087,658,
respectively. The following table summarizes information about the stock options
outstanding under the Plans at January 31, 1998:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- -------------------------------------------------------- ---------- --------------- ----------- --------- -----------
$0.75 - $ 1.21.......................................... 408,177 7.3 $ 1.20 171,927 $ 1.20
1.55 - 1.75.......................................... 1,368,185 8.2 1.59 109,544 1.58
2.00 - 2.46.......................................... 345,000 8.4 2.05 86,250 2.05
2.67 - 4.59.......................................... 897,750 8.4 3.98 212,250 4.47
4.75 - 11.20.......................................... 1,200,000 7.9 9.64 279,000 4.93
---------- ---------
Total................................................... 4,219,112 8.1 $ 4.39 858,971 $ 3.35
---------- ---------
---------- ---------
</TABLE>

F-24
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
The Company also has a stock option plan for non-employee directors (the
"1990 Plan"). Options under this plan are granted at 85% of the fair value at
the date of grant. Under the 1990 Plan, options generally become exercisable
commencing one year from the date of grant in increments of 25% per year with a
maximum term of ten years. As of January 31, 1998, there were 750,000 shares
authorized for issuance and 258,000 shares have been granted and are
outstanding, 141,750 of which were vested and exercisable. There are 492,000
shares of common stock reserved for possible future option grants under the 1990
Plan. The following table summarizes information about the stock options
outstanding under the 1990 Plan at January 31, 1998:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE SHARES LIFE PRICE SHARES PRICE
- -------------------------------------------------------- ---------- --------------- ----------- --------- -----------
$1.19 - $ 1.35.......................................... 27,000 7.7 $ 1.27 10,125 $ 1.24
2.09 - 3.69.......................................... 169,500 7.0 3.15 70,125 3.47
4.61 - 9.14.......................................... 61,500 3.5 7.25 61,500 7.25
---------- ---------
Total................................................... 258,000 6.2 $ 3.93 141,750 $ 4.95
---------- ---------
---------- ---------
</TABLE>

The following tables summarize activity under the 1986 and 1994 Plans and
the 1990 Plan:
<TABLE>
<CAPTION>
1986 AND 1994 PLANS 1990 PLAN
---------------------------------------------------------------- -----------------------------------------------
NUMBER OF OPTION WEIGHTED NUMBER OF OPTION
SHARES SUBJECT PRICE RANGE AVERAGE SHARES SUBJECT PRICE RANGE
TO OPTION PER SHARE EXERCISE PRICE TO OPTION PER SHARE
-------------- ------------------------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Jan. 28,
1995.......... 2,802,768 $ 3.67 - $ 8.09 $ 4.88 213,000 $ 3.33 - $ 9.14
Granted......... 672,261 0.75 - 1.75 1.23 18,000 1.19
Exercised.......
Canceled........ (832,725) 1.21 - 7.50 4.20 (34,500) 1.19 - 4.22
-------------- --------------- ----- ------- -------------
Balance Feb. 3,
1996.......... 2,642,304 0.75 - 8.09 4.16 196,500 1.19 - 9.14
Granted......... 2,064,297 1.17 - 2.67 1.69 13,500 1.35
Exercised....... (10,158) 1.87 - 2.75 1.21 -- -- --
Canceled........ (1,671,729) 0.83 - 8.09 4.80 -- -- --
-------------- --------------- ----- ------- -------------
Balance Feb. 1,
1997.......... 3,024,714 0.75 - 6.17 2.14 210,000 1.19 - 9.14
Granted......... 1,593,912 3.33 - 11.20 8.00 103,500 2.09 - 3.37
Exercised....... (286,753) 0.96 - 3.67 1.78 (7,500) 3.69
Canceled........ (112,761) 1.21 - 3.96 1.97 (48,000) 3.33 - 9.14
-------------- --------------- ----- ------- -------------
Balance Jan. 31,
1998.......... 4,219,112 $ 0.75 - $ 11.20 $ 4.38 258,000 $ 1.19 - $ 9.14
-------------- --------------- ----- ------- -------------
-------------- --------------- ----- ------- -------------

WEIGHTED
AVERAGE
EXERCISE PRICE
---------------
<S> <C>
Balance Jan. 28,
1995.......... $ 5.64
Granted......... 1.19
Exercised.......
Canceled........ 3.82
-----
Balance Feb. 3,
1996.......... 5.55
Granted......... 1.35
Exercised.......
Canceled........
-----
Balance Feb. 1,
1997.......... 5.28
Granted......... 2.86
Exercised....... 3.69
Canceled........ 7.57
-----
Balance Jan. 31,
1998.......... $ 3.93
-----
-----
</TABLE>

F-25
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
The per share weighted-average fair value of the stock options granted
during Fiscal years 1997, 1996 and 1995 was $2.76, $0.70 and $0.38 respectively
using the Black Scholes option pricing model, with the following
weighted-average assumptions;

1997--expected dividend yield 0.0%, risk-free interest rate of 5.5%, expected
life of five years and stock volatility of 48%;

1996--expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 72%;

1995--expected dividend yield 0.0%, risk-free interest rate of 6.7%, expected
life of five years and stock volatility of 47%

The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized in the financial
statements for employee stock options which are issued at the closing stock
price on the date of grant. During fiscal years 1997, 1996 and 1995, the Company
recognized expenses of $52,000, $3,000 and $3,000, respectively, for stock
options issued to non-employee directors at 85% of the closing stock price on
the date of grant. Had the Company determined compensation cost, for the
employee stock options, based on fair value in accordance with SFAS 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Net income (loss), as reported.......................................... $ 20,574 $ 7,102 ($ 23,816)
Basic earnings (loss) per share, as reported............................ $ 0.70 $ 0.24 ($ 0.82)
Diluted earnings (loss) per share, as reported.......................... $ 0.66 $ 0.24 ($ 0.82)

Pro forma net income (loss)............................................. $ 19,074 $ 6,658 ($ 23,919)
Pro forma basic earnings (loss) per share............................... $ 0.65 $ 0.23 ($ 0.82)
Pro forma diluted earnings (loss) per share............................. $ 0.61 $ 0.23 ($ 0.82)
</TABLE>

RESTRICTED STOCK PLAN: Under the 1990 Restricted Stock Plan, the
Compensation Committee of the Board of Directors is authorized to grant awards
for up to 900,000 restricted shares of Common Stock to executive officers and
other key employees of the Company and its subsidiaries. The shares are issued
as restricted stock and are held in the custody of the Company until all vesting
restrictions are satisfied. If conditions or terms under which an award is
granted are not satisfied, the shares are forfeited. Shares begin to vest under
these grants after three years and are fully vested after five years, with
vesting criteria which includes continuous employment until applicable vesting
dates have expired. At January 31, 1998, a total of 225,000 shares have been
granted, of which 75,000 were granted in 1996 with a weighted average grant date
fair market value of $1.58 per share, aggregating a total of $118,750; the
remaining 150,000 shares were granted in 1995 with a weighted average grant date
fair value of $1.55 per share, aggregating a total of $232,500. As of January
31, 1998, a total of 45,000 of these shares had vested. Unearned compensation is
recorded at the date of award, based on the market value of the shares, and is
included as a separate component of shareholders' equity and is amortized over
the applicable vesting period. The amount amortized to expense in Fiscal years
1997 and 1996 was approximately $70,000 and $107,000, respectively. At January
31, 1998, outstanding awards and shares available for grant totaled 225,000 and
675,000, respectively.

F-26
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6. BENEFIT PLANS (CONTINUED)
401 (K) SAVINGS PLAN: The Company offers a 401(k) Savings Plan to eligible
employees meeting certain age and service requirements. This plan permits
participants to contribute up to 16% of their salary, including bonuses, up to
the maximum allowable by Internal Revenue Service regulations. Participants are
immediately vested in their voluntary contributions plus actual earnings
thereon. Participant vesting of the Company's matching and profit sharing
contribution is based on the years of service completed by the participant.
Participants are fully vested upon the completion of four years of service. All
participant forfeitures of nonvested benefits are used to reduce the Company's
contributions in future years. The Company matching contribution totaled
$529,000, $465,000 and $470,000 in Fiscal years 1997, 1996 and 1995,
respectively.

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (SERP): In 1997, the Company
introduced a non-qualified Supplemental Executive Retirement Plan (SERP)
effective March 1, 1997. The SERP, which is unfunded, provides eligible
executives defined pension benefits that supplement benefits under other
retirement arrangements. The annual benefit amount has been predetermined as
part of the plan and vests based on years of service and age at retirement. For
Fiscal year 1997, expenses related to the plan totaled approximately $361,000.
The present value of the projected benefit obligation was approximately $2.3
million at January 31, 1998. The January 31, 1998 Consolidated Balance Sheet
includes $313,000 of accrued expense.

NOTE 7. SHAREHOLDERS' EQUITY

On November 14, 1997, the shareholders approved an amendment to the
Company's Certificate of Incorporation to increase authorized common shares from
20 million shares of $0.01 par value common stock to 50 million shares of $0.01
par value common stock. On that date, the Board of Directors approved a
two-for-one common stock split to be distributed in the form of a 100% stock
dividend. As a result, 9,898,758 shares were issued on December 15, 1997 to
shareholders of record on December 1, 1997. Accordingly, amounts equal to the
par value of the additional shares issued have been charged to additional
paid-in capital and credited to common stock. All references throughout this
annual report to number of shares, per share amounts, stock option data and
market prices of the Company's common stock has been restated to reflect the
stock splits.

At January 31, 1998 and February 1, 1997, the Company held 106,182 and
109,182 shares, respectively, in treasury stock resulting from the repurchase of
common stock through open market purchases.

NOTE 8. STRAWBERRIES ACQUISITION

On October 8, 1997 the Company acquired 90 out of a total of 118 stores
owned by Strawberries, Inc., a privately-held non-mall music specialty retailer
operating primarily in New England. The stores operate under the names
"Strawberries" and "Waxie Maxie" and are primarily located in freestanding or
strip center locations. The acquisition has been accounted for using the
purchase method of accounting. At the time of the acquisition, the Company paid
$21 million for the assets which included the fixed assets, merchandise
inventories, other related current assets and $683,000 in goodwill. This
goodwill is being amortized on a straight-line basis over a 15 year period.

Pro forma combined net sales, including the 90 Strawberries stores acquired,
was $610 million (unaudited) in Fiscal 1997. Pro forma net sales for Fiscal 1996
and pro forma net income for Fiscal 1997

F-27
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8. STRAWBERRIES ACQUISITION (CONTINUED)
and 1996 are not presented because such information was not available as a
result of Strawberries' bankruptcy filing and subsequent liquidation.

NOTE 9. CONCENTRATION OF BUSINESS RISKS

The Company purchases inventory for its stores from approximately 450
suppliers, with approximately 68% of purchases being made from six suppliers. In
the past, the Company has not experienced difficulty in obtaining satisfactory
sources of supply, and management believes that it will retain access to
adequate sources of supply. However, a loss of a major supplier could cause a
possible loss of sales, which would have an adverse affect on operating results
and result in a decrease in vendor support for the Company's advertising
programs.

NOTE 10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL YEAR
ENDED FISCAL 1997 QUARTER ENDED
JANUARY 31, ----------------------------------------------
1998 1/31/98 11/1/97 8/2/97 5/3/97
----------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales............................................... $ 571,314 $ 242,041 $ 114,737 $ 105,024 $ 109,512
Gross profit........................................ 209,892 87,439 43,662 39,527 39,264
Net income (loss)................................... 20,574 21,291 979 (834) (862)
Basic earnings (loss) per share..................... $ 0.70 $ 0.72 $ 0.03 $ (0.03) $ (0.03)
Diluted earnings (loss) per share................... $ 0.66 $ 0.67 $ 0.03 $ (0.03) $ (0.03)
</TABLE>

<TABLE>
<CAPTION>
FISCAL YEAR
ENDED FISCAL 1996 QUARTER ENDED
FEBRUARY 1, --------------------------------------------
1997 2/1/97 11/2/96 8/3/96 5/4/96
----------- ---------- --------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales................................................. $ 481,657 $ 180,735 $ 97,583 $ 96,717 $ 106,622
Gross profit.......................................... 172,705 64,703 36,217 34,616 37,169
Net income (loss)..................................... 7,102 14,710 (2,477) (2,392) (2,739)
Basic earnings (loss) per share....................... $ 0.24 $ 0.50 $ (0.09) $ (0.08) $ (0.09)
Diluted earnings (loss) per share..................... $ 0.24 $ 0.49 $ (0.09) $ (0.08) $ (0.09)
</TABLE>

NOTE 11. RELATED PARTY TRANSACTIONS

The Company leases its 178,000 square foot distribution center/office
facility in Albany, New York from Robert J. Higgins, its Chief Executive Officer
and principal shareholder, under two capitalized leases that expire in the year
2015. The original distribution center/office facility was constructed in 1985.
A 77,000 square foot distribution center expansion was completed in October 1989
on real property adjoining the existing facility.

Under the capitalized leases dated April 1, 1985 and November 1, 1989, the
Company paid Mr. Higgins an annual rent of $1.3 million in fiscal 1997 and $1.2
million in fiscal 1996 and 1995. On January 1, 1998, the aggregate rental
payment increased in accordance with the biennial increase in the Consumer Price
Index, pursuant to the provisions of each lease. Effective January 1, 2000, and
every two

F-28
<PAGE>
TRANS WORLD ENTERTAINMENT CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11. RELATED PARTY TRANSACTIONS (CONTINUED)
years thereafter, the rental payment will increase in accordance with the
biennial increase in the Consumer Price Index, pursuant to the provisions of the
lease. Neither of the leases contain any real property purchase option at the
expiration of its term. Under the terms of the leases, the Company pays all
property taxes, insurance and other operating costs with respect to the
premises. Mr. Higgins' obligation for principal and interest on his underlying
indebtedness relating to the real property approximates $90,000 per month.

The Company leases two of its retail stores from Mr. Higgins under long-term
leases. For each of fiscal 1997, 1996 and 1995 the Company paid Mr. Higgins
$35,000 in annual rental payments. Under the terms of the leases, the Company
pays property taxes, maintenance and a contingent rental if a specified sales
level is achieved. In fiscal 1997, 1996 and 1995, the Company paid Mr. Higgins
$30,000 annually for a lease on certain parking facilities contiguous to the
Company's distribution center/office facility. The lease is a one year lease
renewed annually and was renewed through October 31, 1998, after approval by the
audit committee.

The Company regularly utilizes privately-chartered aircraft owned or
partially owned by Mr. Higgins. Under an unwritten agreement with Quail Aero
Services of Syracuse, Inc., a corporation in which Mr. Higgins is a one-third
shareholder, the Company paid $59,000, $76,000 and $70,000 in 1997, 1996 and
1995, respectively, for chartered aircraft services. The Company also chartered
an aircraft from Crystal Jet, a corporation wholly owned by Mr. Higgins. During
fiscal 1997, 1996, and 1995, payments to Crystal Jet, under an unwritten
agreement, aggregated $199,000, $227,000 and $167,000 respectively. The Company
believes that the charter rates and terms are as favorable to the Company as
those generally available to it from other commercial carriers.

The transactions that were entered into with an "interested director" were
approved by a majority of disinterested directors of the Company's board, either
by the audit committee or at a meeting of the board of directors. The Trans
World board of directors believes that the leases and other provisions are at
rates and on terms that are at least as favorable as those that would have been
available to the Company from unaffiliated third parties under the
circumstances.

NOTE 12. RESTATEMENT

The Company has restated its consolidated financial statements for the
fiscal year ended February 3, 1996 to correct an error in the calculation of the
1995 restructuring charge discussed in Note 2. The effect of the correction of
this error on the 1995 consolidated statement of income was a reduction in the
1995 restructuring charge of $2,436,000, an increase in income tax expense of
$879,000 and a decrease in the net loss of $1,557,000. The effect of the
correction of this error on the consolidated balance sheet as of February 3,
1996 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred
tax assets of $879,505 and an increase in retained earnings of $1,557,000.

The correction of this error did not have an effect on the consolidated
statements of operations for either the fiscal year ended February 1, 1997 or
the fiscal year ended January 31, 1998. The effect of the correction of this
error on the consolidated balance sheets as of February 1, 1997 and January 31,
1998 was an increase in fixed assets, net, of $2,436,000, a decrease in deferred
tax assets (or increase in deferred tax liabilities) of $879,000 and an increase
in retained earnings of $1,557,000.

F-29
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)

CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
NOVEMBER 28,
1998
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................................... $ 9,496
Accounts receivable............................................................................... 6,426
Inventories....................................................................................... 270,831
Deferred income taxes............................................................................. 7,205
Other current assets.............................................................................. 3,274
------------
Total current assets.......................................................................... 297,232
------------
Property, plant and equipment, net.................................................................. 58,317
------------
Other non-current assets:
Goodwill, net of accumulated amortization of $1,138 in 1998....................................... 33,393
Intangible assets, net of accumulated amortization of $1,252 in 1998.............................. 1,514
Deferred income taxes............................................................................. 20,969
Favorable lease values, net of accumulated amortization of $2,931 in 1998......................... 10,507
Other assets...................................................................................... 598
------------
Total other non-current assets................................................................ 66,981
------------
Total assets.................................................................................. $ 422,530
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade........................................................................... $ 119,886
Revolving credit agreement........................................................................ 23,800
Accrued expenses and other liabilities............................................................ 31,444
Current portion of notes payable.................................................................. 5,000
------------
Total current liabilities..................................................................... 180,130
------------
Long-term liabilities:
Notes payable, less current portion............................................................... 20,000
Unfavorable lease values, net of accumulated amortization of $3,239 in 1998....................... 12,781
Other long-term liabilities....................................................................... 4,614
------------
Total long-term liabilities................................................................... 37,395
------------
Total liabilities............................................................................. 217,525
------------
Stockholders' equity:
Common stock...................................................................................... 102
Additional paid-in capital........................................................................ 199,894
Unearned compensation--stock option plans........................................................... (1,627)
Retained earnings................................................................................. 6,636
------------
Total stockholders' equity.................................................................... 205,005
------------
Total liabilities and stockholders' equity.................................................... $ 422,530
------------
------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-30
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------------- -----------------
PERIOD PERIOD
MARCH 1, 1998 MARCH 2, 1997
TO TO
NOVEMBER 28, 1998 NOVEMBER 29, 1997
----------------- -----------------
<S> <C> <C>
Net sales................................................................. $ 377,744 $ 260,249
Cost of sales............................................................. 238,623 175,700
-------- --------
Gross profit.............................................................. 139,121 84,549
Selling, general and administrative expenses.............................. 124,863 92,031
Special items............................................................. 1,096 (4,443)
-------- --------
Income (loss) before other expenses (income), net, reorganization
expenses and income taxes......................................... 13,162 (3,039)
-------- --------
Other expenses (income), net:
Interest income......................................................... (477) --
Interest expense........................................................ 1,299 186
Amortization of financing fees.......................................... 196 345
Other, net.............................................................. 136 (248)
-------- --------
Total other expenses (income), net.................................. 1,154 283
-------- --------
Income (loss) before reorganization expenses and income taxes....... 12,008 (3,322)
Reorganization expenses................................................... -- 3,273
-------- --------
Income (loss) before income taxes................................... 12,008 (6,595)
Income tax expense........................................................ 5,846 --
-------- --------
Net income (loss)......................................................... $ 6,162 ($ 6,595)
-------- --------
-------- --------

Computation of earnings (loss) per share:
Basic:
Average shares outstanding.............................................. 10,178 1,000
-------- --------
-------- --------
Per share............................................................. $ 0.61 $ (6.60)
-------- --------
-------- --------
Diluted:
Average shares outstanding.............................................. 10,178 1,000
Net effect of dilutive stock options.................................... 174 --
-------- --------
Total equivalent shares............................................... 10,353 1,000
-------- --------
-------- --------
Per share........................................................... $ 0.60 $ (6.60)
-------- --------
-------- --------
</TABLE>

- ------------------------

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-31
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------------- -----------------
PERIOD PERIOD
MARCH 1, MARCH 2,
1998 TO 1997 TO
NOVEMBER 28, 1998 NOVEMBER 29, 1997
----------------- -----------------
<S> <C> <C>
Net cash (used in) provided by operating activities........................ $ (8,331) $ 9,846
----------------- -------
Cash flows from investing activities:
Additions to property, plant and equipment............................. (13,038) (5,348)
Acquisition of stores, net of cash acquired............................ (100,380) --
Proceeds from sale of equipment........................................ 28 6
----------------- -------
Net cash used in investing activities................................ (113,390) (5,342)
----------------- -------
Cash flows from financing activities:
Proceeds from lines of credit and other short-term borrowings.......... 90,050 --
Payments on lines of credit and other short-term borrowings............ (66,250) --
Proceeds from long-term borrowings..................................... 25,000 --
Exercise of stock options.............................................. 93 --
Payment of financing fees.............................................. (206) (75)
----------------- -------
Net cash provided by (used in) financing activities.................. 48,687 (75)
----------------- -------
(Decrease) increase in cash and cash equivalents........................... (73,034) 4,429
Cash and cash equivalents at beginning of period........................... 82,530 41,260
----------------- -------
Cash and cash equivalents at end of period................................. $ 9,496 $ 45,689
----------------- -------
----------------- -------
Supplemental Data:
Non-cash investing activities:
Common stock issued in settlement of payable for professional services... $ 188 $ --
----------------- -------
----------------- -------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-32
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)

(UNAUDITED)

1. BASIS OF PRESENTATION

CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30,
1993, and acquired all of the outstanding common stock of Camelot Music, Inc. on
November 12, 1993. The Predecessor Company subsequently changed its name to
Camelot Music Holdings, Inc. and together with Camelot Music, Inc. ("Camelot")
emerged from bankruptcy on January 27, 1998. Camelot Music Holdings, Inc. and
its subsidiaries are referred to herein as the "Successor Company". The
Predecessor Company and the Successor Company are collectively referred to
herein as the "Company".

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.

The accompanying interim condensed consolidated financial statements are
unaudited; however in the opinion of management, all normal recurring
adjustments necessary for a fair presentation of such consolidated financial
statements are reflected in the interim financial statements presented. The
Company's business is seasonal and therefore the interim results are not
indicative of the results for a full year. The significant accounting policies
and certain financial information which is required for financial statements in
accordance with generally accepted accounting principles, but not for interim
financial statement reporting purposes, have been condensed or omitted. The
accompanying condensed consolidated financial statements of the Company should
be read in conjunction with the audited financial statements of the Company for
the fiscal year ended February 28, 1998, which are included within this
Registration Statement.

2. FRESH-START REPORTING

On January 31, 1998, the Company implemented the recommended accounting
principles for entities emerging from Chapter 11 set forth in the American
Institute of Certified Public Accountants Statement of Position 90-7 on
Financial Reporting by Entities in Reorganization under the Bankruptcy Code (SOP
90-7). Under this concept, all assets and liabilities were restated to reflect
the reorganization value of the reorganized entity, which approximated its fair
value at the date of reorganization. In addition, the accumulated deficit of the
Company was eliminated and its capital structure was recast in conformity with
the plan of reorganization (the "Plan"). As such, the accompanying Company
condensed consolidated financial statements as of November 28, 1998 and for the
period March 1, 1998 to November 28, 1998, represents that of a Successor
Company. The condensed consolidated statement of operations and cash flows for
the period March 2, 1997 to November 29, 1997 represent activity of the
Predecessor Company and may not be comparable to those of the Successor Company.

3. ACQUISITION:

Effective July 29, 1998, the Company acquired all of the outstanding common
stock of Spec's Music, Inc. ("Spec's") under the terms of an Agreement and Plan
of Merger dated June 3, 1998 (the "Spec's Merger Agreement"). Spec's is a Miami,
Florida-based retailer of prerecorded music operating 41 stores in south Florida
and Puerto Rico. As of July 29, 1998, Spec's operated 16 mall-based stores and
25 stores in shopping centers and freestanding locations.

F-33
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)

3. ACQUISITION: (CONTINUED)
The acquisition has been accounted for as a purchase. The total purchase
price was $43,005, net of cash acquired, including a cash payment of $18,579,
repayment of Spec's indebtedness of $9,163, assumption of liabilities
aggregating $14,325 and acquisition costs of $938. The excess of the purchase
price over the fair values of the net assets acquired (goodwill) of $9,442 will
be amortized on a straight-line basis over 20 years.

The 20 year amortization period was determined by taking into consideration
the following factors: the critical market position and established brand name
of Spec's in Florida; the combined store mass of the two companies in Florida;
the amortization periods generally used in the retail music business; the highly
competitive nature of the business including emerging forms of competition and
the overall history of profitability of Spec's.

Effective February 28, 1998, Camelot acquired certain assets and assumed
certain liabilities of The Wall Music, Inc. (see Consolidated Financial
Statements as of February 28, 1998--Notes 7 and 20). During the period March 1,
1998 to November 28, 1998, $71,700 (including approximately $1,400 of
acquisition costs) was paid in cash.

The following summarized unaudited pro forma financial information assumes
the acquisition of Spec's had occurred as of March 1, 1998 and March 2, 1997:

<TABLE>
<CAPTION>
PRO FORMA 39 WEEK PRO FORMA 39 WEEK
PERIOD ENDED PERIOD ENDED
NOVEMBER 28, 1998 NOVEMBER 29, 1997
----------------- -----------------
<S> <C> <C>
Net sales.............................................. $ 404,354 $ 399,585
-------- --------
-------- --------

Net income............................................. $ 976 $ (21,155)
-------- --------
-------- --------
</TABLE>

The pro forma amounts are based upon certain assumptions and estimates, and
do not reflect any benefits from the economies which might be achieved from
combined operations. The pro forma results do not necessarily represent results
which would have been achieved on the basis assumed above, nor are they
indicative of the results of future combined operations.

4. DEPRECIATION EXPENSE

Depreciation of property, plant and equipment is included in the condensed
consolidated statements of operations as follows:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
PERIOD PERIOD
MARCH 1, 1998 MARCH 2, 1997
TO TO
NOVEMBER 28, 1998 NOVEMBER 29, 1997
----------------- -----------------
<S> <C> <C>
Cost of sales.............................................................. $ 216 $ 823
------ -------
------ -------
Selling, general and administrative expenses............................... $ 7,999 $ 16,019
------ -------
------ -------
</TABLE>

F-34
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)

5. EARNINGS (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
was effective for the Successor Company for Fiscal 1997. This standard requires
the Successor Company to disclose basic earnings per share and diluted earnings
per share. Basic earnings per share is calculated by dividing net income (loss)
by the weighted average shares outstanding. Diluted earnings per share is
calculated by dividing net income (loss) by the sum of the weighted average
shares and additional common shares that would have been outstanding if the
dilutive potential common shares calculated using the treasury method had been
issued for common stock options from the Successor Company's Stock Option Plan.
For the thirty-nine weeks ended November 28, 1998 and November 29, 1997 the
additional potentially dilutive common shares included in the diluted earnings
per share calculation were 174,000 and zero, respectively. Total stock options
to purchase zero shares of common stock outstanding during the thirty-nine weeks
ended November 28, 1998 and November 29, 1997 were not included in the
computation of diluted earnings per share because to do so would have been
anti-dilutive. As required by SFAS No. 128, all outstanding common stock options
are considered included even though their exercise may be contingent upon
vesting. The historical per share data for the Predecessor Company is not
comparable since the Company has been recapitalized and has adopted fresh start
reporting as of January 31, 1998.

6. SPECIAL ITEMS:

During the period March 1, 1998 to November 28, 1998 the Successor Company
incurred $1.1 million of expenses related to a filing of a registration
statement with the Securities and Exchange Commission and legal fees relating to
open reorganization claims.

During the period March 2, 1997 to November 29, 1997, the Company
discontinued its manual "Punch Card" version of its customer loyalty program and
replaced it with a limited automated program targeted to its most frequent and
highest spending customers. The reduction in the program resulted in the
reversal of program reward redemption reserves aggregating $4.4 million.

7. STOCK OPTION PLANS AND PURCHASE AGREEMENTS:

The Predecessor Company had established a Management Stock Incentive Plan
for certain key employees and a Stock Purchase Agreement with certain key
employee shareholders. No compensation expense was recognized based on the terms
of these agreements and the agreements were terminated as of the effective date
of the Plan with none of the key employees receiving any shares in the Successor
Company as a result of these agreements.

Effective January 27, 1998, the Successor Company established the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers and key employees responsible for the direction and management of the
Company. Vesting of the options is over a four year period with a maximum term
of ten years. Based on the terms of the Stock Option Plan, vesting can
accelerate based on the market performance of the Company's common stock or upon
a change in control.

F-35
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)

7. STOCK OPTION PLANS AND PURCHASE AGREEMENTS: (CONTINUED)
On January 27, 1998, 687,000 options were granted at an exercise price of
$20.75 per share when the fair market value of the Company's common stock was
$28.19 per share. This resulted in compensation expense of $5,112 to be
recognized at $107 per month over the 48 month vesting period of the options. On
March 13, 1998, the Company's common stock met the market performance criteria
causing 343,500, or 50%, of the outstanding options to vest and 50% of the
compensation to be cumulatively recognized. The remaining compensation expense
is being recognized at $116.1 per month until January 2000, at which time the
remaining stock options will become vested.

The compensation expense of $3,379 during the 39 weeks ended November 28,
1998 consists of $2,449 recorded in March and a monthly expense of $116.1
recorded in the months of April through November. The March expense when
combined with the $107 recorded in February, 1998 represents 50% amortization of
the total original compensation expense related to the January 27, 1998 stock
option grant.

On June 4, 1998, the Successor Company established the Outside Director's
Stock Option Plan (the "Directors Plan"). Eligible participants include all
non-employee directors. Options granted under the Directors Plan have a three
year vesting schedule except for the initial grant of 12,500 options made on
June 4, 1998, which vested immediately. The Company recognized $234 in
compensation expense based on the closing stock price on the over-the-counter
market on the date of grant. A total of 125,000 shares were reserved for future
issuance under the Directors Plan.

On September 1, 1998, the Successor Company granted 17,500 options under the
Stock Option Plan. These options were granted at the closing stock price on the
over-the-counter market on the date of grant. No compensation expense was
recognized in conjunction with the issuance of these options.

Information relating to stock options is as follows:

<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF PER SHARE TOTAL
SHARES AVERAGE* PRICE
----------- ------------- ---------
<S> <C> <C> <C>
Shares under option at February 28, 1998..................................... 687,000 $ 20.75 $ 14,255
Granted...................................................................... -- -- --
Exercised.................................................................... -- -- --
Forfeited.................................................................... -- -- --
----------- ------ ---------
Shares under option May 30, 1998............................................. 687,000 $ 20.75 $ 14,255
----------- ------ ---------
----------- ------ ---------
Granted...................................................................... 12,500 20.75 259
Exercised.................................................................... (4,500) 20.75 (93)
Forfeited.................................................................... (4,500) 20.75 (93)
----------- ------ ---------
Shares under option August 29, 1998.......................................... 690,500 $ 20.75 $ 14,328
----------- ------ ---------
----------- ------ ---------
Granted...................................................................... 17,500 26.50 464
Exercised.................................................................... -- -- --
Forfeited.................................................................... -- -- --
----------- ------ ---------
Shares under option November 28, 1998........................................ 708,000 $ 20.89 $ 14,792
----------- ------ ---------
----------- ------ ---------
</TABLE>

* Per share data not in thousands of dollars

F-36
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS, EXCEPT WHERE OTHERWISE INDICATED)

7. STOCK OPTION PLANS AND PURCHASE AGREEMENTS: (CONTINUED)
At November 28, 1998, 347,750 options were exercisable and 820,594 shares of
common stock were reserved for future issuance under the Stock Option Plan.

On October 26, 1998, the Company entered into a definitive agreement to
merge with Trans World Entertainment Corporation. The merger is anticipated to
close in the first quarter of fiscal 1999. Under the terms of the Stock Option
Plan, any unvested portion of options previously granted will vest immediately
upon the closing of the merger. The Company will recognize approximately $1,700
in compensation expense in connection with the accelerated vesting.

8. COMMITMENTS AND CONTINGENCIES:

The Successor Company is a party to various claims, legal actions and
complaints arising in the ordinary course of business, including proposed
pre-petition assessments by the Internal Revenue Service aggregating
approximately $7,900 of which the Company has accrued $800. In the opinion of
management, all such matters not accrued for are without merit or involve such
amounts that unfavorable disposition will not have a material impact on the
financial position, results of operations or cash flows of the Successor
Company. In the event that a judgment is rendered against the Company in the
full amount of the proposed assessment, Camelot's results of operations would be
materially adversely affected with a charge to earnings of $7,100 plus interest
since January 1998. Such a judgment, unless paid or bonded for appeal, would be
an event of default under Camelot's amended credit facility.

9. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:

SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
issued in June, 1998 and effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, with earlier application permitted, requires
companies to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company has evaluated the impact of the application of the new rules on the
Company's consolidated financial statements and the new rules will have no
impact on its results of operations or its financial condition.

F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Stockholders of

Camelot Music Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of Camelot
Music Holdings, Inc. ("Successor Company") as of February 28, 1998 and of CM
Holdings, Inc. ("Predecessor Company") as of March 1, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows of
the Successor Company for the period February 1, 1998 to February 28, 1998
("Successor period"), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period March 2, 1997 to
January 31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 ("Predecessor periods"), respectively. These consolidated
financial statements are the responsibility of the management of Camelot Music
Holdings, Inc. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and the disclosures in the financial statements. An audit also
includes assessing the accounting principles used and the significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

On January 27, 1998, the Company emerged from bankruptcy. As described in
Notes 2, 3 and 4 to the consolidated financial statements, the Company accounted
for the reorganization as of January 31, 1998 and adopted "fresh-start
reporting". As a result, the Successor Company's consolidated financial
statements are not comparable to the Predecessor Company's consolidated
financial statements since they are presented on a new basis of accounting.

In our opinion, the aforementioned Successor Company consolidated financial
statements present fairly, in all material respects, the consolidated financial
position of the Successor Company as of February 28, 1998, and the consolidated
results of its operations and its cash flows for the Successor period, in
conformity with generally accepted accounting principles. Further, in our
opinion, the Predecessor Company consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Predecessor Company as of March 1, 1997, and the consolidated results of its
operations and its cash flows for the Predecessor periods, in conformity with
generally accepted accounting principles.

As discussed in Notes 3 and 15 to the consolidated financial statements for
the 53 week period ended March 2, 1996, the Predecessor Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". In
addition, as discussed in Notes 3 and 4 to the consolidated financial
statements, on January 31, 1998, in conjunction with the Company's adoption of
"fresh-start reporting", the Predecessor Company adopted Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" and Statement of Position 98-5, "Accounting for the Costs of
Start-Up Activities".

As more fully described in Note 21 to the consolidated financial statements,
in conjunction with a filing of these financial statements with the Securities
and Exchange Commission, the Company restated its consolidated financial
statements for the period February 1, 1998 to February 28, 1998.

Cleveland, Ohio

June 10, 1998

COOPERS & LYBRAND L.L.P.

F-38
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 82,530 $ 41,260
Accounts receivable................................................. 1,849 979
Inventories......................................................... 146,672 112,537
Deferred income taxes............................................... 6,557 --
Other current assets................................................ 4,877 5,287
----------- -----------
Total current assets............................................ 242,485 160,063
----------- -----------
Property, plant and equipment, net.................................... 40,220 56,738
----------- -----------
Other non-current assets:
Goodwill, net of accumulated amortization of $0 in 1997 and $4,025
in 1996........................................................... 25,090 41,188
Intangible assets, net of accumulated amortization of $707 in 1997
and $265 in 1996.................................................. 1,487 350
Deferred income taxes............................................... 18,548 --
Favorable lease values, net of accumulated amortization of $276 in
1997.............................................................. 12,148 --
Other assets........................................................ 443 309
----------- -----------
Total other non-current assets.................................. 57,716 41,847
----------- -----------
Total assets.................................................... $ 340,421 $ 258,648
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade............................................. $ 30,703 $ 11,398
Accrued expenses and other liabilities.............................. 99,779 23,336
----------- -----------
Total current liabilities....................................... 130,482 34,734
----------- -----------
Long-term liabilities:
Revolving credit agreement.......................................... -- --
Unfavorable lease values, net of accumulated amortization of $158 in
1997.............................................................. 13,398 --
Other long-term liabilities......................................... 1,592 7,407
----------- -----------
Total long-term liabilities..................................... 14,990 7,407
----------- -----------
Liabilities subject to compromise..................................... -- 484,811
Commitments and contingencies (Notes 2, 4, 7, 12, 16 and 18).......... -- --
----------- -----------
Total liabilities............................................... 145,472 526,952
----------- -----------
Stockholders' equity (deficit):
Common stock........................................................ 102 10
Additional paid-in capital.......................................... 199,378 79,990
Unearned compensation-stock option plans............................ (5,005) --
Retained earnings (accumulated deficit)............................. 474 (348,304)
----------- -----------
Total stockholders' equity (deficit)............................ 194,949 (268,304)
----------- -----------
Total liabilities and stockholders' equity (deficit)............ $ 340,421 $ 258,648
----------- -----------
----------- -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-39
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------
PERIOD PERIOD
FEBRUARY 1, MARCH 2, 1997 52 WEEK 53 WEEK
1998 TO TO JANUARY PERIOD ENDED PERIOD ENDED
FEBRUARY 28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales.............................................. $ 27,842 $ 372,561 $ 396,502 $ 455,652
Cost of sales.......................................... 18,009 248,655 269,401 309,847
------------ ------------- ------------ ------------
Gross profit......................................... 9,833 123,906 127,101 145,805
Selling, general and administrative expenses........... 9,527 114,491 134,519 154,645
Special items.......................................... -- (4,443) 6,523 211,520
------------ ------------- ------------ ------------
Income (loss) before other income (expenses), net,
reorganization income (expenses), income taxes
and extraordinary item........................... 306 13,858 (13,941) (220,360)
------------ ------------- ------------ ------------
Other income (expenses), net:
Interest income...................................... 328 -- -- 263
Interest expense (contractual interest expense was
(1) $58,157 and (2) $41,329)....................... (12) (221)(1) (17,418)(2) (38,319)
Amortization of financing fees....................... (7) (434) (1,856) (3,738)
Other, net........................................... (26) 249 696 (1,503)
------------ ------------- ------------ ------------
Total other income (expenses), net................. 283 (406) (18,578) (43,297)
------------ ------------- ------------ ------------
Income (loss) before reorganization income
(expenses), income taxes and extraordinary
item............................................. 589 13,452 (32,519) (263,657)
Reorganization income (expenses)....................... -- 26,501 (31,845) --
------------ ------------- ------------ ------------
Income (loss) before income taxes and extraordinary
item............................................. 589 39,953 (64,364) (263,657)
(Provision) benefit for income taxes:
Current.............................................. -- (289) -- (376)
Deferred............................................. (115) -- -- (98)
------------ ------------- ------------ ------------
Total (provision) benefit for income taxes......... (115) (289) -- (474)
------------ ------------- ------------ ------------
Income (loss) before extraordinary item............ 474 39,664 (64,364) (264,131)
Extraordinary item, net of tax..................... -- 228,911 -- --
------------ ------------- ------------ ------------
Net income (loss).................................. $ 474 $ 268,575 $ (64,364) $ (264,131)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Computation of earnings per share:
Basic:
Average shares outstanding......................... 10,176,162 1,000,000 1,000,000 1,000,000
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Per share.......................................... $ 0.05 $ 268.58 $ (64.36) $ (264.13)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Diluted:
Average shares outstanding......................... 10,176,162 1,000,000 1,000,000 1,000,000
Net effect of dilutive stock options............... 124,200 -- -- --
------------ ------------- ------------ ------------
Total equivalent shares............................ 10,300,362 1,000,000 1,000,000 1,000,000
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Per share........................................ $ 0.05 $ 268.58 $ (64.36) $ (264.13)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-40
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
RETAINED
COMMON STOCKS ADDITIONAL UNEARNED EARNINGS
---------------------- PAID-IN COMPENSATION PUT (ACCUMULATED
SHARES DOLLARS CAPITAL STOCK OPTIONS AGREEMENTS DEFICIT) TOTAL
--------- ----------- ----------- --------------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balances at February 25, 1995...... 1,000,000 $ 10 $ 79,990 $ -- $ (3,413) $ (19,809) $ 56,778
Net loss......................... -- -- -- -- -- (264,131) (264,131)
Expiration of put agreements..... -- -- -- -- 3,413 -- 3,413
--------- ----- ----------- ------- ----------- ------------ ---------
Balances at March 2, 1996.......... 1,000,000 10 79,990 -- -- (283,940) (203,940)
Net loss......................... -- -- -- -- -- (64,364) (64,364)
--------- ----- ----------- ------- ----------- ------------ ---------
Balances at March 1, 1997.......... 1,000,000 10 79,990 -- -- (348,304) (268,304)
Net income....................... -- -- -- -- -- 268,575 268,575
Adoption of "fresh-start
reporting"*.................... 9,176,162 92 114,276 -- -- 79,729 194,097
--------- ----- ----------- ------- ----------- ------------ ---------
Balances at January 31, 1998....... 10,176,162 $ 102 $ 194,266 $ -- $ -- $ -- $ 194,368
--------- ----- ----------- ------- ----------- ------------ ---------
--------- ----- ----------- ------- ----------- ------------ ---------
SUCCESSOR COMPANY:
Balances at February 1, 1998....... 10,176,162 $ 102 $ 194,266 $ -- $ -- $ -- $ 194,368
Granting of 687,000 options under
stock option plan.............. -- -- 5,112 (5,112) -- -- --
Amortization of unearned
compensation-stock option
plan........................... 107 107
Net income....................... -- -- -- -- -- 474 474
--------- ----- ----------- ------- ----------- ------------ ---------
Balances at February 28, 1998...... 10,176,162 $ 102 $ 199,378 $ (5,005) $ -- $ 474 $ 194,949
--------- ----- ----------- ------- ----------- ------------ ---------
--------- ----- ----------- ------- ----------- ------------ ---------
</TABLE>

- ------------------------

* Cancellation of 1,000,000 shares of the Predecessor Company and issuance of
10,176,162 shares of the Successor Company.

The accompanying notes are an integral part of these financial statements.

F-41
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- ------------------------------------------
PERIOD PERIOD
FEBRUARY 1, MARCH 2, 1997 52 WEEK 53 WEEK
1998 TO TO JANUARY PERIOD ENDED PERIOD ENDED
FEBRUARY 28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ 474 $ 268,575 $ (64,364) $ (264,131)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization excluding financing
fees.............................................. 527 20,484 23,290 26,570
Amortization of favorable/ unfavorable lease
values............................................ 118 -- -- --
Amortization of financing fees...................... 7 434 1,856 3,738
Noncash portion of restructuring charges............ -- -- -- 5,238
Write-down of long-lived assets..................... -- -- 6,523 202,869
Amortization of unearned compensation............... 107 -- -- --
Expiration of put agreements........................ -- -- -- 3,413
Deferred income taxes............................... 115 -- -- 98
Other, net.......................................... -- -- 451 607
Changes in assets and liabilities:
Accounts receivable and refundable income taxes..... (234) (1,438) 2,578 3,437
Inventories......................................... 1,739 4,763 15,216 28,418
Other current assets................................ (87) 2,623 (2,197) (283)
Other assets........................................ 706 -- 131 427
Accounts payable, trade............................. (1,449) 22,124 (12,540) 20,149
Accrued expenses and other liabilities.............. (874) (5,972) 17,509 (8,414)
Accrued income taxes................................ -- 308 647 5,401
Liabilities subject to compromise................... -- (58,507) -- --
Changes due to reorganization activities:
Gain on discharge of prepetition liabilities........ -- (228,911) -- --
Net adjustment in accounts for fair values.......... -- 25,527 -- --
Accrued professional fees........................... -- 2,187 1,717 --
Write-off of financing fees......................... -- -- 15,953 --
Provision for store closing costs................... -- -- 3,988 --
Provision for lease rejection damages............... -- -- 7,658 --
Employment termination costs........................ -- 454 803 --
Write-off of capital lease obligation............... -- -- (1,677) --
Other expenses directly related to bankruptcy....... -- 1,137 (1,261) --
------------- ------------- ------------- ------------
Net cash provided by operating activities......... 1,149 53,788 16,281 27,537
------------- ------------- ------------- ------------
Cash flows from investing activities:
Additions to property, plant and equipment............ (1,807) (8,029) (4,330) (20,873)
Proceeds from sale of equipment....................... 2 10 239 137
Acquisition of The Wall, net of cash acquired......... (2,884) -- -- --
Other assets and liabilities, net..................... (234) 94 93 409
------------- ------------- ------------- ------------
Net cash used in investing activities............. (4,923) (7,925) (3,998) (20,327)
------------- ------------- ------------- ------------
Cash flows from financing activities:
Payment of financing fees............................. -- (819) (615) --
Proceeds from lines of credit and other short-term
borrowings.......................................... -- -- 25,000 195,500
Payments on lines of credit and other short-term
borrowings.......................................... -- -- (25,000) (174,000)
Payments on long-term debt............................ -- -- (27) (2,560)
------------- ------------- ------------- ------------
Net cash (used in) provided by financing
activities...................................... -- (819) (642) 18,940
------------- ------------- ------------- ------------
Net (decrease) increase in cash and cash
equivalents..................................... (3,774) 45,044 11,641 26,150
Cash and cash equivalents at beginning of period........ 86,304 41,260 29,619 3,469
------------- ------------- ------------- ------------
Cash and cash equivalents at end of period.............. $ 82,530 $ 86,304 $ 41,260 $ 29,619
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-42
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS OF DOLLARS)

1. ORGANIZATION AND BUSINESS:

CM Holdings, Inc. ("Predecessor Company") was incorporated on September 30,
1993, and acquired all of the outstanding common stock of Camelot Music, Inc.
(the "Camelot Acquisition") on November 12, 1993. The Predecessor
Companysubsequently changed its name to Camelot Music Holdings, Inc. and
together with Camelot Music, Inc. ("Camelot") emerged from bankruptcy on January
27, 1998 (see Notes 2 and 4). Camelot Music Holdings, Inc. and its subsidiaries
are referred to herein as the "Successor Company". The Predecessor Company and
the Successor Company are collectively referred to herein as the "Company".

The Company is a mall-based specialty retailer of pre-recorded music,
pre-recorded video cassettes and other entertainment products and related
accessories and operates in thirty-seven states across the United States. The
Company operates in a single industry segment, the operation of a chain of
retail entertainment stores. At February 28, 1998, the Company operated four
hundred fifty-five stores nationwide under the "Camelot Music" and "The Wall"
names.

2. STATUS OF REORGANIZATION UNDER CHAPTER 11:

On August 9, 1996 (the "petition date"), CM Holdings, Inc. and Camelot filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11" or the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Chapter 11 proceedings were jointly administered, with the Predecessor
Companymanaging the business in the ordinary course as debtors-in-possession
subject to the control and supervision of the Bankruptcy Court.

Under Chapter 11 proceedings, litigation and actions by creditors to collect
certain claims in existence at the petition date ("prepetition") are stayed,
absent specific Bankruptcy Court authorization to pay such claims. The
Predecessor Company believes that appropriate provisions were made in the
accompanying financial statements for the prepetition claims that could be
estimated at the date of those financial statements. Such claims are reflected
in the March 1, 1997 consolidated balance sheet as "liabilities subject to
compromise" (See Note 12). Claims collateralized by the Predecessor Company's
assets (secured claims) were stayed, although holders of such claims had the
right to move the Bankruptcy Court for relief from the stay. Secured claims were
collateralized by a pledge of stock of Camelot as well as certain non-store
properties.

Under the Bankruptcy Code, a creditor's claim was treated as secured only to
the extent of the value of such creditor's collateral, and the balance of such
creditor's claim was treated as unsecured.

The Predecessor Company received approval from the Bankruptcy Court to pay
or otherwise honor employee wages and benefits and certain other prepetition
obligations necessary for the continuing existence of the Predecessor
Companyprior to a plan of reorganization. Generally, unsecured debt did not
accrue interest after the petition date. In addition, the Predecessor Company
had determined that there was insufficient collateral to cover the interest
portion of scheduled payments on most prepetition debt obligations. Therefore,
the Predecessor Company discontinued accruing interest on those obligations.
Contractual interest on those obligations amounted to $58,157 for the period
March 2, 1997 to January 31, 1998 and $41,329 for the 52 week period ended March
1, 1997, which was $57,936 and $23,911,

F-43
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

2. STATUS OF REORGANIZATION UNDER CHAPTER 11: (CONTINUED)
respectively, in excess of reported interest expense. Refer to Note 11 for a
discussion of the financing arrangements entered into subsequent to the Chapter
11 filings.

As debtor-in-possession, the Predecessor Company had the right, subject to
Bankruptcy Court approval and certain other limitations, to assume or reject
certain executory contracts, including unexpired leases. In this context,
"assumption" meant that the Predecessor Company agreed to perform its
obligations and cure certain existing defaults under the contract or lease, and
"rejection" meant that the Predecessor Company was relieved from its obligations
to perform further on the contract or lease and was subject only to a claim for
damages for the breach thereof. Any claim for damages resulting from the
rejection of an executory contract or an unexpired lease was treated as a
general unsecured claim in the Chapter 11 proceedings. The Predecessor
Companyreviewed its executory contracts and rejected 95 leases. An estimate of
the allowed claims related to the rejected leases of $14,349 was provided for
and included in liabilities subject to compromise.

An official committee of unsecured creditors (the "Committee") was formed to
act in the Chapter 11 proceedings. The Committee had the right to review and
object to certain business transactions. Pursuant to the order of the Bankruptcy
Court, the Committee retained counsel and other professionals at the expense of
the Predecessor Company.

On December 12, 1997, the Bankruptcy Court entered an order confirming the
Predecessor Company's Joint Plan of Reorganization (the "Plan") which was
submitted by the Predecessor Company on October 1, 1997, amended on November 7,
1997, and became effective January 27, 1998. Pursuant to the Plan,
administrative and priority claims of $5,632 will be fully paid in cash. The
remaining prepetition claims were settled principally with the issuance of
equity in the reorganized company (Successor Company) to the claimholders. The
stockholders in the Predecessor Company received no recovery nor were they
issued any shares in the Successor Company under the Plan. Under the Plan,
approximately 10,166,162 common shares in the Successor Company are to be issued
to the claim holders. None of the claimholders receiving shares of the Successor
Company were pre-confirmation shareholders of the Predecessor Company. The
Successor Company expects to register the common shares with the filing of a
Form S-1 with the Securities and Exchange Commission (see Note 22).

As of January 31, 1998, in accordance with the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP") 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code",
the Predecessor Company adopted "fresh-start reporting" and reflected the
effects of such adoption in its consolidated financial statements for the eleven
months then ended (see Note 4).

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

The significant accounting policies used in the preparation of the
consolidated financial statements are as follows:

A. FINANCIAL REPORTING FOR BANKRUPTCY PROCEEDINGS: During the period
August 9, 1996 to January 31, 1998, the Company has accounted for all
transactions related to the Chapter 11 proceedings in accordance with SOP
90-7 for entities reporting during reorganization proceedings before and
after filing of a reorganization plan; as appropriate. Accordingly,
liabilities subject to

F-44
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
compromise under the Chapter 11 proceedings have been segregated on the
consolidated balance sheet and were recorded at the amounts that have been
or are expected to be allowed on known claims rather than estimates of
consideration those claims may receive in a plan of reorganization. In
addition, the consolidated statements of operations and cash flows
separately disclose expenses and cash transactions, respectively, related to
the Chapter 11 proceedings.

On January 31, 1998, the Company accounted for all transactions related
to entities emerging from Chapter 11 reorganization set forth in SOP 90-7
("fresh-start reporting"--see Note 4).

B. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated
Predecessor Company financial statements include the accounts of CM
Holdings, Inc. and its wholly owned subsidiary Camelot and its inactive
subsidiaries--G.M.G. Advertising, Inc. and Grapevine Records and Tapes, Inc.
The accompanying consolidated financial statements of the Successor Company
include the accounts of Camelot Music Holdings, Inc., and its wholly owned
subsidiary Camelot and its recently formed subsidiaries--Camelot Midwest
Region, Inc.; Camelot Northeast Region, Inc.; Camelot Southeast Region,
Inc.; Camelot Western Region, Inc.; Camelot Distribution Co., Inc.; and its
inactive subsidiaries G.M.G. Advertising, Inc. and Grapevine Records and
Tapes, Inc. All significant intercompany accounts and transactions have been
eliminated in consolidation.

C. FISCAL PERIODS: The Company's fiscal year ends on the Saturday
closest to February 28. Any fiscal years or period ends designated in the
consolidated financial statements and the related notes are by the calendar
year in which the fiscal year commences.

D. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.

E. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS: During the period
February 26, 1995 to January 31, l998, the Predecessor Company adopted the
following accounting standards based on the effective date of those
standards or as required by "fresh-start reporting": (1) Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of"; (2) SFAS No. 123, "Accounting for Stock-Based Compensation"; (3) SFAS
No. 128, "Earnings Per Share"; (4) SFAS No. 129, "Disclosure of Information
about Capital Structure"; (5) SFAS No. 130, "Reporting Comprehensive
Income"; (6) SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information"; (7) SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" and (8) SOP 98-5,
"Accounting for the Costs of Start-Up Activities".

The adoption of SFAS No. 123, SFAS No. 128, SFAS No. 129, SFAS No. 130
and SFAS No. 131 had no significant effects on the Company's consolidated
financial statements. The Company has no items of other comprehensive
income. The effect of adopting SFAS No. 121 is discussed in Note 15 and the
effects of adopting SOP 98-1 and SOP 98-5 are discussed in Note 4.

F-45
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
F. REVENUE RECOGNITION: Revenue from the sale of merchandise is
recognized at the point of sale to the consumer, at which time payment is
tendered. There are no provisions for uncollectable amounts since payment is
received at the time of sale.

G. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash equivalents are stated at cost, which approximates
market value.

H. CONCENTRATION OF CREDIT RISKS: The Company maintains centralized
cash management programs whereby excess cash balances are invested in short
term funds and are considered cash equivalents. Certain cash balances are
insured by the Federal Deposit Insurance Corporation up to $100. As of
February 28, 1998 and March 1, 1997 uninsured bank cash balances were
$80,648 and $40,835, respectively.

I. CONCENTRATION OF BUSINESS RISKS: The Company purchases its
pre-recorded music directly from a large number of suppliers, with
approximately 77% of purchases, net of returns, being made from six
suppliers. Prior to the bankruptcy proceedings, the Company had not
experienced difficulty in obtaining satisfactory sources of supply. In
connection with its emergence from bankruptcy, the Company obtained
commitments to reinstate customary trade terms and management believes that
it will retain access to adequate sources of supply. However, a loss of a
major supplier could cause a possible loss of sales, which would have an
adverse affect on consolidated operating results and result in a decrease in
vendor support for the Company's advertising programs.

J. INVENTORIES AND RETURN COSTS: Inventories are valued at the lower
of cost or market. Cost is determined principally by the average cost
method. Inventories consist primarily of resaleable prerecorded music, video
cassettes, video games and other related products. Vendors typically offer a
discount of approximately 1% as an incentive to purchase their product. The
discount is recorded as a reduction in the carrying amount of inventories.
The Company is entitled to return product purchases from these vendors. The
vendors often reduce the return credit with a product return charge ranging
from 0% to 20% of the original product purchase price depending on the type
of product being returned. The Company records the product return charges in
cost of sales when inventory is returned to the vendor.

K. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is
stated at cost. Significant additions and improvements are capitalized while
expenditures for maintenance and repairs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the
related accumulated depreciation are eliminated from the accounts in the
year of disposal. Gains and losses resulting from disposals are included in
operations. In accordance with "fresh-start reporting", the pre-effective
date accumulated depreciation and amortization has been eliminated, and a
new depreciation and amortization base has been established equal to the
fair value of the existing

F-46
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
property, plant and equipment. Depreciation is computed using the
straight-line method based on the following ranges of estimated useful
lives:

<TABLE>
<S> <C>
Buildings and improvements.................. 10-40 years
Shorter of life of lease or 7
Leasehold improvements...................... years
Furniture, fixtures and equipment........... 5-7 years
</TABLE>

Effective January 31, 1998, the direct costs of computer software
developed or obtained for internal use are capitalized and amortized over
the estimated useful life on a straight-line basis. All other related costs
are expensed as incurred.

L. GOODWILL: Goodwill in the Predecessor Company's consolidated
financial statements represented primarily the adjusted amount of the cost
of acquisition in excess of fair value of the Camelot Acquisition and was
amortized using the straight-line method over a 40 year period until March
2, l996. The remaining amount was being amortized using the straight-line
method over a 22 year period. In connection with the emergence from Chapter
11 and in accordance with SOP 90-7, the remaining Predecessor Company
goodwill was written off at January 31, 1998. The Successor Company goodwill
represents the adjusted amount of the cost of acquisition in excess of fair
value of The Wall acquisition (see Note 7) and is being amortized using the
straight-line method over a 20 year period.

The 20 year amortization period was determined by taking into
consideration the following factors: the critical market position and
established brand name of The Wall in many east coast markets; the combined
store mass of the two companies; the amortization periods generally used in
the retail music business; the highly competitive nature of the business
including emerging forms of competition and the overall history of
profitability of The Wall.

M. INTANGIBLE ASSETS AND FAVORABLE (UNFAVORABLE) LEASE
VALUES: Financing fees are amortized on a straight-line basis over the
terms of the related financings, which vary with the terms of the related
agreements ranging from one to four years. As a result of the Chapter 11
proceedings, the net book value of the financing fees related to prepetition
financing was written off during the 52 week period ended March 1, l997.

Favorable lease values and non-compete agreements acquired by the
Predecessor Company in connection with store acquisitions were being
amortized using the straight-line method over the lives of the related
agreements. Primarily as a result of store closings, the net book value of
these assets was written off during the 52 week period ended March 1, 1997.
Favorable (unfavorable) lease values of the Successor Company established in
"fresh-start reporting" and acquired in connection with The Wall store
acquisitions are being amortized to rent expense using the effective
interest method over the lives of the related lease agreements.

The trade name of the Successor Company acquired in The Wall acquisition
is being amortized on a straight-line basis over two years.

N. FAIR VALUE OF LONG-LIVED ASSETS: The Company records impairment
losses on long-lived assets used in operations, and the related goodwill,
when events and circumstances indicate that the

F-47
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets
in accordance with SFAS No. 121.

O. FAIR VALUE OF FINANCIAL INSTRUMENTS: It was not practicable to
estimate the fair value of the Predecessor Company's prepetition debt
obligations as the Predecessor Company was in Chapter 11 proceedings. The
ultimate plan of reorganization could have significantly impacted the
estimated fair value of those obligations. Financial instruments of the
Successor Company consist of a revolving credit facility (including letters
of credit) which is carried at an amount which approximates fair value (see
Note 11).

P. ADVERTISING COSTS: Advertising costs are expensed during the period
incurred. The amount charged to advertising expense during the period
February 1, 1998 to February 28, 1998, the period March 2, 1997 to January
31, 1998, the 52 week period ended March 1, 1997 and the 53 week period
ended March 2, 1996 was $167, $5,810, $6,128 and $6,458, respectively.

Q. STORE OPENING AND OTHER START-UP COSTS: The expenses associated
with the opening of new stores and other start-up costs are charged to
expense as incurred.

R. EARNINGS (LOSS) PER SHARE: In February l997, the Financial
Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which
is effective for the Successor Company for Fiscal 1997. This standard
requires the Company to disclose basic earnings per share and diluted
earnings per share. Basic earnings per share is calculated by dividing net
income (loss) by the weighted average shares outstanding. Diluted earnings
per share is calculated by dividing net income (loss), by the sum of the
weighted average shares and additional common shares that would have been
outstanding if the dilutive potential common shares calculated using the
treasury method had been issued for common stock options from the company's
stock option plans. The additional dilutive potential common shares included
in the diluted earnings per share during the period February 1 to February
28, 1998, the period March 2, 1997 to January 31, 1998 and the fiscal years
1996 and 1995 were 124,200, 0, 0, and 0, respectively. The weighted average
number of outstanding stock options not included in the computation of
diluted earnings per share were zero for all periods presented. To include
these options in the computation would have been antidilutive. As required
by SFAS No. 128 all outstanding common stock options are considered included
even though their exercise may be contingent upon vesting. For all periods
presented all common shares issuable under the Company's stock option plan
were antidilutive. The historical per share data for the Predecessor Company
is not comparable since the Successor Company has been recapitalized and has
adopted fresh-start reporting as of January 31, 1998.

S. INCOME TAXES: The Company uses the liability method of accounting
for income taxes. Deferred tax assets and liabilities are determined based
on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be
in effect when the differences are expected to reverse. The effect on
deferred taxes of a change in tax rates is recognized in the period that
includes the enactment date.

F-48
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
T. STOCK-BASED COMPENSATION: The Company follows Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its employee stock options. Under
APB No. 25, because the exercise price of employee stock options granted in
January 1998 was less than the market price of the underlying stock on the
date of grant, compensation expense is being recognized over the vesting
period (see Note 21). The Company adopted the disclosure-only provisions of
SFAS No. 123 for options issued to employees and directors.

U. DIVIDEND POLICY: The Company has never declared or paid cash
dividends on its common stock. The Successor Company currently intends to
retain any earnings for use in its business and therefore does not
anticipate paying any dividends in the foreseeable future. In addition, the
Successor Company's revolving credit facility limits its ability to pay
dividends under certain circumstances. Any future determination as to the
payment of cash dividends will depend on a number of factors, including
future earnings, capital requirements, the financial condition and prospects
of the Successor Company and any restrictions under credit agreements
existing from time to time.

V. RECLASSIFICATIONS: Certain amounts in the Predecessor Company's
Consolidated Financial Statements have been reclassified to conform to the
Successor Company's Consolidated Financial Statements.

4. FRESH-START REPORTING:

The AICPA has issued Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code". Pursuant to
the guidance provided by SOP 90-7, the Predecessor Company adopted "fresh-start
reporting" for its consolidated financial statements effective as of January 31,
1998, the last day of the Predecessor Company's fiscal month end. Under
fresh-start reporting, the reorganization value of the Company has been
allocated to the emerging Company's assets on the basis of the purchase method
of accounting. Deferred income taxes were reported in conformity with the
liability method of accounting for income taxes and no pre-confirmation net
operating loss carryforwards were available at February 1, 1998. All of the
reorganization value was attributable to specific tangible assets of the
emerging entity and no amount has been recorded as intangible assets or as
"Reorganization Value in Excess of Amounts Allocable to Identifiable Assets" in
the accompanying consolidated balance sheet as of January 31, 1998.

The fresh-start reporting entity value was determined to be $194,368 (net of
$5,632 of administrative and priority claims payments). This value includes an
estimated terminal value of the Company (calculated using a multiple of
approximately five times projected earnings before interest, taxes, depreciation
and amortization, "EBITDA") and results in a per share common stock value of
eighteen dollars and seventy five cents was determined by the Company with the
assistance of its special financial advisor during the Chapter 11
reorganization. The significant factors used in the determination of this value
were a four year analysis of the Company's forecasted cash flows discounted at
14.0% to a present value, an assumed tax rate of 40%, and certain additional
financial analyses and forecasts prepared by management focusing on the capital
structure of the new entity.

F-49
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

4. FRESH-START REPORTING: (CONTINUED)
Under fresh-start reporting, the final consolidated balance sheet of the
Predecessor Company as of January 31, 1998, becomes the opening consolidated
balance sheet of the Successor Company. Since fresh-start reporting has been
reflected in the accompanying consolidated balance sheet as of January 31, 1998,
the consolidated balance sheet as of that date is not comparable to any such
statement as of any prior date or for any prior period.

The adjustments to reflect the consummation of the Plan, including the
subsequent gain on debt discharge of prepetition liabilities in the amount of
$228,911 and the adjustment to record assets and liabilities at their fair
values have been reflected in the accompanying consolidated financial statements
as of January 31, 1998. Accordingly, a black line is shown to separate the
February 28, 1998 consolidated balance sheet and the consolidated statement of
operations and cash flows for the period February 1, 1998 to February 28, 1998
from the prior years since they are not prepared on a comparable basis.

F-50
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

4. FRESH-START REPORTING: (CONTINUED)
The effect of the Plan on the Company's Consolidated Balance Sheet as of
January 31, 1998 is as follows:

<TABLE>
<CAPTION>
ADJUSTMENTS TO RECORD THE PLAN
------------------------------------------
PRE-FRESH FRESH-START
START ---------------------------- FRESH-START
BALANCE SHEET FAIR VALUE BALANCE SHEET
JANUARY 31, DEBT ACCOUNTING ADJUSTMENTS JANUARY 31,
1998 DISCHARGE(A) CHANGES(B) (C)(D) 1998
------------- ------------ --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 87,842 $ (1,538) $ -- $ -- $ 86,304
Accounts receivable............................. 2,401 297 -- -- 2,698
Inventories..................................... 107,774 -- -- 1,007 108,781
Deferred income taxes........................... -- -- -- 6,334 6,334
Other current assets............................ 2,207 -- -- -- 2,207
------------- ------------ ----- ----------- -------------
Total current assets........................ 200,224 (1,241) -- 7,341 206,324
------------- ------------ ----- ----------- -------------
Property, plant and equipment. net................ 46,062 -- -- (21,662) 24,400
------------- ------------ ----- ----------- -------------
Other non-current assets:
Goodwill, net................................... 39,348 -- -- (39,348) --
Intangible assets, net.......................... 813 -- (78) -- 735
Favorable lease values, net..................... -- -- -- 9,256 9,256
Deferred income taxes........................... -- -- -- 18,886 18,886
Other assets.................................... 718 -- -- -- 718
------------- ------------ ----- ----------- -------------
Total other non-current assets.............. 40,879 -- (78) (11,206) 29,595
------------- ------------ ----- ----------- -------------
Total assets................................ $ 287,165 $ (1,241) $ (78) $ (25,527) $ 260,319
------------- ------------ ----- ----------- -------------
------------- ------------ ----- ----------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade......................... $ 33,522 $ -- $ -- $ -- $ 33,522
Accrued expenses and other liabilities.......... 21,836 3,322 -- (1,374) 23,784
------------- ------------ ----- ----------- -------------
Total current liabilities................... 55,358 3,322 -- (1,374) 57,306
------------- ------------ ----- ----------- -------------
Long-term liabilities:
Revolving credit agreement...................... -- -- -- -- --
Unfavorable lease values, net................... -- -- -- 7,100 7,100
Other long-term liabilities..................... 6,229 772 -- (5,456) 1,545
------------- ------------ ----- ----------- -------------
Total long-term liabilities................. 6,229 772 -- 1,644 8,645
Liabilities subject to compromise................. 428,614 (428,614) -- -- --
Commitments and contingencies..................... -- -- -- -- --
------------- ------------ ----- ----------- -------------
Total liabilities........................... 490,201 (424,520) -- 270 65,951
------------- ------------ ----- ----------- -------------
Stockholders' equity (deficit):
Common stock.................................... 10 102 -- (10) 102
Additional paid-in capital...................... 79,990 194,266 -- (79,990) 194,266
Retained earnings (accumulated deficit)......... (283,036) 228,911 (78) 54,203 --
------------- ------------ ----- ----------- -------------
Total stockholders equity (deficit)......... (203,036) 423,279 (78) (25,797) 194,368
------------- ------------ ----- ----------- -------------
Total liabilities and stockholders' equity
(deficit)................................. $ 287,165 $ (1,241) $ (78) $ (25,527) $ 260,319
------------- ------------ ----- ----------- -------------
------------- ------------ ----- ----------- -------------
</TABLE>

- ------------------------
(a) To record the settlement of liabilities subject to settlement under
reorganization proceeding and the payment of administrative expenses in
connection with the Plan, to reflect unpaid priority claims as either
accrued expenses (for claims to be paid within one year) or other long-term
liabilities. Credit balances due from vendors, as of the date of bankruptcy,
with no offsetting claim are required to be repaid to the Company under
Bankruptcy law. Thus, these amounts are deemed collectible as accounts
receivable and are not used to offset the gain on debt discharge.
(b) To record the effects of adopting SOP 98-1 ($0) and SOP 98-5 ($78) as of the
Plan's effective date.
(c) To record the adjustments to state assets and liabilities at fair value and
to eliminate the deficit in accumulated deficit against additional paid-in
capital.
(d) The fair value adjustments do not include the contingency with the Internal
Revenue Service discussed in Note 18.

F-51
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

5. REORGANIZATION INCOME (EXPENSES):

The net reorganization income (expenses) incurred as a result of the Chapter
11 filings and subsequent reorganization efforts have been segregated from
ordinary operations in the Consolidated Statements of Operations:

<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------
<S> <C> <C>
PERIOD 52 WEEK
MARCH 2, PERIOD
1997 TO ENDED
JANUARY 31, MARCH 1,
1998 1997
----------- ----------
Net adjustment to fair values........................................ $ (25,527) $ --
Adjustments to claims (including $1,017 of post March 1, 1997 net
activity).......................................................... 57,511 --
Lease rejection expenses............................................. -- (5,987)
Losses on disposal of inventory...................................... -- (4,704)
Emergence and retention bonuses...................................... (835) (489)
Other restructuring costs............................................ (713) (689)
Bankruptcy related expenses.......................................... (6,246) (4,866)
Financing fees....................................................... -- (15,953)
Interest income...................................................... 2,311 843
----------- ----------
$ 26,501 $ (31,845)
----------- ----------
----------- ----------
</TABLE>

Net adjustments to fair values reflect the net change to state assets and
liabilities at fair value. Adjustments to claims represent prepetition claims
that were either discharged or received no amount of recovery. Lease rejection
expenses represent costs associated with the rejection of several store leases
as part of the bankruptcy filing. In addition, losses were incurred associated
with closing of stores during Fiscal 1996 for the disposal of excess inventory
from those stores. Bonuses to be paid for retention and emergence from Chapter
11 were expensed over the reorganization period. Other restructuring costs
include costs and expenses from travel directly related to the reorganization,
certain expenses related to the rejection of executory contracts, the settlement
of a nonqualified retirement plan as well as gains and losses from the
disposition of related assets. Bankruptcy related expenses relate to
professional fees and other expenses related to the bankruptcy proceedings.
Financing fees consist of the write-off of the unamortized portion of deferred
financing fees relating to collateralized debt as of the petition date. Interest
income is attributable to the accumulation of cash and short-term investments
subsequent to the petition date.

F-52
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

6. EXTRAORDINARY ITEM:

The Plan resulted in the discharge of $428,614 of prepetition claims and the
recognition of $297 in prepetition vendor receivables against/due to the
Predecessor Company during Chapter 11 through the distribution of $5,632 in cash
and the issuance of 10,166,162 shares of new common stock to creditors. The
value of cash and securities distributed less the vendor receivables was
$228,911 less than the allowed claims, and the resultant gain was recorded as an
extraordinary item, net of related tax effects of $0. The value of the shares of
new common stock issued to creditors under the Plan was determined through
negotiations among the Predecessor Company's creditors.

7. ACQUISITION:

Effective February 28, 1998, the Company acquired certain assets and assumed
certain liabilities and operating lease commitments of The Wall Music, Inc.
("The Wall") pursuant to an Asset Purchase Agreement ("Purchase Agreement")
dated December 10, 1997. The closing date for the acquisition was on March 2,
1998; however, on February 28, 1998 a letter was signed by the Company and The
Wall under which February 28, 1998 was deemed the closing date for accounting
purposes. The Wall operated the business for the benefit of the Company from
February 28, 1998 to March 2, 1998.

The Wall is a mall-based music store chain that operated one hundred fifty
stores in the Mid-Atlantic region of the United States. The Company acquired all
of these stores of which eleven stores will be closed as part of the Company's
acquisition strategy. The Company has accrued $410 in exit costs related to
these closings. The purchase of The Wall was funded by the Company's cash and
cash equivalents.

The acquisition has been accounted for as a purchase, and included a cash
payment of $72,351, the assumption of liabilities aggregating $12,863, and
acquisition costs of $2,300. Accordingly, the assets and liabilities of the
acquired business are included in the consolidated balance sheet at February 28,
1998 and no results of operations are included in the consolidated statement of
operations. The Company does not believe the final purchase price will differ
significantly from the preliminary purchase price recorded at February 28, 1998.
The excess of the purchase price over the fair values of the net assets acquired
(goodwill) of $25,090 will be amortized on a straight-line basis over 20 years.

The following summarized unaudited pro forma financial information assumes
the acquisition of The Wall had occurred as of March 2, 1997 and March 3, 1996:

<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PERIOD
PERIOD MARCH 2, PRO FORMA
FEBRUARY 1, 1997 TO 52 WEEK
1998 TO JANUARY 31, PERIOD ENDED
FEBRUARY 28, 1998 MARCH 1, 1997
1998 (PREDECESSOR) (PREDECESSOR)
------------ ------------ -------------
<S> <C> <C> <C>
Net sales......................................... $ 37,106 $ 521,209 $ 541,040
------------ ------------ -------------
------------ ------------ -------------
Net income (loss)................................. $ 1,113 $ 273,086 $ (86,503)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>

The pro forma amounts are based upon certain assumptions and estimates, and
do not reflect any benefits from economies which might be achieved from combined
operations. The pro forma results do not

F-53
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

7. ACQUISITION: (CONTINUED)
necessarily represent results which would have taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.

8. PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment consisted of the following:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
----------- -----------
<S> <C> <C>
Land and buildings.................................... $ 5,470 $ 12,365
Leasehold improvements................................ 12,245 31,643
Office furniture and fixtures......................... 535 1,899
Store furniture and fixtures.......................... 13,123 41,175
Machinery and equipment............................... 5,003 13,139
Remodeling-in-progress................................ 4,371 1,499
----------- -----------
40,747 101,720
Less accumulated depreciation and amortization........ (527) (44,982)
----------- -----------
Total............................................. $ 40,220 $ 56,738
----------- -----------
----------- -----------
</TABLE>

Depreciation expense related to the Company's distribution center facility
and equipment is included in cost of sales as follows:

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
- ----------- ---------------------------------------
PERIOD PERIOD
FEBRUARY 1, MARCH 2, 52 WEEK 52 WEEK
1998 TO 1997 PERIOD PERIOD
FEBRUARY TO JANUARY ENDED ENDED
28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
- ----------- ------------- ----------- -----------
<S> <C> <C> <C>
$ 23 $ 1,005 $ 1,268 $ 1,113
- ----------- ------ ----------- -----------
- ----------- ------ ----------- -----------
</TABLE>

Depreciation expense related to all other property, plant and equipment is
included in selling, general and administrative expenses.

F-54
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

9. INTANGIBLE ASSETS:

Intangible assets consisted of the following:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
----------- -----------
<S> <C> <C>
Financing fees........................................ $ 1,434 $ 615
Trade name............................................ 760 --
----------- -----
2,194 615
Less accumulated amortization......................... (707) (265)
----------- -----
Total............................................. $ 1,487 $ 350
----------- -----
----------- -----
</TABLE>

10. ACCRUED EXPENSES AND OTHER LIABILITIES:

Accrued expenses and other liabilities consisted of the following:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
----------- -----------
<S> <C> <C>
Payroll and related costs............................. $ 8,256 $ 6,775
Taxes other than income............................... 3,266 3,892
Gift certificate liability............................ 5,391 2,456
Payable for acquisition, including expenses
(see Notes 7 and 20)................................ 71,614 --
Customer product guarantee program.................... 1,415 --
Customer loyalty program liability.................... 744 6,101
Reorganization liabilities............................ 4,532 1,273
Other................................................. 4,561 2,839
----------- -----------
Total............................................. $ 99,779 $ 23,336
----------- -----------
----------- -----------
</TABLE>

11. FINANCING ARRANGEMENTS:

PREDECESSOR COMPANY:

As a result of Chapter 11 proceedings, all remaining indebtedness of the
Predecessor Company as of the petition date became immediately due and payable
in accordance with the terms of the instruments governing such indebtedness.
While the Chapter 11 proceedings were pending, the Predecessor Company was
prohibited from making any payments of obligations owing as of the petition
date, except as permitted by the Bankruptcy Court and contractual terms of debt
obligations were suspended subject to settlement. Furthermore, the Predecessor
Company was not able to borrow additional funds under any of its prepetition
credit arrangements. Borrowings outstanding at March 1, 1997 of $285,800, and
related

F-55
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

11. FINANCING ARRANGEMENTS: (CONTINUED)
accrued interest of $9,817, were classified as liabilities subject to compromise
because the principal balance was under secured.

The Predecessor Company obtained debtor-in-possession financing with a
syndicate of financial institutions whereby a maximum of $35,000 revolving
credit facility ("DIP Facility"), which included a letter of credit sub-facility
of $10,000, was available to fund working capital, issue letters of credit and
make other payments during the Chapter 11 proceedings. The DIP Facility was
available through the earlier of February 9, 1998 or the effective date of the
Plan. The maximum amount available under the DIP Facility was subject to a
borrowing base limitation equal to 35% of eligible inventory (as defined) during
the peak period (as defined) and 30% of eligible inventory during the non-peak
period, plus cash and investments held at the Predecessor Company's cash
management bank less the Predecessor Company's cash collateral. Borrowings under
the DIP Facility bore interest, at the Predecessor Company's option, at the Base
Rate (defined as the higher of the Prime Rate or the Base CD Rate plus 1% or the
Federal Funds Effective Rate plus 1/2%) plus 1% (9.25% at March 1, 1997).

Interest on Base Rate loans was payable monthly in arrears. The Predecessor
Company paid a commitment fee of 1/2% on the average daily unused portion of the
DIP Facility. The Predecessor Company had no outstanding borrowings against the
DIP Facility at March 1, 1997. At March 1, 1997, the Predecessor Company had
$3,270 of letters of credit outstanding.

The weighted average interest rate on these borrowings was 9.84% for the 53
week period ended March 2, 1996.

The Predecessor Company's various prepetition loan agreements had covenants
which, among other things, limited the payment of dividends and capital
expenditures, specified levels of consolidated net worth and minimum
consolidated adjusted operating profit as well as maintenance of specified
ratios including interest coverage and current ratios. However, as a result of
the automatic stay resulting from the Chapter 11 proceedings, the Predecessor
Company's lenders could not enforce any rights, exercise any remedies or realize
on any claims in the event that the Predecessor Company failed to comply with
any of the covenants contained in the various prepetition loan agreements.

The Predecessor Company was subject to various financial and other covenants
under the terms of the DIP Facility including, among other things, minimum
EBITDA (as defined in the DIP Facility) and limitations on indebtedness,
investments, payments of indebtedness and capital expenditures. The Company was
in compliance with the DIP Facility covenants at March 1, 1997 or obtained
appropriate waivers.

SUCCESSOR COMPANY:

The Successor Company entered into a Revolving Credit Agreement dated as of
January 27, 1998. The facility provides for loans of up to $50,000 during the
peak period (October through December) and up to $35,000 during the non-peak
period (including in each case up to $5,000 of letters of credit). In no case
can the amount of loans exceed the borrowing base, as defined. The borrowing
base means, during the peak period, 35% of eligible inventory and during the
non-peak period, 30% of eligible inventory. The Successor Company had no
borrowings under the facility during the period January 27, 1998 to February 28,
1998 and had $35,000 of availability at February 28, 1998. The facility
terminates on January 27,

F-56
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

11. FINANCING ARRANGEMENTS: (CONTINUED)
2002. The Successor Company's obligations are guaranteed by Camelot Music
Holdings, Inc. ("CMHI") and by all of Camelot's subsidiaries and are
collateralized by substantially all of Camelot's assets. CMHI has pledged to the
lenders its capital stock of Camelot and Camelot has pledged to the lenders the
capital stock of its subsidiaries.

Loans bear interest, at the option of the Successor Company, at either (a)
the Eurodollar Rate (as defined) plus 1.75% or (b) the greater of (i) the bank's
Prime Rate, (ii) the Base CD Rate (as defined) plus 1%, or (iii) the Federal
Funds Effective Rate (as defined) plus 1/2 of 1%. The Successor Company also
pays an annual commitment fee of 3/8 of 1% on the available commitment. The
Successor Company is required to use any excess proceeds from asset sales of
more than $750 to reduce the commitments under the facility. In addition, the
Successor Company is required for 45 consecutive days during each year to reduce
the principal amount of all outstanding loans to zero.

The Revolving Credit Agreement contains certain customary negative covenants
which under certain circumstances, limit the Successor Company's ability to
incur additional indebtedness, pay dividends, make capital expenditures and
engage in certain extraordinary corporate transactions. The Revolving Credit
Agreement also requires the Successor Company to maintain minimum consolidated
EBITDA (as defined) levels. The Successor Company was in compliance with these
covenants at February 28, 1998.

As of June 3, 1998, the Successor Company received commitment letters from
its lenders to modify the Revolving Credit Agreement to include; among other
things, a term loan provision (see Note 22).

Long-term debt, in accordance with its contracted terms, consisted of the
following:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
------------- -----------
FEBRUARY 28, MARCH 1,
1998 1997
------------- -----------
<S> <C> <C>
Revolving Credit Agreement............................ $ -- $ --
Senior Credit Facility:
Tranche A Term Loan................................. -- 57,000
Tranche B Term Loan................................. -- 78,000
Tranche C Term Loan................................. -- 60,000
Revolving Credit Commitment......................... -- 90,800
Subordinated Debentures............................... -- 55,748
Senior Debentures..................................... -- 55,212
----- -----------
Total........................................... -- 396,760
----- -----------
Less long-term debt classified as current......... -- --
Less amounts included as liabilities subject to
compromise...................................... -- (396,760)
----- -----------
$ -- $ --
----- -----------
----- -----------
</TABLE>

F-57
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

11. FINANCING ARRANGEMENTS: (CONTINUED)
The Predecessor Company accrued interest on its unsecured and under secured
obligations through the petition date; however, due to the uncertainties
relating to a final plan of reorganization, the Predecessor Company ceased
accruing interest on such obligations effective on the petition date (see Note
22).

12. LIABILITIES SUBJECT TO COMPROMISE:

Liabilities subject to compromise consisted of the following:

<TABLE>
<CAPTION>
PREDECESSOR
COMPANY
-----------
<S> <C>
MARCH 1,
1997
-----------
Bank debt and related interest................................................... $ 295,617
Subordinated debentures and related interest of $2,741........................... 58,489
Senior debentures and related interest of $2,439................................. 57,651
Trade claims..................................................................... 54,675
Lease claims..................................................................... 14,349
Priority tax claims.............................................................. 1,219
Other claims..................................................................... 2,811
-----------
Total........................................................................ $ 484,811
-----------
-----------
</TABLE>

Liabilities subject to compromise under the Chapter 11 proceedings included
substantially all current and long-term debt and trade and other payables as of
the petition date. As discussed in Note 2, payment of these liabilities,
including the maturity of debt obligations, was stayed while the Predecessor
Company operated as a debtor-in-possession.

As part of the Chapter 11 proceedings, the Predecessor Company notified all
known or potential claimants for the purpose of identifying all prepetition
claims against the Company. The Bankruptcy Court entered an order setting
January 30, 1997 as the bar date (the "Bar Date") for submission of proofs of
claim in the Chapter 11 proceedings. With certain exceptions, a creditor who
failed to submit on or before the Bar Date a proof of claim in respect of a
claim against the Predecessor Company is forever barred from asserting such
claim against the Predecessor Company.

On December 12, 1997, as described in Notes 2, 4 and 5, the Predecessor
Company's Plan was confirmed whereby substantially all claims arising in
connection with the Chapter 11 proceedings have been resolved. Accordingly,
management believes that the amount of liabilities subject to compromise as
reported are fairly stated.

F-58
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

13. STOCKHOLDERS' EQUITY (DEFICIT):

The following is a summary of the capitalization of the Predecessor Company
at March 1, 1997:

<TABLE>
<S> <C>
Class A Stock:.................. 910,000 shares authorized; 850,000 shares
issued and outstanding
Class C Stock:.................. 557,000 shares authorized; 143,750 shares
issued and outstanding
Class D Voting Stock:........... 6,250 shares authorized; 6,250 shares
issued and outstanding
Class E Stock:.................. 375,010 shares authorized; no shares
issued or outstanding
Common Stock:................... 1,848,260 shares authorized; no shares
issued or outstanding
</TABLE>

The Class A Stock, Class C Stock, Class D Voting Stock and Common Stock had
one cent par values per share. The Class E Stock had a one dollar par value per
share. The transfer of any shares of stock were restricted and voting rights,
liquidation rights and dividend rights were as specified in the Predecessor
Company's Certificate of Designation.

On December 12, 1997, the Company's Plan was confirmed in Bankruptcy Court
whereby the reorganized company emerged and issued approximately 10,166,162
common shares of stock to the various claim holders pursuant to the terms of the
Plan. The stockholders in the Predecessor Company received no recovery nor were
they issued any shares in the Successor Company under the Plan. None of the
claim holders receiving shares of the Successor Company were pre-confirmation
shareholders of the Predecessor Company.

The capitalization of the Successor Company at February 28, 1998 consists of
30,000,000 shares of authorized one cent par value voting common stock of which
9,835,559 shares were issued and outstanding at February 28, 1998 and 330,603
shares will be issued pursuant to the Plan and 10,000 shares were awarded
outside the plan of reorganization in lieu of payment of $188 in administrative
expenses.

14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS:

Effective January 27, 1998, the Successor Company established the Camelot
Music Holdings, Inc. 1998 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers, directors and key employees responsible for the direction and
management of the Company. Vesting of the options was over a four year period
with a maximum term of ten years. Based on the terms of the Stock Option Plan,
vesting has been accelerated based on the market performance of the

F-59
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS: (CONTINUED)
Company's common stock whereby 50% of the options vested on March 13, 1998 and
the remaining 50% will vest on January 28, 2000. None of the options were
exercisable at February 28, 1998. At February 28, 1998, 825,094 shares of common
stock were reserved for future issuance under the Stock Option Plan based on a
requirement that 7.5% of total outstanding shares on a diluted basis be reserved
for the Stock Option Plan.

Information relating to stock options is as follows:

<TABLE>
<CAPTION>
OPTION PRICE TOTAL
NUMBER OF PER SHARE EXERCISE
SHARES AVERAGE* PRICE
----------- ------------- ---------
<S> <C> <C> <C>
Shares under option at January 27, 1998.................. -- $ -- $ --
Granted.................................................. 687,000 20.75 14,255
Exercised................................................ -- -- --
Forfeited................................................ -- -- --
----------- ------ ---------
Shares under option February 28, 1998.................... 687,000 $ 20.75 $ 14,255
----------- ------ ---------
----------- ------ ---------
</TABLE>

* Per share data not in thousands of dollars

The Company has determined that the fair market value of its common stock at
the date of grant of the above options was $28.19. Accordingly, compensation
expense of $5,112 is being recognized ratably over the four year vesting period.
Compensation expense of $107 was recognized during the period February 1, 1998
to February 28, 1998. The balance of unearned compensation is recorded as a
component of stockholders' equity (see Note 21).

Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
<S> <C>
Risk-free interest rate............................................ 5.61%
Dividend yield..................................................... 0%
Volatility factor.................................................. 55.33%
Weighted average expected life..................................... 5 years
</TABLE>

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.

F-60
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

14. STOCK OPTION PLAN AND PURCHASE AGREEMENTS: (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The Company's
pro forma net income and net income per share for the one month period ended
February 28, 1998 were as follows:

<TABLE>
<S> <C>
Net earnings--as reported............................................ $ 474
Net earnings--pro forma.............................................. $ 445
Basic and diluted earnings per share*................................ $ 0.04
</TABLE>

- ------------------------

* Per share amounts not in thousands of dollars

On June 4, 1998, the Successor Company's Board of Directors approved a
Director Stock Option Plan (see Note 22).

15. SPECIAL ITEMS:

Special items consisted of the following:

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- ---------------------------------
PERIOD PERIOD 52 WEEK 53 WEEK
FEBRUARY 1, MARCH 2, PERIOD PERIOD
1998 TO 1997 TO ENDED ENDED
FEBRUARY 28, JANUARY 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Put agreements.................................... $ -- $ -- $ -- $ 3,413
Write-down of long-lived assets................... -- 6,523 202,869
Restructuring charges............................. -- -- -- 5,238
Reduction of customer loyalty program liability... -- (4,443) -- --
----- ----------- --------- ---------
Total......................................... $ -- $ (4,443) $ 6,523 $ 211,520
----- ----------- --------- ---------
----- ----------- --------- ---------
</TABLE>

PUT AGREEMENTS: Effective November 12, 1993 the Predecessor Company entered
into Put Agreements ("Put") with four existing shareholders. The Put provided
the Predecessor Company an option to sell 375,010 shares of its Class E
preferred stock at an aggregate purchase price of $50,000. In consideration for
the Put, the Predecessor Company paid fees of $3,413 to the four shareholders.
The Put was exercisable upon the execution by the Predecessor Company of a
purchase agreement to acquire a company in a business similar to Camelot. The
Put, pursuant to its original terms, expired on December 31, 1995.

WRITE-DOWN OF LONG-LIVED ASSETS: Management identified significant adverse
changes in the Predecessor Company's business climate late in the third quarter
of the 53 week period ended March 2, 1996 that persisted subsequent to year end.
These changes were largely due to increasing competition in the Predecessor
Company's marketplace, which led to operating results and forecasted future
results that were less than previously planned. These factors led to the
conclusion that there was a potential impairment in the recorded value of
goodwill and certain property, plant and equipment. Management performed an

F-61
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

15. SPECIAL ITEMS: (CONTINUED)
analysis of the recoverability of its long-lived assets based upon a variety of
valuation methods including discounted cash flow and earnings before interest,
taxes and depreciation expense. In management's judgment, there was an
impairment of certain of the Predecessor Company's property, plant and equipment
and the carrying value of the Predecessor Company's goodwill was reduced
resulting in an impairment loss of $202,869 which is included in the
consolidated statement of operations for that period.

As a result of the Predecessor Company's financial performance and the
Chapter 11 proceedings, the Predecessor Company closed seventy-three locations
during the 52 week period ended March 1, 1997. In addition, the Predecessor
Company re-evaluated the carrying amount of its property, plant and equipment.
Based on this evaluation, the Predecessor Company determined that property,
plant and equipment with a carrying amount of $17,152 was impaired, resulting in
a write-down of $6,523 to estimated fair value, which amount is included in the
consolidated statement of operations for that period.

RESTRUCTURING CHARGES: In response to an increasingly competitive retail
environment, the Predecessor Company began a "reengineering" project during the
53-week period ended March 2, 1996 in order to lower costs through corporate
overhead reductions and the identification of under performing stores. As part
of this project, the Predecessor Company identified required changes in
corporate and retail operations and, therefore, assessed the realizable value of
certain assets and the cost of restructuring measures. As a result,
restructuring charges of $5,238 were recorded in the consolidated statement of
operations for that period, which primarily relate to costs of $2,306 associated
with lease terminations and $1,637 associated with the handling of inventory
dispositions incurred in connection with 27 store closures and approximately
$722 of professional fees incurred as part of the Company's restructuring
efforts. The results of operations for the assets or operations closed or
otherwise disposed of during the period were not material.

CUSTOMER LOYALTY PROGRAM LIABILITY: During the period March 2, 1997 to
January 31, 1998, the Company discontinued its manual "Punch Card" version of
its customer loyalty program and replaced it with a limited automated program
targeted to its most frequent and highest spending customers. The reduction in
the program resulted in the reversal of program reward redemption reserves
aggregating $4,443 which was recorded in the consolidated statement of
operations for that period. The amount of this reversal represented the
remaining balance in the "punch card" loyalty program reserve once all customer
redemption ceased.

16. LEASES:

The Company leases its retail stores under noncancelable leases expiring in
various years through fiscal 2007. Several of the leases are subject to renewal
options under various terms and generally all the leases require the Company to
pay real estate taxes and common area maintenance charges.

F-62
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

16. LEASES: (CONTINUED)
Minimum rental commitments are summarized as follows:

<TABLE>
<CAPTION>
FISCAL YEARS
- ----------------------------------------------------------------------------------
<S> <C>
1998.............................................................................. $ 39,001
1999.............................................................................. 35,888
2000.............................................................................. 33,550
2001.............................................................................. 29,906
2002.............................................................................. 24,668
Thereafter........................................................................ 43,509
----------
Total minimum payments............................................................ $ 206,522
----------
----------
</TABLE>

Rental expense totaled $2,236, $25,593, $29,361 and $33,404 for the period
February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31,
1998, the 52 week period ended March 1, 1997 and the 53 week period ended March
2, 1996, respectively. Rental expense included contingent rentals of $157,
$2,259, $2,187 and $2,813 for the respective periods. The contingent rentals are
based on sales volume.

F-63
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

17. INCOME TAXES:

The (provision) benefit for income taxes includes current and deferred
income taxes as follows:

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- -------------------------------------------
PERIOD PERIOD
FEBRUARY 1, MARCH 2, 1997 52 WEEK 53 WEEK
1998 TO TO JANUARY PERIOD ENDED PERIOD ENDED
FEBRUARY 28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current taxes:
Federal.................... $ -- $ -- $ -- $ (538)
State and local............ -- (289) -- 162
----- ----- ----- -----
Total.................. -- (289) -- (376)
----- ----- ----- -----
Deferred taxes:
Federal.................... (97) -- -- --
State and local............ (18) -- -- (98)
----- ----- ----- -----
Total.................. (115) -- -- (98)
----- ----- ----- -----
Total (provision)
benefit.............. $ (115) $ (289) $ -- $ (474)
----- ----- ----- -----
----- ----- ----- -----
Income tax (provision)
benefit from continuing
operations before
extraordinary item......... $ (115) -- -- $ (474)
Tax benefit of extraordinary
item....................... -- -- -- --
----- ----- ----- -----
Total........................ $ (115) $ (289) $ -- $ (474)
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

F-64
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

17. INCOME TAXES: (CONTINUED)
The significant differences between the Federal U.S. statutory rate and the
Company's effective tax rate are as follows:

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- -------------------------------------------
PERIOD PERIOD
FEBRUARY 1, MARCH 2, 1997 52 WEEK 53 WEEK
1998 TO TO JANUARY PERIOD ENDED PERIOD ENDED
FEBRUARY 28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Statutory tax rate........... 35.0% 35.0% (35.0)% (35.0 )%
Goodwill amortization and
Fiscal 1995 write-off........ -- 2.0 1.1 26.7
Corporate owned life
insurance.................. (0.4 ) (1.3 ) 4.9 --
Compensation expense
resulting from stock option
grants..................... 3.0 -- -- --
State taxes, net of federal
benefit.................... 4.0 .9 -- --
Utilization of loss
carryforwards.............. -- (35.7 ) -- --
IRC section 108 ordering
rules...................... (22.1 ) -- -- --
Valuation allowance--due to
uncertainty of utilization
of net operating loss
carryforwards.............. -- -- 29.0 8.4
Other adjustments, net....... -- -- -- .1
----- ----- ----- -----
Effective tax rate........... 19.5% .9% 0.0% 0.2%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>

At February 28, 1998 and March 1, 1997, the Company had total deferred tax
assets of $26,344 and $55,989 and total deferred tax liabilities of $1,239 and
$192, respectively. As part of the emergence from Chapter 11 proceedings, the
Company believes that it is more likely than not that it will be able to use the
deferred tax assets at February 28, 1998 in the future. Therefore, no valuation
allowance has been established to offset these deferred tax assets. At March 1,
1997, the Company had net operating loss carryforwards of $76,000 for federal
and state income tax purposes expiring in years 2010 through 2012. For financial
reporting purposes, a full valuation allowance at March 1, 1997 was recognized
to offset the net deferred tax assets as management determined that the assets
may not be realized.

At January 31, 1998, as part of the fresh-start reporting, a reduction in
the deferred tax valuation allowance of $55,797 was recorded. A portion of this
reduction related to the utilization of net operating loss carryforwards against
the cancellation of indebtedness resulting from the emergence from Chapter 11
(see Note 2). Under the provision of the Internal Revenue Code ("IRC"), no
provision for income taxes was recorded on the remaining gain on the
cancellation of indebtedness. The remaining March 1, 1997 valuation allowance
was reversed as a part of the Company's adoption of fresh-start reporting and is

F-65
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

17. INCOME TAXES: (CONTINUED)
included in reorganization income (see Note 5). Deferred tax assets after
fresh-start reporting at the emergence date were $25,220.

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
----------- -----------
FEBRUARY
28, MARCH 1,
1998 1997
----------- -----------
<S> <C> <C>
Net current deferred income tax assets:
Inventory reserves.................................................. $ 1,817 $ 2,775
Reorganization expenses............................................. 1,830 4,967
Other, net.......................................................... 2,910 3,986
----------- -----------
6,557 11,728
----------- -----------
Net long-term deferred income tax assets:
Depreciation differences............................................ 16,138 4,361
Amortization of financing fees...................................... -- 5,749
Net federal and state operating loss................................ -- 28,306
Leases.............................................................. -- 2,265
Other, net.......................................................... 2,410 3,388
----------- -----------
18,548 44,069
----------- -----------
Valuation allowance................................................. -- (55,797)
----------- -----------
Net deferred tax assets on the consolidated balance sheets.......... $ 25,105 $ --
----------- -----------
----------- -----------
</TABLE>

18. COMMITMENTS AND CONTINGENCIES:

CLAIMS AND LEGAL ACTIONS: The Company is a party to various claims, legal
actions and complaints arising in the ordinary course of its business, including
proposed pre-petition assessments by the Internal Revenue Service aggregating
approximately $7,900 of which the Company has accrued $800. In the opinion of
management, all such matters not accrued for are without merit or involve such
amounts that unfavorable disposition will not have a material impact on the
financial position, results of operations or cash flows of the Company. In the
event that a judgment is rendered against the Company in the full amount of the
proposed assessment, the Company's results of operations would be materially
adversely affected with a charge to earnings of $7,100 plus interest since
January, 1998. Such a judgment, unless paid or bonded for appeal, would be an
event of default under the Company's Revolving Credit Agreement.

SELF-INSURANCE COMMITMENTS: The Company is self-insured with respect to
workers' compensation benefits within the State of Ohio and medical benefits for
all of its employees. The Company maintains insurance coverage for workers'
compensation claims in excess of $300 per incident and for annual medical claims
in excess of $75 per employee.

F-66
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

18. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
MANAGEMENT CONSULTING AGREEMENT: The Company was party to a five year
management consulting agreement with Investcorp S.A. ("Investcorp"). Fees under
this agreement were $500 per year payable annually, in advance, with the first
three years paid on November 12, 1993. The final two year payment was not paid
to Investcorp as a result of the rejection of the contract under Chapter 11
proceedings.

19. ELECTIVE SAVINGS AND PLAN:

The Company sponsors an Elective Savings 401(k) and Profit Sharing Plan (the
"401(k) Plan"). The 401(k) Plan covers substantially all employees and provides
for a 22.5% to 50% matching contribution of employee elective contributions up
to a maximum of 10% of wages, not to exceed the statutory limit. Such matching
contributions were approximately $56, $239, $309, and $266 for the period
February 1, 1998 to February 28, 1998, the period March 2, 1997 to January 31,
1998, the 52 week period ended March 1, 1997 and the 53 week period ended March
2, 1996, respectively. The Company may, at the discretion of the Board of
Directors, contribute additional funds to the Plan as deemed appropriate. No
such contributions were made during the respective periods.

20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

<TABLE>
<CAPTION>
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------- ---------------------------------------
PERIOD PERIOD 52 WEEK 53 WEEK
FEBRUARY 1, MARCH 2, 1997 PERIOD PERIOD
1998 TO TO JANUARY ENDED ENDED
FEBRUARY 28, 31, MARCH 1, MARCH 2,
1998 1998 1997 1996
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid (received) during the fiscal year
for:
Interest................................. $ 11 $ 152 $ 2,585 $ 32,136
Income taxes paid (refunded), net........ 3 58 129 (3,221)
Reorganization items..................... -- 5,759 5,956 --
Non-cash reorganization activities:
Reclassification of liabilities subject
to compromise.......................... $ -- $ -- $ 477,153 $ --
Decrease in accounts payable, accrued
expenses and other liabilities......... -- -- (80,393) --
Reduction of debt........................ -- -- (396,760) --
</TABLE>

F-67
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

20. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: (CONTINUED)
<TABLE>
<CAPTION>
SECCESSOR COMPANY
-------------------------
<S> <C> <C>
PERIOD FEBRUARY 1, 1998
TO
FEBRUARY 28, 1998
-------------------------

<CAPTION>
ACQUISTION
FRESH-START OF
REPORTING THE WALL
----------- ------------
<S> <C> <C>
Supplemental disclosures of investing activities:
Assets at fair value:
Cash................................................................................. $ 86,304 $ 153
Accounts receivable.................................................................. 2,698 1,550
Inventories.......................................................................... 108,781 39,630
Prepaid expenses and other........................................................... 8,541 2,583
Property, plant and equipment........................................................ 24,400 14,541
Goodwill............................................................................. -- 25,090
Other long-term assets............................................................... 29,595 3,967
----------- ------------
Total assets..................................................................... 260,319 87,514
----------- ------------
Liabilities at fair value:
Accounts payable..................................................................... 33,522 --
Accrued expenses and other liabilities............................................... 23,784 1,418
Other current liabilities............................................................ -- 4,773
Long-term liabilities................................................................ 8,645 6,672
----------- ------------
Total liabilities................................................................ 65,951 12,863
----------- ------------
Common stock issued in exchange for debt discharged.................................. (194,368) --
Cash acquired........................................................................ -- (153)
Payable for acquisition, including expenses.......................................... -- 71,614
----------- ------------
Cash paid, net of cash acquired...................................................... $ -- $ 2,884
----------- ------------
----------- ------------
</TABLE>

21. RESTATEMENT:

The Company had previously not recorded any compensation expense under APB
No. 25 related to the Successor Company's stock option grant for 687,000 shares
of common stock under its Stock Option Plan based on utilizing a fair value at
the time that was supported by the Successor Company's fresh-start reporting
entity per share value and a third party valuation (see Notes 3 and 14).

Following discussions with the Securities and Exchange Commission, the
Company determined that, for purposes of this presentation, the fair value of
its common stock at the date such stock options were granted exceeded the
exercise price. As a result, the Company has recorded compensation expense of
$107 for the period February 1, 1998 to February 28, 1998 and recorded unearned
compensation of $5,112 as a component of stockholders' equity with a
corresponding increase to additional paid-in capital at February 1, 1998. The
accompanying financial statements have been restated to reflect this change.

F-68
<PAGE>
CAMELOT MUSIC HOLDINGS, INC. (SUCCESSOR COMPANY)
AND
CM HOLDINGS, INC. (PREDECESSOR COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS OF DOLLARS)

22. SUBSEQUENT EVENTS:

PLAN OF MERGER: On June 3, 1998, the Successor Company entered into an
agreement and plan of merger (the "Merger Agreement") with respect to the
proposed acquisition of Spec's Music, Inc. ("Spec's"). Spec's is a Miami,
Florida based music retailer, and operates forty-two stores in Florida and
Puerto Rico. As of June 3, 1998, Spec's operated sixteen mall stores and
twenty-six stores in shopping centers and free-standing locations. Spec's also
owns three specialty Latin businesses, including a music distribution company
and the Latin music record label "Hits Only" and its recording studio, and
maintains an inventory of music produced by a majority of the independent Latin
labels. The acquisition will be accounted for as a purchase, and will include a
cash payment of approximately $26,000 (including repayment of assumed bank debt
of approximately $7,000), the assumption of additional liabilities of
approximately $13,000, and acquisition costs of approximately $2,000. The
acquisition will be funded primarily by the proceeds of a new term loan and the
balance funded by operating cash. Consummation of the acquisition is subject to
certain conditions, including approval of the acquisition by Spec's public
stockholders. The acquisition is anticipated to close in July 1998.

REVOLVING CREDIT AGREEMENT AMENDMENT AND WAIVER: In early June 1998, the
Successor Company received commitment letters from its lenders to modify its
Revolving Credit Agreement (the "Amended Credit Facility"). The commitment
includes the addition of a $25,000 term loan that will bear interest at the same
rate as the existing Revolving Credit Agreement. The proceeds of the term loan
will be used to finance the acquisition of Spec's. Mandatory repayments of the
term loan are $3,000 in Fiscal 1998, $8,000 in Fiscal 1999, $10,000 in Fiscal
2000, and $4,000 in Fiscal 2001. In addition, the modification also increased
the eligible borrowing base to 60% of eligible inventory as well as modified the
current capital expenditures limitation and waived certain covenants in order to
permit the Spec's acquisition. The Successor Company will pay a fee of $125 for
the commitment to modify the Revolving Credit Agreement.

OUTSIDE DIRECTORS STOCK OPTION PLAN: On June 4, 1998, the Successor
Company's Board of Directors approved the Outside Directors Stock Option Plan
(the "Directors Plan"). Eligible participants include all non-employee
directors. A total of 125,000 shares were reserved for future issuance under the
Directors Plan. On June 4, 1998, each of the five outside directors received a
grant of 2,500 stock options at an option price of twenty dollars and
seventy-five cents per share. Vesting on the options is immediate upon grant. In
addition, upon the effective date of the registration statement for the
Company's initial public offerings each outside director will also receive a
grant of 7,500 options at an option price equal to the fair market value of a
share of common stock on the date of the contemplated public offering of the
shares. These options have a three-year vesting schedule. The Company will
recognize approximately $241 in compensation expense based upon the closing
stock price on the over-the-counter market on the date of grant.

INITIAL PUBLIC OFFERINGS: The Company announced its intention to register
with the Securities and Exchange Commission for initial public offerings of
common stock. The offerings will be made by institutional stockholders who
received shares of common stock as part of the Company's emergence from Chapter
11.

F-69
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholder
The Wall Music, Inc.:

We have audited the accompanying statements of operations, stockholder's
equity and cash flows of The Wall Music, Inc. (the "Company"), for the year
ended June 1, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended June 1, 1997 in conformity with generally accepted accounting principles.

As discussed in Note 1 to the financial statements, the Company sold
substantially all of its tangible assets and transferred certain liabilities
effective February 28, 1998.

Deloitte & Touche LLP

Atlanta, Georgia
August 21, 1997
(February 28, 1998 as to Note 1)

F-70
<PAGE>
THE WALL MUSIC, INC.

STATEMENTS OF OPERATIONS

(IN THOUSANDS)

COST AND EXPENSES:
Cost of sales............................................................ 85,701 80,955 99,429
Selling, general, and administrative expenses............................ 41,565 40,758 53,698
Depreciation and amortization............................................ 4,666 6,138 8,197
Writedown of long-lived assets........................................... 23,159 27,323
------------ ---------- -----------
INCOME (LOSS) BEFORE TAXES................................................. 9,382 (20,672) (27,411)

INCOME TAX BENEFIT (EXPENSE)............................................... (3,177) 2,767 3,738
------------ ---------- -----------
NET INCOME (LOSS).......................................................... $ 6,205 $ (17,905) $ (23,673)
------------ ---------- -----------
------------ ---------- -----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-71
<PAGE>
THE WALL MUSIC, INC.

STATEMENTS OF STOCKHOLDER'S EQUITY

FOR THE YEAR ENDED JUNE, 1, 1997
AND THE NINE MONTHS ENDED FEBRUARY 28, 1998 (UNAUDITED)

(IN THOUSANDS, EXCEPT SHARES OUTSTANDING)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ -------------------------- ADDITIONAL
SHARES SHARES PAID-IN ACCUMULATED
OUTSTANDING AMOUNT OUTSTANDING AMOUNT CAPITAL DEFICIT
------------- --------- --------------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE--June 2, 1996................... 749 $ 749 100 $ -- $ 110,656 $ (23,303)

Conversion of stock..................... (749) (749) 400 -- 749 --

Net loss................................ -- -- -- -- -- (23,673)
----- --------- --- --------- ---------- ------------
BALANCE--June 1, 1997................... -- $ -- 500 $ -- $ 111,405 $ (46,976)
----- --------- --- --------- ---------- ------------
Net income (unaudited).................. -- -- -- -- -- 6,205
----- --------- --- --------- ---------- ------------
BALANCE--February 28, 1997.............. -- $ -- 500 $ -- $ 111,405 $ (40,771)
----- --------- --- --------- ---------- ------------
----- --------- --- --------- ---------- ------------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-72
<PAGE>
THE WALL MUSIC, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------ YEAR ENDED
FEBRUARY 28, MARCH 1, JUNE 1,
1998 1997 1997
------------ ---------- -----------
<S> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 6,205 $ (17,905) $ (23,673)
Adjustments to reconcile net income (loss) from operating
activities to net cash provided by operating activities:
Depreciation, amortization and writedown of long-lived assets............. 4,666 29,297 35,520
Deferred income taxes..................................................... 209 (2,819) (3,758)
Gain (loss) on disposition of property and equipment...................... 81 (163) (132)
Increase (decrease) in cash flow resulting from changes
in assets and liabilities:
Accounts receivable..................................................... 45 (135) (60)
Inventories............................................................. (3,091) (6,724) 696
Due from parent company................................................. (10,285) 6,019 1,874
Other current assets.................................................... (2,179) 1,513 2,049
Accounts payable, trade................................................. 2,613 (3,359) (5,833)
Accrued expenses........................................................ 5,979 (1,504) (1,275)
------------ ---------- -----------
Net cash provided by operating activities............................... 4,243 4,220 5,408
------------ ---------- -----------

INVESTING ACTIVITIES:

Additions to property and equipment......................................... (2,061) (4,642) (5,825)

Deferred transaction costs.................................................. (3,350) -- --

Proceeds from sale of property and equipment................................ 417 38 38
------------ ---------- -----------
Net cash used in investing activities..................................... (4,994) (4,604) (5,787)
------------ ---------- -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS................................... (751) (384) (379)

CASH AND CASH EQUIVALENTS
Beginning of period....................................................... 1,782 2,161 2,161
------------ ---------- -----------
End of period............................................................. $ 1,031 $ 1,777 $ 1,782
------------ ---------- -----------
------------ ---------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION --
Cash paid for income taxes................................................ $ 29 $ 86 $ 115
------------ ---------- -----------
------------ ---------- -----------
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES --
Conversion of preferred shares to common shares........................... $ -- $ 749 $ 749
------------ ---------- -----------
------------ ---------- -----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

F-73
<PAGE>
THE WALL MUSIC, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 1, 1997 AND FOR THE NINE MONTHS ENDED
FEBRUARY 28, 1998 (UNAUDITED) AND MARCH 1, 1997 (UNAUDITED)

1. DESCRIPTION OF BUSINESS AND SUBSEQUENT EVENT

The Wall Music, Inc. (the "Company") is a wholly owned subsidiary of WH
Smith Group Holdings (USA), Inc. (the "Parent"). The Parent is a wholly owned
subsidiary of W.H. Smith Group plc, a publicly-held United Kingdom corporation.
Prior to the sale of certain assets and transfer of certain liabilities on
February 28, 1998, the Company was a specialty music retailer operating in ten
states in the Northeastern and Mid-Atlantic regions of the United States. The
Company sold compact discs, cassettes, pre-recorded video cassettes, and other
entertainment products and related accessories.

Pursuant to an Asset Purchase Agreement dated December 10, 1997 (the
"Purchase Agreement"), the Parent sold certain assets and transferred certain
liabilities of the Company to Camelot Music, Inc. ("Camelot") effective February
28, 1998. In connection with the acquisition, Camelot assumed all of the
Company's store leases in effect on February 28, 1998.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION--These financial statements have been prepared from
the separate books and records of the Company and represent the results of
operations, changes in stockholders', and cash flows of the Company immediately
prior to the acquisition by Camelot of substantially all tangible assets and
certain liabilities of the Company.

The financial statements of the Company for the nine months ended February
28, 1998 and March 1, 1997 are unaudited and, in the opinion of management,
include all adjustments consisting solely of normal recurring adjustments
necessary to fairly state the Company's results of operations, changes in
stockholder's equity, and cash flows for the periods presented. The results of
operations for the nine months ended February 28, 1998 and March 1, 1997 are not
necessarily indicative of the results to be expected for the full year.

The Company had certain transactions with its Parent (see Note 7).

FISCAL YEAR--The Company's fiscal year is comprised of the 52- or 53-week
period ending on the Sunday closest to May 31. The year ended June 1, 1997
("fiscal 1997") contained 52 weeks.

REVENUE RECOGNITION--Revenue from the sale of merchandise is recognized at
the point of sale to the consumer, at which time payment is tendered. There are
no provisions for uncollectible amounts since payment is received at the time of
sale. As revenue is recognized, the Company also provides for estimated future
returns of product.

CASH AND CASH EQUIVALENTS--For the purpose of reporting cash flows, cash and
cash equivalents include cash on hand and cash invested highly liquid
investments with a purchased maturity of three months or less.

INVENTORIES--Inventories are valued at the lower of average cost or market.

PREOPENING COSTS--Costs associated with opening new stores are expensed when
incurred.

PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the
shorter of the terms of the leases, including likely renewal options, or ten
years.

GOODWILL--Excess of cost over net assets acquired is amortized over various
periods ranging from 25 to 40 years.

F-74
<PAGE>
THE WALL MUSIC, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAVORABLE LEASE VALUES--Intangible assets related to leases are amortized
over the terms of the associated leases.

INCOME TAXES--The Company was a member of a consolidated group for federal
income tax filing purposes. The Company's Parent allocated income tax expense or
benefit to each of its subsidiaries based on each subsidiary's pretax income or
loss. If the Company had computed income taxes on a separate return basis,
income tax expense for the year ended June 1, 1997 and for the nine months ended
February 28, 1998 and March 1, 1997 would have been approximately zero. (See
also Note 5.)

IMPAIRMENT OF LONG-LIVED ASSETS--During the year ended June 1, 1997, the
Company adopted the provisions of Statement of Financial Accounting Standards
("SFAS") 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of." SFAS 121 requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

3. IMPAIRMENT OF LONG-LIVED ASSETS

During fiscal 1997, the Company evaluated the recoverability of its
long-lived assets on a store-by-store basis. All long-lived assets were used in
the Company's on-going operations and were not held for disposal. For each
operating unit determined to be impaired, the Company recognized an impairment
loss equal to the difference between the carrying value and the fair value of
the operating unit's assets. Fair value, on an individual operating-unit basis,
was estimated to be the present value of expected future cash flows, as
determined by management. As a result of this evaluation, the Company wrote-down
intangible assets by $17,475,000 and property and equipment by $9,849,000 in
fiscal 1997.

4. LEASE OBLIGATIONS

The Company has operating leases that relate primarily to its retail stores.
Lease terms generally range from 3 to 20 years with renewal options. Certain
store leases provide for additional contingent rentals based on a percentage of
sales in excess of a base amount. Certain other leases provide for scheduled
rent increases over the term of the lease; rent expense for such leases is
recognized in equal annual amounts over the term of each such lease. Total rent
expense for the year ended June 1, 1997 (including contingent rentals of
$104,000) was $17,592,000.

Future minimum lease payments as of June 1, 1997 are as follows (in
thousands):

<TABLE>
<CAPTION>
OPERATING
FISCAL YEAR LEASES
- ----------------------------------------------------------------------------------- -----------
<S> <C>
1998............................................................................... $ 16,904
1999............................................................................... 15,826
2000............................................................................... 14,097
2001............................................................................... 13,139
2002............................................................................... 11,740
Thereafter......................................................................... 25,489
-----------
$ 97,195
-----------
-----------
</TABLE>

F-75
<PAGE>
THE WALL MUSIC, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES

The components of income tax benefit (expense) for the year ended June 1,
1997 follow (in thousands):

<TABLE>
<S> <C>
Current:
Federal.......................................................... $ 122
State............................................................ (142)
---------
(20)
---------

Deferred:
Federal.......................................................... 6,539
State............................................................ 1,403
---------
7,942
---------
Change in valuation allowance.................................... (4,184)
---------
Total income tax benefit..................................... $ 3,738
---------
---------
</TABLE>

The income tax benefit computed using the federal statutory rate is
reconciled to the reported income tax benefit as follows for the year ended June
1, 1997:

<TABLE>
<S> <C>
Computed tax benefit at federal statutory rate..................... 34.0%
State taxes, net................................................... 8.2
Nondeductible amortization......................................... (13.3)
Change in valuation allowance...................................... (15.3)
---------
13.6%
---------
---------
</TABLE>

In fiscal 1997, the Company determined that it was unlikely to realize the
benefit of deferred state income tax assets. Accordingly, the Company
established a reserve for the full amount of such deferred taxes.

6. PENSION AND RETIREMENT PLANS

Employees were eligible to participate in the W H Smith, Inc. Savings and
Retirement Plan that qualified as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code. The plan covered substantially all
employees. After one year of continuous service, the Company matched 100% of
employee contributions up to 3% of each employee's salary. The Company recorded
expense in fiscal 1997 related to this plan of $220,000.

In addition, the Company participated in an unfunded Supplemental Executive
Retirement Plan ("SERP") which provided supplemental pension benefits to key
executives. Expense for this plan was $75,000 for the year ended June 1, 1997.

7. RELATED PARTY TRANSACTIONS

The Company regularly received and remitted working capital to the Parent
based on cash flow required for or generated from operations.

F-76
<PAGE>
THE WALL MUSIC, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

7. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company supplied inventory and administrative services for airport music
stores operated by its sister company W H Smith, Inc. ("Smith"). During fiscal
1997, the Company provided Smith $1,650,000 in inventory (at average cost) and
charged Smith $76,000 for related administrative costs.

The Company participated in group insurance programs managed by the Parent.
The Parent charged the Company for its insurance premiums and for its
self-insured medical and workers compensation expense. Such charges aggregated
$1,206,000 for the year ended June 1, 1997.

The Company also expensed a management fee which was based on the
approximate percentages of time incurred by corporate finance and human
resources personnel in support of The Wall's operations for certain services
provided by the Parent. The Company believes this method of allocation is
reasonable. Such expense totaled $250,000 during fiscal 1997. It is not possible
to determine the cost The Wall would have incurred for such services had it
operated on a stand alone basis.

F-77
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
APRIL 30, JULY 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents.......................................................... $ 367 $ 59
Accounts receivable................................................................ 1,063 192
Income tax receivable.............................................................. -- 1,891
Inventories........................................................................ 15,916 14,629
Other current assets............................................................... 325 295
------------- ------------
Total current assets........................................................... 17,671 17,066
------------- ------------
Property, plant and equipment, net................................................... 9,898 11,157
Other non-current assets:
Video rental inventory............................................................. 51 371
Other assets....................................................................... 441 660
------------- ------------
Total other non-current assets................................................. 492 1,030
------------- ------------
Total assets................................................................... $ 28,061 $ 29,253
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable................................................................... $ 9,151 $ 9,860
Accrued expenses and other liabilities............................................. 2,511 3,088
Current portion of notes payable................................................... 7,055 --
------------- ------------
Total current liabilities...................................................... 18,717 12,948
------------- ------------
Long-term liabilities:
Notes payable, less current portion................................................ -- 6,696
------------- ------------
Total long-term liabilities.................................................... -- 6,696
------------- ------------
Total liabilities.............................................................. 18,717 19,644
------------- ------------
Stockholders' equity:
Common stock, par value $.01; 10,000 shares authorized; 5,300 shares issued........ 53 53
Additional paid-in capital......................................................... 3,462 3,551
Retained earnings.................................................................. 5,870 6,135
Less 8,239 shares in treasury at cost.............................................. (41) (130)
------------- ------------
Total stockholders' equity..................................................... 9,344 9,609
------------- ------------
Total liabilities and stockholders' equity..................................... $ 28,061 $ 29,253
------------- ------------
------------- ------------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-78
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Net Sales................................................................................... $ 51,021 $ 53,760
Cost of sales............................................................................... 33,718 35,720
--------- ---------
Gross Profit.......................................................................... 17,303 18,040
Selling, general and administrative expenses................................................ 15,336 18,253
Depreciation and amortization............................................................... 1,523 1,863
Restructuring charge........................................................................ -- 250
Store closing expenses...................................................................... -- 270
--------- ---------
Income (loss) before other income(expenses), net and income taxes..................... 444 (2,596)
--------- ---------
Other income (expenses), net:
Interest expense.......................................................................... (744) (733)
Other, net................................................................................ 35 52
--------- ---------
Total other income (expenses), net.................................................... (709) (681)
--------- ---------
Loss before income taxes.............................................................. (265) (3,277)
--------- ---------
Income tax expense (benefit)................................................................ -- (28)
--------- ---------
Net loss.................................................................................... ($ 265) ($ 3,249)
--------- ---------
--------- ---------
Computation of earnings per share:
Basic
Average shares outstanding................................................................ 5,278 5,249
--------- ---------
--------- ---------
Per share............................................................................. ($ 0.05) ($ 0.62)
--------- ---------
--------- ---------
Diluted:
Average shares outstanding................................................................ 5,278 5,249
--------- ---------
--------- ---------
Net effect of dilutive stock options...................................................... -- --
--------- ---------
Total equivalent shares............................................................... 5,278 5,249
--------- ---------
--------- ---------
Per share............................................................................. ($ 0.05) ($ 0.62)
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-79
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Net cash provided by operating activities.................................................... $ 130 $ 2,830
--------- ---------
Cash flows from investing activities:
Purchases of video rental inventory, net................................................... (3) (307)
Additions to property, plant and equipment................................................. (181) (225)
Dispositions of property, plant and equipment.............................................. -- 145
--------- ---------
Net cash used in investing activities.................................................... (184) (387)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings................................................................... 68,433 65,290
Payments on borrowings..................................................................... (68,074) (67,782)
Proceeds from exercise of stock options.................................................... 3 --
--------- ---------
Net cash provided by (used in) financing activities...................................... 362 (2,492)
--------- ---------
Increase (decrease) in cash and cash equivalents............................................. 308 (49)
Cash and cash equivalents at beginning of period............................................. 59 406
--------- ---------
Cash and cash equivalents at end of period................................................... $ 367 $ 357
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
financial statements.

F-80
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION:

The accompanying consolidated condensed financial statements should be read
in conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended July 31, 1997.

The consolidated condensed financial statements were prepared from the books
and records of the Company without audit or verification. In the opinion of
management, all adjustments which are of a normal recurring nature and necessary
to present fairly the financial position, results of operations and cash flows
for all the periods presented have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.

The results of operations for the nine month period ended April 30, 1998 are
not necessarily indicative of the operating results for the full fiscal year.
The accompanying financial statements include the accounts of the Companyand its
wholly owned subsidiary. All significant intercompany accounts and transactions
have been eliminated.

2. CURRENT MATURITY OF LONG-TERM DEBT

In May 1996, the Company obtained a new two year credit agreement (the
"Revolving Credit Facility"), which includes a $3,000,000 standby letter of
credit facility, both of which expire in May 1998. Under the Company's new
Revolving Credit Facility, it may borrow up to the lesser of (a) $15,000,000 or
(b) 60% of the Company's eligible inventory (as defined in the "Revolving Credit
Facility"). A commitment fee of 3/8% of the unused portion is payable monthly.
There were no borrowings under the standby letter of credit during the first
nine months of fiscal 1998.

The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by a first-priority security interest in
substantially all of the Company's assets, and the Company's assets, and the
Company may not further pledge its assets without the prior approval of its
lender. The Company is also required to meet certain monthly financial
covenants, including but not limited to minimum earnings, current ratio, fixed
charge coverage and tangible net worth levels. In addition, the Company may not
exceed certain capital expenditures and inventory levels.

The Revolving Credit Facility bears interest at a floating rate, adjusted
monthly, equal to the Index Rate (as defined below)plus 2.875%. The "Index Rate"
is the last month-end published rate for 30-day dealer-placed commercial paper
sold through dealers by major corporations as published in the Money Rates
section of the Wall Street Journal. Accrued interest is payable monthly in
arrears. The interest rate at April 30, 1998 was 8.425%.

The outstanding principal amount under the Revolving Credit Facility was
approximately $6.6 million as of April, 1998, and an additional $1.9 million was
available under the terms of the agreement.

On October 3, 1997, the Company obtained an extension to August 1, 1998, on
the Revolving Credit Facility. Under this extended credit facility, the lender
waived any defaults or events of default which had previously arisen from
violations of the original financial covenants. Financial covenants were revised
for the term of the agreement, as discussed above.

Additionally, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the Company
to borrow from another lender, up to an additional $1.0 million above the
existing Revolving Credit Facility. This facility bears interest at a floating
rate,

F-81
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

adjusted monthly, equal to the Prime Rate plus 8.25%. Accrued interest is
payable monthly in arrears. The interest rate at April 30, 1998, was 16.76%. The
outstanding balance under the Subordination and Intercompany Agreement was $.5
million as of April 30, 1998, and an additional $.5 million was available under
the terms of the Agreement.

The Agreements contain restrictions on the declaration and payment of
dividends.

3. STATEMENT OF CASH FLOWS INFORMATION

The following information is supplemental disclosure of cash flow
information:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30
------------------------------
1998 1997
------------------ ----------
<S> <C> <C>
Interest paid................................................. $ 512,176 $ 584,404
Income tax paid............................................... -0- -0-
</TABLE>

During the nine months ended April 30, 1998, no Restricted Stock Awards were
granted and awards totaling $20,879 were canceled. All Restricted Stock Awards
have lapsed. During the nine months ended April 30, 1997, no Restricted Stock
Awards were granted and $95,286 were canceled.

The Company contributed $27,138 and $85,346 in common stock to the Company's
401(k) Planduring the nine months ended April 30, 1998 and 1997, respectively.

4. LOSS PER SHARE

During the quarter ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS 128"), "Earnings per Share". In accordance
with SFAS 128, primary earnings per share have been replaced with basic earnings
per share, and fully diluted earnings per share have been replaced with diluted
earnings per share which includes potentially dilutive securities such as
outstanding options. Prior periods have been presented to conform to SFAS 128,
however, as the Company had a net loss in the current and prior year comparable
periods, basic and diluted loss per share are the same. The following table sets
forth the computation of loss per share:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
APRIL 30
--------------------------
<S> <C> <C>
1998 1997
----------- -------------
Loss available to shareholders.................................... $ (264,677) $ (3,249,100)
----------- -------------
----------- -------------
Weighted average common shares outstanding--basic................. 5,278,000 5,249,000
Loss per share--basic............................................. $ (.05) $ (.62)
----------- -------------
----------- -------------
</TABLE>

5. NEW ACCOUNTING PRONOUNCEMENTS:

In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 establishes standards for the way
that public companies report selected information about operating segments in
annual financial statements and requires that those companies report selected
information about segments in interim financial reports issued to shareholders.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in

F-82
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments. SFAS No. 131
requires that a public company report a measure of segment profit or loss,
certain specific revenue ad expense items and segment assets. SFAS No. 131 is
effective for financial statements for fiscal years beginning after December 15,
1997. The Company has not determined the effects, if any, that SFAS No. 131 will
have on the disclosures in its consolidated financial statements.

6. STORE CLOSING RESERVE:

As a result of the planned closing of store locations, the Company has
recorded store closing reserves representing lease termination costs, write-down
of assets, rent expense and other miscellaneous expenses. As of January 31,
1998, all planned closings were completed.

7. MERGER AGREEMENT

On June 3, 1998, the Company entered into a definitive Merger Agreement with
Camelot Music Holdings, Inc., the nation's third largest mall based music
retailer. The agreement calls for Camelot to acquire the Company by a merger of
a newly created subsidiary of Camelot into the Company. Pursuant to the merger,
Camelot will acquire all of the outstanding shares of Spec's Music common stock
for $3.30 per share. The Boards of both companies have unanimously approved the
proposed merger. The transaction is subject to a number of customary conditions
including the receipt of required regulatory approvals and approval by the
stockholders of Spec's Music. In connection with the merger, approximately 46
percent of the outstanding shares of Spec's Music have agreed to vote all of
their shares for the approval of the merger at the meeting of the stockholders.
The stockholders meeting is expected to be held in late July 1998. The merger is
anticipated to be completed by July 31, 1998.

F-83
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Spec's Music, Inc. and Subsidiary
Miami, Florida

We have audited the accompanying consolidated balance sheet of Spec's Music,
Inc. and Subsidiary (the "Company") as of July 31, 1997 and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the year ended July 31, 1997. These financials statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Spec's Music, Inc. and
Subsidiary as of July 31, 1997 and the results of their operations and their
cash flows for the year ended July 31, 1997 in conformity with generally
accepted accounting principles.

Deloitte & Touche LLP
Certified Public Accountants

Miami, Florida
October 24, 1997

F-84
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

JULY 31, 1997

<TABLE>
<S> <C>
ASSETS
Current Assets;
Cash and equivalents........................................................... $ 59,397
Trade Receivables.............................................................. 192,286
Income tax receivable.......................................................... 1,890,498
Inventories.................................................................... 14,629,312
Prepaid expense................................................................ 294,373
----------
Total current assets......................................................... 17,065,866
Video rental inventory, net.................................................... 369,734
Property and equipment, net.................................................... 11,157,024
Other assets................................................................... 659,911
----------
Total assets................................................................. $29,252,535
----------
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................... $9,860,269
Accrued expenses............................................................... 2,437,332
Store closing reserve.......................................................... 650,000
----------
Total current liabilities.................................................... 12,947,601
Long term debt................................................................. 6,695,994
----------
Stockholders' Equity;
Common stock, par value $0.1; 10,000,000 shares authorized; 5,300,319 shares
issued....................................................................... 53,004
Additional paid-in capital..................................................... 3,551,326
Retained earnings.............................................................. 6,134,540
Less 25,879 shares in treasury, at cost........................................ (129,930)
----------
Total stockholders' equity..................................................... 9,608,940
----------
Total liabilities and stockholders' equity..................................... $29,252,535
----------
----------
</TABLE>

See Notes to Consolidated Financial Statements

F-85
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF OPERATIONS

YEAR ENDED JULY 31, 1997

<TABLE>
<CAPTION>
<S> <C>
Revenues:
Product Sales...................................................................................... $ 67,469,876
Video Rentals...................................................................................... 1,066,566
-------------
Total Revenues..................................................................................... 68,536,442
Cost of goods sold--product sales.................................................................. 45,736,342
Cost of goods sold--video rental................................................................... 541,833
-------------
Gross Profit....................................................................................... 22,258,267
Store operating, general and administrative expenses............................................... 28,036,172
Restructuring charge............................................................................... 214,780
Store closing expenses............................................................................. 898,434
Impairment of long-lived assets.................................................................... 1,500,000
-------------
Operating loss..................................................................................... (8,391,119)

Other income (expense):
Interest income.................................................................................... 3,698
Interest expense................................................................................... (951,517)
Other income....................................................................................... 43,270
-------------
Total other income (expense)....................................................................... (904,549)
-------------
Loss before income taxes........................................................................... (9,295,668)
Provision (benefit) for income taxes............................................................... (160,860)
-------------
-------------
Net loss........................................................................................... $ (9,134,808)
-------------
-------------
Net loss per common share.......................................................................... $ (1.74)
-------------
-------------
Weighted average number of common shares outstanding............................................... 5,252,000
-------------
-------------
</TABLE>

See Notes to Consolidated Financial Statements

F-86
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

YEAR ENDED JULY 31, 1997

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
--------------------- PAID-IN RETAINED ----------------------
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT TOTAL
---------- --------- ------------ ------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1998......... 5,319,269 $ 53,194 $ 3,700,043 $ 15,269,348 (74,600) $ (375,484) $ 18,647,101
Net loss....................... -- -- (9,134,808) -- -- (9,134,808)
Contributions to 401(K) Plan... -- (193,362) -- 48,721 245,554 52,192
Cancellation of restricted
stock award.................. (18,950) (190) (95,511) -- (95,701)
Deferred compensation
expense...................... 140,156 -- -- 140,156
---------- --------- ------------ ------------- --------- ----------- -------------
Balance, July 31, 1997......... 5,300,319 $ 53,004 $ 3,551,326 $ 6,134,540 (25,879) $ (129,930) $ 9,608,940
---------- --------- ------------ ------------- --------- ----------- -------------
---------- --------- ------------ ------------- --------- ----------- -------------
</TABLE>

See Notes to Consolidated Financial Statements

F-87
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CASH FLOWS

YEAR ENDED JULY 31, 1997

<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss..................................................................... $(9,134,808)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amoritization of video rental inventory...................................... 541,833
Depreciation and amoritization of property and equipment..................... 2,450,507
Amoritization of preopening expenses......................................... 26,018
Loss on disposal of property and equipment................................... 1,923,706
Gain on disposal of video rental inventory................................... (7,705)
Amoritization of intangibles................................................. 29,397
Deferred compensation expense................................................ 140,156
Impairment of long-lived assets.............................................. 1,500,000
Changes in assets and liabilities:
(Increase) decrease in assets:
Trade receivables............................................................ 101,395
Income tax receivable........................................................ (653,857)
Inventories.................................................................. 5,074,764
Prepaid expenses............................................................. 269,593
Deferred tax asset........................................................... 2,122,384
Other assets................................................................. (306,521)
Increase (decrease) in liabilities:
Accounts payable........................................................... 1,451,769
Accrued expenses........................................................... 227,146
Store closing reserve...................................................... (2,209,289)
Deferred income taxes...................................................... (293,663)
-----------
Net cash provided by operating activities.................................... 3,252,825
-----------
Cash flows from investing activities:
Purchases of video rental inventory.......................................... (513,133)
Disposition of video rental inventory........................................ 98,920
Additions to property and equipment.......................................... (244,158)
Disposition of property and equipment........................................ 17,290
-----------
Net cash (used in) investing activities...................................... (641,081)
-----------
Cash flows from financing activities:
Proceeds from borrowings..................................................... 82,346,812
Repayments of borrowings and capital lease................................... (85,304,912)
-----------
Net cash provided by (used in) financing activities.......................... (2,958,100)
-----------
Net (decrease) in cash and equivalents................................... (346,356)
Cash and equivalents at beginning of year................................ 405,753
-----------
Cash and equivalents at end of year...................................... $ 59,397
-----------
-----------
</TABLE>

See Notes to Consolidated Financial Statements

F-88
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF OPERATIONS AND BUSINESS RISKS

The Company is a specialty retailer in Florida and Puerto Rico of
prerecorded music and video products and is also engaged in the rental of video
tapes. This industry has experienced increased competition during the past few
years, which coupled with other business related factors, has negatively
impacted the Company's performance. The Company anticipates the competitive
conditions will continue into the foreseeable future. The Company's return to
profitable operations and continuity into the future is dependent upon various
factors including improved sales and profit margins, reducing expenses,
eliminating unprofitable stores, the competitive environment, its ability to
meet its debt covenants, and the availability of capital resources necessary to
conduct its business. Management believes that its cash flow from operations and
availability under its existing credit agreements should be adequate to cover
the company's projected cash requirements during the year ending July 31, 1998.
Operating results are however, subject to various uncertainties and
contingencies, many of which are beyond the Company's control. The Company's
future profitability or the lack thereof, could have a substantial impact on its
liquidity, its ability to meet its debt covenants, and the availability of
capital resources necessary to conduct its business.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the reported amounts of 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.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of
the Company and its wholly owned subsidiary. All material intercompany
transactions and balances have been eliminated.

REVENUE RECOGNITION

Revenue from the sale of merchandise is recognized at the point of sale to
the consumer, at which time either payment in cash or a third party credit card
is received from the consumer.

CASH EQUIVALENTS

The Company considers all highly liquid short-term investments purchased
with a maturity of three months or less to be cash equivalents.

INVENTORIES

Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market.

VIDEO RENTAL INVENTORY

The cost of video rental inventory is being amortized in proportion to the
estimated rental income of the tapes without salvage value. All video rental
tapes are amortized on an accelerated method over a period of three years. The
cost and accumulated amortization of video tapes which are sold or otherwise

F-89
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
disposed are removed from their appropriate accounts and the resulting gain or
loss is reflected in gross profit.

PREOPENING EXPENSES

The Company defers certain expenses incurred in connection with the opening
of new stores. Such preopening expenses are included in prepaid expenses and are
amortized over the twelve-month period following the opening of each store.
There were no unamortized preopening expenses at July 31, 1997.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation on property and
equipment is provided by the straight-line method over their estimated useful
lives. Leasehold improvements are amortized on a straight-line method over the
life of the lease, including renewal options that are probable of exercise, or
the estimated useful lives of the assets, whichever is shorter.

INCOME TAXES

Deferred income taxes are provided in amounts sufficient to give effect to
temporary differences between financial and tax reporting, in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes."

ADVERTISING

The Company expenses advertising costs as incurred. Advertising expense was
$1,737,479 for the year ended July 31, 1997.

LOSS PER SHARE

Loss per share is computed based on net earnings (loss) for the year,
divided by the weighted average number of common shares and equivalents
outstanding during the respective years. Stock options were antidilutive to the
July 31, 1997 calculation and were therefore excluded.

NEW ACCOUNTING PRONOUNCEMENTS ADOPTED

SFAS NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF."

Long-lived assets and certain identifiable intangibles to be held and used
by a company are required to be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Measurement of an impairment loss for such long-lived assets and
identifiable intangibles should be based on the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed of are
required to be reported generally at the lower of the carrying amount or fair
value less the cost to sell. The Company adopted SFAS No. 121 in fiscal 1997,
(see Note E).

SFAS NO. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION."

SFAS No. 123 defines and encourages the use of the fair value method of
accounting prescribed in Accounting Principles Board Opinion No. 25 ("APB 25")
for measurement of employee stock-based

F-90
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A / SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
compensation is allowed with pro-forma disclosures of net income and earnings
per share as if the fair value method of accounting had been applied.
Transactions in which equity instruments are issued in exchange for goods or
services from non-employees must be accounted for based on the fair value of the
consideration received or of the equity instrument issued, whichever is more
reliably measurable. The Company has continued to use the method of accounting
prescribed in APB 25 for measurement of employee stock-based compensation.

NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

("SFAS") NO. 128, "EARNINGS PER SHARE."

SFAS No. 128, which supersedes Accounting Principles Board ("APB") Opinion
No. 15, requires a dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income or loss attributable to common stockholders by
the weighted-average number of 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 that then shared
in the earnings of the entity. When adopted, all prior-period earnings per share
data are required to be restated. The Company believes SFAS No. 128 will not
significantly alter previously reported earnings per share data.

SFAS NO. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION."

SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual financial statements and
requires that those companies report selected information about segments in
interim financial reports issued to shareholders. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company has not determined the
effects, if any, that SFAS No. 131 will have on the disclosures in its
consolidated financial statements.

B / FAIR VALUE OF FINANCIAL INSTRUMENTS:

In accordance with SFAS No. 107, "Disclosures About Fair Value of Financial
Instruments," the Company has estimated the fair value of financial instruments.
The estimated fair value has been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting data to develop such
estimates. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.

The following methods and assumptions were used to estimate the fair value
of the Company's financial instruments for which it was practicable to estimate
that value:

- The carrying amounts of cash and equivalents, receivables and accounts
payable approximate fair value due to their short term nature; and

F-91
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

B / FAIR VALUE OF FINANCIAL INSTRUMENTS: (CONTINUED)
- Discounted cash flows using current interest rates for financial
instruments with similar characteristics and maturity were used to
determine the fair value of the long-term debt.

There were no significant differences as of July 31, 1997 in the carrying
value and fair value of financial instruments.

C / SUPPLEMENTAL CASH FLOW INFORMATION:

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION FOR THE YEAR ENDED JULY 31,
1997 IS AS FOLLOWS:

Cash paid during the year for:

<TABLE>
<S> <C>
Interest.......................................................... $ 749,512
Income Taxes...................................................... 0
</TABLE>

SUPPLEMENTAL NONCASH FINANCING ACTIVITIES INFORMATION

The Company contributed approximately $52,000 of treasury stock to the
Company's 401(k) Planduring the year ended July 31, 1997.

During the fiscal year ended July 31, 1997 the Company canceled restricted
stock awards totaling approximately $96,000.

D / VIDEO RENTAL TAPES:

The following comprise cost and accumulated amortization of video rental
tapes at July 31, 1997:

<TABLE>
<S> <C>
Cost............................................................ $1,751,132
Less accumulated amortization................................... 1,381,398
---------
$ 369,734
---------
---------
</TABLE>

E / PROPERTY AND EQUIPMENT:

The following comprise property and equipment at July 31, 1997:

<TABLE>
<CAPTION>
USEFUL
LIVES
-----------
<S> <C> <C>
Building............................................................................. 31 years $ 4,995,707
Equipment, furniture and fixtures.................................................... 5-8 years 9,281,906
Transportation equipment............................................................. 2-5 years 141,981
Signs................................................................................ 1-10 years 1,155,341
Leasehold improvements............................................................... 1-31 years 5,088,367
-------------
20,663,302
Less accumulated depreciation and amortization....................................... 9,506,278
-------------
$ 11,157,024
-------------
-------------
</TABLE>

During fiscal 1997, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting For The Impairment of Long-lived Assets
and For Long-lived Assets To Be Disposed

F-92
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

E / PROPERTY AND EQUIPMENT: (CONTINUED)
Of," the Company recorded an estimated write down of $1,500,000 based on
projected future cash flows of certain stores.

F / LONG TERM DEBT:

In May 1996, the Company obtained a new 2 year credit agreement (the
"Revolving Credit Facility"), which includes a $3,000,000 stand-by letter of
credit facility, both of which expire in May, 1998. Under the Company's new
Revolving Credit Facility, it may borrow up to the lesser of (a) $15,000,000 or
(b) 60% of the Company's eligible inventory (as defined in the Credit
Agreement). A commitment fee of 3/8% of the unused portion is payable monthly.
There were no borrowings under the stand-by letter of credit during fiscal 1997.

The Revolving Credit Facility and all of the Company's obligations in
connection therewith are secured by a first-priority security interest in
substantially all of the Company's assets, and the Company may not further
pledge its assets without the prior approval of its lender. The Company is also
required to meet certain monthly financial covenants, including, but not limited
to minimum earnings, current ratio, fixed charge coverage and tangible net worth
levels. In addition, the Company may not exceed certain capital expenditures and
inventory cost levels.

The Revolving Credit Facility bears interest at a floating rate, adjusted
monthly, equal to the Index Rate (as defined below) plus 2.875%. The "Index
Rate" is the last month-end published rate for 30-day dealer-placed commercial
paper sold through dealers by major corporations as published in the Money Rates
section of The Wall Street Journal. Accrued interest is payable monthly in
arrears. The interest rate at July 31, 1997 was 8.445%.

The outstanding amount under the Revolving Credit Facility was approximately
$6.7 million as of July 31, 1997 and an additional $338,000 was available under
the terms of the agreement.

On October 3, 1997, the Company obtained an extension to August 1, 1998 on
the Revolving Credit Facility. Under this extended facility the lender waived
any defaults or events of default which had previously arisen from violations of
the original financial covenants. New financial covenants have been set for the
term of the agreement.

Additionally, the lender entered into a Subordination and Intercreditor
Agreement, which is effective through August 1, 1998, which allows the Company
to borrow from another lender, up to an additional $1 million above the existing
Revolving Credit Facility. This facility bears interest at a floating rate,
adjusted monthly, equal to the Prime Rate plus 8.25%.

The Agreements contain restrictions on the declaration and payment of
dividends.

F-93
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G / INCOME TAXES:

Components of income taxes for the year ended July 31, 1997 consist of the
following:

<TABLE>
<S> <C>
FEDERAL:
Current......................................................... $(1,989,581)
Deferred........................................................ 1,563,433
----------
(426,148)
----------
STATE:
Deferred........................................................ $ 265,288
----------
$ (160,860)
----------
----------
</TABLE>

The difference between the expected federal income tax rate and the
Company's effective tax rate for the year ended July 31, 1997 is as follows:

<TABLE>
<S> <C>
Expected federal tax rate............................................ 34.0%
State income tax, net of federal income tax effects.................. (1.9)
Change in valuation allowance........................................ (42.1)
Reversal of previously recorded deferred tax liabilities............. 5.8
Other................................................................ 5.9
---------
1.7%
---------
---------
</TABLE>

The approximate tax effect of each type of temporary difference that gave
rise to the Company's deferred tax asset and liability on the accompanying
balance sheet is as follows:

<TABLE>
<CAPTION>
ASSETS LIABILITIES TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Accelerated depreciation on property and equipment for tax purposes...... $ 14,961 $ -- $ 14,961
Capitalization for tax purposes of inventory related costs............... 238,498 -- 238,498
Accrued return authorization reserves.................................... 42,568 -- 42,568
Store closing reserve.................................................... 297,461 -- 297,461
Accrued rent............................................................. 59,121 -- 59,121
Accrued vacation......................................................... 73,311 -- 73,311
Accrued insurance........................................................ 3,528 -- 3,528
Deferred compensation.................................................... 26,103 -- 26,103
Shrinkage reserve........................................................ 38,629 -- 38,629
Impairment of assets..................................................... 564,000 -- 564,000
Contributions............................................................ 10,749 -- 10,749
Preopening expenses...................................................... -- (15,872) (15,872)
Net operating loss carry forwards........................................ 2,562,969 -- 2,562,969
----------- ----------- -----------
3,931,898 (15,872) 3,916,026
(3,931,898) 15,872 (3,916,026)
----------- ----------- -----------
$ -0- $ -0- $ -0-
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

F-94
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

G / INCOME TAXES: (CONTINUED)
In view of continuing losses from operations, the Company has recorded a
valuation allowance on deferred asset amounts which may not be recoverable
through thc future utilization of operating losses.

The Company has received a $1,890,000 federal income tax refund in October
1997 for the fiscal year ending July 31, 1997.

The Company has available federal net operating loss carryforwards totaling
approximately $6,005,892 which expire in 2012. In addition, the Company has
available state operating loss carryforwards totaling approximately $14,351,667
expiring in years 2011 and 2012.

H / PROFIT-SHARING PLAN:

The Company has a profit-sharing plan which includes a salary deferral
provision under section 401(k) of the Internal Revenue Code. Participation in
the plan is available to all full-time employees who are over 20 1/2 years old
and have completed six months of continuous service. Contributions are
determined annually by the Board of Directors. For the year ended July 31, 1997
the company provided approximately $66,000 for contribution to the 401(k) Plan.
Approximately $52,000 of the contribution was made in the Company's common
stock.

I / STOCKHOLDERS' EQUITY

COMMON STOCK

During fiscal 1991, the Board of Directors authorized a common stock
repurchase program of up to 300,000 shares of the Company's common stock. The
Board of Directors authorized the purchase of a additional 300,000 shares of the
Company's common stock during fiscal year 1993. During fiscal 1997 no shares
were purchased. In connection with contributions to thc 401(k) Plan, grants of
restricted stock awards and the exercise of stock options, 48,721 shares were
issued from treasury stock in 1997. The remaining shares are included in
treasury stock at July 31, 1997.

STOCK OPTION PLANS

In May 1986, the Board of Directors approved the adoption of an employee
stock option plan. Under the plan, 500,000 shares of common stock have been
reserved for issuance. In fiscal 1987, the plan was amended and restated as an
incentive stock plan which includes stock options, stock appreciation rights,
restricted stock and performance shares. As of May 1996, no additional grants of
stock options can be made under the plan.

On September 21, 1993, the Board of Directors created two new plans: The
1993 Non-Employee Director Plan and the 1993 Employee Stock Option Plan.The
Company reserved 50,000 shares under the Director's plan and granted 15,000
options. The Company reserved 500,000 shares for the 1993 Employee Stock Option
Plan.

On December 10, 1996, the Shareholders approved the 1996 Non-Employee
Directors Stock Option Plan. The company reserved 150,000 shares under the
Non-employee Directors Plan.

At July 31, 1997, the Company has two stock options plans, which are
described above. The Company applies Accounting Principle Board ("APB") Opinion
25 and related interpretations in measuring compensation expense for its plans.
Accordingly, no compensation has been recognized for its fixed stock option
plans. Had compensation cost for the Company's stock-based compensation plans
been determined based

F-95
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I / STOCKHOLDERS' EQUITY (CONTINUED)
on the fair value at the grant dates for awards under those plans, the Company's
net loss and loss per share would have been increased to the pro-forma amounts
indicated below;

<TABLE>
<S> <C>
Net Loss
As reported................................................... $(9,134,808)
Pro forma..................................................... (9,266,349)
Loss per share
As reported................................................... (1.74)
Pro forma..................................................... (1.76)
</TABLE>

The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions for the
grants:

<TABLE>
<S> <C>
Expected volatility............................................... 61%
Expected lives.................................................... 5 years
Dividend yield.................................................... 0%
Risk free interest rate........................................... 5.88-6.50%
</TABLE>

Transactions and other information relating to stock options granted are
summarized as follows;

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding July 31, 1996.............................................. 686,505 $ 2.39
Granted................................................................ 477,000 $ 0.78
Canceled............................................................... (286,910) $ 2.28
---------- -----
Outstanding July 31, 1997.............................................. 876,595 $ 1.55
---------- -----
---------- -----
</TABLE>

The weighted average fair value of options granted during the year ended
July 31, 1997 was $.44.

All stock options with the exception of those listed below were granted with
option prices that were equal to market value at the date of grant. The term of
the options granted may be no more than ten years from the effective date of
grant. During fiscal 1992 and 1993, the Company extended the exercise period of
the 1987 outstanding stock options from September 1992 to September 1994. On
September 14, 1994 the Company's Board of Directors extended the current
expiration dates on all outstanding stock options to a nine year term. At July
31, 1997, options to purchase 661,727 shares of common stock were exercisable.

During fiscal 1996, in connection with various consulting agreements, the
Company granted 469,766 compensatory stock options which do not become effective
until fiscal 1997. The options, granted at prices below the fair market value at
the date of grant of $254,604, vest over the term of the agreements.
Compensation expense is charged to earning on a pro-rata basis over the life of
the consulting agreements.

On September 30, 1994, the Board of Directors granted 29,300 shares of
restricted stock to 86 management associates which vest as described above. At
July 31, 1997, 5,500 shares remain outstanding after cancellations.

F-96
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

I / STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about the option plans as of July
31, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTURAL AVERAGE AVERAGE
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------- ----------- ----------------- ----------- ----------- -----------
$ 1.13 50,000 0.4 $ 1.13 50,000 $ 1.13
1.31 279,595 2.0 1.23 279,595 1.23
4.50 16,000 2.2 4.50 16,000 4.50
4.75 18,000 3.2 4.75 18,000 4.75
1.00 2,000 3.4 1.00 -- 1.00
1.88 20,000 3.9 1.88 7,215 1.88
4.50 18,000 4.3 4.50 18,000 4.50
6.00 30,000 5.3 6.00 22,500 6.00
5.00 5,000 6.2 5.00 3,750 5.00
4.50 33,000 7.2 4.50 16,500 4.50
3.00 1,000 7.9 3.00 1,000 3.00
1.25 1,000 8.4 1.25 1,000 1.25
1.00 36,000 9.4 1.00 7,000 1.00
0.63 192,000 9.6 0.63 192,000 0.63
0.69 175,000 9.9 0.69 29,167 0.69
- ------------- --
----------- ----- ----------- -----
$ 0.63-$6.00 876,595 5.9 $ 1.49 661,727 $ 1.55
- ------------- --
----------- ----- ----------- -----
</TABLE>

J / COMMITMENTS:

The Company leases certain facilities and equipment under non-cancelable
operating leases which expire at various dates through fiscal 2010. Future
minimum lease payments under leases that have terms in excess of one year are:

<TABLE>
<S> <C>
1998........................................................... $6,211,187
1999........................................................... 5,723,885
2000........................................................... 4,961,589
2001........................................................... 3,851,757
2002........................................................... 3,167,831
Thereafter..................................................... 8,770,767
----------
$32,687,016
----------
----------
</TABLE>

Base rent expenses, including real estate taxes, insurance, and related
common area repairs and maintenance, were approximately $8,400,000 for the year
ended July 31, 1997. Some leases include contingent rent based on applying a
specified percentage of sales in excess of a predetermined base. Such contingent
rent expense was approximately $71,000 in the year ended July 31, 1997. Most
leases contain renewal options.

F-97
<PAGE>
SPEC'S MUSIC, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

K / RELATED-PARTY TRANSACTIONS:

The Company leases its store in Coral Gables, Florida from the Martin W.
Spector Irrevocable Trust, certain of whose trustees and beneficiaries are
officers and directors of the Company. Rental payments for the year ended July
31, 1997 was approximately $175,000.

The Company also leases a store located in St. Petersburg, Florida, from the
Lieff Family Trust and the Zacks Family Trust, whose trustees are officers and
directors of the Company. Rental payments for the year ended July 31, 1997 was
approximately $169,000.

L / STORE CLOSING AND RESTRUCTURING RESERVES

In fiscal 1997 the company adopted a plan as part of its response to
industry conditions to close certain unprofitable store locations. In connection
therewith, the following was charged to operations:

<TABLE>
<S> <C>
Loss on disposal of assets........................................ $ 431,000
Lease expense..................................................... 467,000
---------
$ 898,000
---------
---------
</TABLE>

These charges are based on a series of estimates and final actual results
could vary from these estimates, depending on certain factors.

Additionally, in fiscal 1997, the Company recorded a $215,000 restructuring
charge primarily for severance associated with eliminated positions.

M / QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Summarized quarterly financial results for fiscal 1997 are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS,
EXCEPT PER SHARE)
------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED NET EARNINGS
NET AVERAGE (LOSS) PER
GROSS EARNINGS SHARES COMMON
REVENUES PROFIT (LOSS) OUTSTANDING SHARE
--------- --------- ----------- ------------- ---------------
First Quarter......................................... $ 15,789 $ 5,414 $ (821) 5,247 (0.16)
Second Quarter........................................ 21,461 7,167 (370) 5,242 (0.07)
Third Quarter......................................... 16,510 5,459 (2,057) 5,254 (0.39)
Fourth Quarter........................................ 14,776 4,218 (5,886) 5,252 (1.12)
</TABLE>

F-98
<PAGE>
ANNEX A

AGREEMENT AND PLAN
OF MERGER
BY AND AMONG
TRANS WORLD ENTERTAINMENT CORPORATION,
CAQ CORPORATION
AND
CAMELOT MUSIC HOLDINGS, INC.
DATED AS OF OCTOBER 26, 1998
TABLE OF CONTENTS
<PAGE>

ARTICLE I

THE MERGER

Section 1.01. The Merger.............................................................................. A-1
Section 1.02. Effective Time.......................................................................... A-1
Section 1.03. Certificate of Incorporation and By-Laws of Surviving Corporation....................... A-1
Section 1.04. Directors and Officers of Surviving Corporation......................................... A-2
Section 1.05. Stockholders' Meeting................................................................... A-2
Section 1.06. Filing of Certificate of Merger......................................................... A-2
Section 1.07. Further Assurances...................................................................... A-2

ARTICLE II

CONVERSION OF SHARES

Section 2.01. Shares.................................................................................. A-3
Section 2.02. Subco Common Stock...................................................................... A-3
Section 2.03. Exchange of Shares...................................................................... A-4
Section 2.04. Effect on Company Options and Warrants.................................................. A-4
Section 2.05. Fractional Shares....................................................................... A-5

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBCO

Section 3.01. Organization, Etc....................................................................... A-6
Section 3.02. Board Recommendation.................................................................... A-6
Section 3.03. Authority Relative to This Agreement.................................................... A-6
Section 3.04. No Violations, Etc...................................................................... A-6
Section 3.05. Fairness Opinion........................................................................ A-7
Section 3.06. Finders or Brokers...................................................................... A-7
Section 3.07. Registration Statement; Joint Proxy Statement........................................... A-7
Section 3.08. SEC Filings............................................................................. A-7
Section 3.09. Financial Statements.................................................................... A-8
Section 3.10. Absence of Undisclosed Liabilities...................................................... A-8
Section 3.11. Absence of Changes or Events............................................................ A-8
Section 3.12. Capitalization.......................................................................... A-8
Section 3.13. Litigation.............................................................................. A-9
Section 3.14. Tax Treatment; Officer's Certificate as to Tax Matters.................................. A-9
Section 3.15. Taxes................................................................................... A-9
Section 3.16. Accounting Matters...................................................................... A-10
Section 3.17. State Antitakeover Statutes............................................................. A-10

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Section 4.01. Organization, Etc....................................................................... A-10
</TABLE>

A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
Section 4.02. Authority Relative to This Agreement.................................................... A-10
Section 4.03. No Violations, Etc...................................................................... A-11
Section 4.04. Fairness Opinion........................................................................ A-11
Section 4.05. Board Recommendation.................................................................... A-11
Section 4.06. State Antitakeover Statutes............................................................. A-12
Section 4.07. Affiliates.............................................................................. A-12
Section 4.08. Finders or Brokers...................................................................... A-12
Section 4.09. Joint Proxy Statement................................................................... A-12
Section 4.10. Capitalization.......................................................................... A-12
Section 4.11. Company Reports......................................................................... A-13
Section 4.12. Financial Statements.................................................................... A-13
Section 4.13. Absence of Undisclosed Liabilities...................................................... A-13
Section 4.14. Absence of Changes or Events............................................................ A-13
Section 4.15. Capital Stock of the Company Subsidiaries............................................... A-15
Section 4.16. Litigation.............................................................................. A-15
Section 4.17. Insurance............................................................................... A-15
Section 4.18. Contracts and Commitments............................................................... A-15
Section 4.19. Labor Matters; Employment and Labor Contracts........................................... A-16
Section 4.20. Compliance with Laws.................................................................... A-16
Section 4.21. Intellectual Property Rights............................................................ A-16
Section 4.22. Taxes................................................................................... A-17
Section 4.23. Employee Benefit Plans; ERISA........................................................... A-17
Section 4.24. Environmental Matters................................................................... A-19
Section 4.25. Tax Treatment; Officer's Certificate as to Tax Matters.................................. A-19
Section 4.26. Accounting Matters...................................................................... A-19

ARTICLE V

COVENANTS

Section 5.01. Conduct of Business of the Company and Parent........................................... A-19
Section 5.02. No Solicitation......................................................................... A-23
Section 5.03. Access to Information................................................................... A-24
Section 5.04. Registration Statement and Joint Proxy Statement........................................ A-25
Section 5.05. Commercially Reasonable Efforts; Other Actions.......................................... A-25
Section 5.06. Public Announcements.................................................................... A-25
Section 5.07. Notification of Certain Matters......................................................... A-25
Section 5.08. Indemnification......................................................................... A-25
Section 5.09. Expenses................................................................................ A-26
Section 5.10. Affiliates.............................................................................. A-26
Section 5.11. Stock Exchange Listings................................................................. A-26
Section 5.12. Letter of the Company's Accountants..................................................... A-26
Section 5.13. Letter of Parent's Accountants.......................................................... A-26
Section 5.14. Pooling of Interests.................................................................... A-26
Section 5.15. Employee Benefits and Employment Contracts.............................................. A-26
Section 5.16. Registration Rights Agreement........................................................... A-27
Section 5.17. Board Representation.................................................................... A-27
</TABLE>

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<S> <C> <C>
ARTICLE VI

CONDITIONS TO THE OBLIGATIONS OF PARENT, SUBCO AND THE COMPANY

Section 6.01. Registration Statement.................................................................. A-27
Section 6.02. Stockholder Approval.................................................................... A-28
Section 6.03. Listing................................................................................. A-28
Section 6.04. Certain Proceedings..................................................................... A-28
Section 6.05. Tax Matters............................................................................. A-28
Section 6.06. Pooling Letter.......................................................................... A-28

ARTICLE VII

CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUBCO

Section 7.01. Representations and Warranties True..................................................... A-28
Section 7.02. Performance............................................................................. A-28
Section 7.03. Certificates............................................................................ A-29
Section 7.04. Material Adverse Change................................................................. A-29
Section 7.05. Consents, Approvals and Notifications................................................... A-29

ARTICLE VIII

CONDITIONS TO THE OBLIGATIONS OF THE COMPANY

Section 8.01. Representations and Warranties True..................................................... A-29
Section 8.02. Performance............................................................................. A-29
Section 8.03. Certificates............................................................................ A-29
Section 8.04. Material Adverse Change................................................................. A-29
Section 8.05. Consents, Approvals and Notifications................................................... A-29

ARTICLE IX

CLOSING

Section 9.01. Time and Place.......................................................................... A-30
Section 9.02. Filings at the Closing.................................................................. A-30

ARTICLE X

TERMINATION AND ABANDONMENT

Section 10.01. Termination............................................................................. A-30
Section 10.02. Termination by Parent................................................................... A-30
Section 10.03. Termination by the Company.............................................................. A-31
Section 10.04. Procedure for Termination............................................................... A-31
Section 10.05. Effect of Termination and Abandonment................................................... A-31
</TABLE>

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<TABLE>
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<S> <C> <C>
ARTICLE XI

DEFINITIONS

Section 11.01. Terms Defined in This Agreement......................................................... A-32

ARTICLE XII

MISCELLANEOUS

Section 12.01. Amendment and Modification.............................................................. A-33
Section 12.02. Waiver of Compliance; Consents.......................................................... A-33
Section 12.03. Survivability; Investigations........................................................... A-34
Section 12.04. Notices................................................................................. A-34
Section 12.05. Assignment; Third Party Beneficiaries................................................... A-35
Section 12.06. Governing Law........................................................................... A-35
Section 12.07. Counterparts............................................................................ A-35
Section 12.08. Severability............................................................................ A-35
Section 12.09. Interpretation.......................................................................... A-35
Section 12.10. Entire Agreement........................................................................ A-35

Signatures................................................................................................ A-36
</TABLE>

EXHIBITS

<TABLE>
<S> <C>
Exhibit A Form of Company Affiliate Letter
Exhibit B Form of Company Lock-up Agreement
Exhibit C Form of Parent Lock-up Agreement
Exhibit D Registration Rights Agreement
Exhibit E-1 Parent Stockholder Voting Agreement
Exhibit E-2 Company Stockholder Voting Agreement
</TABLE>

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<PAGE>
AGREEMENT AND PLAN OF MERGER

AGREEMENT AND PLAN OF MERGER, dated as of October 26, 1998 (the
"Agreement"), by and among TRANS WORLD ENTERTAINMENT CORPORATION, a New York
corporation ("Parent"), CAQ CORPORATION, a Delaware corporation ("Subco"), which
is a newly-formed direct wholly-owned subsidiary of Parent, and CAMELOT MUSIC
HOLDINGS, INC., a Delaware corporation (the "Company"). Subco and the Company
are hereinafter sometimes collectively referred to as the "Constituent
Corporations."

RECITALS

WHEREAS, Parent and the Company believe it is in the long-term strategic
interests of their respective stockholders to combine their businesses;

WHEREAS, the combination will be effected by the merger of Subco with and
into the Company pursuant to which stockholders of the Company will receive
Parent Shares (as defined in Section 2.01) and the Company will become a
wholly-owned subsidiary of Parent, all upon the terms and subject to the
conditions of this Agreement;

WHEREAS, such combination is intended to qualify for Federal income tax
purposes as a tax-free reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code");

WHEREAS, such combination is intended to be accounted for as a "pooling of
interests" under Opinion 16 of the Accounting Principles Board and applicable
SEC rules and regulations;

WHEREAS, simultaneous with the execution of this Agreement, Robert J.
Higgins has entered into the Parent Stockholder Voting Agreement attached hereto
as Exhibit E-1 whereby he has agreed to vote in favor of the Parent Merger
Matters (as defined in Section 1.05(b)) at the Parent Special Meeting (as
defined in Section 1.05(b));

WHEREAS, simultaneous with the execution of this Agreement, certain
stockholders of the Company have entered into the Company Stockholder Voting
Agreement attached hereto as Exhibit E-2 whereby each such stockholder has
agreed to vote to approve this Agreement at the Company Special Meeting (as
defined in Section 1.05(a)); and

WHEREAS, Parent, Subco and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
merger of Subco and the Company.

NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:

ARTICLE I
THE MERGER

Section 1.01. THE MERGER. (a) In accordance with the provisions of this
Agreement and the General Corporation Law of the State of Delaware (the
"Delaware Act"), at the Effective Time (as defined in Section 1.02), Subco shall
be merged (the "Merger") with and into the Company, and the Company shall be the
surviving corporation (hereinafter sometimes called the "Surviving Corporation")
and shall continue its corporate existence under the laws of the State of
Delaware. The name of the Surviving Corporation shall be Camelot Music Holdings,
Inc. At the Effective Time the separate existence of Subco shall cease.

(b) The Merger shall have the effects on Subco and the Company as
constituent corporations of the Merger as provided in the Delaware Act.

Section 1.02. EFFECTIVE TIME. The Merger shall become effective at the
time of filing of, or at such later time specified in, a certificate of merger,
in the form required by and executed in accordance with the Delaware Act, with
the Secretary of State of the State of Delaware in accordance with the Delaware
Act (the "Certificate of Merger"). The date and time when the Merger shall
become effective is herein referred to as the "Effective Time."

Section 1.03. CERTIFICATE OF INCORPORATION AND BY-LAWS OF SURVIVING
CORPORATION. The Certificate of Incorporation and by-laws of the Company, as in
effect immediately prior to the Effective Time, shall be
<PAGE>
the Certificate of Incorporation and by-laws of the Surviving Corporation until
thereafter amended as provided by law.

Section 1.04. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION. The
directors of Subco immediately prior to the Effective Time shall be the initial
directors of the Surviving Corporation, and the officers of the Company
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, in each case until their successors are duly elected and
qualified.

Section 1.05. STOCKHOLDERS' MEETINGS. (a) The Company shall take all
action necessary in accordance with applicable law and its Certificate of
Incorporation and by-laws to call and convene a special meeting of its
stockholders (the "Company Special Meeting") as soon as practicable to consider
and vote upon this Agreement. This Agreement shall be submitted to the
stockholders of the Company for purposes of acting upon it as soon as
practicable and, except to the extent enjoined or restrained by court order, in
any event within 45 days of the effectiveness of the Registration Statement,
regardless of whether the Board of Directors of the Company determines at any
time subsequent to the date hereof that this Agreement is no longer advisable
and recommends that the stockholders of the Company reject it. The Company,
through its Board of Directors, unless the Board of Directors, after consulting
with outside counsel, determines in good faith that other action is required in
order to discharge properly the directors' fiduciary duties, (i) shall recommend
to its stockholders approval of this Agreement, the Merger and the other
transactions contemplated hereby, which recommendation shall be contained in the
joint proxy statement of the Company and Parent with respect to the Merger (the
"Joint Proxy Statement") and (ii) shall use all commercially reasonable efforts
to solicit from its respective stockholders proxies in favor of approval and
adoption of this Agreement.

(b) Parent shall take all action necessary in accordance with applicable law
and its Certificate of Incorporation and by-laws to call and convene a special
meeting of its stockholders (the "Parent Special Meeting" and together with the
Company Special Meeting, the "Special Meetings") as soon as practicable to
consider and vote upon an amendment to its Certificate of Incorporation to
increase the number of authorized shares of Parent Common Stockand the issuance
of Parent Shares in connection with the Merger as required by the Nasdaq rules
(the "Parent Merger Matters"). Parent also intends to submit to a separate vote
of its stockholders at the Parent Special Meeting amendments to its Certificate
of Incorporation to adopt a classified Board of Directors removable only for
cause and provisions relating to the exculpation of members of Parent's Board of
Directors for monetary liability to the fullest extent permissible under the New
York Business Corporation Law (the "Additional Matters"). The Parent Merger
Matters shall be submitted to the stockholders of Parent for purposes of acting
upon them as soon as practicable and, except to the extent enjoined or
restrained by court order, in any event within 45 days of the effectiveness of
the Registration Statement, regardless of whether the Board of Directors of
Parent determines at any time subsequent to the date hereof that the Parent
Merger Matters are no longer advisable and recommends that the stockholders of
Parent reject them. Parent, through its Board of Directors, unless the Board of
Directors, after consulting with outside counsel, determines in good faith that
other action is required in order to discharge properly the directors' fiduciary
duties, (i) shall recommend to its stockholders approval of the Parent Merger
Matters, which recommendation shall be contained in the Joint Proxy Statement
and (ii) shall use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of approval of the foregoing. Parent may also
solicit proxies from its stockholders for approval of the Additional Matters in
the manner set forth above in the Joint Proxy Statement.

Section 1.06. FILING OF CERTIFICATE OF MERGER. At the Closing (as defined
in Section 9.01), Parent, Subco and the Company shall cause the Certificate of
Merger to be executed and filed with the Secretary of State of the State of
Delaware, as provided in the Delaware Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.

Section 1.07. FURTHER ASSURANCES. If, at any time after the Effective
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving

A-2
<PAGE>
Corporation its right, obligation, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, obligation, title and interest in,
to and under such rights, properties or assets in the Surviving Corporation or
otherwise to carry out this Agreement.

ARTICLE II
CONVERSION OF SHARES

Section 2.01. SHARES. (a) Each share of common stock, par value $.01 per
share, of the Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (except for shares, if any, owned by the
Company as treasury stock or owned by the Company Subsidiaries (as defined in
Section 4.01) or owned by Parent or the Parent Subsidiaries (as defined in
Section 3.04)) shall, by virtue of the Merger and without any action on the part
of the holder thereof, be converted into the right to receive 1.90 shares
("Parent Shares") of common stock, par value $.01 per share, of Parent ("Parent
Common Stock") (such 1.90 Parent Shares being referred to herein as the
"Exchange Ratio"); PROVIDED that no Dissenting Shares (as defined in Section
2.01(c)) will be deemed to be converted into and represent the right to receive
Parent Shares hereunder and holders of Dissenting Shares, if any, will be
entitled to payment solely from the Surviving Corporation of the appraised value
of such Dissenting Shares in accordance with Section 262 of the Delaware Act.

The Parent Shares to be delivered in exchange for shares of Company Common
Stock pursuant to this Section 2.01(a) are hereinafter sometimes called the
"Closing Consideration." In the event of any change (or the establishment of a
record date prior to the Effective Time with respect to any change) in Parent
Shares or Company Common Stock by reason of any stock split, readjustment, stock
dividend, exchange of shares, reclassification, recapitalization or otherwise,
the Exchange Ratio shall be correspondingly adjusted.

(b) Except as otherwise provided herein, at the Effective Time all shares of
Company Common Stock, by virtue of the Merger and without any action on the part
of the holders thereof, shall no longer be outstanding and shall be cancelled
and retired and shall cease to exist, and each holder of a Certificate (as
defined in Section 2.03) shall thereafter cease to have any rights with respect
to the number of shares of Company Common Stock evidenced by such Certificate,
except the right to receive the Closing Consideration for such shares of Company
Common Stock specified in the foregoing clause (a) upon the surrender of such
Certificate in accordance with Section 2.03.

(c) Notwithstanding the provisions of this Section 2.01 or any other
provision of this Agreement to the contrary, the shares of Company Common Stock
that are issued and outstanding immediately prior to the Effective Time and are
held by stockholders who have not voted such shares in favor of the adoption of
this Agreement and who properly demand appraisal of such shares, in accordance
with Section 262 of the Delaware Act (the "Dissenting Shares"), will not be
converted as provided in Section 2.01(a) and 2.01(b) at or after the Effective
Time unless and until the holder of such Dissenting Shares fails to perfect or
effectively withdraws or loses such right to appraisal and payment under the
Delaware Act. If a holder of Dissenting Shares so fails to perfect or
effectively withdraws or loses such right to appraisal and payment, then as of
the Effective Time or the occurrence of such event, whichever last occurs, such
holder's Dissenting Shares will be converted into and represent solely the
rights provided in Section 2.01(a) and 2.01(b).

Section 2.02. SUBCO COMMON STOCK. All shares of common stock, par value
$.01 per share, of Subco issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and

A-3
<PAGE>
without any action on the part of the holder thereof, be converted into such
number of newly issued shares of common stock of the Surviving Corporation as
shall equal the sum of the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time and the number of shares of Company
Common Stock underlying options, warrants, calls, subscriptions or other rights
or other agreements or commitments of the Company assumed by Parent.

Section 2.03. EXCHANGE OF SHARES. (a) At or prior to the Effective Time,
Parent shall deposit, or shall cause to be deposited, with a bank or trust
company reasonably acceptable to the Company (the "Exchange Agent"), for
exchange in accordance with this Article II, certificates representing the
shares of Parent Common Stock and an estimated amount of cash to be paid
pursuant to this Article II in exchange for outstanding shares of Company Common
Stock. Any cash and certificates representing shares of Parent Common Stock
deposited with the Exchange Agent shall hereinafter be referred to as the
"Exchange Fund."

(b) Promptly after the Effective Time, Parent shall mail to each record
holder, as of the Effective Time, of an outstanding certificate or certificates
that immediately prior to the Effective Time represented shares of Company
Common Stock (the "Certificates") a form letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to the
Exchange Agent) and instructions for use in effecting the surrender of the
Certificates for exchange. Upon surrender to the Exchange Agent of a
Certificate, together with such letter of transmittal duly executed, the holder
of such Certificate shall be entitled to receive in exchange therefor that
number of Parent Shares that such holder has the right to receive under this
Article II, and such Certificate shall forthwith be cancelled. If any Parent
Shares are to be issued to a person other than the person in whose name the
Certificate surrendered is registered, it shall be a condition of exchange that
the Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such exchange shall pay any
transfer or other taxes required by reason of the exchange to a person other
than the registered holder of the Certificate surrendered or such person shall
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered in accordance with the
provisions of this Section 2.03, each Certificate shall represent, for all
purposes, the right to receive the Closing Consideration in respect of the
number of shares of Company Common Stock evidenced by such Certificate. No
dividends or other distributions that are declared after the Effective Time on
Parent Shares and payable to the holders of record thereof after the Effective
Time will be paid to holders of Certificates until such holders surrender their
Certificates. Upon such surrender, there shall be paid to the record holder of
the Parent Shares representing Parent Shares issued upon such exchange, the
amount of dividends or other distributions, excluding interest, that become
payable after the Effective Time and were not paid because of the failure to
surrender Certificates for exchange.

(c) From and after the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of Company
Common Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
II. Any portion of the Exchange Fund that remains unclaimed by the stockholders
of the Company for six months after the Effective Time shall be paid or
delivered to Parent. Any stockholders of the Company who have not theretofore
complied with this Article II shall thereafter look only to Parent for payment
of Parent Shares, cash in lieu of any fractional shares and unpaid dividends and
distributions on the Parent Shares deliverable in respect of each share of
Company Common Stock such stockholder holds as determined pursuant to this
Agreement, in each case, without any interest thereon.

(d) Neither Parent nor the Surviving Corporation shall be liable to any
holder of shares of Company Common Stock delivered to a public official pursuant
to any applicable abandoned property, escheat or similar law.

Section 2.04. EFFECT ON COMPANY OPTIONS AND WARRANTS. (a) As of the
Effective Time, by virtue of the Merger and without any action on the part of
the holders thereof, all rights with respect to Company

A-4
<PAGE>
Common Stock pursuant to any Company Common Stock Equivalents (as defined in
Section 4.10) outstanding immediately prior to the Effective Time, whether or
not then exercisable, shall be converted into and become rights with respect to
Parent Common Stock, and Parent shall assume all of the Company's obligations
and liabilities under or in respect of such Company Common Stock Equivalents in
accordance with the terms of any stock option plan under which they were issued
and any stock option agreement by which they are evidenced, except that (i) each
Company Common Stock Equivalent shall be exercisable for the greatest number of
whole Parent Shares equal to the product of the number of shares of Company
Common Stock subject to such Common Stock Equivalent immediately prior to the
Effective Time multiplied by the Exchange Ratio and (ii) the exercise price per
share of Parent Shares shall be an amount equal to the exercise price per share
of Company Common Stock specified under such Company Common Stock Equivalent in
effect immediately prior to the Effective Time divided by the Exchange Ratio
(rounded up to the nearest whole cent) (the "Parent Exchange Options").

(b) Prior to and effective as of the Effective Time, Parent shall take all
action necessary or appropriate to (i) reserve for issuance a sufficient number
of Parent Shares for delivery upon exercise of all of the Parent Exchange
Options and (ii) cause all such Parent Shares to be registered on Securities and
Exchange Commission (the "SEC") registration statement Form S-8 (or any
successor form thereto) (the "Parent Form S-8"). From and after the Effective
Time, Parent shall cause the Parent Form S-8 to continue in effect until all
Parent Exchange Options have been fully exercised or expired.

(c) As soon as practicable, but no later than 30 days, following the
Effective Time, Parent shall cause to be delivered to each holder of a Parent
Exchange Option a notice setting forth the number of Parent Shares subject to
such Parent Exchange Option, the exercise price per Parent Share and an
acknowledgment that all such Parent Exchange Options are fully vested and
exercisable and, except as provided in Section 2.04(a), will continue to be
governed by the terms and conditions of the Company stock option plans under
which the corresponding Company Common Stock Equivalents were originally granted
and any applicable stock option agreement evidencing such original grants.
Parent acknowledges and agrees that pursuant to the current terms of the
Company's stock option plans, all Company Common Stock Equivalents granted
thereunder that are outstanding immediately prior to the Effective Time shall
become automatically fully vested and exercisable as of the Effective Time.

(d) Notwithstanding any other provision hereof, Company Common Stock
Equivalents that, as of the Effective Time, qualify as "incentive stock options"
under Section 422 of the Code shall be converted into options to purchase Parent
Shares in compliance with the requirements of Section 424 of the Code such that,
immediately following the conversion thereof, such Company Common Stock
Equivalents will continue to qualify as incentive stock options under the Code.

Section 2.05. FRACTIONAL SHARES. Notwithstanding any other provision of
this Agreement, each holder of shares of Company Common Stock who, upon
surrender of Certificates, would be entitled to receive a fractional Parent
Share shall not be entitled to receive dividends on or vote such fractional
share and shall receive, in lieu of such fractional share, cash (without
interest) in an amount equal to such fraction multiplied by the Market Value (as
defined below). "Market Value" shall mean, with respect to Parent Shares issued,
the mean between the high and low sale prices of the Parent Shares as reported
by the Nasdaq National Market ("Nasdaq") on the Nasdaq trading day immediately
prior to the Effective Time (as reported in The Wall Street Journal or, if not
reported therein, in another authoritative source). The fractional share
interests of each Company stockholder will be aggregated, and no Company
stockholder pursuant to this Section 2.05 will receive cash in an amount equal
to or greater than the value of one full share of Parent Shares. All references
in this Agreement to Parent Shares to be issued as Closing Consideration shall
be deemed to include any cash in lieu of fractional shares payable pursuant to
this Section 2.05.

A-5
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBCO

Except as disclosed in the section and subsection, if applicable, of the
Disclosure Statement, dated as of the date hereof, delivered by Parent to the
Company (the "Parent Disclosure Statement") corresponding to the applicable
section and subsection of this Article III, each of Parent and Subco jointly and
severally represents and warrants to the Company as follows:

Section 3.01. ORGANIZATION, ETC. Each of Parent and Subco is a corporation
duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Parent owns directly all of the outstanding
capital stock of Subco.

Section 3.02. BOARD RECOMMENDATION. The Board of Directors of Parent has,
at a meeting of such Board duly held on October 25, 1998, (a) approved and
adopted this Agreement, the Merger and the other transactions contemplated
hereby, (b) determined that this Agreement, the Merger and the other
transactions contemplated hereby are fair and advisable to, and in the best
interests of, the holders of Parent Shares, (c) determined and agreed to submit
the Parent Merger Matters to the stockholders of the Company for purposes of
acting upon them as soon as reasonably practicable and in any event within 45
days of the effectiveness of the Registration Statement, regardless of whether
the Board of Directors of Parent determines at any time subsequent to the date
hereof that the Parent Merger Matters are no longer advisable and recommends
that the stockholders of Parent reject them and (d) resolved to recommend that
holders of Parent Shares approve the Parent Merger Matters in connection with
this Agreement, the Merger and the transactions contemplated hereby.

Section 3.03. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and
Subco has full corporate power and authority to execute and deliver this
Agreement and to consummate the Merger and the other transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
Merger and the other transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of each of Parent and Subco and by Parent
as the sole stockholder of Subco and no other corporate proceedings on the part
of Parent or Subco are necessary to authorize this Agreement or to consummate
the Merger or the other transactions contemplated hereby (other than the
approval of the Parent Merger Matters by the affirmative vote of a majority of
the outstanding shares of Parent Common Stock at the Parent Special Meeting or
any adjournment thereof as required by the New York Business Corporation Law).
This Agreement has been duly and validly executed and delivered by each of
Parent and Subco and, assuming the due authorization, execution and delivery
hereof by the Company, constitutes a valid and binding agreement of each of
Parent and Subco, enforceable against each of them in accordance with its terms,
except to the extent that its enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable principles.

Section 3.04. NO VIOLATIONS, ETC. Except for the filing of the Certificate
of Merger as required by the Delaware Act and the filings required under and in
compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations promulgated thereunder (the "HSR Act"),
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder (the "Securities Act"), and the Securities Exchange Act
of 1934, as amended, and the rules and regulations promulgated thereunder (the
"Exchange Act"), no filing with, notification to and no permit, authorization,
consent or approval of, any public body is necessary on the part of Parent or
Subco for the consummation by Subco of the Merger, the other transactions
contemplated hereby or the exercise by Parent and the Surviving Corporation of
full rights to own and operate the business of the Company and the Company
Subsidiaries. Neither the execution and delivery of this Agreement nor the
consummation of the Merger or the other transactions contemplated hereby nor
compliance by Parent or Subco with any of the provisions hereof nor the exercise
by Parent and the Surviving Corporation of full rights to own and operate the
business of the Company and the Company Subsidiaries will (i) subject to
obtaining the approval of a

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<PAGE>
majority of the outstanding shares of Parent Common Stock at the Parent Special
Meeting or any adjournment thereof, conflict with or result in any breach of any
provision of the Certificate of Incorporation or by-laws of Parent or any person
(a) who is a corporation of which the outstanding capital stock having at least
a majority of the votes entitled to be cast in the election of directors is
owned, directly or indirectly, by Parent, or (b) who is not a corporation and
with respect to which at least a majority of the voting interest is owned,
directly or indirectly, by Parent (the "Parent Subsidiaries"), (ii) violate any
order, writ, injunction, decree, statute, rule or regulation applicable to
Parent, any of the Parent Subsidiaries or any of their respective properties or
assets or (iii) result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default (or give rise to any
right of termination, cancellation, acceleration, redemption or repurchase)
under, any of the terms, conditions or provisions of any (x) note, bond,
mortgage, indenture, or deed of trust or (y) license, lease, agreement or other
instrument or obligation to which Parent or any of the Parent Subsidiaries is a
party or by which either of them or any of their properties or assets may be
bound, excluding from the foregoing clause (iii), violations, breaches or
defaults that, individually or in the aggregate, would not either impair
Parent's and Subco's ability to consummate the Merger or the other transactions
contemplated hereby or have a material adverse effect on the business,
operations, assets, financial condition, prospects or results of operations of
Parent and the Parent Subsidiaries taken as a whole (a "Parent Material Adverse
Effect").

Section 3.05. FAIRNESS OPINION. Parent has received the opinion of
Goldman, Sachs & Co. to the effect that as of the date hereof the Exchange Ratio
is fair to Parent's stockholders from a financial point of view.

Section 3.06. FINDERS OR BROKERS. Except for Goldman, Sachs & Co., whose
fees have been disclosed to the Company, neither Parent nor any Parent
Subsidiary has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to a
fee or any commission the receipt of which is conditioned upon consummation of
the Merger.

Section 3.07. REGISTRATION STATEMENT; JOINT PROXY STATEMENT. None of the
information, other than the information provided by the Company, included or
incorporated by reference in (a) the registration statement registering under
the Securities Act the Parent Shares to be issued at the Effective Time (such
registration statement, as amended by any amendments thereto, being referred to
herein as the "Registration Statement") or (b) the Joint Proxy Statement, shall
(i)(A) in the case of the Registration Statement, at the time the Registration
Statement becomes effective and (B) in the case of the Joint Proxy Statement, on
the date the Joint Proxy Statement is first mailed to stockholders of the
Company, and (ii) at the time of the Special Meetings, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading. If, at any time prior to the Effective Time, any event with respect
to Parent or Subco shall occur that is required to be described in the
Registration Statement or the Joint Proxy Statement, such event shall be so
described, and an amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of Parent and the
Company. The Registration Statement and the Joint Proxy Statement will comply as
to form in all material respects with the applicable provisions of the
Securities Act and the Exchange Act.

Section 3.08. SEC FILINGS. (a) Parent has filed with the SEC all required
forms, reports, registration statements and documents required to be filed by it
with the SEC since January 31, 1998 (collectively, the "Parent SEC Reports"),
all of which complied as to form when filed in all material respects with the
applicable provisions of the Securities Act and the Exchange Act, as the case
may be. As of their respective dates, the Parent SEC Reports (including all
exhibits and schedules thereto and documents incorporated by reference therein)
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.

(b) Parent will deliver to the Company as soon as they become available true
and complete copies of any report, registration statement or statement mailed by
it to its securityholders generally or filed by it

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with the SEC, in each case subsequent to the date hereof and prior to the
Effective Time. As of their respective dates, such reports and statements
(excluding any information therein provided by the Company, as to which Parent
and Subco make no representation) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they are made, not misleading and will comply in all material respects
with all applicable requirements of law. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Parent and
the Parent Subsidiaries to be included or incorporated by reference in such
reports and statements will be prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") applied on a consistent
basis throughout the periods involved (except as set forth therein) and will
fairly present the consolidated financial position of Parent and the Parent
Subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flow for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
to the extent they may not include footnotes or may be condensed or summary
statements).

Section 3.09. FINANCIAL STATEMENTS. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Parent and
the Parent Subsidiaries included or incorporated by reference in any of the
required forms, reports, registration statements and documents required to be
filed with the SEC by Parent since January 31, 1998 have been prepared in
accordance with U.S. GAAP applied on a consistent basis during the periods
involved (except as set forth therein) and fairly present the consolidated
financial position of Parent and the Parent Subsidiaries as of the dates thereof
and the consolidated results of operations and consolidated cash flows for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements) and such audited
financial statements are accompanied by an unqualified opinion thereon by
Parent's independent auditors.

Section 3.10. ABSENCE OF UNDISCLOSED LIABILITIES. At August 1, 1998,
neither Parent nor any of the Parent Subsidiaries had any liabilities or
obligations of any nature, whether absolute, accrued, unmatured, contingent or
otherwise, or any unsatisfied judgments or any unusual or extraordinary
commitments, except the liabilities recorded on the Consolidated Balance Sheet
as at August 1, 1998 of Parent and the Parent Subsidiaries contained in its
unaudited financial statements for the thirteen weeks ended August 1, 1998
and/or reflected in the notes thereto, and except for liabilities or obligations
that would not, individually or in the aggregate, have a Parent Material Adverse
Effect.

Section 3.11. ABSENCE OF CHANGES OR EVENTS. Since January 31, 1998, except
as set forth in the Parent SEC Reports filed prior to the date of this
Agreement, including all exhibits filed therewith, there has been no Parent
Material Adverse Effect.

Section 3.12. CAPITALIZATION. The authorized capital stock of Parent
consists of 50,000,000 Parent Shares, and 5,000,000 shares of preferred stock,
par value $.01 per share ("Parent Preferred Shares"). As of October 23, 1998,
there were 32,718,970 Parent Shares issued and outstanding, 105,432 Parent
Shares held in Parent's treasury and no Parent Preferred Shares outstanding. As
of such date there were (i) 8,550,000 Parent Shares reserved for issuance upon
the exercise of outstanding options and options that may be granted under the
stock option plans of Parent (the "Parent Plans"), (ii) 900,000 Parent Shares
reserved for issuance pursuant to Parent's Restricted Stock Plan (the
"Restricted Stock Plan") and (iii) zero Parent Shares reserved for issuance
pursuant to other outstanding options, warrants and/or rights to acquire Parent
Shares (the "Other Plans"). Except for the Parent Plans, the Restricted Stock
Plans and the Other Plans, there were not as of such date any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Parent to issue, transfer or sell any shares of its
capital stock or any other securities convertible into or evidencing the right
to subscribe for any such shares. At the close of business on September 15,
1998, Parent consummated a 3 for 2 stock split payable to shareholders of record
as of the close of business on September 1, 1998. All issued and outstanding
Parent

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Shares are, and all Parent Shares to be issued at the Effective Time shall be,
when issued, duly authorized and validly issued, fully paid, non-assessable and
free of preemptive rights with respect thereto.

Section 3.13. LITIGATION. There is no (i) claim, action, suit or
proceeding pending or, to the best knowledge of Parent, threatened against or
relating to Parent or any of the Parent Subsidiaries before any court or
governmental or regulatory authority or body or arbitration tribunal or (ii)
outstanding judgment, order, writ, injunction or decree, or application, request
or motion therefor, of any court, governmental agency or arbitration tribunal in
a proceeding to which Parent, any Parent Subsidiary or any of their respective
assets was or is a party except, in the case of clauses (i) and (ii) above, such
as would not, individually or in the aggregate, either impair Parent's ability
to consummate the Merger or the other transactions contemplated hereby or have a
Parent Material Adverse Effect.

Section 3.14. TAX TREATMENT; OFFICER'S CERTIFICATE AS TO TAX
MATTERS. Neither Parent nor, to Parent's knowledge, any of its affiliates has
taken or agreed to take any action that would prevent the Merger from
constituting a transaction qualifying under Section 368(a) of the Code. Neither
Parent nor, to Parent's knowledge, any of its affiliates or agents is aware of
any agreement, plan or other circumstances that would prevent the Merger from
qualifying under Section 368(a) of the Code, and, to Parent's knowledge, the
Merger will so qualify. As of the date hereof, Parent knows of no reason why it
will be unable to deliver to Cahill Gordon & Reindel and to Cleary, Gottlieb,
Steen & Hamilton with respect to Parent and Subco at the Closing a
representation letter in form and substance sufficient to enable such counsel to
render the opinions required by Section 6.05 of this Agreement.

Section 3.15. TAXES. Parent and each of the Parent Subsidiaries, and any
consolidated, combined, unitary or aggregate group for tax purposes of which
Parent or any Parent Subsidiary is or has been a member has timely filed (or has
had timely filed on its behalf) all Tax Returns required to be filed by it, and
all such Tax Returns are true, complete and correct in all material respects,
has paid (or has had paid on its behalf) all Taxes shown thereon to be due and
has provided adequate reserves in its financial statements in accordance with
U.S. GAAP for any Taxes that have not been paid, whether or not shown as being
due on any Tax Returns. (i) No claim for unpaid Taxes has become a lien against
the assets of Parent or any of the Parent Subsidiaries or is being asserted
against Parent or any of the Parent Subsidiaries; (ii) no audit of any Tax
Return that includes Parent or any of the Parent Subsidiaries is being conducted
by a Tax authority; (iii) no extension or waiver of the statute of limitations
on the assessment of any Taxes or with respect to any Tax Return has been
granted by Parent or any of the Parent Subsidiaries and is currently in effect;
(iv) there is no arrangement with respect to sharing or allocating Taxes that
will require any payment by Parent or any of the Parent Subsidiaries after the
date of this Agreement; (v) Parent and the Parent Subsidiaries have withheld and
paid in a timely manner all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, stockholder or other third party; (vi) neither Parent nor any of the
Parent Subsidiaries has made an election under Section 341(f) of the Code (or
any similar provision of state, local or foreign law); and (vii) neither Parent
nor any of the Parent Subsidiaries is a party to any agreement or arrangement
that provides for the payment of any amount, or the provision of any other
benefit, that could constitute a "parachute payment" within the meaning of
Section 280G of the Code (or any similar provision of state, local or foreign
law). There are no written or, to Parent's knowledge, oral proposed assessments
of Taxes against Parent or any of the Parent Subsidiaries or written or, to its
knowledge, oral proposed adjustments to the manner in which any Tax of Parent or
any of the Parent Subsidiaries is determined.

"Tax" or "Taxes" means (i) all federal, state, local or foreign taxes,
charges, fees, imposts, levies or other assessments, including, without
limitation, all net income, alternative minimum, gross receipts, capital, sales,
use, ad valorem, value added, transfer, franchise, profits, inventory, capital
stock, license, withholding, payroll, employment, social security, unemployment,
excise, severance, stamp, occupation, property and estimated taxes, customs
duties, fees, assessments and charges of any kind whatsoever, (ii) all interest,
penalties, fines, additions to tax or other additional amounts imposed by any
taxing authority in connection with any item described in clause (i) and (iii)
all transferee, successor, joint and several or

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contractual liability (including, without limitation, liability pursuant to
United States Treasury Regulation ("Treas. Reg.") Section 1.1502-6 (or any
comparable state, local or foreign provisions)) in respect of any items
described in clause (i) or (ii) above.

"Tax Return" or "Tax Returns" means all returns, declarations, estimates,
information statements and reports and any other filings required to be filed
with respect to Taxes.

Section 3.16. ACCOUNTING MATTERS. Parent has disclosed to its independent
certified public accountants all actions taken by it and the Parent Subsidiaries
that would impact the accounting of the business combination to be effected by
the Merger. As of the date hereof, after consultation with its independent
certified public accountants, Parent believes that the Merger will qualify as a
pooling of interests under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations.

Section 3.17. STATE ANTITAKEOVER STATUTES. Parent has granted all
approvals and taken all other steps necessary to exempt the Merger, the Parent
Stockholder Voting Agreement and the other transactions contemplated hereby from
the requirements and provisions of Section 912 of the New York Business
Corporation Law (the "New York Act") and, to the extent it has the power to do
so, any other state antitakeover statue or regulation such that none of the
provisions of Section 912 of the New York Act or any other "business
combination" or other state antitakeover statute or regulation (x) prohibits or
restricts Parent's ability to perform its obligations under this Agreement or
its ability to consummate the Merger and the other transactions or void this
Agreement, the Parent Stockholder Voting Agreement or any provision hereof or
thereof, or (z) would subject the Company to any material impediment or
condition in connection with the exercise of any of its rights under this
Agreement or the Parent Stockholder Voting Agreement.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

Except as disclosed in the section and subsection, if applicable, of the
Disclosure Statement, dated as of the date hereof, delivered by the Company to
Parent (the "Company Disclosure Statement") corresponding to the applicable
section and subsection of this Article IV, the Company represents and warrants
to Parent and Subco that:

Section 4.01. ORGANIZATION, ETC. Each of the Company and each person (i)
who is a corporation of which the outstanding capital stock having at least a
majority of the votes entitled to be cast in the election of directors is owned,
directly or indirectly, by the Company, or (ii) who is not a corporation and
with respect to which at least a majority of the voting interest is owned,
directly or indirectly, by the Company (the "Company Subsidiaries"), is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and has all requisite power and authority
to own, lease and operate its properties and to carry on its business as now
being conducted. Each of the Company and the Company Subsidiaries is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or leased or the
nature of its activities makes such qualification necessary, except for failures
to be so qualified or in good standing that would not, individually or in the
aggregate, have a material adverse effect on the business, operations, assets,
financial condition, prospects or results of operations of the Company and the
Company Subsidiaries taken as a whole (a "Material Adverse Effect"). Neither the
Company nor any of the Company Subsidiaries is in violation of any of the
provisions of its Certificate of Incorporation (or other applicable charter
document) or by-laws. The Company has made available to Parent accurate and
complete copies of the Certificate of Incorporation (or other applicable charter
document) and by-laws, as currently in effect, of each of the Company and each
of the Company Subsidiaries.

Section 4.02. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has full
corporate power and authority to execute and deliver this Agreement and to
consummate the Merger and the other transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the Merger

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and the other transactions contemplated hereby have been duly and validly
authorized by the Board of Directors of the Company and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate the Merger and the other transactions contemplated hereby
(other than the approval of a majority of the outstanding shares of Company
Common Stock at the Company Special Meeting or any adjournment thereof as
required by the Delaware Act). This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery hereof by Parent and Subco, constitutes a valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except to the extent that its enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable principles.

Section 4.03. NO VIOLATIONS, ETC. Except for the filing of the Certificate
of Merger as required by the Delaware Act and the filings required under and in
compliance with the HSR Act, the Securities Act and the Exchange Act, no filing
with, notification to and no permit, authorization, consent or approval of, any
public body is necessary on the part of the Company for the consummation by the
Company of the Merger, the other transactions contemplated hereby or the
exercise by Parent and the Surviving Corporation of full rights to own and
operate the business of the Company and the Company Subsidiaries. Except for the
Revolving Credit Agreement dated January 27, 1998, as amended, among Camelot
Music, Inc. (a wholly-owned Company Subsidiary), as borrower, the several
lenders named therein and The Chase Manhattan Bank, as agent (the "Company
Credit Facility"), and except for those leases that will require consent which
the Company reasonably expects to obtain and the failure of which to obtain,
individually, or in the aggregate, will not have a Material Adverse Effect,
neither the execution and delivery of this Agreement nor the consummation of the
Merger or the other transactions contemplated hereby nor compliance by the
Company with any of the provisions hereof nor the exercise by Parent and the
Surviving Corporation of full rights to own and operate the business of the
Company and the Company Subsidiaries will (i) subject to obtaining the approval
of a majority of the outstanding shares of Company Common Stock at the Company
Special Meeting or any adjournment thereof, conflict with or result in any
breach of any provision of the Certificate of Incorporation or by-laws of the
Company or any of the Company Subsidiaries, (ii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company, any
of the Company Subsidiaries or any of their respective properties or assets or
(iii) result in a violation or breach of, or constitute (with or without due
notice or lapse of time or both) a default (or give rise to any right of
termination, cancellation, acceleration, redemption or repurchase) under, any of
the terms, conditions or provisions of any (x) note, bond, mortgage, indenture,
or deed of trust or (y) license, lease, agreement or other instrument or
obligation to which the Company or any of the Company Subsidiaries is a party or
by which either of them or any of their properties or assets may be bound,
excluding from the foregoing clause (iii), violations, breaches or defaults
that, individually or in the aggregate, would not either impair the Company's
ability to consummate the Merger or the other transactions contemplated hereby
or have a Material Adverse Effect.

Section 4.04. FAIRNESS OPINION. The Company has received the opinion of
Merrill Lynch, Pierce, Fenner & Smith Incorporated to the effect that as of the
date hereof the Exchange Ratio is fair to the Company's stockholders from a
financial point of view.

Section 4.05. BOARD RECOMMENDATION. The Board of Directors of the Company
has, at a meeting of such Board duly held on October 25, 1998, (a) approved and
adopted this Agreement, the Merger and the other transactions contemplated
hereby, (b) determined that this Agreement, the Merger and the other
transactions contemplated hereby, taken together, are fair and advisable to, and
in the best interest of the stockholders of the Company, (c) determined and
agreed to submit this Agreement to the stockholders of the Company for purposes
of acting upon it as soon as practicable and in any event within 45 days of the
effectiveness of the Registration Statement, regardless of whether the Board of
Directors of the Company determines at any time subsequent to the date hereof
that this Agreement is no longer advisable and recommends that the stockholders
of the Company reject it and (d) resolved to recommend that the

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holders of shares of Company Common Stock approve and adopt this Agreement, the
Merger and the other transactions contemplated hereby.

Section 4.06. STATE ANTITAKEOVER STATUTES. The Company has granted all
approvals and taken all other steps necessary to exempt the Merger, the Company
Stockholder Voting Agreement and the other transactions contemplated hereby from
the requirements and provisions of Section 203 of the Delaware Act and, to the
extent it has the power to do so, any other state antitakeover statute or
regulation such that none of the provisions of Section 203 of the Delaware Act
or any other "business combination," "moratorium," "control share," or other
state antitakeover statute or regulation (x) prohibits or restricts the
Company's ability to perform its obligations under this Agreement or its ability
to consummate the Merger and the other transactions contemplated hereby, (y)
would have the effect of invalidating or voiding this Agreement, the Company
Stockholder Voting Agreements or any provision hereof or thereof, or (z) would
subject Parent or Subco to any material impediment or condition in connection
with the exercise of any of their respective rights under this Agreement, the
Company Stockholder Voting Agreements or their ownership and operation of the
business of the Company and the Company Subsidiaries.

Section 4.07. AFFILIATES. The Company has delivered to Parent in the
Company Disclosure Statement a list identifying all persons who may be deemed to
be "affiliates" of the Company for purposes of Rule 145 under the Securities Act
("Affiliates"), together in the case of the Company's executive officers listed
thereon with the written agreement of each such person, substantially in the
form of Exhibit A hereto. The Company will deliver to Parent promptly after the
date hereof such written agreements from all Affiliates not previously
delivered.

Section 4.08. FINDERS OR BROKERS. Except for Merrill Lynch, Pierce, Fenner
& Smith Incorporated and Policano and Manzo LLC, whose fees have been disclosed
to Parent, neither the Company nor any of the Company Subsidiaries has employed
any investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or any
commission the receipt of which is conditioned upon consummation of the Merger.

Section 4.09. JOINT PROXY STATEMENT. Except for information concerning
Parent that is provided by Parent for inclusion or incorporation by reference in
the Joint Proxy Statement, such information, at the date the Joint Proxy
Statement is first mailed to stockholders and at the time of the Special
Meetings, shall not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. If, at any time prior to the
Effective Time, any event with respect to the Company or any of the Company
Subsidiaries shall occur that is required to be described in the Joint Proxy
Statement, such event shall be so described, and an amendment or supplement
shall be promptly disseminated to the stockholders of Parent and the Company.
The Joint Proxy Statement will comply as to form in all material respects with
the applicable provisions of the Exchange Act.

Section 4.10. CAPITALIZATION. The authorized capital stock of the Company
consists of 30,000,000 shares of Company Common Stock and no preferred stock. As
of October 21, 1998, there are 10,178,931 shares of Company Common Stock
outstanding and no treasury shares. Section 4.10 of the Company Disclosure
Statement identifies and describes the number of shares of Company Common Stock
to be received upon exercise or conversion, and the exercise or conversion
price, of each outstanding option, warrant and convertible or exchangeable note
(the "Company Common Stock Equivalents"). Except for the Company Common Stock
Equivalents, there are no existing options, warrants, calls, subscriptions or
other rights, or other agreements or commitments, obligating the Company or the
Company Subsidiaries to issue, transfer or sell any shares of capital stock of
the Company or the Company Subsidiaries or any other securities convertible into
or evidencing the right to subscribe for any such shares. There are no
outstanding stock appreciation rights with respect to the capital stock of the
Company or the Company Subsidiaries. All issued and outstanding shares of
Company Common Stock are duly authorized and validly issued, fully paid,
non-assessable and free of preemptive rights with respect thereto.

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Section 4.11. COMPANY REPORTS. (a) Set forth in Section 4.11 of the
Company Disclosure Statement are all forms, reports, registration statements and
documents prepared by the Company for its securityholders generally since
January 27, 1998 or filed by the Company with the SEC since January 27, 1998 to
the date hereof (collectively, the "Company Reports"). As of their respective
dates, the Company Reports (including all exhibits and schedules thereto and
documents incorporated by reference therein) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.

(b) The Company will deliver to Parent as soon as they become available true
and complete copies of any report, registration statement or statement mailed by
it to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Parent or Subco, as to which the Company makes no representation)
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not misleading
and will comply in all material respects with all applicable requirements of
law. The audited consolidated financial statements and unaudited consolidated
interim financial statements of the Company and the Company Subsidiaries to be
included or incorporated by reference in such reports and statements will be
prepared in accordance with U.S. GAAP applied on a consistent basis throughout
the periods involved (except as set forth therein and except as contemplated by
SOP 90-7 in connection with the adoption of "fresh start" reporting) and will
fairly present the consolidated financial position of the Company and the
Company Subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flow for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be condensed
or summary statements).

Section 4.12. FINANCIAL STATEMENTS. The audited consolidated financial
statements and unaudited consolidated interim financial statements of the
Company and the Company Subsidiaries included or incorporated by reference in
any of the Company Reports since January 27, 1998 have been prepared in
accordance with U.S. GAAP applied on a consistent basis during the periods
involved (except as set forth therein and except as contemplated by SOP 90-7 in
connection with the adoption of "fresh start" reporting) and fairly present the
consolidated financial position of the Company and the Company Subsidiaries as
of the dates thereof and the consolidated results of operations and consolidated
cash flows for the periods then ended (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the extent
they may not include footnotes or may be condensed or summary statements) and
such audited financial statements are accompanied by an unqualified opinion
thereon by the Company's independent auditors (which opinion includes
explanatory paragraphs discussing the Company's adoption of "fresh start"
reporting and its adoption of SFAS 121, SOP 98-1 and SOP 98-5).

Section 4.13. ABSENCE OF UNDISCLOSED LIABILITIES. At May 30, 1998, neither
the Company nor the Company Subsidiaries has any liabilities or obligations of
any nature, whether absolute, accrued, unmatured, contingent or otherwise, or
any unsatisfied judgments or any unusual or extraordinary commitments, except
the liabilities recorded on the Consolidated Balance Sheet as of May 30, 1998 of
the Company and the Company Subsidiaries and/or reflected in the notes thereto,
and except for liabilities or obligations that would not, individually or in the
aggregate, have a Material Adverse Effect.

Section 4.14. ABSENCE OF CHANGES OR EVENTS. Except as disclosed on SEC
registration statement form S-1 (no. 333-56811), as amended by amendment no. 1
thereto (the "Company S-1"), since January 27, 1998, neither the Company nor any
of the Company Subsidiaries have, directly or indirectly:

(a) purchased, otherwise acquired, or agreed to purchase or otherwise
acquire, any shares of capital stock of the Company or the Company
Subsidiaries, or declared, set aside or paid any dividend or otherwise made
a distribution (whether in cash, stock or property or any combination
thereof) in

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respect of their capital stock (other than dividends or other distributions
payable solely to the Company or the Company Subsidiaries);

(b) authorized for issuance, issued, sold, delivered, granted or issued
any options, warrants, calls, subscriptions or other rights for, or
otherwise agreed or committed to issue, sell or deliver, any shares of any
class of capital stock of the Company or any of the Company Subsidiaries or
any securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of the Company or any of the Company
Subsidiaries, other than pursuant to and in accordance with the terms of the
Company Common Stock Equivalents listed in Section 4.10 of the Disclosure
Statement;

(c) except in the ordinary course of business and consistent with past
practice or in connection with this Agreement and the transactions
contemplated hereby, (i) created or incurred any indebtedness for borrowed
money, (ii) assumed, guaranteed, endorsed or otherwise as an accommodation
become responsible for the obligations of any other individual, firm or
corporation, other than between or among the Company and any of the Company
Subsidiaries which are wholly-owned, (iii) made any loans or advances to any
other individual, firm or corporation, (iv) entered into any commitment or
transaction material to the Company and the Company Subsidiaries taken as a
whole or (v) amended or supplemented any contract, agreement or other
instrument in existence on or prior to January 27, 1998;

(d) instituted any change in their accounting methods, principles or
practices except insofar as may have been required by a change in U.S. GAAP;

(e) revalued any of their respective assets, including, without
limitation, writing down the value of inventory or writing off notes or
accounts receivables except in the ordinary course of business consistent
with past practice;

(f) suffered any damage, destruction or loss, whether covered by
insurance or not, except for such as would not, individually or in the
aggregate, have a Material Adverse Effect;

(g) suffered a Material Adverse Effect;

(h) Except (x) as may be required under the terms of any applicable
written agreement, plan or arrangement in effect as of October 26, 1998 and
listed in Section 4.14(h) of the Disclosure Schedule or (y) as may be
required to comply with applicable law (i) increased in any manner the
compensation of any of their respective directors or officers or employees,
except in the ordinary course of business and consistent with past practice;
(ii) paid or agreed to pay any material pension, retirement allowance or
other employee benefit, or entered into any contract, agreement or
understanding with any of their respective past or present employees
providing for the payment of any material pension, retirement allowance or
other employee benefit, except, in each case, as required under agreements,
plans or arrangements existing at October 26, 1998 and listed in Section
4.14(h) of the Company Disclosure Statement; (iii) granted any severance or
termination pay to, or entered into any employment, consulting or severance
agreement with, any person; (iv) entered into any material contract,
agreement or understanding with any of the Company's or the Company
Subsidiaries' past or present employees; (v) except in the ordinary course
of business and consistent with past practice, or as may be required to
comply with applicable law, become obligated under any new pension plan,
welfare plan, multiemployer plan, employee benefit plan, written benefit
arrangement, or similar legally binding plan or arrangement that was not in
existence on or prior to October 26, 1998 and listed in Section 4.14(h) of
the Company Disclosure Statement, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, group
insurance, severance pay, retirement or other benefit plan, contract,
agreement or written understanding, or amended any such plans, contracts,
agreements or written understandings in existence at or prior to October 26,
1998 and listed in Section 4.14(h) of the Company Disclosure Statement; or
(vi) except for liens created by the Company Credit Facility and except as
otherwise expressly contemplated hereby, sold, transferred, leased,
licensed, pledged, mortgaged, or otherwise disposed of, or encumbered, or
agreed to sell,

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transfer, lease, license, pledge, mortgage or otherwise dispose of or
encumber, any material properties, real, personal or mixed; and

(i) agreed to (i) do any of the things described in the preceding
clauses (a) through (h) other than as expressly contemplated or provided for
in this Agreement or (ii) take, whether in writing or otherwise, any action
that, if taken prior to the date of this Agreement, would have made any
representation or warranty in this Article IV untrue or incorrect.

Section 4.15. CAPITAL STOCK OF THE COMPANY SUBSIDIARIES. (a) Except for
pledges of stock of the Company Subsidiaries under the Company Credit Facility,
the Company is directly or indirectly the record and beneficial owner (including
all such qualifying shares) of all of the outstanding shares of capital stock of
each of the Company Subsidiaries; (b) there are no proxies with respect to such
shares, and there are not any existing options, warrants, calls, subscriptions,
or other rights or other agreements or commitments obligating the Company or any
of the Company Subsidiaries to issue, transfer or sell any shares of capital
stock of any such Company Subsidiary or any other securities convertible into or
evidencing the right to subscribe for any such shares; and (c) all of such
shares so owned by the Company are duly authorized and validly issued, fully
paid, non-assessable and free of preemptive rights with respect thereto and are
owned by the Company free and clear of any claim, lien or encumbrance of any
kind with respect thereto. The Company does not, directly or indirectly, own any
interest in any corporation, partnership, joint venture or other business
association or entity.

Section 4.16. LITIGATION. Except as would not, individually or in the
aggregate, either impair the Company's ability to consummate the Merger or the
other transactions contemplated hereby or have a Material Adverse Effect:

(a) There is no claim, action, suit or proceeding pending or, to the
best knowledge of the Company, threatened against or relating to the Company
or any of the Company Subsidiaries before any court or governmental or
regulatory authority or body or arbitration tribunal.

(b) There is no outstanding judgment, order, writ, injunction or decree
of any court, governmental agency or arbitration tribunal in a proceeding to
which the Company, any of the Company Subsidiaries or any of their
respective assets was or is a party.

Section 4.17. INSURANCE. The Company maintains insurance policies in force
on the date hereof covering the businesses, properties and assets of the Company
and the Company Subsidiaries consistent with industry practices. All such
policies are currently in effect and true and complete copies of all such
policies have been made available to Parent. The Company has not received notice
of the cancellation of any of such insurance in effect on the date of this
Agreement.

Section 4.18. CONTRACTS AND COMMITMENTS. (a) Except as set forth in the
Company S-1, neither the Company nor any of the Company Subsidiaries is a party
to:

(i) any existing contract, obligation or commitment of any type that is
a material contract (as such term is defined in item 601(b)(10) of
Regulation S-K of the SEC (a "Material Contract"));

(ii) any contract under which any amount payable by the Company or any
Company Subsidiary is dependent upon the revenues or profits of the Company
or any such Company Subsidiary (other than leases of real property);

(iii) any contract with any director, officer or employee of the Company
or any Company Subsidiary other than in such person's capacity as a
director, officer or employee of the Company or any such Company Subsidiary
or any contract with any entity in which, to the best of the Company's
knowledge, any director or officer or any immediate family member of a
director or officer has a material economic interest;

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(iv) any contract that limits or restricts where either of the Company or
any Company Subsidiary may conduct its business or the type or line of
business that the Company or any Company Subsidiary may engage in; or

(v) any material contract containing any agreement with respect to any
change of control (other than leases of real property).

(b) Each Material Contract to which the Company or any of the Company
Subsidiaries is a party or by which either of them or any of their properties or
assets is bound is valid and binding upon the Company and/or any such Company
Subsidiary, as the case may be (and, to the Company's knowledge, on all other
parties thereto), in accordance with its terms and is in full force and effect.
There is no material breach or violation of or default by the Company or any of
the Company Subsidiaries (or, to the Company's knowledge, by the other parties
thereto) under any such contract, whether or not such breach, violation or
default has been waived. No event has occurred with respect to the Company or
any of the Company Subsidiaries which, with notice or lapse of time or both,
would constitute a material breach, violation or default, or give rise to the
right of termination, cancellation, foreclosure, imposition of a lien,
prepayment or acceleration under any such contract.

Section 4.19. LABOR MATTERS; EMPLOYMENT AND LABOR CONTRACTS. (a) Neither the
Company nor any of the Company Subsidiaries is a party to any union contract or
other collective bargaining agreement. Each of the Company and the Company
Subsidiaries is in compliance with all applicable laws respecting employment and
employment practices, terms and conditions of employment and wages and hours,
except for those failures to comply that, individually or in the aggregate,
would not have a Material Adverse Effect. To the Company's knowledge, there is
no labor strike, slowdown or stoppage pending (or any labor strike or stoppage
threatened) against the Company or any of the Company Subsidiaries. To the
Company's knowledge, no petition for certification has been filed and is pending
before the National Labor Relations Board with respect to any employees of the
Company or any of the Company Subsidiaries who are not currently organized.

(b) Except as set forth in the Company S-1, neither the Company nor any of
the Company Subsidiaries is a party to any written employment, management
services, consultation or other written contract or agreement with any present
officer or director or, to the best of the Company's knowledge, any entity
affiliated with any present officer or director.

Section 4.20. COMPLIANCE WITH LAWS. Neither the Company nor any of the
Company Subsidiaries has violated or failed to comply with any statute, law,
ordinance, regulation, rule or order of any federal or state government or any
other governmental department or agency, or any judgment, decree or order of any
federal or state court, applicable to its business or operations, except where
any such violations or failures to comply would not, individually or in the
aggregate, have a Material Adverse Effect. Each of the Company and the Company
Subsidiaries have all permits, licenses and franchises from federal or state
governmental agencies required to conduct its business as now being conducted,
except for such permits, licenses and franchises the absence of which would not,
individually or in the aggregate, have a Material Adverse Effect.

Section 4.21. INTELLECTUAL PROPERTY RIGHTS. Section 4.21 of the Company
Disclosure Statement discloses all Intellectual Property Rights (as defined
below) which are necessary for the Company and each of the Company Subsidiaries
to conduct their respective businesses as they are presently being conducted,
the absence of which would have a Material Adverse Effect. The Company and the
Company Subsidiaries own or have the right to use the Intellectual Property
Rights disclosed in the Company Disclosure Statement.

"Intellectual Property Rights" shall mean and include rights to use
trademarks, trade names, copyrights, and all currently pending applications for
any thereof and any trade secrets, know-how, confidentiality agreements,
consulting agreements and software licenses.

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Section 4.22. TAXES. The Company and each of the Company Subsidiaries, and
any consolidated, combined, unitary or aggregate group for tax purposes of which
the Company or any Company Subsidiary is or has been a member has timely filed
(or has had timely filed on its behalf) all Tax Returns required to be filed by
it, and all such Tax Returns are true, complete and correct in all material
respects, has paid (or has had paid on its behalf) all Taxes shown thereon to be
due and has provided adequate reserves in its financial statements in accordance
with U.S. GAAP for any Taxes that have not been paid, whether or not shown as
being due on any Tax Returns. (i) No claim for unpaid Taxes has become a lien
against the assets of the Company or any of the Company Subsidiaries or is being
asserted against the Company or any of the Company Subsidiaries; (ii) no audit
of any Tax Return that includes the Company or any of the Company Subsidiaries
is being conducted by a Tax authority; (iii) no extension or waiver of the
statute of limitations on the assessment of any Taxes or with respect to any Tax
Return has been granted by the Company or any of the Company Subsidiaries and is
currently in effect; (iv) there is no arrangement with respect to sharing or
allocating Taxes that will require any payment by the Company or any of the
Company Subsidiaries after the date of this Agreement; (v) the Company and the
Company Subsidiaries have withheld and paid in a timely manner all Taxes
required to have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or other third
party; (vi) neither the Company nor any of the Company Subsidiaries has made an
election under Section 341(f) of the Code (or any similar provision of state,
local or foreign law); and (vii) neither the Company nor any of the Company
Subsidiaries is a party to any agreement or arrangement that provides for the
payment of any amount, or the provision of any other benefit, that could
constitute a "parachute payment" within the meaning of Section 280G of the Code
(or any similar provision of state, local or foreign law). There are no written
or, to the Company's knowledge, oral proposed assessments of Taxes against the
Company or any of the Company Subsidiaries or written or, to its knowledge, oral
proposed adjustments to the manner in which any Tax of the Company or any of the
Company Subsidiaries is determined.

Section 4.23. EMPLOYEE BENEFIT PLANS; ERISA. Except as set forth in the
Company S-1:

(a) There are no "employee pension benefit plans" as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended ("
ERISA") (" Pension Benefit Plans"), "welfare benefit plans" as defined in
Section 3(1) of ERISA (" Welfare Plans"), or stock bonus, stock option,
restricted stock, stock appreciation right, stock purchase, bonus,
incentive, deferred compensation, severance, or vacation plans, or any other
employee benefit plan, program, policy or arrangement, covering employees
(or former employees), maintained or contributed to by the Company or any of
the Company Subsidiaries or any of their ERISA Affiliates (as hereinafter
defined), or to which the Company or any of the Company Subsidiaries or any
of their ERISA Affiliates contributes or is obligated to make payments
thereunder or otherwise may have any liability (collectively, the "Employee
Benefit Plans"). For purposes of this Agreement, "ERISA Affiliate" shall
mean any person (as defined in Section 3(9) of ERISA) that is or has been
treated as a single employer together with the Company or the Company
Subsidiaries pursuant to Section 414(b), (c), (m) or (o) of the Code.

(b) The Company and the Company Subsidiaries, and each of the Pension
Benefit Plans and Welfare Plans, are in compliance with the applicable
provisions of ERISA, the Code and other applicable laws, except where the
failure to comply would not, individually or in the aggregate, have a
Material Adverse Effect.

(c) All contributions to, and payments from, the Pension Benefit Plans
that are required to have been made in accordance with the Pension Benefit
Plans have been timely made, except where the failure to make such
contributions or payments on a timely basis would not, individually or in
the aggregate, either impair the Company's ability to consummate the Merger
and the other transactions contemplated hereby or have a Material Adverse
Effect.

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(d) Any Pension Benefit Plans intended to qualify under Section 401 of
the Code have been determined by the Internal Revenue Service ("IRS") to be
so qualified and no event has occurred and no condition exists with respect
to the form or operation of such Pension Benefit Plans that would reasonably
be expected to cause the loss of such qualification.

(e) There are (i) no investigations pending by any governmental entity
(including the Pension Benefit Guaranty Corporation) involving the Pension
Benefit Plans or Welfare Plans and (ii) no pending or threatened claims
(other than routine claims for benefits), suits or proceedings against any
Pension Benefit or Welfare Plan, against the assets of any of the trusts
under any Pension Benefit or Welfare Plan or against any fiduciary of any
Pension Benefit or Welfare Plan with respect to the operation of such plan
or asserting any rights or claims to benefits under any Pension Benefit Plan
or against the assets of any trust under such plan, except for those that
would not, individually or in the aggregate, give rise to any liability that
would have a Material Adverse Effect.

(f) None of the Company, any of the Company Subsidiaries or any employee
of the foregoing, nor any trustee, administrator, other fiduciary or any
other "party in interest" or "disqualified person" with respect to the
Pension Benefit Plans or Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA) that could reasonably be expected to result in a tax or
penalty on the Company or any of the Company Subsidiaries under Section 4975
of the Code or Section 502(i) of ERISA, except any such event that would
not, individually or in the aggregate, either impair the Company's ability
to consummate the Merger and the other transactions contemplated hereby or
have a Material Adverse Effect.

(g) None of the Company, any of the Company Subsidiaries or any of their
ERISA Affiliates maintains or contributes to any pension plan subject to
Title IV of ERISA or Sections 412 of the Code or 302 of ERISA.

(h) None of the Company, any of the Company Subsidiaries or any of their
ERISA Affiliates has incurred, or reasonably expects to incur, any material
liability under Title IV of ERISA.

(i) None of the Company, any of the Company Subsidiaries or any of their
ERISA Affiliates has any material liability (including any contingent
liability under Section 4204 of ERISA) with respect to any multiemployer
plan, within the meaning of Section 3(37) of ERISA.

(j) True, correct and complete copies of the following documents have
been made available to Parent, with respect to all material Employee Benefit
Plans, and will be made available with respect to all other Employee Benefit
Plans: (i) the plan document and any related trust agreement, including
amendments thereto, (ii) any current summary plan descriptions and other
material written communications to participants relating to the Employee
Benefit Plans, (iii) the most recent Forms 5500, if applicable, and (iv) the
most recent IRS determination letter, if applicable.

(k) None of the Welfare Plans maintained by the Company or any of the
Company Subsidiaries provide for continuing benefits or coverage for any
participant or any beneficiary of a participant following termination of
employment, except as may be required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA"). The Company and the
Company Subsidiaries (to the extent that any such Company Subsidiary
maintains a "group health plan" within the meaning of Section 5000(b)(1) of
the Code) have complied with the notice and continuation requirements of
Section 4980B of the Code, COBRA, Part 6 of Subtitle B of Title I of ERISA
and the regulations thereunder, except where the failure to comply would
not, individually or in the aggregate, either impair the Company's ability
to consummate the Merger and the other transactions contemplated hereby or
have a Material Adverse Effect.

(l) No liability under any Pension Benefit or Welfare Plan has been
funded nor has any such obligation been satisfied with the purchase of a
contract from an insurance company as to which the

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Company or any of the Company Subsidiaries has received notice that such
insurance company is in rehabilitation or a comparable proceeding.

(m) Except as provided in this Agreement, the consummation of the
transactions contemplated by this Agreement will not result in an increase
in the amount of compensation or benefits or accelerate the vesting or
timing of payment of any benefits or compensation payable to or in respect
of any employee of the Company or any of the Company Subsidiaries.

(n) There are no Foreign Plans. For purposes hereof, the term "Foreign
Plan" shall mean any plan, program, policy, arrangement or agreement
maintained or contributed to by, or entered into with, the Company or any of
the Company Subsidiaries with respect to employees (or former employees)
employed outside the United States.

Section 4.24. ENVIRONMENTAL MATTERS. The Company and the Company
Subsidiaries are in compliance with all environmental laws, rules and
regulations promulgated, adopted or enforced by the United States Environmental
Protection Agency and by similar agencies in states in which they conduct their
respective businesses, except for any non-compliance that individually or in the
aggregate would not have a Material Adverse Effect. Neither the Company nor any
of the Company Subsidiaries is a party to any suit, action or proceeding now
pending before any court, governmental agency or board or other forum or, to the
knowledge of the Company, threatened by any person as to which there is a
reasonable likelihood of an adverse determination and which, if adversely
determined, individually or in the aggregate would have a Material Adverse
Effect (i) for alleged noncompliance with any environmental law, rule or
regulation or (ii) relating to the discharge or release into the environment of
any hazardous material or waste at or on a site presently or formerly owned,
leased or operated by the Company.

Section 4.25. TAX TREATMENT; OFFICER'S CERTIFICATE AS TO TAX MATTERS.
Neither the Company nor, to the Company's knowledge, any of its affiliates has
taken or agreed to take any action that would prevent the Merger from
constituting a transaction qualifying under Section 368(a) of the Code. Neither
the Company nor, to the Company's knowledge, any of its affiliates or agents is
aware of any agreement, plan or other circumstance that would prevent the Merger
from qualifying under Section 368(a) of the Code, and to the Company's
knowledge, the Merger will so qualify. As of the date hereof, the Company knows
of no reason why it will be unable to deliver to Cleary, Gottlieb, Steen &
Hamilton and to Cahill Gordon & Reindel at the Closing representation letters
with respect to the Company in form and substance sufficient to enable such
counsel to render the opinions required by Section 6.05 of this Agreement.

Section 4.26. ACCOUNTING MATTERS. The Company has disclosed to its
independent certified public accountants all actions taken by it and the Company
Subsidiaries that would impact the accounting of the business combination to be
effected by the Merger. As of the date hereof, after consultation with its
independent certified public accountants, the Company believes that the Merger
will qualify as a pooling of interests under Opinion 16 of the Accounting
Principles Board and applicable SEC rules and regulations.

ARTICLE V
COVENANTS

Except as disclosed in the section and subsection, if applicable, of the
Parent Disclosure Statement or the Company Disclosure Statement, as applicable,
corresponding to the applicable section and subsection of this Article V, each
of Parent and the Company agree to the following covenants:

Section 5.01. CONDUCT OF BUSINESS OF THE COMPANY AND PARENT. (a) Except as
contemplated by this Agreement or as expressly agreed to in writing by Parent,
during the period from the date of this Agreement to the Effective Time, the
Company and the Company Subsidiaries will each conduct its operations according
to its ordinary and usual course of business consistent with past practice, and
will use all commercially reasonable efforts to preserve intact its business
organization, to keep available the

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services of its officers and employees in each business function and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will not voluntarily take any action
that would result in a breach of a representation or warranty that would
adversely affect its ability to consummate the Merger or the other transactions
contemplated hereby. Without limiting the generality of the foregoing, and
except as otherwise expressly provided in or contemplated by this Agreement,
prior to the Effective Time, neither the Company nor any of the Company
Subsidiaries will, without the prior written consent of Parent:

(1) amend its Certificate of Incorporation or by-laws;

(2) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of the Company or any of the Company Subsidiaries or
any securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of the Company or any of the Company
Subsidiaries, other than, in the case of the Company, pursuant to and in
accordance with and subject to the limitations set forth in the terms of the
Company Common Stock Equivalents listed in Section 4.10 of the Company
Disclosure Statement;

(3) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock except dividends to the Company or purchase, redeem or
otherwise acquire any shares of its own capital stock or that of any of its
subsidiaries;

(4) except in the ordinary course of business and consistent with past
practice, (A) create or incur indebtedness for borrowed money; (B) assume,
guarantee, endorse or otherwise as an accommodation become liable or
responsible for the obligations of any other individual, firm or corporation
or make any loans, advances or capital contributions to or investments in
any other individual, firm or corporation, other than between or among the
Company and any of the Company Subsidiaries that are wholly-owned or (C)
enter into any commitment or transaction material to the Company and the
Company Subsidiaries taken as a whole;

(5) A (I) increase in any manner the compensation of any of the
Company's or the Company Subsidiaries' directors or officers or employees,
except in the case of employees in the ordinary course of business and
consistent with past practice; (II) pay or agree to pay any material
pension, retirement allowance or other employee benefit, or enter into any
contract, agreement or understanding with any of the Company's or the
Company Subsidiaries' past or present employees providing for the payment of
any such material pension, retirement allowance or other employee benefit,
except as required under agreements, plans or arrangements existing as of
October 26, 1998 and listed in Section 4.14(h) of the Company Disclosure
Statement; (III) except as required under agreements, plans or arrangements
existing as of October 26, 1998 and listed in Section 4.14(h) of the Company
Disclosure Schedule, grant any severance or termination pay to, or enter
into any employment, consulting or severance agreement with, any person;
(IV) enter into any contract, agreement or understanding with any of the
Company's or the Company Subsidiaries' past or present officers or other
employees, except in the case of employees other than officers in the
ordinary course of business and consistent with past practice; and (V)
except in the ordinary course of business and consistent with past practice
or as required under agreements, plans or arrangements existing as of
October 26, 1998 and listed in Section 4.14(h) of the Company Disclosure
Schedule, or as may be required to comply with applicable law, become
obligated under any new pension plan, welfare plan, multiemployer plan,
employee benefit plan, benefit arrangement, or similar plan or arrangement
that was not in existence on or prior to October 26, 1998 and listed in
Section 4.14(h) of the Company Disclosure Statement, including any bonus,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other
benefit plan, contract, agreement or understanding, or amend in any material
respect any such plans, contracts, agreements or understandings in existence

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prior to October 26, 1998 and listed in Section 4.14(h) of the Company
Disclosure Statement or (B) enter into any employment, consulting, severance
or termination agreement with any director or officer of the Company or the
Company Subsidiaries;

(6) except (A) in the ordinary course of business and consistent with
past practice, (B) in connection with the closing of certain stores pursuant
to the Company's Store Closing Statement for fiscal 1998 previously
furnished to Parent, (C) in connection with the Company Credit Agreement and
(D) as otherwise expressly contemplated hereby, sell, transfer, lease,
license, pledge, mortgage or otherwise dispose of, or encumber, or agree to
sell, transfer, lease, license, pledge, mortgage or otherwise dispose of or
encumber, any material properties, real, personal or mixed;

(7) except in the ordinary course of business or as otherwise expressly
contemplated hereby, grant or acquire any material licenses to use any
Intellectual Property Rights set forth in Section 4.21 of the Company
Disclosure Statement; PROVIDED that the Company and the Company Subsidiaries
shall not grant any material licenses to use any material Intellectual
Property Rights so set forth without the prior written consent of Parent,
which consent shall not be unreasonably withheld;

(8) except as otherwise expressly contemplated hereby, enter into any
other agreements, commitments or contracts, except agreements, commitments
or contracts for the purchase, sale or lease of goods or services in the
ordinary course of business and consistent with past practice and having a
term of no more than one year;

(9) subject to Section 5.02(I) authorize, recommend, propose or announce
an intention to authorize, recommend or propose, or enter into any agreement
in principle or an agreement with any other person with respect to, any plan
of liquidation or dissolution, any acquisition of a material amount of
assets (other than in the ordinary course of business) or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or any
amendment or modification of any material contract or any release or
relinquishment of any material contract rights except in each case in the
ordinary course of business and consistent with past practice or as
expressly contemplated by this Agreement;

(10) except as previously approved by the Board of Directors of the
Company prior to the date hereof and as identified to Parent prior to the
date hereof, authorize or commit to make capital expenditures in excess of
$100,000;

(11) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except where such
insurance as altered, modified or replaced is materially equivalent, and
except in the ordinary course of business and consistent with past practice
and following written notice to Parent;

(12) maintain its books and records in a manner not in the ordinary
course of business and consistent with past practice;

(13) enter into any hedging, option, derivative or other similar
transaction;

(14) institute any change in its accounting methods, principles or
practices, except insofar as may have been required by a change in U.S.
GAAP;

(15) pay, discharge or satisfy any material claims, liabilities or
obligations (absolute, accrued, contingent or otherwise), other than the
payment, discharge or satisfaction of liabilities (including accounts
payable) in the ordinary course of business and consistent with past
practice, or collect, or accelerate the collection of, any amounts owed
(including accounts receivable) other than the collection in the ordinary
course of business;

(16) take, cause or permit to be taken any action, whether before or
after the Effective Time, that could reasonably be expected to prevent the
Merger from constituting a "reorganization" within the

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meaning of Section 368(a) of the Code or qualifying as a "pooling of
interests" under Opinion 16 of the Accounting Principles Board; or

(17) agree to do any of the foregoing.

(b) Except as contemplated by this Agreement or as expressly agreed to in
writing by the Company, during the period from the date of this Agreement to the
Effective Time, Parent and the Parent Subsidiaries will each conduct its
operations according to its ordinary and usual course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees in each business function and to maintain satisfactory
relationships with suppliers, distributors, customers and others having business
relationships with it and will not voluntarily take any action that would result
in a breach of a representation or warranty that would adversely affect its
ability to consummate the Merger or the other transactions contemplated hereby.
Without limiting the generality of the foregoing, and except as otherwise
expressly provided in or contemplated by this Agreement, prior to the Effective
Time, neither Parent nor any of the Parent Subsidiaries will, without the prior
written consent of the Company:

(1) with respect to Parent, amend its Certificate of Incorporation;

(2) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of Parent or any of the Parent Subsidiaries or any
securities convertible into or exchangeable or exercisable for shares of any
class of capital stock of Parent or any of the Parent Subsidiaries, other
than, in the case of Parent, (A) pursuant to and in accordance with and
subject to the limitations set forth in the terms of the Parent Plans, the
Restricted Stock Plan, the Other Plans and (B) in connection with any
acquisition with respect to which Parent is not required by the rules of
Nasdaq to obtain shareholder approval;

(3) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock except dividends to Parent or purchase, redeem or otherwise
acquire any shares of its own capital stock or that of any of its
subsidiaries;

(4) subject to Section 5.02(II), authorize, recommend, propose or
announce an intention to authorize, recommend or propose, or enter into any
agreement in principle or an agreement with any other person with respect
to, any plan of liquidation or dissolution, any acquisition of a material
amount of assets (other than in the ordinary course of business) or
securities, any disposition of a material amount of assets or securities or
any material change in its capitalization, or any entry into a material
contract or any amendment or modification of any material contract or any
release or relinquishment of any material contract rights except in each
case in the ordinary course of business and consistent with past practice or
as expressly contemplated by this Agreement;

(5) maintain its books and records in a manner not in the ordinary
course of business and consistent with past practice;

(6) enter into any hedging, option, derivative or other similar
transaction;

(7) institute any change in its accounting methods, principles or
practices except insofar as may have been required by a change in U.S. GAAP;

(8) take, cause or permit to be taken any action, whether before or
after the Effective Time, that could reasonably be expected to prevent the
Merger from constituting a "reorganization" within the meaning of Section
368(a) of the Code or qualifying as a "pooling of interests" under Opinion
16 of the Accounting Principles Board; or

(9) agree to do any of the foregoing.

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Section 5.02. NO SOLICITATION. (I)(a) The Company agrees that, prior to the
Effective Time, it shall not, and shall not authorize or permit any of the
Company Subsidiaries or any of its or any of the Company Subsidiaries'
directors, officers, employees, agents or representatives to, directly or
indirectly, solicit, initiate, facilitate or encourage (including by way of
furnishing or disclosing non-public information) any inquiries or the making of
any proposal with respect to any merger, consolidation or other business
combination involving the Company or any of the Company Subsidiaries or any
acquisition of any kind of a material portion of the assets or capital stock of
the Company and the Company Subsidiaries taken as a whole (an "Acquisition
Transaction") or negotiate, explore or otherwise communicate in any way with any
person who is not a party to this Agreement (a "Third Party") with respect to
any Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. Notwithstanding
anything to the contrary in the foregoing, the Company may, prior to the date of
the Company Special Meeting, in response to an unsolicited written proposal with
respect to an Acquisition Transaction involving the acquisition of all of the
outstanding shares of Company Common Stock on a fully diluted basis (or all or
substantially all of the assets of the Company and the Company Subsidiaries)
from a Third Party (i) furnish or disclose non-public information to such Third
Party and (ii) negotiate, explore or otherwise communicate with such Third
Party, in each case only if (a) after being advised by (x) its outside counsel
with respect to its fiduciary obligations and (y) Merrill Lynch, Pierce, Fenner
& Smith Incorporated with respect to the financial terms of any such proposed
Acquisition Transaction, the Board of Directors of the Company determines
reasonably and in good faith by a majority vote that taking such action is
necessary in the exercise of its fiduciary obligations under applicable law, (b)
prior to furnishing or disclosing any non-public information to, or entering
into negotiations with, such Third Party, the Company receives from such Third
Party an executed confidentiality agreement with terms no less favorable in the
aggregate to the Company than those contained in the Company Confidentiality
Agreement, but which confidentiality agreement shall not provide for any
exclusive right to negotiate with the Company or any payments by the Company and
(c) the Company advises Parent of all non-public information delivered to such
Third Party concurrently with such delivery.

(b) The Company shall immediately notify Parent of receipt of any proposal
relating to an Acquisition Transaction or any request for nonpublic information
relating to the Company in connection with an Acquisition Transaction or for
access to the properties, books or records of the Company or any of the Company
Subsidiaries by any person or entity that informs the Board of Directors of the
Company that it is considering making, or has made, a proposal relating to an
Acquisition Transaction. Such notice to Parent shall be made orally and in
writing and shall include a copy of any writing submitted by such person or
entity and shall indicate in reasonable detail the identity of the offeror and
the terms and conditions of such proposal, inquiry or contract.

(c) During the period from the date of this Agreement through the Effective
Time, the Company shall not terminate, amend, modify or waive any provision of
any confidentiality or standstill agreement to which it or any of the Company
Subsidiaries is a party. During such period, the Company shall take all
reasonable steps to seek to enforce, to the fullest extent permitted under
applicable law, the provisions of any such agreement, including, but not limited
to, obtaining injunctions to prevent any breaches of any such agreement and to
enforce specifically the terms and provisions thereof in any court of the United
States of America or of any state having jurisdiction.

(II)(a) Parent agrees that, prior to the Effective Time, it shall not, and
shall not authorize or permit any of the Parent Subsidiaries or any of its or
any of the Parent Subsidiaries' directors, officers, employees, agents or
representatives to, directly or indirectly, solicit, initiate, facilitate or
encourage (including by way of furnishing or disclosing non-public information)
any inquiries or the making of any proposal with respect to any Acquisition
Transaction with respect to Parent and the Parent Subsidiaries or negotiate,
explore or otherwise communicate in any way with any Third Party with respect to
any Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate

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or fail to consummate the Merger or any other transactions contemplated by this
Agreement. Notwithstanding anything to the contrary in the foregoing, Parent
may, prior to the date of the Parent Special Meeting, in response to an
unsolicited written proposal with respect to an Acquisition Transaction
involving the acquisition of all of the outstanding shares of Parent Common
Stock on a fully diluted basis (or all or substantially all of the assets of
Parent and the Parent Subsidiaries) from a Third Party (i) furnish or disclose
non-public information to such Third Party and (ii) negotiate, explore or
otherwise communicate with such Third Party, in each case only if (a) after
being advised by (x) its outside counsel with respect to its fiduciary
obligations and (y) Goldman, Sachs & Co. with respect to the financial terms of
any such proposed Acquisition Transaction, the Board of Directors of Parent
determines reasonably and in good faith by a majority vote that taking such
action is necessary in the exercise of its fiduciary obligations under
applicable law, (b) prior to furnishing or disclosing any non-public information
to, or entering into negotiations with, such Third Party, Parent receives from
such Third Party an executed confidentiality agreement with terms no less
favorable in the aggregate to Parent than those contained in the Parent
Confidentiality Agreement, but which confidentiality agreement shall not provide
for any exclusive right to negotiate with Parent or any payments by Parent and
(c) Parent advises the Company of all non-public information delivered to such
Third Party concurrently with such delivery.

(b) Parent shall immediately notify the Company of receipt of any proposal
relating to an Acquisition Transaction or any request for nonpublic information
relating to Parent in connection with an Acquisition Transaction or for access
to the properties, books or records of Parent or any of the Parent Subsidiaries
by any person or entity that informs the Board of Directors of Parent that it is
considering making, or has made, a proposal relating to an Acquisition
Transaction. Such notice to the Company shall be made orally and in writing and
shall include a copy of any writing submitted by such person or entity and shall
indicate in reasonable detail the identity of the offeror and the terms and
conditions of such proposal, inquiry or contract.

Section 5.03. ACCESS TO INFORMATION. (a) From the date of this Agreement
until the Effective Time, the Company will give Parent and Subco and their
authorized representatives (including counsel, environmental and other
consultants, accountants, auditors and agents) reasonable access upon reasonable
notice during normal business hours to all facilities, personnel and operations
and to all books and records of it and the Company Subsidiaries, will permit
Parent and Subco and their authorized representatives to conduct inspections as
they may reasonably require (including, without limitation, any air, water, soil
or other environmental testing and monitoring deemed necessary by them) and will
cause its officers and those of the Company Subsidiaries to furnish Parent with
such financial and operating data and other information with respect to its
business and properties as Parent may from time to time request.

(b) Parent will give the Company and its agents (including its counsel and
auditors) access to Parent's books and records for the purpose of conducting
customary due diligence regarding the accuracy of the Parent SEC Reports and
Parent's and Subco's compliance with their respective obligations under this
Agreement.

(c) Parent will hold and will cause the Parent Subsidiaries and all of their
representatives, including consultants and advisors, to hold in strict
confidence pursuant to the Confidentiality Agreement, dated as of September 22,
1998, between Parent and the Company, all documents and information (whether
oral or written) concerning the Company and the Company Subsidiaries furnished
to Parent or Subco in connection with the transactions contemplated by this
Agreement (the "Company Confidentiality Agreement"). The Company will hold and
will cause its representatives, including consultants and advisors, to hold in
strict confidence pursuant to the Confidentiality Agreement, dated as of
September 24, 1998, between the Company and Parent, all documents and
information (whether oral or written) concerning Parent and the Parent
Subsidiaries furnished to the Company in connection with the transactions
contemplated by this Agreement (the "Parent Confidentiality Agreement").
Notwithstanding any provision of Article X hereof, nothing herein shall relieve
any party of liabilities for any and all damages to the other party by reason of
any breach of this Section 5.03(c).

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Section 5.04. REGISTRATION STATEMENT AND JOINT PROXY STATEMENT. Parent and
the Company shall prepare and file with the SEC as soon as is reasonably
practicable after the date hereof the Registration Statement in which the Joint
Proxy Statement shall be included. Parent and the Company shall use all
commercially reasonable efforts to have the Registration Statement declared
effective by the SEC and the Joint Proxy Statement cleared by the staff of the
SEC as promptly as practicable. Parent shall take any action required to be
taken under applicable state blue sky or securities laws in connection with the
Parent Shares to be issued as Closing Consideration. Parent and the Company
shall promptly furnish to each other all information, and take such other
actions (including, without limitation, using all commercially reasonable
efforts to provide any required consents of their respective independent
accountants or auditors, as the case may be), as may reasonably be requested in
connection with any action by any of them in connection with this Section 5.04.

Section 5.05. COMMERCIALLY REASONABLE EFFORTS; OTHER ACTIONS. Subject to the
terms and conditions herein provided, Parent, Subco and the Company shall use
all commercially reasonable efforts to take, or cause to be taken, all other
actions and do, or cause to be done, all other things necessary, proper or
appropriate under applicable laws and regulations to consummate and make
effective the transactions contemplated by this Agreement, including, without
limitation, (i) the filing of Notification and Report Forms under the HSR Act
with the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") and using all commercially
reasonable efforts to respond as promptly as practicable to any inquiries
received from the FTC or the Antitrust Division for additional information or
documentation, (ii) the obtaining of all necessary consents, approvals or
waivers and (iii) the lifting of any legal bar to the Merger. Parent shall cause
Subco to perform all of its obligations under this Agreement and shall not take
any action that would cause the Company to fail to perform its obligations
hereunder. The Company shall not take any action that would cause either Parent
or Subco to fail to perform its obligations hereunder.

Section 5.06. PUBLIC ANNOUNCEMENTS. Before issuing any press release or
otherwise making any public statement with respect to the Merger or any of the
other transactions contemplated hereby, Parent, Subco and the Company will
consult with each other as to its form and substance and shall not issue any
such press release or make any such public statement prior to obtaining the
consent of each of the other parties to this Agreement (which consent will not
be unreasonably withheld), except as may be required by law.

Section 5.07. NOTIFICATION OF CERTAIN MATTERS. Each of the Company and
Parent shall give prompt notice to the other party of (a) any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the Merger or other transactions
contemplated hereby, (b) any change or prospective change that is likely to
have, respectively, a Material Adverse Effect or Parent Material Adverse Effect
or (c) the occurrence or existence of any event that would, or could with the
passage of time or otherwise, make any representation or warranty contained
herein untrue.

Section 5.08. INDEMNIFICATION. (a) Parent shall, and shall cause the
Surviving Corporation to, maintain and perform to the greatest extent permitted
under the Company's existing indemnification and expense advancement provisions
and arrangements (including, without limitation, the indemnity agreements listed
in Section 5.08 of the Company Disclosure Statement) with respect to present and
former directors and officers of the Company for all losses, claims, damages,
expenses or liabilities arising out of actions or omissions or alleged actions
or omissions occurring at or prior to the Effective Time, to the extent
permitted or required under applicable law, and the Company's Certificate of
Incorporation and by-laws in effect at the date hereof (including, without
limitation, provisions regarding elimination of liability and indemnification of
directors, officers and employees and regarding advancement of expenses).

(b) For a period of six years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by the Company (provided
that the Surviving Corporation may substitute therefor policies of at least the
same coverage and amounts containing terms and conditions that are no less
advantageous) with respect to

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claims arising from facts or events that occurred at or before the Effective
Time; provided, however, that the Surviving Corporation shall not be obligated
to make annual premium payments for such insurance to the extent such premiums
exceed 200% of the annual premiums paid as of the date hereof by the Company for
such insurance; and provided further that if the annual premiums of such
insurance coverage exceed such amount, the Surviving Corporation shall be
obligated to obtain insurance coverage in such amounts as may be generally
available for the maximum premium referred to in the preceding proviso.

Section 5.09. EXPENSES. Except as set forth in Section 10.05, Parent and
Subco, on the one hand, and the Company, on the other hand, shall bear their
respective expenses incurred in connection with this Agreement, the Merger, and
the transactions contemplated hereby, including, without limitation, the
preparation, execution and performance of this Agreement and the transactions
contemplated hereby and all fees and expenses of investment bankers, finders,
brokers, agents, representatives, counsel and accountants.

Section 5.10. AFFILIATES. (a) The Company shall advise Parent in writing of
any person who becomes an Affiliate after the date hereof and prior to the
Effective Time and shall use all commercially reasonable efforts to cause each
such person to deliver to Parent, no later than the date such person becomes an
Affiliate, a written agreement substantially in the form of Exhibit A hereto.

(b) Parent shall use all commercially reasonable efforts to cause each of
its Affiliates to execute and deliver to Parent a Lockup Agreement substantially
in the form of Exhibit C hereto. To the extent not provided previously as
contemplated by Section 4.07, the Company shall use all commercially reasonable
efforts to cause each of its Affiliates who are not parties to the Registration
Rights Agreement to execute and deliver to Parent a Lockup Agreement
substantially in the form of Exhibit B hereto.

Section 5.11. STOCK EXCHANGE LISTINGS. Parent shall use all commercially
reasonable efforts to have approved for quotation on Nasdaq, upon official
notice of issuance, the Parent Shares to be issued in connection with the
Merger.

Section 5.12. LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall use its
best efforts to cause to be delivered to Parent a letter from the Company's
independent certified public accountants addressed to the Company and indicating
that it may be delivered to Parent, dated as of the Closing Date, stating that
such independent accountants concur with the conclusion of the Company's
management that no conditions exist with respect to the Company which would
preclude the Company from being a party to a merger accounted for as a pooling
of interests within the meaning of Opinion 16 of the Accounting Principals Board
and applicable SEC rules and regulations.

Section 5.13. LETTER OF PARENT'S ACCOUNTANTS. Parent shall use its best
efforts to cause to be delivered to the Company a letter from Parent's
independent certified public accountants, addressed to Parent and indicating
that it may be delivered to the Company, dated as of the Closing Date, stating
that such independent certified public accountants concur with the conclusion of
Parent's management that no conditions exist with respect to Parent which would
preclude Parent from being a party to a merger accounted for as a pooling of
interests within the meaning of under Opinion 16 of the Accounting Principles
Board and applicable SEC rules and regulations.

Section 5.14. POOLING OF INTERESTS. Each of the Company and Parent shall use
its respective best efforts to cause the transactions contemplated by this
Agreement to be accounted for as a pooling of interests under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations, and such
accounting treatment to be accepted by each of the Company's and Parent's
independent certified public accountants, respectively, and each of the Company
and Parent agrees that it shall voluntarily take no action that would cause such
accounting treatment not to be obtained.

Section 5.15. EMPLOYEE BENEFITS AND EMPLOYMENT CONTRACTS. (a) From and after
the Effective Time, the Surviving Corporation shall honor, pay and perform all
of the Company's or any Company Subsidiary's liabilities and obligations under
or in respect of (i) each employment, retention, severance, termination or

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similar agreement with any director, officer or other employee of the Company or
any Company Subsidiary and (ii) each deferred compensation or other equity based
plan or arrangement covering any director, officer or other employee of the
Company or any Company Subsidiary, in each case, in accordance with the terms
thereof in effect as of the date hereof. Parent shall cause the amount of any
bonus or other incentive compensation payable to any officer or other employee
of the Company or any Company Subsidiary for the fiscal or other applicable plan
year that includes the Effective Time to be determined under the terms of the
applicable bonus or incentive compensation plans of the Company or a Company
Subsidiary as in effect as of the date hereof and without taking into account
any extraordinary charges or other expenses incurred or recognized by the
Company as a result of or in connection with the consummation of the
transactions contemplated hereby. Such bonus otherwise shall be payable in
accordance with the terms of such plan, except that (i) any officer or other
employee who was such at the Effective Time shall be entitled to receive a bonus
if any are payable under the plan upon completion of the fiscal or other
applicable plan year and (ii) bonuses shall become payable notwithstanding the
Company's failure to achieve the performance objectives specified in the plan
for the entire fiscal year if such targets have been achieved for periods
completed prior to the Effective Time.

(b) Parent shall cause the Company to offer compensation and benefits to the
Company's employees that are substantially equivalent when taken as a whole to
the compensation and benefits that such employees enjoyed before the Effective
Time; provided that nothing in this Section 5.15(b) shall obligate the Company
to renew any employment agreements after their expiration or termination or
prohibit the Company from terminating at any time any employee employed at will.

(c) From and after the Effective Time, if any officer or other employee
becomes eligible to participate in any compensation or benefit plan, agreement
or arrangement maintained by Parent or any Parent Subsidiary, Parent shall cause
(i) all service of such officer or employee completed prior to the Effective
Time with the Company or any Company Subsidiary to be recognized under such
plan, agreement or arrangement for eligibility to participate and vesting
purposes thereof, (ii) to be waived any exclusions for pre-existing conditions
of, any such officer or employee and his or her dependents and (iii) to be
recognized all co-payments, deductibles or similar amounts or costs incurred by
any such officer or employee under a comparable plan, agreement or arrangement
of the Company, any Company Subsidiary or the Surviving Corporation during the
plan year in which such officer or employee commences participation in an
applicable benefit plan, agreement or arrangement of Parent or any Subsidiary
thereof.

(d) The Parent shall cause the Company to maintain for one year following
the Effective Time its severance policies (including constructive termination
described in Schedule 4.18 of the Company Disclosure Schedule).

Section 5.16. REGISTRATION RIGHTS AGREEMENT. Concurrently with the execution
and delivery of this Agreement, Parent shall execute and deliver, and the
Company shall use all commercially available efforts to cause each of the
persons listed on Exhibit C to this Agreement to execute and deliver, the
Registration Rights Agreement attached hereto as Exhibit D, together with Annex
A thereto.

Section 5.17. BOARD REPRESENTATION. At the Effective Time, Parent shall
increase its Board size to add two additional directors, who shall be selected
by the Company's current Board of Directors prior to the Effective Time, at
least one of which will not have a term which is scheduled for re-election at
the next annual meeting of stockholders of Parent.

ARTICLE VI
CONDITIONS TO THE OBLIGATIONS OF PARENT, SUBCO AND THE COMPANY

The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing (as defined in Section
9.01) of each of the following conditions:

Section 6.01. REGISTRATION STATEMENT. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act. No
stop order suspending the effectiveness of the

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Registration Statement shall have been issued by the SEC and remain in effect.
All necessary state securities and blue sky authorizations shall have been
received.

Section 6.02. STOCKHOLDER APPROVAL. (a) The approval of this Agreement, the
Merger and the other transactions contemplated hereby by a majority of the
outstanding shares of Company Common Stock cast at the Company Special Meeting
or any adjournment thereof shall have been obtained.

(b) The approval of the Parent Merger Matters by a majority of the
outstanding shares of Parent Common Stock cast at the Parent Special Meeting or
any adjournment thereof shall have been obtained.

Section 6.03. LISTING. The Parent Shares issuable in connection with the
Merger shall have been approved for quotation on Nasdaq, subject to official
notice of issuance.

Section 6.04. CERTAIN PROCEEDINGS. (a) No writ, order, decree or injunction
of a court of competent jurisdiction or governmental entity shall have been
entered and remain in effect against Parent, Subco or the Company that prohibits
the consummation of the Merger or limits the exercise by Parent and the
Surviving Corporation of full rights to own and operate the business of the
Company and the Company Subsidiaries, and any waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated.

(b) All authorizations, orders, consents, licenses, confirmations,
clearances, permissions and approvals that may be required in any foreign
jurisdiction for the purposes of applicable anti-trust, competition, takeover or
similar legislation in connection with the consummation of the Merger and the
other transactions contemplated hereby shall have been received and shall remain
in full force and effect.

Section 6.05. TAX MATTERS. Parent shall have received an opinion of Cahill
Gordon & Reindel, counsel to Parent and Subco, and the Company shall have
received an opinion of Cleary, Gottlieb, Steen & Hamilton, counsel to the
Company, each such opinion dated as of the Effective Date, and each such opinion
substantially to the effect that (i) the Merger will be treated as a
reorganization within the meaning of Section 368(a) of the Code; and (ii) except
for cash received in lieu of fractional Parent Shares, no gain or loss will be
recognized by a stockholder of the Company as a result of the Merger with
respect to the shares of Company Common Stock converted into Parent Shares. In
rendering such opinions, such counsel may receive and rely upon representations
of fact contained in certificates as specified in Section 3.14 and 4.25.

Section 6.06. POOLING LETTER. The Company and Parent shall have received the
letter from Parent's independent certified public accountants referred to in
Section 5.13.

ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF PARENT AND SUBCO

The obligation of Parent and Subco to effect the Merger and to perform their
other obligations to be performed at or subsequent to the Closing shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, any one or more of which may be waived by Parent or
Subco:

Section 7.01. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of the Company contained herein (without regard to any materiality
qualifications, exceptions or provisos therein) shall be true and correct in all
respects on the date of this Agreement and on the date of the Effective Time as
though such representations and warranties were made at and on such dates
(except that representations and warranties that by their terms speak as of the
date of this Agreement or some other date shall be true and correct as of such
date), except (i) for those untruths or inaccuracies that, individually or in
the aggregate, would not either impair the Company's ability to consummate the
Merger and the other transactions contemplated hereby or have a Material Adverse
Effect and (ii) for changes permitted or contemplated by this Agreement.

Section 7.02. PERFORMANCE. The Company shall have performed and complied in
all material respects with all agreements, obligations and conditions required
by this Agreement to be performed or complied with by it on or prior to the
Closing Date, except for those failures to so perform or comply that,

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individually or in the aggregate, would not either impair the Company's ability
to consummate the Merger and the other transactions contemplated hereby or have
a Material Adverse Effect.

Section 7.03. CERTIFICATES. The Company shall furnish such certificates of
its officers to evidence compliance with the conditions set forth in Sections
7.01 and 7.02 as may be reasonably requested by Parent or Subco.

Section 7.04. MATERIAL ADVERSE CHANGE. There shall not have occurred or
become known since the date hereof any material adverse change in the business,
operations, assets, financial condition or prospects of the Company and the
Company Subsidiaries taken as a whole.

Section 7.05. CONSENTS, APPROVALS AND NOTIFICATIONS. All the consents and
approvals, and notifications and disclosures, and filings and registrations
listed in Section 4.03 of the Company Disclosure Statement shall have been
obtained.

ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE COMPANY

The obligations of the Company under this Agreement to effect the Merger
shall be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by the
Company:

Section 8.01. REPRESENTATIONS AND WARRANTIES TRUE. The representations and
warranties of Parent and Subco contained herein (without regard to any
materiality qualifications, exceptions or provisos therein) shall be true and
correct in all respects on the date of this Agreement and on the date of the
Effective Time as though such representations and warranties were made at and on
such dates (except that representations and warranties that by their terms speak
as of the date of this Agreement or some other date shall be true and correct as
of such date), except (i) for those untruths or inaccuracies that, individually
or in the aggregate, would not either impair the ability of Parent or Subco to
consummate the Merger and the other transactions contemplated hereby or have a
Parent Material Adverse Effect and (ii) for changes permitted or contemplated by
this Agreement.

Section 8.02. PERFORMANCE. Parent and Subco shall have performed and
complied in all material respects with all agreements, obligations and
conditions required by this Agreement to be performed or complied with by them
on or prior to the Closing Date except for those failures to so perform or
comply that, individually or in the aggregate, would not either impair the
ability of Parent or Subco to consummate the Merger and the other transactions
contemplated hereby or have a Parent Material Adverse Effect.

Section 8.03. CERTIFICATES. Parent and Subco shall furnish such certificates
of their respective officers to evidence compliance with the conditions set
forth in Sections 8.01 and 8.02 as may be reasonably requested by the Company.

Section 8.04. MATERIAL ADVERSE CHANGE. There shall not have occurred or
become known since the date hereof any material adverse change in the business,
operations, assets, financial condition or prospects of Parent and its Parent
Subsidiaries taken as a whole.

Section 8.05. CONSENTS, APPROVALS AND NOTIFICATIONS. All necessary consents
and approvals of, and notifications and disclosures to, and filings and
registration with, any United States or any other governmental authority or any
other third party required on the part of Parent and Subco for the consummation
of the Merger and the other transactions contemplated hereby shall have been
obtained or accomplished.

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ARTICLE IX

CLOSING

Section 9.01. TIME AND PLACE. Subject to the provisions of Articles VI, VII,
VIII and X, the closing of the Merger (the "Closing") shall take place at the
offices of Cahill Gordon & Reindel, as soon as practicable but in no event later
than 9:30 A.M., local time, on the first business day after the date on which
each of the conditions set forth in Articles VI, VII and VIII (other than
conditions relating to delivery of opinions, letters with respect to pooling and
certificates at Closing) have been satisfied or waived by the party or parties
entitled to the benefit of such conditions; or at such other place, at such
other time, or on such other date as Parent, Subco and the Company may mutually
agree. The date on which the Closing actually occurs is herein referred to as
the "Closing Date."

Section 9.02. FILINGS AT THE CLOSING. Subject to the provisions of Articles
VI, VII, VIII and X, the Company, Parent and Subco shall cause to be executed
and filed at the Closing the Certificate of Merger and shall cause the
Certificate of Merger to be recorded in accordance with the applicable
provisions of the Delaware Act and shall take any and all other lawful actions
and do any and all other lawful things necessary to cause the Merger to become
effective.

ARTICLE X

TERMINATION AND ABANDONMENT

Section 10.01. TERMINATION. This Agreement may be terminated and the Merger
may be abandoned any time prior to the Effective Time, whether before or after
approval by the stockholders of the Company:

(a) by mutual consent of the Boards of Directors of Parent and the Company;

(b) by either Parent or the Company if, without fault of such terminating
party, the Merger shall not have been consummated on or before April 30,
1999, which date may be extended by mutual consent of the parties hereto;

(c) by either Parent or the Company, if any court of competent jurisdiction
or other governmental body shall have issued an order (other than a
temporary restraining order), decree or ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger, and such
order, decree, ruling or other action shall have become final and
nonappealable; or

(d) by either Parent or the Company, if either stockholder approval
contemplated in Section 6.02(a) or 6.02(b) is not obtained; PROVIDED that
the party seeking termination is not then in material breach of any
provisions of this Agreement.

Section 10.02. TERMINATION BY PARENT. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of Parent, at
any time prior to the Effective Time, before or after the approval by the
stockholders of the Company, if:

(a) the Company shall have failed to comply in any respect (without regard
to any materiality qualifications, exceptions or provisos therein) with
any of the covenants or agreements contained in Articles I and V of this
Agreement to be complied with or performed by the Company at or prior to
such date of termination except for those failures to so perform or
comply that, individually or in the aggregate would not either impair the
Company's ability to consummate the Merger and the other transactions
contemplated hereby or have a Material Adverse Effect;

(b) there exists a breach or breaches of any representation or warranty of
the Company contained in this Agreement such that the Closing condition
set forth in Section 7.01 would not be satisfied; PROVIDED, HOWEVER, that
if such breach or breaches are capable of being cured prior to the
Effective Time, such breaches shall not have been cured within 30 days of
delivery to the Company of written notice of such breach or breaches;

A-30
<PAGE>
(c) the Board of Directors of the Company (i) fails to recommend the
approval of this Agreement and the Merger to the Company's stockholders,
(ii) withdraws or amends or modifies in a manner adverse to Parent its
recommendation or approval in respect of this Agreement or the Merger or
(iii) makes any recommendation with respect to an Acquisition Transaction
(including making no recommendation or stating an inability to make a
recommendation), other than a recommendation to reject such Acquisition
Transaction, or the Board of Directors of the Company shall have resolved
to take any of the foregoing actions referred to in this clause and
publicly discloses such resolution;

(d) the Company or its representatives shall furnish or disclose non-public
information or negotiate, discuss, explore or otherwise communicate in
any way with a third party with respect to an Acquisition Transaction, or
the Board of Directors of the Company shall have resolved to take any of
the foregoing actions referred to in this clause and publicly discloses
such resolution; or

(e) the number of Dissenting Shares exceeds the lesser of (p) 10% of the
total number of shares of Company Common Stock outstanding immediately
prior to the Effective Time and (q) such number of Dissenting Shares as
Parent shall be advised by its independent certified public accountants
will render them unable to deliver the letter referred to in Section 6.06
given the totality of other circumstances in existence at the Effective
Time.

Section 10.03. TERMINATION BY THE COMPANY. This Agreement may be terminated
and the Merger may be abandoned at any time prior to the Effective Time, before
or after the approval by the stockholders of the Company, by action of the Board
of the Directors of the Company, if (a) Parent or Subco shall have failed to
comply in any respect (without regard to any materiality qualifications,
exceptions or provisos therein) with any of the covenants or agreements
contained in Articles I and V of this Agreement to be complied with or performed
by Parent or Subco at or prior to such date of termination except for those
failures to so perform or comply that, individually or in the aggregate, would
not either impair Parent's ability to consummate the Merger and the other
transactions contemplated hereby or have a Parent Material Adverse Effect, (b)
there exists a breach or breaches of any representation or warranty of Parent or
Subco contained in this Agreement such that the Closing condition set forth in
Section 8.01 would not be satisfied; PROVIDED, HOWEVER, that if such breach or
breaches are capable of being cured prior to the Effective Time, such breaches
shall not be cured within 30 days of delivery to Parent of written notice of
such breach or breaches or (c) the Board of Directors of Parent (i) fails to
recommend the approval of the amendment to Parent's Certificate of Incorporation
increasing the authorized Parent Common Stock and the issuance of Parent Shares
in connection with the Merger, (ii) withdraws or amends or modifies in a manner
adverse to the Company its recommendation or approval in respect of the
amendment to Parent's Certificate of Incorporation increasing the authorized
Parent Common Stock and the issuance of Parent Shares in connection with the
Merger or (iii) makes any recommendation with respect to an Acquisition
Transaction (including making no recommendation or stating an inability to make
a recommendation), other than a recommendation to reject such Acquisition
Transaction unless such Acquisition Transaction is of the type contemplated by
the second proviso of Section 5.02(II)(a), or the Board of Directors of the
Company shall have resolved to take any of the foregoing actions referred to in
this clause and publicly discloses such resolution.

Section 10.04. PROCEDURE FOR TERMINATION. In the event of termination and
abandonment of the Merger by Parent or the Company pursuant to this Article X,
written notice thereof shall forthwith be given to the other.

Section 10.05. EFFECT OF TERMINATION AND ABANDONMENT. (a) In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no party hereto (or any of its directors or officers) shall have any
liability or further obligation to any other party to this Agreement, except (i)
as provided in this Section 10.05 and (ii) for any liability or further
obligation arising from or in connection with any willful breach of its
obligations hereunder.

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<PAGE>
(b) In the event of a termination of this Agreement by the Company pursuant
to Section 10.03(c) or pursuant to Section 10.01(d) if the Parent
stockholder approvals contemplated by 6.02(b) are not obtained, then
Parent shall within two business days of such termination pay the Company
by wire transfer or immediately available funds to an account specified
by the Company (i) up to $3 million to reimburse the Company for its
documented fees and expenses (including the fees and expenses of counsel,
accountants, consultants and advisors) incurred in connection with this
Agreement and the transactions contemplated hereby and (ii) a cash fee of
$18 million. In the event of a termination of this Agreement by Parent
pursuant to Section 10.02(c), 10.02(e) or pursuant to Section 10.01(d) if
the Company stockholder approvals contemplated by 6.02(a) are not
obtained, then the Company shall within two business days of such
termination pay Parent by wire transfer or immediately available funds to
an account specified by Parent (i) up to $3 million to reimburse Parent
for its documented fees and expenses (including the fees and expenses of
counsel, accountants, consultants and advisors) incurred in connection
with this Agreement and the transactions contemplated hereby and (ii) a
cash fee of $18 million.

ARTICLE XI

DEFINITIONS

Section 11.01. TERMS DEFINED IN THIS AGREEMENT. The following capitalized
terms used herein shall have the meanings ascribed in the indicated sections.

<TABLE>
<S> <C>
Acquisition Transaction..................... 5.02
Additional Matters.......................... 1.05(b)
Affiliates.................................. 4.07
Agreement................................... First Paragraph
Antitrust Division.......................... 5.05
Certificate of Merger....................... 1.02
Certificates................................ 2.03(b)
Closing..................................... 9.01
Closing Consideration....................... 2.01
Closing Date................................ 9.01
COBRA....................................... 4.23
Code........................................ RECITALS
Company..................................... First Paragraph
Company Common Stock........................ 2.01
Company Common Stock Equivalents............ 4.10
Company Confidentiality Agreements.......... 5.03(c)
Company Credit Facility..................... 4.03
Company Disclosure Statement................ Article IV
Company Reports............................. 4.11
Company S-1................................. 4.14
Company Special Meeting..................... 1.05(a)
Company Subsidiaries........................ 4.01
Constituent Corporations.................... First Paragraph
Delaware Act................................ 1.01
Dissenting Shares........................... 2.01(c)
Effective Time.............................. 1.02
Employee Benefit Plans...................... 4.23
ERISA....................................... 4.23
ERISA Affiliate............................. 4.23
Exchange Act................................ 3.04
</TABLE>

A-32
<PAGE>
<TABLE>
<S> <C>
Exchange Ratio.............................. 2.01
Foreign Plan................................ 4.23
FTC......................................... 5.05
HSR Act..................................... 3.04
Intellectual Property Rights................ 4.21
IRS......................................... 4.23
Joint Proxy Statement....................... 1.05
Market Value................................ 2.05
Material Adverse Effect..................... 4.01
Merger...................................... 1.01
Nasdaq...................................... 2.05
Other Plans................................. 3.12
Parent...................................... First Paragraph
Parent Common Stock......................... 2.01
Parent Confidentiality Agreement............ 5.03(c)
Parent Disclosure Statement................. Article III
Parent Exchange Options..................... 2.04
Parent Form S-8............................. 2.04
Parent Material Adverse Effect.............. 3.04
Parent Merger Matters....................... 1.05(b)
Parent Plans................................ 3.12
Parent Preferred Shares..................... 3.12
Parent SEC Reports.......................... 3.08
Parent Shares............................... 2.01
Parent Special Meeting...................... 1.05(b)
Parent Subsidiaries......................... 3.04
Pension Benefit Plans....................... 4.23
Registration Statement...................... 3.07
Restricted Stock Plan....................... 3.12
SEC......................................... 2.04
Securities Act.............................. 3.04
Special Meetings............................ 1.05(a)
Subco....................................... First Paragraph
Surviving Corporation....................... 3.15
Tax......................................... 3.15
Tax Returns................................. 3.15
Taxes....................................... 3.15
U.S. GAAP................................... 3.08
Welfare Plans............................... 4.23
</TABLE>

ARTICLE XII

MISCELLANEOUS

Section 12.01. AMENDMENT AND MODIFICATION. Subject to applicable law, this
Agreement may be amended, modified or supplemented only by written agreement of
Parent, Subco and the Company at any time prior to the Effective Time with
respect to any of the terms contained herein; PROVIDED, HOWEVER, that after this
Agreement is adopted by the stockholders of the Company, no such amendment or
modification shall change the amount or form of the Closing Consideration.

Section 12.02. WAIVER OF COMPLIANCE; CONSENTS. Any failure of Parent or
Subco, on the one hand, or the Company, on the other hand, to comply with any
obligation, covenant, agreement or condition herein may be waived by the Company
or Parent or Subco, respectively, only by a written instrument signed by the

A-33
<PAGE>
party granting such waiver, but such waiver or failure to insist upon strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure. Whenever this Agreement requires or permits consent by or on behalf of
any party hereto, such consent shall be given in writing in a manner consistent
with the requirements for a waiver of compliance as set forth in this Section
12.02.

Section 12.03. SURVIVABILITY; INVESTIGATIONS. The respective representations
and warranties of Parent, Subco and the Company contained herein or in any
certificates or other documents delivered prior to or at the Closing shall not
be deemed waived or otherwise affected by any investigation made by any party
hereto and shall not survive the Closing.

Section 12.04. NOTICES. All notices and other communications hereunder shall
be in writing and shall be delivered personally, by next-day courier or mailed
by registered or certified mail (return receipt requested), first class postage
prepaid, or telecopied with written confirmation of receipt, to the parties at
the addresses specified below (or at such other address for a party as shall be
specified by like notice; PROVIDED that notices of a change of address shall be
effective only upon receipt thereof). Any such notice shall be effective upon
receipt, if personally delivered or telecopied, one day after delivery to a
courier for next-day delivery, or three days after mailing, if deposited in the
U.S. mail, first class postage prepaid.

<TABLE>
<C> <S>
(a) if to the Company, to
Camelot Music Holdings, Inc.
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Telecopy: (330)494-8535

Attention: James E. Bonk

with a copy to

Calfee, Halter & Griswold LLP
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, OH 44114-2688
Telecopy: (216) 241-0816

Attention: Thomas F. McKee, Esq.

and a copy to

Cleary, Gottlieb, Steen & Hamilton
1 Liberty Plaza
New York, NY 10006
Telecopy: (212) 225-3999

Attention: Victor I. Lewkow, Esq.

(b) if to Parent or Subco, to

Trans World Entertainment Corporation
38 Corporate Circle
Albany, NY 12203
Telecopy: (518) 869-4819

Attention: Robert J. Higgins
</TABLE>

A-34
<PAGE>
<TABLE>
<C> <S>
with a copy to

Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Telecopy: (212) 269-5420

Attention: William M. Hartnett, Esq.
</TABLE>

Section 12.05. ASSIGNMENT; THIRD PARTY BENEFICIARIES. This Agreement and all
of the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns (including,
without limitation, any wholly-owned subsidiary of Parent incorporated under the
laws of the United States and substituted for Subco as provided in Section
1.01), but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties. This Agreement is not intended to
confer any rights or remedies hereunder upon any other person except the parties
hereto and, with respect to Section 5.08, the officers, directors and employees
of the Company and, with respect to Article I, the stockholders of the Company.

Section 12.06. GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including, but not limited to, matters of validity, construction, effect,
performance and remedies.

Section 12.07. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

Section 12.08. SEVERABILITY. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall only
apply as to such party in the specific jurisdiction where such judgment shall be
made.

Section 12.09. INTERPRETATION. The article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; and (ii) the term "subsidiary" of any specified
corporation shall mean any corporation of which a majority of the outstanding
securities having ordinary voting power to elect a majority of the board of
directors is directly or indirectly owned by such specified corporation or any
other person of which a majority of the equity interests therein is, directly or
indirectly, owned by such specified corporation.

Section 12.10. ENTIRE AGREEMENT. This Agreement, including the exhibits
hereto and the documents and instruments referred to herein (including the
Parent Disclosure Statement and the Company Disclosure Statement), embodies the
entire agreement and understanding of the parties hereto in respect of the
subject matter contained herein. There are no representations, promises,
warranties, covenants, or undertakings, other than those expressly set forth or
referred to herein and therein.

A-35
<PAGE>
IN WITNESS WHEREOF, Parent, Subco and the Company have caused this Agreement
to be signed by their respective duly authorized officers as of the date first
above written.

<TABLE>
<S> <C> <C>
TRANS WORLD ENTERTAINMENT CORPORATION

By: /s/ ROBERT J. HIGGINS
-----------------------------------------
Name: Robert J. Higgins
Title: Chairman of the Board, President
and
Chief Excutive Officer

CAQ CORPORATION

By: /s/ ROBERT J. HIGGINS
-----------------------------------------
Name: Robert J. Higgins
Title: Chairman of the Board, President
and
Chief Excutive Officer

CAMELOT MUSIC HOLDINGS, INC.

By: /s/ JAMES E. BONK
-----------------------------------------
Name: James E. Bonk
Title: Chairman of the Board and
Chief Excutive Officer
</TABLE>

A-36
<PAGE>
EXHIBIT A

FORM OF COMPANY AFFILIATE LETTER

TRANS WORLD ENTERTAINMENT CORPORATION
38 Corporate Circle
Albany, NY 12203

Gentlemen:

The undersigned, a holder of shares of common stock, par value $.01 per
share ("Company Common Stock"), of Camelot Music Holdings, Inc., a Delaware
corporation (the "Company"), is entitled to receive, in connection with the
merger (the "Merger") between the Company and a direct wholly-owned subsidiary
of Trans World Entertainment Corporation ("Parent"), shares ("Parent Shares") of
common stock, par value $.01 per share, of Parent.

If the undersigned is deemed to be an affiliate under Rule 145 of the
Securities Act of 1933, as amended, the undersigned's ability to sell, assign or
transfer the Parent Shares received by the undersigned upon conversion of any
shares of Company Common Stock pursuant to the Merger may be restricted unless
such transaction is registered under the Act or an exemption from such
registration is available. The undersigned understands that such exemptions are
limited and the undersigned has obtained advice and counsel as to the nature and
conditions of such exemptions, including information with respect to the
applicability to the sale of such securities of Rule 145 promulgated under the
Act.

The undersigned hereby represents to and covenants with Parent that the
undersigned will not sell, assign or transfer any of the Parent Shares received
by the undersigned upon conversion of shares of Company Common Stock pursuant to
the Merger except (i) pursuant to an effective registration statement under the
Act, (ii) in conformity with the limitations specified by Rule 145, (iii) in a
transaction which, in the opinion of counsel reasonably satisfactory to Parent
is not required to be registered under the Act or (iv) in a transaction that, as
described in a "no-action" or interpretive letter from the Staff of the
Securities and Exchange Commission (the "SEC"), is not required to be registered
under the Act.

In the event of a sale or other disposition by the undersigned of Parent
Shares pursuant to Rule 145(d)(1), the undersigned will supply Parent with
evidence of compliance with such Rule, in the form of a letter in the form of
Annex I hereto. The undersigned understands that Parent may instruct its
transfer agent to withhold the transfer of any Parent Shares disposed of by the
undersigned, but that upon receipt of such evidence of compliance the transfer
agent shall effectuate the transfer of the Parent Shares sold as indicated in
the letter.

The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing Parent Shares received by the undersigned in
the Merger or held by a transferee thereof, which legends will be removed by
delivery of substitute certificates upon receipt of an opinion in form and
substance reasonably satisfactory to Parent from independent counsel reasonably
satisfactory to Parent to the effect that such legends are no longer required
for the purposes of the Act or the third paragraph of this letter.

The undersigned acknowledges that (i) the undersigned has carefully read
this letter and understands the requirements hereof and the limitations imposed
upon the distribution, sale, transfer or other disposition of Parent Shares and
(ii) the receipt by Parent of this letter is an inducement and a condition to
Parent's obligations to consummate the Merger.

Very truly yours,
--------------------------------------

By:________________________________________
Name:
Title:

A-37
<PAGE>
ANNEX I

TO EXHIBIT A

[Name] [Date]

On the undersigned sold shares ("Parent Shares") of
common stock, par value $.01 per share, of Trans World Entertainment Corporation
(the "Parent"). The Parent Shares were received by the undersigned in connection
with the merger of a direct wholly-owned subsidiary of Parent with and into
Camelot Music Holdings, Inc.

Based upon the most recent report or statement filed by the Parent with the
Securities and Exchange Commission, the Parent Shares sold by the undersigned
were within the prescribed limitations set forth in paragraph (e) of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Act").

The undersigned hereby represents that the Parent Shares were sold in
"brokers' transactions" within the meaning of Section 4(4) of the Act or in
transactions directly with a "market maker" as that term is defined in Section
3(a)(38) of the Securities Exchange Act of 1934, as amended. The undersigned
further represents that the undersigned has not solicited or arranged for the
solicitation of orders to buy the Parent Shares, and that the undersigned has
not made any payment in connection with the offer or sale of the Parent Shares
to any person other than to the broker who executed the order in respect of such
sale.

Very truly yours,

A-38
<PAGE>
EXHIBIT B

[Stockholder]

[ ]
[ ]
[ ]

October 26, 1998

Trans World Entertainment
Corporation
38 Corporate Circle
Albany, NY 12203

Ladies and Gentlemen:

The undersigned understands that Camelot Music Holdings, Inc., a Delaware
corporation (the "Company"), and Trans World Entertainment Corporation, a New
York corporation ("Parent") have entered into an Agreement and Plan of Merger,
dated as of October 26, 1998 (the "Merger Agreement", capitalized terms used
herein but not otherwise defined shall have the meaning provided in the Merger
Agreement). The undersigned understands that the transactions contemplated by
the Merger Agreement require that the undersigned refrain from entering into
certain transactions with respect to Company Common Stock and with respect to
Parent Common Stock which the undersigned will receive as Closing Consideration.
Therefore in consideration of the foregoing, the covenants and promises
contained in the Merger Agreement and other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the undersigned,
intending to be legally bound hereby agrees as follows:

The undersigned hereby agrees not to offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option right or warrant to purchase, or otherwise reduce the
undersigned's risk relative to any shares of (a) Company Common Stock from
December 15, 1998 through and including the Effective Time and (b) Parent Common
Stock received as Closing Consideration, from and including the Effective Time
until the day after Parent publicly reports revenues and earnings covering at
least 30 days of combined operations of Parent and the Company following the
Effective Time; provided that the foregoing shall not be construed to prohibit
the undersigned from selling (through a third party cashless exercise program)
shares of Company Common Stock or Parent Common Stock for the purpose of
providing the undersigned with funds sufficient to enable the undersigned to pay
the exercise price for shares of Company Common Stock or Parent Common Stock
underlying options to purchase Company Common Stock, but only if the independent
certified public accountants for the Company and for the Parent each agree in
writing prior to any such transaction that such transaction would not preclude
accounting for the Merger as a pooling of interests.

Yours truly,

--------------------------------------

By:________________________________________
Name:
Title:

A-39
<PAGE>
EXHIBIT C

[Stockholder]

[ ]
[ ]
[ ]

October 26, 1998

Trans World Entertainment
Corporation
38 Corporate Circle
Albany, NY 12203

Ladies and Gentlemen:

The undersigned understands that Camelot Music Holdings, Inc., a Delaware
corporation (the "Company"), and Trans World Entertainment Corporation, a New
York corporation ("Parent") have entered into an Agreement and Plan of Merger,
dated as of October 26, 1998 (the "Merger Agreement", capitalized terms used
herein but not otherwise defined shall have the meaning provided in the Merger
Agreement). The undersigned understands that the transactions contemplated by
the Merger Agreement require that the undersigned refrain from entering into
certain transactions with respect to Parent Common Stock. Therefore in
consideration of the foregoing, the covenants and promises contained in the
Merger Agreement and other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the undersigned, intending to be
legally bound hereby agrees that the undersigned will not offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option right or warrant to purchase, or otherwise
reduce the undersigned's risk relative to any Parent Common Stock for a period
from December 15, 1998 until the day after the Company publicly reports its
revenues and earnings covering at least 30 days of combined operations of Parent
and the Company following the Effective Time.

Sincerely,

[ ]
By:________________________________________
Name:
Title:

A-40
<PAGE>
ANNEX B

VOTING AGREEMENT

VOTING AGREEMENT, dated as of October 26, 1998 (this "AGREEMENT"), among
Trans World Entertainment Corporation, a New York corporation ("PARENT") and the
individuals whose names and addresses are set forth on the signature pages
hereto (collectively, the "STOCKHOLDERS", and each, individually, a
"STOCKHOLDER").

WHEREAS, Parent and its wholly owned subsidiary, CAQ Corporation, a Delaware
corporation ("SUBCO"), have entered into an Agreement and Plan of Merger, dated
as of the date hereof (the "MERGER AGREEMENT"), with Camelot Music Holdings,
Inc., a Delaware corporation (the "COMPANY"), which Merger Agreement provides,
among other things, that Subco will merge with and into the Company pursuant to
the merger contemplated by the Merger Agreement (the "MERGER"); and

WHEREAS, as of the date hereof, the Stockholders own (both beneficially and
of record) the number of shares of Common Stock, par value $.01 per share, of
the Company ("COMPANY COMMON STOCK") set forth opposite their respective names
at the foot of this Agreement; and

WHEREAS, the Stockholders have agreed to enter into this Agreement governing
the voting and disposition of the shares of Company Common Stock now owned and
which may hereafter be acquired by any of the Stockholders (the "SHARES").

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:

1. VOTING OF SHARES. Each Stockholder shall, until the Termination Date
(as hereinafter defined), cause the Shares owned by such Stockholder to be
voted (i) in favor of the Merger Agreement, the Merger and the other
transactions contemplated thereby and (ii) against any Acquisition
Transaction (as defined in Section 4) and any action or agreement that would
impede, frustrate or nullify this Agreement, or would result in a breach in
any respect of any covenant, representation or warranty or other obligation
or agreement of the Company under the Merger Agreement or which would result
in any of the conditions set forth in Article VI or VII of the Merger
Agreement not being fulfilled (the subject matters of the foregoing clauses
(i) and (ii) being referred to herein as the "VOTING MATTERS") at any
meeting of the stockholders of the Company where any such vote shall be
taken or in any consent in lieu of such a meeting. For the purposes of this
Agreement, "TERMINATION DATE" shall mean the earliest of (i) the termination
of the Merger Agreement in accordance with its terms, (ii) the Effective
Time (as defined in the Merger Agreement), (iii) the termination of this
Agreement by the mutual written agreement of the parties hereto or pursuant
to the terms of Section 8 of this Agreement or (iv) April 30, 1999, unless
the parties to the Merger Agreement shall amend the date specified in
Section 10.02 thereto to specify some later date in which case the date
specified in this subsection (iv) shall be deemed to be for all purposes the
same date as is specified in Section 10.02 to the Merger Agreement, as it
may then be amended.

2. IRREVOCABLE PROXY. Each Stockholder hereby irrevocably appoints
Parent, until the Termination Date, as its attorney and proxy pursuant to
the provisions of Section 212 of the Delaware General Corporation Law with
full power of substitution, to vote upon any Voting Matters in such manner
as Parent or its substitute shall, in its sole discretion, deem proper and
otherwise act (by written consent or otherwise) with respect to the Shares
(and all other securities issued to the Stockholder in respect of the
Shares) which each Stockholder is entitled to vote at any meeting of
stockholders of the Company (whether annual or special and whether or not
adjourned or postponed meeting) or in respect of any consent in lieu of any
such meeting or otherwise, in accordance with the provisions of Section 1 of
this Agreement. This proxy and power of attorney is irrevocable and coupled
with an interest in favor of Parent. Each Stockholder hereby revokes all
other proxies and powers of attorney

B-1
<PAGE>
with respect to the Shares (and all other securities issued to the
Stockholder in respect of the Shares) which it may have heretofore appointed
or granted with respect to any Voting Matters, and until the Termination
Date has occurred, no subsequent proxy or power of attorney with respect to
any Voting Matters shall be given or written consent executed (and if given
or executed, shall not be effective until the Termination Date has occurred)
by the Stockholder with respect thereto.

3. NO DISPOSITION OR ENCUMBRANCE OF SHARES. Each Stockholder hereby
covenants and agrees that, until the Termination Date has occurred, except
as contemplated by this Agreement, the Stockholder shall not, and shall not
offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise
dispose of, or create or permit to exist any security interest, lien, claim,
pledge, option, right of first refusal, agreement, limitation on the
Stockholder's voting rights, charge or other encumbrance of any nature
whatsoever (each of the foregoing being referred to herein as a
"Disposition") with respect to the Shares UNLESS the transferee with respect
to any such transaction executes and delivers to Parent a voting agreement
substantially in the form of this Agreement with respect to the Shares which
are the subject of any such transaction and further agrees, if requested by
Parent in its sole discretion, to execute and deliver a Waiver and Lock-up
Agreement substantially in the form of Annex A to the Registration Rights
Agreement referred to in Section 5.16 of the Merger Agreement and a Company
Affiliate Letter substantially in the form of Exhibit A to the Merger
Agreement.

4. NO SOLICITATION OF TRANSACTIONS. Until the Termination Date has
occurred, each Stockholder shall not, directly or indirectly, through any
agent or representative or otherwise, solicit, initiate, facilitate or
encourage (including by way of furnishing or disclosing non-public
information) any inquiries or the making of any proposal with respect to any
merger, consolidation or other business combination involving the Company or
acquisition of any kind of material portion of the assets or capital stock
of the Company (an "ACQUISITION TRANSACTION") or negotiate, explore or
otherwise communicate in any way with any third party with respect to any
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to perform as
contemplated by this Agreement. Until the Termination Date has occurred,
each Stockholder immediately shall cease and cause to be terminated all
existing discussions or negotiations of the Stockholder and its agents or
other representatives with any Person conducted heretofore with respect to
any of the foregoing. Each Stockholder shall notify immediately Parent if
any proposal or offer, or any inquiry or contact with any Person with
respect to an Acquisition Transaction, is made and shall, in any such notice
to Parent, indicate in reasonable detail the identity of the Person making
such proposal, offer, inquiry or contact and the terms and conditions of
such proposal, offer, inquiry or contact.

5. LEGEND ON CERTIFICATES. If there shall be any proposed Disposition
with respect to any of the Shares, immediately prior to such Disposition,
the certificate(s) evidencing the Shares shall be endorsed with a
restrictive legend substantially as follows:

THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING
AGREEMENT DATED AS OF OCTOBER 25, 1998 BETWEEN THE REGISTERED HOLDER HEREOF
AND TRANS WORLD ENTERTAINMENT CORPORATION, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE COMPANY. THE HOLDER OF THIS CERTIFICATE, BY HIS
ACCEPTANCE HEREOF, AGREES TO BE BOUND BY ALL THE TERMS OF SUCH AGREEMENT, AS
THE SAME IS IN EFFECT FROM TIME TO TIME.

6. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each Stockholder
hereby severally represents and warrants with respect to itself and its
ownership of the Shares to Parent as follows:

a. AUTHORITY RELATIVE TO THIS AGREEMENT. The Stockholder has all
necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Stockholder and the consummation by the Stockholder of the transactions
contemplated hereby have been duly and validly authorized by all
necessary action on the part of the Stockholder. This

B-2
<PAGE>
Agreement has been duly and validly executed and delivered by the
Stockholder and, assuming the due authorization, execution and delivery
by Parent, constitutes a legal, valid and binding obligation of the
Stockholder, enforceable against the Stockholder in accordance with its
terms, except that such enforceability may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights generally.

b. NO CONFLICT. The execution and delivery of this Agreement by the
Stockholder does not, and the performance of this Agreement by the
Stockholder will not, (i) require any consent, approval, authorization or
permit of, or filing with or notification to (other than pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
Securities Exchange Act of 1934, as amended), any governmental or
regulatory authority, domestic or foreign, (ii) conflict with or violate
the Certificate of Incorporation or By-laws of the Stockholder, (iii)
conflict with or violate any law, rule, regulation, order, judgment or
decree applicable to the Stockholder or by which any property or asset of
the Stockholder is bound, or (iv) result in any breach of or constitute a
default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation of
a lien or other encumbrance of any nature whatsoever on any property or
asset of the Stockholder pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which the Stockholder is a party or by
which the Stockholder or any property or asset of the Stockholder is
bound.

c. TITLE TO THE SHARES. The Stockholder owns all such Shares free and
clear of all security interests, liens, claims, pledges, options, rights
of first refusal, agreements, limitations on the Stockholder's voting
rights, charges and other encumbrances of any nature whatsoever, and,
except as provided in this Agreement, the Stockholder has not appointed
or granted any proxy, which appointment or grant is still effective, with
respect to the Shares.

d. BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on
behalf of the Stockholder.

7. REPRESENTATIONS AND WARRANTIES OF PARENT. Parent hereby represents
and warrants to the Stockholders that Parent has all necessary power and
authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance of this
Agreement by Parent have been duly authorized by all necessary action on the
part of Parent. This Agreement has been duly and validly executed and
delivered by Parent and, assuming the due authorization, execution and
delivery by the Stockholders, constitutes a legal, valid and binding
obligation of Parent enforceable in accordance with its terms, except that
such enforceability may be limited by bankruptcy, insolvency or similar laws
affecting creditors' rights generally.

8. TERMINATION OF AGREEMENT. Parent reserves the right in its sole
discretion at any time hereafter to terminate this Agreement and all
irrevocable proxies granted to it hereunder.

9. MISCELLANEOUS.

a. EXPENSES. Except as otherwise provided herein or in the Merger
Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party
incurring such expenses.

b. FURTHER ASSURANCES. From time to time at the requesting party's
reasonable request, Parent and each Stockholder will execute and deliver
all such further documents and instruments and take all such further
action as may be necessary in order to consummate the transactions
contemplated hereby.

B-3
<PAGE>
c. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any of the provisions of this Agreement
were not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy to which they may be entitled at law or in
equity.

d. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between Parent and the Stockholders with respect to the subject matter
hereof and supersedes all prior agreements and understandings, both
written and oral, between Parent and any Stockholder with respect to the
subject matter hereof.

e. ASSIGNMENT. This Agreement shall not be assigned by operation of
law or otherwise, without the prior written consent of the parties.

f. OBLIGATIONS OF SUCCESSORS; PARTIES IN INTEREST. This Agreement
shall be binding upon, inure solely to the benefit of, and be enforceable
by, the successors and permitted assigns of the parties hereto. Nothing
in this Agreement, express or implied, is intended to or shall confer
upon any other person any rights, benefits or remedies of any nature
whatsoever under or by reason of this Agreement.

g. AMENDMENT; WAIVER. This Agreement may not be amended or changed
except by an instrument in writing signed by the parties hereto. Any
party hereto may (i) extend the time for the performance of any
obligation or other act of the other party hereto, (ii) waive any
inaccuracy in the representations and warranties contained herein or in
any document delivered pursuant hereto and (iii) waive compliance with
any agreement or condition contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.

h. SEVERABILITY. The validity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.

i. NOTICES. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery in
person, by cable, telecopy, telegram or telex or by registered or
certified mail (postage prepaid, return receipt requested) to the
respective parties at the following addresses (or at such other address
for a party as shall be specified in a notice given in accordance with
this Section 9(i)):

<TABLE>
<C> <S>
if to Parent:

TRANS WORLD ENTERTAINMENT CORPORATION
38 Corporate Circle
Albany, NY 12203
Attention: Robert J. Higgins
Telecopy: (518) 452-7833

with a copy to:

Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: William M. Hartnett, Esq.
Telecopy: (212) 269-5420

if to any Stockholder:

at the respective addresses of such Stockholder set forth on the
signature pages to this Agreement.
</TABLE>

B-4
<PAGE>
j. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
CONTRACTS EXECUTED IN AND TO BE PERFORMED IN THAT STATE.

k. HEADINGS. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.

l. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any
other person any rights, benefits or remedies or any nature whatsoever
under or by reason of this Agreement.

m. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate
counterparts, each of which when executed shall be deemed to be an
original but all of which taken together shall constitute one and the
same agreement.

n. WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ANY RIGHT IT MIGHT
HAVE TO A JURY TRIAL OF ANY DISPUTE ARISING IN CONNECTION WITH THIS
AGREEMENT.

IN WITNESS WHEREOF, Parent and each of the Stockholders have duly executed
this Agreement, as of the date first written above.

PARENT:

TRANS WORLD ENTERTAINMENT CORPORATION

By: /s/ Robert J. Higgins
- ---------------------------------------------

Name: Robert J. Higgins

Title: Chairman of the Board, President
and Chief Executive Officer

B-5
<PAGE>
STOCKHOLDERS: NUMBER OF SHARES OWNED:

VAN KAMPEN-MERRITT
PRIME RATE INCOME TRUST

By: /s/ Jeffrey W. Maillet
- ---------------------------------------------

Name: Jeffrey W. Maillet

Title: Senior Vice President

Address: One Parkview Plaza
Oakbrook Terrace, IL 60180

FERNWOOD ASSOCIATES, L.P.

By: /s/ Thomas P. Burger
- ---------------------------------------------

Name: Thomas P. Burger

Title: General Partner

Address: 667 Madison Avenue, 20th Floor
New York, New York 10021

FERNWOOD RESTRUCTURING, LTD.

By: /s/ Thomas P. Burger
- ---------------------------------------------

Name: Thomas P. Burger

Title: Director

Address: 667 Madison Avenue, 20th Floor
New York, New York 10021

FERNWOOD FOUNDATION FUND

By: /s/ Thomas P. Burger
- ---------------------------------------------

Name: Thomas P. Burger

Title: General Partner

Address: 667 Madison Avenue, 20th Floor
New York, New York 10021

FERNWOOD RETURN HOLDINGS, LTD.

By: /s/ Thomas P. Burger
- ---------------------------------------------

Name: Thomas P. Burger

Title: Director

Address: 667 Madison Avenue, 20th Floor
New York, New York 10021

B-6
<PAGE>
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED

By: /s/ John Humphrey
- ---------------------------------------------

Name: John Humphrey

Title:

Address: World Financial Center, North Tower
New York, New York 10281

OAKTREE CAPITAL MANAGEMENT, LLC (in
its capacity as general partner and
investment manager of OCM
Opportunities Fund, L.P. and
Columbia/HCA Master Retirement Trust
(separate account I))

By:/s/ Matt Barrett
- ---------------------------------------------

Name: Matt Barrett

Title: Managing Director

Address: 550 South Hope Street, 22nd Floor
Los Angeles, California 90071

By:/s/ Ken Liang
- ---------------------------------------------

Name: Ken Liang

Title: Managing Director and General Counsel

Address: 550 South Hope Street, 22nd Floor
Los Angeles, California 90071

B-7
<PAGE>
ANNEX C

VOTING AGREEMENT

VOTING AGREEMENT, dated as of October 26, 1998 (this "AGREEMENT"), among
Camelot Music Holdings, Inc., a Delaware corporation (the "COMPANY") and the
individual whose name and address is set forth on the signature page hereto (the
"STOCKHOLDER").

WHEREAS, Trans World Entertainment Corporation, a New York Corporation
("PARENT") and its wholly owned subsidiary, CAQ Corporation, a Delaware
corporation ("SUBCO"), have entered into an Agreement and Plan of Merger, dated
as of the date hereof (the "MERGER AGREEMENT"), with the Company, which Merger
Agreement provides, among other things, that Subco will merge with and into the
Company pursuant to the merger contemplated by the Merger Agreement (the
"MERGER"); and

WHEREAS, as of the date hereof, the Stockholder owns (both beneficially and
of record) the number of shares of Common Stock, par value $.01 per share, of
Parent ("PARENT COMMON STOCK") set forth opposite his name at the foot of this
Agreement; and

WHEREAS, the Stockholder has agreed to enter into this Agreement governing
the voting and disposition of the shares of Parent Common Stock now owned and
which may hereafter be acquired by the Stockholder (the "SHARES").

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:

1. VOTING OF SHARES. The Stockholder shall, until the Termination Date
(as hereinafter defined), cause the Shares owned by the Stockholder to be
voted (i) in favor of the Parent Merger Matters (as defined in the Merger
Agreement) and (ii) against any Acquisition Transaction (as defined in
Section 3) and any action or agreement that would impede, frustrate or
nullify this Agreement, or would result in a breach in any respect of any
covenant, representation or warranty or other obligation or agreement of
Parent under the Merger Agreement or which would result in any of the
conditions set forth in Article VI or VIII of the Merger Agreement not being
fulfilled (the subject matters of the foregoing clauses (i) and (ii) being
referred to herein as the "VOTING MATTERS") at any meeting of the
stockholders of Parent where any such vote shall be taken or in any consent
in lieu of such a meeting. For the purposes of this Agreement, "TERMINATION
DATE" shall mean the earliest to occur of (i) the termination of the Merger
Agreement in accordance with its terms, (ii) the Effective Time (as defined
in the Merger Agreement), (iii) the termination of this Agreement by the
mutual written agreement of the parties hereto or pursuant to Section 7 of
this Agreement or (iv) April 30, 1999, unless the parties to the Merger
Agreement shall amend the date specified in Section 10.02 thereto to specify
some later date in which case the date specified in this subsection (iv)
shall be deemed to be for all purposes the same date as is specified in
Section 10.02 to the Merger Agreement, as it may then be amended.

2. NO DISPOSITION OR ENCUMBRANCE OF SHARES. The Stockholder hereby
covenants and agrees that, until the Termination Date has occurred, except
as contemplated by this Agreement, the Stockholder shall not, and shall not
offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise
dispose of, or create or permit to exist any security interest, lien, claim,
pledge, option, right of first refusal, agreement, limitation on the
Stockholder's voting rights, charge or other encumbrance of any nature
whatsoever with respect to the Shares UNLESS the transferee with respect to
any such transaction executes and delivers to the Company a voting agreement
substantially in the form of this Agreement with respect to the Shares which
are the subject of any such transaction and further agrees, if requested by
Parent in its sole discretion, to execute and deliver a Lock-up Agreement
substantially in the form of Exhibit B to the Merger Agreement and a Company
Affiliate Letter substantially in the form of Exhibit A to the Merger
Agreement.

C-1
<PAGE>
3. NO SOLICITATION OF TRANSACTIONS. Until the Termination Date has
occurred, the Stockholder shall not, in his capacity as a Stockholder,
directly or indirectly, through any agent or representative or otherwise,
solicit, initiate, facilitate or encourage (including by way of furnishing
or disclosing non-public information) any inquiries or the making of any
proposal with respect to any merger, consolidation or other business
combination involving Parent or acquisition of any kind of material portion
of the assets or capital stock of Parent (an "ACQUISITION TRANSACTION") or
negotiate, explore or otherwise communicate in any way with any third party
with respect to any Acquisition Transaction or enter into any agreement,
arrangement or understanding requiring it to abandon, terminate or fail to
perform as contemplated by this Agreement. Until the Termination Date has
occurred, the Stockholder immediately shall cease and cause to be terminated
all existing discussions or negotiations of the Stockholder and its agents
or other representatives with any Person conducted heretofore with respect
to any of the foregoing. The Stockholder shall notify immediately the
Company if any proposal or offer, or any inquiry or contact with any Person
with respect to an Acquisition Transaction, is made and shall, in any such
notice to the Company, indicate in reasonable detail the identity of the
Person making such proposal, offer, inquiry or contact and the terms and
conditions of such proposal, offer, inquiry or contact.

4. LEGEND ON CERTIFICATES. If there shall be any proposed Disposition
with respect to any of the Shares, immediately prior to such Disposition,
the certificate(s) evidencing the Shares shall be endorsed with a
restrictive legend substantially as follows:

THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING AGREEMENT
DATED AS OF OCTOBER 25, 1998 BETWEEN THE REGISTERED HOLDER HEREOF AND
CAMELOT MUSIC HOLDINGS, INC., A COPY OF WHICH IS ON FILE AT THE PRINCIPAL
OFFICE OF PARENT. THE HOLDER OF THIS CERTIFICATE, BY HIS ACCEPTANCE HEREOF,
AGREES TO BE BOUND BY ALL THE TERMS OF SUCH AGREEMENT, AS THE SAME IS IN
EFFECT FROM TIME TO TIME.

5. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
hereby represents and warrants with respect to itself and its ownership of
the Shares to the Company as follows:

a. AUTHORITY RELATIVE TO THIS AGREEMENT. The Stockholder has all
necessary power and authority to execute and deliver this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed
and delivered by the Stockholder and, assuming the due authorization,
execution and delivery by the Company, constitutes a legal, valid and
binding obligation of the Stockholder, enforceable against the
Stockholder in accordance with its terms, except that such enforceability
may be limited by bankruptcy, insolvency or similar laws affecting
creditors' rights generally.

b. NO CONFLICT. The execution and delivery of this Agreement by the
Stockholder does not, and the performance of this Agreement by the
Stockholder will not, (i) require any consent, approval, authorization or
permit of, or filing with or notification to (other than pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended and the
Securities Exchange Act of 1934, as amended), any governmental or
regulatory authority, domestic or foreign, (ii) conflict with or violate
any law, rule, regulation, order, judgment or decree applicable to the
Stockholder or by which any property or asset of the Stockholder is
bound, or (iii) result in any breach of or constitute a default (or an
event which with notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
other encumbrance of any nature whatsoever on any property or asset of
the Stockholder pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Stockholder is a party or by which
the Stockholder or any property or asset of the Stockholder is bound.

C-2
<PAGE>
c. TITLE TO THE SHARES. The Shares owned by the Stockholder are all
the securities of Parent owned, either of record or beneficially, by the
Stockholder. The Stockholder owns all such Shares free and clear of all
security interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on the Stockholder's voting rights,
charges and other encumbrances of any nature whatsoever, and, except as
provided in this Agreement, the Stockholder has not appointed or granted
any proxy, which appointment or grant is still effective, with respect to
the Shares.

6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Stockholder that the Company has all
necessary power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. The execution, delivery and performance
of this Agreement by the Company have been duly authorized by all necessary
action on the part of the Company. This Agreement has been duly and validly
executed and delivered by the Company and, assuming the due authorization,
execution and delivery by the Stockholder, constitutes a legal, valid and
binding obligation of the Company enforceable in accordance with its terms,
except that such enforceability may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally.

7. TERMINATION OF AGREEMENT. The Company reserves the right in its sole
discretion at any time hereafter to terminate this Agreement.

8. MISCELLANEOUS.

b. FURTHER ASSURANCES. From time to time at the other party's
reasonable request, the Company and the Stockholder will execute and
deliver all such further documents and instruments and take all such
further action as may be necessary in order to consummate the
transactions contemplated hereby.

c. SPECIFIC PERFORMANCE. The parties hereto agree that irreparable
damage would occur in the event any of the provisions of this Agreement
were not performed in accordance with the terms hereof and that the
parties shall be entitled to specific performance of the terms hereof, in
addition to any other remedy to which they may be entitled at law or in
equity.

d. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the Company and the Stockholder with respect to the subject
matter hereof and supersedes all prior agreements and understandings,
both written and oral, between the Company and the Stockholder with
respect to the subject matter hereof.

e. ASSIGNMENT. This Agreement shall not be assigned by operation of
law or otherwise, without the prior written consent of the parties.

C-3
<PAGE>
g. AMENDMENT; WAIVER. This Agreement may not be amended or changed
except by an instrument in writing signed by the parties hereto. Any
party hereto may (i) extend the time for the performance of any
obligation or other act of the other party hereto, (ii) waive any
inaccuracy in the representations and warranties contained herein or in
any document delivered pursuant hereto and (iii) waive compliance with
any agreement or condition contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the
party or parties to be bound thereby.

<TABLE>
<C> <S>
if to the Company:
CAMELOT MUSIC HOLDINGS, INC.
8000 Freedom Avenue, N.W.
North Canton, Ohio 44720
Attention: James E. Bonk
Telecopy: (330) 494-8535

with a copy to:

Calfee Halter & Griswold LLP
1400 McDonald Investment Center
800 Superior Avenue
Cleveland, OH 44114
Attention: Thomas F. McKee, Esq.
Telecopy: (216) 241-0816
and a copy to:
Cleary, Gottlieb, Steen & Hamilton
1 Liberty Plaza
New York, NY 10005
Attention: Victor I. Lewkow, Esq.
Telecopy: (212) 225-3999

if to the Stockholder:

at the addresses of the Stockholder set forth on the signature page to
this Agreement.
</TABLE>

j. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
CONTRACTS EXECUTED IN AND TO BE PERFORMED IN THAT STATE.

k. HEADINGS. The descriptive headings contained in this Agreement are
included for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.

l. PARTIES IN INTEREST. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to or shall

C-4
<PAGE>
confer upon any other person any rights, benefits or remedies or any
nature whatsoever under or by reason of this Agreement.

n. WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES ANY RIGHT IT MIGHT
HAVE TO A JURY TRIAL OF ANY DISPUTE ARISING IN CONNECTION WITH THIS
AGREEMENT.

IN WITNESS WHEREOF, the Company and the Stockholder have duly executed this
Agreement, as of the date first written above.

COMPANY:

CAMELOT MUSIC HOLDINGS, INC.

By:/s/ JAMES E. BONK
- ---------------------------------------------

Name: James E. Bonk

Title: Chairman of the Board and
Chief Executive Officer

STOCKHOLDER: NUMBER OF SHARES OWNED:

/s/ ROBERT J. HIGGINS
- -------------------------------------------------

Name: Robert J. Higgins

Address:
President and Chief Executive Officer

C-5
<PAGE>
ANNEX D-1

FORM OF
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF TRANS WORLD ENTERTAINMENT CORPORATION
UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW

The undersigned, being the President and Secretary of Trans World Entertainment
Corporation, do hereby certify:

1. The name of the corporation is Trans World Entertainment Corporation.
The name under which the corporation was originally incorporated is Trans-World
Music Corp.

2. The certificate of incorporation of said corporation was filed by the
Department of State on the 7th day of February, 1972.

3. The Certificate of incorporation is amended to increase the aggregate
number of shares the corporation is authorized to issue. The first two sentences
of paragraph "Fourth" of the certificate of incorporation which refers to the
authorized shares is amended to read as follows:

"FOURTH": "The total number of shares of stock which the corporation shall
have authority to issue is 205,000,000. Of said shares, 5,000,000 shares shall
be of a class designated as Preferred Stock with a par value of $.01 each and
200,000,000 shares shall be of a class designated as Common Stock with a par
value of $.01 each."

4. This amendment to the certificate of incorporation of Trans World
Entertainment Corporation was authorized by a majority of the board of directors
followed by a vote of the holders of a majority of all outstanding shares of
capital stock entitled to vote thereon at a meeting of the shareholders.
<PAGE>
ANNEX D-2

FORM OF

CERTIFICATE OF AMENDMENT

TO THE

CERTIFICATE OF INCORPORATION

OF TRANS WORLD ENTERTAINMENT CORPORATION

UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW

The undersigned, being President and Secretary of Trans World Entertainment
Corporation, do hereby certify:

1. The name of the corporation is Trans World Entertainment Corporation. The
name under which the corporation was originally incorporated is Trans-World
Music Corp.

2. The certificate of incorporation of said corporation was filed by the
Department of State on the 7th day of February, 1972.

3. The certificate of incorporation is amended by adding a new Paragraph
"Ninth" in the following form:

"NINTH": "1) The number of directors of the Corporation shall be fixed by
resolution duly adopted from time to time by a majority of the entire Board of
Directors; provided, however, that any decrease in the number of Directors shall
not shorten the term of any incumbent Director.

2) The Directors shall be classified, with respect to the term for which
they hold office, into three classes, as nearly equal in number as possible. The
initial Class 1 Directors shall serve for a term expiring at the annual meeting
of shareholders to be held in 1999, the initial Class 2 Directors shall serve
for a term expiring at the annual meeting of shareholders to be held in 2000,
the initial Class 3 Directors shall serve for a term expiring at the annual
meeting of shareholders to be held in 2001 and, in each case, until their
successors are duly elected and qualified. At each annual meeting of
shareholders, the successor or successors of the class of Directors whose term
expires at that meeting shall be elected by a plurality of votes cast at such
meeting and shall hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election, and
until their successors are duly elected and qualified.

3) Any and all vacancies in the Board of Directors, however occurring,
including without limitation, by reason of an increase in size of the Board of
Directors, or death, resignation, disqualification or removal of a Director,
shall be filled solely by the affirmative vote of a majority of the remaining
Directors then in office, even if less than a quorum of the Board of Directors.
When the number of Directors is increased or decreased, the Board of Directors
shall determine the class or classes to which the increased or decreased number
of Directors shall be apportioned; provided, however, that any Director who is
appointed to the Board of Directors shall not be classified until the next
annual meeting of shareholders. In no case shall a decrease in the number of
Directors shorten the term of any incumbent Director."

SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW

(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.

(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:

(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section 251 of this title.

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:

a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock, depository receipts and cash in
lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraph a., b. and c. of this paragraph.

(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.

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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.

(d) Appraisal rights shall be perfected as follows:

(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or

(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series or stock
of such constituent corporation who are entitled to appraisal rights of the
approval of the merger or consolidation and that appraisal rights are
available for any or all shares of such class of series of stock of such
constituent corporation, and shall include in such notice a copy of this
section; provided that, if the notice is given on or after the effective
date of the merger or consolidation, such notice shall be given by the
surviving or resulting corporation to all such holders of any class or
series of stock of a constituent corporation that are entitled to appraisal
rights. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such
notice, demand in writing from the surviving or resulting corporation the
appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the effective
date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the
merger or consolidation notifying each of the holders of any class or series
of stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided,
however, that if such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent
of the corporation that is required to give either notice that such notice
has been given shall, in the absence of fraud, be prima facie evidence of
the facts stated

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therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.

(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.

(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.

(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.

(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on

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the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted such stockholder's certificates of
stock to the Register in Chancery, if such is required, may participate fully in
all proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.

(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this state or of any state.

(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.

(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
court, and such approval may be conditioned upon such terms as the Court deems
just.

(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by CH. 339, L.
'98, EFF. 7-1-98.)

E-4
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ANNEX F

Investment Banking
Corporate and
Institutional
Client Group
World Financial Center
North Tower

[LOGO]
New York, New York
10281-1330
212 449 1000
October 25, 1998

Board of Directors
Camelot Music Holdings, Inc.
8000 Freedom Avenue, N.W.
North Canton, OH 44720

Members of the Board of Directors:

Camelot Music Holdings, Inc. (the "Company") and Trans World Entertainment
Corporation (the "Acquiror") and CAQ Corporation, a newly formed direct wholly
owned subsidiary of the Acquiror (the "Aquisition Sub"), propose to enter into
an Agreement and Plan of Merger (the "Agreement") pursuant to which the
Acquisition Sub will be merged with and into the Company in a transaction (the
"Merger") in which each outstanding share of the Company's common stock, par
value $0.01 per share (the "Company Shares"), will be converted into the right
to receive 1.9 shares (the "Exchange Ratio") of the common stock of the
Acquiror, par value $0.01 per share (the "Acquiror Shares").

You have asked us whether, in our opinion, the Exchange Ratio is fair from a
financial point of view to the holders of the Company Shares.

In arriving at the opinion set forth below, we have, among other things:

(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be relevant;

(2) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets, liabilities and prospects of
the Company and the Acquiror, as well as the amount and timing of the
cost savings and related expenses and synergies expected to result from
the Merger (the "Expected Synergies") furnished to us by the Company and
the Acquiror, respectively;

(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the matters
described in clauses (1) and (2) above, as well as their respective
businesses and prospects before and after giving effect to the Merger
and the Expected Synergies;

(4) Reviewed the market prices and valuation multiples for the Acquiror
Shares and compared them with those of certain publicly traded companies
that we deemed to be relevant;

(5) Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;

(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;

(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their financial and
legal advisors;

(8) Reviewed the potential pro forma impact of the Merger;

F-1
<PAGE>
(9) Reviewed a draft dated October 25, 1998 of the Agreement; and

(10) Reviewed such other financial studies and analyses and took into account
such other matters as we deemed necessary, including our assessment of
general economic, market and monetary conditions.

In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct any physical inspection of the properties or facilities of the Company
or the Acquiror. With respect to the financial forecast information and the
Expected Synergies furnished to or discussed with us by the Company or the
Acquiror, we have assumed that they have been reasonably prepared and reflect
the best currently available estimates and judgment of the Company's or the
Acquiror's management as to the expected future financial performance of the
Company or the Acquiror, as the case may be, and the Expected Synergies. We have
further assumed that the Merger will be accounted for as a pooling of interests
under generally accepted accounting principles and that it will qualify as a
tax-free reorganization for U.S. federal income tax purposes. We have also
assumed that the final form of the Agreement will be substantially similar to
the last draft reviewed by us.

Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available to
us as of, the date hereof. We have assumed that in the course of obtaining the
necessary regulatory or other consents or approvals (contractual or otherwise)
for the Merger, no restrictions, including any divestiture requirements or
amendments or modifications, will be imposed that will have a material adverse
effect on the contemplated benefits of the Merger.

In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or any
part of the Company.

We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In addition,
the Company has agreed to indemnify us for certain liabilities arising out of
our engagement. We have, in the past, provided financial advisory and financing
services to the Company and may continue to do so and have received, and may
receive, fees for the rendering of such services. We currently own approximately
1.4 million shares of the Company's common stock, obtained as a result of the
conversion of the Company's debt securities to equity in the Company's
reorganization and emergence from bankruptcy. In addition, in the ordinary
course of our business, we may actively trade the Company Shares, as well as the
Acquiror Shares for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.

This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation to
any shareholder as to how such shareholder should vote on the proposed Merger or
any matters related thereto.

We are not expressing any opinion herein as to the prices at which the
Company Shares or the Acquiror Shares will trade following the announcement or
consummation of the Merger.

On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair from a financial point of view to
the holders of the Company Shares.

Very truly yours,

MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED

[LOGO]

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<PAGE>
ANNEX G

Goldman, Sachs & Co. -- 85 Broad Street -- New York, New York 10004
Tel: 212-902-1000

[LOGO]

PERSONAL AND CONFIDENTIAL

October 26, 1998

The Board of Directors
Trans World Entertainment Corporation
38 Corporate Circle
Albany, NY 12203

Ladies and Gentlemen:

You have requested our opinion as to the fairness from a financial point of view
to Trans World Entertainment Corporation (the "Company") of the exchange ratio
of 1.90 (the "Exchange Ratio") shares of common stock, par value $0.01 per share
(the "Shares"), of the Company for each share of common stock, par value $0.01
per share (the "Common Stock"), of Camelot Music Holdings, Inc. (the "Seller")
pursuant to the Agreement and Plan of Merger, dated as of October 26, 1998,
among the Company, Subco, a direct wholly-owned subsidiary of the Company, and
Seller (the "Agreement").

Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
the Company having provided certain investment banking services to the Company
from time to time, including having acted as managing underwriter of a public
offering of Shares in April 1998 and having acted as its financial advisor in
connection with, and having participated in certain of the negotiations leading
to, the Agreement. Goldman, Sachs & Co. provides a full range of financial
advisory and securities services and, in the course of its normal trading
activities may from time to time effect transactions and hold securities
including derivative securities of the Company or Seller for its own account and
for the accounts of customers.

In connection with this opinion, we have reviewed, among other things, the
Agreement; the Voting Agreement among the Seller and Robert J. Higgins dated
October 26, 1998; the Voting Agreement among the Company and certain
stockholders of the Seller dated October 26, 1998; the Registration Rights
Agreement by and among the Company and certain holders of Shares dated October
26, 1998; Amendment No. 1 to the Seller's registration statement on Form S-1
dated August 11, 1998; Annual Reports to Stockholders and Annual Reports on Form
10-K of the Company for the five fiscal years ended January 31, 1998; certain
interim reports to stockholders and Quarterly Reports on Form 10-Q of the
Company; certain other communications from the Company and Seller to their
respective stockholders; and certain internal financial analyses and forecasts
for the Company and the Seller prepared by their respective managements. We also
have held discussions with members of the senior management of the Company and
Seller regarding the strategic rationale for, and the potential benefits of, the
transaction contemplated by the Agreement and the past and current business
operations, financial condition and future prospects of their respective
companies. In addition, we have reviewed the reported price and trading activity
for the Shares and the Common Stock, compared certain financial and stock market
information for the Company and the Seller with similar information for certain
other companies the securities of which are publicly traded, reviewed the
financial terms of certain recent business combinations in the music retail
industry specifically and in other industries generally and performed such other
studies and analyses as we considered appropriate.

G-1
<PAGE>
Trans World Entertainment Corporation
October 26, 1998
Page 2

We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In that regard, we have assumed with
your consent that the internal financial forecasts prepared by the management of
the Company have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the Company, and that such
forecasts will be realized in the amounts and time periods contemplated thereby.
We have assumed, with your consent, that the transaction contemplated by the
Agreement will be accounted for as a pooling-of-interests under generally
accepted accounting principles. In addition, we have not made an independent
evaluation or appraisal of the assets and liabilities of the Company or Seller
or any of their subsidiaries and, we have not been furnished with any such
evaluation or appraisal. Our advisory services and the opinion expressed herein
are provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation as to how
any holder of Shares should vote with respect to such transaction.

Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the Exchange
Ratio pursuant to the Agreement is fair from a financial point of view to the
Company.

Very truly yours,

[LOGO]
- -------------------------------------------
(GOLDMAN, SACHS & CO.)

G-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 722 of the New York Business Corporation Law (the "NYBCL") provides
that a corporation may indemnify an officer or director, in the case of third
party actions, against judgments, fines, amounts paid in settlement and
reasonable expenses and, in the case of derivative actions, against amounts paid
in settlement and reasonable expenses, if the director or officer "acted in good
faith for a purpose which he reasonably believed to be in . . . the best
interests of the corporation" and, in the case of criminal actions, "had no
reasonable cause to believe that his conduct was unlawful." Statutory
indemnification may not be provided in derivative actions in respect of a
threatened action, or a pending action which is settled or otherwise disposed
of, or any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation, unless and only to the extent that the
court in which the action was brought, or, if no action was brought, any court
of competent jurisdiction, determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such portion of the settlement and expenses as the court deems
proper.

As contemplated by NYBCL Section 721, the Registrant's By-Laws, as amended
on March 31, 1987, provide a broader basis for indemnification in accordance
with and as permitted by NYBCL Article 7.

SECTION 6.6 OF THE BY-LAWS OF THE REGISTRANT PROVIDES AS FOLLOWS:

"SECTION 6.6 INDEMNIFICATION.

Except to the extent expressly prohibited by the New York Business
Corporation Law, the Corporation shall indemnify each person made or threatened
to be made a party to any action or proceedings, whether civil or criminal, by
reason of the fact that such person or such person's testator or intestate is or
was a director or officer of the Corporation, or serves or served at the request
of the Corporation any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity, against judgments,
fines, penalties, amounts paid in settlement and reasonable expenses, including
attorney's fees, incurred in connection with such action or proceedings, or any
appeal therein, provided that no such indemnification shall be made if a
judgment or other final adjudication adverse to such person establishes that his
or her acts were committed in bad faith or were the result of active and
deliberate dishonesty and were material to the cause of action as adjudicated,
or that he or she personally gained in fact a financial profit or other
advantage to which he or she was not legally entitled, and provided further that
no such indemnification shall be required with respect to any settlement or
other nonadjudicated disposition of any threatened or pending action or
proceedings unless the Corporation has given its prior consent to such
settlement or other disposition.

The Corporation shall advance or promptly reimburse upon request any person
entitled to indemnification hereunder for all expenses, including attorney's
fees, reasonably incurred in defending any action or proceeding in advance of
the final disposition thereof upon receipt of an undertaking by or on behalf of
such person to repay such amount if such person is ultimately found not to be
entitled to indemnification or, where indemnification is granted, to the extent
the expenses so advanced or reimbursed exceed the amount to which such person is
entitled, provided, however, that such person shall cooperate in good faith with
any request by the Corporation that common counsel be utilized by the parties to
an action or proceeding who arc similarly situated unless to do so would be
inappropriate due to actual or potential differing interests between or among
such parties.

Nothing herein shall limit or affect any right of any person otherwise than
hereunder to indemnification or expenses, including attorneys' fees, under any
statute, rule, regulation, certificate of incorporation, by-law, insurance
policy, contract or otherwise.

Anything in these by-laws to the contrary notwithstanding, no elimination of
this by-law, and no amendment of this by-law adversely affecting the right of
any person to indemnification or advancement of

II-1
<PAGE>
expenses hereunder shall be effective until the 60th day following notice to
such person of such action, and no elimination of or amendment to this by-law
shall deprive any person of his or her rights hereunder arising out of alleged
or actual occurrences, acts or failures to act prior to such 60th day.

The Corporation shall not, except by elimination or amendment of this by-law
in a manner consistent with the preceding paragraph, take any corporate action
or enter into any agreement which prohibits, or otherwise limits the rights of
any person to, indemnification in accordance with the provisions of this by-law.
The indemnification of any person provided by this by-law shall continue after
such person has ceased to be a director, officer or employee of the Corporation
and shall inure to the benefit of such person's heirs, executors, administrators
and legal representatives.

The Corporation is authorized to enter into agreements with any of its
directors, officers or employees extending rights to indemnification and
advancement of expenses to such person to the fullest extent permitted by
applicable law, but the failure to enter into any such agreement shall not
affect or limit the rights of such person pursuant to this by-law, it being
expressly recognized hereby that all directors, officers and employees of the
Corporation, by serving as such after the adoption hereof, are acting in
reliance hereon and that the Corporation is estopped to contend otherwise.

In case any provision in this by-law shall be determined at any time to be
unenforceable in any respect, the other provisions shall not in any way be
affected or impaired thereby, and the affected provision shall be given the
fullest possible enforcement in the circumstances, it being the intention of the
Corporation to afford indemnification and advancement of expenses to its
directors, officers and employees, acting in such capacities or in the other
capacities mentioned herein, to the fullest extent permitted by law.

For purposes of this by-law, the Corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his or her duties to the Corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan, and excise taxes assessed on a person with respect to
an employee benefit plan pursuant to applicable law shall be considered
indemnifiable expenses. For purposes of this by-law, the term "Corporation"
shall include any legal successor to the Corporation, including any corporation
which acquires all or substantially all of the assets of the Corporation in one
or more transactions."

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following exhibits are filed as part of this Registration Statement:

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>

2.1 Agreement and Plan of Merger dated October 26, 1998 by and among Trans World, CAQ Corporation and Camelot
(included as Annex A to this joint proxy statement/prospectus).
</TABLE>

<TABLE>
<C> <S>
2.2 Second Amended Joint Plan of Reorganization dated November 7, 1997--incorporated
herein by reference to Exhibit 2.1 to Camelot's Form 10 as filed on February 13,
1998. Commission File No. 0-23807.

2.3 Asset Purchase Agreement by and among Camelot Music, Inc., The Wall Music, Inc. and
WH Smith Group Holdings (USA), Inc. dated as of December 10, 1997--incorporated
herein by reference to Exhibit 2.2 to the Camelot's Form 10 as filed on February 13,
1998. Commission File No. 0-23807.

2.4 Assignment of The Wall Purchase Agreement--incorporated herein by reference to
Exhibit 2.3 to Camelot's Form 10 as filed on February 13, 1998. Commission File No.
0-23807.

2.5 Agreement and Plan of Merger among Camelot, SM Acquisition, Inc. and Spec's Music,
Inc. dated as of June 3, 1998--incorporated herein by reference to Exhibit 2.4 to
Camelot's
</TABLE>

- --------------
* Filed previously

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
Registration Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission File No.
333-56811.

3.1 Restated Certificate of Incorporation--incorporated herein by reference to Exhibit 3.1 to Trans World's
Annual Report on Form 10-K for the fiscal year ended January 29, 1994. Commission File No. 0-14818.

3.2 Certificate of Amendment to the Certificate of Incorporation--incorporated herein by reference to Exhibit
3.1 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter ended October 29, 1994.
Commission File No. 0-14818.

3.3 Certificate of Amendment to the Certificate of Incorporation--incorporated herein by reference to Exhibit
3.4 to Trans World's Annual Report on Form 10-K for the year ended January 31, 1998. Commission File No.
0-14818.

3.4 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to Trans World's Annual Report on Form
10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.

3.5 Proposed Certificate of Amendment to the Certificate of Incorporation (included as Annex D-1 to this
joint proxy statement/prospectus).

3.6 Proposed Certificate of Amendment to the Certificate of Incorporation (included as Annex D-2 to this
joint proxy statement/prospectus).

4 Registration Rights Agreement dated October 26, 1998 between Trans World and certain stockholders named
therein.*

5 Opinion of Cahill Gordon & Reindel re: validity of Trans World common stock.*

8.1 Opinion of Cahill Gordon & Reindel re: tax matters.*
</TABLE>

<TABLE>
<C> <S>
8.2 Opinion of Cleary, Gottlieb, Steen & Hamilton re: tax matters.*

10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and Record Town,
Inc. and Trans World Music Corporation, as Tenant and Amendment thereto dated April
28, 1986--incorporated herein by reference to Exhibit 10.3 to Trans World's
Registration Statement on Form S-1, No. 33-6449.

10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1, 1985, among
Robert J. Higgins, and Trans World Music Corporation, and Record Town, Inc.,
exercising five year renewal option--incorporated herein by reference to Exhibit
10.2 to Trans World's Annual Report on Form 10-K for the fiscal year ended February
3, 1990. Commission File No. 0-14818.

10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and Record
Town, Inc. and Trans World Music Corporation, as Tenant--incorporated herein by
reference to Exhibit 10.3 to Trans World's Annual Report on Form 10-K for the fiscal
year ended February 2, 1991. Commission File No. 0-14818.

10.4 Lease, dated as of September 1, 1998, between Robert J. Higgins, as Landlord, and
Record Town, Inc. and Trans World, as Tenant, for additional office space at 38
Corporate Circle-- incorporated herein by reference to Exhibit 10.1 to Trans World's
Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 1998.
Commission File No. 0-14818.

10.5 Employment Agreement, dated as of February 1, 1996 between Trans World and Robert J.
Higgins--incorporated herein by reference to Exhibit 10.4 to Trans World's Annual
Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No.
0-14818.
</TABLE>

- --------------
* Filed previously

II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
10.6 Employment Agreement, dated as of May 1, 1998 between Trans World and Robert J. Higgins--incorporated
herein by reference to Exhibit 10.4 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 2, 1998. Commission File No. 0-14818.

10.7 Trans World Music Corporation 1986 Incentive and Non-Qualified Stock Option Plan, as amended and
restated, and Amendment No. 3 thereto--incorporated herein by reference to Exhibit 10-5 of Trans World's
Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.

10.8 Trans World Entertainment Corporation 1990 Stock Option Plan for Non-Employee Directors, as amended and
restated--incorporated herein by reference to Annex A to Trans World's Definitive Proxy Statement on Form
14A filed as of May 7, 1998. Commission File No. 0-14818.

10.9 Trans World Music Corporation 1990 Restricted Stock Plan--incorporated herein by reference to Exhibit
10.7 to Trans World's Registration Statement on Form S-2, No. 33-36012.

10.10 Form of Restricted Stock Agreement dated February 1, 1995 and May 1, 1995 between Trans World and Edward
W. Marshall, Jr., Executive Vice President of Operations and Bruce J. Eisenberg, Senior Vice President of
Real Estate, respectively--incorporated herein by reference to Exhibit 10.1 to Trans World's Quarterly
Report on Form 10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818.

10.11 Form of Restricted Stock Agreement dated May 1, 1996 between Trans World and John J. Sullivan, Senior
Vice President-Finance and Chief Financial Officer--incorporated herein by reference to Exhibit 10.14 to
Trans World's Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission File No.
0-14818.

10.12 Severance Agreement, dated May 20, 1996 between Trans World Entertainment Corporation and James A.
Litwak, Executive Vice President of Merchandising and Marketing-- incorporated herein by reference to
Exhibit 10.15 to the Trans World's Annual Report on Form 10-K for the fiscal year ended February 1, 1997.
Commission File No. 0-14818.
</TABLE>

<TABLE>
<C> <S>
10.13 Severance Agreement, dated October 1, 1994, between Trans World Entertainment
Corporation and Edward Marshall, Senior Vice President-Operations--incorporated
herein by reference to Exhibit 10.2 of Trans World's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818.

10.14 Trans World Entertainment Corporation 1994 Stock Option Plan--incorporated herein by
reference to Exhibit 10.1 to Trans World's Quarterly Report on Form 10-Q for the
fiscal quarter ended July 30, 1994. Commission File No. 0-14818.

10.15 Trans World Entertainment Corporation 1998 Stock Option Plan--incorporated herein by
reference to Annex B to Trans World's Definitive Proxy Statement on Form 14A filed
as of May 7, 1998. Commission File No. 0-14818.

10.16 Trans World Entertainment Corporation 1994 Director Retirement Plan--incorporated
herein by reference to Exhibit 10.1 to Trans World's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 31, 1994. Commission File No. 0-14818.

10.17 Form of Indemnification Agreement dated May 1, 1995 between Trans World and its
officers and directors--incorporated herein by reference to Exhibit 10.1 to Trans
World's Quarterly Report on Form 10-Q for the fiscal quarter ended April 29, 1995.
Commission File No. 0-14818.
</TABLE>

- --------------
* Filed previously

II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
10.18 Trans World Entertainment Corporation 1997 Supplemental Executive Retirement Plan-- incorporated herein
by reference to Exhibit 10.1 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 3, 1997. Commission File No. 0-14818.

10.19 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries, Inc.-- incorporated
herein by reference to Exhibit 10.16 to Trans World's Annual Report on Form 10-K for the year ended
January 31, 1998. Commission File No. 0-14818.

10.20 Voting Agreement dated October 26, 1998 between Trans World and certain stockholders named therein
(included as Annex B to this joint proxy statement/prospectus).

10.21 Voting Agreement dated October 26, 1998 between Camelot and Robert J. Higgins (included as Annex C to
this joint proxy statement/prospectus).

10.22 Second Amended and Restated Employment Agreement, dated as of January 1, 1998, between Camelot Music,
Inc. and James E. Bonk--incorporated herein by reference to Exhibit 10.3 to Camelot's Form 10 as filed on
February 13, 1998. Commission File No. 0-23807.

10.23 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Jack K. Rogers--incorporated herein by reference to Exhibit 10.6 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.24 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Lewis S. Garrett--incorporated herein by reference to Exhibit 10.7 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.25 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 21, 1996,
between Camelot Music, Inc. and Charles Marsh--incorporated herein by reference to Exhibit 10.8 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.26 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Charles R. Rinehimer III--incorporated herein by reference to Exhibit
10.9 to Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No.
333-56811.

10.27 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Lee Ann Thorn--incorporated herein by reference to Exhibit 10.10 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.28 Camelot's 1998 Stock Option Plan--incorporated herein by reference to Exhibit 10.4 to Camelot's Form 10
as filed on February 13, 1998. Commission File No. 0-23807.

10.29 Form of Stock Option Agreement--incorporated herein by reference to Exhibit 10.5 to Camelot's
Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.
</TABLE>

<TABLE>
<C> <S>
10.30 Camelot's 1998 Outside Directors Stock Option Plan--incorporated herein by reference
to Exhibit 10.13 to Camelot's Registration Statement on Amendment No. 1 to Form S-1
as filed on August 11, 1998. Commission File No. 333-56811.

10.31 Form of Customary Trade Terms Commitment and Option Exercise Notice--incorporated
herein by reference to Exhibit 10.15 to Camelot's Registration Statement on Form S-1
as filed on June 15, 1998. Commission File No. 333-56811.
</TABLE>

- --------------
* Filed previously

II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
10.32 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Roger D. Marks--incorporated herein by reference to Exhibit 10.16 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.33 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 17, 1996,
between Camelot Music, Inc. and William H. Scott--incorporated herein by reference to Exhibit 10.17 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.34 Employment and Severance Agreement between Camelot Music, Inc. and Larry K. Mundorf--incorporated herein
by reference to Exhibit 10.18 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed
on August 11, 1998. Commission File No. 333-56811.

10.35 Indemnity Agreement between Camelot and Stephen H. Baum, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.19 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.36 Indemnity Agreement between Camelot and George R. Zoffinger, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.20 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.37 Indemnity Agreement between Camelot and Michael B. Solow, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.21 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.38 Indemnity Agreement between Camelot and Marc L. Luzzatto, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.22 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.39 Indemnity Agreement between Camelot and Herbert J. Marks, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.23 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.40 Indemnity Agreement between Camelot and James E. Bonk, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.24 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.41 Indemnity Agreement between Camelot and Jack K. Rogers, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.25 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.
</TABLE>

<TABLE>
<C> <S>
10.42 Indemnity Agreement between Camelot and Lee Ann Thorn, dated June 4,
1998--incorporated herein by reference to Exhibit 10.26 to Camelot's Registration
Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission
File No. 333-56811.

10.43 Indemnity Agreement between Camelot and Charles R. Rinehimer III, dated June 4,
1998--incorporated herein by reference to Exhibit 10.27 to Camelot's Registration
Statement
</TABLE>

- --------------
* Filed previously

II-6
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission File No. 333-56811.

10.44 Indemnity Agreement between Camelot and Lewis S. Garrett, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.28 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.45 Indemnity Agreement between Camelot and Larry K. Mundorf, dated June 4, 1998--incorporated herein by
reference to Exhibit 10.29 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.46 Camelot's 1998 Deferred Compensation Plan--incorporated herein by reference to Exhibit 10.30 to Camelot's
Registration Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission File No.
333-56811.

10.47 Form of Stock Option Agreement for 1998 Outside Directors Stock Option Plan--incorporated herein by
reference to Exhibit 10.31 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.48 Camelot's Key Employee Retention Program.*

10.49 Loan and Security Agreement, dated July 9, 1998, between Congress Financial Corporation and Trans World,
for the secured revolving credit agreement--incorporated herein by reference to Exhibit 10.1 to Trans
World's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997. Commission File No. 0-14818.

21 Significant Subsidiaries of the Registrant.*

23.1 Consent of KPMG LLP.*

23.2 Consent of PricewaterhouseCoopers LLP.*

23.3 Consent of Deloitte & Touche LLP (Atlanta, Georgia).*

23.4 Consent of Deloitte & Touche LLP (Miami, Florida).*

23.5 Consents of Cahill Gordon & Reindel (included in Exhibit 5.1 and Exhibit 8.1).*

23.6 Consent of Cleary, Gottlieb, Steen & Hamilton (included in Exhibit 8.2).*

24 Power of Attorney (included on the signature page to the Registration Statement as initially filed).

99.1 Form of Trans World's Proxy.*

99.2 Form of Camelot's Proxy.*

99.3 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (included as Annex F to this joint proxy
statement/prospectus).

99.4 Opinion of Goldman, Sachs & Co. (included as Annex G to this joint proxy statement/prospectus).

99.5 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.*

99.6 Consent of Goldman, Sachs & Co.*

99.7 Consent of Michael B. Solow.*

99.8 Consent of George R. Zoffinger.*
</TABLE>

- -------------------
* Filed previously

II-7
<PAGE>
ITEM 22. UNDERTAKINGS

A. The undersigned Registrant hereby undertakes:

(1) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form;

(2) that every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;

(3) to respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request;

(4) to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

II-8
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its behalf
by the undersigned thereunto duly authorized, in the City of Albany, State of
New York, on the 29th day of March, 1999.

TRANS WORLD ENTERTAINMENT CORPORATION

By: /s/ JOHN J. SULLIVAN
-----------------------------------------
John J. Sullivan
SENIOR VICE PRESIDENT--FINANCE, CHIEF
FINANCIAL OFFICER AND TREASURER

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
Chairman of the Board,
** President, Chief
- ------------------------------ Executive Officer and March 29, 1999
(Robert J. Higgins) Director

March 29, 1999
/s/ JOHN J. SULLIVAN
- ------------------------------
(John J. Sullivan) Senior Vice President--
Finance, Chief Financial
Officer and Treasurer*

**
- ------------------------------ Secretary and Director March 29, 1999
(Matthew H. Mataraso)

**
- ------------------------------ Director March 29, 1999
(Dean S. Adler)

**
- ------------------------------ Director March 29, 1999
(George W. Dougan)

**
- ------------------------------ Director March 29, 1999
(Charlotte G. Fischer)
</TABLE>

- ------------------------

*Chief accounting and principal financial officer

II-9
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
**
- ------------------------------ Director March 29, 1999
(Martin E. Hanaka)

**
- ------------------------------ Director March 29, 1999
(Isaac Kaufman)

**
- ------------------------------ Director March 29, 1999
(Dr. Joseph G. Morone)
</TABLE>

<TABLE>
<S> <C> <C> <C>
**By: /s/ JOHN J. SULLIVAN
------------------------- Attorney-in-fact March 29, 1999
John J. Sullivan
</TABLE>

II-10
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>

2.1 Agreement and Plan of Merger dated October 26, 1998 by and among Trans World, CAQ Corporation and Camelot
(included as Annex A to this joint proxy statement/prospectus).

2.2 Second Amended Joint Plan of Reorganization dated November 7, 1997--incorporated herein by reference to
Exhibit 2.1 to Camelot's Form 10 as filed on February 13, 1998. Commission File No. 0-23807.

2.3 Asset Purchase Agreement by and among Camelot Music, Inc., The Wall Music, Inc. and WH Smith Group
Holdings (USA), Inc. dated as of December 10, 1997--incorporated herein by reference to Exhibit 2.2 to
the Camelot's Form 10 as filed on February 13, 1998. Commission File No. 0-23807.

2.4 Assignment of The Wall Purchase Agreement--incorporated herein by reference to Exhibit 2.3 to Camelot's
Form 10 as filed on February 13, 1998. Commission File No. 0-23807.

2.5 Agreement and Plan of Merger among Camelot, SM Acquisition, Inc. and Spec's Music, Inc. dated as of June
3, 1998--incorporated herein by reference to Exhibit 2.4 to Camelot's Registration Statement on Amendment
No. 1 to Form S-1 as filed on August 11, 1998. Commission File No. 333-56811.

3.4 Amended By-Laws--incorporated herein by reference to Exhibit 3.2 to Trans World's Annual Report on Form
10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.

3.5 Proposed Certificate of Amendment to the Certificate of Incorporation (included as Annex D-1 to this
joint proxy statement/prospectus).

3.6 Proposed Certificate of Amendment to the Certificate of Incorporation (included as Annex D-2 to this
joint proxy statement/prospectus).

4 Registration Rights Agreement dated October 26, 1998 between Trans World and certain stockholders named
therein.*

5 Opinion of Cahill Gordon & Reindel re: validity of Trans World common stock.*

8.1 Opinion of Cahill Gordon & Reindel re: tax matters.*

8.2 Opinion of Cleary, Gottlieb, Steen & Hamilton re: tax matters.*

10.1 Lease, dated April 1, 1985, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans World
Music Corporation, as Tenant and Amendment thereto dated April 28, 1986--incorporated herein by reference
to Exhibit 10.3 to Trans World's Registration Statement on Form S-1, No. 33-6449.

10.2 Second Addendum, dated as of November 30, 1989, to Lease, dated April 1, 1985, among Robert J. Higgins,
and Trans World Music Corporation, and Record Town, Inc., exercising five
</TABLE>

- --------------
* Filed previously

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
year renewal option--incorporated herein by reference to Exhibit 10.2 to Trans World's Annual Report on
Form 10-K for the fiscal year ended February 3, 1990. Commission File No. 0-14818.
<C> <S>

10.3 Lease, dated November 1, 1989, between Robert J. Higgins, as Landlord, and Record Town, Inc. and Trans
World Music Corporation, as Tenant--incorporated herein by reference to Exhibit 10.3 to Trans World's
Annual Report on Form 10-K for the fiscal year ended February 2, 1991. Commission File No. 0-14818.

10.4 Lease, dated as of September 1, 1998, between Robert J. Higgins, as Landlord, and Record Town, Inc. and
Trans World, as Tenant, for additional office space at 38 Corporate Circle-- incorporated herein by
reference to Exhibit 10.1 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 1998. Commission File No. 0-14818.

10.5 Employment Agreement, dated as of February 1, 1996 between Trans World and Robert J.
Higgins--incorporated herein by reference to Exhibit 10.4 to Trans World's Annual Report on Form 10-K for
the fiscal year ended February 1, 1997. Commission File No. 0-14818.

10.6 Employment Agreement, dated as of May 1, 1998 between Trans World and Robert J. Higgins--incorporated
herein by reference to Exhibit 10.4 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter
ended May 2, 1998. Commission File No. 0-14818.

10.9 Trans World Music Corporation 1990 Restricted Stock Plan--incorporated herein by reference to Exhibit
10.7 to Trans World's Registration Statement on Form S-2, No. 33-36012.

<TABLE>
<C> <S>
10.11 Form of Restricted Stock Agreement dated May 1, 1996 between Trans World and John J.
Sullivan, Senior Vice President-Finance and Chief Financial Officer--incorporated
herein by reference to Exhibit 10.14 to Trans World's Annual Report on Form 10-K for
the fiscal year ended February 1, 1997. Commission File No. 0-14818.

10.12 Severance Agreement, dated May 20, 1996 between Trans World Entertainment
Corporation and James A. Litwak, Executive Vice President of Merchandising and
Marketing-- incorporated herein by reference to Exhibit 10.15 to the Trans World's
Annual Report on Form 10-K for the fiscal year ended February 1, 1997. Commission
File No. 0-14818.

10.13 Severance Agreement, dated October 1, 1994, between Trans World Entertainment
Corporation and Edward Marshall, Senior Vice President-Operations--incorporated
herein by reference to Exhibit 10.2 of Trans World's Quarterly Report on Form 10-Q
for the fiscal quarter ended October 29, 1994. Commission File No. 0-14818.
</TABLE>

- --------------
* Filed previously

<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------
<C> <S> <S>
10.14 Trans World Entertainment Corporation 1994 Stock Option Plan--incorporated herein by reference to Exhibit
10.1 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter ended July 30, 1994.
Commission File No. 0-14818.

10.15 Trans World Entertainment Corporation 1998 Stock Option Plan--incorporated herein by reference to Annex B
to Trans World's Definitive Proxy Statement on Form 14A filed as of May 7, 1998. Commission File No.
0-14818.

10.16 Trans World Entertainment Corporation 1994 Director Retirement Plan--incorporated herein by reference to
Exhibit 10.1 to Trans World's Quarterly Report on Form 10-Q for the fiscal quarter ended October 31,
1994. Commission File No. 0-14818.

10.17 Form of Indemnification Agreement dated May 1, 1995 between Trans World and its officers and
directors--incorporated herein by reference to Exhibit 10.1 to Trans World's Quarterly Report on Form
10-Q for the fiscal quarter ended April 29, 1995. Commission File No. 0-14818.
</TABLE>

<TABLE>
<C> <S>
10.18 Trans World Entertainment Corporation 1997 Supplemental Executive Retirement Plan--
incorporated herein by reference to Exhibit 10.1 to Trans World's Quarterly Report
on Form 10-Q for the fiscal quarter ended May 3, 1997. Commission File No. 0-14818.

10.19 Trans World Entertainment Corporation Asset Purchase Agreement with Strawberries,
Inc.-- incorporated herein by reference to Exhibit 10.16 to Trans World's Annual
Report on Form 10-K for the year ended January 31, 1998. Commission File No.
0-14818.

10.20 Voting Agreement dated October 26, 1998 between Trans World and certain stockholders
named therein (included as Annex B to this joint proxy statement/prospectus).

10.21 Voting Agreement dated October 26, 1998 between Camelot and Robert J. Higgins
(included as Annex C to this joint proxy statement/prospectus).

10.22 Second Amended and Restated Employment Agreement, dated as of January 1, 1998,
between Camelot Music, Inc. and James E. Bonk--incorporated herein by reference to
Exhibit 10.3 to Camelot's Form 10 as filed on February 13, 1998. Commission File No.
0-23807.

10.23 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of
October 11, 1996, between Camelot Music, Inc. and Jack K. Rogers--incorporated
herein by reference to Exhibit 10.6 to Camelot's Registration Statement on Form S-1
as filed on June 15, 1998. Commission File No. 333-56811.

10.24 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of
October 11, 1996, between Camelot Music, Inc. and Lewis S. Garrett--incorporated
herein by reference to Exhibit 10.7 to Camelot's Registration Statement on Form S-1
as filed on June 15, 1998. Commission File No. 333-56811.

10.25 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of
October 21, 1996, between Camelot Music, Inc. and Charles Marsh--incorporated herein
by reference to Exhibit 10.8 to Camelot's Registration Statement on Form S-1 as
filed on June 15, 1998. Commission File No. 333-56811.

10.26 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of
October 11, 1996, between Camelot Music, Inc. and Charles R. Rinehimer
III--incorporated herein by reference to Exhibit 10.9 to Camelot's Registration
Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.27 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of
October 11, 1996, between Camelot Music, Inc. and Lee Ann Thorn--incorporated herein
by reference to Exhibit 10.10 to Camelot's Registration Statement on Form S-1 as
filed on June 15, 1998. Commission File No. 333-56811.
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10.28 Camelot's 1998 Stock Option Plan--incorporated herein by reference to Exhibit 10.4 to Camelot's Form 10
as filed on February 13, 1998. Commission File No. 0-23807.

10.29 Form of Stock Option Agreement--incorporated herein by reference to Exhibit 10.5 to Camelot's
Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.30 Camelot's 1998 Outside Directors Stock Option Plan--incorporated herein by reference to Exhibit 10.13 to
Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission
File No. 333-56811.

10.31 Form of Customary Trade Terms Commitment and Option Exercise Notice--incorporated herein by reference to
Exhibit 10.15 to Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File
No. 333-56811.

10.32 Amended and Restated Severance and Bonus Management Incentive Agreement, dated as of October 11, 1996,
between Camelot Music, Inc. and Roger D. Marks--incorporated herein by reference to Exhibit 10.16 to
Camelot's Registration Statement on Form S-1 as filed on June 15, 1998. Commission File No. 333-56811.

10.34 Employment and Severance Agreement between Camelot Music, Inc. and Larry K. Mundorf-- incorporated herein
by reference to Exhibit 10.18 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed
on August 11, 1998. Commission File No. 333-56811.

10.35 Indemnity Agreement between Camelot and Stephen H. Baum, dated June 4, 1998-- incorporated herein by
reference to Exhibit 10.19 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.36 Indemnity Agreement between Camelot and George R. Zoffinger, dated June 4, 1998-- incorporated herein by
reference to Exhibit 10.20 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.37 Indemnity Agreement between Camelot and Michael B. Solow, dated June 4, 1998-- incorporated herein by
reference to Exhibit 10.21 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.38 Indemnity Agreement between Camelot and Marc L. Luzzatto, dated June 4, 1998-- incorporated herein by
reference to Exhibit 10.22 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

10.39 Indemnity Agreement between Camelot and Herbert J. Marks, dated June 4, 1998-- incorporated herein by
reference to Exhibit 10.23 to Camelot's Registration Statement on Amendment No. 1 to Form S-1 as filed on
August 11, 1998. Commission File No. 333-56811.

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10.41 Indemnity Agreement between Camelot and Jack K. Rogers, dated June 4,
1998--incorporated herein by reference to Exhibit 10.25 to Camelot's Registration
Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission
File No. 333-56811.

10.42 Indemnity Agreement between Camelot and Lee Ann Thorn, dated June 4, 1998--
incorporated herein by reference to Exhibit 10.26 to Camelot's Registration
Statement on Amendment No. 1 to Form S-1 as filed on August 11, 1998. Commission
File No. 333-56811.
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10.43 Indemnity Agreement between Camelot and Charles R. Rinehimer III, dated June 4, 1998-- incorporated
herein by reference to Exhibit 10.27 to Camelot's Registration Statement on Amendment No. 1 to Form S-1
as filed on August 11, 1998. Commission File No. 333-56811.

10.48 Camelot's Key Employee Retention Program.*

21 Significant Subsidiaries of the Registrant.*

23.1 Consent of KPMG LLP.*
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23.2 Consent of PricewaterhouseCoopers LLP.*

23.3 Consent of Deloitte & Touche LLP (Atlanta, Georgia).*

23.4 Consent of Deloitte & Touche LLP (Maimi, Florida).*

23.5 Consents of Cahill Gordon & Reindel (included in Exhibit 5.1 and Exhibit 8.1).*

23.6 Consent of Cleary, Gottlieb, Steen & Hamilton (included in Exhibit 8.2).*

24 Power of Attorney (included on the signature page to the Registration Statement as
initially filed).

99.1 Form of Trans World's Proxy.*

99.2 Form of Camelot's Proxy.*

99.3 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated (included as Annex F
to this joint proxy statement/prospectus).

99.4 Opinion of Goldman, Sachs & Co. (included as Annex G to this joint proxy
statement/prospectus).

99.5 Consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.*

99.6 Consent of Goldman, Sachs & Co.*

99.7 Consent of Michael B. Solow.*

99.8 Consent of George R. Zoffinger.*
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