<PAGE>
                                                                               .
                                                                               .
                                                                               .
                                                                      Exhibit 13




Financial Report

FINANCIAL SECTION
TABLE OF CONTENTS

<TABLE>
<S>                                                                                                 <C>
Selected Financial Data ........................................................................... 17
Financial Report .................................................................................. 18
Consolidated Statements of Operations ............................................................. 28
Consolidated Balance Sheets ....................................................................... 29
Consolidated Statements of Cash Flows ............................................................. 30
Consolidated Statements of Changes in Stockholders' Equity ........................................ 31
Notes to Consolidated Financial Statements ........................................................ 32
Report of Independent Registered Public Accounting Firm ........................................... 44
Report of Financial Responsibility ................................................................ 44
Corporate Information ............................................................................. 45
</TABLE>

ADVO - 16

<PAGE>



                                                         Selected Financial Data

<TABLE>
<CAPTION>
                                         YEAR ENDED         Year ended         Year ended         Year ended          Year ended
(In millions, except per share data)  SEPTEMBER 25, 2004 September 27, 2003 September 28, 2002 September 29, 2001 September 30, 2000
------------------------------------  ------------------ ------------------ ------------------ ------------------ ------------------
<S>                                   <C>                <C>                <C>                <C>                <C>
SUMMARY OF OPERATIONS
Revenues                                 $  1,245.8          $  1,163.1         $  1,130.1         $  1,137.2        $  1,129.2
Operating income                               81.0                81.6               80.2               97.0              96.3
Net income                                     48.7                49.5               42.0               51.0              48.8
Diluted earnings per share(1)                  1.59                1.64               1.38               1.65              1.57
Dividends declared per share                   0.44                  --                 --                 --                --
Weighted average diluted shares(1)             30.7                30.1               30.4               30.9              31.2
</TABLE>

<TABLE>
<CAPTION>
(In millions)                         SEPTEMBER 25, 2004 September 27, 2003 September 28, 2002 September 29, 2001 September 30, 2000
------------------------------------  ------------------ ------------------ ------------------ ------------------ ------------------
<S>                                   <C>                <C>                <C>                <C>                <C>
BALANCE SHEET DATA
Cash and cash equivalents                 $     30.3         $     17.0         $     12.3         $     17.7         $      6.0
Total assets                                   427.4              353.5              329.6              321.7              288.8
Long-term debt                                 125.2               94.0              146.8              173.8              180.0
Total debt                                     125.2              130.3              171.0              189.1              190.0
Stockholders' equity (deficiency)              141.8               89.1               35.8                2.4              (41.0)
</TABLE>

(1)   Diluted earnings per share and weighted average diluted shares for the
      years ended September 30, 2000 through September 27, 2003 have been
      restated for a three-for-two stock split, effected in the form of a stock
      dividend, to shareholders of record on October 24, 2003.

                                                                       ADVO - 17

<PAGE>


Financial Report

This section should be read in conjunction with the Company's Consolidated
Financial Statements and the notes thereto.

Financial Overview

Highlighting the fiscal 2004 results of ADVO, Inc. ("ADVO" or the "Company") was
a 7.1% increase in revenue. Increased advertising piece volumes as a result of
increased client demand drove this revenue growth. Over the past two years ADVO
has focused on customized solutions to meet clients' needs via its Breakout
Growth strategy, which focuses the Company's efforts on major clients and on
vertical growth categories such as grocery, casual dining and home furnishing
sectors, to name a few. This focus has resulted in growing revenues, especially
evident in the fiscal 2004 revenue results. The Company's core shared mail
programs showed gains across advertising retail categories and across the
country. In the fourth quarter the Company announced market expansions with the
start-up of additional advertising programs on alternative days of the week in
Southern California and Pittsburgh.

Fiscal 2004 results include operating income of $81.0 million, which reflects a
0.8% decrease from fiscal 2003, and diluted earnings per share (EPS) of $1.59,
decreasing 3.0% from the prior year. The Company's operating results were
impacted by a $3.9 million pre-tax charge related to the departure of the
Company's former Chief Executive Officer ("CEO") and a $1.4 million write-off of
unamortized debt issue costs associated with the Company's debt refinancing
activities.

The Company's debt balance at September 25, 2004 was its lowest debt level since
the Company's initial assumption of debt in 1996. During the first quarter of
fiscal 2004, the Company replaced its existing credit facilities through the
private placement of $125 million senior secured notes with several
institutional investors and a $150 million revolving line of credit with a
syndicate of banks. This refinancing provides a long-term source of capital,
enhancing the Company's flexibility in the future. The Company finished the year
with $125 million of senior secured notes outstanding and no borrowings against
the revolving line of credit.

Throughout fiscal 2004, the Company maintained a strong focus on cash
management. The Company finished the year with a cash balance of $30.3 million,
increasing $13.3 million over the prior year despite cash outflows for quarterly
dividends and capital expenditures, including outlays for the construction of
the Company's new production facility in Windsor, Connecticut. Shareholders'
equity was $141.8 million, reflecting an increase of $52.8 million over fiscal
2003.

To enhance shareholder value in fiscal 2004, the Company announced the following
steps:

-     a three-for-two stock split effected in the form of a stock dividend to
      shareholders of record on October 24, 2003;

-     the payment of a regular quarterly cash dividend of $0.11 per share or
      $0.44 annually; and

-     an increase in the Company's stock repurchase program to a total of 1.5
      million shares.

Results of Operations

FISCAL 2004 COMPARED TO FISCAL 2003

REVENUES

The Company reported revenues of $1,245.8 million in fiscal 2004, increasing
$82.7 million over fiscal 2003 revenues of $1,163.1 million. The 7.1% revenue
growth was primarily attributable to volume gains in the Company's shared mail
products, which were achieved through increased business in existing markets
and increased frequency of mailings in response to client demand. The revenue
growth was present across the country and in each of the Company's top ten
advertising categories, with the exception of the grocery category which would
have grown absent the grocery strike. The grocery category was negatively
impacted by the grocery strike in Southern California that ended during the
Company's second quarter. The revenue volume gains were also illustrated by the
growth by shared mail packages and shared mail pieces delivered. Shared mail
packages increased 4.9% to 3.576 billion packages and shared mail pieces
increased 9.9% to 29.8 billion pieces. Average shared mail pieces per package,
another key performance indicator of the Company, was 8.33, increasing 4.8% over
fiscal 2003.

Offsetting the volume increases mentioned above was a 1.7% decrease in shared
mail revenue per thousand pieces to $38.28 for fiscal 2004. This decline
reflects the shift in product mix to lower-priced products and a decrease in
pricing.

ADVO - 18

<PAGE>



                                                                Financial Report

During the fourth quarter of fiscal 2004, the Company announced the start-up of
several additional advertising programs on alternative days of the week in
Southern California and Pittsburgh. These programs commenced in the middle of
September and included approximately $1.8 million of revenues. The Company
believes these programs represent opportunities for future growth because they
offer the Company's targeting capabilities to advertisers who prefer delivery
on alternative days of the week and also allows the Company to offer these
markets to national clients.

OPERATING EXPENSES

The $56.5 million increase in fiscal 2004 cost of sales over the prior year was
primarily attributable to higher distribution and print costs. Distribution
costs, predominantly postage costs, increased 6.2% over the prior year. The
Company incurred increased postage costs as a result of the volume growth in
shared mail pieces and packages delivered. Print expense increased 15.2% due to
the print costs associated with the growth of certain shared mail products. Also
included in cost of sales were $2.4 million of costs associated with the new
programs in Southern California and Pittsburgh that began in the fourth quarter.
The Company opened a second facility in Los Angeles to fulfill the incremental
demand driven by the expected volume increases in Southern California from the
new weekend program and the continued growth in existing programs.

Cost of sales as a percentage of revenue decreased 0.4 percentage points from
73.9% in fiscal 2003 to 73.5% in fiscal 2004. This improvement was driven by
increased revenue associated with the growth in average shared mail pieces per
package in fiscal 2004 and the resulting efficiencies in postage utilization.

As a percentage of revenue, selling, general and administrative costs, including
the provision for bad debts ("SG&A" costs) were 19.1% in fiscal 2003 compared to
20.0% in fiscal 2004. SG&A costs increased $26.8 million over the prior year and
were comprised of a $16.9 million increase in selling expense and a $9.9 million
increase in general and administrative costs.

Selling expense increased over the prior fiscal year mainly due to increased
commission and sales support costs directly associated with the fiscal 2004
revenue growth. Also contributing to the increased selling costs were the
Company's continued investments in selling capabilities associated with its
Breakout Growth strategy. In addition, bad debts expense increased $3.0 million
during fiscal 2004 primarily due to receivables associated with two specific
clients.

The year-over-year increase in general and administrative costs was primarily
due to the following factors:

-     a $4.0 million increase in employee benefits costs due to rising medical
      and insurance costs;

-     the $3.9 million severance charge associated with the departure of the
      Company's former CEO;

-     a $1.4 million increase in depreciation expense primarily as a result of
      certain phases of the service delivery redesign project being placed into
      service; and

-     increases in miscellaneous costs, including insurance premiums for
      directors and officers and legal fees.

In fiscal 2004 certain reductions in general and administrative expenses
offset the year-over-year increases mentioned above. Specifically, the Company
did not incur in fiscal 2004 the consulting expenses to the level recorded in
fiscal 2003 related to that year's project that focused on accelerating the
Company's revenue growth potential. The Company also paid lower incentive
compensation wages in fiscal 2004 than fiscal 2003.

OPERATING INCOME

This year the Company experienced a slight decrease in operating income,
recording $81.0 million in fiscal 2004 versus $81.6 million in fiscal 2003.
Fiscal 2004's operating results were negatively impacted by the $3.9 million
pretax charge related to the departure of the Company's former CEO.

INTEREST EXPENSE

For fiscal 2004, the Company reported interest expense of $5.4 million versus
$7.4 million in fiscal 2003. This $2.0 million decrease was primarily due to
lower interest rates and a lower average outstanding debt balance. The average
outstanding debt balance was $138.3 million in fiscal 2004 versus $163.5 million
in 2003. Although market forecasts indicate that interest rates may rise during
fiscal 2005, the Company intends to focus on maintaining conservative
outstanding debt balances and to limit additional interest expense.

In an effort to lower interest expense and provide additional sources of capital
for the Company's ongoing operations, on December 4, 2003, the Company
replaced its existing credit facilities, term loan and revolving line of credit,
with the private placement of

                                                                       ADVO - 19

<PAGE>



Financial Report

senior secured notes and a new bank revolver. The Company concluded that the
replacement of the term loan with senior secured notes met the criteria of an
extinguishment of debt per EITF 96-19, "Debtor's Accounting for a Modification
or Exchange of Debt Instruments." Consequently, all unamortized debt issue costs
associated with the term loan were written off. In addition, the Company
followed the guidance per EITF 98-14, "Debtor's Accounting for Changes in the
Line-of-Credit or Revolving-Debt Arrangements," to calculate the amount of
unamortized debt issue costs associated with the replacement of the
revolving line of credit. In total, the Company wrote off $1.4 million of
unamortized debt issue costs associated with the previous credit facilities.

EQUITY EARNINGS IN JOINT VENTURES

The Company owns a 50% interest in Detroit Weekend Direct ("DWD") and New
England Direct ("NED") and accounts for these interests under the equity method.
These joint ventures with specific metropolitan newspapers create integrated
print advertising solutions by combining targeted direct mail with newspaper
distribution. The Company's equity earnings in joint ventures increased $1.2
million to $2.6 million in fiscal 2004 primarily driven by increased revenue
performance in the DWD joint venture.

INCOME TAXES

The Company's effective tax rate for fiscal 2004 was 36.0% versus 34.3% in
fiscal 2003. The lower effective tax rate in fiscal 2003 was the result of R&D
credits earned and taken by the Company. Due to the absence of these credits,
the effective income tax rate for fiscal 2005 is expected to be approximately
between 38% and 39%.

EARNINGS PER SHARE

The Company reported diluted earnings per share of $1.59 in fiscal 2004 compared
to $1.64 in fiscal 2003. The fiscal 2004 diluted earnings per share were
impacted negatively in the aggregate amount of $0.11 per share by charges
discussed above related to the departure of the Company's former CEO ($0.08) and
the write-off of the unamortized debt issue costs associated with the debt
retirement ($0.03).

FISCAL 2003 COMPARED TO FISCAL 2002

REVENUES

Fiscal 2003 revenues of $1,163.1 million increased $33.0 million over fiscal
2002 revenues. Volume gains associated with the Company's core shared mail prod-
ucts were the largest contributor to the 2.9% revenue growth. The volume growth
was driven by a 4.0% increase in total shared mail pieces, from 26.1 billion
pieces in fiscal 2002 to 27.1 billion pieces in fiscal 2003, and a 1.2% increase
in total shared mail packages delivered, from 3.369 billion packages in fiscal
2002 to 3.411 billion packages in fiscal 2003. In addition, average shared
mail pieces per package were 7.95 for fiscal 2003, representing a 2.8% increase
over the prior fiscal year.

Revenues for the year ended September 27, 2003 also included $5.5 million of
incremental revenues associated with the acquisition of ADVO Canada in June
2002. Offsetting the revenue growth in fiscal 2003 was lower shared mail revenue
per thousand pieces primarily due to shifts in product mix and weights as a
result of higher volume in lower-priced products. The shifts in product mix and
weights contributed to the 1.6% decrease in shared mail revenue per thousand
pieces, from $39.56 for the year ended September 28, 2002, to $38.93 for the
year ended September 27, 2003.

OPERATING EXPENSES

Cost of sales as a percentage of revenue was 73.9% for fiscal 2003, increasing
0.4 percentage points over the same prior year period. In absolute terms, cost
of sales increased $28.4 million, from $830.8 million in fiscal 2002 to $859.2
million in fiscal 2003. This was largely caused by a 4.3% increase in
distribution costs, which are primarily comprised of postage costs. Postage
costs increased over the prior year due to the shared mail piece and package
growth, as well as the price increase from fiscal 2002's postal rate increase.
Also contributing to the increase in cost of sales were higher facilities and
overhead costs, which included such items as utilities, insurance and increased
rent associated with the modernization of certain facilities. Offsetting these
increased costs were operational efficiencies at the Company's production
facilities. The Company manufactured a greater number of pieces and packages in
its facilities during fiscal 2003, resulting in the cost per thousand pieces
manufactured decreasing 6.5% for fiscal 2003 as compared to fiscal 2002.

As a percentage of revenue, SG&A costs were 19.1% representing a decrease of 0.3
percentage points from fiscal 2002. This decrease attests to the Company's
commitment to actively manage costs. In

ADVO - 20

<PAGE>



                                                                Financial Report

absolute terms, SG&A costs, including the provision for bad debts, increased
$3.1 million over the prior year. SG&A costs for fiscal 2003 included higher
incentive compensation and costs for a project focused on accelerating the
Company's revenue growth potential. The costs for this project totaled $10.3
million for fiscal 2003 and included incremental costs such as: consulting
expenses, additional compensation and other re-deployed costs associated with
the formation of this project group. Offsetting these costs was lower bad debts
expense of $4.3 million due to improved credit and collection efforts. Also
affecting year-over- year comparisons were charges of $4.2 million and $0.6
million in the third and fourth quarters of fiscal 2002, respectively, related
to organizational realignment charges to strengthen the Company's sales and
marketing organization.

OPERATING INCOME

The Company reported operating income of $81.6 million for fiscal 2003 versus
$80.2 million for fiscal 2002, an increase of $1.4 million.

INTEREST EXPENSE

Interest expense relating to the Company's credit facilities totaled $7.4
million in fiscal 2003 compared to $13.2 million in fiscal 2002. This decrease
was the result of lower market rates of interest, a decline in the average
outstanding debt balance and the expiration of the Company's interest swap
agreements during the first quarter of fiscal 2003.

EQUITY EARNINGS IN JOINT VENTURES

In fiscal 2003 equity earnings in joint ventures increased $1.4 million over the
prior year. The increase was mainly related to the profitability of the joint
venture, which was in its start-up phase during fiscal 2002.

INCOME TAXES

The Company's effective tax rate for fiscal 2003 was 34.3% versus 36.5% in
fiscal 2002. The lower effective tax rate was due to R&D tax credits earned by
the Company.

EARNINGS PER SHARE

The Company reported diluted earnings per share of $1.64 for fiscal 2003
compared to $1.38 for fiscal 2002. This 18.8% increase over fiscal 2002 was the
combination of improved operating income, lower interest expense and higher
earnings from the joint ventures, along with a lower effective income tax rate.

Financial Condition, Liquidity and Capital Resources

STOCKHOLDERS' EQUITY

Stockholders' equity was $141.8 million at September 25, 2004, increasing $52.8
million from September 27, 2003. The increase was essentially attributable to
fiscal 2004 earnings of $48.7 million. Other significant stockholders' equity
activity included $23.0 million of employee stock plan transactions and the
associated tax benefits relating to the vesting of restricted stock and the
exercise of stock options. Of this amount, $16.2 million related to stock option
exercises executed by the Company's former CEO and the associated tax benefits
to the Company for these exercises. Offsetting these increases were treasury
stock transactions of $5.2 million related to elections by employees to
satisfy tax withholding requirements for stock option exercises and quarterly
cash dividends totaling $13.3 million.

On October 16, 2003, the Company announced a three-for-two stock split of its
common stock, effected in the form of a stock dividend to shareholders of record
on October 24, 2003. The stock split was recorded by increasing common stock by
$0.1 million and decreasing accumulated earnings by $0.1 million on the
Consolidated Balance Sheets (issuance of 10 million shares at $0.01 par value).
There was no effect to the Company's overall equity position as a result of the
stock split.

Also, on October 16, 2003, the Company announced an increase in its stock
repurchase authorization to a total of 1.5 million shares. During fiscal 2004,
no shares were purchased under the stock repurchase program.

LIQUIDITY AND CAPITAL RESOURCES

The following table summarizes selected measures of liquidity and capital
resources.

<TABLE>
<CAPTION>
                                  September 25,  September 27,
(In millions)                         2004           2003
-------------                     -------------  -------------
<S>                               <C>            <C>
Cash and cash equivalents          $     30.3     $     17.0
Cash generated from
  operating activities             $     92.4     $     91.9
Working capital                    $     89.2     $     30.9
Working capital ratio                    1.77           1.23
Total debt                         $    125.2     $    130.3
</TABLE>

                                                                       ADVO - 21

<PAGE>


Financial Report

The Company's primary source of liquidity has been cash and cash equivalents and
cash generated from operating activities. The Company also has unused
commitments under its revolving line of credit that may be used to fund
operating activities.

The Company's cash and cash equivalents consist of bank balances and short-term
investment funds. These investments have a high degree of liquidity and the
maturities of these funds do not exceed three months. The management of cash is
carefully controlled both to optimize returns on cash balances and to ensure
that it is readily available to meet the Company's operating requirements as
they arise. The amount of cash on hand and borrowings available under the credit
facilities are influenced by a number of factors including, fluctuations in the
Company's operating results, revenue growth, accounts receivable collection,
the level of capital expenditures, cash requirements related to financing
instruments, vendor terms and the timing of tax and other payments.

Based on current earnings projections and the prevailing economic conditions
for customer demand, the Company believes that over the next 12 months it
will have sufficient liquidity from cash and cash equivalents, cash flow from
operating activities and borrowings from unused commitments on its revolving
line of credit to fund its operations and working capital requirements as
currently planned, its capital plan expenditures, interest payments on its
indebtedness, contractual obligations, investments in additional advertising
programs and anticipated quarterly cash dividends. While it is the Company's
intention to pay quarterly cash dividends in fiscal 2005 and beyond, any
decision to pay future cash dividends will be made by the Company's Board of
Directors and will depend upon the Company's earnings, financial condition and
other factors.

SOURCES AND USES OF CASH

The Company's financial position remained strong throughout fiscal 2004 with
cash and cash equivalents increasing $13.3 million over fiscal 2003. Cash
inflows from operating activities totaled $92.4 million, while cash outflows
were $68.5 million for investing activities and $10.7 million for financing
activities.

OPERATING ACTIVITIES Net cash provided by operating activities for fiscal 2004
was $92.4 million, slightly increasing $0.5 million from net cash provided by
operating activities for fiscal 2003. The Company's earnings, which are the
primary driver of cash provided by operating activities, remained relatively
consistent year-over-year. In addition, the year-over-year change included
non-cash charges to earnings, specifically a decrease in deferred income taxes
offset to a degree by an increase to the provision for bad debts primarily due
to receivables associated with two specific clients.

In fiscal 2004, the Company's principal working capital requirements, which also
affected the net cash provided by operating activities, were as follows:

-     an increase in accounts receivable primarily due to the 12% revenue growth
      for the month of September compared to the same month of the prior year.
      The revenue growth was attributable to shared mail pieces and packages
      growth. Also contributing to the increase was the extension of credit
      terms to existing major clients, however the Company maintained the same
      accounts receivable level of percent current as the previous fiscal year;

-     an increase in accounts payable due to the timing of vendor payments;

-     an increase in accrued compensation and benefits primarily due to the
      severance accrual recorded for the departure of the Company's former CEO
      that will be paid over the next two years; and

-     an increase in accrued other expenses due to higher client incentives,
      higher legal contingencies and the timing of interest expense payments.

Net cash provided by operating activities was $91.9 million for fiscal 2003,
representing a 37.8% increase from fiscal 2002. The year-over-year increase was
primarily attributable to the Company's improved operating results and increases
in non-cash charges to earnings from the provision for deferred income taxes and
depreciation expense offset to a degree by lower bad debts expense due to lower
trended write-offs.

In fiscal 2003, the Company's principal working capital requirements,
which also affected the net cash provided by operating activities, were as
follows:

-     an increase in accounts receivable due to decreases in allowances as a
      result of lower trended write-offs and improved collections;

-     an increase in prepaid and other current assets due in part to higher
      insurance premiums;

-     an increase in accounts payable related to the timing of vendor payments;

-     an increase in income taxes payable as a result of a change in the payment
      date by the IRS; and

ADVO - 22

<PAGE>



                                                                Financial Report

-     lower accrued other liabilities, primarily related to the expiration of
      the Company's interest rate swap agreements and lower accrued interest
      payable.

The Company's interest rate swap agreements, which expired on December 9, 2002,
converted a portion of its floating rate debt to a fixed basis. At September 27,
2003, the fair value of the interest rate swap agreement was zero representing
a fair value decrease of $1.1 million from September 28, 2002. Accrued interest
payable decreased $1.9 million from fiscal 2002 due to the timing of interest
payments and lower market rates of interest due in part to the expiration of the
interest rate swap agreements which fixed interest at approximately 7.2%. The
average interest rate was approximately 4.5% in fiscal 2003 versus approximately
7.1% in fiscal 2002.

INVESTING ACTIVITIES Net cash used by investing activities of $68.5 million for
the year ended September 25, 2004 was primarily due to capital expenditures of
$71.0 million. Equity distributions of $2.6 million received from the Company's
joint ventures decreased the net cash used by investing activities.

Acquisitions of property, plant and equipment totaled $71.0 million for fiscal
2004 as compared to $49.2 million for fiscal 2003. This $21.8 million increase
was primarily due to the land and construction costs associated with the
relocation of the Company's former Hartford, Connecticut production facility to
a new location in Windsor, Connecticut. The construction costs for the Company's
new facility were recorded to construction in progress ("CIP"), a component of
property, plant and equipment. At September 25, 2004, the balance in CIP
associated with the new facility was approximately $3.7 million reflecting some
additional areas that have not been fully completed. The majority of the
construction costs were placed into service when the new facility opened in
September 2004. The total cost of the new facility through fiscal 2004 was $25.0
million, which includes $1.6 million of land acquisition costs.

Other property, plant and equipment expenditures for fiscal 2004 included:

-     $10.9 million for the deployment of Alphaliners (computerized mail
      sorters) and other production equipment; and

-     $4.6 million of computer hardware primarily to meet the needs of financial
      and operational software currently being developed by the Company.

During fiscal 2004 the Company continued to develop software for the service
delivery redesign project that is scheduled to be implemented through fiscal
2005. This project will upgrade current software applications, employ new
technology and work processes to speed information flow, and will automate
several functions throughout the organization. Certain phases of the new
software and systems were placed in service during fiscal 2003 and 2004 with the
remaining expected to be placed in service during fiscal 2005. In fiscal 2004,
the Company capitalized $25.3 million relating to software and software
development.

In fiscal 2003, net cash used by investing activities of $47.3 million was
comprised of capital expenditures totaling $49.2 million for projects similar to
those discussed above. The fiscal 2003 costs were as follows: $26.1 million
for software and software development, $5.2 million for production equipment,
$3.4 million for computer hardware and $9.1 million for renovations to certain
of the Company's facilities. In fiscal 2003, $1.2 million of equity
distributions from the Company's joint ventures offset the capital expenditures.

The Company's capital expenditures for fiscal 2004 were significantly higher
than in previous years due to the construction of the new facility. The
Company's fiscal 2005 capital plan estimates capital expenditures to be
approximately $45.0 million to $50.0 million, returning to past annual spending
levels. Historically, cash from operating activities has been sufficient to
cover the financing of these capital expenditures. The Company expects this
trend will continue and that cash from operating activities will be sufficient
to cover future capital expenditures.

FINANCING ACTIVITIES Net cash used by financing activities was $10.7 million
in fiscal 2004 and reflects the following debt activity resulting from the
refinancing in the first quarter of fiscal 2004:

-     the net effect of the payment of the term loan and borrowing of the senior
      secured notes;

-     net repayments on the revolving line of credit; and

-     the payment of $2.2 million of debt issue costs.

Other financing outflows for fiscal 2004 included quarterly cash dividend
payments totaling $13.3 million and treasury stock transactions of $5.2 million
pursuant to elections by employees to satisfy tax withholding requirements.
Financing activity inflows for the year included proceeds of $15.2 million from
stock options exercises, $9.2 million of which

                                                                       ADVO - 23

<PAGE>



Financial Report

represented proceeds from exercises by the Company's former CEO.

Financing activities in fiscal 2003 were primarily comprised of debt payments of
$39.0 million, including both net payments on the prior revolver and scheduled
principal payments on the term loan.

On December 4, 2003, the Company replaced its existing credit facilities. The
aggregate principal amount of the new credit agreements totals $275 million and
includes the private placement of $125 million senior secured notes with several
institutional investors and a $150 million revolving line of credit ("revolver")
with a syndicate of banks.

The senior secured notes consist of $65 million notes at a fixed interest rate
of 5.71% (Series A Notes) and $60 million notes at a variable interest rate of
LIBOR rate plus 0.92% (Series B Notes). The senior secured notes have a ten-year
life and mature in December 2013. Interest is payable semiannually on the Series
A and quarterly on the Series B Notes.

The revolver has a four-year life and remains available until maturity in
December 2007. The revolver bears interest, at the Company's option, equal to
the LIBOR rate or to the bank's "base rate" plus an "applicable margin" based on
certain financial ratios. The applicable margin ranges from 0.875% to 1.50% on
the LIBOR rate and 0% to 0.50% on the base rate. Interest is payable quarterly
or upon the maturity of the LIBOR contracts, whichever is shorter.

At September 25, 2004, the senior secured notes accounted for the entire
outstanding debt balance of $125.0 million. Since the Company's cash flow from
operating activities was strong, the Company did not need to borrow from the
revolving line of credit at year-end. As a result there was no outstanding bal-
ance on the revolving line of credit. The Company anticipates it will be able to
meet its debt obligations through funds generated from operations.

The Company pays fees on the unused commitments at a rate ranging from 0.20% to
0.40% depending on the Company's debt ratio, as defined in the definitive
agreement governing the revolver. At September 25, 2004, there was $138.4
million available for future borrowings, which reflects $11.6 million utilized
by letters of credit under separate agreements related to the Company's workers'
compensation program.

In the first quarter of fiscal 2004, the Company capitalized $2.2 million of
debt issue costs directly associated with the issuance of the new debt. These
costs are included in other assets and are being amortized either over the
ten-year life of the senior secured notes or over the four-year life of the
revolver, whichever is applicable.

Under the terms of the senior secured notes and the revolver, the Company is
required to maintain certain financial ratios. The credit facilities also place
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional debt.

CONTRACTUAL OBLIGATIONS

The Company anticipates it will be able to meet the commitments detailed below
through funds generated from operations or from available credit under its
revolving line of credit.

<TABLE>
<CAPTION>
(In millions)                 Total Debt      Operating leases
-------------                 ----------      ----------------
<S>                           <C>             <C>
Less than one year            $      0.2      $        13.8
One to three years                    --               28.2
Four to five years                    --               12.3
After five years                   125.0               12.8
                              ----------      -------------
Total                         $    125.2      $        67.1
                              ==========      =============
</TABLE>

The Company's long-term debt obligations are discussed above in the "Financing
Activities" section. The amount of $0.2 million listed in the "less than one
year" category represents the fair value of the Company's fixed to floating
interest rate swap agreement at September 25, 2004.

The Company leases property in its normal business operations under
noncancellable operating leases. Certain of these leases contain renewal options
and certain leases also provide for cost escalation payments.

The Company has various agreements with International Business Machines
Corporation ("IBM") Global Services to provide systems development, technical
support, a customer support center and server farm management services to the
Company. The noncancellable portions of these contracts have lapsed, allowing
the Company the option to cancel these contracts subject to termination charges
ranging from $7.1 million in fiscal 2005 to $0.3 million in fiscal 2008,
depending on the year in which the cancellation becomes effective.

ADVO - 24

<PAGE>



                                                                Financial Report

The Company has cancellable agreements with various paper suppliers to assure
the continuity of supply as well as the supply of proper paper grades.
Approximately 70% of the Company's expected paper requirements are covered by
these agreements. The Company has negotiated prices that are tied to a published
paper price index. These arrangements expire at various dates through 2006.

The Company has outstanding letters of credit of approximately $11.6 million
under separate agreements expiring in April 2005, primarily relating to its
workers' compensation program.

Market Risk

The Company's interest expense is sensitive to changes in interest rates. In
this regard, changes in interest rates affect the interest paid on its debt. To
mitigate the impact of interest rate fluctuations, the Company maintains
interest rate swap agreements.

The Company entered into one interest rate swap agreement with a notional amount
of $25 million to swap a portion of the 5.71% fixed rate interest on the
Company's $65 million senior secured notes for variable rate interest. At
September 25, 2004, the fair market value of this agreement was a gain of $0.2
million. This fair value hedge expires on December 4, 2013.

The Company entered into three separate four-year interest rate swap agreements
with notional amounts totaling $25 million to swap a portion of the variable
rate interest on the Company's $60 million senior secured notes for fixed rate
interest. The start and maturity dates of these agreements are detailed in Note
8 of the Company's financial statements. At September 25, 2004, the fair market
value of the agreement in effect was a loss of $0.6 million.

If interest rates should change by 2 percentage points in fiscal 2005 from those
rates in effect at September 25, 2004, interest expense would increase/decrease
by approximately $1.6 million. These amounts are determined by considering the
hypothetical interest rates on the Company's borrowing cost. The sensitivity
analysis also assumes no changes in the Company's financial structure.

Critical Accounting Policies

Critical accounting policies are defined as those that are most important to the
portrayal of a company's financial condition and results of operations and which
require complex or subjective judgments or estimates. The most significant areas
involving management estimates and assumptions are detailed below. Actual
results could differ from those estimates under different assumptions and
conditions. Historically, actual results have not differed significantly from
the Company's estimates.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company reviews the collectibility of its receivables on an ongoing basis taking
into account a combination of factors. On a monthly basis, the Company conducts
meetings to identify and review potential problems, such as a bankruptcy filing
or deterioration in the customer's financial condition, to ensure the Company
is adequately accrued for potential loss. The Company also calculates a trended
write-off of bad debts over a rolling 12-month period and takes into account
aging categories, historical trends and specific accounts. If a customer's
situation changes, such as bankruptcy or creditworthiness, or there is a change
in the current economic climate, the Company may modify its estimate of the
allowance for doubtful accounts.

VALUATION OF GOODWILL AND INTANGIBLE ASSETS

Goodwill represents the excess purchase price paid over the fair value of net
assets acquired in connection with the purchase of a business. The Company is
required to test goodwill annually for impairment. Impairment exists when the
carrying amount of goodwill exceeds its fair market value. The Company's
goodwill impairment test was performed by comparing the net present value of
projected cash flows to the carrying value of goodwill. The Company utilized
discount rates determined by management to be similar with the level of risk in
the current business model. The Company performed the annual impairment
testing during the first quarter of fiscal 2004 and determined that no
impairment of goodwill exists. Although no change is expected, if the
assumptions the Company made regarding estimated cash flows, such as future
operating performance and other factors used to determine the fair value, are
less

                                                                       ADVO - 25

<PAGE>



Financial Report

favorable than expected, the Company may be required to record an impairment
charge.

REVENUE RECOGNITION

Revenues are recognized when persuasive evidence of a sales arrangement exists
and when services are rendered. The Company's services are considered rendered
when all printing, sorting, labeling and ancillary services have been provided
and the package has been accepted by the United States Postal Service. There is
no risk pertaining to customer acceptance and the sales arrangement specifies a
fixed and determinable price and collectibility is reasonably assured. The
Company provides for a reserve against revenues for estimated claims resulting
from billing adjustments and sales adjustments in the event of incorrect or
untimely mailings of customers' advertising material. The amount of this reserve
is evaluated monthly taking into account historical trends, specific items and
trended sales adjustments.

SELF-INSURANCE CLAIMS

The Company self-insures a significant portion of expected losses under its
workers' compensation program and medical benefits claims. The Company's lia-
bility represents an estimate of the ultimate cost of claims incurred as of the
balance sheet date. The workers' compensation accrual is based on an analysis
of historical data and independent actuarial estimates, and is reviewed by the
Company on a quarterly basis to ensure the liability is appropriate. Actuarial
assumptions take into account claim-development factors based on loss history,
economic conditions, the frequency or severity of claims, and settlement prac-
tices. The medical benefits claims accrual is based upon historical, trended
claims and an independent actuarial estimate. The Company maintains stop loss
coverage for medical benefits claims with a third party insurer to limit the
Company's total liability exposure. Unexpected changes in claim trends,
including the severity and frequency of claims, actuarial estimates, and medical
cost inflation could result in costs that are significantly different than
initially reported. The Company believes these estimates are reasonable based on
information currently available, however, the possibility exists that future
claims-related liabilities could increase due to unforeseen circumstances.

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 amounts reported in the financial statements and accompanying
notes. These accounting estimates will change as new events occur, as more
experience is acquired, as additional information is obtained and as the
Company's operating environment changes.

Significant estimates and assumptions include, in addition to those detailed
above:

-     DEPRECIABLE LIVES OF ASSETS Depreciation is computed generally by the
      straight-line method over the estimated useful lives of the respective
      assets. The valuation and classification of these assets and the
      assignment of useful depreciable lives is based on the Company's estimate
      of useful lives of similar assets.

-     ACCRUAL FOR CLIENT INCENTIVES The Company bases its estimate for client
      incentives on the terms in the customer's contract, future volume
      expectations for the client's mailings and past historical trends of
      similar client incentives.

-     INCOME TAXES The Company's future effective tax rate could be affected by
      changes in the valuation of deferred tax assets or liabilities or
      changes in federal or state tax laws or interpretations of the law. In
      addition, the Company is subject to the examination of its income tax
      returns by the Internal Revenue Service and other tax authorities. The
      Company considers the effect of legislative developments and the outcome
      of IRS examinations when it updates its estimate of the quarterly tax
      rate.

New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which was
revised in December 2003 ("FIN No. 46-R"). This new rule requires that companies
consolidate a variable interest entity if the company is subject to a majority
of the risk of loss from the variable interest entity's activities and/or is
entitled to receive a majority of the entity's residual returns. The provisions
of FIN No.46-R were required to be applied as of the end of the first reporting
period after March 15, 2004 for the variable interest entities in which the
company holds a variable interest that it acquired

ADVO - 26

<PAGE>



                                                                Financial Report

on or before January 31, 2003. The adoption of FIN No. 46-R did not have any
impact on the financial position or results of operations of the Company.

On October 13, 2004, the FASB concluded that Statement No.123R,"Share-Based
Payment," would require the fair value of stock options to be recognized in the
financial statements as compensation expense. The proposed requirements in the
exposure draft would be effective for the Company's fourth quarter of fiscal
2005. The pro-forma impact of stock option expensing is calculated as required
under FASB Statement No. 123, "Accounting for Stock-Based Compensation," and
disclosed in Note 12 of the Company's consolidated financial statements.
However, the actual impact to our financial statements upon adoption of the
proposed standard may differ from the pro-forma information included in Note 12
due to differences in the option- pricing models used, estimates and
assumptions, and the options to be included in the calculation upon adoption.
The Company will monitor the status of the proposed standard and will evaluate
the impact to our financial position and results of operations when the final
standard is issued, tentatively scheduled by the FASB to be on or about December
15,2004.

Business Outlook

The following business outlook is as of the date of this annual report and is
subject to the Company's safe harbor and guidance policies detailed below in
"Forward Looking Statements."

Given the Company's revenue growth trends in the second half of fiscal 2004, as
well as expected continued economic and retail recovery, the Company expects
revenue to grow in the range of 9 to 11% during fiscal 2005. This assumes that
broad-based increases in demand across advertising categories and geographies
continue, and the Company continues to have success in its strategy to grow its
share of advertising spent by large national clients. The Company's investment
in distribution costs and facilities to support the new advertising programs
in Southern California, Pittsburgh, and other smaller programs across the
country will have a negative effect on margins and EPS for fiscal 2005.
Despite this, the Company believes that profit growth from existing programs
will more than offset these investments and will result in fiscal 2005 diluted
EPS in the range of $1.80 to $1.85.

Forward Looking Statements

Except for the historical information stated herein, the matters discussed in
this Management's Discussion and Analysis of Financial Condition and Results of
Operations contain forward looking statements within the meaning of Section 27A
of the Securities Exchange Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, each as amended. Such forward looking statements are based
on current information and expectations and are subject to risks and
uncertainties that could cause the Company's actual results to differ materially
from those in the forward looking statements. The Company's business is
promotional in nature, and ADVO serves its clients on a "just in time" basis. As
a result, fluctuations in the amount, timing, pages and weight, and kinds of
advertising pieces can vary significantly from week to week, depending on its
customers' promotional needs, inventories and other factors. In any particular
quarter these transactional fluctuations are difficult to predict, and can
materially affect the Company's revenue and profit results. The Company's
business contains additional risks and uncertainties that include but are not
limited to: general changes in customer demand and pricing, the possibility of
consolidation throughout the retail sector, the impact of economic and political
conditions on retail advertising spending and our distribution system,
postal and paper prices, possible governmental regulation or legislation
affecting aspects of the Company's business, the efficiencies achieved with
technology upgrades, the number of shares the Company will purchase in the
future under its buyback program, fluctuations in interest rates related to the
outstanding debt and other general economic factors.

                                                                       ADVO - 27

<PAGE>



Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                           YEAR ENDED                Year ended        Year ended
                                                          SEPTEMBER 25,             September 27,     September 28,
(In thousands, except per share data)                        2004                       2003              2002
-------------------------------------                     -------------             -------------     -------------
<S>                                                       <C>                       <C>               <C>
REVENUES                                                  $  1,245,838              $  1,163,113      $  1,130,113
COSTS AND EXPENSES:
  Cost of sales                                                915,767                   859,223           830,800
  Selling, general and administrative                          242,256                   218,422           211,024
  Provision for bad debts                                        6,837                     3,826             8,086
                                                          ------------              ------------      ------------

OPERATING INCOME                                                80,978                    81,642            80,203
Interest expense                                                (5,364)                   (7,356)          (13,238)
Debt issue costs associated with debt retirement                (1,401)                       --                --
Equity earnings (loss) in joint ventures                         2,601                     1,356               (70)
Other expense, net                                                (682)                     (233)             (740)
                                                          ------------              ------------      ------------
INCOME BEFORE INCOME TAXES                                      76,132                    75,409            66,155
Provision for income taxes                                      27,408                    25,865            24,147
                                                          ------------              ------------      ------------
NET INCOME                                                $     48,724              $     49,544      $     42,008
                                                          ============              ============      ============

EARNINGS PER SHARE:
  Basic earnings per share                                $       1.61              $       1.67      $       1.40
  Diluted earnings per share                              $       1.59              $       1.64      $       1.38
                                                          ============              ============      ============

DIVIDENDS DECLARED PER SHARE                              $       0.44              $         --      $         --
                                                          ============              ============      ============
Weighted average basic shares                                   30,193                    29,749            29,903
Weighted average diluted shares                                 30,680                    30,129            30,370
                                                          ============              ============      ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

ADVO - 28

<PAGE>



                                                     Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                      SEPTEMBER 25,     September 27,
(In thousands, except share data)                                        2004              2003
---------------------------------                                     -------------     -------------
<S>                                                                   <C>               <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                           $     30,284      $     17,012
  Accounts receivable, less allowances of $5,229 in 2004 and
    $4,831 in 2003                                                         149,606           122,104
  Inventories                                                                2,123             2,491
  Prepaid expenses and other current assets                                  7,788            10,875
  Deferred income taxes                                                     15,484            12,496
                                                                      ------------      ------------
        TOTAL CURRENT ASSETS                                               205,285           164,978

Property, plant and equipment - net                                        177,937           143,025
Investment in deferred compensation plan                                    12,800            11,106
Goodwill                                                                    22,514            22,242
Other assets                                                                 8,873            12,130
                                                                      ------------      ------------
        TOTAL ASSETS                                                  $    427,409      $    353,481
                                                                      ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of long-term debt                                   $         --      $     36,250
  Accounts payable                                                          51,880            36,581
  Accrued compensation and benefits                                         28,050            25,286
  Customer advances                                                          8,650             4,991
  Federal and state income taxes payable                                     3,405            10,398
  Accrued other expenses                                                    24,088            20,559
                                                                      ------------      ------------
        TOTAL CURRENT LIABILITIES                                          116,073           134,065

Long-term debt                                                             125,159            94,000
Deferred income taxes                                                       25,330            19,765
Deferred compensation plan                                                  13,821            11,917
Other liabilities                                                            5,205             4,666

STOCKHOLDERS' EQUITY
  Preferred Stock, $.01 par value
    (Authorized 5,000,000 shares, none issued)                                  --                --
  Common Stock, $.01 par value (Authorized 80,000,000 shares,
    issued 31,020,658 in 2004 and 20,042,005 in 2003)                          310               200
  Additional paid-in capital                                               160,145           137,252
  Unamortized deferred compensation                                         (1,879)           (1,628)
  Accumulated deficit                                                       (9,073)          (44,384)
  Less shares of common stock held in treasury at cost,
    214,893 in 2004 and 79,889 in 2003                                      (6,547)           (1,716)
  Less shares of common stock held in deferred compensation trust           (1,021)             (811)
  Accumulated other comprehensive (loss) income                               (114)              155
                                                                      ------------      ------------
        TOTAL STOCKHOLDERS' EQUITY                                         141,821            89,068
                                                                      ------------      ------------
        TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                    $    427,409      $    353,481
                                                                      ============      ============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                                                       ADVO - 29
<PAGE>



Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                              YEAR ENDED               Year ended               Year ended
(In thousands)                                            SEPTEMBER 25, 2004       September 27, 2003       September 28, 2002
--------------                                            ------------------       ------------------       ------------------
<S>                                                       <C>                      <C>                      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                           $      48,724            $       49,544           $        42,008
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
  CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
     Depreciation                                                35,901                    33,671                    29,080
     Amortization of intangibles and
        deferred compensation                                     1,703                     1,715                     1,639
     Amortization of debt issue costs                               627                       992                       992
     Deferred income taxes                                        2,810                     7,688                     1,048
     Provision for bad debts                                      6,837                     3,826                     8,086
     Equity (earnings) loss from joint ventures                  (2,601)                   (1,356)                       70
     Debt issue costs associated with debt retirement             1,401                        --                        --
     Other                                                           53                       128                      (243)
CHANGE IN OPERATING ASSETS AND LIABILITIES,
  NET OF EFFECTS OF ACQUISITIONS:
     Accounts receivable                                        (34,408)                   (5,217)                   (8,764)
     Inventories                                                    371                       (61)                      779
     Prepaid expenses and other current assets                    2,650                    (3,735)                      250
     Investment in deferred compensation plan                       491                       (81)                     (149)
     Other assets                                                 3,917                       402                    (4,580)
     Accounts payable                                            15,385                     3,572                    (5,409)
     Accrued compensation and benefits                            2,769                       461                     3,215
     Deferred compensation plan                                    (491)                       81                       149
     Customer advances                                            3,653                    (2,182)                   (4,968)
     Federal and state income taxes payable                        (954)                    5,933                     2,365
     Other liabilities                                            3,580                    (3,458)                    1,154
                                                          -------------            --------------           ---------------
        NET CASH PROVIDED BY OPERATING ACTIVITIES                92,418                    91,923                    66,722
                                                          -------------            --------------           ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Acquisitions, net of cash acquired                            (220)                       19                    (1,457)
     Expenditures for property, plant and equipment             (70,955)                  (49,212)                  (37,387)
     Proceeds from disposals of property,
        plant and equipment                                          97                       675                       648
     Distributions from equity joint ventures                     2,559                     1,197                       303
     Proceeds from sale of business                                  --                        --                       378
                                                          -------------            --------------           ---------------
        NET CASH USED BY INVESTING ACTIVITIES                   (68,519)                  (47,321)                  (37,515)
                                                          -------------            --------------           ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:
     Payments on term loan                                     (101,250)                  (22,500)                  (11,250)
     Revolving line of credit - net                             (29,000)                  (16,500)                   (4,500)
     Proceeds on private placement notes                        125,000                        --                        --
     Note payable                                                    --                    (1,715)                   (2,391)
     Proceeds from exercise of stock options                     15,230                     1,645                     3,355
     Treasury stock transactions                                 (5,179)                     (922)                  (19,853)
     Payment of debt issue costs                                 (2,213)                       --                        --
     Cash dividends paid                                        (13,274)                       --                        --
                                                          -------------            --------------           ---------------
        NET CASH USED BY FINANCING ACTIVITIES                   (10,686)                  (39,992)                  (34,639)
                                                          -------------            --------------           ---------------

Effect of exchange rate changes on cash
  and cash equivalents                                               59                       121                       (15)
                                                          -------------            --------------           ---------------

Change in cash and cash equivalents                              13,272                     4,731                    (5,447)
Cash and cash equivalents at beginning of year                   17,012                    12,281                    17,728
                                                          -------------            --------------           ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                  $      30,284            $       17,012           $        12,281
                                                          =============            ==============           ===============
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

ADVO - 30

<PAGE>



                      Consolidated Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>
                                                        Additional  Unamortized  Accumulated
                                         Common stock    paid-in     deferred     earnings
(In thousands)                           Shares  Amount  capital    compensation  (deficit)
--------------                          -------- ------ ----------  ------------ -------------
<S>                                     <C>      <C>    <C>         <C>          <C>
Balance  -
September 29, 2001                       30,318  $  303 $  198,197   $  (975)    $  19,321
Components of comprehensive
     income (loss):
  Net income                                                                        42,008
  Unrealized gain on derivative
     instruments
  Cumulative translation
     adjustment
Total comprehensive income
Treasury stock transactions
Activity in deferred
     compensation trust
Grants of restricted stock                   31              1,174    (1,174)
Exercise of stock options                   245       3      3,352
Tax effect - employee stock plans                            2,441
Amortization of deferred compensation                                  1,276
                                        =======  ====== ==========  ========     =========

Balance  -
September 28, 2002                       30,594  $  306 $  205,164   $  (873)    $  61,329
Components of comprehensive
     income:
  Net income                                                                        49,544
  Reclassification adjustment on
     derivative instruments
  Cumulative translation adjustment
Total comprehensive income
Treasury stock transactions
Activity in deferred
     compensation trust
Retirement of treasury shares           (10,700)   (107)   (72,332)               (155,257)
Grants of restricted stock                   62              2,101    (2,101)
Exercise of stock options                    86       1      1,661
Tax effect - employee stock plans                              658
Amortization of deferred compensation                                  1,346
                                        =======  ====== ==========  ========     =========
Balance  -
September 27, 2003                       20,042  $  200 $  137,252   $(1,628)    $ (44,384)
Components of comprehensive
income (loss):
  Net income                                                                        48,724
  Unrealized loss on derivative
  instruments, net of taxes
  Cumulative translation adjustment
Total comprehensive income
Treasury stock transactions
Activity in deferred
  compensation trust
Cancellation of restricted stock            (24)              (662)      662
Grants of restricted stock                   82       1      2,636    (2,612)
Exercise of stock options                   911       9     14,873
Tax effect - employee stock plans                            6,046
Stock split (three-for-two)              10,010     100                               (100)
Cash dividends declared
  ($0.44 per share)                                                                (13,313)
Amortization of deferred compensation                                  1,699
                                        =======  ====== ==========  ========     =========

BALANCE  -
SEPTEMBER 25, 2004                       31,021  $  310 $  160,145   $(1,879)    $  (9,073)
                                        =======  ====== ==========  ========     =========

<CAPTION>
                                                            Stock held     Accumulated
                                                            in deferred       other            Total
                                          Treasury stock    compensation   comprehensive   stockholders'
(In thousands)                           Shares    Amount      trust      income (loss)        equity
--------------                          -------- ---------- ------------  --------------   -------------
<S>                                     <C>      <C>        <C>           <C>              <C>
Balance  -
September 29, 2001                      (10,198) $(208,620) $    (553)    $    (5,273)     $    2,400
Components of comprehensive
     income (loss):
  Net income                                                                                   42,008
  Unrealized gain on derivative
     instruments                                                                4,183           4,183
  Cumulative translation
     adjustment                                                                   (33)            (33)
                                                                                           ==========
Total comprehensive income                                                                     46,158
Treasury stock transactions                (556)   (19,853)                                   (19,853)
Activity in deferred
     compensation trust                                            69                              69
Grants of restricted stock                                                                         --
Exercise of stock options                                                                       3,355
Tax effect - employee stock plans                                                               2,441
Amortization of deferred compensation                                                           1,276
                                        =======  =========  =========     ===========      ==========
Balance  -

September 28, 2002                      (10,754) $(228,473) $    (484)    $    (1,123)     $   35,846
Components of comprehensive
     income:
  Net income                                                                                   49,544
  Reclassification adjustment on
     derivative instruments                                                     1,090           1,090
  Cumulative translation adjustment                                               188             188
                                                                                           ==========
Total comprehensive income                                                                     50,822
Treasury stock transactions                 (30)      (922)                                      (922)
Activity in deferred
     compensation trust                                          (327)                           (327)
Retirement of treasury shares            10,700    227,696                                         --
Grants of restricted stock                                                                         --
Exercise of stock options                     4        (17)                                     1,645
Tax effect - employee stock plans                                                                 658
Amortization of deferred compensation                                                           1,346
                                        =======  =========  =========     ===========      ==========
Balance  -

September 27, 2003                          (80) $  (1,716) $    (811)    $       155      $   89,068
Components of comprehensive
income (loss):
  Net income                                                                                   48,724
  Unrealized loss on derivative
  instruments, net of taxes                                                      (370)           (370)
  Cumulative translation adjustment                                               101             101
                                                                                           ==========
Total comprehensive income                                                                     48,455
Treasury stock transactions                (147)    (5,179)                                    (5,179)
Activity in deferred
   compensation trust                                            (210)                           (210)
Cancellation of restricted stock                                                                   --
Grants of restricted stock                                                                         25
Exercise of stock options                    12        348                                     15,230
Tax effect - employee stock plans                                                               6,046
Stock split (three-for-two)                                                                        --
Cash dividends declared
  ($0.44 per share)                                                                           (13,313)
Amortization of deferred compensation                                                           1,699
                                        =======  =========  =========     ===========      ==========

BALANCE  -
SEPTEMBER 25, 2004                         (215) $  (6,547) $  (1,021)    $      (114)     $  141,821
                                        =======  =========  =========     ===========      ==========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                                                       ADVO - 31

<PAGE>


Notes to Consolidated Financial Statements

NOTE 1: BUSINESS

ORGANIZATION ADVO, Inc. ("ADVO" or the "Company") is a full service
home-delivered print advertising company which operates under one segment and is
primarily engaged in soliciting and processing printed advertising from
retailers, manufacturers and service companies for targeted distribution by both
shared and solo mail to consumer households in the United States and Canada on a
national, regional and local basis. Founded in 1929 as a hand delivery company,
ADVO entered the direct mail industry as a solo mailer in 1946 and began its
shared mail program in 1980. The Company currently is the largest commercial
user of standard mail (formerly third-class mail) in the United States.

ADVO's direct mail products and services include shared mail and solo mail. ADVO
also provides ancillary services to complement its direct mail programs. The
Company's predominant source of revenue is from its shared mail programs. In
these programs, the advertisements of several advertisers are combined in a
single mail package. This offers the features of penetration and targeted
marketing at a significant cost reduction when compared to mailing on an
individual or solo mail basis. The Company's client base consists principally of
national and local grocers, pizza/fast food, drug stores, discount stores, auto
service, telecommunications, casual dining and home furnishing stores. The
Company's consumer Web site, ShopWise.com, allows retailers to electronically
target promotions and values to consumers.

NOTE 2: SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of ADVO and its subsidiaries. All significant intercompany transac-
tions and balances among ADVO and its subsidiaries have been eliminated. Certain
reclassifications have been made in the fiscal 2003 and 2002 financial state-
ments to conform to the fiscal 2004 presentation. ADVO's fiscal year closing
date is the last Saturday in September.

The Company's investments in joint ventures which are not "majority owned" or
controlled are accounted for under the equity method. The Company's portion of
the earnings or losses of the joint ventures is recorded on the Consolidated
Statements of Operations.

BUSINESS SEGMENT REPORTING ADVO operates in one reportable segment, direct mail,
in accordance with Statement of Financial Accounting Standards ("Statement") No.
131, "Disclosure About Segments of an Enterprise and Related Information."
Approximately 99.3% of the Company's fiscal 2004 revenues were generated in the
United States and essentially all assets are located in the United States.

In fiscal 2004, 2003, and 2002 no one customer accounted for more than 6% of the
Company sales.

CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid
investment instruments with original maturities of three months or less when
purchased. These investments are valued at cost, which approximates fair value.

INVENTORIES Inventories, which consist of raw materials, finished goods and
spare parts, are valued at the lower of cost (first-in, first-out method) or
market.

LONG-LIVED ASSETS Property, plant and equipment are recorded at cost and include
amounts associated with the development of software for internal use.
Depreciation and amortization are computed generally by the straight-line method
over the estimated useful lives of the respective assets (ranging from 3 to 25
years) or over the terms of the related leases for leasehold improvements. The
Company continually monitors its property, plant and equipment assets for
impairment. In determining whether any impairment losses have occurred, the
Company evaluates the expected cash flows, on an undiscounted basis, of the
underlying assets.

GOODWILL AND OTHER INTANGIBLES Intangible assets that have a finite life
continue to be amortized over their useful lives. Goodwill is tested for impair-
ment at least annually. Impairment exists when the carrying amount of goodwill
exceeds its fair market value. The Company performs the impairment tests
annually in the first quarter of each fiscal year. Fair value is determined
using the discounted cash flow methodology. The Company has determined that no
impairment of goodwill exists in fiscal 2004, 2003 and 2002.

RECOGNITION OF REVENUES AND ACCOUNTS RECEIVABLE Revenues and accounts receivable
are recognized when persuasive evidence of a sales arrangement exists and when
services are rendered. The Company's services are considered rendered when all
printing, sorting, labeling and ancillary

ADVO - 32

<PAGE>



                                      Notes to Consolidated Financial Statements

services have been provided and the package has been accepted by the United
States Postal Service. There is no risk pertaining to customer acceptance and
the sales arrangement specifies a fixed and deter- minable price and
collectibility is reasonably assured. Credit is extended based on an evaluation
of each customer's financial condition, generally collateral is not required.
Revenues are presented in the financial statements net of sales allowances and
adjustments. Accounts receivable are presented in the financial statements net
of allowances.

ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. The Company reviews the collectibility of its receiv-
ables on an ongoing basis, taking into account a combination of factors. The
Company reviews potential problems, such as past due accounts, a bankruptcy
filing or deterioration in the customer's financial condition, to ensure the
Company is adequately accrued for potential loss. Accounts are considered past
due based on when payment was originally due. The Company also calculates a
trended write-off of bad debts over a rolling 12-month period taking into
account aging categories, historical trends and specific accounts. If a
customer's situation changes, such as a bankruptcy or creditworthiness, or there
is a change in the current economic climate, the Company may modify its estimate
of the allowance for doubtful accounts. The Company will write off accounts
receivable at the time they are either deemed uncollectible or submitted to an
outside agency for additional collection efforts.

DERIVATIVE INSTRUMENTS The Company uses derivative instruments to manage
exposure to interest rate risks related to a portion of its outstanding debt.
Derivative instruments are recognized as either assets or liabilities and are
measured at fair value. The Company's derivative instruments are considered
"effective" under Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." For derivative instruments designated as fair-value hedges,
changes in the fair value are recognized in earnings as an offset to the changes
in the fair value of the exposures being hedged. For derivative instruments
designated as cash-flow hedges, changes in the fair value are deferred in
accumulated other comprehensive income (loss) and recognized in earnings as the
hedged transactions occur. See Note 8 for additional details on the derivative
terms.

STOCK-BASED COMPENSATION The Company follows Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock plans. Accordingly, compensation cost is
recognized only for those arrangements, such as restricted stock, where the
quoted market price of the stock at the grant date is in excess of the amount
the employee must pay to acquire the stock.

INCOME TAXES Income tax expense is based on reported earnings before income
taxes. Deferred income taxes reflect the impact of temporary differences between
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes, and are measured by applying enacted tax
rates in effect in years in which differences are expected to reverse.

EARNINGS PER SHARE Basic earnings per share exclude common stock equivalents,
such as stock options, and are computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflect the potential dilution that would occur if common stock
equivalents, such as stock options, were exercised.

FOREIGN CURRENCY TRANSLATION The functional currency for the Company's
Canadian operation is the Canadian dollar. As such, assets and liabilities are
translated into United States dollars at month-end exchange rates. Income and
expenses are translated into United States dollars at average rates of exchange
for the reporting period. Net changes resulting from such translations are
excluded from net income and are recorded as a separate component of accumulated
other comprehensive income (loss) in the consolidated financial statements.
Gains and losses from foreign currency transactions are included in net income
in the period in which they arise.

COMPREHENSIVE INCOME Comprehensive income includes net income and all other
changes in a company's equity other than from transactions with the Company's
stockholders. Comprehensive income is shown as a separate component in the
Consolidated Statements of Changes in Stockholders' Equity.

                                                                       ADVO - 33

<PAGE>



Notes to Consolidated Financial Statements

The following summarizes the activity within accumulated other comprehensive
(loss) income:

<TABLE>
<CAPTION>
                                           Cumulative
                            Derivative     Translation
(In thousands)              Instruments    Adjustment         Total
--------------              -----------    -----------     -----------
<S>                         <C>            <C>             <C>
Balance -
September 29, 2001          $   (5,273)    $       --      $   (5,273)
Unrealized gain on
  derivative instruments         4,183             --           4,183
Cumulative translation
  adjustment                        --            (33)            (33)
                            ----------     ----------      ----------

Balance -
September 28, 2002          $   (1,090)    $      (33)     $   (1,123)
Reclassification
  adjustment on
  derivative instruments         1,090             --           1,090
Cumulative translation
  adjustment                        --            188             188
                            ----------     ----------      ----------

Balance -
September 27, 2003                  --            155             155
Unrealized loss on
  derivative instruments,
  net of taxes                    (370)            --            (370)
Cumulative translation
  adjustment                        --            101             101
                            ----------     ----------      ----------
BALANCE -
SEPTEMBER 25, 2004          $     (370)    $      256      $     (114)
                            ==========     ==========      ==========
</TABLE>

FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments of cash
and cash equivalents, accounts receivable, and accounts payable approximate fair
value due to the short-term nature of these instruments. The carrying value of
the Company's debt approximates fair value due to the variable interest rate on
the debt.

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 amounts reported in the financial statements and
accompanying notes. While management believes that the estimates and related
assumptions used in the preparation of these financial statements are
appropriate, actual results could differ from those estimates.

NOTE 3: ACQUISITIONS

In fiscal 2002, the Company acquired several businesses, all of which were
recorded using the purchase method of accounting. Accordingly, the results of
operations of the acquired companies have been included in the consolidated
statements of operations from the acquisition dates. The acquired assets have
been recorded at their estimated fair values.

The acquisitions did not have a material pro-forma effect on operations for the
periods prior to the acquisitions.

In June 2002, the Company paid cash of $0.7 million to acquire FACC Corporation
("FACC"), which is based in Toronto, Canada. FACC includes both FACC and
Breezeway Communications, Inc. and is an innovator in both targeting and
distribution of in-home print advertising in Canada. FACC was renamed ADVO
Canada. The purchase price was allocated to the fair value of assets acquired,
totaling $1.2 million, and liabilities assumed of $1.0 million and resulted in
goodwill of $0.5 million. Under the terms of the purchase agreement with FACC,
the Company may be required to pay certain contingencies if certain future
earnings objectives are achieved. Upon completion of the first and second year,
ADVO Canada met its earnings targets and the previous shareholders received $0.2
million during the third quarter of both fiscal 2004 and fiscal 2003. This
payment was recorded by the Company as additional goodwill.

In May 2002, the Company acquired a franchise operation directly from the
franchisee of the Company's MailCoups subsidiary for $0.2 million, which was
subsequently sold in the last month of fiscal 2002 to an unrelated third party
for an amount, which approximates book value.

During fiscal 2002, the Company invested approximately $0.5 million in two
joint ventures. The total investment balance of these joint ventures, which is
included in other assets, was $1.0 million and $0.9 million at September 25,
2004, and September 27, 2003, respectively.

NOTE 4: GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of business acquisition costs over the fair
value of net assets acquired. At September 25, 2004 and September 27, 2003,
goodwill was $22.5 million and $22.2 million, respectively. The increase in
goodwill relates to the $0.2 million payout to the previous ADVO Canada share-
holders during fiscal 2004. See Note 3 for ADVO Canada payout details.

Included in other assets are amortizable intangibles consisting primarily of
airplane use rights, which are recorded at cost, net of related amortization. At
September 25, 2004, and September 27, 2003, the net carrying value of these
assets was $2.3 million

ADVO - 34

<PAGE>



                                      Notes to Consolidated Financial Statements

and $3.2 million, respectively. Subsequent to year-end significant portions of
the airplane use rights were sold for amounts approximating carrying value,
resulting in an immaterial amount of intangibles to be amortized in fiscal
2005.

NOTE 5: PROPERTY, PLANT AND EQUIPMENT

Balances of major classes of property, plant and equipment and accumulated
depreciation and amortization are as follows:

<TABLE>
<CAPTION>
                                       SEPTEMBER 25,  September 27,
(In thousands)                             2004            2003
--------------                         -------------  -------------
<S>                                    <C>            <C>
Land, building and
  building improvements                 $   47,057     $   25,398
Leasehold improvements                      24,363         26,380
Machinery and equipment                    112,502        104,801
Furniture and fixtures                      20,107         19,507
Computer hardware                           20,315         18,086
Computer software and
  software development costs               101,890         85,925
Construction in progress                    47,905         35,217
                                        ----------     ----------
Total                                      374,139        315,314
Less accumulated depreciation
  and amortization                         196,202        172,289
                                        ----------     ----------
Property, plant and
  equipment - net                       $  177,937     $  143,025
                                        ==========     ==========
</TABLE>

Construction in progress is comprised principally of costs associated with
software systems for internal use, which are expected to be in placed in service
in fiscal 2005. The Company capitalized interest of $0.5 million and zero,
respectively, for the years ended September 25, 2004 and September 27, 2003.

NOTE 6: ACCRUED COMPENSATION AND BENEFITS

The composition of accrued compensation and benefits is as follows:

<TABLE>
<CAPTION>
                             SEPTEMBER 25,  September 27,
(In thousands)                   2004            2003
--------------               -------------  -------------
<S>                          <C>            <C>
Employee compensation         $   12,571     $   11,921
Workers' compensation              6,813          6,705
Employee withholdings
  and other benefits               8,666          6,660
                              ----------     ----------
Total                         $   28,050     $   25,286
                              ==========     ==========
</TABLE>

During fiscal 2004, the Company incurred a $3.9 million severance charge
relating to the departure of its former Chief Executive Officer. This charge
primarily included wages, benefits and incentive compensation. These costs, of
which $3.0 million were still payable at September 25, 2004, are included in
employee withholdings and other benefits.

NOTE 7: ACCRUED OTHER EXPENSES

The composition of accrued other expenses is as follows:

<TABLE>
<CAPTION>
                                SEPTEMBER 25,   September 27,
(In thousands)                      2004            2003
--------------                  -------------   -------------
<S>                             <C>             <C>
Taxes other than income           $   3,447       $   3,763
Professional services                 7,312           8,161
Interest                              1,417             401
Client incentives                     4,972           3,444
Legal contingency                     2,320             741
Other                                 4,620           4,049
                                  ---------       ---------
Total                             $  24,088       $  20,559
                                  =========       =========
</TABLE>

NOTE 8: FINANCING ARRANGEMENTS

On December 4, 2003, the Company replaced its existing credit facilities. The
aggregate principal amount of the new credit agreements totals $275 million and
includes the private placement of $125 million senior secured notes with several
institutional investors and a $150 million revolving line of credit ("revolver")
with a syndicate of banks. All of the assets of the Company and its subsidiaries
have been pledged as collateral under the Credit Agreement.

The senior secured notes consist of $65 million notes at a fixed interest rate
of 5.71% (Series A Notes) and $60 million notes at a variable interest rate of
LIBOR rate plus 0.92% (Series B Notes). The senior secured notes have a ten-year
life and mature in December 2013. Interest is payable semi-annually on the
Series A Notes and quarterly on the Series B Notes.

The revolver has a four-year life and remains available until maturity in
December 2007. The revolver bears interest, at the Company's option, equal to
the LIBOR rate or to the bank's "base rate" plus an "applicable margin" (based
on certain financial ratios). The applicable margin ranges from 0.875% to
1.50% on the LIBOR rate and 0% to 0.50% on the base rate. The Company has the
option to select interest rates at either the LIBOR or base rate at the time of
borrowing

                                                                       ADVO - 35

<PAGE>


Notes to Consolidated Financial Statements

and/or conversion. Interest is payable quarterly or upon the maturity of the
LIBOR contracts, whichever period is shorter.

A summary of debt is set forth in the following table:

<TABLE>
<CAPTION>
                                   SEPTEMBER 25,    September 27,
(In thousands)                         2004             2003
--------------                     -------------    -------------
<S>                                <C>              <C>
Private placement notes
  Series A notes - 5.71%            $   65,000        $      --
  Fair value hedge (a)                     159               --
  Series B notes -
     LIBOR rate of 2.98%
     at September 25, 2004              60,000               --
Revolver - base rate of 4.875%
     at September 25, 2004                  --               --
Term loan                                   --          101,250
Revolving line of credit                    --           29,000
                                    ----------       ----------
                                       125,159          130,250
Less current portion of
  long-term debt                            --           36,250
                                    ----------       ----------
Total long-term debt                $  125,159       $   94,000
                                    ==========       ==========
</TABLE>

(a)   Represents unrealized gains for fair value hedging arrangement (see
      "Derivatives and Hedging Activities" below for details).

The Company pays fees on the unused commitments at a rate ranging from 0.20% to
0.40% depending on the Company's debt ratio, as defined. At September 25, 2004,
there was $138.4 million available for future borrowings, which reflects $11.6
million utilized by letters of credit under separate agreements related to the
Company's workers' compensation program.

In the first quarter of fiscal 2004, the Company capitalized $2.2 million of
debt issue costs directly associated with the issuance of the new credit
facilities. These costs are included in other assets and are being amortized
either over the ten-year life of the senior secured notes or over the four-year
life of the revolver, whichever is applicable.

As a result of the debt refinancing the Company wrote off $1.4 million of
unamortized debt issue costs associated with the previous credit facilities
during the first quarter of fiscal 2004. The Company concluded that the
replacement of the term loan with private placement notes met the criteria of an
extinguishment of debt per EITF 96-19, "Debtor's Accounting for a Modification
or Exchange of Debt Instruments." Consequently, all unamortized debt issue costs
associated with the term loan were written off. In addition, the Company
followed the guidance per EITF 98-14, "Debtor's Accounting for Changes in the
Line-of-Credit or Revolving-Debt Arrangements," to calculate the amount of
unamortized debt issue costs associated with the replacement of the revolving
line of credit and wrote off a portion of those costs. In accordance with EITF
98-14, the remaining unamortized debt issue costs of $0.6 million will be
amortized over the life of the new revolver. At September 25, 2004 and September
27, 2003, unamortized costs totaled $2.3 million and $2.1 million, respectively.

Under the terms of the senior secured notes and revolver, the Company is
required to maintain certain financial ratios. The credit facilities also place
restrictions on disposals of assets, mergers and acquisitions, dividend
payments, investments and additional debt.

DERIVATIVES AND HEDGING ACTIVITIES

During the first quarter of fiscal year 2004, the Company entered into various
interest rate swap agreements allowing the Company to take advantage of low,
near-term interest rates and to mitigate risk from exposure to forward upward
movements in interest rates. The Company does not enter into derivative
financial instruments for trading or speculative purposes. The Company
documented all relationships between hedging instruments and hedged items, as
well as its risk management objective and strategy for undertaking various hedge
transactions in accordance with Statement of Financial Accounting Standards
("Statement") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The Company has determined that the current interest rate swap
agreements qualify for treatment under the short-cut method of assessing
effectiveness and are considered highly effective, as defined by Statement No.
133, since all of the terms of the derivative instruments match those of the
hedged item.

The following table presents the notional amount of interest rate swaps by
class:

<TABLE>
<CAPTION>
(In thousands)                        Notional     Start
Financial Instrument   Hedge Type      Amount      Date     Maturity Date
--------------------   ----------      ------      ----     -------------
<S>                    <C>            <C>         <C>       <C>
Fixed to floating      Fair Value     $ 25,000    12/23/03   12/04/13
Floating to fixed      Cash Flow         8,000    12/04/04   12/04/08
Floating to fixed      Cash Flow         8,000    12/04/05   12/04/09
Floating to fixed      Cash Flow         9,000    12/04/06   12/04/10
</TABLE>

Statement No. 133 requires companies to recognize all derivatives on the balance
sheet at fair value. Changes in the fair value of the interest rate swap
agreements that are designated as fair value hedges are recognized in earnings
as an offset to the changes in the fair value of the exposures being hedged. As
a result, the fair value of the interest rate swap (fixed to floating), a
receivable of $0.2 million at September 25,

ADVO - 36

<PAGE>



                                      Notes to Consolidated Financial Statements

2004, increased the carrying amount of debt and decreased the interest rate swap
liability.

The changes in the fair value of the interest rate swap agreements that are
designated as cash flow hedges are deferred in accumulated other comprehensive
income (loss) and are recognized in earnings as the hedged transactions occur.
The fair value of the cash flow hedges was a liability of $0.6 million and was
recorded net of taxes, as a reduction of $0.4 million in accumulated other
comprehensive income (loss) at September 25, 2004.

NOTE 9: STOCKHOLDERS' EQUITY

On October 16, 2003, the Company announced a three-for-two stock split of its
common stock effected in the form of a stock dividend. As a result of the split,
stockholders received one additional share of common stock for every two
shares held. The stock dividend was paid on November 7, 2003 to common
shareholders of record as of October 24, 2003. The stock split was recorded by
increasing common stock by $0.1 million and decreasing accumulated earnings by
$0.1 million on the Consolidated Balance Sheets (issuance of 10 million shares
at $0.01 par value). There was no effect to the Company's overall equity
position as a result of the stock split. All share and per share data have been
restated to give retroactive effect to the split.

Also on October 16, 2003, the Company announced a regular quarterly cash
dividend. The initial quarterly dividend was aligned with the stock split and
was paid at a rate of $0.11 per share. The Company paid quarterly cash dividends
of $13.3 million, for a total of $0.44 per share for the year ended September
25, 2004. The Company expects to continue to pay cash dividends on a quarterly
basis.

During the previous fiscal years, the Company had announced several stock
buyback programs and, on October 16, 2003, the Company increased the total
authorized shares to be purchased to 1.5 million. The Company accounts for
treasury stock under the cost method. During the years ended September 25, 2004,
September 27, 2003, and September 28, 2002, the Company purchased, in connection
with the buyback programs, no shares, 10,000 shares for $0.3 million, and 0.5
million shares for $17.3 million, respectively. Stock purchases under these
programs exclude shares reacquired in connection with taxes due from associates
on certain exercises under the Company's stock option plans. As of September 25,
2004, there were 1.5 million shares remaining to be purchased.

At the Company's Annual Meeting held on January 23, 2004, the Company's
stockholders approved the amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock, $0.01
par value per share, from 40 million to 80 million shares.

The Company has a Shareholder Protection Rights Plan (the "Rights Plan") to
protect shareholders from potential unfair hostile takeovers. The Rights Plan
expires on February 11, 2013. Pursuant to the Rights Plan, common shareholders
have one Right for each share of common stock held. The Rights become
exercisable only in the event that any person acquires or commences a tender
offer to acquire 15% or more of the Company's common stock, as defined.

On September 26, 2003, the Company retired 10.7 million shares of treasury
stock. The treasury stock retirement was effected by reducing the following:
treasury stock by $227.7 million, common stock by $0.1 million, additional
paid-in-capital by $72.3 million and accumulated earnings by $155.3 million on
the Consolidated Balance Sheets. There was no effect to the Company's overall
equity position as a result of the retirement.

At September 25, 2004, there were 3.6 million shares of common stock reserved
for issuance upon the exercise of stock options, 2.4 million of which repre-
sent options outstanding and 1.2 million of which represent shares available
for future grant.

                                                                       ADVO - 37

<PAGE>


Notes to Consolidated Financial Statements

NOTE 10: EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                       YEAR ENDED     Year ended     Year ended
(In thousands,                        SEPTEMBER 25,  September 27,  September 28,
except per share data)                    2004           2003           2002
----------------------                -------------  -------------  -------------
<S>                                   <C>            <C>            <C>
Net income                              $   48,724     $   49,544     $   42,008
Weighted average
  basic shares                              30,193         29,749         29,903
Effect of dilutive securities:
    Stock options                              437            341            428
    Restricted stock                            50             39             39
                                        ----------     ----------     ----------
Dilutive potential
  common shares                                487            380            467
                                        ----------     ----------     ----------
Weighted average
  diluted shares                            30,680         30,129         30,370
                                        ==========     ==========     ==========
Basic earnings
  per share                             $     1.61     $     1.67     $     1.40
                                        ==========     ==========     ==========
Diluted earnings
  per share                             $     1.59     $     1.64     $     1.38
                                        ==========     ==========     ==========
</TABLE>

Outstanding stock options to purchase common stock with an exercise price
greater than the average market price of common stock were 0.1 million, 1.6
million and 1.5 million in fiscal 2004, 2003 and 2002, respectively, and are
not included in the calculation of diluted earnings per share.

NOTE 11: SAVINGS PLANS

The Company has a savings plan for all employees that qualifies as a profit
sharing plan under the Internal Revenue Code of 1986, as amended, and other non-
qualified savings plans. All plans feature both employee and employer matching
contributions. The expense for matching contributions was $6.4 million, $5.5
million and $5.5 million for fiscal 2004, 2003 and 2002, respectively.

The Company has a rabbi trust agreement to protect the assets of its
non-qualified deferred compensation plan ("Plan"). The Plan allows participants
to defer amounts in excess of the dollar limitation regulated by the federal
government to 401(k) plans. Each participant's account in the Plan is
comprised of the participant's contribution, the Company's matching contribu-
tion and the Plan's earnings. In accordance with EITF No. 97-14, "Accounting for
Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and
Invested," the accounts of the rabbi trust are reported in the Company's
financial statements and the employer stock held in the rabbi trust is classi-
fied as equity similar to the accounting for treasury stock. As such, the
Company's consolidated balance sheets at September 25, 2004 and September 27,
2003 reflect the investment in the rabbi trust and common stock held in deferred
compensation trust offset by the deferred compensation obligation due to the
Company's employees. These amounts are included in non-current assets,
stockholders' equity and non-current liabilities, respectively. The deferred
compensation plan investments are considered trading securities and are reported
at fair value on the Consolidated Balance Sheets with the realized and
unrealized holding gains and losses related to these investments, as well as the
offsetting compensation expense, recorded in operating income.

NOTE 12: STOCK COMPENSATION PLANS

The Company maintains several stock-based compensation plans relating to stock
options and restricted stock awards.

Pro forma information regarding net income and earnings per share, as required
by Statement No. 123 "Accounting for Stock-Based Compensation," has been
determined as if the Company had accounted for its employee stock options under
the fair value method.

The fair value of the stock options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average assump-
tions for 2004, 2003 and 2002:

<TABLE>
<CAPTION>
                        YEAR ENDED        Year ended      Year ended
                       SEPTEMBER 25,     September 27,   September 28,
                           2004              2003            2002
                       -------------     -------------   -------------
<S>                    <C>               <C>             <C>
Risk free rate
  of interest               5.4%              5.3%           4.4%
Dividend yield              1.5%              0.0%           0.0%
Volatility factor            24%               41%            32%
Expected life of
  option (years)            5.3               5.2            4.7
                            ===               ===            ===
</TABLE>

The weighted average fair value of options granted was $8.59 in 2004, $9.23 in
2003 and $8.82 in 2002.

ADVO - 38

<PAGE>



                                      Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                 YEAR ENDED      Year ended      Year ended
(In thousands,                  SEPTEMBER 25,   September 27,   September 28,
except per share data)              2004            2003            2002
----------------------          -------------   -------------   -------------
<S>                             <C>             <C>             <C>
Net income, as reported           $   48,724     $   49,544     $   42,008

Deduct: Total stock-
  based compensation
  expense determined
  under fair value based
  method for all awards,
  net of related tax
  effects                              3,595          4,094          4,640
                                  ----------     ----------     ----------
Pro forma net income              $   45,129     $   45,450     $   37,368
                                  ==========     ==========     ==========
Earnings per share:
Basic - as reported               $     1.61     $     1.67     $     1.40
Basic - pro forma                 $     1.49     $     1.53     $     1.25
                                  ==========     ==========     ==========

Diluted - as reported             $     1.59     $     1.64     $     1.38
Diluted - pro forma               $     1.48     $     1.51     $     1.24
                                  ==========     ==========     ==========
</TABLE>

For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 4 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.

STOCK OPTIONS The Company's 1998 Incentive Compensation Plan (the "1998 Plan")
allows a Committee appointed by the Board of Directors to grant both cash and
equity awards including stock options, stock appreciation rights, restricted
stock, restricted stock units and other stock-based awards, as deemed
appropriate, to Directors and employees of the Company. The 1998 Plan provides
for the granting of both incentive and non-qualified stock options. Currently,
the Company has only granted non-qualified stock options that are generally
exercisable 25% each year, cumulatively, beginning one year from the date of
grant. The terms of the options may not exceed ten years and the option price
shall not be less than the fair market value of the common stock on the date of
grant. As of September 25, 2004, there were 1.2 million shares available for
future grant under the 1998 Plan.

The exercise price of options and the required tax withholdings under the 1998
Plan may be paid in either cash or in shares of the Company's common stock. In a
stock-for-stock exercise the employee tenders mature shares (held for 6 months
or more) to the Company for a value equal to the fair market price of the common
stock to pay for the exercise price of the options. Rather than accepting those
shares and issuing a new certificate for the number of options exercised, the
Company allows the employee to retain the shares and issues a certificate for
the net shares. The 1998 Plan also allows employees to withhold shares from the
option exercise to meet required tax withholdings. The Company accounts for
stock-for-stock exercises as fixed awards.

The 1998 Plan contains a reload feature for all options granted prior to June
30, 2002, which allows employees exercising options through a stock-for-stock
exercise using mature shares, to be granted a new option (reload option) equal
to the number of shares of common stock used to satisfy both the exercise
price of the option and the tax withholding requirements. The reload options
granted have an exercise price equal to the fair market value of the common
stock on the grant date and vest one year from the grant date. The reload
options retain the expiration date of the original option. The reload feature is
not available for options granted after June 30, 2002 since the options granted
subsequent to this date do not contain the reload feature in the original terms
of the award. The Company accounts for options with the reload feature as fixed
awards.

Information with respect to the Company's stock option plans is summarized
below:

<TABLE>
<CAPTION>
                                                        Weighted
                                                         Average
                                        Shares        Exercise Price
                                        ------        --------------
<S>                                    <C>            <C>
Outstanding at September 29, 2001       2,916,064        $19.403
Granted                                   813,855         25.625
Cancelled                                (112,683)        21.541
Exercised                                (608,121)        15.597
                                       ----------        -------

Outstanding at September 28, 2002       3,009,115         21.775
Granted                                   578,025         22.926
Cancelled                                (201,784)        23.427
Exercised                                (219,436)        17.718
                                       ----------        -------

Outstanding at September 27, 2003       3,165,920         22.161
Granted                                   669,759         30.993
Cancelled                                (257,568)        27.663
Exercised                              (1,146,463)        17.916
                                       ----------        -------

OUTSTANDING AT SEPTEMBER 25, 2004       2,431,648        $26.012
                                       ==========        =======
</TABLE>

                                                                       ADVO - 39

<PAGE>



Notes to Consolidated Financial Statements

                              OPTIONS OUTSTANDING

<TABLE>
<CAPTION>
                            OUTSTANDING        WEIGHTED
                               AS OF            AVERAGE           WEIGHTED
                            SEPTEMBER 25,      REMAINING           AVERAGE
RANGE OF EXERCISE PRICES        2004        CONTRACTUAL LIFE    EXERCISE PRICE
------------------------    -------------   ----------------    --------------
<S>                         <C>             <C>                 <C>
$ 7.25 - $22.17                257,539           4.9              $ 16.192
 22.48 -  24.38                436,850           8.2                22.605
 24.67 -  25.80                504,175           6.6                25.573
 26.15 -  27.00                320,605           6.1                26.973
 27.33 -  30.60                306,377           5.3                28.856
 30.70 -  33.71                606,102           9.1                31.060
                             ---------           ---              --------
                             2,431,648           7.1              $ 26.012
                             =========           ===              ========
</TABLE>

                              OPTIONS EXERCISABLE

<TABLE>
<CAPTION>
                            EXERCISABLE AS OF            WEIGHTED
                              SEPTEMBER 25,              AVERAGE
RANGE OF EXERCISE PRICES          2004                EXERCISE PRICE
------------------------    -----------------         --------------
<S>                         <C>                       <C>
$ 7.25 - $22.17                235,039                $   15.804
 22.48 -  24.38                103,845                    22.817
 24.67 -  25.80                250,186                    25.376
 26.15 -  27.00                218,105                    26.961
 27.33 -  30.60                246,453                    28.663
 30.70 -  33.71                    750                    30.820
                             ---------                ----------
                             1,054,378                $   24.090
                             =========                ==========
</TABLE>

RESTRICTED STOCK The Company maintains the 1990 Non-Employee Directors'
Restricted Stock Plan ("1990 Non-Employee Plan"), which provides for the
granting of 187,500 shares of common stock to non-employee Directors. These
grants of restricted stock vest after one year.

The Company issued restricted stock grants of 81,826 shares in fiscal 2004,
93,000 shares in fiscal 2003 and 46,500 shares in fiscal 2002 from both the 1990
Non-Employee Plan and the 1998 Plan. The weighted average market price of the
restricted shares granted during fiscal 2004, 2003 and 2002 was $32.221, $22.592
and $25.238, respectively. The Company cancelled 24,000 restricted shares in
fiscal 2004 and cancelled no restricted shares in fiscal 2003 or fiscal 2002. At
September 25, 2004, there were 122,000 shares of outstanding restricted stock.

The market value of shares at the date of the restricted stock award in excess
of cash consideration received is charged to operations over the stock award's
restriction period. The compensation cost charged against income over the
restriction period was $1.7 million, $1.3 million and $1.3 million for the years
ended September 25, 2004, September 27, 2003 and September 28, 2002,
respectively. In addition, the Company recorded approximately $25,000 of
deferred compensation expense for restricted stock grants that vested
immediately. Unamortized deferred compensation was $1.9 million and $1.6 million
at September 25, 2004 and September 27, 2003, respectively, and is recorded in
unamortized deferred compensation within stockholders' equity.

During the first quarter of fiscal 2004, the Company granted 26,000
performance-based restricted stock units to its now former Chief Executive
Officer ("CEO"). The units vest in installments of one-third each year from the
date of grant subject to the Company achieving certain performance criteria. As
disclosed in the CEO's separation agreement, these units will continue to vest
over the two-year separation period. The former CEO is not entitled to receive
the units associated with the third year vesting since his separation agreement
ends in June 2006. The performance criteria are based on pre-established
thresholds. The units vest cumulatively, in that, if the threshold is not
met in a given year but is achieved in the subsequent fiscal year, the
cumulative units will be awarded in that subsequent year in which the thresh-
old is met.

Since on the grant date neither the fair market value on the day the units vest
nor the number of units that could ultimately be earned is known, the restricted
stock units have been deemed to be a variable award. In accordance with variable
stock compensation accounting, the estimated compensation expense, as measured
quarterly, may fluctuate based on the fair market value of the stock price and
the probability of achieving the performance criteria. No compensation expense
was recorded for the year ended September 25, 2004 since the achievement of the
performance criteria was not met. For each subsequent quarter, the Company will
re-evaluate the probability of achieving the performance criteria and record
compensation expense accordingly.

ADVO - 40

<PAGE>



                                      Notes to Consolidated Financial Statements

NOTE 13: INCOME TAXES

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                        YEAR ENDED       Year ended       Year ended
                       SEPTEMBER 25,    September 27,    September 28,
(In thousands)             2004              2003            2002
--------------         -------------    -------------    -------------
<S>                    <C>              <C>              <C>
Federal:
  Current               $   21,646      $   16,667        $   21,106
  Foreign                      197             113                --
  Deferred tax               2,329           6,369               868
                        ----------      ----------        ----------
Total Federal               24,172          23,149            21,974
                        ----------      ----------        ----------

State:
  Current                    2,643           1,340             1,993
  Foreign                      112              57                --
  Deferred tax                 481           1,319               180
                        ----------      ----------        ----------
Total State                  3,236           2,716             2,173
                        ----------      ----------        ----------
Total Provision         $   27,408      $   25,865        $   24,147
                        ==========      ==========        ==========
</TABLE>

The Company's effective income tax rate differed from the federal statutory rate
due to the following:

<TABLE>
<CAPTION>
                                  YEAR ENDED       Year ended       Year ended
                                 SEPTEMBER 25,    September 27,    September 28,
                                     2004             2003             2002
                                 -------------    -------------    -------------
<S>                              <C>              <C>              <C>
Federal statutory rate              35.0%            35.0%            35.0%
State income taxes,
  net of federal benefit             3.4              3.0              2.6
Research &
  development credit                (1.0)            (2.8)              --
Adjustment to
  tax accrual                       (1.8)            (1.2)            (1.0)
Other                                0.4              0.3             (0.1)
                                    ----             ----             ----
Effective income tax rate           36.0%            34.3%            36.5%
                                    ====             ====             ====
</TABLE>

Significant components of the Company's deferred income tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
                                        SEPTEMBER 25,    September 27,
(In thousands)                              2004             2003
--------------                          -------------    -------------
<S>                                     <C>              <C>
Deferred income tax assets:
  Deferred compensation                  $    6,824       $    5,449
  Employee benefits                           4,295            5,660
  Allowance for
    accounts receivable                       6,053            5,103
  Capital loss carryforward                   1,890               --
  Other                                       3,372            3,163
                                         ----------       ----------
  Total deferred income tax assets           22,434           19,375
                                         ----------       ----------
Deferred income tax liabilities:
  Property, plant and equipment             (32,098)         (25,999)
  Prepaid assets                               (182)            (645)
                                         ----------       ----------
Net federal and state deferred
  income tax liabilities                 $   (9,846)      $   (7,269)
                                         ==========       ==========
</TABLE>

NOTE 14: COMMITMENTS AND CONTINGENCIES

ADVO leases property and equipment under noncancellable operating lease
agreements, which expire at various dates through 2014. The leases generally
provide that the Company pays the taxes, insurance and maintenance expenses
related to the leased assets. Rental commitments at September 25, 2004 under
long-term noncancellable operating leases are as follows:

<TABLE>
<CAPTION>
(In thousands)
--------------
<S>                                         <C>
Fiscal year:
2005                                        $13,765
2006                                         10,882
2007                                          9,067
2008                                          8,212
2009                                          6,759
Thereafter                                   18,378
                                            -------
Total minimum lease payments                $67,063
                                            =======
</TABLE>

Certain of these leases contain renewal options and certain leases also provide
for cost escalation payments. Rental expense for the years ended September 25,
2004, September 27, 2003 and September 28, 2002 was approximately $20.2 million,
$20.6 million and $20.0 million, respectively.

The Company has various agreements with International Business Machines
Corporation ("IBM") Global Services to provide systems development, technical
support, a customer support center and server farm management services to the
Company. The noncancellable portions of these contracts have lapsed, allowing
the Company the option to cancel these contracts subject to termination charges
ranging from $7.1 million in fiscal 2005 to $0.3 million in fiscal 2008
depending on the year in which the cancellation becomes effective. The
agreements also provide for the Company to pay cost of living adjustments
due to inflation. In addition, the Company may receive additional credits or
charges if IBM does not meet or exceed certain baseline utilization assump-
tions and service level standards.

The Company has cancelable agreements with various paper suppliers to assure the
continuity of supply as well as supply of proper paper grades. Approximately 70%
of the Company's expected paper requirements are covered by these agreements.
The Company has negotiated prices that are tied to a published paper price
index. These arrangements expire at various dates through 2006 and bear no risk

                                                                       ADVO - 41

<PAGE>



Notes to Consolidated Financial Statements

to loss as they are all cancellable at the Company's option.

ADVO is party to various legal proceedings and claims related to its normal
business operations, including several suits in which it is a defendant. In the
opinion of management, the Company has substantial and meritorious defenses for
these claims and proceedings in which it is a defendant, and believes these
matters will be ultimately resolved without a material adverse effect on the
consolidated financial position, results of operations or liquidity of the
Company.

STATE AUDIT The Company received a state sales and use tax assessment for $4.7
million covering the period of January 1995 through October 1998. The Company
appealed the assessment since it believed the assessment and the state's
underlying position were neither supportable by the law nor consistent with
previously provided interpretative guidance from the State Comptroller's office.
During the fourth quarter of fiscal 2004, the State Comptroller's office filed
a motion to dismiss. The motion clears the period under assessment and all
subsequent periods through November 21, 2004. Prior to the motion, the Company
concluded that the state's potential for success was not probable and
accordingly had no provision for this tax exposure.

KMART CORPORATION In January 2002, Kmart Corporation filed for Chapter 11
bankruptcy protection and requested the Bankruptcy Court (the "Court") designate
the Company and several other companies to be classified under critical vendor
status. The Court approved this designation and the Company received
approximately $1.1 million, including a payment made to a subsidiary of the
Company, due from Kmart.

In February 2004, the U.S. Court of Appeals for the 7th Circuit affirmed a U.S.
District Court ruling that the order authorizing Kmart to pay critical vendors,
including the Company and its subsidiary, was invalid. As a result of the
ruling, Kmart has filed lawsuits against each critical vendor seeking
reimbursement of these payments. The Company believes that it has meritorious
defenses to the lawsuit. The range of the potential liability is $0 to
approximately $1.1 million with no amount within this range representing a
better estimate than any other amount at this time. The Company has not provided
any amount for this potential liability because the Company has deemed that a
loss is not probable and the amount of any such loss cannot be reasonably
estimated at this time.

CHOPRA, ET AL. V. ADVO, INC. The Company is the defendant in the Chopra, et al
v. ADVO, Inc. case where the plaintiffs, five former Company employees, allege
that the Company terminated them because of their national origin. On May 8,
2003, the California Superior Court for the County of Alameda entered judgement
in favor of the plaintiffs in the amount of $0.65 million, plus attorneys' fees
and simple interest of 10% until the judgement is paid. On August 25, 2004, the
Superior Court awarded plaintiff attorneys' fees of approximately $0.7 million.
The Company has filed an appeal on the award, which is pending. The Company also
filed an appeal on the main judgement in the First District Court of Appeals,
which was heard on September 13, 2004 and denied on October 13, 2004. As a
result, the Company intends to pay approximately $0.76 million, representing the
$0.65 million judgement plus interest, to the plantiffs on or about December 8,
2004. The Company has provided approximately $1.3 million at September 25, 2004
for this potential exposure because it is probable that the Company will have to
pay the settlement and the aggregate amount of the settlement can be reasonably
estimated.

NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                            YEAR ENDED       Year ended       Year ended
                           SEPTEMBER 25,    September 27,    September 28,
(In thousands)                 2004             2003             2002
--------------             -------------    -------------    -------------
<S>                        <C>              <C>              <C>
Cash paid during
the year for:
  Interest expense          $    4,216       $    7,394       $   12,487
  Income taxes                  26,759           12,993           20,941
                            ----------       ----------       ----------
    Total cash paid         $   30,975       $   20,387       $   33,428
                            ==========       ==========       ==========

Non-cash activities
during the year for:
  Deferred compensation
    plan investment
    gains (losses)          $    1,413       $    1,687       $   (1,033)
                            ==========       ==========       ==========
</TABLE>

NOTE 16: EQUITY INVESTMENTS AND RELATED PARTY TRANSACTIONS

The Company owns a 50% interest in Detroit Weekend Direct ("DWD") and New
England Direct ("NED") and accounts for these interests under the equity method.
These joint ventures are with specific metropolitan area newspapers creating
integrated print advertising solutions by combining targeted direct mail with
newspaper distribution. DWD was formed

ADVO - 42

<PAGE>


                                      Notes to Consolidated Financial Statements

in October 2001 and NED was formed in July 2001. ADVO's equity investment
balance in these joint ventures was $1.0 million and $0.9 million at September
25, 2004 and September 27, 2003, respectively.

Equity earnings (loss) in these joint ventures were $2.6 million, $1.4 million
and $(0.1) million, respectively, for the years ended September 25, 2004,
September 27, 2003 and September 28, 2002. At September 25, 2004 and September
27, 2003, the Company had a payable due to these joint ventures, recorded within
accrued other expenses, of $0.3 million and $0.8 million, respectively,
resulting from transactions in the normal course of business. During fiscal
2004, 2003 and 2002, the Company recorded revenues associated with production
of the mail packages for the joint ventures of $2.6 million, $2.3 million and
$1.2 million, respectively.

NOTE 17: RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," which was
revised in December 2003 ("FIN No. 46-R"). This new rule requires that companies
consolidate a variable interest entity if the company is subject to a majority
of the risk of loss from the variable interest entity's activities and/or is
entitled to receive a majority of the entity's residual returns. The
provisions of FIN No. 46-R were required to be applied as of the end of the
first reporting period after March 15, 2004 for those variable interest entities
in which the company holds a variable interest that it acquired on or before
January 31, 2003. The adoption of FIN No. 46- R did not have any impact on the
financial position or results of operations of the Company.

On October 13, 2004, the FASB concluded that Statement No. 123R, "Share-Based
Payment," would require the fair value of stock options to be recognized in
the financial statements as compensation expense. The proposed requirements in
the exposure draft would be effective for the Company's fourth quarter of fiscal
2005. The pro-forma impact of stock option expensing is calculated as required
under FASB Statement No. 123, "Accounting for Stock-Based Compensation" and is
disclosed in Note 12 of these financial statements. However, the actual impact
to our financial statements upon adoption of the proposed standard may differ
from the pro-forma information included in Note 12 due to differences in the
option-pricing models used, estimates and assumptions, and the options to be
included in the calculation upon adoption. The Company will monitor the status
of the proposed standard and will evaluate the impact to our financial position
and results of operations when the final standard is issued, which is
tentatively scheduled by the FASB to be on or about December 15, 2004.

NOTE 18: QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
(In millions, except per share data)
FISCAL YEAR ENDED                FIRST       SECOND          THIRD         FOURTH
SEPTEMBER 25, 2004              QUARTER(1)   QUARTER        QUARTER(2)     QUARTER
------------------              ----------   -------        ----------     -------
<S>                             <C>          <C>            <C>            <C>
Revenues                         $302.4      $304.3          $318.9        $320.3
Gross profit                       81.0        80.9            87.5          80.7
Operating income                   19.8        19.0            20.7          21.6
Net income                         11.2        11.5            13.3          12.7
Basic earnings per share           0.37        0.38            0.44          0.42
Diluted earnings per share         0.37        0.38            0.43          0.41
                                   ====        ====            ====          ====
</TABLE>

<TABLE>
<CAPTION>

FISCAL YEAR ENDED                First       Second          Third         Fourth
SEPTEMBER 27, 2003              Quarter      Quarter        Quarter        Quarter
------------------              -------      -------        -------        -------
<S>                             <C>          <C>            <C>            <C>
Revenues                        $291.2       $287.1         $289.7         $295.2
Gross profit                      76.8         74.8           75.9           76.4
Operating income                  20.0         18.7           21.6           21.3
Net income                        10.9         10.9           13.6           14.1
Basic earnings per share          0.37         0.37           0.46           0.47
Diluted earnings per share        0.36         0.36           0.45           0.46
                                  ====         ====           ====           ====
</TABLE>


(1)   Includes a pretax charge of $1.4 million, or $0.03 per share, related to
      the write-off of debt issue costs associated with the debt retirement.

(2)   Includes a pretax charge of $3.9 million, or $0.08 per share, related to
      the departure of the Company's former Chief Executive Officer.

                                                                        ADVO -43

<PAGE>

Report of Independent Registered
Public Accounting Firm

TO THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS OF ADVO, INC.:

We have audited the accompanying consolidated balance sheets of ADVO, Inc. at
September 25, 2004 and September 27, 2003, and the related consolidated
statements of operations, cash flows, and changes in stockholders' equity for
each of the three years in the period ended September 25, 2004. 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 audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ADVO, Inc. at
September 25, 2004 and September 27, 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 25, 2004, in conformity with U.S. generally accepted accounting
principles.

                                                           /s/ Ernst & Young LLP

                                                               Ernst & Young LLP



October 21, 2004
Hartford, Connecticut




Report of Financial Responsibility

TO THE STOCKHOLDERS OF ADVO, INC.:

The management of ADVO, Inc. is responsible for the integrity and objectivity of
the consolidated financial statements and other financial information presented
in this report. These statements have been prepared in accordance with generally
accepted accounting principles and necessarily include amounts based on
judgements and estimates by management.

ADVO maintains internal accounting control policies and related procedures
designed to provide reasonable assurance that assets are safeguarded, that
transactions are executed in accordance with management's authorization and
properly recorded, and that accounting records may be relied upon for the prepa-
ration of reliable published annual and interim financial statements and other
financial information. The design, monitoring, and revision of internal
accounting control systems involve, among other things, management's judgement
with respect to the relative cost and expected benefits of specific control
measures. The Company also maintains an internal auditing function which
evaluates and reports on the adequacy and effectiveness of internal accounting
controls and policies and procedures.

The Company's consolidated financial statements have been audited by independent
auditors who have expressed their opinion with respect to the fairness of these
statements.

The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with ADVO's management, internal auditors and
independent auditors to review matters relating to the quality of financial
reporting and internal accounting controls. Both the internal auditors and the
independent auditors have unrestricted access to the Committee.

/s/ S. Scott Harding

S. Scott Harding
Chief Executive Officer

/s/ Donald E. McCombs

Donald E. McCombs
Executive Vice President, President - Operations
Group and Acting Chief Financial Officer

/s/ John D. Speridakos

John D. Speridakos
Vice President and Controller

October 21, 2004

ADVO - 44