The role of rare earth addition on the microstructure and texture during recrystallization of cold rolled sheets is investigated by a comparative study of pure Mg, Mg-3Y and Mg1.5Nd sheets. In pure Mg, nucleation occurs mainly at shear bands which results in a texture weakening. The basal-type texture re-strengthens rapidly during grain growth of the pure Mg sheet. In contrast, in the Mg-RE alloys the weaker texture formed during early recrystallization strage is retained during further annealing due to retarded grain growth. Uni-axial tensile and Erichsen tests show that ductility and sheet formability are significantly improved by addition of rare earth elements.