Implementing welfare reform will require difficult decisions from states about how to treat welfare clients who have problems with alcohol or other drugs (AOD). The processes by which states may respond to welfare reform are detailed in this guidebook. It is suggested that states begin with values clarification regarding welfare clients who abuse alcohol or other drugs. In recognition of both the realities of addiction and the demands of community opinion, state policy must balance the responsibility of public and private agencies to provide effective treatment with the reciprocal responsibilities of clients to comply with treatment requirements. Steps that states must take to respond to AOD problems are outlined. They include the following: clarifying values; determining the extent of AOD problems and the need for AOD services; making decisions on screening, assessment, and testing practices; determining treatment options; defining job readiness; addressing the needs of children; making decisions regarding felony drug offenders; working with other needed services; and measuring outcomes of a state's response to welfare reform. Some states' experiences and some program models are detailed here. Six appendices give information on legal requirements, estimates of welfare clients with AOD-related problems, screening and assessment issues, drug testing, patient placement, and factors affecting treatment outcomes. (RJM)