The relationship between literacy, welfare, and work was examined in an exploratory study that included a literature review and focus group interviews with a total of 17 literacy instructors and 10 literacy students from two locations in Manitoba: Winnipeg and Brandon with the rural area surrounding it. Particular attention was paid to the connection between illiteracy and unemployment, poverty and other barriers to education and employment, the lack of "real jobs," and the impact of welfare reforms on the literacy community. The study underscored the importance of literacy education in achieving employment and alleviating poverty and the numerous barriers faced by students moving from welfare to work. The relationship between education and work was determined to be very complex. It was concluded that literacy students and instructors need more information on welfare legislation and the labor market and better support services and that the current climate of welfare reform requires more dialogue, flexibility, and student input in decision making. (Appended are 22 recommended resources for teaching literacy and employability and the focus group discussion guides used with the literacy instructors and students. The report contains 53 references. Addresses and phone numbers of six Canadian literacy-related organizations conclude the document.) (MN)