This report assesses the income sources, amounts and relative poverty status of welfare families in the Aid to Families with Dependent Children (AFDC) program, and determines the implications of these results for federal welfare policy. Annually, about $15 billion in AFDC payments are made to needy families with children for such basics as food, shelter, clothing, and utilities. The Federal government pays about 54 percent of these costs. AFDC families are also eligible for in-kind food, health care and housing benefits. Each state sets payment standards by family size and can elect program options. Each month about 3.7 million families receive AFDC. Ninety-three percent are headed by one parent, almost always the mother. Nationally, two- to four-member AFDC families had monthly incomes, consisting mostly of welfare benefits, that averaged $819 at market value and $646 at recipients value. AFDC families' cash incomes rarely exceeded the poverty level. Nine of ten AFDC families participated in at least two other federal welfare programs. The following three factors affect individual AFDC family incomes: (1) state of residence; (2) subsidized housing; and (3) earnings. As AFDC payments become larger, benefits from the other programs become smaller. The report highlights the following matters having implications for welfare policy: (1) the extent of states' discretion in setting AFDC eligibility criteria and payment levels; (2) AFDC's interactions with other programs; (3) public housing inequalities due to limited availability; (4) validity of official poverty thresholds; and (5) valuing in-kind benefits in determining incomes. Data are presented on 20 tables and figures. Appendices describe the valuation techniques employed, discuss the data quality, and enumerate sampling errors. (BJV)