Background: A strong link between phonological awareness (PA) and literacy exists, but the origins of this link are difficult to investigate, since PA skills are hard to test in young, pre-literate children, and many studies neither include such children nor report children's initial literacy levels. Aims: To examine PA and literacy in children who are attending or not attending school in rural East Africa. Sample: One hundred and eight children ages 7-10 years, with no education, or in grade 1 or 2, randomly selected from a community survey of all children in this age group. Methods: PA skill, reading, cognitive abilities, and socio-economic status were examined. Results: Implicit and explicit PA skill with small or large units is related to letter reading ability, and this effect is independent of age, schooling, and cognitive ability. Some PA tasks are performed above chance levels by children who cannot recognize single letters. Conclusions: Basic PA develops prior to the attainment of literacy, and learning to read improves PA both quantitatively and qualitatively.