The Performance Funding Project of the Tennessee Higher Education Commission to improve the current appropriations formula in Tennessee is discussed, and abstracts regarding pilot implementation of the project at four institutions are presented. The major project objective is to explore the feasibility of allocating some portion of state funds on a performance criterion, as compared to allocating funds solely on an enrollment criterion. It is assumed that funding will continue to be primarily based on enrollment, but that a complementary feature might be built into the formula to promote institutional diversity and improved instructional performance. During the first project year, faculties at 11 Tennessee institutions developed institutional-wide instructional goals and associated indicators for measuring performance on those goals. The second project year involved collecting data on the indicators and exploring ways in which project results might be incorporated into the allocation process. Indicator profiles are included for the following four colleges: Columbia State Community College, The University of Tennessee at Knoxville, The University of Tennessee at Martin, and The University of Tennessee at Nashville. Observations based on the pilot projects are presented. An "Evaluation Network Newsletter" article on evaluation in higher education at the departmental and program level is appended. (SW)