A performance funding policy adopted in Tennessee in 1979, which recognizes and rewards instructional performance through the state funding formula, is described. The schedule permits institutions to earn an additional 2 percent of their educational and general appropriations based on an evaluation of institutional instructional performance on five performance variables. The variables are as follows: proportion of eligible academic programs accredited; performance of graduates on measures of general education and specialized field outcomes; evaluation of institutional programs by enrolled students, recent alumni, and community employer representatives; and peer evaluation of academic programs. An institution could earn a maximum of 20 points on each variable, for a total award of 100 points. In the fall of 1979, 23 public institutions submitted performance data on these five variables; the total performance scores ranged from a low of 0 to a high of 67. In adopting this instructional evaluation schedule, the Tennessee Higher Education Commission requested about $2 million more from the state than it would have without the adoption of that schedule. The formula recommendation was approximately 95 percent funded. The performance standards for the first four variables have been improved and strengthened and the "peer evaluation variable" has been replaced with a variable emphasizing evaluation planning. Some notes on the origins of the policy and the concerns encountered in its implementation are included. (SW)