Sponsored by the Tennessee Higher Education Commission (THEC), a statewide coordinating agency for higher education, the Performance Funding Project is a developmental effort now in its fourth year. The purpose of the project is to explore the feasibility of allocating some portion of state funds to public colleges and universities on a performance criterion as compared to an enrollment criterion. Grants from four foundations provide a $555,000 budget for the project. This is a statewide partnership effort involving not only the Commission but the two governing boards and ll of their campuses. Campus-based pilot projects at 11 institutions have agreed to identify goals reflective of their instructional mission, to identify performance indicators that might associate with those goals, and to acquire data on those indicators. This report describes the project's procedures and its proposed outcome of bridging the gap between public accountability and institutional autonomy. Appended are: a description of the THEC funding formula; lists of national and state advisory panel members; the pilot project contract; pilot project report abstracts; project brochure; and letters from project evaluators. (Author/LBH)