Using the experience of the Educational Quality Inputs (EQI) Scheme in Sri Lanka the paper examines the distributional aspects of formula-based funding and efficiency of decentralized management of education funds in a developing country setting. The study finds that the EQI fund distribution is largely pro-poor. However, results show that to reduce disparities allocated funds need to be fully utilized. The findings of the study supports the hypothesis that qualified principals, adequate levels of human and physical resources and state level monitoring and support are needed for the success of education management at the school level. (Contains 5 figures and 2 tables.)