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The purpose of the Commonwealth Literacy and Numeracy Programme is to improve the literacy and numeracy outcomes for educationally disadvantaged students. This report outlines the three principles that should underpin resource allocation in this program. These are: (1) equity: making sure resources are targeted to those students in greatest need; (2) effectiveness: making sure that resources are used to support the introduction of effective approaches; and (3) efficiency: making sure that resources are not used up in administrative processes. The report begins by reviewing the Australian and overseas practice relating to special purpose programs in literacy and evaluates some possibilities for using funding methods to target resources on program purposes. It then outlines the context and program background, describes current Australian practice in allocating funds and discusses the indicators that are used in these allocations and the processes through which they are used. The paper also considers the ways in which funding and outcomes are linked in England and the United States and the use of outcome measures in Australian schools. Principles and approaches to funding are then discussed including some of the issues involved in outcomes and funding. Results of the analyses are presented to show the extent to which outcome measures and social indicators are correlated. In the concluding section, the report considers some ways in which outcome measures may be used as a basis for improving students' skills in the foundation areas of literacy and numeracy.