This paper explores some of the issues involved in developing an index of functional literacy that can serve diagnostic purposes. In 1985, Secretary of Education William J. Bennett outlined principles for the National Assessment of Educational Progress (NAEP), including a principle calling for NAEP to "develop an index of functional literacy that is consistent over time and applicable to the adult population as well as to children of school age." Two major issues must be dealt with in indexing functional literacy: (1) the nature of literacy; and (2) societal demands for literacy. The issue of literacy as knowledge, skill, and information processing with the written language and other graphic tools of thought and communication underlies many of the problems in the assessment of literacy and functional literacy. Presently, neither NAEP nor any other assessment conceptualizes these different aspects of cognition and uses them for designing tests to reveal contributions of these different facets of ability to the performance of literacy tasks. The determination of the demands of society produces the major controversies surrounding the assessment of literacy. It is difficult to develop an index of functional literacy that can be used diagnostically with precision. (LMO)