My son's school uses this system and I'd have to say, it works pretty well for a system. However, it's the implementation that can be concerning!
DS's school goes until the kid is done with the test- either reaches a max level or just gives up. However, I've heard many many other schools won't go beyond one year above grade level. We've had friends whose first graders were not allowed to test beyond "J". That wouldn't have worked for my 1st grader who tested at "U" when the year started!
DS's school also used readinga-z material for their in class books. These worked out well because 1st graders with very high reading levels would still finish the guided reading in one week. I think it made differentiation easier for the teacher to have it broken down that way. Nobody was reading a chapter book for a month while others were still in BOB books.
