My experience with leveled reading is that my kids get stuck in a level that is lower than what they read at home. I think DS7 got stuck in an "O", which is like third grade, because he is not able to explain text well from someone else's point of view (and it's developmentally appropriate for him to not be able to do that.) He has been stuck at a level O since kindergarten. The other advanced readers are the same. So because he is stuck on just one skill, leveled reading gives him texts that don't have a rich vocabulary, are phonetically too easy, simply stories and plots, etc. Luckily the teacher lets him bring in his own books from home and she ignores his tested level.
On reading assessments that do not ask the kids to "explain", DS does great, and is at around a 7th grade equivalent (meaning he scores the same as 7th graders). So if leveled readers are given I think it depends on the method used to assess the kids, and some methods are a lot more ridiculous than others. DS is currently reading all the Unicorn Chronicles books in class...they are about 500 pages long and on the back it says 5th grade level. He understands the books just fine. He wouldn't read them otherwise. If the teacher stuck to the "levels" she wouldn't be allowing that and he would probably be reading "Horrible Harry" or "Magic Treehouse" or something of the like.
