OH JBDad, I'm sorry you're jaded at the moment...things looked so hopeful in the beginning. But you never know what next year's teacher will be like.
As far as reading level, I didn't see my son slow up at a 3rd grade level. Now that he reads about 5th-6th grade level, I see a slowing...mostly b/c a lot of books start to get inappropriate for his age. IMHO, they should still be challenging. If she is getting every word correct when reading books in reading group it's too easy. That's at least what my teacher friend said.
And I wouldn't worry so much about levels....different teachers score differently. I would focus on cultivating a love of reading and giving your DD access to good books w/ lots of discussion about what she's reading.
