Hey Svk800 - The system usually throws you a medium level question at the start and if you answer it correctly it throws in a slightly difficult question. But if you answer it incorretly it would throw in a lower level and after about 15-20 questions, the sytems gets an idea of your level
Having said that the GMAT algorithm is hard to decode but general trends show that high accuracy in the first quartile is usually followed by a increase in difficulty but the 3rd and 4th quartiles may stay at the same level. It is really complex to explain
Just go through some of the ESRs uploaded on the forum and you will be able to decode it for yourself