First off, it sounds like your gymmie is doing wonderful and enjoying gymnastics. Testing TOPS or not should never value her love of gymnastics. If she loves it then she is right where she needs to be. I like the idea that you would just encourage her to continue to work hard & continue to give her all

Do they train TOPS in your gym, or did they just decide to test a couple of girls kind of last minute?
TOPS is not necessary for a gymnast to reach the elite level, however it can be beneficial. Shawn Johnson was not a TOPS girl and it seems she has done just fine for herself

. Ivan Hong's gym (GAGE) also uses their own progression system and does not use TOPS. A strong elite track coach will know the proper progressions to train to that level with or without this specific program if this is what the gymmies goal is.
She turned 10 this year then? 10 & 11 yr old tend to be the most experienced of the bunch at TOPS testing. You mentioned that she was short on a few of her phys ability skills, this could be a big reason why she would not get chosen by her gym... Most 10 & 11 yr olds that train and test for TOPS do very well in the physical abilities portion. 10 presses, 60 second handstand hold, 10 cast handstands, 20 leg lifts, strong oversplits in both legs, quick no leg rope climb, good shoulder flexibility, high vertical jump & fast sprint.
Here is a video of a 10 yr old testing the phys ability portion, this gymnast is exceptional and made it to national testing & was also invited to participate in the A camp:
YouTube - Nica Hults USA Gymnastics TOPs Testing July 15, 2007
After they test phys abilities if they hit a certain goal they may be invited to the national testing (scheduled for Oct.) where they will test phys abilities again after they do the
skills portion of TOPS (for a 10 yr old this portion is worth 70%) . The skills are not necessarily the same as a typical L8 would have (some gyms may train them, some not) & these skills vary by age.
Here is the link to the skill portion of the TOPS test with a by age explanation:
http://www.usa-gymnastics.org/Portal...7TOPskills.pdf
Have to run real quick, but hope this info helps.