We have our own custom plugins that uses WPMU DEV post indexer. Our front end reader ( http://edublogs.org/reader/ ) gives you an idea of how it works (the original concept). Most of our focus is now on the Dashboard Reader. This information gives you some insight into how the dashboard reader works with My Class – http://teacherchallenge.edublogs.org/step-11-set-up-student-blogs/
You are able to search for tags and categories across the entire network within the dashboard reader.