The "grade" of a spell acts as a modifier to your effective level, for casting purposes. There are four grades to each catagory (Apprentice, Adept, and Master) but not all of them are in the game yet. If you have the Apprentice 1 version in your Book, you can scribe any better versions you acquire. There are no level prerequisites for upgrades.
Apprentice I = level-1 (automatic)
Apprentice II = baseline (storebought)
Apprentice III = level+1 (crafted from common harvests)
Apprentice IV = level+2 (not yet in game. Quested?)
Adept I = level+3 (uncommon drop)
Adept II = level+4 (not yet in game. Harder quest?)
Adept III = level+5 (crafted from rare harvests, recipes are in uncommon dropped books)
Adept IV = level+6 (not yet in game. Long, difficult quest?)
Master I = level+7 (rare drop or character advancement choice)
Master II = level+8 (not yet in game. Very hard and insanely long quest?)
Master III = level+9 (crafted from very rare drops, recipes are in rare dropped books)
Master IV = level+10 (ultra-rare drop. Artifact rarity of around one per server. Not hard-limited to just one in existence, but don't expect to ever own one of these)
So, using a Master I version, you cast that spell as if you were seven levels higher than you really are. The devs balanced the game around the assumption that everyone would have App.3 spells. If you're using better, that's just gravy. Do not expect to upgrade ALL of your spells to Adepts or Masters. If you get even half of them to Adept or Master levels, you're doing very well.
Edited, Mon Nov 15 17:07:16 2004 by Pelendril