Grade refers to the contrast or mid slope of the charateristic curve of the paper. There are discussions about this in "Post Process" by Ctein and in Photo Techniques about 2 years ago in an article by Dickerson and Zawadski.

Basically, a grade 2 paper has a mid tone slope of about 2.5 measuring Density vs Log Exposure. Higher grades have a higher slope and lower grades have a lower slope.