Most arms, armor, and equipment can be found in a common level of quality. However, occasionally you will find a piece of equipment that is uncommonly special or well-made. These items generally function at a higher level than the regular tool. There are five levels of masterwork items: masterwork, greater masterwork, superior masterwork, epic, and legendary.
Masterwork items are more expensive, last longer, and function better than regular items. They also may have special properties that normal items don't. Most importantly, only masterwork items can be enchanted and made into magic items.
For more details on creating masterwork items, see Weapons, Armor, Shields, or Items.