A shader model defines how advanced shading techniques are allowed to get on a graphics card. This prevents older graphics cards from being physically able to recognize newer shading techniques. Currently there are five versions of shader models: SM 1.1, SM 1.4, SM 2.0, SM 3.0 and SM 4.0.

Shader Models vs Shader Profiles (Windows)

http://msdn.microsoft.com/en-us/library/windows/desktop/bb509626(v=vs.85).aspx

http://en.wikipedia.org/wiki/High_Level_Shader_Language

A chart showing differences between shader models

http://msdn.microsoft.com/en-us/library/bb219840(v=vs.85).aspx

Function reference for different vertex and pixel shader versions

http://www.bit-tech.net/hardware/2005/07/25/guide_to_shaders/1