Flying creatures can fly high above the battlefield out of range of all missile fire and magic from the ground. A flying high wizard may not cast spells down onto the battlefield, and neither is it possible to cast spells from the battlefield at him. However, dispels can still be cast freely, regardless of whether the caster or dispeller is on the battlefield or on high.
If two enemy wizards are both flying on high then they can cast spells against each other. However, many spells won't work in aerial combat because spells are designed to work on the ground, not in the air! The following guidelines will help you to interpret how spells work in the air. Note that these are guidelines, not a definitive list of spells that will or won't work. Further comments are included in the commentaries.
Contact Spells
Some spells work by physical contact, ie you need to be in base contact with your target or you need to be in hand-to-hand combat. As there is no such thing as a static combat engagement on high such spells cannot work. Models are never touching in the magic phase. Examples are Iyrtu's Embrace and Mace of Years.
Ranged Attacks
These are broadly defined as spells that have a range and inflict 1 or more hits, which are then resolved in a conventional way. For example, The Fate of Bjuna, Fireball, Blast, etc. These spells can be used normally and all flying high targets are assumed to be within range. Other comparable spells cause automatic wounds or a chance of damage worked out in some other way, for example The Choking Foe. These can also be worked out as normal. Some ranged attacks affect anything underneath an extended line, such as The Burning Head, or anything within a fixed distance, such as the Crown of Taidron. These spells affect one target only.
Movement Spells
Spells which move you or your target about are of no use to a flying wizard. For example, Wings of Fire, Speed of Lykos, etc. Such spells cannot be used to move you from on high to the battlefield or vice versa.
Remain in Play
In the upper air the power of magic is effuse and spells will not hold for long. Because of this spells don't remain in play in the air except for spells cast upon yourself such as Amaranth and Vengeful Hood. Other spells which last for several turns or for the duration of the battle will not do so. You can still continue to use such spells in most cases, but they only work for one magic phase. For example, the Sanguine Swords, Light of Battle and The Purple Sun of Xereus.
Templates
Spells which use templates can be used against a single target as if they were ranged attacks. Some spells of this type will normally remain in play once cast. When used in the air spells never remain in play. Examples include Flamestorm and The Purple Sun of Xereus. If a template spell normally has a chance of scattering away from its target, then make the scatter roll as normal. If the spells scatters then it automatically misses. For example, Da Krunch.
Binding or Entrapment Spells
Some spells bind the target, preventing movement, shooting and combat for several turns. Such spells will generally have no effect in the air because the magic doesn't last long enough. For example, the Crimson Bands, Writhing Worm, The Amber Trance and Abulla's Snare.