I am playing a Khajiit character and I wanted to cast night eye. For some reason I am unable to cast it. I try equipping it just like the basic heal or flame spell (both of which I am able to cast), but the little 'L' or 'R' doesn't show up in the equipped icon and I cannot cast the spell. Does it require a certain Illusion skill level or something? If so, I think that's pretty lame for a racial ability.

If you're playing on PC, it can be used by pressing 'z' I assume. At least the other racial powers are used that way.

You don't cast them with hands. You cast them the way you use shouts.