1. App Versions are strings, not numbers
Although most of the examples show the 'version' field in app.yaml and appengine-web.xml as a number, that's just a matter of convention. App versions can be any string that's allowed in a URL. For example, you could call your versions "live" and "dev", and they would be accessible at "live.latest.yourapp.appspot.com" and "dev.latest.yourapp.appspot.com".
2. You can have multiple versions of your app running simultaneously
As we alluded to in point 1, App Engine permits you to deploy multiple versions of your app and have them running side-by-side. All the versions share the samedatastore and memcache, but they run in separate instances and have different URLs. Your 'live' version always serves off yourapp.appspot.com as well as any domains you have mapped, but all your app's versions are accessible at version.latest.yourapp.appspot.com. Multiple versions are particularly useful for testing a new release in a production environment, on real data, before making it available to all your users.
Read more: Google App Engine Blog