What does the transaction version byte mean?

Firstly, the version number is actually 4 bytes. It is a 32 bit little endian integer.

The version number is used to signal specific support for some technologies. Specifically, a transaction must be version 2 in order to use OP_CHECKSEQUENCEVERIFY. Otherwise the transaction is exactly the same as a version 1 transaction. Only transaction versions 1 and 2 are considered standard.