-upgradewallet Upgrade wallet to latest format
I have noticed that my wallet format is a few behind bitcoind's version number. Does this mean it is an old format? If so, why should I upgrade it?
The latest wallet.dat version is 0.6.0; wallet.dat didn't change with the 0.7 releases.
Wallet.dat version 0.4.0 introduced the wallet encryption feature.
Wallet.dat version 0.6.0 introduced 'compressed public keys', which make transactions you send smaller. Right now, that is the only reason you might want to run -upgradewallet, although even if you upgrade, you won't start using compressed public keys until you use up the 100 uncompressed keys in the wallet's keypool. You can force bitcoind to use up the old keys by running the 'getnewaddress' RPC command repeatedly.
Note that when you encrypt a previously unencrypted wallet bitcoind/Bitcoin-Qt will automatically upgrade to the latest wallet.dat version, because it has to re-write the entire wallet.dat file anyway.