Reason for this change is more pretty internal file naming. Thus reserved MS Windows file names as 'con', 'prn', 'aux', 'nul', 'com1'..'com9', 'lpt1'..'lpt9' are specially decorated and paths longer then 120 chars now stored as fixed length with decoration by SHA1 hash.
New format does not affect the wire (or bundle) protocols in any way.
But local operation denied on new format repository by old Mercurial version (prior to 1.0.x). If you try you get:
For more details refer to http://mercurial.selenic.com/wiki/fncacheRepoFormat
PS. Read next new story about another new format...