OK, worked it out I think.
hMod uses it's own server jar file (minecraft_servero.jar, fact fans!) which obviously hasn't been updated when i updated the official server file.
I've just launched the original server jar, and it's currently converting the world to the new format. I suspect this will take FOREVER, and there is a back up if it goes wrong or whatever. That means no hMod until hMod is updated.
Alternative is we hold back and use 1.2 client and server until hMod is up and running with the new server. I don't mind which, but let me know what you'd all prefer (I think I know what that will be somehow :D).
On the plus side, the 1.3 client is /much/ faster than the 1.2 was for me - on Singleplayer I can have fancy graphics on my laptop, view set to normal and still got 40+FPS. The new lighting is pretty, too.