Client knows what version its up to

Is there somewhere on the client computer where it stores what versions have previously been downloaded?

The version number is stored in the client.wyc file. Also, stored in the client.wyc file is a list of files, folders, and registry to rollback upon uninstallation of your app. That is, new files/folders/registry/etc. that have been installed since the first installation.

You should call "wyUpdate.exe /uninstall" from your uninstaller to remove all the new things added.