We only moved our son to underwear after he consistently went a few weeks without wetting it.
The fact that he's still waking with a wet diaper indicates, to me, that he's not ready to stop using it yet. We have a few sets of friends whose daughters were both past 6 years old when they finally had the control/recognition not to wet each night.
Telling your child that it's something bad (when they literally may not be able to physically control it yet) may have an adverse effect on their self esteem.
Our son had an accident the other night - we have no idea why. Just happened. We didn't scold him because he's 3.5, and it happens rarely. But, we did tell him that he needs to let us know if he wakes up and needs to go to the bathroom.
Also, remember that urine is not just the byproduct of what they're drinking. It's also the byproduct of normal metabolism (food, fasting, etc).
http://www.healthychildren.org/English/ages-stages/toddle...