First you must get the Lamb Sword (the only way to get it is to build up the Wise Owl Sword).
Next you must get your WHP low, you will know it is low enough, because it will say at the bottom right corner, "The Lamb Sword got scared so it went into Wolf Mode". When it goes into that it raises it's stats.

Note: It will go back to regular mode when you do an "Upgrade" or "Repair" it.

Hint: The Lamb Sword evolves into the Atlamillia Sword which evolves into the Chronicle Sword, the 2nd best sword in the game (The Chronicle 2 Sword which you find at the end of the Demon Shaft)