On win98 os.path.expanuser('~') does not result in a useable directory. The MSDN recommendation for user specific directories is the use of shell.ShGetSpecialFolder, so use it. For details see: http://msdn.microsoft.com/library/default.asp?url=/library/en-us/shellcc/platform/shell/reference/functions/shgetspecialfolderpath.asp

#!/bin/sh

hg init
echo "nothing" > a
hg add a
hg commit -m ancestor -d "1000000 0"
echo "something" > a
hg commit -m branch1 -d "1000000 0"
hg co 0
echo "something else" > a
hg commit -m branch2 -d "1000000 0"
HGMERGE=merge; export HGMERGE
hg merge 1
hg id
egrep -v ">>>|<<<" a
hg status