D:\Temp>rmdir /s /q lib

D:\Temp>rmdir /s /q proj

D:\Temp>rmdir /s /q projlocal

D:\Temp>hg init lib

D:\Temp>hg init proj

D:\Temp>echo main project data> proj\proj.txt

D:\Temp>echo this is a lib file> lib\lib.txt

D:\Temp>cd lib

D:\Temp\lib>hg add
adding lib.txt

D:\Temp\lib>hg commit -m "Added first lib file"

D:\Temp\lib>cd..

D:\Temp>cd proj

D:\Temp\proj>hg clone ../lib
destination directory: lib
updating to branch default
1 files updated, 0 files merged, 0 files removed, 0 files unresolved

D:\Temp\proj>echo lib=../lib > .hgsub

D:\Temp\proj>hg add
adding .hgsub
adding proj.txt

D:\Temp\proj>hg commit -m "Incorporated lib into proj"
committing subrepository lib

D:\Temp\proj>cd..

D:\Temp>hg clone proj projlocal
updating to branch default
pulling subrepo lib from D:\Temp\proj\../lib
requesting all changes
adding changesets
adding manifests
adding file changes
added 1 changesets with 1 changes to 1 files
3 files updated, 0 files merged, 0 files removed, 0 files unresolved

D:\Temp>cd projlocal\lib

D:\Temp\projlocal\lib>echo New line added from projlocal>>lib.txt

D:\Temp\projlocal\lib>cd..

D:\Temp\projlocal>hg commit -m "Added a line in lib from projlocal"
committing subrepository lib

D:\Temp\projlocal>hg push
pushing to d:\Temp\proj
pushing subrepo lib to D:\Temp\proj\../lib
searching for changes
adding changesets
adding manifests
adding file changes
added 1 changesets with 1 changes to 1 files
searching for changes
adding changesets
adding manifests
adding file changes
added 1 changesets with 1 changes to 1 files

D:\Temp\projlocal>cd ..\lib

D:\Temp\lib>hg update
1 files updated, 0 files merged, 0 files removed, 0 files unresolved

D:\Temp\lib>cd..

D:\Temp>cd proj

D:\Temp\proj>hg --debug --traceback update
  searching for copies back to rev 1
resolving manifests
 overwrite False partial False
 ancestor 3dad70aa1d0f local 3dad70aa1d0f+ remote 13536ab74c75
 .hgsubstate: remote is newer -> g
updating: .hgsubstate 1/1 files (100.00%)
getting .hgsubstate
subrepo merge 3dad70aa1d0f+ 13536ab74c75 3dad70aa1d0f+
  subrepo lib: other changed, get ../lib:829e726c428f48bffd5004ad83b971d7341ee07
2:hg
Traceback (most recent call last):
  File "mercurial\dispatch.pyc", line 58, in _runcatch
  File "mercurial\dispatch.pyc", line 601, in _dispatch
  File "mercurial\dispatch.pyc", line 406, in runcommand
  File "mercurial\dispatch.pyc", line 655, in _runcommand
  File "mercurial\dispatch.pyc", line 609, in checkargs
  File "mercurial\dispatch.pyc", line 598, in <lambda>
  File "mercurial\util.pyc", line 433, in check
  File "mercurial\commands.pyc", line 4080, in update
  File "mercurial\hg.pyc", line 381, in update
  File "mercurial\merge.pyc", line 549, in update
  File "mercurial\merge.pyc", line 353, in applyupdates
  File "mercurial\subrepo.pyc", line 118, in submerge
  File "mercurial\subrepo.pyc", line 451, in get
  File "mercurial\subrepo.pyc", line 444, in _get
  File "mercurial\subrepo.pyc", line 225, in _abssource
Abort: default path for subrepository lib not found
abort: default path for subrepository lib not found