The Inotify Bug
If you're seeing incorrect results from 'hg status' and are running a Debian or Ubuntu system, you're probably a victim of the 'inotify bug'. You can quickly check whether inotify is enabled with:
$ hg showconfig | grep inotify extensions.inotify
Debian and Ubuntu packages of Mercurial up to the 1.2 timeframe included configuration files in /etc/mercurial that incorrectly enabled many extensions, including the experimental InotifyExtension extension. Mercurial extensions are defined as functionality that should not be enabled by default, and recent versions of these packages have removed these settings.
If you can't modify the global hgrc, you can still disable the extension by putting the following in your local ~/.hgrc:
[extensions] # inotify is still experimental hgext.inotify=!
bugs
* hg status w/ inotify reports files in nested repositories as unknown