Fixed by http://hg.intevation.org/mercurial/crew/rev/34e33d50c26b
(subrepo: correctly handle update -C with modified subrepos (issue2022))

Likely related: Issue2217: http://mercurial.selenic.com/bts/issue2217 
‘subrepo “unknown revision” when updating with changes in sub’

The .hgsubstate gets merged with the update instead of merging the
subrepository changes.

The patch is not yet in main or crew, so removing testing

Hello,

I think that solve the 'update' issue in case of 'overwrite' (with -C flag).
could it be included in the next release ?

--- merge.py.old	2010-02-06 14:29:13.000000000 +0100
+++ merge.py	2010-02-06 14:31:00.000000000 +0100
@@ -184,6 +184,12 @@
             if n == m2[f] or m2[f] == a: # same or local newer
                 if m1.flags(f) != rflags:
                     act("update permissions", "e", f, rflags)
+                # in case of subrepos, update if overwrite and subrepos is
dirty
+                if overwrite and f == '.hgsubstate':
+                    for s in p1.substate:
+                        if p1.sub(s).dirty(): # if dirty, force update
+                            act("remote is newer", "g", f, rflags)
+                            break
             elif n == a: # remote newer
                 act("remote is newer", "g", f, rflags)
             else: # both changed

Just tried with Mercurial version 1.4.3, same problem.

Although main repo update doesn't trigger subrepos update, it automatically
trigger merge ! I don't think that it is a desired feature.

Test case:
hg init main
cd main
hg init nested
echo test > nested/foo
hg -R nested add nested/foo
echo nested = nested > .hgsub
hg add .hgsub
hg ci -mtest
cd ..
hg clone main main2
cd main
echo modification > nested/foo
hg ci -mmodif
cd ..
cd main2
echo modification2 > nested/foo
hg -R nested commit -mmodif2
hg pull ../main
hg update

Forgot to note that test was done on Mercurial 1.4.2 on SUSE Linux
Enterprise Server 10.2

While using subrepositories, it seems that updating the main repository
doesn't trigger the subrepositories updating process.

Test Case :
After a commit on the main repositories, change the subrepository and try to
update to the previous state.

hg init main
cd main
hg init nested
echo test > nested/foo
hg -R nested add nested/foo
echo nested = nested > .hgsub
hg add .hgsub
hg ci -mtest
echo modification > nested/foo
hg -R nested commit -mmodif
hg update
hg update -C -r 0

Nothing is updated.