Mercurial: Two Windows developers, central repository on my PC. Should I work in the central repository or clone from it?

Is it okay to work in the central repository itself, or is that a "no-no?" Let's say on my PC I have the central repository called C:\Src. Is it okay for me to develop right in that repository itself or is that bad form?

Would it be better to clone a new directory called C:\MySrc?

C:\Src is shared on the network and the other developer of course cloned from that.

I would work on a clone of the repository, especially if you are working with multiple developers. In my typical workflow I will make frequent check-ins when I reach a certain point and want to pull down new changes from other developers then once I get to a good state for sharing I push to the central repository.

You may want to also check out using hg serve for sharing instead of using a fileshare as it may work more reliably for you.