And a walkthrough with the default repo format:

Curium:415936 straussd$ bzr init-repo
bzr: ERROR: command 'init-repository' requires argument LOCATION
Curium:415936 straussd$ bzr init-repo .
Shared repository with trees (format: pack-0.92)
Location:
  shared repository: .
Curium:415936 straussd$ bzr init old
Created a repository tree (format: pack-0.92)                                  
Using shared repository: /Users/straussd/Sandbox/415936/
Curium:415936 straussd$ cd old/
Curium:old straussd$ touch a
Curium:old straussd$ bzr add
adding a
Curium:old straussd$ bzr commit -m"a"
Committing to: /Users/straussd/Sandbox/415936/old/                             
added a
Committed revision 1.                                                          
Curium:old straussd$ touch b
Curium:old straussd$ bzr add
adding b
Curium:old straussd$ bzr commit -m"b"
Committing to: /Users/straussd/Sandbox/415936/old/                             
added b
Committed revision 2.                                                          
Curium:old straussd$ cd ..
Curium:415936 straussd$ bzr init new
Created a repository tree (format: pack-0.92)                                  
Using shared repository: /Users/straussd/Sandbox/415936/
Curium:415936 straussd$ cd new
Curium:new straussd$ bzr merge ../old/
+N  a                                                                          
+N  b
All changes applied successfully.                                              
Curium:new straussd$ bzr commit -m"Merge from old."
Committing to: /Users/straussd/Sandbox/415936/new/                             
aborting commit write group: PointlessCommit(No changes to commit)
bzr: ERROR: No changes to commit. Use --unchanged to commit anyhow.
Curium:new straussd$ bzr stat
working tree is out of date, run 'bzr update'
Curium:new straussd$ bzr up
-D  a                                                                          
-D  b
All changes applied successfully.                                              
bzr: ERROR: Reserved revision-id {null:}
Curium:new straussd$ bzr log
Curium:new straussd$ touch c
Curium:new straussd$ bzr add
adding c
Curium:new straussd$ bzr commit -m"c"
Committing to: /Users/straussd/Sandbox/415936/new/                             
deleted a
deleted b
added c
Committed revision 1.                                                          
Curium:new straussd$ bzr log
------------------------------------------------------------
revno: 1
committer: David Strauss <email address hidden>
branch nick: new
timestamp: Wed 2009-08-19 15:42:13 +0000
message:
  c
------------------------------------------------------------
revno: 0
committer: David Strauss <email address hidden>
branch nick: old
timestamp: Wed 2009-08-19 15:39:50 +0000
message:
  b
------------------------------------------------------------
revno: -1
committer: David Strauss <email address hidden>
branch nick: old
timestamp: Wed 2009-08-19 15:39:40 +0000
message:
  a
Curium:new straussd$ 
Curium:new straussd$ bzr log --include-merges
------------------------------------------------------------
revno: 3
committer: David Strauss <email address hidden>
branch nick: new
timestamp: Wed 2009-08-19 15:42:13 +0000
message:
  c
------------------------------------------------------------
revno: 2
committer: David Strauss <email address hidden>
branch nick: old
timestamp: Wed 2009-08-19 15:39:50 +0000
message:
  b
------------------------------------------------------------
revno: 1
committer: David Strauss <email address hidden>
branch nick: old
timestamp: Wed 2009-08-19 15:39:40 +0000
message:
  a
Curium:new straussd$