To setup Mercurial-FogBugz integration, start by logging into FogBugz as an administrator and going to Admin | Source Control. Click Create New Repository. In the resulting dialog, select Mercurial as the type and click Next.
In the resulting dialog, download the Python script and place it anywhere that's visible to the Mercurial server process. It should not be in your hgext directory.
To enable the script, edit the .hg/hgrc file in your repository by adding the following lines:
[hooks]
changegroup = python:/path/to/fogbugz.py:hook
You will then need to configure the FogBugz extension so that it knows where to locate your FogBugz install. Simply add the following lines, edited appropriately, into your .hg/hgrc file:
[fogbugz]
host=http://full/path/to/fogbugz
Finally, you should set your baseurl to make sure that the appropriate repository location is passed along to FogBugz. Baseurl is the web URL to where the "hg serve" web server is running for the provided repository.
[web]
baseurl=http://url/of/your/repo
Assuming you supplied the right value for baseurl in your hgrc file, FogBugz will automatically link to logs and diffs in Mercurial. If you do not have hg serve running, then although FogBugz will record changesets, the links back from FogBugz will not point anywhere meaningful.