diff --git a/setup.py b/setup.py
--- a/setup.py
+++ b/setup.py
@@ -1631,7 +1631,6 @@
 for root in ('templates',):
     for curdir, dirs, files in os.walk(os.path.join('mercurial', root)):
         curdir = curdir.split(os.sep, 1)[1]
-        dirs[:] = filter(ordinarypath, dirs)
         for f in filter(ordinarypath, files):
             f = os.path.join(curdir, f)
             packagedata['mercurial'].append(f)