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It looks like posixpath.py uses os.environ to resolve
environment variables. That makes sense. On my OS X 10.4
Python 2.4.2, HOSTNAME does not appear in os.environ. There
must be some shell gimmick to resolve it from the command line. 

I originally experienced this error on RedHat Enterprise
Linux. I'm unable to reproduce it in the interpreteer. The
process experiencing the error is launched from our client's
version of init. I suspect it just isn't getting the
HOSTNAME environment variable passed to it.

So in short, os.expandvars works as designed. I apologize
for submitting the bug without checking more throughly.