When the conduit finds that your desktop text file and your device text base have both been changed since the last sync it will call GNU diff3 program to merge them against the last known version of your texts.
Why diff3? Its simple to use, has been around for quite a while, it does a very good job and its GNU! The current version of the conduit calls it externally, future versions might include diff3's code inside the conduit's dll, to reduce the package size and installation.
The installer will install diff3 binaries from cygwin package. You can choose to override the diff3 binary that the conduit uses from its configuration screen. If you have cygwin installed in your computer you can point it to the diff3 program in your cygwin's bin directory and then delete cygwin's dll's and diff's binaries from the conduit installation directory, but that will only save you 1mb approximately, so if you have space just leave diff3 binaries alone. The configuration options is there in case you want to use a newer version of diff3, because of bug fixes, or better merging capabilities.
You should check diff3's homepage:
You will find a manual and its sources there. If you are interested in its precompiled binary version for windows check:
Diff3 relies on three files to merge changes, your text base, your text file and a previous version of your text saved by the conduit in a work directory. If, for some strange reason, the previous version is not found then diff3 will issue an error. You will have to merge the changes manually and then delete, either your text file, or your text base. On the next HotSync you text will be upload or downloaded and thing will work again.
Conflicts might arise when merging texts. Diff3 will place conflicting text lines into your text and will enclose them in marking blocks. You will find the lines from the original file, your text file and your text base. You can then edit the conflicting lines manually, either on you PDA, or your desktop and sync again, at any latter time. Its recommended to resolve conflicts as soon as possible, nested conflicts tend to make the text hard to fix.
Check diff3's manual at its home page. You will find a more complete explanation on conflicts there.