Interestingly, in ZAV 7, I have a number of folders in the virtual file system I have set to Merge, however, unlike what I believe to be the functionality from the help file, I cannot see files in the real filesystem in the same location.

Am I wrong in thinking Merge allows access to both virtualised files and real file system simultaneously?

The docs say:

If a folder is virtualized in Merge mode, files present in a virtual folder will be merged with files in the corresponding directory on the host machine, if such a directory exists. Writes to host files are passed through to the host device and writes to virtual files are redirected into the sandbox data area. Merge mode is generally used when some level of interaction with the host device is desired. For example, Merge mode might be used to allow the virtualized application to write to the host device's My Documents folder.