The layer merging issue is tricky. Unlike other applications that use layers, we have a separation between paper and paint. When it comes to merging layers in ArtRage, in essence you're removing the paper from beneath the upper layer, and dropping the ink onto the layer beneath.
It's likely the layering system will be changed at some point to be more like Photoshop layers, because that's a bit easier to understand, and gives results more in line with what most people would expect.
Regarding the undo problem, if you can drop a note to email@example.com with a list of steps most likely to cause the undo bug to show up, we'll look into it.
AndyRage's mantra for graphics engine code:
"Sure - how hard can it be?"