This seems very odd, is it not even merging the libraries supplied with Basic4ppc?
The rules for merging are pretty simple. The compiler looks at every component added to either the desktop or device depending upon the type of compilation. If the component has a ".dll" extension it removes that and adds a ".cs" extension. It then does a FileExists check for the *.cs file in the \...\Basic4ppc\Libraries folder and if it exists it adds it as a source file to the compilation so merging it, otherwise it adds a reference to the dll in the project folder to the compilation and marks that library as not merged. After compilation it displays those libraries marked not merged as requiring distribution.
The Libraries folder is obtained by finding the folder from which Basic4ppc was started and adding "\Libraries" to it. The contents of the \...\Basic4ppc\Tzor folder are required for compilation and that folder is located in the same way. If compilation succeeds without error then it must have found the Tzor folder, and by implication should also have found the Libraries folder. Assuming the relevant cs files were present in the Libraries folder I don't see how they would not be merged.
Maybe working through the above description of the process will help.