What version of PVCS do I need, to use the auto-merge feature of TeamSource?

You only need the basic PVCS engine. Make sure when you install TeamSource that the PVCS directory is in the path. Then check the PVCS option and TeamSource will be able to detect if you have PVCS. Once detected, Team Source will generate the IPVCS.tsx file and place this in the Delphi5\Bin directory.