You cannot perform a merge on a binary file, or a file that stores latest version only

This error has the following cause and solution:

• VSS can only merge text files that come from a common ancestor version.  The selected file is either a binary file or is set to store only the latest version.  If it is set to store only latest version then VSS can’t determine what the ancestor file looked like and therefore can’t merge the files.

  Choose a text file that stores more than one version.