Delphi 7 does create .cfg file. That is the reason why in Delphi Distiller tool you can see a tweak "Don't create .cfg files" for example.

Some quick tests with Delphi 7:
- newly created project is saved with .cfg file
- a change to the compiler page in options is saved to .cfg file when saving project
- if you change .cfg file manually it is overwritten from .dof file right after project is opened in IDE

This is why I think .cfg files are useless for VCS. 
They are needed only if you are building project from command line. In such case one can use this utility: http://sourceforge.net/projects/dof2cfg/
Build tools (FinalBuilder for example) also can generate .cfg files automatically.