This is well intended, but did you do the following:

(1) Under Messages History... you did check "Automatically keep a history of my conversations"
(2) Then designate a proper folder where the conversations are to be saved.
(2) Then click the "Apply Button".

Just asking as some fail to complete all the steps completely. If not this then I have no idea as to a solution. Might try a new install of MSN Messenger 7.

Best of Luck!

Glenn