you need photostory 3.1 instead of 3.0 to work in Win 7. you can get it for free at the microsoft website bundled into Digital Image Starter Edition 2006 download. It should fire up with no problem, unlike 3.0.
Don't know if this is still going to be helpful to anyone, but I downloaded Photo Story straight from Microsoft's site and it worked fine on my machine running Windows 7 Home Premium 32-bit. For those who still can't get it to work, I recommend Google's Picasa. It's a great photo management software. You can touch up photos, create montages and slideshows, and share it online easily from within the software. Give it a try!