I have a Canon EOS 5D and only use the largest format in jpg. For processing I use Elements 3 and any alterations I SaveAs in Photoshop (PSD,PDD) Therefore I can go back at any time and alter any alteration that I have made to the image without spoiling the original. Have you a particular reason for using RAW, just interested?
I don't think you can use the DNG convertor with PS7, but it's such a long time ago that I used PS7, I can't be 100% certain.
This however is academic as even PS CS2 does not work with Raw, Adobe Camera Raw is required and this certainly does not work with PS7
There are two ways to overcome your problem, one is to download rawshooter essentials, freeware and one of the best convertors around click here. Or alternatively use the Raw Convertor supplied by Minolta