Also try with several different people, and see if it succeeds. I have seen the popup dialog appearing despite that option being enabled, and I think it had something to do with odd DCC ports being set.
Do note the dangers of downloading automatically. Someone could quite easily send you a virus. You might wish to make use of the 'Trusted' list. Also note, mIRC is not another form of Kazaa, incase you are using it like that (purely for file trading that is).
Regards,