When I close out the fiscal year (in the network version), and it purges invoices, it seems to do it willy nilly. Of course all open invoices stay, but random other closed invoices also remain. What is the reason for this and is it normal?

If I choose to retain all invoice transactions for 2007, will it greatly hinder the performance of the system?

Soundsd like you receive items in the purchases module. This would cause the invoices to remain until you have changed the Receives into bills. If you have 'check for duplicate invoices' selected in preferences, there is a possibility that after a few years, the function of searching all of your invoices to see if the new one is a duplicate could impact performance.