What operating system are you using?
Photoshop 7 will display the "Scratch Disk Full" message if your drive has more than 1 TB of free space, otherwise did you check to see if your hard drive was actually full?
You can change the Scratch Disk Preferences by holding down the Ctrl+Alt keys (Cmd-Option on mac) just after starting the launch of photoshop 7. In other words, double click on the ps 7 icon to start and immediately hold down Ctrl+Alt till you get the Scratch Disk Preferences dialog