Very possible that PS 7 doesn't recognize larger disk. I doubt that there is a setting in the preferences for that, as large disks weren't available back then, so there would have been no reason to write code for them or even known how to write code to access larger drives. Only workaround that I can think of, which might work, is to partition your drive into a smaller drive for staving images.
Chris Cox (senior Photoshop programmer) explains it this way:
When it tries to gauge the free space it can't deal with a number as large as is returned by the operating system.
"Actually, the problem was an overflow in a number returned by the OS.
There was no way for Photoshop to get the full number, even though it could deal with the increased disk size.
The limit was 1TB exactly.
In Photoshop CS, we found other APIs to work around the limit."
Try switching disks to the smaller one.
ctrl + K and then under Performance, select C drive.
Im assuming you only use D for storage and C stores and runs all of your applications?
I have this strange issue every once in a while where my computer will default back to C which is a much smaller disk compared to my very large D drive.