Please remove the unwanted software from your C drive and try to free the space.
Reinstall the software hope it will work.
Tried reinstalling to no avail, and there is no unwanted software.
As far as I'm aware Photoshop 7 doesn't recognize hard drives over 1TB hence the scratch disk error.
Contacted the seller for this version which I needed and here is his answer which worked fine. :
Hi, it's not an uncommon error. Here's a fix that usually works:
Immediately after double clicking on the Photoshop 7 shortcut press the Ctrl+Alt keys and keep holding the keys until you get the scratch disk preferences dialog which will be as soon as the program finishes initializing (see image), then choose your recovery partition or a separate drive (if you have one) as the First.
This would only work if you have a recovery partition or another smaller hard drive installed that you can use as the scratch disk.