I havent used Photoshop 7 in a while as I mostly use Elements, but I just tried it and it's working fine. I'm running Vista and all the usual Microsoft updates are installed automatically.
You could try searching the Photoshop Support Knowledge Base:
Adobe : Photoshop Support Center - Help and Support for Photoshop
I also found this question which seems to refer to the same problem:
Adobe photoshop 7 Not Responding? - Yahoo! Answers