Is Photoshop 7 compatible with OS X 10.6.8?

No. PS 7 was really an OS 9 application with just enough extra code (it asks if you want to install it) that allowed PS 7 to run in OS X. Since it requires OS 9 (Classic) you can't run it under any version of OS X after Tiger, 10.4.x. since Leopard and later don't support Classic.