It should work with those settings. One thing you can check, is double check your brush's spacing. If it's set very small, the color can build very quickly, and may appear to be coming out full strength. You can try changing the spacing to see if that helps, or you can also set Flow to pen pressure as well, which will make a light touch have less opacity and flow, and thus build even slower.
It's also possible it's an issue with the pad's settings or driver install, so double check those as well. For example, if it's set too sensitive, even a light touch may read as a much heavier one.
Maybe you should post a screenshot of your brush settings? It's been a while since I've seen Photoshop 7. Are there any triangles with exclamation points in them in your brush settings? Do your brush settings show a brush preview and if so, does it look as though the opacity is changing in that preview.
I've attached a file that shows what I mean. In one opacity is controlled by pressure (and the brush preview reflects this) and in the other it doesn't.
Otherwise I'd do what J Wilson suggested and grab the latest drivers from Wacom. I've got an old Graphire tablet lying in work and for some reason every now and again it loses pressure and I have to unplug it and plug it back in again.