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I am on a server that offers a package called fantastico that automatically installs the 3.06 script for me. When I downloaded Cube Cart 3.07 and did a manual install, the script works and the problem no longer exist. So it was either a problem with 3.06 cubecart or a problem with the way fantastico installs the script.
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So if you are having this problem and have installed your script via fantastico, I recommend downloading the lastest version from the cubecart website and do the install yourself.
I'm inclined to not blame Fantastico. I have installed several CC stores using Fantastico.
Out of the blue, one of them (3.0.5) has about 30 products in it with lots of pics around 30 kb.
Product 31 gave me the 2kb limit error.
Folder permissions are set to 755
Also good attempt:
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As an admin you keep the right to limit the size of files to be uploaded. Just make an appropriate change in "Max Upload Filesize:" in the "Store Settings" section.
Changing the data for this setting doesn't seem to correct the problem.
But...
Maybe a work-around!
I was able to upload a 40 kb graphic (jpg) and then select it from the CC Control panel. So far, so good.
(Looks for fingers-crossed smiley)