POST ing small files problem

no, that is normal

OK done a bit more digging.

Tried uploading small >1200 bytes and larger files to your server (grabbed from your error screenshot)
small ones fail, with no response from server and the AI2 screen error. Larger files are correctly stored and responded to. (Sorry, you will have a file called housesquare.jpg you will need to remove!)

So it is not in AI2 but in your server where the problem lies...

I also see that the folder you are trying to upload to is inside your website, which is running on Wordpress. Could it be that the Wordpress php configuration and media settings files are interfering ?

(I have covered up the url in your image now)

You can also test the POST upload with curl from the command line:
(this is what it looks like on my linux system...)

curl --data-binary '@/path/to/file/test2.png' -d 'pic=test2.png' -X POST