did you get it to read files larger than 3mb?
that is where mine stopped
I've been able to open images that were 7MB or more. I haven't run into a hard file size limit with photo editor (that i've noticed). I have gotten errors which say "Image is too large (too many bytes)", but I stopped paying attention to file sizes after I noticed that error being triggered by a file just over 1MB when I could still open other images which were much larger.
It seems like the limitation has more to do with how much memory is needed to display the image than with the size of the file on disk (see WD2000: Error Creating New Image in Photo Editor
I'm guessing that the 32MB memory limit, like the limit on the number of open files (also 32), is not an arbitrary limitation that can be changed by a registry key or even a patch because the constraints were built into the program by how it was designed. If that's the case nothing short of a major re-write would increase those limits and that isn't going to happen.
Microsoft abandoned Photo editor when they came out with Office 2003. They replaced it with Microsoft Office Picture Manager which is not the same thing at all (file manager, not image viewer). The best advice you're likely to get from Microsoft is to use Windows Photo Viewer. It most likely handles larger images consistently. I tried it for a few days when I first got Windows 7, but I didn't like not being able to drag and drop several files at a time and it lacks the simple but powerful editing features photo editor had.
There are other options out there for both image viewers and editors. The last time I looked for a good image viewer I wasn't too impressed with the free options I tried. They all seemed to want to organize and manage image collections and not just quickly show me a picture then get out of my way.
That's why, even with it's limitations, I still use photo editor for my default image viewer. It's fast, simple, and 90% of the time it does exactly what I need it to. When I run into an image that's 'too large' and I only need to view it, I'll throw it in a new tab in my browser (which is almost always open already anyway) or if I need to do anything fancy I'll wait for photoshop to load. If it's an image I'll open often I'll use photoshop to save a copy of the image re-sized to something that photo editor can handle and keep the big file for editing.