I had simililar problems with much headscratching as the result.
I found that whenever I tried to create a boot image with System Image Utility (SIU) using an image file of my existing system as the source SIU would fail with the annoying "No space left on device" message everytime. I did a little investigating and found that SIU always created a 400 MB disk image file to copy to. So the error message was correct as my source was way over 4 GB.
I checked the manual and found the embarrasingly simple solution. It's not mentioned directly, rather it is stated that when you want to create an boot image from an existing system you should boot the machine containing the desired system on disk from an alternate source and the run SIU on that machine. The "trick" is that you're running SIU with the existing system mounted as a disk.
So I went back to my Xserve, mounted the image so it appeared on the desktop. Ran SIU and chose the mounted volume as the source instead of the image file, and hey presto!
MacBook Pro, Xserve, eMac, iMac... any Mac I can get my hands on Mac OS X (10.4.6)