the 2 stage ISO works by copying the "big" ISO into a ramdisk and then booting from this ramdisk. I do not know the actual size of this ramdisk, but I tried to boot a plain Windows 7 ISO (3.4GB) and it failed as well.
Booting your 4GB image on a 4GB of memory machine will be almost next to impossible using this method.
I guess making the ramdisk size modular through the ISO Builder is probably a good idea.
I hope this helps a bit.