Based on the last line of the error reading "permission denied" I'm thinking it is a permission issue. I would try again using "sudo" or root access or if you want to avoid that, check the permissions of the image "server1.example.com-1.img"
Refer to the top right hand corner of your screenshot: You're running the xserver/DE as root - you should not be doing that. Log in as a normal user and try it again...