From what you describe it sounds like you want the list of available 'work items' for the field 'Service project' (in your case projects) to be dependant on whether the work item (project) has been set as a Service Project, using your field 'Is Service project'.
Unfortunately, I don't believe this can be done easily, however I would suggest speaking to your account manager to see if they can help. We had a requirement to do something similar in restricting which projects to show and Clarizen PS were able to sort us a solution, but this involved a full custom panel.
Alternatively, it would be straightforward enough to add a validation rule that checks whether the project selected was a Service project and display a message requesting the user to select a valid service project. Certainly not as good as restricting the options, but might work if you're not able to get a reduced list.
Hope some of that helps,
Phil