Will 3Tb SATA hard drives work in Xserve (Model Xserve1,1) and allow all the space to be allocated.
This may be third-hand information, from this page of specs, but:
Apple reports that this Xserve supports "any combination of SATA or SAS Apple Drive Modules: up to 2.25 TB using three 750 GB 7200 RPM SATA drive modules; or up to 900 GB using three 300 GB 15,000 RPM SAS drive modules."
If you configured it with an Apple RAID card then no, you are limited to 2.25gb drives, but if it doesn't have a RAID card then you're fine.
To identify your model, if you have a RAID card or not, look here: http://support.apple.com/kb/HT1346