Extracted from the XServe User Guide:
System identifier button and light: The yellow system identifier light flashes if a problem is detected. You can also turn it on or off manually by pressing the button, or turn it on remotely using Server Monitor. This indicator is useful for locating a particular unit in a rack with more than one Xserve. A second system identifier button and light are on the back of the Xserve.
So, a yellow light indicates an error. You should check the Server Monitor or the /var/log tab in the Applications/Utilites/Console application.
Just so you know, this Button/Light thing, are on both sides of the Xserve.