I'm not after an xserve, but I'm thinking GumTree is a good option to ebay (au) as of late, for Aussies. The xserve looks damned good tho' btw.

Yes and yes.

Yes, when I upgraded mine, I went for the OSX 10.7 first, then installed the Server app. I also put OSX 10.6 Client on another of the hard disks and then dropped Server install on top of that. It booted and ran reliably with OSX 10.6 and OSX 10.7 Client. I stuck with OSX 10.6 Server because of Intel LOM (Lights Out Management) Support and the Wiki Server was exactly what I needed.

Video cards, yes, It'll take a short and slim PCI Express 2.0 card. I dropped a spare Radeon HD 2600 in, which will play everything I would want to run on it, just fine. This also gave me DVI output. It ran just fine, no special drivers needed.
I pulled the Radeon X1300 out, even though it has it's own "mezzanine" slot, it has a mini-DVI port which I was never going to use, and the Xserve kept using that card for the main screen - it didn't seem to realise that there was no monitor attached. That also mucked up my VNC / ARD connection, it stil thoight there were 3 monitors connected (X1300 and 2 DVI ports on HD2600) even though only 1 actual monitor was connected. Once I pulled the X1300, everything was fine (it's still sitting on my desk).

Just a note, you can't install Windows or Linux, there may be a firmware patch out there to allow this, but in the end I'm not fussed, it's fast enough and has enough memory for me to run VMs with whatever OS's I want. My Mac Pro used to do this.

The ad looks like a bargain, three 15K drives, with RAID, Fibre Channel, etc. If I was local I'd buy both and strip and sell the extras from each to get all my money back.

Nice, added to my favourites.