If you want something more than the standard white flash from the LED on your iPhone 4, sure you could take it apart and replace it with a new colored LED or cover it with colored material, but why would you want to do all that when you can do something a lot cheaper and A LOT CHEAPER!
This video will show you the simplest way to change the LED color on your iPhone device. Just go to Staples, or any other office supply store, and pick up a few things, like some rectangular Post-it Notes. Actually, they're Post-it Flags. All you do is place the colored (and somewhat translucent) paper over the LED and enjoy the light show! If you add a case, you won't even be able to see the Post-it!