Hey jimdil4st, I suspected the ribbon cable was the problem as the volume down button does not work the phone is booted into safe mode, whereas the volume up continues to work. However I was wrong. Here's some added details I've uncovered since my last post.
-The original owner of the phone got it wet only a few weeks after receiving it (on a 2 year contract). The phone was dried out though and continued to work fine thereafter for over a year.
-The phone then began exhibiting the current behaviour, which is volume down button not working at all, and the phone automatically booting into safe mode every single time it is powered on.
Since my last post I dissambled the phone and noticed the water indicators had indeed been triggered toward the top of the phone. As such a replaced the ribbon cable that operates the volume buttons and ear speaker.
However even after replacing the ribbon cable the problem still exists; ie volume down button does not work and phone boots into safe mode.
I reset the phone to factory default (through the settings menu) but that didn't help. So I thought I'd try flashing a new firmware (I was going to ditch the telstra firmware anyway). If I power on the phone holding the volume down button + home button then I can access the menu when it asks if I want to press volume up to launch download mode, or press volume down to cancel.
If I press volume up nothing happens. If I press volume down nothing happens. Likewise for the power button. All I can do at this point is remove the battery to restart the phone (into safe mode again).
After determining that the volume button ribbon cable was not the problem, I went looking around for anything else that seemed amiss. There is an length of antenna cable that connects to a radial connector and runs up the side of the phone. I noticed that where this cable weaves under the motherboard the plastic had worn through and a tiny section of bare metal was exposed, and no doubt would have been in direct contact with the motherboard. I taped over the exposed section but that hasn't helped. So either the exposed wire wasn;t the problem, or the exposed wire has damaged a component of the phone somewhere.
I've tried powering on the phone with different components disconnected (ie camera, volume ribbon cable, sim tray + sd card component), but that each time it still boots safe mode.
I cannot see any fried circuitry or components on the motherboard, but that's certainly not to say that something hasn't been cooked as a result of the exposed cable that contacted the motherboard.