Thanks for the advice. The WIFI was something I had thought of, but I didn't think about turning it off. I have tried using the PS3 and turning off the wireless media connectivity but the lights still came on. The problem is more annoying then anything and why does it happen with one model PS3 (40GB) and not the other (60GB).
As for sending my PS3 HDD to Sony from what Ive been told Sony Australia will "due to privacy" wipe all data on the HDD. So my other option is as you said to send it to a third party repairer and hope for the best. Sony Australia charge $250 ($232US) to repair it or rather take mine and send a refurnished one back to me.