IPhone keeps dying, not turning on, hot near ear speaker, red light glowing

Question

After having used the iPhone 4 without problems since its release last month, I am now experiencing a bug since I've installed iOS 4.0.1. The symptoms are:
1. I can see a dim red light above the ear speaker after turning on the phone and even for a while (many seconds if not minutes) after locking it. I suspect that this red light is related to the proximity sensor.
2. The proximity sensor is not working any more, i.e. when I make a phone call and hold the phone to my head, the display stays on and the pad keeps sensing touches.
3. For the second time within two days, the phone doesn't turn on any more, i.e. it remains black on the screen, does not appear on USB (i.e. not seen in iTunes nor in System Profiler), and doesn't even respond to a hard reset (holding home and lock buttons for about 10 seconds), while the aforementioned red light keeps glowing, and the area there getting warm.
So far, the only way to get the phone back to being operational is to get it into DFU mode (which involves a more complex set of pressing buttons) and then restore it from a backup. Unfortunately, when I do this I lose all the pictures I've made since the last backup (already lost a few this way).
It appears that this problem is related to a wrongdoing of the proximity sensory unit. Funny though, that I had never any problems before the 4.0.1 update, whereas this update was supposed to fix a proximity sensor issue, wasn't it? For me, this update appears to rather have broken it.
I'll see that I can have this phone replaced by Apple soon, just though I'd record this odd behavior in case others see this happening, too.
If you have the same issue, please mention if it started only after the 4.0.1 update for you, too.

Answer 1

Devinh wrote:
That little red light means the phone has water damage, did you drop it in water or something?
Um not, there isn't a "light" for water sensors, they are stickers that just change color from white to red/pink. No electricity about them. One in doc, one in headphone jack (not under earpiece).
He is seeing a sensor (it doesn't turn on and glow, just reflecting light and has always been there).