Why is my Iphone 3Gs screen appear to be disintegrating?

Iphone 3Gs screen appears to have burn holes in it and looks like it is disintegrating in a pixelated format.  There appears to be a dark rainbowlike hole in the areas affected.  There are also small pixelated lines that run though areas of the top and bottom of the screen.  We tried turning off the phone for an extended period of time and it seemed to get better but now it the problem has persisted and gotten worse.

Whether this is due to a defect in the display or damage, there's no way to fix it without replacing the display or entire phone. 
If the phone is still under warranty or AppleCare, take it to Apple or whoever provides iPhone warranty service in your area.  If out of warranty, Apple can give you an out-of-warranty replacement (refurb) for $199 (in USA).
Another choice is to take it to a 3rd party iPhone repair center which may be able to fix it for a lot less.  If you know what you're doing, you can buy a new LCD screen and install it yourself.

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