iPhone 3G serious LCD Display issue

I got this phone as a replacement from apple a month ago. I have not dropped it, and there is no water damage. All of a sudden on Christmas Eve, I take my phone out of my purse and my screen has these gray lines and gray blurs and you can only see part of my apps. The touchscreen works, i can call I can text i can listen to music. The display progressively got worse, I did a hard reset and nothing happened. Some screens would turn white with rainbow type colors, other gray black and white, and other apps or screens would be perfectly normal. I decided to just turn off the phone and let it rest for the night. I turn it on this morning..it reboots complete white screen and then gray with some pink and blue lines move in from the right of the screen until it takes up the whole screen. I can still text, answer calls all of these things. I called Apple talked to the tech and he walked me through yet another reset which didnt work, and then we restored the phone and that didnt work.
My question is..if it turns out to be a loose cable or something like that which is what the guy thinks..I have a 90day warranty on the phone..will it get replaced or fixed? or will I have to pay $199?
3G iPhone OS 3.1.2