Last night I was in some very mild rain and noticed that the bottom row of keys on the keyboard (zxcv...) aren't working. The area is roughly the same level as the slider to open the phone or a little higher. I was testing in various ways but ended up using Sketches to see what was going on.

An image on the screen is here: http://bigrecruit.com/SketchesSnapshot.jpg
and a movie of the behavior is here: http://bigrecruit.com/iPhoneProblemScreenTouching.m4v

When I move my fingers diagonally (which shows it better) I get to a certain point in the screen and a straight line or a slightly angled line is quickly drawn. Moving back and forth in the area produces no response.

Is this a hardware or software issue?

I am of course screwed because the phone is unlocked. I could revirginize but Apple now requires a at&t account.

Would a firmware restore help?