Chances are, it's hardware.
Download and burn a copy of Ultimate Boot CD Insert the disk and boot your Mac by holding down the "C" key. It's a Linux OS and will boot up in text mode (not graphics intensive)
There are a number of video related tests you can run. Since it is outside of OS X, you are removing the OS from the equation.
Chances are, you are going to run across something hardware wise.
If you don't get errors reported back, it may be a connector or the display itself. If you have an external monitor, hook that up and see if the problem manifests there. If it dosen't, then you know it is something between the logic board and display.
If you do see errors, then you know for a fact it's your chip.
Don't dispair. I have used a service that will replace graphic chips on Apple logic boards and they have been quite reliable. I can give you the name privately, if you like. The cost was (give or take) about $100 including shipping.
I have personally used the above techniques and vendor with zero failures thus far.
I hope this helps.