Keep asking me to restart...

If you didn't see this grahpic when your computer told you to restart, then it may not be a kernel panic.

If you did see that graphic then try here > Resolving Kernel Panics

The pixels issue could be a grahpics card going bad.

Run the Apple Hardware Test

That is a kernel panic from what you've described although "pixel thing" isn't too informative. Try this:

Reinstalling Lion Without the Installer

Boot to the Recovery HD: Restart the computer and after the chime press and hold down the COMMAND and R keys until the menu screen appears. Alterhatively, restart the computer and after the chime press and hold down the OPTION key until the boot manager screen appears. Select the Recovery HD and click on the downward pointing arrow button.

Repair the Hard Drive and Permissions: Upon startup select Disk Utility from the main menu. Repair the Hard Drive and Permissions as follows.

When the recovery menu appears select Disk Utility. After DU loads select your hard drive entry (mfgr.'s ID and drive size) from the the left side list. In the DU status area you will see an entry for the S.M.A.R.T. status of the hard drive. If it does not say "Verified" then the hard drive is failing or failed. (SMART status is not reported on external Firewire or USB drives.) If the drive is "Verified" then select your OS X volume from the list on the left (sub-entry below the drive entry,) click on the First Aid tab, then click on the Repair Disk button. If DU reports any errors that have been fixed, then re-run Repair Disk until no errors are reported. If no errors are reported click on the Repair Permissions button. Wait until the operation completes, then quit DU and return to the main menu.

Reinstall Lion: Select Reinstall Lion and click on the Continue button.

Note: You can also re-download the Lion installer by opening the App Store application. Hold down the OPTION key and click on the Purchases icon in the toolbar. You should now see an active Install button to the right of your Lion purchase entry. There are situations in which this will not work. For example, if you are already booted into the Lion you originally purchased with your Apple ID or if an instance of the Lion installer is located anywhere on your computer.

If you actually have Snow Leopard then:

Reinstall OS X without erasing the drive

Do the following:

1. Repair the Hard Drive and Permissions

Boot from your Snow Leopard Installer disc. After the installer loads select your language and click on the Continue button. When the menu bar appears select Disk Utility from the Utilities menu. After DU loads select your hard drive entry (mfgr.'s ID and drive size) from the the left side list. In the DU status area you will see an entry for the S.M.A.R.T. status of the hard drive. If it does not say "Verified" then the hard drive is failing or failed. (SMART status is not reported on external Firewire or USB drives.) If the drive is "Verified" then select your OS X volume from the list on the left (sub-entry below the drive entry,) click on the First Aid tab, then click on the Repair Disk button. If DU reports any errors that have been fixed, then re-run Repair Disk until no errors are reported. If no errors are reported click on the Repair Permissions button. Wait until the operation completes, then quit DU and return to the installer.

If DU reports errors it cannot fix, then you will need Disk Warrior and/or Tech Tool Pro to repair the drive. If you don't have either of them or if neither of them can fix the drive, then you will need to reformat the drive and reinstall OS X.

2. Reinstall Snow Leopard

If the drive is OK then quit DU and return to the installer. Proceed with reinstalling OS X. Note that the Snow Leopard installer will not erase your drive or disturb your files. After installing a fresh copy of OS X the installer will move your Home folder, third-party applications, support items, and network preferences into the newly installed system.

Download and install the Combo Updater for the version you prefer from support.apple.com/downloads/.

mine did the same but now Im at intalation of disk and it sasking me which? Mac OS extended (journalad) is what you reccomend but I can't have ANYTHING erased!! Mine busted before I could copy anything externally!!! so whatever I do here, its done! what should I do? once disk is out, even after repairs to disk, etc.....it will just go back to that first posters picture with pixals and no options but to keep starting over. HELP!!

You will do better to start a new thread as this one is marked as solved and is less likely to be read - you'll likely get more help in an unsolved thread. Make sure to note what version of OS X you are running and on what model iMac.