That looks like hell man...but it's hard to tell what's going on from that photo. At first glance it looks like a coating's coming off in small spots, but that could just be an artifact of the image, not the reality. Can you get a closer shot?
I looks like it just needs a good cleaning with the right stuff. I assume you have done that so I would get it sent off to Leupold. They have awesome customer service and will get you fixed up either way.