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Looks like you have an LCD crack. Reminds me of my old Palm Pilot Professional. I'll never wear a PDA using a belt clip again... I went to play basketball with buddies and emptied my pocket and removed my watch of course. But I forgot to take my Palm Pilot off my belt and whamo. Cracked the LCD when I collided with someone else.
These things happen most often when too much pressure is applied, or the screen is bent and pulled. If you twisted your iPaq, that might have done it although I don't think twisting it while in the cradle would be a large enough twist.
Might have cracked at the very bottom, which lets you use pretty much all of the screen still.
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