It's some sort of loose cable. I've had the exact same thing happen to me after my ipad2 experienced a slight drop on the floor. (You can still see things on the screen, but the red pattern is still always sort of there in the background, right?) Anyways, I read about this happening to other people online (try googling it) and the solution suggested one place, was to punch the back of the iPad. I turned it around, gave it a good solid couple of whacks, and it fixed the problem, works fine now.