That does look like it may be faulty.
As Chris suggested, you could try re-loading the blue module in the handset. Another thing to try would be to press the 'reset' button on the underside of the handset. (It's the little grey button that you can best press with a ballpoint pen or a small knitting needle.) This might help if it's a software glitch.
One last thing to try would be to increase the keypad contrast setting. This is in the 'System Settings' menu. (See pages 48-49 of the v1.4 manual.) It's unlikely, but possible that this would have gotten set too low, but there is nothing to lose by trying it.
If all else fails, Lionel will fix it for you. They have a world class customer service/repair department.
Good luck.