This was terrifying to read, but thanks for sharing. I've been paranoid about Li-Ion battery proliferation for a while, and always worried something like this might happen to me. I never expected headphones to do this though, more like cell phones or laptops.

Do you know how any chemicals got on your arm? Was the smoke itself the likely chemical that your arm was exposed to? (Did it not affect your lungs and eyes?) Or did something drop/drip from the headphones on your body? Or is it that when you grabbed it while it was burning, some part of it that had burned also rubbed your arms? Did your ears feel chemically burnt the same way?