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A student at a local high school received minor burns today from a 2nd Gen iPod Touch he had in his pocket that caught fire. A fellow student took a picture of it with his 3G iPhone and sent it to me. Has anyone heard of other such cases with the 2nd Gen Touch.
Apple treats anyone who suffers a safety issue (sparks, smoke, fire, etc) like royalty, he will have no trouble at all getting it replaced. Even if it were out of warranty they'd likely be generous.
I wouldn't worry about the touch. Apple will be very quick to replace it. And the data is backed up by design. I'd worry most about burns. If he didn't get injured he's very lucky and that's something to actually be quite happy about.