After looking closely at everything here is one possible cause...
In the picture below is the screw blown up a bit. You can see the tip of the screw has gotten hot and has also melted. You can see the forming of a drip. The second picture shows a closeup of the burn mark on the switch mounting ear where the screw head was located. You can also see a burn mark on the screw near the underside of the head. Since the arc took place here it would indicate that the screw was not tight and this connection was a bit loose. If the switches mounting screw end was very close to the open side of a wire nut say and the switch moved it may have come in contact with a live wire causing the short. The arc would have been strongest at the closest point to an uninterrupted ground. What that means is the screw would come in contact with the live wire and taken on that potential and the arc would happen at the next point where a poor connection exists. (If there would of been no other poor connections the arc would have taken place at the screw tip) Under this condition the screw tip gets hot but doesn't arc and burn like where it did at the screw head (loose connection) from which that point on you had a good connection to a ground. You do need to further examine the switch for damage because my possible explanation is only that. one possible explanation.
(http://www.bdshost.com/X10/switch1.jpg)
(http://www.bdshost.com/X10/switch2.jpg)
If the short was outside the switch the switch would still be functional. A test... You could try hooking up the switch on a test bench to see if it even works now. You would need to be very careful doing that and be sure it is powered up on a fused circuit.
(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)----KDR
keyboardgnome I see what you mean about the screws. From the looks of the other pics you posted it looks like it failed inside. My guess is there is no use testing it. I see a burn mark on the side of the switch also. Wonder what caused that.
(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)---(http://www.bdshost.com/X10/lpup.gif)----KDR