Lipos are delievered partially charged - they are not fully charged so when you went and used it that way, you overdischarged it and the styarter box motors were pulling more amps than the partly charged lipo could supply and the lipo got hot and puffed. That size is common - it just needed to start fully charged not at 50% or less....

I'll agree that you've damaged it. Its a good sign it came back to normal size, but damaging it you have prob reduced its capacity (mah) and reduced its life (number of charge/discharge cycles). Lipo should be protected in some way from overdischarging - using them in cars and trucks the speed copntrol usually has a low voltage cutoff that prevents overdischarge. You have nothing in the starter box to prevent overdischarging. You either need to check it with a DVM/MM as you use it during the day to make sure its still over 12v (3v/cell is minimum voltage, shouldn't go below that) or buy a low voltage alarm (eBay) that plugs into the balkance wire that will alert you when the voltage starts to get low. You do have a lipo balancing charger to charge it with?

It wouldn't hurt to do a little reading on lipo - you could have easily caused a fire to start in the box by the way you were treating the lipo. This is not a gell cell where you use it until its flat.

http://www.rchelicopterfun.com/rc-lipo-batteries.html