This is a split unit, Heil heat pump model # NHP024AKC1 outside charged with R-22. In the attic is the heat unit, International Comfort Products Model #EBX2400A.

Last night I was getting only COLD air blowing from all the upstairs registers. I checked the breakers outside and nothing had tripped. I reset the breakers anyway and had the same results. I just put a new filter in and confirmed the blower in the unit upstairs was coming on.

I removed the service panel on the unit in the attic and found the insulation on the inside of the housing was laying against the leads to the heating element, when I moved the insulation away it arced. I turned off the power and re-affixed the insulation to the housing and turned the power back on.

Still cold air and the heating element was not getting hot. I turned the unit to "Emergency" and got warm air and left it that way last night and today while I was at work. Tonight I turned the unit back to "Heat" and I'm getting warm air again. I know (or at least I'm relatively certain) that I haven't fixed anything yet. The outside unit fan comes on when the heat is on also (is that normal?).

I am at a loss as to what (or HOW) to test next to make sure the problem is resolved. Hvac1000 was a GREAT help with diag and repair on my Heil Gas Pack for downstairs heat about 3 days ago (the Draft Inducer Motor was the problem) and I could really use his expertise again.

< I edited your post for readability>

In a heat pump system, the fan outside should run until about freezing, then the system switches to electric heat only if you have it.

At an outside temperature below the balance point, where the HP produces the same amount of heat as the loss in the house, both the electric and outside unit runs at the same time.

The O/B terminal indirectly controls the reversing valve in the outside unit. If the system is in heat and below the outside temp is above the compressor cut off temp, the O/B terminal should shange ste with heat/cool changes in the stat within about 5 minutes.

The reversing valve changes the direction of refrigerent flow and they stick sometimes or they need to be replaced.

In addition, something else I noticed was that if I turn the temp setting up high enough (around 78 deg) the "AUX" light will come on and I will get warm air again also.

That's usually dependent on the temperature difference of the setpoint and room temperature (measured value) whether the aux heat kicks on.

e.g. room temp 68, setpoint 68, system off. Move to 69. Heatpum only. Move to 70 heat pump and resistance heating (depending on other variables).

p19 here: http://www.geappliances.com/products/introductions/zoneline/download/zoneline_data_manual_08.pdf is a good example.