Falcon 1 was felled by fire

A fire on the outside of the main engine, which caused a pneumatic control system to shut down and thus aborted the mission, was the cause of Friday's launch failure.
The SpaceX site now has the full story on their website, by company founder Elon Musk, HERE.
They have good pictures of the actual fire in flight, beginning about 25 seconds in.
There's also some amazing details about the fallback, HERE, on a blog from Kwajelein Atoll. He describes the satellite as having come straight through the roof of a machine shop there.
Then again, the author of the site, Kimbal Musk (who is the brother of Elon Musk) also writes that "Please don't trust a word I say. Really. For all you know, I'm making it all up and I'm actually sitting in my basement somewhere in Boulder." (Kimbal owns a restaurant on Boulder's famed Pearl Street mall). But it doesn't sound like he's making it up, and Elon Musk confirmed in a private message that what Kimbal writes in his blog, "though unofficial, is largely correct."