SpaceX's "smooth" CRS-1 launch came uncomfortably close to disaster

SpaceX's Falcon 9 rocket, launching the Dragon capsule on it's first commercial flight to the space station, suffered a major failure of one of it's Merlin engines around 79 seconds after launch.  The rocket was only a few seconds from the period of maximum pressure on the vehicle (max q) at the time, but the flight software was able to adjust for the engine loss and continue on.

The video below clearly shows what appears to be an explosion and then debris falling away from the vehicle at about the 1:19 mark.

SpaceX released this statement about the incident today:

Approximately one minute and 19 seconds into last night’s launch, the Falcon 9 rocket detected an anomaly on one first stage engine. Initial data suggests that one of the rocket’s nine Merlin engines, Engine 1, lost pressure suddenly and an engine shutdown command was issued immediately. We know the engine did not explode, because we continued to receive data from it. Our review indicates that the fairing that protects the engine from aerodynamic loads ruptured due to the engine pressure release, and that none of Falcon 9’s other eight engines were impacted by this event.
As designed, the flight computer then recomputed a new ascent profile in real time to ensure Dragon’s entry into orbit for subsequent rendezvous and berthing with the ISS. This was achieved, and there was no effect on Dragon or the cargo resupply mission.
Falcon 9 did exactly what it was designed to do. Like the Saturn V, which experienced engine loss on two flights, Falcon 9 is designed to handle an engine out situation and still complete its mission.