Falcon 1 Flight 3 took off from Omelek Island on Kwajalein in August 2008, nearly one and a half years after the second failed attempt of Falcon 1. Unlike flight 2, flight 3 carried a myriad of 4 small satellites: Trailblazer for the U.S. Air Force; the 4kg satellite NanoSail-D which had an solar sail area of 10 square metres; the breadloaf sized PRESat, which was to study yeast in a controlled environment in micro-gravity, and a orbital burial capsule for Celestis.
Flight 3 of Falcon 1 was the first to feature the all new more powerful Merlin 1C engine which would go on to power the first five Falcon 9 launches and generate a thrust of 480kN in a vacuum with a vacuum specific impulse of 304.8 seconds, and an extended body to accommodate extra propellant.
Liftoff occurred at 3:34 UTC on the 3rd of August after 2 recycle attempts, and the new Merlin 1C engine performed perfectly. Taking in a wealth of improvements that were made after the second flight, the flight went well until at stage separation, some residual fuel in the new Merlin 1C engine evaporated, providing enough transient thrust for the first stage to recontact the second stage, which prevented successful mission completion resulting in all payloads being lost. The vehicle ultimately reached a top velocity of 3.2km/s and a peak altitude of 217km. This seemingly laughable mistake was discovered in a matter of hours and deemed fixable by simply increasing the duration between first stage shutdown and stage separation - one line of code.
At this point, SpaceX was near bankruptcy, and barely had the funds to make a fourth flight. After the failure of the flight, Elon Musk walked out and addressed the company, revealing that funding had been secured for another 2 launches if needed, and that SpaceX would pick itself back up. It did.