I had read some material about the shuttles and watched several earlier launches on TV. As I watched the launch on TV I initially thought that was a odd looking booster separation. Then I noticed there was much more exhaust from the boosters than there normally is at separation. That's when I realized the external tank had disintegrated. For a short period after that realization I was hoping to see the orbiter glide out of the cloud of steam (from the external tank propellants), but of course all I saw was falling debris. I still wonder if one of the larger pieces I saw that day was the crew compartment.
I was in a computer club meeting when Challenger broke up and someone from the business school we were meeting at told us after the meeting ended (just a few
minutes after it was reported on the news).