Commander Kelly was not a bit worried about the tile damage on STS-118. He said John Young, commander of STS-1 Columbia, spoke at meetings with STS-118 crew and stated that many tiles were lost on Columbia on her maiden voyage. She came home safely on her first trip out to space.
From the STS-1 Mission page:
Major systems tested successfully on first flight of Space Transportation System. Orbiter sustained tile damage on launch and from overpressure wave created by the solid rocket boosters. Subsequent modifications to the water sound suppression system eliminated the problem. A total of sixteen tiles were lost and 148 tiles were damaged.
The three inch gouge was not in a critical area such as the wing tips or the nose cone. The felt between the tiles was not burnt at all.