On October 24, 1994, at 0830 hours Hawaii standard time, an Eurocopter AS-350D, N5771L, collided with trees after a loss of power near Kaupo, Hawaii, on the island of Maui. The helicopter was being operated as a sightseeing flight under 14 CFR Part 135 by Papillon Helicopter, Ltd., Honolulu, Hawaii. The helicopter was substantially damaged. The certificated commercial pilot and three passengers received minor injuries. The flight originated in Kahului, Maui, about 0800 hours. Visual meteorological conditions prevailed and a company visual flight rules flight plan was filed. The pilot reported he heard an explosion followed by the engine out horn while flying at 2,500 feet above mean sea level while over mountainous terrain. The engine temperature (T4) gauge was noted by the pilot at 900 degrees Celsius and the engine chip detector light illuminated. The pilot accomplished an autorotative landing in trees. The engine, a Lycoming LTS 101-600A3, was examined and partially disassembled on October 25, 1994, under the supervision of the Federal Aviation Administration. Preliminary information from the examination indicated the engine had sustained damage to the axial compressor, compressor stator vanes, and the impeller. The engine was shipped to the National Transportation Safety Board Southwest Regional Office for further examination. The engine was examined on January 10th and 11th, 1995, by the Safety Board, the Federal Aviation Administration, and the engine manufacturer at a metallurgical laboratory, Fowler, Inc., in Gardena, California. According to the examining metallurgists, portions of the impeller blades were examined microscopically revealing evidence of metal fatigue. The precise origin of the fatigue could not be determined due to smearing of the fracture surface. Pitting was evident throughout the impeller blades. Energy dispersive x ray showed the presence of sulfur and chlorine in corrosion deposits in the pits. Review of the engine logbook revealed the engine was removed from another airframe (serial No. 1186) on June 12, 1994, and installed in the accident helicopter on September 13, 1994. During the period the engine was not installed in an airframe, a 1,200-hour inspection was performed and several components were replaced. According to the records, the impeller, axial compressor, and compressor stator were not replaced. The engine logbook records subsequent inspections of the engine on October 6th and 11th, 1994. On October 6, 1994, a 100-hour inspection was performed, and on October 11, 1994, a 100/300-hour inspection was performed. The maintenance manual for the Lycoming LTS 101 engine lists a visual inspection of the compressor section every 100 hours. The inspection details removal of the upper inlet scroll which houses the compressor and inspecting for foreign object damage and cracks. The maintenance manual also prescribes a daily compressor water rinse to remove salt deposits, followed by inspecting the compressor for cleanliness.