ON SUNDAY 1/27/85 AT APPROXIMATELY 0849 MST, A BEECH DUCHESSN1850S, ON LEASE TO THE UNIVERSITY OF NORTH DAKOTA CRASHED AFTER TAKEOFF FROM THE GRAND FORKS AIRPORT, GRAND FORKS, ND.THE STUDENT PILOT AND CERTIFIED FLIGHT INSTRUCTORE WERE NOT INJURED. TWO PASSENGERS IN THE BACK SEATS RECEIVED SERIOUS INJURIES. THERE WAS NO FLIGHT PLAN FILED AND VMC PREVAILED. THE PRELIMINARY INVESTIGATION REVEALED THAT THIS FLIGHT WAS A TRAINING FLIGHT IN A MULTI-ENGINE AIRCRAFT. THE STUDENT PILOT INITIATED THE FLIGHT ON RUNWAY 34R. AT AN ALTITUDE OF APPROXIMATELY 150 FT. ABOVE GROUND LEVEL (AGL) THE FLIGHT INSTRUCTOR SIMULATED AN ENGINE FAILURE RETARDING THE LEFT THROTTLE. THE STUDENT PILOT WAS SLOW TO REACT TO THE FAILURE AND THE AIRSPEED DROPPED BELOW VMC. THE FLIGHT INSTRUCTOR TOOK CONTROL OF THE AIRCRAFT AND ATTEMPTED TO REGAIN FLYING SPEED BY INCREASING BOTH ENGINES TO FUEL POWER. THE INSTRUCTOR WAS UNABLE TO REGAIN AIRSPEED BEFORE GROUND IMPACT.