On October 26, 2004, about 1640 eastern daylight time, an experimental Kitfox II, N267KF, registered to and operated by a private individual, as a Title 14 CFR Part 91 instructional flight lost engine power after takeoff and had a forced landing at the Indian River Aerodrome, Vero Beach, Florida. Visual meteorological conditions prevailed at the time and no flight plan was filed. The commercial-rated pilot-in-command/certified flight instructor (CFI) received minor injuries and the private-rated dual student received serious injuries, and the airplane incurred substantial damage. The flight was originating at the time. The CFI stated the owner, dual student of the airplane made arrangements to get checked out in the airplane. Before the accident flight, the airplane had an engine run-up and several operational checks without any discrepancies noted. The dual student performed several high speed taxi tests to become familiar with the airplane. The CFI and the dual student departed from the runway and during the initial climb, at about 250 feet above ground, the engine lost power. The CFI allowed the dual student to be in control of the airplane during the forced landing. The airplane landed straight ahead and collided with a tree. The engine on the airplane had a total time of about 2 hours since being overhauled. The FAA inspector who examined the engine stated he found no apparent external broken or missing parts. He was able to rotate the engine by hand and found it to turn freely. The spark plugs were found with normal burn indication. The cylinder bores were checked for scoring and no stress was noted. Clean, properly mixed fuel was found at the time the carburetor bowls were examined. The carburetor fuel screens were free from debris. From these observations he established the engine should have been capable of producing power.