What you need

Aluminum foil (for the basket)
Birthday candles (for the fuel)
Scissors
Ultra-thin garbage bag (like those lining office trash cans and those that dry cleaners use*)
plastic straws (for the frame)
Clear tape
Lighter
Adult supervision and common sense
Plenty of indoor space
String (if flying your balloon in a space where it can travel beyond your reach

What You Do:

Cut a 4 x 4" square of aluminum foil. This will be your "basket."
Use the lighter to melt wax from the bottom end of the candle so it forms a pool about 1" in from the corner of the aluminum foil.
Before the wax hardens, press the end of the candle into the melted wax and hold it in place until the candle stands upright on its own. It may take a few tries.
Repeat with the remaining candles, placing them 1" in from the other three corners. Be gentle with the baskets, as too mush jostling will dislodge the candles. If this does happen, simply melt more wax and secure the candle in place again.
Fold the edge of the aluminum foil in 1/4 to 1/2 inch, forming a 'wall' to contain the wax as it burns, so it won't drip outside the basket.
Measure the width of your bag's opening and determine how long your straw frame should be. We simply estimated and used trial and error until our frame fit snugly inside the bag's opening.
If using flexible straws, cut off the bendable part so only the straight section remains.
You'll need to fasten the straws into two pieces of identical length for the frame. Each of ours had three straws connected together.
To connect the straws, cut a small slit (about 1/4 inch) at the bottom of one straw then insert another straw into the cut end of the first. The slit will make the connection stronger, but secure it with tape for added rigidity, using as little tape as possible.
Repeat for the second half of your frame.
Find the middle of your straws and tape them together in an "X," again using as little tape as possible.
Place the "X" frame snugly inside the bag's opening. Using as little tape as necessary, secure it in place.
Staggering the straw frame and the candles (so the candles aren't directly above the straws), tape the basket onto the frame with the candle wicks pointing up into the envelope.
If you're flying your balloon in an area where it can travel beyond your reach, tie string to the basket, so you can harness it during its flight.
Take your hot air balloon to an open, mostly empty room to fly it. (You may try it outside, but even days that don't seem windy usually have too much breeze for a balloon like this to fly.) We flew ours in our office lobby.
Have an adult help you launch the balloon. Have one person hold the closed end of the bag up and away from the basket while the other lights the candles. A lighter with a long stem, like an Aim 'n Flame, works best. Continue holding the bag until it fills with air and stands on its own.
After a minute or so, it should lift off the ground.

How to make a mini hot air balloon