Like most water balloon games, the Water Balloon Towel Toss is delightfully simple. All you'll need is a couple dozen water balloons and a stack of beach towels (one beach towel per two players).
Divide players into teams of two, and have them hold the lengthwise ends of a beach towel. Place a water balloon in one team's beach towel so they can swing the towel back and forth, and when they've gathered enough momentum, send the balloon flying through the air toward the other team, which tries to catch it in their beach towel without popping it. If the team fails to catch the balloon, or if the balloon breaks, the throwing team gains a point. Play continues until a team reaches 10 points.
Because the object of this game is to see how many times the water balloon can be tossed between teams without breaking, we don't want to make it too easy. For each successful catch, have teams take a step farther apart from each other [source: Love, Play and Learn].