The Set Up: You are going to need a red, a white and a blue water balloon for each two person team. It is a good idea to have extras ready since water balloons sometimes break without warning. In a large, open outdoor area divide your players into teams of two. Form two long lines with teammates facing each other a yard apart( one in each of the lines). Give all of the participant in one of the lines a red, a white and a blue water balloon.
The Rules: As the game starts the player with the balloons tosses the red balloon to their teammate who attempts to catch it without breaking the balloon. If successful, they gently put the red balloon down and their teammate now tosses them the white balloon and the process repeats again with the blue balloon. If a water balloon breaks for any reason it is not replaced. When a team has broken all three balloons they are eliminated.
Once the first turn is complete, the teams that still have at least one water balloon remaining face each other and both take one step backwards. Now the player that caught the water balloons in the first round tosses the balloons back to their teammate in order, just like the first round. Continue rounds of tossing balloons and then stepping backwards to increase the distance and difficulty until just one team has an unbroken water balloon. That team wins and receives a prize.
Prank Prize Option: If you want to have a little fun with the winning team, pull aside the players as they get eliminated from the game and give them your extra water balloons. The people still in the contest will likely be too focused to even notice. When the last water balloon breaks and the winning team is celebrating give them their prize; all the losing players attacking them with the leftover water balloons!