On June 26, 1999, at 0645 hours mountain standard time, an Aerostar Rally RX-7, N6426K, fell to the ground after colliding with power lines near Prescott Valley, Arizona. The hot air balloon, owned and operated by the pilot, sustained substantial damage. The commercial pilot was not injured; however, the passenger suffered serious injuries. The local area personal flight originated from Prescott Valley about 0615, and was conducted under the provisions of 14 CFR Part 91. Visual meteorological conditions prevailed and no flight plan was filed. The pilot reported that she was flying the lead balloon in a group of 22 balloons. She took off and climbed to approximately 1,000 feet agl, flying a south-to-north route. She stated that the surface winds were from the south about 3 knots. The pilot reported that she selected a landing site and descended to a lower altitude to set up her approach. A ground crewmember checked the surface winds with a windmeter and reported that they were from the south at 2.5 knots. The pilot flew over a residential area and descended again after clearing the last house. She reported that she checked carefully for power lines and poles. She vented the balloon to descend, reached for the rip line, and suddenly saw a power line outlined against the sky. She reported that the power lines arced and cut the cables that connect the balloon to the basket. The basket separated and fell about 20 feet to the ground. The power lines remained intact. The pilot reported that she had not experienced any problems with the balloon prior to impacting the power lines.