On November 05, 2006, about 0745 mountain standard time, a Strategie Balloon Co. Amazon, registration PP-XKY, became engulfed in flames during an in-flight fire and made a subsequent hard landing near Page, Arizona. The pilot was operating the foreign registered balloon under the provisions of 14 CFR Part 91. The commercial pilot and two passengers were not injured; the two remaining passengers sustained minor injuries. The balloon sustained substantial damage. The local area flight was originating at the time of the accident. Visual meteorological conditions prevailed, and a flight plan had not been filed. In a written statement the pilot reported that after arriving at the departure point, he began a cold inflation of the balloon envelope. He performed a preflight inspection and commenced the hot inflation of the balloon. Prior to entering the basket, he gave a briefing to the three passengers. After everyone was situated, he turned on the burners until the balloon started to ascend from the launch field. As the balloon continued through 300 feet above ground level (agl), he noticed grass cuttings descending from the envelope into the basket. The pilot further stated that he then could discern a clump of grass engulfed in flames that had landed on the scoop [a portion of the envelope's throat fabric]. Shortly thereafter, the scoop fabric started to burn and the pilot pulled the vent line in an effort to descend. As the balloon was descending about 800 feet per minute (fpm), he attempted to remove the fire extinguisher from its straps, to no avail. The pilot then activated the burners to slow the descent rate. The suspension cables began to disconnect from the throat of the balloon as a result of the fire. The basket contacted the ground and two passengers were ejected. The absence of the passengers weight resulted in the balloon starting an ascent. The fire continued to burn the fabric comprising the balloon's throat and seven additional suspension cables disconnected. The pilot manipulated the balloon back to the surface and the ground crew secured the basket. The pilot could finally free the fire extinguisher from its attachment bracket and put out the fire. The pilot spoke with a police officer immediately following the accident. The pilot stated that as part of the balloon setup a large fan was used to aid in inflation of the envelope. During the inflation process, dry grass was blown inside the envelope. Shortly after departure, the grass caught fire, resulting in the balloon's envelope becoming engulfed in flames.