Step 2: Fill the Ballon with water, tie a knot and freeze it.
Lay the balloon on a flat surface before proceeding.
Stuff the wires down the balloon till you have the LED at the desired position inside the balloon. It looks best if it is at the center IMHO.
Tie a regular knot and drag the wires all the way through the knot.
Freeze the balloon. Be careful of how you place the balloon in the freezer. If you do it the wrong way the LED might freeze in an undesirable position. Try to place it so that the LED is suspended in the center of the balloon.
I think it looks great when the balloon is not completely clear. This way the light is reflected in unpredictable directions. If you want to make clear ice you should read this.