Here are some good tuorials for fusing plastic bags:
http://etsylabs.blogspot.com/2007/05/long-overdue-fusing-plastic-bag.html 

http://blog.etsy.com/?p=239
http://modcottage.com/?p=109
http://www.inthewake.org/howtos/shopping-bag-plastic.html

My own tips and tricks I will add  to the above:

This is all you need to start fusing:

1. an iron
2. a hard heat-resistant surface like a wooden cutting board
3. baking parchament paper. This works better than typing paper because it's silicon coated and nothing sticks to it. It's also larger, and semi-transparent so you can see appliques have the correct placement, etc.
4. Some plastic bags! There's no shortage of those, unfortunately.

DO set the iron between polyester and rayon. One of the tutes says to ste it at cotton, that is too hot in my opinion  but perhaps irons vary.
DON'T use steam.

DO fuse both HDPE (recycle code 2) and LDPE (recycle code 4) bags

HDPE is the crinkly plastic grocery bags, LDPE is the glossy stretchy bags like Target bags, also clear bags like dry cleaner bags.
They will both fuse, to themselves and to eachother. You may need to lower the heat just a bit for LDPE.
There are some  tutorials which say you cannot use LDPE, but I have successfully fused it.
The sides of this bag are Target bags (LDPE) and the inside layers are HDPE


and  this entire bag is LDPE, I used the clear bags my newspaper is delivered in on rainy days


DO use  all kinds of plastic, not just grocery bags. Use the bags from frozen veggies, use the bag from dried pasta, bread wrappers, etc. You can use potato chip bags inside out to get a silver metallic color. This works better for small appliques than for a large piece.

DO apply the heat a little longer for thicker plastic. You also don't need as many layers when you use a thicker plastic.

DO put a clear plastic layer over any vivid colored design you want to show on the outside of the bag. Red ink especially seems to melt and bleed. If you don't use the clear layer on top, the ink will transfer to your paper like this

DO use a layer of clear plastic on top of appliques too, to seal them in.

DO reuse the parchament paper over and over, unless it gets an ink transfer from a bag. Then you will need a clean piece, because it will transfer that ink back to your next fused piece.
DON'T use waxed paper instead of parchament paper! The wax will melt and make a stinky mess.

DO use a hard ironing surface such as a wooden cutting board. A hard, smooth surface will help you get even adhesion.
DO use firm pressure when ironing, but keep the iron moving. This isn't like fusible interfacing where you have to keep the iron in place for 10 or 15 seconds- f you do that the plastic will probably burn.

DO fuse one or two new layers at a time.
DON'T try to fuse all 8 layers at once, or the middle layers will have incomplete adhesion.

If you find your fused plastic curling up too much, flip it over and fuse the next layer onto the back. This will equalize the shrinkage and flatten it out.

DO sew the finished material in the sewing machine or serger.
DO use a longer stitch length, so you won't have too many holes forming a perforated line.(prone to tearing)
DO sew small items wrong sides together.
You DON'T need to turn the seams to the inside like you do with fabric items, because the plastic does not fray. Also, it may be difficult to turn smaller items like cosmetic pouches inside out.

To see some of my fused plastic finished projects, check out this Flickr set.

To see my fused plastic items for sale, check out my Etsy store.