I think I just posted a reply to this in another topic but...
Noni Designs has great instructions on how to do this. I have tried her method and it worked great.
[I]Felt handles separately from bags in small lingerie bags. Then apply by hand-sewing them to the inside of the bag with a double strand of good polyester sewing thread or “cordonette” (formerly known as button hole twist). You will want to make sure that about 1.5 – 2 inches of handle is applied to the inside of the bag below the top edge in order to have a nice secure handle.
If you are applying your handle to the outside of your bag, make sure that at least an inch of the handle is sewn to the body of the bag. [/I]