Hey everyone. Some great posts on this. I didn't put up the three possibilties because I wanted to see if they were actual possibilities that were believed or just so much theological conjecture.
The first two theories are thus:
1) The passage deals with baptism as essential to salvation (speaking of immersion baptism)
2) The passage deals with the natural birth (from your mom) in that you pass through water.
I will get to the third idea. What I'm going to do is post a mini-paper that I had to write for a soteriology (doctrine of salvation) class that I took. In this paper I present the two ideas mentioned above, and side with idea #2. As Cright has posted in her post.
k, here's the (mini) paper..
John 3:5 "Jesus answered, Verily, verily, I say unto thee, Except a man be born of water and of the Spirit, he cannot enter into the kingdom of God."
According to John 3:5 is baptism necessary for Salvation? Is Jesus telling Nicodemus, and vicariously the body of all believers, that without baptism a person cannot enter into the kingdom of heaven? Some theologians have purported that this is the case while others have opposed the opinion. This scripture, I believe, supports the case of plenary interpretation. With examination using plain, literal and common usage we are able to accomplish the actual meaning of the verse.
The first point to notice is that this verse is actually an answer to a question. During this discourse between Jesus and Nicodemus we find the first instance of the doctrine of regeneration revealed. In verse 3 of this same chapter Jesus has explained the necessity of the second birth, or regeneration, in admittance to the kingdom of God. While Nicodemus was certainly a spiritual man, a member of the Sanhedrin, this concept confused him a great deal. In obvious bewilderment Nicodemus asked Jesus "How can a man be born when he is old? Can he enter the second time into his mothers womb, and be born?" It is in answer to this question that Jesus offers the explanation of verse 5. To interpret the answer accurately we ought to look first at the question. Nicodemus did not ask Jesus what steps were necessary for a second birth; rather he asked him whether or not a man could be physically born again. In answer to this question Jesus explained that aside from the natural or physical birth through water, a second spiritual birth through spirit was required. The next verse in the conversation further develops this idea "That which is born of the flesh is flesh; and that which is born of the Spirit is spirit." Again we have the division between the natural birth and the spiritual birth explained. The question that was asked did not include the steps to regeneration, and the answer likewise does not explain the necessity of belief, confession or any of the other Biblical requirements toward salvation. It is therefore not logical for baptism to figure into the answer at all. The contrast is clearly between the birth of an infant and the birth of the spirit.
We have learned that both the sinner and God have a part in regeneration. The part of the sinner is to believe and receive the salvation that is freely offered through the sacrifice of the Lord Jesus Christ. The greater and miraculous part of regeneration, however, belongs to God alone. Charles Hodge in his "Systematic Theology" defines the new birth as thus, "The soul enters upon a new state. It is introduced into a new world. A whole class of objects before unknown or unappreciated are revealed to it, and exercise upon it their appropriate influence. The "things of the Spirit" become the chief objects of desire and pursuit, and all the energies of the new-born soul are directed towards the spiritual, as distinguished from the seen and temporal."2 I find it sad and somewhat typical that man would insert himself as a part of the miraculous aspect of regeneration. To believe that without man baptizing, a sinner would be sent to hell though he had believed that God raised Jesus from the dead and confessed with his mouth that Jesus is Lord is not only contrary to such scriptures as Romans 10:9 it is prideful to say the least. Some of the same people who berate Roman Catholics for belief that the sacraments will ensure salvation practice the same trust in the belief that baptism is mandatory for salvation.
*That's the end of the paper**
Ok there is one more interpretation that I will post tomorrow (because I'm tired... real tired). Basically the third interpretation claims that neither water baptism, or birth (the baby passes through a kind of water) is the correct interpretation. It feels that the reference to water is symbolic. Just something to mull over....
BT
I must say that I don't understand this, can someone break it down for me? 
