
Alan> 2.  We can also analyze to whom the Lord is addressing: "Marvel
Alan> not that I said unto thee, Ye must be born again" (John 3:7).
Alan> Here Jesus is clearly directing his remarks to Nicodemus -- a
Alan> ruler of the Jews (not a child).

Yes, but Jesus also made a very general and doctrinal statement
in the same conversation:

"Flesh gives birth to flesh, but the Spirit gives birth to spirit."
(John 3:6)

Clearly infants are not born of the spirit.  Thus, without baptism
they are unspiritual.  They are not born with the image of God, but in
Adam's fallen image (cf. Gen 5:3).  They have no righteousness of
their own, just as adults have no righteousness of their own.  There
is only the imputed righteousness of Christ, which believers receive
through faith.

Alan> 3.  We can ask ourselves why the Lord would even introduce the
Alan> concept of spiritual re-birth through baptism if newborn babies
Alan> weren't free from sin?

Your point is a little obscure here, but I think you are saying
that Christ used the "innocence" of newborn babes as a metaphor
for spiritual re-birth.  But this is not what he did.
If you look at the text, he did not speak
of spiritual re-birth but of spiritual birth.  We are
born of the Spirit once, not twice or several times.
We are also born of the flesh once.  The Lord makes it
clear that these are separate and different events.
It is true that other Scriptures refer to spiritual
birth as re-birth because it is a second birth
(for example, Titus 3:5).  But it is not a second
*spiritual* birth.

The only thing the two births have in common is the concept of birth,
which is used as a symbol of `new life' -- not of innocence.  When an
infant is born (or conceived) a new life is begun--but it is neither
innocent nor righteous.  Similarly when that same individual is
baptized, or perhaps when they believe prior to baptism, they begin a
new life in Christ (Romans 6:3, Colossians 2:12, Titus 3:5, Ephesians
2:5).  Then the believer has God's assurance of the forgiveness of
their sins, and of Christ's imputed righteousness.

For references, see 
	The Augsburg Confession Article II, Original Sin, 
	The Apology to the Augsburg Confession, 
		Article II, Original Sin, 
	the Formula of Concord, Article I, Original Sin, and 
	Luther's Large Catechism, Part 4, Baptism.  

For something more recent, see "Baptized into God's Family: The
Doctrine of Infant Baptism" by Andrew Das, available from Northwestern
Publishing House.  Andrew is a graduate of Concordia Lutheran
Seminary, St. Louis, and is now pursuing doctoral studies at Yale
Divinity School.