To bake something in a water bath you simply put the baking pan containing the product to be baked inside another larger baking pan, and fill it with hot water.  This produces a more even and gentle heat.

There are a number of things you are going to want to bake in a water bath.  This is to give them a gentle and more even heat, which will produce a more even texture in the finished product.  Things with eggs in them, like egg custards and quiches benefit greatly from being cooked in a water bath.  The even heat allows egg based dishes like these to develop a smooth, creamy texture.  Without a water bath egg based dishes are likely to come out with the texture of an old plastic sponge. 

Cheese cake is another good candidate for a water bath.  Be warned however.  If you are baking it in a spring-form pan, you must wrap the pan in aluminum foil to prevent water from seeping into the pan and rendering the crust soggy. I also use a water bath for my meat loaf, Pâtés and Terrines.  Not only does it produce a smoother

and more even texture, but it makes clean up a lot easier.  Any fat that drips out of the pan goes into the water below instead of sticking to the stove or drip pan.