Cut off a tightly closed lily flower that has retreated below the surface of the water; use scissors or garden shears and leave about 2 inches of stem on the flower. Flowers that do not contain seeds fall over and sink with the flower open, so the ones with seeds easily can be distinguished.
Place the flower into a container filled with distilled water. Leave the flower until it opens and releases seeds. The seeds will be covered in a gelatinous membrane, which should not be removed. This can take time (from weeks to even a couple of months), so be patient. Change the water every two weeks; sooner if the water greens or becomes cloudy before this time.
Fill a 4-inch-deep growing pan with soil from the garden. Don't use potting mixes, as these won't settle in water properly. Place the lily seeds gingerly on the soil and sprinkle with sand -- just enough to keep the seed in place once they are submerged in water.
Place a large container (an aquarium will work) in a place that receives a lot of sunlight. If sunlight is a problem, use grow lights or an aquarium heater to keep the water warm (above 65 degrees).
Put the growing pan into the container and slowly fill it with water until the water is about 3 inches above the surface of the pan. The garden slow is heavy, so it will not float away. The seeds are weighted down by the sand, so they should stay in place. If the seeds begin to float, put more sand on top of them.
Transplant the water lily seedlings once they have germinated and the first pads reach the water's surface. Fill the bottom of 5-inch potting containers with compost then gingerly place the seedlings in the pots. Fill them with heavy garden soil.
Set the transplanted lilies into the container or aquarium again and cover with them 2 or 3 inches of water. Maintain this level of water in the container. These plants will be ready for transplanting into larger pots and into a pond or container water garden in about six to eight months. At this time, the water lilies have developed the roots that they are normally grown from.