It's really quite simple.
1. Australia top the rankings because of a decade long reign at the top, and look now to be regaining form after a period of loss of form (Hussey) and injuries to key players (Hayden, Lee, Clark, Symonds). They've lost just two series since 05 Ashes (one of those in India, where they've won just once in 30-odd years and recently against a rampant SA, both series played with the out of form, injured players and debutants).
2. SA are close behind because they have not lost a series since, well, since they last played Aus 3 years ago. They have beat all comers and managed to draw in India.
3. India are close behind because they are a very talented side, won in Eng, but lost in SL, have not yet managed to win away series against SA/Aus and only managed a draw @ home against SA.
See, it's all very clear. Aus and SA are two talented, evenly matched sides, hence the close series (3-3). India are very close. Seems like the ICC rankings have got it right.
England?

While India must certainly be in the mix for the top three teams, there is no way they can claim to be number one yet. They beat Australia in India but a bling man and his dog could have told you Australia were never going to win that series. The two reciprocal series in South Africa and Australia were entertaining because of the little difference between the two sides at present.

India are a top side, and they finally have a bowling lineup that can look threatening on most pitches. I'm still yet to be convinced they can win a series on pitches that won't suit them though. And there is always the lingering problem about how long Dravid, Tendulkar and Laxman will stay in the test side. I look forward to future test clashes between the three nations as they are the mosty entertaining teams to watch at the moment.

The difference between the three teams is very small and series are being won or lost on very small margins. For me, even though they've lost the recent series to Australia, South Africa lead the other two by a small margin. I would put India slightly above Australia as they finally have an attack that can bowl out sides outside India. Australia are a side under transition and might regain the top spot sooner than expected if the newcomers to the side, who did so well recently in South Africa, can maintain that level of performance over the next few years and if they can find a decent spinner. So, Saffers, India and Aussies in that order for me.

Things are complicated by the fact that SA and Aus play in home conditions that aren't that dissimilar to each other. They'll always find it easier to beat each other away, compared to India who will have a tougher job since SA/Aus conditions are so dissimilar to Indian. Which means that among the 3 countries, SA and Aus have familiarity with conditions in two countries, while India has the disadvantage of unfamiliarity in two countries. (It must be kept in mind that the last series drawn by SA in India was a result of India providing SA with a pitch more suited to the visitors than themselves in one of the tests).
Of course, this also means India are more likely to win 2 series at home compared to SA and Aus who are likely to win one against India and go 50-50 against each other. In a world that rates away wins more than home wins, India start off with a natural disavantage due to no fault of theirs. If they win even 1 away series against SA and Aus soon, they'll be #1 in my books.

Hi Trimethoprim
I was wondering whether I had gone to doctor's clinic or what looking at your name?
Coming to the point, you have said that India provided SA with a pitch that was more suited to the visitors. I would like to ask you why the hell do indians boast of a world class bowling if they cannot make the visitors out twice within 5 days in those conditions?

India are a whole lap behind Aussie and SA in the race to the title of "best test side on earth". India are flat-track bullies. On a proper pitch, they're useless.

Looks like our friend 'Jon' thinks that Wanderers, Perth and Sydney are all flat tracks. :-)

Please chk cricinfo stats guru to see india performance in last decade or so.. india performed better in seaming conditions like headingly, Wanderers, perth and recently in NZ..

Indeed Headingly, Perth and the Wanderers are the flattest pitches I have seen. Nobody wins on flat tracks, you draw them. You win either on spin-friendly tracks or pace friendly, at least slighly (unless one batting side collapses in one innings).

Why do you insist the ICC rankings are unrepresentative? As far as India and Australia are concerned. Australia won the series at home and India won the series in India. Sure India won by a larger margin, but being great is about sustaining brilliance. To be at the top of the table you have to be consistently good over a long period. If Australia maintain their current form they will probably drop down the table, not because they aren't playing well, but because they were playing better 2 years ago, and soon those results will fall off the table.

I think Indian cricket would be best served by ignoring the rubbish ICC rankings - which, for instance, had Matt Hayden as one of the top 10 test batsmen of all time, only for the ICC to soon retract that statement - and instead concentrate on strengthening the core. Funnily, while Indian teams since 1995 or so have had problems with not having the bowling to back their batting - barring Anil Kumble - India now seems to be entering a phase where the talent of the newcomers is not necessarily among the best in the world, but the results definitely are. Hopefully, they can improve and challenge others to be the best. There is invariably a lot of rubbish written about being "flat track bullies" and such, which is not quite borne about the facts and stats, which do not normally ring true when biases get in the way, but that is a different matter altogether.