Dear edrushie,
The player was never entitled to play a provisional ball for a ball that may be lost inside a water hazard (see Rule 27-2a and Decision 27-2a/2). Thus the second ball played took the original ball out of play and the third ball took the second ball played out of play. The player was lying 5 with the third ball and was required to complete the hole in relation to this ball.
By playing the original ball, the player played a wrong ball and incurred a loss of hole penalty in match play. In stroke play, the player incurred a 2 stroke penalty and was required to hole out with the third ball played from the tee before making a stroke on the next hole. If he fails to do so, he is disqualified per Rule 15-3.
Thank you for your interest in the Rules of Golf - regards,