Water Injection is mostly for forced induction (i.e. turbocharged or, to a lesser degree, supercharged) engines. When the turbo compresses the air it also heats it up, there is a thermodynamics law about that. Hot intake air is bad because it causes detonation which makes the computer retard the timing to save the engine, but reducing the power in the process (if the computer didn't do that and detonation got worse you end up with some blown pistons and a damaged engine). So bottom line is, hotter air -> less power.

To cool the air you usually have a larger intercooler. Sometimes you don't have the space or money for it. You can also inject high-pressure water (an alcohol + water mix, actually) in the intake manifold, which evaporates while absorbing heat thus cooling the intake charge. This is "Water Injection". It's done only at boost or there is a small risk of hydrolocking your engine. There are other good side effects such as a denser air charge / more oxygen which supposedly makes for more efficient fuel burning, or increased resistance to detonation.

Don't confuse it with water sprayers used on intercoolers, they just spray a fine mist on the outside of the intercooler to cool it down. Same principle though and it's a pretty low-tech device (basically your windshield spray system, modified a bit).

The pictures below are of my installation of the Spearco Water Injection kit I bought back in 2000. Spearco are no longer selling this kit although most of the parts can be found in home improvement stores (Home Depot and the like) and auto stores. This kit does not offer good performance because of its very coarse control (or lack thereof) of water flow versus engine fuel/air intake.

A better (and more expensive) kit is made by Aquamist.