The point of water injection is to have an air/fuel/water mixture going into the engine. As long as the water is sprayed in a fine mist, it cools the air down better than most intercoolers, and has no harmful effects on the engine. The only thing to make sure is that you do it after the maf and after the turbo. This is because over time, the water droplets hitting the turbo blades can actually dent the blades (because turbos spin so damn fast).
Water injection has been around for many years, they used it on planes and race cars. By introducing a fine mist into the intake, the surface area of the cooling water is so great that the air temps are reduced by huge amounts. Check out this link:
www.snowperformance.net - these guys have one of the higher quality kits on the market.
I am torn between using water injection and getting a water-air intercooler. The water-air intercooler is nice because it is a closed system, but the water injection is very cheap, and very effective. But, you have to refill the bottle every now and then. Most people get a bottle that is big enough to last them an entire tank of gas, so they refill the water when they refill the gas.
Also, most people inject methanol or alcohol in the mix with water as well. This helps to reduce detonation as well because it basically increases the octane of the air/fuel mix going into the engine.
You dont have to worry about damaging the engine because most of the water evaporates before it hits the cylinders, but even if it hasnt evaporated by then, it is such a fine mist that it doesnt cause damage. Actually, if you read the faq on the link above, you will see that an engine that was torn down after two years of water injection showed no signs of wear.
Holley made a kit for a while, a few companies make kits for the Buick Grand National (but the kit is universal), and there are a few other companies that make kits. You can actually make it yourself if you make sure to use a high pressure pump and a good nozzle tip.
One thing that I don't like about it is that during the winter, you have to use a water/methanol or water/alcohol mix so that it doesnt freeze in your engine bay, and adding either of those ups the cost of refilling it. Actually, methanol isnt too expensive if you live near a place that sells it, but I don't. But, during the winter, its not even that important to use the water injection because our intercoolers work better in the winter anyway.
People get huge gains with this stuff, but alot of people turn up their noses at it and say "it's just a band-aid" and that it doesn't fix the problem of needing a better intercooler. But, if you always have water in the tank, then it does fix the problem, and arguably better.