I did some research in this area for a project in my Thermal Dynamics class in University and I found the same information.

While doing my research back then I stumbled across some interesting studies on water injection. From what I understand water injection was used in rally cars until it was banned.

The jist of it is that water is injected into the cylinder along with the gas. By injecting both at the same time they are able to lean out the gas mixture because the water has a higher latent heat of vaporization and cools the combustion process. This is what prevents engine knocking. By doing this you can run really high compression or increase the boost pressure on a turbo without getting knocking.

I think that's basically the gist of it. Has anyone else ever heard of this?

I've actually seen a car that had a water injection set up in it. It was a Volvo turbo and the guy said his gas mileage was great but the water would freeze in the winter.