kwils11 -- Admittedly I am paraphrasing here, but my understanding of it was that the lemon keeps your kidneys flushing your system so that the fluids don't pool in your ankles / feet. I don't think the lemon is quite the diuretic that, say, caffeine is and, since it's just a squeeze of lemon in a big bottle of water I'd venture to say that the water would probably counteract any dehydrating / diuretic effect the lemon would have anyway.
I can say that, for whatever reason, it does work wonders. She recommended this to me a few weeks ago when, after being awake for a few nights so I'd been sitting or standing for over two days straight on an extremely humid weekend, my feet and ankles blew up like balloons. My husband called me Fred Flintstone all weekend. I'd never had that happen before and it was *extremely* uncomfortable. I had my feet evalated for hours, but it didn't seem to help much -- the moment I stood up again they just puffed right back up -- but two bottles of water and half a lemon later they were noticeably better and I could actually put shoes on again. After less than twenty-four hours of lemon water, I was back on the treadmill good as new.
Anyway, I don't know why it works or whether it will work for anyone other than me, but wanted to pass it along. YMMV as they say! ;)