Yes, that is my understanding anyway.

If this is so, do you take the water content

It gets accounted for when you weigh the food.  How else can you do it?

An entire watermelon, for

Well, those mountain climbers ate dehydrated food -- 2 lbs of it as I
recall.  So if you rehydrate it, it might weigh 9 lbs.

Let the fun begin!

right.

plus, as far as I am concerned, I eat about 3 lbs of vegetables per
day. would not want to give that up...

Correct. But the 2 pound limitation must be reached gradually. Weigh
what you are presently eating, don't cheat, and move the volume of
food/drink down slowly.

http://www.heartmdphd.com/lowtnd.asp

Here's where you get to apply, in time, an Ounce Of Common Sense.

The 2PDiet is based on several factors but one of the most significant
ones is that your tummy is used to higher than necessary amounts of
food. MOF, so is your (plural usage) psyche.

That is to say, there is a widespread misunderstanding of the amounts
of food that are required to maintain health. We have been duped into
oversized meals brought on by an abundance of cheap food,  mainly by
the targeted, conspiratorial marketing of food to excess by those who
make $$$ selling food.

With that said, weighing the water amounts in your food (such as
cooked spaghetti instead of weighing dehydrated spaghetti) is about
retraining your stomach and your psyche to accepting, and both will,
these lowered, in weight, food volumes.

Personally, after six or eight weeks, I was well adjusted to averaging
around  2 pounds per day and made a Common Sense allowance for the
water that I knew was either added or part of the food I was eating.
Take note though I made this adjustment with full knowledge, and a
vigilant eye on the scale, that if I found myself back in the
overeating trap, I would have to go directly back to the basics as
Chung has laid out.

Yes, you could.

Luna, I tell you this simple diet will absolutely make you rethink all
you ever took for granted about food. Food amounts, the importance of
food (other than as necessary fuels and chemicals), your real
relationship with food, how many plan their whole day around
meals...the list is endless.

If you note how this highly successful approach to eating is so
routinely disdained, what you see is people fighting against the
realities of their obsessions and abnormal relationships with food in
quantity. They flat don't want to give higher than required volumes of
food and drink up.

And they will fight to the end trying to justify the unjustifiable. Of
course, these are the same folks that also remain obese.

http://antwrp.gsfc.nasa.gov/apod/ap991014.html
Lift well, Eat less, Walk fast, Live long.