Lateral Water Hazard Rules: Can You Declare a Ball Unplayable?

Question
My ball game to rest in a small dried up pond with red stakes indicating a lateral water hazard. The lie was extremely bad and I wanted to declare the ball unplayable and take a penalty. My opponent said that since the ball was found I had to play the ball as it lies from the hazard. Who is correct

Answer
Daniel:  
Unfortunately, neither of you is correct.  First of all, a ball cannot be declared unplayable in a hazard.  Secondly, a hazard is a hazard whether or not there's water in it.  If you chose not to play from the hazard without grounding your club, you should proceed under the lateral water hazard rule.   

Fairways and Greens,

John
www.golfnutts.com

p.s.  The rules can be read online at http://www.usga.org/playing/rules/books/rules.html