Attached Link: http://panthersxchange.com/phpbb/viewtopic.php?t=171

You need to use a filter on Material 2, on the affected by height field. Basically you want to chop that texture away as soon as it gets any real height with a steep filter. You'll probably need a filter that goes from the top left corner, and drops dramatically so that it's at 0 value by the time its gone 10% across the filter or something similar. I attached a link to a tut I made, although it doesn't play around with either water or terrain height, it does show you how to play with filters.