For starters I would just like to point out how old this is. If I could properly update it so the end product looks much better, then I would. But I can't at the moment, so bear with me, please. :) I'm sure your end product will be 400 times better than mine. It's the technique you should be learning from this, not tips from me :P
Okay, anyways... First off, for this to work you need to uncheck: "Advanced > Enforce Water Height Limits".
Then you do the first step of making a normal waterfall. You first make 2 or 3 levels of cliff. On the top level fill it will deep water, and surround the bottom with it too (Where you want the water, leave out the areas you want land).
You should have this:
Now, remove the cliff around the edges (Decrease Two) like so:
This is how it looks after you added some doodads, such as flowers as shrubs. Rocks look great on waterfalls. Bear with me, as I am not a master terraininer :rolleyes:
Now, your end product is a unique style of waterfall. This is a hard type to master, though can become a very nice piece of terrain. Remember, the undo button can be your best friend!
Have a nice day, all! I hope this taught you something :)