Ok, suppose you make a square room, with a cylinder carved into the floor where the water will be. Hit the sheet button and make it bigger than that cylinder, and overlap the top of the cylinder with it. This will be the surface of the water. Do not add it yet. Don't line it up to the very top of the cylinder either. Make it a tiny bit lower. Now you need to hit the Add Special Brush button. A dialog will pop up and you will have to choose water. And make sure 2 sided is checked. Now hit add. Ok, now you have to add a waterzoneinfo in the cylinder, anywhere under the surface. Open the actor class browser, and go under zone info and find water zone info... Highlight it, then right click in your 3d view inside of the cylinder and hit add waterzoneinfo here. Rebuild the level and try it out.