There are a couple of things potentially going on here.
Firstly, as Dune alluded to, you should have your lake displacement last (just before the Compute Terrain).
If you want to rough up the shape of the image map, you should do this before connecting it to the displacement shader.
The reason for these two requirements is that you want to use your displacement function as a mask for your population density.
Another problem is that you've connected the surface shader to the population density NOT the image map. What you have is a population density based on the colour of the terrain. (You don't need the second image for the surface shader mask, you can just use the first and invert the mask.)
For your population density shader then, add a colour adjust shader and connect the input to your displacement function into this. Set the black value of the colour adjust shader to 1. TG smooths images, so even if your mask had only black and white, the anti-aliasing on the image would give you a smooth border. This colour adjustment ensures you don't get trees in the shallow parts of the lake. Use this colour adjust node as the population density.
Haven't changed the order of nodes, but try this.
[edit] An altitude restriction above your lake level may be enough as Dune mentioned, but it is possible to have multiple lakes at different altitudes, not to mention adding variation to the population density using a power fractal for the population density. In those cases I multiply any additional masks by the image map mask.
You can also reduce the amount of water rendered by masking the lake object.
http://forums.planetside.co.uk/index.php?topic=4459.msg49935#msg49935
