The folks on my server and I have done some testing: Upon running a Vanilla server we have determined that this is a Bukkit issue, as it is absent in vanilla. Also adding to this is that a console message is spewed out when the y-axis adjustment occurs indicating a server-side problem, not to mention that this problem has never been present before. In Vanilla a person who is flying DOES seem to bounce around abnormally, and when flying too low to the ground or water, the sounds make it seem like one is actually lower than their actual altitude. Adding the Zombes4Bukkit plugin does help, though only nominally as y-axis adjustments do occur over time, and most particularly when a player stops moving and hovers. Hope this helps, and that this issue gets resolved.