Is this something that was important in old editions?
Its come up a lot lately (in my gaming group, most of whom never played 3.x but did play adnd, and on other forums)
RAW there is no such thing as higher ground. You are either adjacent (even if this is one square diagonally up and over) or you are further away than adjacent.
even in my 3.x games higher ground modifiers never came up, not that the measly +1 would make a difference when prone/squeezing/helpless were +4's
That makes me wonder if the table WAS 5ft high, and there was an ally on the ground opposite to the enemy... would that count ask flanking? or would the ally have to be 5ft below ground to be "opposite" the enemy?
you're second is correct for medium creatures. Draw a side view and determine flanking as if it were overhead. for medium creatures you would have one in a diagonal square, and one in the direct side square, and they would not be on opposite sides.
for large creatures, who take up 2x2x2 you would be flanking until the table placed the player 10ft off the ground.