The problem is mostly in long distances of players connecting to the server. Players with lousy connections also affect all nearby players with a good connection. If all players were connecting from the same city server is located in, you would see much less lag.
And then CPU not having as high frequency as we would need. Flserver is not programmed to take advantage of multi-core CPUs, so what we would need is a single-core CPU running at 10GHz. If you see it sold somewhere, contact me...:)