(this is the win7 64 path, I am pretty sure Vista 64 path is the same. XP will just be Program Files I think, and it's using the minecraft_server.jar from bottom of this page http://www.minecraft.net/download.jsp)
File/Save as, select "all file types" from bottom drop down, save as MCServer.bat (tHe name doesn't matter as long as it's a .bat) and put it in your server folder, you did put it in a folder yes?
This is just assigning the server more ram, so it may not fix connection/lag issues. I still get "could not keep up" messages, though it doesn't seem to effect anyones gameplay. You may be getting lag issues purely from network/internet bandwidth, so it may not be resolved by doing this.
Everything is working but when I am not playing, and the server is simply on people report Lag Spikes, and large amounts of lag, does anyone know what may be causing this lag, or how to reduce lag amount?
Since you are able to connect, and don't have issue with lag, but people outside of your local network are experiencing it, I would hazard a guess that it has to do with your internet connection. Either it's your connection, or theirs. Seeing as everyone connecting has the problem, I will guess again and say it's yours. SOMETHING is causing the incoming connections to stutter I think.
Unfortunately I don't know how to resolve the problem, if this is it, or if there even is a solution.
I now know that in fact all servers I have been to are lagging, It's not just my server, is everyone one, and everyone on the servers are lagging as well. Notch's current updating/Minecraft.net migrating I believe is the cause of all the lag. Everyone on the servers agrees with me on this, and some of them are quite made.
Unfortunately, the recent migration is only to handle authentication/website, and has nothing to do with user made server stability. It's possible that an update has caused a new bug to crop up in the game itself, but SMP is the least stable part of the game at the moment.