That's odd. I made a nether portal last night, but it seemed that the lag in the nether was a lot less then in the normal world at the time. I could mine blocks without trouble, whereas in the normal world I'd sometimes had to mine blocks 2 or 3 times.
Also time of day seems to be a factor. Between 9:00 and 12:00 CET I've never experienced any lag, so maybe it isn't just Minecraft 1.2.3. Maybe the host is running too many servers on a single piece of hardware? The only way to fix that is with money I'm afraid.
Anyway, server issues asside. Having train stations between the different settlements sounds like a great idea. I've been saving up the tracks I've found in mines which I'd be'd willing to donate to the cause