When players log on to the server, they get massive internet lag and then get disconnected. But only client side! They are still on the server for me and the console doesn't say that they have disconnected, so then they log back in and see themselves! The error that they get is
Exception: io.netty.handler.timeout.ReadTimeoutException
This is making it impossible to play on my server.
I have tried re-starting my router, resetting the server files and they have tried resetting .minecraft
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EDIT: My CPU usage sometimes sits at 97% while running the server, so does my friends. I have an intel i5 processor, so its not my system.

Ok, players are no longer getting disconnected. They are getting about 30 seconds of delay. This doesn't happen in 1.7 or below, but as soon as I try to update to the snapshots, this happens!

Please can someone reply to this! It is making the game un-playable! None of my friends can host a server in 1.8!

Good luck to receive any support, Mojang doesn't even take a look at theses bug reports, I'm quite sure they screwed something really badly and don't want to go back to to rewrite the part that got screwed up.
I'm in the same boat since starting my server in 1.8, computer for the server isn't bad for a 2 players only we settled up in this :
ASUS P5K-E
Core2Quad Q6600 2.4GHZ
8GB DDR2 800
128GB Adata SSD drive
Windows 7 Ultimate 64 bits
We've played on a heavy modded 1.6.4 server (140 mods loaded) with this beast without any lags or any kind of problems with 3 players online
Now we couldn't even run a basic vanilla 1.8 server, this can't be true.
The only task running on this machine is the Minecraft server Official 1.8 release
computer is up to date, got both latest versions of java (32 and 64 bits version) made sure the server used the latest one by cleaning up all the older versions of it also.

My 1.8 (release version) server is experiencing the same issue. The 1.7.10 release ran great but now the same world in 1.8 is unplayable. The server can't keep up and the console is flooded with:
[05:16:19] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 18861ms behind, skipping 377 tick(s)
[05:16:21] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2176ms behind, skipping 43 tick(s)
[05:17:06] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 26332ms behind, skipping 526 tick(s)
[05:17:08] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2384ms behind, skipping 47 tick(s)
[05:18:00] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 32211ms behind, skipping 644 tick(s)
[05:18:02] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2818ms behind, skipping 56 tick(s)
[05:19:08] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 39414ms behind, skipping 788 tick(s)
[05:19:10] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2278ms behind, skipping 45 tick(s)
[05:20:17] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 39530ms behind, skipping 790 tick(s)
[05:20:19] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2267ms behind, skipping 45 tick(s)
[05:21:07] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 29640ms behind, skipping 592 tick(s)
[05:21:09] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2595ms behind, skipping 51 tick(s)
[05:21:54] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 25908ms behind, skipping 518 tick(s)
[05:21:56] [Server thread/WARN]: Can't keep up! Did the system time change, or is the server overloaded? Running 2195ms behind, skipping 43 tick(s)

Same issue, lags, disconnects, overload warning messages
Server is just cleanly built and installed, everything is upto date
hardware is not the issue
Xeon 5430, 8 gb ram, only 3 users that try and play on server(me and 2 of my sons so far) all client computers are connected via GigE or 2xGigE,
Server I have tried with Network both teaming enabled and disabled made no diffrence

log file from my family's dedicated minecraft server

Sounds like you have something in your world that's bringing the server down to its knees.
Do you have a lot of entities somewhere, like a mob farm or something?

Ok, this issue seems to have fixed itself in the full 1.8 release, I am now able the run a server on a normal world with 5 players online 🙂
This is a really odd bug....