On the subject of what determins if a hit was made, I think the only realistic solution is if the FE thinks a hit was made. Think about it: My FE tells server a hit was made. Server contacts the targets FE and says at such and such a time a bullet passed through a place in space. Were you there? What exact position were you in? Of course we all know that where I thought he was in my FE is not where his FE says he was at any particular time. So of course almost every time his FE will say he was not there and it will record a miss. As I recall, Warbirds tried something along these lines and failed miserably. In the end, the FE of the shooter has to determine what got hit and how bad, and hacking has to be dealt with at another level.
And while I agree that lag exploiting is not exactly hacking, there should be a minimal connection quality that has to be acheived consistently, or else you get dumped. I know that will piss a lot of people off, but hey, that's my place in life.
And btw did I mention that overall I think this the best dam sim ever made? For all our whining about how it could be better, can we have a moment of kudos that we even have something so awesomely cool as a playable WWII flite sim?