I found the problem.
I was using IISRelayJ that is being used to forward IIS headers to Jetty.
I took this out of the picture and the performance is a-ok. I am working with the guys that wrote the IISRelayJ to resolve the issue. It is a great tool (other than this peculiar problem that is most likely due to my slow servlet than anything else).
Can you please tell me how did you solve the problem? plz plz. I couldn't understand your solution