Garbage Collection Problems
Hey, not a bad game! I liked the graphics, they reminded me a bit of Gun Run. I liked that you don't die right away too. It was hard to tell when I hit something, though, and I didn't really notice the lives counter until my second time playing. Maybe a flash of color or some particles could hep with that.
As for the lag, I got it too, and setting the storage to unlimited did help. The problem, I'm guessing, is garbage collection, which is a new thing in AS3 (if you used AS2, then I don't know). If you're removing a lot of variables or movieclips in a short amount of time, they aren't deleted right away. Flash will store them for a while and try to delete them in big chunks when it uses up the storage space, which will drop a frame or two. If you do this regularly it'll cause a jumpy stutter effect, which is what I experienced, as opposed to lag.
If you need to go through a lot of movieclips or variables, the best method in AS3 is to store them in an array or linked list, and reuse them instead of removing them. That way you won't overwhelm the memory and garbage collection won't cause a stutter. As a happy side effect this'll increase performance too!