I\'ve a server/client architecture implemented, where all state changes are sent to the function, validated and broadcasted to all clients connected. This works rather well, but
The basic approach to this is something called Dead Reckoning and a quite nice article about it can be found here. Basically it is a predication algorithm for where entities positions will be guessed at for the times between server updates.
There are more advanced methodologies that build on this concept, but it is a good starting point.
Also a description of how this is handled in the source engine (Valve's engine for the first Half Life game) can be found here, the principle is basically the same - until the server tells you otherwise use a prediction algorithm to move the entity along an expected path - but this article handles the effect this has on trying to shoot something in more depth.