Personally I think that military sims develop in 3 different ways:

1. Graphics
2. Flight modelling (in the very broadest sense, I'll include opponent AI and the relative accuracy of gauges/panels and other instruments that are available)
3. The campaign

Graphics have certainly moved on since the early days. IL2, CFS3, FS2004 (ok, not military but needs including) and all the rest like LoMac etc all have unique aspects to their graphics that can make them look better than the others in certain circumstances and can all look very real at times. There's still a lot of room for improvement of course but graphics are generally pretty good in modern sims. As graphics cards support more and more features in the hardware and with increased CPU power to throw at models, not to mention some of the shared knowledge from other game types' engines, I think that getting the graphics right and looking 'modern' is probably easier than ever before.

Flight modelling has also come a long way, not just the flight characteristics but also the accuracy of cockpits and the range of instruments available and their usefulness in the air. Opponent and friendly AI has a long way to go, but again a reasonable amount of interaction is generally there. Whilst people can argue about which sim has the better characteristics, all of them are certainly better than what was around years ago.

Campaigns though - just what has happened? I look back at Aces of the Pacific, the Lucas Arts' BoB, Red Baron (and RBII/3D), Falcon, etc and then I look at what's available in the current slew of games. IL2 has very primitive campaigns (a bit better in FB/FBAces), CFS2 was pretty simplistic, etc. CFS3 had a good stab at getting a campaign back in the centre of the action again, but was clearly just a first version of something that could have been a lot better with refinement. I've not really played much of the other sims out there, but nothing I've read indicates to me that any of them are even half of what's available in Falcon or RB3D. So not only have things not progressed in 10 years, they've if anything gone backwards.

The problem with this is that all of the flight sims are in fact games and of the 3 areas it's the campaigns that make them games. Whilst we all appreciate realism and graphics it seems to me that flight sims have pigeon-holed themselves by failing to have accessible campaigns. Years ago flight sims were fairly mainstream and whilst the number of computer games sold has gone up enormously I'd bet everything I have that the proportion of flight sims sold has dropped dramatically. I think this is because all the effort has gone into graphics and flight modelling and precious little into gaming. For sure 1&2 need to be top of the priority list, but not to the exclusion of everything else (at least not if the genre is going to become more and more sidelined in the next 10 years).

Of course the requirement to have a joystick to get anything from a flight sim only makes things worse in terms of reaching a mass market. 10+ years ago I'd guess most people who played games on a computer would have a joystick, now it's a minority. If a sim developer manages to get some sort of control mechanism where keyboard, mouse and joystick can be used to enjoy the game (not necessarily in the same way) then it could be the case again where everyone has a sim next door to their FPSes and so on.