Didn't this same thing used to happen with some people when they minimised LFS and then opened it again? I remember my old screwy system I got the square text / messed up mirrors issue doing stuff like that.
Sorry to say this, but unless there's a lot of people getting the same issue under the same conditions, that's a system problem not a software bug.
If you've been overclocking anything, that would be my first stop. Simply returning to normal speeds might fix it, but if you've fried something you're out of luck.
Try changing gfx devices (I'm pretty sure your motherboard will have an onboard device) to see if it's the card. LFS will run on integrated hardware, I suspect Flight Sim won't (bad programming? I doubt it).
Try digging up some more Dx7/8 games to see if they work as well. If it's area of the card that affects only old Dx stuff that's faulty, you will experience issues with other games that use the same part, which would explain why Dx10 Flight Sim doesn't.
Of course if you're using a Dx10 card, it might just be that those drivers don't fully support older versions of Dx very well.