I took another look at this game and did some more experimenting with the joystick setup. I made some headway so I thought I'd share.
It looks like the default joystick setup flies in a similar way to keyboard flying with an overly large deadzone in cyclic and collective input as stated in my first post. Fly by mouse though has no deadzone, so this would account for some people that are not using flight gear commenting that it flies quite well.
So in the end the solution for people using flightsticks was quite simple. In my case I use Saitek HOTAS and pedals, so I used the SST software to assign the "mouse axis" to "X" and "Y" of the flightstick and save it into an ARMA2 profile. All done flies quite nice using a joystick.
1. Open SST editor
2. If your using X52 you will need to "unprogramme" the ministick X and Y axis to release the mouse.
3. Assign the mouse axis X and Y to your flihtstick X and Y
4. Save your profile
5. Go into ARMA2 controller options and remove default "joystick" setting from "pitch" and "bank"
6. Assign "mouse left" and "mouse right" to "bank left" and "bank right"
7. Click OK
8. All done, now just load your profile before playing. Sensitivity can be tweaked via the SST software.
enjoy :)