The newer versions unfortunately seem geared to pumping out as many supplements as possible. That aside, as a system, it is less broken in terms of exploits and balance than prior editions. Even with that you still have the power-curve issues. Casters are still king of the walk once you hit mid-levels and beyond.
Online...do you mean DDO? It hasn't been around that long. I beta'd DDO and quite honestly didn't like it very much. I've beta'd or played MOGs since they were MUDs. DDO was too buggy, clunky, and wasn't a good port of a pencil and paper system. NWN was far superior in that respect. There was nothing new in DDO that could hold my attention. LoTRO has a more well-known and developed world (sand-castles, real constellations, lots of detail), WoW follows the tried and true Blizzard game system of fun (kill-reward-repeat).
Do younger folks play? Yes. Most of the gaming groups that play v3.5 have gone in a bit of a holding pattern with 4E around the corner. Even with that, even my town has a decent-sized gaming community. The last group I played a few rounds with were all in their teens-early 20's.
You may also want to consider the 'Living' Campaigns. They are pencil and paper D&D, but use a system of character tracking (log sheets, known as adventure records) that enable you to play your character at any sanctioned game.
Living Greyhawk is the standard D&D, but it's dying as of this year. Living Forgotten Realms is replacing it. These variants of D&D have a very large following.
I do agree though that the pencil and paper is still a niche market.