Iowa State University does a lot of VR-oriented research: http://www.vrac.iastate.edu/.

The majority of the research going on here is driven by industry and military applications, with comparatively little funding for things for consumer use. One common misperception I've noticed is that many people assume VR == head-mounded displays, when in reality there is a great variety of possible displays (VRAC's facilities include a number of non-headset displays.) The Howe Hall auditorium, in which over 200 people can view a VR presentation (often a science- or engineering-oriented visualization, but there are many artistic applications as well) is an excellent way to show normal people that VR doesn't have to involve bulky headsets.

Although advancements in VR are generally oriented towards specific applications -- a better input device for a paint program, a new wireless sensor/transmitter system, etc. -- the field as a whole is still moving forward in leaps and bounds. Although it's debatable whether consumers will see any Virtual Reality products or devices in Wal-Mart anytime soon, industry use of VR is alive and well, and there is nothing to suggest that the field will go away anytime soon.