This paper presents the design, development, and application of a novel space simulation environment for rapidly prototyping and testing flight software for distributed space systems. The environment combines the flexibility, determinism, and observability of software-only simulation with the fidelity and depth normally attained only by real-time hardware-in-the-loop testing. Ultimately, this work enables an engineering process in which flight software is continuously improved and delivered in its final, flight-ready form, and which reduces the cost of design changes and software revisions with respect to a traditional linear development process. Three key methods not found in existing tools enable this environment's novel capabilities: first, a hybrid event-driven simulation architecture that combines continuous-time and discrete-event simulation paradigms; second, a lightweight application-layer software virtualization design that allows executing compiled flight software binaries while modeling process scheduling, input/output, and memory use; and third, high-fidelity models for the multi-spacecraft space environment, including for wireless communication, relative sensing such as differential GPS and cameras, and flight computer health metrics like heap exhaustion and fragmentation. The simulation environment's capabilities are applied to the iterative development and testing of two flight-ready software packages: the guidance, navigation, and control software for the VISORS mission, and the Stanford Space Rendezvous Laboratory software kit for rendezvous and proximity operations. Results from 33 months of flight software development demonstrate the use of this simulation environment to rapidly and reliably identify and resolve defects, characterize navigation and control performance, and scrutinize implementation details like memory allocation and inter-spacecraft network protocols.