Lets say I'm playing Germany. During an invasion of France I tend to raise troops from French occupied cities so that they are ready at the front line. As the war progresses, the "ethnically" German troops will die out and slowly the German Empire will have a French army. This is unrealistic.
It would seem so, in modern times, over short periods. But actually, it happened alot in history. The situation you describe actually did happen. Who were the Franks? Germans. A powerful, but small, tribe of Germans. They conquered the Romano-Gallic population (which was considerably larger than their own population) of what had been Gaul, and, to make a long story short (omitting chapters like the Burgundians and Aquitanians and all that), the end result was the French.
There are alot of different things that can happen. Here's a few.
Elitism
The conquering group become the ruling class; the conquered become the foot-soldiers. This is possible because the leaders of the conquered are all wiped out and the only ones left to organize them are the conquerors. This is uncommon in the modern era, because people have different beliefs about their role in society, and are capable of organizing themselves if they have to.
But in times past, the masses were often organized into strict classes or castes and commoners were indoctrinated to believe that they could only follow. This was very, very common; even among groups that weren't all that organized (eg the Celts, who were organized into strict, colour-coded castes; your caste determined how many and what colours you were allowed to wear).
Extermination
Rare! Very rare. It did happen, but not as often as people think.
What happens here is that the conquerers wipe out the natives completely and settle their land, with no interbreeding or assimilation happening. This was rare because before the modern era, it was hard to do, and it was even harder to stop one's soldiers and settlers from taking women.
Weak Assimilation
Over a period of time, the two groups fuse their identity. This can be like in ancient Rome, where Etruscans or Celtic groups in the Po Valley eventually come to be totally Roman and completely forget their previous culture. It isn't always the conquered who get assimilated, either. Sometimes, it happens the other way around and the conquerors are the ones who assimilate. This happened to the descendants of Strongbow and the Hiberno-Norman lords who invaded Ireland in the Middle Ages, for example.
Strong Assimilation
Some people might call this "cultural genocide". This is where the culture, but not the people, is deliberately stamped out. Probably the best example is the Inca. When they conquered an area, they separated everyone (especially families) and resettled them, scattering them across their empire. They were forced to speak Quechua (the Incan tongue), and their history was forbidden and erased. Rather than resettling them as groups or communities, each individual was separated out and resettled with a sort of commune or work unit that formed the basis of the Incan society, and they were responsible to indoctrinate the new peon. This was highly effective. The cultures and identities of the conquered groups vanished, practically immediately, yet the state still got the additional population to add to its labour force.
