Some of the comments in this thread against LFS/for GT4 are utterly ridiculous. I'm trying as hard as possible to not be biased here, as I've been playing ALOT of LFS recently.
I'm an avid player of both games, but for me, LFS beats GT4 in more ways than one. GT4 is nice an' all, and it has some great features - being able to take any car I want for a spin and thrash it round a number of real world tracks is great. As for the physics, I think they're as accurate as can be with so much else crammed into the game (cars, tracks, music, etc) and the game is a great example of what the PS2 - the oldest of all the current generation consoles - can do. The thing that bothers me about GT4 is everything is so easy to do, you can hop in pretty much any car and drive decent (not fast, but fast enough) times from the off, which is great as it's still a console game - It's got a pick up and play value. I think PD have done a great job with GT4 and it's on par with forza for console racing games, They each have their own features and are both great games in their own right.
As for LFS, I don't know what it is, but it just feels so much better. You can hop in an XR GT Turbo, only a 250bhp car - feeble compared to some of the monsters in GT4 and struggle for dear life as you try to get it round a corner without ending up on your roof. You can have some incredibly close racing online, literally centimetres away from other cars, playing chicken on the braking zones. If you spin out in a race, you've blown it, but if you do manage to get behind the pack, you'll be struggling alot with dirt on your tires. I like LFS because everything feels more of an achievement - every time you win a race against good drivers, or hit a new personal best that's close to a world record, you can't help but feel like you did good, it's an incredibly rewarding game. You can't just hop in to a server and win races, you have to learn the tracks, learn the characteristics of the cars, and there's no blinking numbers telling you to brake and go round at a reccomended gear - you need to know when to do it all yourself to be competitive. Sure you may not have real cars or real tracks, but it really doesn't matter, the game just feels better.
In closing, I love both games, they both have their good points and their bad points (for instance, the AI on both). We're all entitled to opinions on what we think is better, but seriously guys, what's with all the mudslinging?