it means LFS has reached the limit on the amount of physics objects it can calculate. we've had this on autox stunt servers quite alot.
for example if you're about to drive onto some ramps, and right at that same moment, some one else runs into a stack of objects and triggers the "too many physics objects", if you hit those ramps at that exact moment, your car will drive straight through them, as if they were not there at all.
simply because lfs has reached its limit (whatever amount that is) of calculations (relating to the car hitting objects) such that it cant calculate any more! phew!
(thats how i interpret it anyway)