I race with a wheel and pedals. I think thats the only way to go with racing games.
As far as being a sim. I completely agree that LFS is about as good as anyone as simluated so far. I actually race in SCCA offline, so I know a thing or too about realistic driving. However, sometimes the pure fun and entertainment value isn't always there in a hardcore sim. So from time to time I like to pick up a more entertaining game as a diversion. For example, one of my favorite driving games on the PC was actually Need for Speed: Porsche Unleashed. It wasn't necessarily the most realistic "sim," but all of the cars handled predictably and the AI was pretty fun to race against.
On that note, poor AI was actually one of the reasons I stopped playing GT3. I actually found the cars fairly fun to drive, but the AI was just ridiculous. Thats one reason I'm thinking Forza with online support might be interesting....