My experience with Two Player Battle Mode (hereafter known as TPBM) has been completely wonky.
When I first started playing GT4 and racing others, I was completely frustrated because cars from my garage were *forced* into standard or sports tires instead of racing tires, unless the car was considered a "race" car. If it was a "normal" or "concept" vehicle, it would limit the tire selection to standard/sports. If it was a racing vehicle, it would limit the selection to race tires. Additionally, I found that some other tuning features (like racing brakes) did not function in TPBM.
Suddenly, and without a known cause, TPBM now uses all my tuning properly, including the tires I specify and racing brakes. The difference was so pronounced thought there was something wrong until figured out what had happened. I backed up my game and will keep that card as an archive. Note that I am still presented with a tire-selection dialogue box, but TPBM now ignores that selection and uses whatever tires I have assigned in the currently active tuning for that car.
I'm happy that TPBM now works better. I feel this is the way it should have functioned all along (although NOS still won't work for Player 2).
The only thing I can guess (if it isn't just a bug), is that this is an undocumented reward of some kind which I got for completing a certain part of the game or something like that.
I definitely hope it doesn't switch back to the previous mode, it sucked forcing a fully modded Ford GT or Zonda into sports tires.