You have to assign your gamepad to number 1 after the game loaded. Then it will work.
Just hold down the PS button on your normal controller while in game until the menu screen comes up where it says Quit Game, Reassign Controller, etc. Then reassign the controller to game port 1. After doing this you can use the controller to navigate and do things, but once you start driving in a race the wheel takes control. Kinda cool really.