Light Room is a very good Raw converter and cataloguing system and is totally loss-less, it treats every file as a Raw file even Tiff and Jpeg.It's designed for rapid work-flow and pre processing your shoot ready for Photoshop. More tools are being added, but it will never be as deep as Photoshop. It replaces and extends the Bridge component of Photoshop, not Photoshop itself.
Elements 7 has more Tools, but being a cut down version of Photoshop it has limitations, no Curves and no Layer Masks are the main two, there work arounds though. Photoshop is a much more creative program and as soon as you want to work with selections and the creative Graphics side of things you need Photoshop or Elements.
Ideally you need both, but if it has to be one then I would say Elements 7, it can do everything that Lightroom can do plus the more creative things.
Chris
