I looked into this recently and here is an interesting article about it. Read the comments below it's a very interesting and informative discussion.
http://www.bit-tech.net/news/hardware/2008/12/11/amd-exec-says-physx-will-die/1
After reading that whole thing I was able to distill a few things.
1. nV is creating allot of incentives for members of TWIMTBP to develop PhysX into their titles. TWIMTBP members cannot advertise with AMD/ATI
2. AMD/ATI will never put a nV PhysX logo on their GPU packaging so they will never adopt it with the current Marketing set up.
3. nV blames AMD for not coming on board, AMD blames nV for not letting them in.
4. DX11 could give ATI some free access to PhysX as nV plans to fully support DX11 and OpenCL.
5. Intel's Larrabee "may" make all of this moot if they actually "revolutionize" the GPU industry. However nV said this about Larrabee: "like a GPU from 2006" so who knows about Larrabee.
Because of all this PhysX has three roads it could go down.
A. AMD/ATI through DX11 and a possible marketing deal with nV supports it and we get some crazy kickass physics in games and can get more life from our old cards by using them as PhysX card.
B. It's a freebee to nV users that adds mostly an enhanced visual experience as game developers will not make interaction points that depend on PhysX support if users of AMD/ATI cards can't play it. (EXAMPLE: say in Mirror's Edge you had to shoot a flag and then jump and grab it and gravity would then "tear" it dropping you safely down to another area.)
C. It will die with DX11 as Microsoft announces a standard or in some way undermines Physx possibly with a partnership with Intel.
As to which out come it will be I cannot say. It looks like AMD is going to stall and wait for DX11. At which point we'll either see a real introduction of real time physics processing in games either on the GPU or the CPU or both. Until then I wouldn't expect allot of innovation in physics in gameplay. Physics will remain an immersion element, an eye-candy element that some games, utilizing PhysX, will be more effective at if your running a nV card.
Also if you currently own a PhysX enabled GPU card you can use it in the future as a dedicated PhysX card. Here is a review of a GTX295 with a 9800GTX+ as a dedicated PhysX card running Mirror's Edge:
http://www.bjorn3d.com/read_pf.php?cID=1476
Pretty impressive.