I don't hate the idea of a dedicated PPU, but I just don't think it has any purpose when you look at what is going on in the CPU world.
The first problem with the PPU is a classic chicken-or-egg problem. Gamers will not buy PhysX until there are a large number of games that utilize it, meanwhile developers will not utilize PhysX in their games until a large number of gamers buy it. With the PhysX costing $250 (IIRC) initially, and $150~ now, getting gamers to adopt it will be hard. $150 is just too much to spend for something that isn't going to get much utilization. If Ageia made the PhysX around $50-60, then they'd get a good number of gamers willing to take a chance on it.
The second problem is the increasing power of processors and the move to massively multi-core designs. Dedicated PPUs like PhysX made sense in the world of single-core processors, where complex physics calculations were too much to add onto all the processes that the CPU had to execute. A dedicated processor to handle physics makes sense, because with only a single processing core, complex physics are just too much of a burden for the CPU to handle.
However, in the world of processors with 4, and soon more, cores, the PPU doesn't make much sense anymore. Now, you can dedicate a core, or even 2 (like Alan Wake will) to physics, and run the rest of the game on the other cores. There is no longer any real reason to off-load physics onto a dedicated processor. In the future, CPUs will have dozens of cores, and the benefit of a PPU will continue to diminish. There just isn't a place for the PPU when you can dedicate several, or eventually, dozens, of processing cores just to physics.
Personally I love the idea of PhysX, which is to bring complex physics into games. My "perfect game" would be a game where everything was destructible; if I fire a rocket into a wall, I want parts of the wall to be destroyed. If I have a tank, I want to be able to utterly destroy a building. IMO, full destructibility and accurate physics would completely change the gameplay and be simply amazing. I love good graphics as much as anyone, but graphics can't change gameplay like physics can. I just don't think that PhysX is the way to go.