Really, it's just a question of packaging. You could put it anywhere you want: CPU, motherboard, separate card, etc. It's more of a marketing issue than a technical one.
A separate physics card will always cost a certain amount of money to build and advertising to sell. But if you can package a physics chip with something else, the production and marketing costs drop off quite a bit.
As I see it, lots of people want CPU's who don't have any use for physics processors. But pretty much everyone who buys a 3D accelerator card will also want to be able to do physics processing.
So maybe graphics card makers could go ahead and incorporate some physics processing capability. It would take some space and generate some heat, but I think it would be a good selling point. If, for example, nVidia had a decent physics chip on their latest generation of cards and Radeon didn't, I'd shell out a few extra bucks (or trade a new shading hue I can't see anyway) to take some load off my CPU, speed up my games and save me the time, trouble and slot a separate physics card would take.
Just think what that would do to video card reviewers' benchmarks. Some game framerates might be DOUBLED. I think that could help sell a card or two.
From a game designer's point of view, if one of the two major video cards added this, developers would start incorporating the algorithms within months instead of years. And if both major GPU producers did it, developers would start going nuts with 3D acceleration practically overnight.