Gamasutra has an interesting piece up on the use of physics in games by Pascal Luban, on the current applications, limitations, and future possibilities. It's worth a read through if you're interested in game design, even though physics is one of those things that ought to be invisible. The potential uses are interesting to ponder, and with better technology and some creative designers:
Physics is extremely demanding in terms of resources and some of the ideas that I have developed here are not currently achievable -- but the advances in the tools and technologies are foreseeable, giving us the power in the future. From now on, gameplay can be improved with uses that are not just cosmetic. The development of dynamic game environments that the player can change on the fly is already a trend in today's level design. Physics makes this evolution possible.
Physics is more than skin deep? It's a short article and not too heavy on the science speak.
Physics in Games: A New Gameplay Frontier [Gamasutra]