Most of the collaborative projects I've worked on have been through the Internet, and I can honestly say I don't think the lack of any physical presence has ever caused much of a barrier. Of course, these have all been smaller projects with three- to four-person teams (i.e., one person doing the programming, one person doing the designing, one person handling art, and so on); it might be different if you have multiple people working on one particular aspect of a game. But if your project's small--and you're working with people you know are dependable--it's certainly not impossible.

If it helps, I saw this feature on Gamasutra a week or so ago--it's a postmortem with the developers of Zack Zero, and one of the problems they talk about is the various difficulties they had in trying to build a larger project like that remotely. Might be relevant to you.

In my biggest project, it was mostly a 50-50 effort between me and the programmer. We started off exchanging e-mails about the type of game we wanted to make, the setting, the story, and the characters. We decided on an adventure game, and I started writing out the interactions and dialogues in a script format, sent it to him, and he started coding it. While he was coding, I'd keep writing, and when he was finished he'd send the build to me to look over--after which I'd note any suggestions/changes I had, and send them along with the current script version. It was very straightforward. We communicated purely through e-mail; we never used Skype or IM or anything. We used placeholder art until the game was about 50% complete, at which point we brought in an artist, sending him the individual models to recreate more professionally and cleanly.

Mind you, this was a side-project for both of us--we both have full-time jobs in addition to our videogame development--so it wasn't a big deal to us to have to wait for the other person to e-mail us back. Plus, I was able to spend any downtime I had working on other, smaller projects.