One big issue is that, generally speaking, you're going to be very constrained with the kinds of challenges you can throw at the party if all your exalted are the same level. An NPC of the same level as the party is usually just not a terribly hard challenge. Normally we'd correct this by having them be slightly higher level than the players, but that breaks your premise. Do monsters (as in, stuff you find in the Monster Manual) exist in this world? If yes, you will have plenty to throw at your players, but they will be less special ("Ooh, a barbarian. How nice. We got ogre magi on the next block over, dude."), if no, you're going to have a hard time coming up with compelling encounters.
One thing you could do is have there be 80 exalted, and use the Sean K Reynolds Level-Up System
from Monte Cook's World of Darkness, which says you break each level up into four parts. In his version, every session they gain 1/4th of a level, but you could easily make it "every time an exalted dies." This probably works best if you let them have a feat every level, gained with their saving throws (since saves are the least sexy of the four categories and the most likely to be "dead" at a given level.) That might be a good idea anyway, as it will soften the blow of not having much magic available.
Frankly, for this premise, I think making spontaneous casters more attractive than prepared casters is a feature, not a bug. This premise seems to beg for the whole "I have weird magical powers that I don't completely understand" vibe of the Sorcerer and the Oracle as opposed to the "magic is a body of attainable knowledge" vibe of the Wizard.
Finally, it seems like there will be serious motivational issues here. There is no "adventuring economy" in this world (no P Cs capable of making magic items to entice them to search for loot), so a lot of your bread-and-butter D&D adventures are out. I guess they can all just be on a murderous rampage against other exalted, hoping to be the last one standing, but then why are they working as a team instead of murdering each other for the free levels?
So I'm going to be running a campaign, based on the premise of the comic book Rising Stars. Everyone in the game world will be normal; they'll have NPC classes, and only a single level. Except for the players and an undecided number of NP Cs; they'll have levels in adventuring classes, and the ability to break the 1 hit die cap. I plan to take it from 1 to 20, and explore the impact these super-powered characters have one the world around them. Here's the twist; XP doesn't mean a thing. The only way for the (let's call them "exalted") to level up is for one of their number to die.
Once the characters realize this mechanic, they'll have to deal with the problems of NPC exalted hunting them, as well as convincing other, potentially helpful exalted that they aren't hunting them to level grind (which might not be certain; I'm going to ask for good-aligned characters, but I'm not quite sure how my group will be able to handle that...)
Originally, I intended the leveling mechanic to work along the lines of "one of the exalted dies, all the others take a level"; but doing it like that without dealing with the epic rules means I could only have 24 of these exalted running around, which is fewer than I wanted, or else that the campaign would have to end with a dozen or so unaccounted for, also something I don't like.
My new idea is for there to be 44 exalted on the planet, and every time one dies, the remaining gain a half level. First death, the remainder gain a new hit die, higher save bonus, and increased base attack bonus/spell level/spells per day/spells known (if applicable). Second death, survivors get increased skill points, increased ability attribute(if applicable), new feat (if applicable) and increased sneak attack/wildshape/insert class feature here (as appropriate). And so on in that fashion.
But- I'm concerned that kludge might screw over certain character classes. If forcing the barbarian to adventure with four hit dice for a while before gaining Great Cleave and a second daily use of rage neuters him, I don't want to do it. So maybe just let the players pick what perks they want when upgrading, depending on what they prioritize? Or would it be better to just say everyone gains a level every other death? But that screws up the "every time one dies, you gain power" theme. I dunno, does anyone have a good idea?
Furthermore, are there any unforseen complications lurking in the general "low magic, low treasure value, you level up when it's appropriate to the story" parameters? A player I always use as my sounding board caught me off guard when he pointed out no sane person would play an arcane caster who prepares spells, as the unavailability of scrolls mean they'll lag behind spontaneous casters in both spells per day and spells known for much of they're careers. Granted, they'll gain a new spell level faster, but he's got me thinking of giving any wizard or wu jen Collegiate Wizard as a bonus feat. Any more hurdles I haven't caught sight of yet?
Another TL:DR post.