Well, there are two other problems that "weapons that level with you" had compared to normal magic items.
1) Golf bag. With all the various different types of DR, you'd want a weapon of every material. Having just one cold iron longsword that you always used was nice thematically, but then a group of lycanthropes pop up and well, there goes that. Your cold iron longsword is pretty sweet, right up until the enemy wizard casts Stoneskin.
2) In general, people would much, much rather have a sword that's +1 and a whole bunch of other enchantments, then a +5 sword with one or two other enchantments. This ties into the golf bag, in that a +1 shocking/flaming sword is cheaper then a +5 shocking/flaming, and you need a shocking/flaming sword of all materials.
I think the style of item, where it gets strong with you, works a lot better in Pathfinder, where having a +x also passes through DR, helping eliminate both 1 and 2. When your +5 weapon can pass through any DR, you no longer NEED to have a golf bag, and you can focus on having just one weapon.
As for WoL itself, good idea with absolutely atrocious mechanics to go behind it. Sure, you can take penalties to upgrade your item, and you might break even! Or you can just get ahead and not bother with it altogether.