There are a lot of interesting issues that go along with shifting the focus away from external, magic-drive character abilities and placing it on ones that are inherently linked to a character. Ben asked me about this, so I'm going to give everyone an idea of what's up with that in Iron Lore.
There are two types of issues that come up with yanking out D&D's point buy powers/magic items. As I mentioned before, that's what magic items are - a point buy system welded on to the class system.
These two issues fall into everyone's two favorite camps of RPG stuff - fluff and crunch. Personally, I prefer "story" and "rules" as the distinction here, primarily because the words fluff and crunch make me think of marshmellow fluff and crunchy peanut butter, two components of one damn fine sandwich.
See, I'm getting hungry already.
Anyway, the key to the system design lies in figuring out what parts of magic items/spells address story elements and which parts address system elements.
Being able to fly is a story advantage for the characters. It's useful, and it opens up tactical options, but it doesn't mean anything when the beholder zaps you with his disintegrate eye. A flying monster still needs to get close to you to affect you, and there are things you can do (independent of the rules) to neutralize its power, like run into a cave.
That disintegrate eye, OTOH, is a rules issue. It has X% chance to hit you, and then X% chance to kill you. There are story things that can help you deal with it, like running into a cave, but a designer has no control over those. I can't design a (good) game that tells the DM to include a cave that the PCs can hide in as part of every encounter.
So, you need to sort the story stuff that the DM has absolute control over from the game stuff, which he usually doesn't have control over (IME, the vast majority of players object to house rules unless they take part in the rules' creation.)
You'll notice that IL is designed to use the MM, but it isn't necessarily designed for use with every d20 adventure out there. Some adventure assume that you can fly, or that you can teleport, or that you can breathe water, or whatever.
But you know what? Those story bits don't matter, because just as the DM can say "You need to fly to get to this city" he can also say "... and this griffon is willing to take you there." As a DM, it's really easy to design that stuff. The monsters in the MM don't care where they are or how they got there. They just have their BAB, damage, AC, and so on, to pit against the PCs, and that's what IL is balanced against.
As a consequence, high level IL adventures are far easier to design. You can now run a murder mystery for 15th level PCs that doesn't immediately end when the wizard and cleric team up to read everyone's minds, talk to the gods, and teleport to where the murderer is hanging out. In many ways, IL hands DMs far more control over the story elements surrounding the game bits.
By the same token, the changes needed to rip out spell bleeders (environmental stuff in an adventure that's basically there to force you to use spells to deal with the environment, like an underwater adventure, an aerial adventure, an adventure in a lava cave, etc.) are trivially easy to handle. In a lot of ways, those factors are a lot more fun now because they have a far bigger impact on the game. If you run an underwater adventure, you can do that at any level in IL. The characters can't just snap their fingers to turn the environment into something that just forces them to bleed a few spells to treat it like any other dry land adventure.
If you've ever come up with a real cool adventure idea, then realized that the adventure would never fly because of a spell like teleport, or detect thoughts, or divination, you're going to love Iron Lore. The story side of the game is much, much easier to deal with.
So that's the basic issue - a lot of the stuff that magic items let you do doesn't have a real impact on how you can fight the stuff in the MM, but it does make things tough on the DM when he wants to come up with the story elements for his game.