I'm worried about layout here mostly. Should the fluff come first, and then the crunch second, or vice versa? Perhaps the two should be interspaced - say notes about the characters and technology first, then character creation, followed by notes about society, then the combat rules etc.
One of my projects features a continuous story of a character talking to the reader, with rules and so forth as either parenthetical remarks, side bars, or pulled out sections (ie gray background italics between two paragraphs) However, this has been quite on and off since I'm not sure if it would word.
As a second concern - how closely should the story and mechanics intertwine. Is story there to illustrate the mythology of the world, or is it grounded in what characters are really capable of?
Wether one should have the fluff writen, then adapt rules to it, or adapt story to system is more of a left/right brain thing I think. Then again, I seem to have started with mechanics ideas first a number of times, despite being a very right brained individual.

All is good
There are advantages and disadvantages to all these approaches. Personally, my favourite is to put a lot of the fluff upfront and then tag the rules on afterwards. Castle Fakenstein worked nicely this way, and so did a lot of the WoD products. It gives the players/ref an idea of what they're getting into and sets the scene.
If the rules are going to be a bit "heavy", then do put fluff in amongst them. I have found the old G3e layout to be a bit confusing at times (particularly when the fluff is good, but the subject matter is essential), but it was a life saver in Far Trader. I almost gave up on the rules for trade mechanics, except for the fluff that gave good examples of what was going on.