Actually what's happening is you are leveling up, but I never got the level display or a level up message working. Every time you level up your damage and max hp increases and the amount of xp needed to reach the next level increases by 20 percent. You get a flat damage boost of between 50% and 100% of your level (so at level 10 you are getting 5 to 10 additional damage. If you have picked up the sword this bonus is doubled.
Thanks for playing!