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How do you level up in this game?? Killing enemies doesnt seem to give exp.

(+1)

You don't level up in this game, however you do get bonus HP and MP when you sleep after completing a chapter. Most of the progression is based on the equipment (the game isn't very focused on combat, anyway).

okay. Just seemed weird since in the status section it says level 1.

Yeah, it's one of those things I wasn't sure about at first when designing the game, so I left the default RPG Maker status window. I might change that eventually.