You can indeed level your characters. You need a day of general downtime, i.e. no fighting, climbing mountains, riding at full speed or casting 'strenuous' spells (generally, normal utility spells are OK, but no casting Fireball or Tenser's Transformation et.al.) if you want to level up during that day.
On the rules, currently we're using 3.0, with 3.5 skills and DR (skill changes including the change from Animal Empathy skill to Wild Empathy class feature).
"I'd appreciate it, thank you", Chendra says. "So, are we ready to go? I want to taste freedom."