In order for the Sword of Illiven to “grow with” Valon, he shares his experience points with it— similar to the way a spellcaster would give a little of his/herself to make a magic item or scroll. This method of item improvement is explained in Dragon #289 pages 56-58 in an article called “Leveled Treasures” by Stephen Kenson. To make the Sword a +2 weapon, Valon would need to give it 1600 xp when he hit 5th level (or higher).