What the heck is imagination? Well, glitches now have imagination (iMG) instead of XP. You gain iMG by questing, crafting, and collecting (i.e., by playing the game), and you can spend it on upgrades and various other gizmos still in the works. In short, iMG allows you to "create, grow, and customize the world and your character." It also serves as a nifty way of explaining new game abilities as opposed to boring old XP.
TinySpeck has authored a FAQ on the imagination changeover. Give it a read-through before you log in, as both the level curve and your character's accumulated XP have undergone significant changes.
[Thanks to Halldorr for the tip!]