Avalon takes full advantage of a DirectX 9-compatible video card for hardware acceleration, but has a software fallback mode for lower spec machines. It's inevitably somewhat slower but you'll certainly be able to explore the fundamentals of Avalon development quite happy this way. I have the November CTP running fine on a Virtual PC box.

To answer some of the other questions, this MSI file contains the appropriate build of .NET Framework 2.0 (any of the Beta 1 releases should work) and should install happily side-by-side alongside .NET Framework 1.1. But as Charles says, this is a fairly rough and ready pre-beta version, so don't bank on it in a critical environment!