Since MS have been, officially, very quiet about DCE - even at the WinHEC and PDC events - some people still fail to understand that whilst Avalon is the "presentation layer", it isn't the rendering engine which Explorer Glass is built on. That function still comes down to DCE, which will not be backported to XP.
Actually, I think you got some of the fine points of the Avalon graphics architecture wrong here. Avalon does include the rendering and compositing engine. The DWM is being built on parts of the Avalon platofrm.
The main part here to keep in mind is the UCE -- Unitified Composition engine. This is a evolution from what we were calling the DCE (Desktop Compostion Engine) and the ACE (Application Composition Engine) early on. We basically looked at the problems we were solving to composite applications on the desktop and we looked at the problems we had to solve to composite controls inside the app and discovered (huge surprise..) that these situations were very similar. So we merged these two parts together to create one unitified engine.
An instance of the UCE runs as part of every Avalon application (doesn't matter on OS) and does the composition for the client area of that application. This will allow any app developer to do transparencey and other cool composition effects inside of the window. The output of this UCE gets passed desktop management system for dispaly. When the DWM isn't running, this means that the content gets presented by DX or GDI (depending if HW accel is being used). When the DWM is running this content gets passed to an instance of UCE running inside of the DWM process.
The DWM process has an instance of the UCE that is special in that, when the DWM is running, it is the thing that finally takes the content and puts it on the screen via fulls screen DX. It is essentially an Avalon application that takes all of the client areas for each application (GDI, DX and Avalon alike) and merges those together into the composited desktop.
The basic architecture won't change with this announcement. However, the DWM will only be shipped on Longhorn as it is impossible to reasonably retrofit the redirection capabilities necessary to make it work on XP and W2k3. But *inside* the client area of an application the Avalon architecture remains essentially unchanged.
There are more details in my blog here: http://www.eightypercent.net/Archive/2004/08/30.html#a208.
After-post mint: I kept reading and it looks like you guys are way ahead of me and found our WinHEC slides. Avalon will basically run as it always has inside the window. The desktop composition stuff will be built on parts of Avalon and will run only on Longhorn.