After our initial reveal of the Xbox 360 avatars, it was still in the realm of rumors. Now, after the Microsoft press conference, we can be sure that they are absolutely real. And they're just a small part of a much larger overhaul to the entire 360 Dashboard. Avatars will integrated into the larger 360 experience via a community "channel", when your friends come online, their avatars will appear in said channel.
Microsoft is also creating a party system via the community channel which will allow for users to chat in large groups, share the media from their hard drives, and more. Demonstrated was the ability to move the party from photos, to videos, to games all while keeping the party of Avatars and players together.
Also unveiled was "Xbox Live Primetime" which allows for Avatars to be used in a mix of game show, video game and traditional TV. Additionally, Microsoft promises to have "real prizes" available through Primetime.