I've only watched the first 5 minutes of the episode because we didn't finish season 5 until after midnight so don't know if there's any more detail about Desmond.
I think that if the island is under water then that happened in 1977 when Juliet detonated the nuke. If that is the case then Widmore may very well be dead and Penny might not exist (don't know how old she is supposed to be). If Widmore never left the island then there's no boat race for Desmond to go on and he would never have crashed. So Desmond could be anywhere since he can't be on the island.
I think the two realities are supposed to be connected and that people are going to start seeing flashes/memories of the last 5 seasons, probably starting with Jack. If Desmond didn't do the race he likely wouldn't have been training in LA so wouldn't have met Jack then, so I'm assuming Jack recognised him because it's the first sign he rememebers it all.