Silverlight 1 is purely AJAX and Javascript based. All the code has to be written in Javascript and XAML.
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Silverlight 2 supports managed code. When Silverlight 2 runtime is installed, it installs a limited version of .NET runtime on the client machine. This allows .NET programmers to write managed code to be executed on the client PC and provide a better user experience to the users. Of course, there is security and restrictions built in to it so that the code has limited access to the client computer.
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