Silverlight 1 is purely AJAX and JavaScript based. All the code has to be written in JavaScript and XAML.
Silverlight 2 supports managed code. When the Silverlight 2 runtime is installed, it installs a limited version of the .NET runtime on the client machine. This allows .NET programmers to write managed code to be executed on the client PC, and provides a better user experience to users. Of course, there is security restrictions built in to it so that the code has limited access to the client computer.
The biggest change is the implementation of the .NET Framework. If you are familiar with Silverlight 1.0, then you will be used to coding the application functionality in JavaScript. You can still implement functionality using JavaScript; however, you can now also implement functionality using C#, Visual Basic, Python, Ruby, and managed JavaScript.
Another major change is the introduction of the XAP package. In Silverlight 1.0, the XAML code was referenced directly by the Silverlight object embedded in the browser. In Silverlight 2, however, the embedded object references an XAP package that contains the XAP file, assemblies, and resources necessary to run the Silverlight application.
