Microsoft is working on a new engine that allows users to create a rich user interface and thus allows them to hide the underlying OS. Its codenamed as ‘Alchemy’. Alchemy is what will bringer richer UI scenarios such as smooth transitions, 3D animations, etc. that Silverlight enables. Alchemy also will allow developers to use Silverlight technologies on devices without requiring them to run in a browser- in other words it will provide users with a standalone Silverlight version.
This is a good strategy from Microsoft. Microsoft is shipping Flash with Windows Mobile as a plug-in (but not standalone Flash Lite). So with Silverlight UI, Microsoft enables and encourages users to learn Silverlight, and hopes that they will take up writing web applications. If they don’t, well Flash is already there. So no matter what happens, they win!