It appears that they're introducing a mark-up language called XAML, which is "based on" XML. This will basically interface to native widgets and their whole .NET distributed objects thingy. They'll use this to write their application GUIs in. They'll also encourage web sites to use it to write their front-ends. I suspect a lot of web sites would like a more functional GUI than HTML provides without the bloat of Flash. Eventually all the web are belong to Gates, and those Linux and Mac users are locked out in the cold, starving to death unable to buy their groceries, books or entertainment, having long since forgotten about real shops.
However, the up side is that none of this is happening in a hurry, and MS failed with exactly the same trick with Blackbird in 1995. OTOH, avoiding an open cross-platform application framework from being developed was exactly why MS squashed Netscape, and there might not be enough non-MS traffic to encourage web sites to go down any other route before MS come along with their solution.