Silverlight 1.0 is a cut down version of XAML that Microsoft created for cross platform development and is where WPF/E (E is for Everywhere) came from. It is billed as the Microsoft's answer to Flash and runs via a plug-in.
XBAP only runs on Windows with .NET 3.0 runtime installed and currently is supported in IE and Firefox. It runs within a sandbox inside a browser.
Hence XBAP has better features, but less widespread support compared to Silverlight 1.0. This means XBAP is a good choice for intranet applications and user interfaces that are controlled. If you can get away with Silverlight 1.0's cut down XAML feature set, then this will give a wider audience and is probably a better choice for general Internet applications at the moment.
On the way though is Silverlight 2.0 (once billed Silverlight 1.1) which fills in a lot of the areas that Silverlight 1.0 was missing. One notable feature being the addition of a decent set of user entry controls that Silverlight 1.0 is lacking.
Check the link below to see what Silverlight 2.0 will bring to the table.
Silverlight 1.0 and 2.0 feature matrix comparison