From newly converted ARC MVP Sam Gentile, I found this interesting post from Drew Marsh about how XAML is compiled:
XAML is indeed a language, but it is never compiled into C# or IL... The truth is, it's not "compiled" at all. If anything you can say it is "compacted" and that only happens in scenarios where it is turned into a BAML stream. That, however, is an optimization and not a necessity for XAML to work. XAML can be interpreted purely in it's raw XML text form, using Parser::LoadXml. Even BAML is interpreted, it's just a far more compact and efficient representation of the object graph than raw XML text.[Drew Marsh - The XAML Experience]
Given that I just wrote about compiling, I wanted to weigh with a couple of points:
XAML isn't the only place where the traditional compiling to executable model is being stretched. In Windows Workflow Foundation, though your workflow is defined as a type, you can actually modify running instances of the workflow. Given that WF supports declaring workflows as C# or XOML (soon to be XAML), I wonder if they are going to go the same route as WPF and eliminate the C#/IL way of declaring workflows. Another interesting example is LINQ and C# 3.0. This is interesting because you can use LINQ directly on in memory data, but when you apply it to database (via DLinq) the LINQ statements are parsed into expression trees then converted into SQL. (Check out this post from Ian Griffiths for deeper coverage of expression trees).
Anyway, it's late and I realize I've written quite a bit to basically say that the definition of "compiled" is pretty blurry at this point and getting blurrier going forward. In the end, it's much more interesting IMO to focus on the model environment you're working in (XAML in this case) rather than the details of how that model is translated into the execution environment, unless you're the one building those translation tools.
UPDATE - I had one other thought on all this. It's interesting that computing power (CPU + IO bandwidth) have improved to a point where the performance of interpreting BAML at runtime is as fast than executing XAML compiled to IL directly. I certainly wouldn't have assumed that.