A widget is a micro application that runs inside another host application. This host application usually contains its own programming language such that to make a widget you do not need to be extremelly knowledgeable in code, rather you only need some basics: so in perhaps a standard program language you might need to write a string like:
draw box 123,123 to 345,345
shade box color 445234
draw box.....
shade....background color etc.
In a widget it may read:
Big Hollow box: green
And the widget engine interprets this data and displays it using its own code.
As for the Yahoo widget engine: the new one uses half the system resources of the old one, plus for Windows XP users, it is an ideal alternative to the Vista toolbar: more options and applications available, looks better, uses less system resources, and you can even write your own widgets if you can't find exactly what you are looking for!
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