Absolutely true! The merger-politics, the marketing missteps, and the cool technology that got buried are all epic.
Image-based development also didn't sit well with a lot of people
Not so true, for those who really "got it" and hit their stride, and anyone who comments who didn't get to that point is commenting as a clueless newbie. In image-based development, all of your programming meta-data are there as live Objects, instantly scriptable, totally and instantly obedient to your every whim. Ditto for runtime state -- everything available as live Objects and instantly scriptable. Really, once you learn a suitable style, it's heavenly, intoxicating and addictive. The same thing is true for Python and Ruby, but only about half as much. For example, a lot of advanced IDE functions require one to detect changes to files and re-parse things to keep programming metadata current. That problem just vanishes with image-based development. Literally hundreds of problems just vanish because everything is an object and they're all instantly available.
On the other hand, image-based deployment SUCKS. Sucks sucks sucks. Just about every Smalltalker agrees. The big advantage of being file based is that your development test environment resembles your deployment, or is at least halfway to deployment by comparison. Image-based Smalltalk development is like the ultimate monkey-patching uber-debugger. Very cool to develop in, but you do not want to give it to your users!