I agree with both of you, its more like an "OS inside and OS". However do note here that there is a project to make smalltalk into a true standalone OS called SqueakNOS. Of course I dont think of this as a special feature of Smalltalk, any language could be used to do the same. This is because modern languages come with loads of re factoring tools, GUI APIs and user environments. Smalltalk may have been the first to implement this approach (GUI wise) but no longer the only one.

Its not so much that smalltalk is an OS , but rather that is a Live Coding OS. The ability to hack application while they run, is something that could have a profound effect on user experience. Such features are hard coded to apps themselves and are not considered languages features for all non smalltalk apps.

But with smalltalk is not that you run an OS as much that you can hack any application on the spot , while it runs and see your changes immediately. This happens because smalltalk does not compile source files but rather methods and of course because of the flexibility of the whole system.

Smalltalk is an extremely user friendly environment for users that love to hack the easy way and not get insane in the process.