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What are some good current Smalltalk implementations? The only one I've really heard of is Pharo.

Try Squeak http://squeak.org It is a good implementation and has a very friendly community.

Looking at that (and Pharo) it seems like all applications run inside the development environment. Is that correct?

That's at least some of the reason Smalltalk is useful. It's also probably the main reason Smalltalk has never taken off.