Anyway, the two problems that pop into my head, even though I am totally unqualified to analyze the problem, are that Io doesn't use classes (Io site says it is more powerful than mere classes and can implement classes in Io)

The fact that Io doesn't use classes is largely irrelevant, the Io->Parrot compiler will decide what it needs to represent Io structures in, which will likely be Parrot PMCs of some kind, but Io doesn't need to care either way. There is no need for there to be a one-to-one mapping of language level "things" to VM level "things". I can't seem to find any docs on Io's VM instruction table, but I imagine it is quite small. The YARV (Yet Another Ruby VM) instruction table is a good example of this. The first ~50 instructions are all that are needed to run Ruby, all other instructions after that are just optimizations.

Oh, and incidentally Question 2: Io talks about being good for embedded.

In this context they mean embedding Io into your own (C/C++/etc) application, for use as a scripting language. However, there is nothing to stop you from running that application on an embedded platform (PDA, cell phone, etc). In fact, Io is ideally suited for just this type of application since it has such a small footprint.