This has been discussed ad nauseum, even in the last Slashdot article, but: no, Parakey does not do "everything an OS can do" from a technical perspective, which is the only perspective most people here care about. That should be obvious. The quote was in the context of average users--people like my mother--who are not thinking about concepts like memory management. The idea is that Parakey accomplishes the functions of an OS (and much more) from an *end-user's* perspective.
I'm confident the truth won't stand in the way of another 200 posts on this topic :)