There's no way that the image shown would be a 2" sq Nano. Based on the image, that would make the click wheel about 3/4" in diameter and not very functional.

There also will still have to be an iPod that has a large storage capacity. There are too many people with large music/video libraries that will not settle for 8GB of memory. It only makes sense to have a "big screen" iPod with large hard drives.