I think it makes sense and it is technical possible.
1. The four thirds patent has a provision for a Square sensor, so is not limited to only4:3, and I quote from the patent:
"Cameras having various specifications may be applied in an interchangeable lens type digital camera system. Therefore, cameras can have imaging ranges with different aspect ratios even having the same image circle. Especially, even when an image pickup device with the aspect ratio of 1:1 is mounted to the camera system according to this embodiment, the length-to-width concept of the camera no longer exists. In this case, when a screen with an arbitrary aspect ratio is trimmed and is read from the imaging range, the direction for holding a camera does not have to be changed for vertically long pictures and horizontally long pictures. Thus, the usability can be improved."
2. Many potential 4/3 buyers have rejected 4/3rds just because they don't like the 4:3 aspect ratio. They are used to 3:2 film.
The "Whole Frame" format not only solves that but it also will attract the square format fans.
3. Marketing wise it does 2 things, a) Gives Olympus more room to expand on the advertised megapixels. b) Introduce a new Flagship product that can be competitive with Full Frame. Heck, "Whole Frame" is in fact a more complete frame than 3:2 FF is.
4. Being 4/3rds the smallest DSLR format it gives them the advantage on cost, so mirror, shutter, sensor, prism would cost less. Everything is smaller than the competition. Canon can't match it, because the EF-S mount registration distance is too small, and Nikon is busy frying the FF fish. I'm sure sensor cost is not an issue, since it would have the area of a 1.5x crop sensor.
A "Whole Frame" version for 35mmFF would not only be too costly, but impossible due to the FF mount size.
5. Panasonic has shown the concept before with the TZ3 and TZ5 cameras, is similar but without the square sensor. So they might be interested.
6. Problems: The larger mirror couldn't fit in there, but I doubt it since the 4/3 mount have a spacious (38.67 mm) registration distance and this would need just about 3 to 4mm extra for the larger mirror. The lens baffles are not a problem either, AFAIK none of the 4/3 lenses would block an 18x18mm sensor. A bit of a problem however are the lens hoods, but that is just a piece of $8 plastic that can be offer to match the larger square format, those hoods would be a bit larger, about the size of a Nikon DX hoods, but with nicer symmetrical petals. The only real problem is the one or two lenses that have non-removable hoods, but those can lenses or lens can still shoot 4:3, can't it?
7. The benefits seem too small at first, but when you think about it, is actually quite revolutionary.
- This would put an end to the long 100+ year aspect ratio compromises in photography (OK except 6x6MF). "Whole Frame" is a free aspect ratio camera. So whatever is your AR preference this camera will do it. (Broader market appeal).
- Not having to rotate camera is the best part I think, and that has multiple "real world" benefits. In a Basketball game for instance, the ideal composition is changing rapidly from vertical to horizontal to square in matter of seconds, so there is not time to rotate and compose. In a wedding, when a bride is throwing the bouquet, there is no way to anticipate how high it will go, so this will allow the flexibility of that shot to being fully captured. Windsurfing, Motocross, etc, those are events that require flexibility with framing.
-Gone is the big vertical grip, the hassle to rotate photos in PP, and the camera can be designed with better ergonomics and there is no need for in-camera orientation sensor either.
-No more missed shots due to clumsy rotations needed when the camera is mounted on a tripod or monopod.
-Because of the larger frame coverage, making multi row panoramas require less shots, and if your are making one-shot bubble surrounds this will make for a more efficient capture.
-When using telephoto or/and small apertures, most lenses cast a larger than nominal image circle, this would make possible then to take even larger square shots with little or no vignetting.
As you can see these are some of the benefits.
So I hope the rumor is true.
It looks like the perfect flagship product the 4/3rds need.
Especially now that FF cameras are eroding E-3 market share.
Olympus have now like 5 different models in their current line-up with the major difference among them seem to be just in the name.
And I think the rumored Photokina E-30 tweener won't cut it, is just "another camera", they need something more exciting, more aggressive and more high-end.
BTW, In case you haven't noticed, the "Whole Frame" sensor 3:2-2:3 match EXACTLY Leonardo Da Vinci's Vitruvian Man. So there shouldn't be any question about the right proportions.