650c wheels are fine. I don't understand the vitriol thats generated sometimes against anything thats different. For the record I think the woman rider in this picture is quite well fitted on this bike however take note that she has quite a bit of seatpost extension and her seat is higher than her handlebars. If every one who rode this size bike had their seatpost extended this far then their fit would be fine too however this is not often the case. I can see that her knee isn't rising too high at the top of the stroke and her elbows are bent showing that the top tube isn't too long. I'd say that she would be 5' 5" tall or thereabouts.

Back on topic I think the bike store has offered the correct advise based on what I can deduce although I obviously haven't inspected the wheel. I suspect that the nail has gone right through the rim damaging it beyond repair. It happens.

Regards, Anthony