Has it been announced yet how iPhone 5 apps will work on older iPhones?
For example, if I create an app to take advantage of the 4 inch screen will I also have to create another version of my app to support the older 3.5 inch screen?
You don't have to create different versions at all. The reason why current apps cannot all the space is because they haven't been tested with the new iPhone, and therefore iOS _pretends_ they have a smaller screen.
The first thing you should do is ask the OS "give me a list of all screens". You'll get a list, and there will always be one screen for the device itself, but there can be more screens for example when the iPhone is connected to a TV. Some games use that to display the game on the second screen and use the first screen as a game controller.
Next you check how big the first screen is. And then you put windows and views on that screen according to the screen size. Like iOS itself, which puts fewer or more rows of apps on the screen, depending on screen size. Just don't assume that you know how big the screen is, it is as big as iOS tells you.
Now you could and should have done all that before the iPhone 5 was released (Mac developers do that all the time, because of resizable windows). But Apple knows that many developers didn't, and the code would be untested anyway. So the developer _first_ tells iOS that they know about iPhone 5, and then iOS tells them the true screen size. If they leave that step out, iOS lies - as a result, you don't get the full screen, but it works.
If a developer writes an app that works on iPhone 5, but not on iPhone 4S, then it probably won't pass the app store police
