I think the lack of definition of "iOS 7 optimized" is what is confusing to those of us who haven't developed apps on iOS.
Yep. Starting from May of 2013, they will reject any app that letterboxes on an iPhone 5.
Does this mean that, essentially, we only build for iOS 7 onwards?
Apps that are built for iOS 7 get the new shiny keyboard and some different behaviour when run on iOS 7, but can still run fine on older versions of iOS if the app developer is willing to support older versions of iOS. This is done by setting an option called "deployment target" to an older iOS version when building in Xcode (and testing a ton on older versions of iOS, and not calling newer APIs on versions of iOS that don't support them).
So this announcement means Apple is dropping support for older versions of Xcode (with older iOS SDKs), but older versions of iOS are still technically supported as long as you're building with the iOS 7 SDK.
It means give primary focus to iOS7 in terms of performance, UI, design idioms, usage of underlying technologies etc….
It means don't build apps targeting prior iOS and just reply upon backward compatibility of iOS7. Use iOS7 as your main target OS.