Ok, here's the fix I have found. Unfortunately I deleted my Classic install before trying this, but hopefully that's not necessary.
Connect the Pre to a PC in USB mode.
Backup anything you need from the ClassicApps folder.
Delete the ClassicApps folder.
Disconnect and Classic should now work.
Classic will recreate the ClassicApps folder, but there is a new structure:
PALM
+--Launcher
Install
Anything you want to be visible when in the emulator must be placed in PALM\Launcher.
If you put files in the Install folder, you will get the blue screen at startup. I'm not sure what the correct process for installing apps is now.
Under the Preferences of the Classic app, there are new options for emulator speed and sound. Sound still does not seem to work, and I'd be leery of activating the background alarms option right now.
Classic is made up of two pieces internally, a javascript bit that launches and handles some setup, and a background native part that does the emulation. Palm's update brought over the background part without updating the javascript front end. I suspect that it got accidentally rolled into the update, but I don't know.
This should get you running again until a real fix appears.
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Palm IIIx-->Palm Vx-->Kyocera 6035-->Kyocera 7135-->Treo 650-->Treo 700p-->Pre
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