System 7.5 users may update the Launcher only by acquiring disks one and three of the System 7.5 Update 2.0 disk set and performing a custom install of the Launcher control panel.
Other workaround solution
This issue shows up in environments where creation of folders is very frequent. Eventually, the directory ID, known as dirID (an unseen folder counter in the file system) becomes too large for the Launcher to process correctly. With this understanding, the following solution could also be adopted.
Locate a folder on the hard drive that has been around for while and would therefore have low dirID number. Using a temporary folder -- the contents of the old folder and the Launcher's failing bullet-named category folder can be swapped, the folder names interchanged, and the folder locations reversed. The old folder with the lower dirID should be processed correctly as a Launcher category folder.