If memory serves me right... this is what the bug is about:
In TOS, memory is reserved to cache the filestructure of the disk. This cache was in TOS 1.0-1.02 big enough for 40 folders, and is reset every time you change disk.
Now, this was never a problem with floppydisks, very few floppys contained that many folders, and people swapped them back and forth every once in a while, resetting this cache.
But with the harddrive, it was never reset.
So what happened?
The 40 folder buffer/cache filled up, and when it was full, it kept on writing. Causing a buffer overflow or whatever you decide to call it, and the next time you saved a file, and TOS saved the 'new' filestructure to disk, the overflowing part, by now likely to be filled with data from something else, got saved with it, causing havoc on the filesystem.
Result: Crashed drive.
Quick solution, the FolderXXX.prg patch, letting people expand this limit to a few hundred folders instead, to prevent the overflow from happening.
With TOS 1.04, Atari removed the acute need for folderXXX.prg. They expanded the default size for the buffer, aswell as putting in a safe guard against it trashing the drives filesystem, and HALTs the system if the limit is reached.
With TOS 2 Atari finally removed all need of folderXXX.prg with a dynamically allocated buffer.
This is just to improve speed on harddrives. Newer harddisk drivers include a cache. So this program only make sense for those still using AHDI.