Unremovable Links in OSX Finder Sidebar

Before anything, you should try renaming the folder. It will most likely not break your app because of how HFS works. But there are indeed some applications that might not link properly to files.

I could come up with 4 different solutions:

1. This may be the simplest: do it the other way around. Use whatever name you like on the folder and add an Alias to it. Grab the folder with the name you want and add it to the sidebar. The alias will not change. In your instance, you'd rename your Applications from within your "username" folder to something like My Applications and as we already know, that would be the enforced name on the sidebar. Then add an alias (or a symlink) to it called Applications, which will probably work for your program.

   As Daniel said as a comment, you can aditionally hide the alias or the folder (but not the symlink) from finder by using: chflags hidden folder/alias. Use chflags nohidden folder/alias to show it again and with ls -lO (that's a capital o) you can see its flags on Terminal.

2. Use a savedSearch. You can name them whatever you want. Steps:

   1. go to that alternate Applications folder
   2. begin a search typing anything
   3. clear whatever you typed in
   4. select "File Name" (rather than "Contents") and your folder (rather than "This Mac")
   5. press the + sign
   6. press on Kind to add Other
   7. choose File Visibility and suit your taste
   8. press "Save", choose any name leaving the ".savedSearch" intact
   9. make sure "Add to Sidebar" is ticked.

3. If you prefer trying the hack, good luck with it. Basically you would edit ~/Library/Preferences/com.apple.sidebarlists.plist (use Property List Editor if you have XCode installed) and change the Name of your custom useritems and restart Finder. Supposedly option+right click on Finder and Relaunch would do this last trick. I couldn't myself reproduce this and make it work, but maybe it will if you reboot the machine. I doubt anyone would ever build any tweaker for such an overlooked feature.

4. ForkLift is a great Finder alternative that will accept aliases on the sidebar.

I had the same problem, turning off legacy FileVault, as Andrey suggested, solved the problem for me.

Legacy FileVault encrypts the user's home directory only, whereas FileVault in Lion encrypts the entire disk. I'm almost sure, adding the home folder to the sidebar will work with Lion's standard FileVault activated.