diff --git a/src/Session.cpp b/src/Session.cpp
index 545674802..19887bd95 100644
--- a/src/Session.cpp
+++ b/src/Session.cpp
@@ -53,6 +53,7 @@
 
 #include "Pty.h"
 #include "TerminalDisplay.h"
+#include "ShellCommand.h"
 #include "Vt102Emulation.h"
 #include "ZModemDialog.h"
 
@@ -170,12 +171,15 @@ void Session::setCodec(QTextCodec* codec)
 
 void Session::setProgram(const QString& program)
 {
-    _program = program;
+    _program = ShellCommand::expand(program);
+}
+void Session::setInitialWorkingDirectory(const QString& dir)
+{
+    _initialWorkingDir = ShellCommand::expand(dir);
 }
-
 void Session::setArguments(const QStringList& arguments)
 {
-    _arguments = arguments;
+    _arguments = ShellCommand::expand(arguments);
 }
 
 QList<TerminalDisplay*> Session::views() const
diff --git a/src/Session.h b/src/Session.h
index 68698d1c4..55a2e17fe 100644
--- a/src/Session.h
+++ b/src/Session.h
@@ -197,7 +197,7 @@ public:
    * Sets the initial working directory for the session when it is run 
    * This has no effect once the session has been started.
    */
-  void setInitialWorkingDirectory( const QString& dir ) { _initialWorkingDir = dir; }
+  void setInitialWorkingDirectory( const QString& dir );
 
   /**
    * Sets the type of history store used by this session.
diff --git a/src/ShellCommand.cpp b/src/ShellCommand.cpp
index 3ee5720c5..bab8ad5b9 100644
--- a/src/ShellCommand.cpp
+++ b/src/ShellCommand.cpp
@@ -25,6 +25,10 @@
 
 using namespace Konsole;
 
+// expands environment variables in 'text'
+// function copied from kdelibs/kio/kio/kurlcompletion.cpp
+static bool expandEnv(QString& text);
+
 ShellCommand::ShellCommand(const QString& fullCommand)
 {
     bool inQuotes = false;
@@ -87,3 +91,81 @@ bool ShellCommand::isAvailable() const
     Q_ASSERT(0); // not implemented yet
     return false; 
 }
+QStringList ShellCommand::expand(const QStringList& items)
+{
+    QStringList result;
+
+    foreach( QString item , items )
+        result << expand(item);
+
+    return result;
+}
+QString ShellCommand::expand(const QString& text)
+{
+    QString result = text;
+    expandEnv(result);
+    return result;
+}
+
+/*
+ * expandEnv
+ *
+ * Expand environment variables in text. Escaped '$' are ignored.
+ * Return true if expansion was made.
+ */
+static bool expandEnv( QString &text )
+{
+    qDebug() << "Expanding text: " << text;
+
+	// Find all environment variables beginning with '$'
+	//
+	int pos = 0;
+
+	bool expanded = false;
+
+	while ( (pos = text.indexOf(QLatin1Char('$'), pos)) != -1 ) {
+
+		// Skip escaped '$'
+		//
+		if ( pos > 0 && text.at(pos-1) == QLatin1Char('\\') ) {
+			pos++;
+		}
+		// Variable found => expand
+		//
+		else {
+			// Find the end of the variable = next '/' or ' '
+			//
+			int pos2 = text.indexOf( QLatin1Char(' '), pos+1 );
+			int pos_tmp = text.indexOf( QLatin1Char('/'), pos+1 );
+
+			if ( pos2 == -1 || (pos_tmp != -1 && pos_tmp < pos2) )
+				pos2 = pos_tmp;
+
+			if ( pos2 == -1 )
+				pos2 = text.length();
+
+			// Replace if the variable is terminated by '/' or ' '
+			// and defined
+			//
+			if ( pos2 >= 0 ) {
+				int len	= pos2 - pos;
+				QString key	= text.mid( pos+1, len-1);
+				QString value =
+					QString::fromLocal8Bit( ::getenv(key.toLocal8Bit()) );
+
+				if ( !value.isEmpty() ) {
+					expanded = true;
+					text.replace( pos, len, value );
+					pos = pos + value.length();
+				}
+				else {
+					pos = pos2;
+				}
+			}
+		}
+	}
+
+    qDebug() << "Expanded to" << text;
+
+	return expanded;
+}
diff --git a/src/ShellCommand.h b/src/ShellCommand.h
index e2d3bc6bb..e8e243af8 100644
--- a/src/ShellCommand.h
+++ b/src/ShellCommand.h
@@ -66,7 +66,9 @@ public:
     /** Returns the arguments. */
     QStringList arguments() const;
 
-    /** Returns the full command line. */
+    /** 
+     * Returns the full command line. 
+     */
     QString fullCommand() const;
 
     /** Returns true if this is a root command. */
@@ -74,6 +76,12 @@ public:
     /** Returns true if the program specified by @p command() exists. */
     bool isAvailable() const;
 
+    /** Expands environment variables in @p text .*/
+    static QString expand(const QString& text);
+
+    /** Expands environment variables in each string in @p list. */
+    static QStringList expand(const QStringList& items);
+
 private:
     QStringList _arguments;    
 };