This is just a straight copy of an e-mail I posted on the LS Mailing list, it explains what the problem is and how to work around it.

I'm really surprised I haven't heard anything about this... I had a
post on Litestep.net's forums about a problem I was having getting
popup2 to display icons for certain entries, and I was able to figure
out the problem. Popup2 doesn't seem to show an icon on any entry
whose path uses an evar (even if the evar is correctly pointing to
the target. The popup entry would WORK, it just wouldn't show an icon
or the default icon). I'm thinking popup2 parses evars correctly for
the file path, but not for the icon. I'm using popup2.dll from the
02-09-2003 indiestep build (which I believe is still the latest),
though I'm relatively certain the problem goes back further than
that. I can reproduce the following by doing this:

*Popup &Search... "$miscDir$find.exe"
that line opens the find dialog but does not display an icon
*Popup &Search... "c:\litestep\themes\paradox 2.0\misc\find.exe"
that line opens the find dialog and properly displays the icon

if the full path is loaded into a global evar and that evar used
alone in the popup line it works though, IE

FindUtility "c:\litestep\themes\paradox 2.0\misc\find.exe"
with
*Popup &Search "$FindUtility$"
works as it should, with the icon.

Furthermore the problem seems to be recursive, if I use
*Popup "LSDocs" !dynamicfolder:"$litestepdir$\lsdocs\*.html"
none of the entries in the dynamic folder have icons, however
*Popup "LSDocs" !dynamicfolder:"c:\litestep\lsdocs\*.html"
works fine.

Has anyone else noticed/can confirm this? Is there a newer version of
popup2 floating around somewhere that I somehow didn't hear about?
Thanks in advance.