diff --git a/lisp/files.el b/lisp/files.el
index 5cdd384..7d92535 100644
--- a/lisp/files.el
+++ b/lisp/files.el
@@ -675,10 +675,14 @@ parse-colon-path
 a leading or trailing separator, or two adjacent separators), return
 nil (meaning `default-directory') as the associated list element."
   (when (stringp search-path)
-    (mapcar (lambda (f)
-	      (if (equal "" f) nil
-		(substitute-in-file-name (file-name-as-directory f))))
-	    (split-string search-path path-separator))))
+    (let ((path (mapconcat 'identity
+                           (mapcar 'substitute-env-vars
+                                   (split-string search-path path-separator))
+                           path-separator)))
+      (mapcar (lambda (f)
+                (if (equal "" f) nil
+                  (file-name-as-directory (expand-file-name f))))
+              (split-string path path-separator)))))
 
 (defun cd-absolute (dir)
   "Change current directory to given absolute file name DIR."