Hiawatha does a simple search and replace for variables. There is no need for the plus sign. So, you could use the following:
set [progdir] = C:\Documents and Settings\pippo\Desktop\hiawatha-7.5\
WorkDirectory = [progdir]Hiawatha\work
Hiawatha does indeed have a hard coded "C:\Program Files". Hiawatha is build for Unix. Because Cygwin makes it so easy to make a Windows binary, I provide one. But it should only be seen as a 'nice to have'. If you want a version optimized for your OS, install Cygwin. Download the source, change extra/cygwin_config.h and do a "./configure && make win" to compile it.