Hmm, well I completely changed the interface. It is no longer a menu. It is a dialog that list the default folder colors available if that folder has no custom icon already, if there is a custom icon set it shows the icon or icon resource the icon is in and allows you to choose your own custom icon file (I was thinking about making it shareware since I put a lot more time into this and selecting a custom icon would be in the registered version, but not sure yet). So, I should be able to allow custom text under the icon on the dialog. Right now I use a number that corresponds to the icon number in the icon resource file.
I am not sure I completely understand your second request. Maybe since it is now on a dialog, that would not apply? See the screen shot attached for the new look as it stands now.