This bug was reported on Ubuntu Launchpad as:
https://bugs.launchpad.net/bugs/388095

From the launchpad report:

There seems to be a couple problems with launchers in xubuntu 9.10 (perhaps older versions too):

1) mkdir "/tmp/foo bar"
2) cp /usr/bin/mousepad "/tmp/foo bar"
3) Right click the desktop and create a launcher pointed at /tmp/foo bar/mousepad
4) Double click the launcher - it will not launch mousepad
5) Edit the .desktop file and quote the Exec value
6) Double click the launcher and it works correctly (good)
7) Move the .desktop file into ~/.local/share/applications so that it shows up on the Applications menu
8) Click the launcher from menu and it fails to launch