I think that password might be the "execute as root" .. so it is either asking for root's password via su, or it is using sudo and your user is not able to run sudo without a password in the sudoers file. (look around the forums for solutions).

I don't think the run in xterm checkbox works.. I've used that before and had the same result.. and empty xterm window opened and just sat there; while the app I ran went into a new window. There didn't seem to be any purpose at all to that other xterm window.