Version:            (using KDE 4.0.3)
Installed from:    SuSE RPMs
OS:                Linux

When setting a menu entry to start in terminal mode, the started process does
not run into the directory chosen by the "work path" option.

The same is true when editing manually .desktop files: if Terminal=true, Path
variable is not used. 

You can quickly reproduce this behaviour by creating a script:
echo `pwd` >> /tmp/touched

And then creating a menu entry for it, setting a "work path" value. Run it
first without selecting "run in terminal", the checking it.

I'm using opensuse 11 Live cd kde4 20080430 i386.