When I click on a text file and say open (.txt is associated with text pad), texpad tries to open each portion of the file location in a separate (fake) file: e.g., c:\documents and settings\gfurash becomes "c:\documents" "and" "settings\gfurash" - none of which are real files.
Also - check your "files in document class" settings .. if it really does say ".txt" then try "*.txt" ... because i'm not experiencing the problem you described and mine says "*.txt"