Problem:
When “Use Category Names In Links?” is set to “Yes”, visiting a page with a category that has spaces in its name is not causing Weblog Entries tags to display the right entries.

Solution:
Spaces in category names used in the URL are not supported.  As noted in the Global Weblog Preferences form:

If you choose to use the category name make sure when you create categories you name them using only alpha-numeric text.

Please see the Wiki article: Spaces in Category Names in URLs for the suggested workaround.