Solution found.
I activated the upload progress bar and set up the paths.
Then since the progress bar has never worked for me with the new menoder, I changed it to the old version.
Now I can upload files with or without spaces and they are converted correctly to underscore characters and the conversion to flv works.
I can also ftp files to the import folder and then as admin import the files and then again as admin locate and reconvert them under the Queue menu.

BTW this site is hosted on Dreamhost.