OK, this is an interesting issue.
I'm thrilled to have the formatting show correctly on our registration page finally! And if a user tries to use a name with a space in it, the system kicks back an error message which shows up. All good so far.
The issue is that the user's information is passed through and a new user is created but not activated. Then when the user tries to resubmit their information with a different user name, it kicks back an error saying "sorry, that email is already taken." Which is true, because although the error message was registered, the new user was still created.
Here is a link to the site: http://www.jewelorjalopy.com/registration-page/
if anyone wants to try it out. Just try a username with a space in it, and you'll get the error message.
Given that we are using WP, Buddypress, BBPress and Membership I'm not sure where the conflict is coming from.