It seems that this has been corrected in later versions - I may have to upgrade:
Installshield has fixed this issue in their Installshield 2011 and Professional editions.
http://kb.flexerasoftware.com/selfservice/viewContent.do?externalId=Q208910
IOA-000054509 (Basic MSI, InstallScript MSI, Merge Module, Transform)
It is now possible to add to a component a service that has one or more spaces in its name. Previously, InstallShield displayed an error if you tried to use spaces in a service name.
EDIT: In case anyone comes across this issue, I was able to overcome it by going to the direct Editor in InstallShield, then clicked on Service control. There, I was able to edit the name for the service - putting in the spaces. This changed it on the component under Advanced Settings as well. The installer now had the correct service nema to start and was able to do so.