There are 3 places (except one unrelated in ./themes/modus/admin/admin.inc.php) found for a

grep -r "str_replace( *'_' *, *' '" .

./admin/element_set_ranks.php:                  $thumbnail_name = str_replace('_', ' ', $file_wo_ext);
./admin/site_update.php:        'name'        => str_replace('_', ' ', $dir),
./include/functions.inc.php:  return str_replace('_',' ',get_filename_wo_extension($filename));

of which the one in ./admin/site_update.php where the directories are looped seems to be related. However, I don't know what exactly would happen if that was changed.. probably only new directories would be treated, worst case you might end up with duplicated category names with and without underscore (though it doesn't look like, but I didn't investigate deeper).

Btw, I think having spaces instead of underscores for display purposes is nice. Category URIs are generated with underscore again.