This is a "known" issue that was fixed after 1.4. Fortunately, it can be fixed.
The problem is when you use Parent Categories, the URL to the child category in the Category List widget combines the parent category name and the child category name. The URL should only contain the child category name.
To fix this, in the App_Code\Controls folder, there's a file named CategoryList.cs. In it, you should find this line of code:
anc.HRef = Utils.RelativeWebRoot + "category/" + Utils.RemoveIllegalCharacters(key) + BlogSettings.Instance.FileExtension;
The correct line SHOULD BE:
anc.HRef = Utils.RelativeWebRoot + "category/" + Utils.RemoveIllegalCharacters(cat.Title) + BlogSettings.Instance.FileExtension;
Similarly, for the little RSS feed icon, you probably currently have:
feedAnchor.HRef = Utils.RelativeWebRoot + "syndication.axd?category=" + dic[key].ToString();
But this should be:
feedAnchor.HRef = Utils.RelativeWebRoot + "category/feed/" + Utils.RemoveIllegalCharacters(cat.Title) + ".aspx