I find a significant quantity of websites visited, most often myspace.com to generate the following area when accessed via hotspot mode:

Mikrotik HttpProxy
Error: 400 Bad Request

(for example, I just tried setting the 'mood' and the entire page didn't load, giving me that error)

Sometimes its just advertising, sometimes its the entire page. Not every site does it. I'm wondering what is causing this...

I use a webcache on the same machine running the hotspot. The hotspot's NAT host is not included in the nat forwarding for the transparent proxy.

Any ideas would be appreciated!

Which version do you use ? (make sure it is the latest version).
Note, that HotSpot uses embedded proxy too (if this option is not disabled for you).