Can you post the code you are using. I just tested using this:

DECLARE @data NVARCHAR(MAX) = 'EXEC Proc_gen @PsID=12, @kID=-1, @ID=3183';

SELECT @data AS theData ,

REPLACE(@data, ' ', '') AS dataNoSpaces;

Granted I tested on SQL Server 2012, but I'm not aware of any changes to the REPLACE functionality between 2005 and 2012.

I don't have access to a 2005 server to test on and I don't think I want to spin up a VM just for that.