i'm pretty sure there is a CHAR(13) + CHAR(10) in there, that you are not seeing, but is part of the data...THAT is what is getting replaced witha < br /> tag, and not a space.
this is especially true in SSMS when looking at data in the grid: the CrLf is in the data, but is NOT used in the gridview, because you cannot scroll DOWN in a cell, so it is stripped out for presentation purposes in SSMS; switching to Text View(control+T) would prove this.
for example, i'm sure your data looks like this:
Dear Customer, & n b s p; [CrLf] We'd like to invite you to a seminar[CrLf]
and when converted to html changes or appends a < br /> tag to the end of the [CrLf]
if you use a different text editor, for example Editplus, you can use it to see spaces,tabs and CrLf a lot easier. most Notepad replacements like Editplus, UltraEdit, NotePad++ and many others do the same.
see how a space is a floating dot, a CrLf is the paragraph sign and a tab is double arrow thingy...makes it much easier to visualize using a better text editor like this.
Lowell