Like this:

DROP TABLE #Tbl1

DROP TABLE #Tbl2

DROP TABLE #Tbl3

CREATE TABLE #Tbl1 ([sid] int, cid int)

CREATE TABLE #Tbl2 (oid int, tnum varchar(10))

CREATE TABLE #Tbl3 (rec_id int identity, otnum varchar(10), ntnum varchar(10), [sid] int)

INSERT INTO #Tbl1 ([sid], cid)

SELECT 1, 10 UNION ALL

SELECT 2, 20 UNION ALL

SELECT 3, 30 UNION ALL

SELECT 4, 40 UNION ALL

SELECT 5, 50 UNION ALL

SELECT 6, 60 UNION ALL

SELECT 7, 70

INSERT INTO #Tbl2 (oid, tnum)

SELECT 10, '100 0' UNION ALL

SELECT 20, '2000' UNION ALL

SELECT 30, '300 0' UNION ALL

SELECT 40, '4000' UNION ALL

SELECT 50, '500 0'

-- Step1:I need to select tbl1.sid using a join of tbl1 & tbl2 based on tbl1.cid=tbl2.oid-working fine

-- step2:All the selected sid's need to be inserted into Tbl3-woking fine

INSERT INTO #Tbl3 ([sid])

SELECT tbl1.[sid]

FROM #tbl1 tbl1

INNER JOIN #tbl2 tbl2 ON tbl1.cid = tbl2.oid

-- step4:insert each updated record into Tbl3-stuck???

INSERT INTO #Tbl3 ([sid], otnum)

SELECT oid, REPLACE(tnum, ' ', '')

FROM #Tbl2 Tbl2

WHERE tnum LIKE '% %'

-- step3:After this I need to run an update query to remove spaces from tbl2.tnum &

UPDATE #Tbl2

SET tnum = REPLACE(tnum, ' ', '')

WHERE tnum LIKE '% %'

SELECT * FROM #Tbl3

SELECT * FROM #Tbl2