It would be easier to help if you said what you were trying to do...(you said you wanted to replace o with 0, but what do you want to do with the text you get?)

$replace is used like this:
I want to replace the e in the word hello with the letter b, so I use this:
//echo -a $replace(hello,e,b)


Code:
on *:INPUT:*: {
  if ( o isin $1- ) {
    msg $active $replace($1-,o,0)
    halt
  } 
}
^I think that will do what you are trying to.