As far as my undergrad school is concerned, the F's *are* replaced by the new grades and thus they do not calculate the F's into the GPA, however, the original F's and dropped classes will still show up on the official transcript and thats how LSAC recalculates it into a lower GPA, because it takes everything into account whereas the UG school sometimes does not.
It sucks, but i guess it's a way of making everything standard.