If the arguments to a replace command are in lower case, it preserves case when it makes a replacement. Thus, the command
M-x replace-string RET foo RET bar RET
replaces a lower case `foo' with a lower case `bar', an
all-caps `FOO' with `BAR', and a capitalized `Foo' with
`Bar'. (These three alternatives--lower case, all caps, and
capitalized, are the only ones that replace-string can
distinguish.)
If upper case letters are used in the second argument, they remain
upper case every time that argument is inserted. If upper case letters
are used in the first argument, the second argument is always
substituted exactly as given, with no case conversion. Likewise, if the
variable case-replace is set to nil, replacement is done
without case conversion. If case-fold-search is set to
nil, case is significant in matching occurrences of `foo' to
replace; this also inhibits case conversion of the replacement string.