Shader replacement is a technique for improving performance by rewriting pixel shader programs (the most common, but potentially also vertex shaders) that ship with a game to run better on a specific piece of hardware or shader architecture.
The only proven example of shader replacement so far is ATi's Doom3 replacement shader, which susbstitutes math instructions (which the ATi shader architecture is good at) for the original texture lookup instructions (which ATi is poor at compared to competing shader architectures).
Most of the fuss and controversy surrounding the issue, was fuelled by ATi and its supporters, alleging that their competition makes widespread use of shader replacement. As staed above, the Doom3 shader, by ATi is the only proven example sof far...