How do I change an incoming uri to a different string before the VIP sends it to the Pool?

Depending on BIG-IP version (don't recall when it changed) the HTTP::uri command will always return what's in the request buffer, even if you've changed it inline. So what you're seeing in the last log statement is to be expected. Other than that, here's a slight modification to your iRule:

when HTTP_REQUEST { 
    log local0. "Request Before if statement: [HTTP::uri]" 
    if { ( [string tolower [HTTP::host]] equals "server.domain.com" ) and ( [string tolower [HTTP::uri]] starts_with "/webapplication?frc=AO" ) } { 
        log local0. "We are inside the if statement" 
        HTTP::uri "/flexiblewebapplication/index.jsp?frc=A0" 
    } 
}

If that still fails, then what happens if you navigate to "/flexiblewebapplication/index.jsp?frc=A0" directly?