I remember in the demo of Wave at Google IO, I was very impressed with the spell checker.
Its statistical approach meant that a word that was a valid dictionary word could be signalled as a spell error because statistically it didn't fit into the context.
The example that was shown at Google IO was "Icland is an icland"
The spell checker was smart enough to recognize that the first "Icland" should be "Iceland", and the second "icland" should be "island"
Interestingly, the spell checker is not highlighting any word in "Icland is an icland". I'm guessing that "Icland is an icland" has now appeared in so many blogs, that statistically it is a valid phrase.
"Icland is cold" correctly gives "Iceland" as the suggested correction.