For auto-correction sakes normally I entered some short 2-letter abbreviations that I regularly use in Contacts so that auto-correct uses them when I type.
I found that in iOS 4.2 GM, auto-correct no longer uses those contact names as references for short 2 letter words like "lg", "dr". Auto-correct always replace them with "LG" and "Dr". Abbreviations with more than 3-letters work though. Some contact names also doesn't enter correctly with proper capitalizations, etc.
iOS 4.1 uses exactly what I entered in Contacts.