The Windows Phone 7 keyboard received much praise, and Microsoft intended to improve on this in Windows Phone 8.
They introduced Wordflow, which looks not just at a single word, but at a series of words to provide more accurate word prediction. Microsoft says they surveyed a dictionary of 2.5 billion words built from Wikipedia and Twitter scraping, and selected 600,000 for the on-device dictionary, resulting in word correction which was 94% accurate, and always learning to get even better over time.
Of course the dictionary will still not help you swear, but then you cant have everything 😉
Read more about the keyboard technology at Microsoft here.