have never used the ipad 2 without the external keyboard since the first week i had the ipad. if zagg keyboard off, spell check works. if using zagg keyboard, no spell check. apple tech support says no known issue*, however..... zagg says this is an issue for all bluetooth keyboards with ipad; something in bluetooth interface in ios turns off auto correct and spell check.
*chat with apple tech support lowered opinion of expertise. after discussing symptoms, guy went away for several minutes, and than asked me to check settings. beyond that he had no info. the first thing i would ask is level of os and settings.