My Contacts contains the contacts you explicitly put in your address book (via manual entry, import or sync) as well as any address you've emailed a lot (we're using five or more times as the threshold for now).
Suggested Contacts is where Gmail puts its auto-created contacts. By default, Suggested Contacts you email frequently are automatically added to My Contacts, but for those of you who prefer tighter control of your address books, you can choose to disable usage-based addition of contacts to My Contacts (see the checkbox in the screenshot above). Once you do this, no matter how many times you email an auto-added email address it won't move to My Contacts.
We realize there's a lot more we can do to make Gmail contacts even more useful, but let us know what you think so far.