Gag patterns are case sensitive.
There are two types of matching: "Line Contains" means that your Gag pattern can occur anywhere in a line of text received from the MUD. A "Start of Line" Gag will only match when your Gag pattern occurs at the start of a line of text.
If you save a Gag with a blank pattern, the Gag will suppress all empty lines of text. This has the effect of collapsing all newlines in your MUD's text, which can be handy on the iPhone's small screen.