I am seeing exactly all the symptoms you describe with my copy of the knoppix 5.1.0 CD running under VMWare player. My regular debian sarge install, OTOH shows filenames with accented characters without any problem (konq, xterm, ls, java...). LANG is set to en_GB (not even explicitly utf, and the FS is ext3 - but i doubt it matters. Either locale support is broken in knoppix, or the setting that would correct things escapes me, sorry...