Between the various responses, people have got it right. The minimum
you need is:
1. Your database/table to the right character set
2. Your database connection to the right character set, by putting an
"encoding: ..." line in database.yml
3. Make sure Rails is telling the browser the right character set, as
per http://nubyonrails.com/articles/2006/02/01/rjs-and-content-type-
header
I recommend you use utf8. Rails 1.2 will have a lot more tools for
handling utf8, and Rails already tells your browser to send utf8 by
default, so you can skip step 3. 
Cheers,
Pete Yandell http://aliencamel.com/