There may be problems with the theme "bluedragon" because it is using an imported bitmap font, but it should work with the "default" font ...
Where are you setting your texts? In TITLE or DESCRIPTION fields in admin? There are still restrictions on usage of special characters in physical folder and filenames, but that is why we are using TITLE which is saved in XML. Please respond and I will look into this!
You are right - Seems like the admin isn't saving the language files as UTF-8. As you can see in the following link, the characters work for the norsk.xml that was created and saved manually: http://www.barrio.se/?language=lang/norsk.xml