This problem is related to Mysql default encoding.
Not farther than yesterday I was able to fix this issue by changing settings in /etc/mysql/my.cnf. Need to say that this is true if your site is running on your own server or you have root access to it (i.e. ssh).
If your site is hosted somewhere you will need to ask your hosting provider how to change that.
Here is example from my my.cnf (mysql configuration file):

====== /etc/mysql/my.cnf ==========
[client]
default-character-set=utf8
loose-default-character-set=utf8

[mysql]
default-character-set=utf8

[mysqld]
collation-server=utf8
default-character-set=utf8
skip-character-set-client-handshake
init-connect='SET NAMES utf8'
default-collation=utf8_general_ci
======== end ===========
Other settings remain unchanged. Then you'll need to restart mysql and recreate Mysql DB as it is much faster and simpler than convert existing tables into proper encoding. After that you will have fully cyrillic support :-)

Thank you for your reply,

unfortunately I'm on shared hosting and I don't believe my provider will do that for me.

There must be some solution that can be done on the C5 code to fix this problem.

I don't believe that I have problems with character encoding in 2011 :/

I don't think C5 code is able to override Mysql settings if they are set globally like latin_swedich or smth.
Anyway, UTF8 is a standart de-facto these days, so you may try to ask your provider about this, I think they can easily do that.

I don't think the server is the problem,

I have installed Joomla, Wordpress and a ton of other scripts on the same hosting account and neither one of them had problem with Cyrillic characters.

Anyway, I have checked the installation sql dump I presume it is the scheme.sql file and I found that in two places there is a "latin1" encoding written, however weirdly I get installation error if I change that to utf8

Are you absolutely sure Joomla, Wordpress and Drupal always use UTF8? Probably they use any available on hosting encoding, maybe this is why you didn't have problems with them? And C5 tries to use UTF8 and writing utf8 symbols into non-utf8 DB gives ????? instead of cyrillic...
I suppose "latin1" which you've found in sql dump are used in tables which do not need unicode (not chars, for example) with purpose not to waste aditional space in DB.

BTW, could you say what is your hosting provider? I'm curious if there are ISPs who don't support UTF8 yet.

Its not the hosting mate, I have addon domain with Joomla site on the same account in the same time, fully in Cyrillic, from frontend till backend and I don't see the question marks on Cyrillic letters... only on C5 I see the ????????????????

I use Jumpline hosting, they are one of those fake "Top 10 Hosts" there is no way they can make such a mistake.

It is definitely something with C5 that doesn't support UTF8

Maybe you're right, but....
>> from Jumplin.com FAQ:
What version of PHP and MySQL does Jumpline offer?
We offer both PHP 4 & PHP 5 along with MySQL 4 and MySQL 5

Jumpline maintains the custom Linux OS that is used for all of our Web Hosting accounts.

Can I install applications that are not listed on your sales site?
You are welcome to install any web-based application that you wish, even if it is not already provided in the applications made available from within your control panel. The applications we offer are provided for easy one-click installation but you are welcome to manually install programs and scripts if you wish.
========
What I see from that - they run CUSTOM Linux OS (?), they host several mysql and php versions...this could potentially lead to some mess...
And the good sign is last sentence: "You are welcome to install any web-based application that you wish".
So why not try to ask them about this Mysql trouble?
I never met such a problem with runet hosters...

Hey, I've found this thread, read it:
http://www.concrete5.org/community/forums/internationalization/unic...
Seems it could help you fix youir issue without access to mysql.
Cheers

Ok, my case is slightly different. I have two sites looking the same way.http://example2.azuli.org/ was uploaded 4 months ago and thishttp://bonjourbg.azuli.org/ several hours ago. example2 support cyrillic fonts bonjourbg doesn't. I can't understand. All this DB tables must be convertet in utf8 but I have no idea, in spite of the couleges upload some lines I have no idea what to do with these lines. Please help me I'm already desperate!