Converting from LATIN1 to UNICODE encoding?

I have a database that was created using the LATIN1 encoding.

Is it necessary for me to convert the database to some other encoding
(e.g. UNICODE) before I can store non-LATIN1 characters or does
PostgreSQL catch these and encode them somehow?

I have actually been attempting to convert a database by doing a pg_dump
(from the LATIN1 database) followed by a pg_restore (to one created with
the UNICODE encoding). Seemed to work with a sparsely populated 8.0.3
database, but I am running into all sorts of problems with 7.3.10 (e.g.
corrupted database followed by corrupted pg_clog).

What about JDBC, how does it know the encoding of the data I throw at
it? I guess I should ask this last question on the JDBC list.

Thanks in advance for any comments.

Scott