I have characters which are outside 7-bit ASCII in my username, "Jakub Narębski". Characters outside US-ASCII are dropped from the full profile URL: https://meta.stackoverflow.com/users/130454/jakub-narbski (observe that it is 'narbski', not 'narebski' or 'narębski').
I'm not quite sure if it is a bug or not. I think that the last part of URL is purely informational; https://meta.stackoverflow.com/users/130454 works as well, I suspect to allow to change one's name field.
Added 2009-07-30:
This feature request, in the form of stripping diacritical marks, got implemented (status-completed). Wouldn't it be a good idea to separate this Unicode transliteration code and put it as ASP.NET snippet or mini-library somewhere?
See also: This Is America, Take Your Unicode Somewhere Else blog post by Ted Dziuba, which mentions Text::Unidecode Perl module (which does US-ASCII transliterations of Unicode text), and mentions Stack Overflow in passing.
Added 2009-08-30
Perl 6 has :ignoreaccent
modifier, and there is also the Text::Unaccent Perl module (which uses unac C library).