Version:            (using KDE KDE 3.1.93)
Installed from:    Compiled From Sources
Compiler:          gcc-3.3.1 
OS:          Linux

I'm not sure if this is a bug... but when using digest-md5 smtp auth, kmail sends charset directive even if server haven't sent it.
From rfc2831:
"   charset
      This directive, if present, specifies that the client has used
      UTF-8 encoding for the username and password. If not present, the
      username and password must be encoded in ISO 8859-1 (of which
      US-ASCII is a subset). The client should send this directive only
      if the server has indicated it supports UTF-8. The directive is
      needed for backwards compatibility with HTTP Digest, which only
      supports ISO 8859-1."