OK, this worked.

I took a clue from your post and did the following. I changed the meta header from

<meta http-equiv="Content-Type" content="text/html; charset=utf-8" /> to

<meta http-equiv="Content-Type" content="text/html; charset=iso-8859-2" />

And I also changed the code from

$HTML = encode( "iso-8859-2", $HTML); to

encode( "iso-8859-2", $HTML);

Now my Croatian characters are showing up like they are supposed to. I was additionally confused by the fact that my Notepad++ character settings were not showing the Croatian characters correctly. They show up fine in Dreamweaver.

Thanks for the tips, everyone. I consider the problem SOLVED.