thank you for the extra information about your Moodle version and setup. Unfortunately, I am a bit stumped because I can't reproduce the problem with apostrophe's on any other server I have access to.
One thing you could try is to update to the lastest version of the HotPot module for Moodle 1.5. It is slightly newer (v2.0.10) than the version you are using (v2.0.9). You can download it from here:
If that apostrophe's still are not handled correctly, I wonder if you would consider giving me ftp access to the HotPot folder on your server so that I can look inside the scripts while they are running and work out why they are misbehaving?