Lynn M,
OK. Assuming the correct database (vle2) was the active one when you ran that query, that is the reason Moodle doesn't believe your database is Unicode. Problem is, we are getting conflicting information from phpMyAdmin: in your earlier post you showed a screenshot of phpMyAdmin executing the ALTER DATABASE query and reporting it had done so successfully, so the character set of the database should be utf8. On the other hand, the character_set_database variable says it is still latin1.
Maybe the problem is in the database prefix marlinpr. I don't know enough about phpMyAdmin to know whether I was wrong to include it in the ALTER DATABASE query I gave you. Maybe it should have been just _vle2. If so, since it reported a successful execution of that query, maybe what it did was create a new database called marlinprmarlinpr_vle2, and make its character set utf8. You might want to check your list of databases for that. If that's what happened, try the ALTER DATABASE query again with just _vle2 as the database name.
Otherwise, it looks like there is a bug in either phpMyAdmin or MySQL itself that is causing it to maintain inconsistent info on databases. (I'm assuming the database is still empty. If a latin1 table was added to it, that is probably the problem.) Either the database really is utf8, and the variable Moodle is using to check it is wrong, or it really is latin1, and it didn't really execute the ALTER DATABASE query correctly. If that is true, I don't know what workaround Moodle could do; maybe the developers do. So let's pin this down and report the results to the tracker.
In the meantime, the only suggestion I would have if there really is a bug in MySQL regarding changing character sets of databases, is to drop the database and recreate it. I know it can do that because I have a utf8 MySQL database on my computer.
RLE