When converting a database from MSSQL(2000) to MYSQL (v5) I must have spent days trying to figure this problem out. Some people have come up with very creative albeit complicated solutions:
http://www.oreillynet.com/onlamp/blog/2006/01/turning_mysql_data_in_latin1_t.html

Instead, I found this:
http://forums.mysql.com/read.php?104,124017,124790#msg-124790
Thank you Miguel.
The solution is simple:

In Migration Toolkit’s first step, where you select the source and target db, in Advanced >> option, use the following jdbc connection string for MSSQL:
jdbc:jtds:sqlserver://server:1433/database;user=user;password=password;useUnicode=true;domain=

And this one for MySQL:
jdbc:mysql://server:3306/?user=user&password=password&useServerPrepStmts=false&useUnicode=true

Forget the utf-8 character encoding that you see elsewhere. useUnicode rules. And so does Miguel.