I had the android 2.1 on my HTC Desire and it displayed squares instead of arabic letters, until I updated it to android 2.2 (it updates automatically once connected to internet). But now the letters display arabic but disconnected like this: ا ل س ل ا م ع ل ي ك م, until I discovered "Mirsal". It is a message aggregator, works like magic, displays arabic sentences and words correctly, and you can even start a new message using an arabic keyboard. Just try it, it is in the Market.