Case sensitivity is, ahem, a sensitive matter. Unix file systems were designed to be case sensitive. For example, developers on other Unix platforms would sometimes have both makefile and MAKEFILE files in the same directory. Most filenames were all lowercase, with exceptions for important files such as README. Windows NT, with its NTFS file system, took a different approach: files retain their case setting, meaning the names are stored with the case that was specified when creating them, but filename comparisons are made without regard to case. For example, if you create a file named Macintosh.txt, it is stored that way but compares equal to macintosh.txt and MACINTOSH.TXT and Macintosh.txt. Mac OS X made the same compromise, retaining case but not distinguishing in the Finder. So having both Blah and blah in the same folder would be a problem.
Windows seems to display initial caps in some cases, even when a file is not created that way. I've noticed this behavior with items in the Start menu.
Is case-retention with case insensitive comparison a good idea or a bad idea? It doesn't much matter, since the decision has been made. The computer scientist in me says that all comparisons should be case sensitive, as in pure Unix filesystems, but I know that the compromise approach adopted in Mac OS X is the most convenient for most people.
I've stated facts from memory without actually testing them this morning. If I've got them wrong, please correct me.