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Close the thread, if its resolved..
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Use System.Net.WebUtility.HtmlDecode instead of Decode.
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.NET 4 Client Profile. Actually, I just found the problem. When you said it worked fine for you, I thought maybe I should try it as basic as possible, not as part of my actual program so in my main function I put Console.WriteLine(Decode(Encode("test^string"))); and it actually outputted it correctly.
After wracking my brain, the only difference I saw was that when it fails in the normal part of my code, it's being passed as a command line argument so I had it echo the input rather than the encoded output and sure enough, it was coming in as teststring.
Once I encapsulated the command line argument with double quotes, the problem was solved. Thanks.
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Code working fine for me. Which framework are you using?