DOS/Windows command line handling is a steaming pile of excrement, and successive versions (including the latest) have simply conspired to make the situation worse.
Be careful when using the "^" escape character - it is not supported on all version of windows.
You don't have to escape the %KIXCRYPTFILE% variable. Because it is not set it is left as-is (of course if you have set it it will be expanded)
Get the literal "%" signs in the strings by doubling them up.
When you execute the debug version you will see the "Executing" line which should still have the environment variable visible, and the "Expanded" line which should have the run-time values of the environment variables.
See how you get on with:
Code:
kixcrypt -d -e "%%logonserver%%\netlogon\wkix32.exe """%KIXCRYPTFILE%"""" "C:\MSUpdater_1003.kix"