Why did you create a new master key on instance2? :w00t: This is probably the cause of the problem.

The correct sequence to restore an encrypted database from one instance to another is:

Inst1

Run SetupTDE.sql

Backup database to db.bak

Copy db.bak, TDEServerMasterKey.key, TDEServerCertificate.cer and TDEServerCertificate.key to Inst2

Inst2

Run RestoreTDE.sql

Run StatusOfTDE.sql to check all OK

Restore the database

I have done this many times and it works fine.

To then remove TDE from Inst2:

Run RemoveTDE.sql

Possibly necessary now to restart SQL service so that tempdb is rebuilt definitly without TDE

You will not now be able to restore db.bak until you run RestoreTDE.sql again