You get the question-mark-diamond characters when your textfile uses high-ANSI encoding -- meaning it uses characters between 127 and 255. Those characters have the eighth (i.e. the most significant) bit set. When ASP.NET reads the textfile it assumes UTF-8 encoding, and that most significant bit has a special meaning.
You must force ASP.NET to interpret the textfile as high-ANSI encoding, by telling it the codepage is 1252:
String textFilePhysicalPath = System.Web.HttpContext.Current.Server.MapPath("~/textfiles/MyInputFile.txt");
String contents = File.ReadAllText(textFilePhysicalPath, System.Text.Encoding.GetEncoding(1252));
lblContents.Text = contents.Replace("\n", "<br />"); // change linebreaks to HTML