To encrypt or decrypt email, PGP Desktop uses a messaging proxy. The PGP messaging proxy monitors email to encrypt or decrypt messages when needed. PGP Desktop monitors the email traffic between your email client and your mail server. Depending on the circumstances, PGP Desktop will intercede on your behalf to encrypt, sign, decrypt, or verify messages.
The PGP Messaging proxy can fail due to
Microsoft Exchange components being installed on a system with Microsoft Outlook.
If Microsoft Outlook is being used on a the same system with Microsoft Exchange components installed, this may cause the PGP Messaging proxy to fail. If the PGP Messaging proxy fails, encrypted email messages are not automatically encrypted or decrypted.
Using Outlook and the Exchange Server components on the same system is unsupported by Microsoft and should not be installed on the same system per the following Microsoft Knowledge Base:
http://support.microsoft.com/kb/266418