This is clearly a FAKE. There are a number of warning signs present. Firstly, as far as I am aware, Windows 98 is NO LONGER SUPPORTED, yet the message mentions that OS. Secondly, Microsoft DO NOT issue experimental private versions of updates. Thirdly, have a look here:
HOW TO: Identify Encrypted Files in Windows XP. Notice the date, and also notice that it only applies to Windows XP Pro.
Another clue is the KB number. These are currently in the 8xxxxx and 9xxxxx range, whereas this is in the 3xxxxx range. Finally, Microsoft DO NOT issue updates by means of an attachment to an email.
As regards the PGP key, it is easy for someone to cut this from a genuine email notification and paste it into the rogue email. Also, NEVER click on links in emails, even from friends - ALWAYS manually type the address into your browser.