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PKI email encryption

Running Windows 2003 Domain.  Exchange 2003 and Outlook 2003.  Outlook is accessed via a Windows 2003 Terminal Server. Budget is not allowing an upgrade of our servers.  

One of our clients is requiring that our emails with them are encrypted with PKI.  We have a Barracuda appliance to filter for spam/viruses, but, per our client, the Barracuda email encryption service is not acceptable to send encrypted emails.  

I can create a user certificate from out local domain Certificate Authority and then import the cert into Outlook.  I tried sending an email to a gmail account, but Outlook balked since I didn't have the recipient's certificate.  

My questions:
To send an email, will the end user (client) have to send me a certificate and how would I import that so I can send encrypted email?
Is what I did, able to satisfy my client's request for PKI?
Is there a better way to do this? I have +/- 15 users that will have to send encrypted emails.
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Rich Rumble
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