mycingular.net did not encrypt this message, message sent as email
I've had this happen a few times, and it's always been a problem with the carrier (not the phones or Apple's services). His carrier (Cingular) is sending the text message as if it were an email; this clear from the address @mms.att.net.

Thus, I suspect it has nothing to do with data in contacts apps on the phones. Similarly, the encryption warning is irrelevant.

Whenever I've experienced this before, it has fixed itself. That is, suddenly texts begin working properly. 

Your friends should make sure he has run the latest updates on his iPhone. If that doesn't fix it, resetting network settings might force some carrier updates. (See Settings > General > Reset.)