I work with the DoD on a classified program. You're right, we don't use encryption on any of our desktops, but the only reason is because you go through 2 security gates with guards, then finally enter a closed room with a giant digital lock with a badge swipe and keypad on the door, not to mention a giant separately digitally controlled deadbolt in addition to the digital lock.
You better bet your ass that we use whole-disk encryption on any machine that would leave the building, though (such as laptops). And those are unclassified!
