Interesting enough my friend had the same problem. And sometimes pest trap would pop up telling him to buy some licenses and so on... its funny how spyware programs want you to buy the whole spyware program and infect you more.

The reason why you are getting that pop up from windows xp saying that your computer is infected because of a process that you computer is running... I don't remember what it was called right now but I vaguely think it began with 'win....exe' so just press Ctrl+alt+delete and check on google if that process is a virus and then stop the process. This will stop the 'your computer is infected' thing from coming up.

Along with that uninstall any program that you haven't installed. And read the link Sami has provided.

For my friend the infection was so bad that he had to re-install windows all over again, but hopefully you can rescue your system.