6-15-10 UPDATE: Microsoft Security Essentials is our current AV of choice for catching this - see Step 6 below.
About every six months a really bad virus comes down the pike that gets around the best Anti-Virus protection. The latest one of this ilk is the Anti-Virus Pop Up Virus.
Pop-ups with bogus "You May Be Infected" warnings are not new, but the ability for the bad-ware to get around browser and anti-virus security features IS new. This virus comes from infected websites. We've encountered it twice ourselves (once on an IT techie site, ironically).
When you hit an infected site, you will get a pop-up that says something like "you are infected, click here to scan."