Need Help: Computer Viciously Infected, Will No Longer Start

Hi all,
I recently attempted to install an illicitly-obtained copy of Photoshop CS 4 on my Dell Dimension Desktop running Windows XP SP3. Within a few moments of running the installation, my desktop was changed to an image reading something like "YOUR COMPUTER IS INFECTED, DOWNLOAD SO AND SO SOFTWARE TO CORRECT THE PROBLEM." A small red circle with a white X appeared next to my clock indicating that my computer has been infected with a virus when moused over. My firefox began to open multiple tabs instructing me to download software to correct the problem.

I attempted to run Panda Antivirus off their online service and it did not seem to correct the problem. Within a few hours the computer began to startup extremely slowly and lag on boot. System restore would not work (I would select a restore point, but hitting "next" yielded no result). At this point it is impossible to get the computer to start up normally; when I select a user from the login menu, it freezes and goes nowhere. I have not had any success booting up in safe mode. Additionally as the login screen indicates the computer has been renamed from "milford," as I had originally set it, to "SPARTACUS."

My primary worry is recovering data. I've downloaded an .iso of Knoppix and I plan on booting the system from the Knoppix cd in order to transfer needed photos and word documents over onto an external drive. Will this work? Ideally I would like to save the OS as well, as I don't believe I have the original disk and would naturally prefer not to spend the money on windows, though this is a secondary concern.

Please, do any of you have any suggestions for me? I really appreciate your help in advance. Thank you kindly.