HELP! FBI Department of Justice Virus Took over my computer...

Running Windows 7 on a Gateway N214 laptop (did not come with any start up disc)

haven't downloaded anything lately except Adobe updates which now I think have been 'bogus'...

Turned on my computer 3 days ago and a snapshot of me was in the corner saying I downloaded something illegal and owed the government $450 or I'd go to jail...

I called department of justice and they said it was a virus...

I restarted my machine and pressed F8 and F12 and got the DOS prompt to Repair computer, so I tried to Restore to a previous date, but that didn't work (there was only one date)...

Then I tried to restore my computer to factory settings, but now it won't come up with anything... I can't get past "Windows could not complete the installation, please restart windows to complete the installation" so I press 'OK' and it restarts and comes to the same error message... I can't get past this... someone Help Me Please!!! I don't care if I lose everything at this point, I just need my computer back up and running... I've been using Microsoft Security Essentials as my virus program, but evidently that doesn't work...

Thanks for any help you have to offer...