Hi,
What you describe does sound like some sort of spyware infection. Your pop up blocker is not working because the popups are eminating from your actual pc and not from a website. Although when you visit sites the spy/adware will typcially bombard you and it is a nuisance, especially as you describe when it puts mature content in your face, it really is no good. Your browser is probaly Hijacked by the malicious software too.
In your post you didn't say if you use Windows Live One Care? If so is it the beta 2.0 that you use?
If you do use Windows Live OC then i suggest you do a full scan of your system and see what it says first then report here.