My hotmail email has been hacked into. I've changed my password and hope this fixes the problem. Does this mean my imac software is infected. If so what should I do? Everything appears to be working ok.

Unless you have installed anything, you are fine.

You may find this User Tip on Viruses, Trojan Detection and Removal, as well as general Internet Security and Privacy, useful:

https://discussions.apple.com/docs/DOC-2435

Bear in mind that from April to December 2011 there were only 58 attempted security threats to the Mac - a mere fraction compared to Windows malware:

http://www.f-secure.com/weblog/archives/00002300.html

(I have ClamXav set to scan incoming emails, but nothing else.)

For the short term, do what Klaus advises. But hotmail is a spammer's paradise, full of botnets and the kind of activity you have described. A great deal of the spam I get originates through botnetted, hotmail computers. Get another email service like Gmail.

I have even considered blocking all hotmail messages at my mail server, but we have a handful of people who continue to use it. It is really garbage.

I completely agree.