Ignore the error message and choose to Open the installer. If you are running Lion and never downloaded and installed Java, then you do not need to install the update. If you open Software Update and no updates are available you do not need the update.
Helpful Links Regarding Flashback Trojan
A link to a great User Tip about the trojan: Flashback Trojan User Tip
A related link in the tip to a checker: Malware Checker Dowload Link
Another excellent reference on malware: Mac Malware Guide
A Google search can reveal a variety of alternatives on how the remove the trojan should your computer get infected. This can get you started.
Checking for and removing the "Flashback" trojan
Kaspersky Flashback Trojan Site:Flashback Trojan Detection and Removal
F-Secure Tool: Flashback Removal Tool
Also see Apple's article About Flashback malware.