I am very disheartened by this and have contacted both LJ and kylecassidy regarding this issue.
I have a paid permanent account and a long-standing home here, so I am not going to delete my journal. However, once I figure out how to load my LJ to DreamWidth (the DW loader doesn't work, apparently I have some old entries that make it fail every time). I will transfer my primary useage to DreamWidth until LiveJournal comes up with a real fix (not a we'll pull the problem ad, which as noted does not stop other ads carrying malware).
I am also going to recommend that anyone who uses the internet regardless of whether it's to read LiveJournal, or Salon.com, or use Google search or anything else install ad blocking software and pop-up/pop-under blocking software such as mentioned in the above article right away. A lot of sites use pop-up or pop-under advertising, and some (not all) of those ads can contain malware that installs even if you don't click any part of the ad.
P.S. This was originally posted as private on 1/28/10 as I was struggling with Dreamwidth. I forgot about it completely until today when I was looking for another entry entirely.