The plugin for your browser doesn't matter to LimeWire, so you can disable the Sun plugin if you want. The problem may not be direct draw (and if you placed that file alongside LimeWire.exe and still saw the blurriness, then it likely isn't). I'd remove that file (since all it'll do now is slow down LimeWire), and search the web for other people that have blurriness or no video shown when using Java. We haven't ever heard these particular symptoms before, so I'm not sure where to go from here.

One thing I'd do is make sure your video card drivers are up to date by going to the manufacturer's website and updating them.