Alright, I found the answer to both of my queries above. For R2012a, at least (I can't speak to other versions, the java heap settings in the matlab.prf file seem to override anything you put in java.opts. The trick is, this file lives in your preferences directory which may or may not live under your $MATLABROOT directory.
In my case, my preferences file was stored in ~/.matlab/R2012a/matlab.prf.
I figured this out by launching matlab from a command line with no java virtual machine running, and running the prefdir command:
matlab -nodisplay -nodesktop -nosplash -nojvm
Once I figured that out, I edited the matlab.prf file and scrolled to the bottom to find:
Changing that line to the following:
... fixed my problem and reset the slider under the graphical Java Heap Memory settings in the Preferences GUI back to 1512. So, use the .prf file for R2012a version.
Brady C. Jackson