1024k is less than a 1.44MB floppy disk. You probably want to specify java heap size in megabytes instead of kilobytes, e.g. -Xmx128M -Xms128M
You really should not need a 1GB heap to compile a 350kB java file. Can you easily reproduce this error, and do you have more copy/paste error messages, including stacktraces and things? I don't know how mixing a project in eclipse and the modeler works, who's gonna (re-)compile stuff when starting, but probably someone else can comment on this from experience.
.XXMaxPermSize256M will be ignored by the JVM because it's syntactically incorrect. -XX:MaxPermSize=256M would work, but MaxPermSize isn't really the problem here.
What finally seemed to help was option 'close unrelated projects' (right mouse click on upper project folder in eclipse project explorer). Not saying that this is the ultimate solution but leading to a 'workable situation'.