Yes, this is the file I was talking about. Can you open it with a text editor? And find the line that starts with "deployment.javapi.jre.1.5.0.args="? If such a line is missing, insert it into the file, the inserted line should look like this:
deployment.javapi.jre.1.5.0.args=-Xmx256m -Xms64m
This is what I asked you to do in the previous message, sorry for not being clear enough. However, now I'm doubting that this editing will help. I have read more articles and threads related to the problem you are experiencing and came to conclusion that Safari on a computer with an Intel processor can fail to recognize the Java runtime installed via the Update manager. That is, the problem is specific to Intel machines and Java SDK installed using the Update feature of Mac OS. In September another user came across the same issue as you - it was reported here:
http://discussions.apple.com/thread.jspa?threadID=1708113
If you read the thread, you will learn that the user could successfully run Eclipse, so Java worked for ordinary applications and the problem only was with Java applets in Safari. Apparently, the Update manager doesn't enable Java for applets or doesn't set some required parameters in the system. Therefore, I recommend that you download a separate installation package from this page:
http://support.apple.com/downloads/Javafor_Mac_OS_X_10_5_Update2
and install it into your system over the existing Java installation which was made via the Update manager.
If you do it and this doesn't solve the problem, try editing the "deployment.properties" file as I described in the beginning of this message.
I'm looking forward to hearing your results.