Yes, that's what I'm pretty well saying. I am guessing but I have seen similar problems when Lightroom sends files to droplets or other apps. There's a limit to the length of the command line that can be passed, and it's lower in Windows than on Mac. The location of the droplet will only be there once, and the location of Photoshop probably doesn't matter, but the paths to the files will be full length. You'll probably be able to run more files if the paths are like this:
c:\droplet.exe D:\Batch\110327_0001 Cheriton.dng D:\Batch\110327_0002 Cheriton.dng D:\Batch\110327_0003 Cheriton.dng
than like this:
c:\droplet.exe R:\Landing Zone\DNG_104\110327 Cheriton\110327_0001 Cheriton.dng D:\Batch\110327_0002 Cheriton.dng D:\Batch\110327_0003 Cheriton.dng
So it can make sense to temporarily move the files.
John