..\_jvm\bin\java.exe -cp ..\DataLoader.jar -Xms32m -Xmx128m -Dsalesforce.config.dir=%1 com.salesforce.dataloader.process.ProcessRunner %PROCESS_OPTION%
When not specified, the heap size defaults to 1MB but will increase to 16MB as needed. The above code increases the allotted memory to 32MB and allows for expansion to 128MB if needed.
See this article by Brett Spell for more on setting heap sizes. Thanks also to Anna478 and Demand Chain Sysytems.