Local paths or mapped drives are not allowed in a farm, UNC notation is required
If you are trying to restore a SharePoint Portal backup and you see this error - and you, like me (big smile) - are new to SPS - then this will drive you nuts!!!
SharePoint does not backup/restore to / from physical drives / paths. You have to setup a share on the server and backup to and restore from a share.
For example, if I have a backup.xml manifest in the C:\SPSBackup folder, and I attempt to restore from this physical path, I receive the error above.
To resolve this, simply share that path on the server (or conversely, create a similar share on the portal you are trying to restore to), and then browse that share. (i.e. \\servername\SPSBackup\backup.xml) and that should resolve this problem for you.