In other words, the system could not find the specified path... that was when I tried restoring through a substituted (subst R: G:\project02\SQLBackup) drive, and for sure R:\MyDB_20080521.bak did exist. Nastier was the fact that G:\project02\SQLBackup\MyDB_20080521.bak restored in an instant, so the problem was likely to be found in the interaction between subst and SQL Server. This was rather disappointing, as it would have been nice to separate the environment for different customers/projects and still be able to use generic scripts targeted at a drive-letter.
So a little quest started to find some solutions, if it's a bug?, should be a feature... I was surprised by the small number of pointers I came across on the Internet and only one useful. After establishing net use R: \\myserver\projdata\project02\SQLBackup suffered the same problem when it came to restoring, I widened the search an came across a post from the beta stage of SQL Server 2005. In there Erland Sommarskog hinted it might have something to do with profile setting, which would apply if the setting in question weren't a system setting. Now that made perfect sense, so let's see how the world looks like through xp_cmdshell.
So on my SQL Server 2005 instance I enabled xp_cmdshell and I substituted a path for a drive letter on Windows. Sure enough, I could see the substituted drive W: as pointing to D:\SQLData, but running EXEC xp_cmdshell 'subst' yielded NULL from the instance running under LocalSystem. Then, after running EXEC xp_cmdshell 'subst W: D:\SQLData' my SQL Server instance running under LocalSystem got the picture too. From SQL Server Management Studio I could "see" drive W: and also restore from and backup to my "W-drive". Safe to say it isn't a bug for SQL Server and if a feature request is to be made, it has to be addressed to the Windows team. Something like; enable system-wide setting of subst and net use commands by administrators through an extra switch (or make it a policy setting default on for administrators only).
In the end it can easily be solved with a little sqlcmd-script like:
:setvar path "G:\project02\SQLBackup"
:setvar drive "R"
EXEC xp_cmdshell 'subst $(drive): /d'
EXEC xp_cmdshell 'subst $(drive): $(path)'