Software Deployment

The issue seems to be related with the particular machine that you are using, Have you tried installing Office 2007 earlier on the same machine?
If that is the case, try to clean up the system by using 'FixIt' method mentioned on the below link -
http://support.microsoft.com/kb/290301
However, you may want to test it on a clean machine.

As long as the .msp file is in 'Updates' folder, you need not specify the path to msp on commandline.

I've only found this 'error' with MS Office 2007 but the .MSP file doesn't have to be located in the Updates folder. It can be in the directory above the Updates folder location with the setup.exe. It has been a while since I went through this hassle but I remember dealing with a similar error message. Once I moved the MSP file from the Updates folder to the directory above it I magically was no longer dealing with the error message.

Sandeep is correct that you don't need to specify the path to the MSP file. You only need to use the /adminfile switch with the name of the MSP once you have created it and placed it in its proper location. Don't forget the /config switch with the XML file as well.
\\uncpath\setup.exe /adminfile PATCHNAME.MSP /config \\uncpath\config.xml

Now as a warning if you plan to script out Office 2010 in the future, the MSP does need to be in the Updates folder with that version. I couldn't explain to you why Office 2007 is like this but thinking about it just gives me another headache again.