I ran into a funny issue in creating a custom theme for WSS.
After following the steps to create and deploy a custom theme, I was getting an error message in SharePoint when I tried to apply the theme to any site.
The error was:
Cannot open "[THEME NAME]": no such file or folder."
I had followed all of the steps and couldn’t figure out what was up.
I finally found this post (see the reply from Bil Simser) that’s related to SP 2003, but still apparently applies to 2007. Turns out the folder name for a theme can’t contain more than eight characters or any non-alphanumeric characters.
In my case, the theme name had a dash in it. After fixing that issue, the theme works like a charm.