Windows Backup And SQL 2005

I know I've been posting a lot about another problem but you all have been most helpful so I thought I'd throw this one at you too.

My nephew's company has a server with Small Business Server 2003 SP1 and they run Windows Backup for their daily backups. They also have SQL 2005 Workgroup on that machine. Prior to SQL 2005, they ran SQL 7 and had no problems with their daily backups. Once they upgraded (clean installed actually) SQL 2005 their backups fail. The event log errors with Event ID 6013 and says:

SQLlib error: OLEDB Error encountered calling IDBInitialize::Initialize. hr=0x80004005 SQLSTATE: 08001, Native Error: 17 Error state: 1, Severity: 16
Source: Microsoft OLE DB Provider for SQL Server
Error Message: [DBNETLIB][ConnectionOpen[Connect[]].]SQL Server does not exist or access denied.

Obviously, SQL Server does exist, so I presume it has to do with an access denial. Microsoft has been no help and Googling other sites have gotten nowhere. DLL updates have been done and hot fixes installed. But the error persists.

Any ideas of where he should look?

Thanks in advance

Dave