I made a deep log investigation and durring my review of
bkupinst.htm I came across the following row:
05-11-2009,12:29:56 : V-225-136: The patch failed to install. Return code: 1603 ***To search for information about this error, click here. Following the suggested articles I found this one useful:
http://seer.entsupport.symantec.com/docs/307589.htm
I found in the log files that in deed my MS SQL 2005 Express server is not configured to use Named pipes and that's why the Service Pack installer tries to install new instance. Anyway, I managed to install SP1 by renaming the file
BEInstParams.prm as per above article. It wasnt form our client's Panda Security but thanks anyway for the tip Craig!