The behaviour of dependancies for VS changed a while ago. The newer version install side-by-side with older versions. Your application exe's and dll's will then include a manifest entry referring to the versions of MFC or ATL it requires.
To ensure that the msm is being installed, inpect the Windows\WinSXS folder, it should include all the dll's (including multiple versions of the dll's).
When you install the VS2005redist.exe, are you installing the newer version (SP1) or the older version? I suspect that the redist is older, since it should not be installing directly to System32.
So in short, later versions will not replace older versions. The main question is: does your application still run correctly? If you run depends.exe (Visual Studio Tools) and inspect the dependancies, does it show that it is bound to the new versions? In that case, there are no issues.
If your application does not run correctly, take a look here:
http://msdn.microsoft.com/en-us/library/ms235342(VS.80).aspx