SQL Server services could not be started as 2 instances sharing same 'model' file
The paths of the other system databases (model, msdb, and tempdb) can be changed using ALTER DATABASE ... MODIFY FILE. The changes take effect on instance restart.

I blogged about how to move all the system databases here, including a video demo of the whole process. (The demos shows 2008 R2, but it's the same for 2005.) In your case, the files are already in the spot you want, so all you need to do is change the paths.