When you install a new EPiServer CMS 5 project using the EPiServer CMS Manager, the .csproj file shipped is for Visual Studio 2005 SP1. Opening the project in Visual Studio 2008 will start the project upgrade wizard, which will fail if you have installed the new site as a root site in IIS.

Open the PublicTemplates.csproj file in your favorite editor. In the bottom of the file, it should look something like this:

<Project DefaultTargets="Build" xmlns="http://schemas.microsoft.com/developer/msbuild/2003">
  ...
  <ProjectExtensions>
    <VisualStudio>
      <FlavorProperties GUID="{349c5851-65df-11da-9384-00065b846f21}">
        <WebProjectProperties>
          <AutoAssignPort>False</AutoAssignPort>
          <DevelopmentServerPort>6666</DevelopmentServerPort>
          <DevelopmentServerVPath>/</DevelopmentServerVPath>
          <NTLMAuthentication>False</NTLMAuthentication>
          <UseIIS>True</UseIIS>
          <IISUrl>http://localhost/publictemplates</IISUrl>
        </WebProjectProperties>
      </FlavorProperties>
    </VisualStudio>
  </ProjectExtensions>
</Project>

The line you need to change is

<IISUrl>http://localhost/publictemplates</IISUrl>

to:

<IISUrl>http://localhost</IISUrl>

You can then open the project in Visual Studio 2008, run the upgrade wizard and you're good to go.