Limit number of posts on a custom category template – breaking pagination

You need to tell WordPress to get only 5 posts per page. The parameter to do this is posts_per_page. You should use query_posts() function before your have posts as in the following example.

<?php
   // your includes and stuff

   global $query_string;

   query_posts( $query_string . '&posts_per_page=5' );

   // now your have_posts
   if ( have_posts() ) {
       // list the posts
   } else {
       // not found msg here..
   }
?>