Step 1: Interpret the clinical picture. Ballooning of the prepuce during micturition in a 5 year old indicates that urine is collecting under a tight, non-retractile foreskin before escaping, i.e. true (pathological) phimosis. Preputial adhesions are also present.
Step 2: Distinguish physiological from pathological phimosis. Physiological non-retractility is normal in infants and usually resolves by about 3 to 5 years, and asymptomatic non-retractility can be managed conservatively. However, when there is symptomatic phimosis with ballooning on voiding, intervention is indicated.
Step 3: Choose the definitive treatment. Circumcision is the definitive surgical treatment for symptomatic pathological phimosis with ballooning. It removes the obstructing preputial ring and relieves the symptoms.
Step 4: Why not the others. Adhesiolysis and dilatation is incomplete and adhesions tend to recur; a dorsal slit relieves the constriction but is reserved for emergencies such as paraphimosis or when circumcision is contraindicated and leaves a cosmetically poor result; conservative management is appropriate only for asymptomatic physiological non-retractility, not for symptomatic ballooning phimosis.
Answer: B (Circumcision).