Conditional category query breaking?

i’m not sure what you are trying to achieve w/ the $paged variable. seems like you could simplify your query though

$posts_per_page = is_paged() ? 5 : 2; 

$args=array(
      'post_type'=>'post',
      'category_name' => 'featured-content',
      'posts_per_page' => $posts_per_page
);

$temp = $wp_query;
$wp_query= null;
$wp_query = new WP_Query($args);

edit, adding an offset (and fixing syntax errors):

$paged = (get_query_var('paged')) ? get_query_var('paged') : 1;
$posts_per_page = !is_paged() ? 5 : 2; 
$offset = is_paged() ? 5 + 2*($paged-2) : 0;

$args=array(
      'post_type'=>'post',
      'category_name' => 'featured-content',
      'posts_per_page' => $posts_per_page,
      'offset' => $offset
);

$featured = new WP_Query($args);

if($featured->have_posts()):

    echo '<ul>';

    while ($featured->have_posts()): $featured->the_post();
        echo '<li>' . get_the_title(). '</li>';
    endwhile;

    echo "</ul>";
endif;

it is possible that if you don’t have a ton of featured items, you will run out as you go back through the paging.