Pagination not working

I have my Homepage set to a certain page, and my blog page to something else.

On my homepage, I’m trying to display only posts from a certain category. Here is the code I’m using for that:

<?php $paged = (get_query_var('paged')) ? get_query_var('paged') : 1; ?>
<?php query_posts("cat=1&showposts=2&paged=$paged"); ?>

What’s not working is pagination. Every page shows the same posts that are on the homepage, and even though I’m on mysite.com/page/2/ – the navigation link displays as if I’m on page 1.

I have spent a good 3 hours trying different code from Googling and nothing works. I am going insane.

Please help.