Paged Navigation doesn’t Work

the problem with that code is that it does not take pagination (the paged parameter for query_posts()) in consideration.
and using the offset parameter does general not work well with pagination.

checking this article might help:
http://stylizedweb.com/2008/08/13/query_posts-pagination-problem/

to style the first post different, you could use a different method that utilizes a counter variable to distinguish the first post (and only on front page);

schematic:

<?php $counter = 1;  ?>

<?php if (have_posts()) : while (have_posts()) : the_post(); ?>

  <?php if(($counter == '1')&&!is_paged()) { ?>
    <?php // show the first post different ?>
  <?php } else { ?>
    <?php // show all other posts in their own way ?>
  <?php } ; ?>
  <?php $counter++; ?>

<?php endwhile; else: ?>

<?php endif; ?>