You must comply with the line-of-sight requirements, except that inside at close quarters there can be sufficient signal strength and bounce for the system to work. Outside, the coded light instructions can get swamped by the ambient light.
Your ST-E2 should perform much better than you report. One possibility that dimensions or dirt could result in a malfunction. One test is to see if your camera menu "Flash control", "External flash func. settings" is showing when the ST-E2 is connected and powered up. It should report three settings and enable two settings (at least that happens with my 50D). If it says "Incompatible flash..." then it suggests that the pin contacts are faulty and the unit is being mis-recognised. Try cleaning the contacts on both shoe and foot.
Can you test another photographer's unit? It would be embarrassing to return it on a "user error"!
Given your name, you should look at RadioPoppers if you haven't already. They overcome the line-of-sight, distance and daylight limitations of the Canon E-TTL communication system.