First things first, Dotster is totally lacking in documentation on WordPress.
So, through trial and error, I figured out that you can do permalinks on a Dotster.com hosted WordPress blog with the following done first:
1.) create a .htaccess file on your desktop, name it 1.htaccess using Wordpad, no MS Word. Just a text file.
2.) FTP it to your blog’s install directory. Here’s where it may be tricky. there is already an .htaccess file (not user-accessible), but it in a different “higher-up” directory. don’t mess with that file.
3.) make the file permissions 777. that’s the only thing that will work on dotster.
4.) go into WP and set up permalinks.
In many settings Dotster requires higher CHMOD permission settings than other servers that I’ve seen here. Also, the initial database setup, falls into the 1% of servers that requires you to change it–that’s in another post here. So, why isn’t this info in Dotster’s FAQ?