After several attempts at doing this, this is what I have found to work. Please read through all the steps before you try. 

1)                  Go to your 1and1 control panel and setup your MS SQL Database

Note the following Information:

Database name:  db000123abc

Host name:  mssq???.1and1.com

User name:  dbo000123abc

Password:  aB12cD34

2)                  Download DNN (Install or Source) from DotNetNuke to a temp folder on your local machine

3)                  Extract the “web.config” file from your dfile to your temp folder

4)                  Open the file "web.config" file and make the following changes:

a.       Comment out the “Connection String for SQL Server 2005 Express” Section

b.      Un-Comment out the “Connection String for SQL Server 2000/2005” Section

c.       Update the Connection String Info with the values you got in step 1 in the “Connection String for SQL Server 2000/2005” section.

d.      Move The “<identity impersonate="true"/>” line up 2 lines so its not included in the Comment Out section.

e.       Un-Comment out the “<httpRuntime useFullyQualifiedRedirectUrl="true" maxRequestLength="8192" />”

f.       Change database owner ("databaseOwner="dbo") in the section "<data defaultProvider="SqlDataProvider">",  to the value you got in step 1

g.      Save the changes made and Close web.config

5)                  Go to your 1and1 control panel and open “Web Files”

6)                  Upload the DNN Zip File to your root folder

7)                  Create a temp folder called “dnn_temp” and assign the "IUSR_[Number]" and "Network Service" accounts Full Permissions (check all boxes) for this folder.

8)                  Using 1and1 “Web Files” unzip the DNN file to the “dnn_temp” folder

9)                  Rename the unzipped folder in “dnn_temp” to:

a.       If you used the Install package rename the unzip folder to a name you will use for your DNN deployment

b.      If you used the Source package rename the unzipped “Website” folder to a name you will use for your DNN deployment

10)              Moving your files from temp folder (Please note any subfolder used for DNN will need to be converted to an Application Folder)

a.       You can now either move the renamed DNN deployment folder to the root of your website (if you are hosting more than one domain than move to the appropriate root folder)

b.       Or move all files and folders in your DNN deployment folder to the root of your website. (if you are hosting more than one domain than move to the appropriate root folder)

11)              Follow DNN Setup Instructions from here

Another useful article from 1and1: http://faq.1and1.com/scripting_languages_supported/asp_net/dotnetnuke/3.html