With reference to post by chris hammond on module development at  http://www.dnnsoftware.com/Resources/Blogs/EntryId/2880/New-DotNetNuke-Module-Development-Templates-w-video.aspx 

I have installed dnn under the folder dnndev. While creating a new site in IIS7, I gave my site the port number of 8090. So, I was able to access the dnn website through 

localhost:8090/

Now, when I opened VS2008 and did exactly the same steps you mentioned. When I am trying to save the properties of the project after changing to 'Use Local IIS Web server' 
I gave the Project URL as 'http://localhost:8090/DesktopModules/moduleExample' and override application root url to 'http://localhost:8090/' 

When I am trying to save it I get an error that says 
' the url localhost:8090/DesktopModules/moduleExample is not configured in local IIS, would you like to create a virtual directory now? '

When I click 'yes' and reload my dnn home page it says
DotNetNuke Error 
and has some details as 
'An error has occured. DotNetNuke.Services.Exceptions.PageLoadException:Object Reference not set to an instance of an object - ? System.NullReferenceException: Object reference not set to an instance of an object.............................................'

I am struggling with this thing since a week. I have re-installed DNN for almost 10 times. After reading reviews I thought DNN was one of the best thing to learn to develop websites. I have experience with php and html. 

Now setting this is really the most difficult thing.

Please help me...