You can definitely use the install rather than the source version to setup your development site (though it is occassionally useful to be able to debug the framework to see why something is happening in your module).

As for using the built-in web server instead of IIS... Since you'd need the web server for the dotnetnuke site, not just for your module, it is a little difficult to manage.  You'd probably have more luck setting up the Casini Development Web Server to create a persistent local server for your DNN site, and then pointing your module to that site.  In general, I'm not sure that it's worth the hassle just to avoid using/setting up IIS.

Hope that helps,