It seems that using File System website project in МЫ is more fast - you do not need seemingly excesssive step and time to configure virtual directory.

Also, [1] uses only File System in all steps as well as on [1, p.35(49)] tells:

Note I strongly suggest that if you have Windows XP Home to upgrade to XP Pro so you can use IIS as a web server. While the simple File System web server with VWD works, it has some drawbacks. First of all, it can be a little flakey at times. This is from the DNN guys themselves. I have not experienced this flakiness myself, but be forewarned. The other drawback is that the simple server only accepts internal requests. You will not be able to test your website from outside your computer

I am to develop skins and modules in C# on isolated from net computer. So, I was inclined to use File System WSP (website projects).
It seems like it is not being tested since most things failing in File System WPS nevertheless work  if launched from LocalIIS WSP

While I should admint to waste a lot of time using File System WSP nevertheless
I am still not convinced in completely abandoning File System WSP in favor of Local IIS WSp. Especially since File System is prevailing in my already running projects

I think there must be more pronounced arguments and warning for novices why (and when) to use IIS and not File System WSP for development.
Or to use File System at all...

Let's share here those arguments.
First of all, I am interested to know what is the environment used for development and thereafter
for testing releases by DNN development team?

[1] Book
Beginning DotNetNuke 4.0 Website Creation in C# 2005 with Visual Web Developer 2005 Express:
From Novice to Professional
Copyright © 2006 by Nick Symmonds