All,

I was like most and having great difficulty getting VS2008 to play nice with DNN ... then I came across Joe Brinkman's post.   It provides a nice MSBuild functionality that copies all the appropriate file to the DNN directory.  This allowed me to create a development directory separated from the DNN site

As they say -- your mileage will vary -- so you may need to work with the script MSBuild post build processing a bit ... but Joe outlines the effort. 

See http://blog.theaccidentalgeek.com/post/2008/10/26/DNN-Tips-amp3b-Tricks-6-Building-Modules-in-VS-2008.aspx

Give it a try .. I especially like the fact that my development directory is outside the DNN Desktopmodules directory. 

Hope this helps
Paul.

Debug works just fine for the module I am working on -- I don't typically need to trace into the core.  If I needed that I would create a solution with the core project added.