I have found a solution!  I needed to change the way my solution is organized and create a Startup Project in the DNNDev virtual folder.  That way the default web.config file IS the default project web.config file for debugging.  I hope this helps someone else and would suggest my solution structure might be added to the DNN FAQ

The web.config file is associated with the project and there cannot be multiple web.config files.  It must be in the same project folder that the VS project is in for debugging.   What is needed is a VS project at the virtual folder level.   VS 2010 now also supports multiple web.config files and  in the project based upon configuration, release, debug, etc. 

 So, the solution is to create or copy a VS project to the virtual folder and set it as the Start Up Project.  Copy your existing web.config to the configuration files as below and add a new Web Configuration item to the DNNDev project (right click your solution | add | new item | web templates | web configuration)

 So you end up with this taxonomy:

…\DNNDev\DNNDev.sln
…\DNNDev\DNNDev.csproj
…\DNNDev\web.config
…\DNNDev\ web.debug.config
…\DNNDev\ web.release.config
…\DNNDev\ DesktopModiules\<module 1 name>.csproj (no web.config)
…\DNNDev\ DesktopModiules\<module 2 name>.csproj (no web.config)

I still have the VS designer problem of not recognizing the Telerik prefix tag because it seems the designer looks to the local project for its web.config and not the startup project.  The current work around is to add a @ Register tag to each acsx file that needs a Telerik control.  I would like to put a link in each VS project pointing to the web.config file in the virtual folder DNNDev  but I can’t seem to do that.  You have to add an actual file to each project which chokes IIS.

<%@ Register Assembly="Telerik.Web.UI" Namespace="Telerik.Web.UI" TagPrefix="telerik" %>