Quick summary as I have a lot going on today.
Setup the SOURCE solution, I configure it in the following folder
c:\inetpub\wwwroot\dotnetnuke
Setup a virtual directory in IIS for dotnetnuke_2 point it to the c:\inetpub\wwwroot\dotnetnuke\website folder
Make sure DNN installs properly, setup your database, etc.
Install the SOURCE Version of Engage: F3, this will put it into the desktopmodules/engagef3 folder
Open the project file.
Make changes, compile, boom you're done. If you want to use the nant scripts read this blog post.
Does that all make sense?