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Well standard installations install directly in the web root and not in the /xoops-2.0.18.1/htdocs/ directory, so your URL's would normally look as:
http://www.dummy.com/modules/extgallery/ .(eg. see this sites URL.) (Both optons work, but as you saw for yourself the URL does not look so good.)
It is possible to simply move all the files, but then you must edit mainfile.php to adjust the new path in the definitions of XOOPS_URL and XOOPS_ROOT_PATH.