i finally had some free time, so figured to write this one (as much detailed as i can).
before we begin i'll mention this tutorial was aimed to fill all questions requested by Grumpy ol' Jim @ REQUEST: Tutorial on Test or Development Boards
and like he said, since no one took the time to write some comprehensive tutorial, it's can be quite hard for people to do this fearing of the "unknown".

Disclaimer
before we begin, i want to point out that despite of me doing my best here to provide a fully-detailed step-by-step guide, you are still responsible for your own data, and required to make proper backups before doing anything. also be ware that any mis-use (not following steps properly) of information given here might (in rare cases, but i guess it has some chance if someone clicks for example "drop" button instead of "export" , etc.) damage your info. therefore i'm only giving my best advice here, and the decision to take it (or not) remains yours.

ok, lets begin:

Hosting & Domains - Few points to think about:
before you start to make your test board you'll need to place it on hosting.
for most people, the hosting is no problem, since you got some hosting for main forum. However, for others there might be few limits that prevent them from installing it on their hosting (like max new db limits, amount of free HD space, or some other hard limit set by your hosting company like 'MaxQueries' - that should only concern busy forums that makes alot of queries and just might reach that limit by adding few more).
so the first thing you need to ask yourself is, can i allocate the resources needed for it on my current hosting ?
No
Solution 1: install a local copy of http server on your box (when possible).
solution resources:
reffer to thread @ [How To] Run vBulletin On your P.C. for many free packages suggest there.
Pros:
1. The cost - it's free !
2. some packages provide you with everything you need with 1 easy install wizard.
Cons:
1. it's possible "security hole" into your box, assuming you're not familer with all involved "securing" your box against 0-days exploits & everything required to keep all server componnets up-to-date.
2. on most times, assuming your ip is dynamic, this kind of solution is aimed for those who work alone, locally, without the need of having some "outsider" help you with it. true, there are ways to overcome this problem (like no-ip.com or other free service providing dynamic dns) however i won't get into that.
3. this might slow-down your computer, as it will hog a little of it's resources when running as service in background.
Bottom line: if you're not willing to spend more moeny, then this is your best solution.
Solution 2: rent another hosting package or just upgrade your current to allow more reources for having dev board on it.
solution resources:
either get another account from your current hosting company or ask friends for some recommendation, or you can also google for it.
Note: (in case you googled) plz beware to be temped to sign up for hosting with a very low costs. usually there are some small letters that will make you pay more eventually.
Yes
read further.

now, few notes regarding domains:
vbulletin has a known issue (at least from my experience) to conflict with cookies when you place the test board into subdomains.
meaning if my domain is www.mydomain.com and i place the dev @ dev.mydomain.com - unless you'll fix few settings (will explain them), you are about to have either problem it won't log at all (keep prompting you to login) or you'll have to re-login every time you switch browsing between the two.
Solution 1:
my fav
go to free domains websites (like www.afraid.org).
register for some free domain to point to your hosting ip (will try to write quick howto later on) and then you don't need to mess with cookies issues.
Solution 2:
(can give you quite a headache sometimes, as other may vouch about it)
will be explained further on, as it requires admincp axx, and we've yet to install anything yet).


Export Stage
ok, here will start actually exporting our data.
i'll assume you use Cpanel (as i cannot cover all admin management software out there, so doing the most popular one).
login into your Cpanel (usually your domain port 2082).

scroll to bottom & click on phpMyAdmin link:

then you should see your DB info.
select it's name on the combo-box on the left, and click it's name on the narrow left frame to see list of all tables on his right wide frame.
now on top you should see button named "export"
click it, and you should see this screen:

click the "select all" on the top-left corner to select all tables in your db.
also make sure the "extended inserts" is NOT CHECKED.
The reason for this is the backup restore utility we intend to use (bigdump) doesn't support extended inserts.
now scroll down, and CHECK the "Save as file" option.
leave this with NO compression & hit "go" button.
now save your .sql file into some place on your HD, we'll upload it later on.

Import Stage
since most chances are your .sql file you've just finished to export in the previous stage is over 40-50M (for any big board that run for more than few months). the normal way of importing files via phpmyadmin just won't work for you, as there is 8M max upload file size set on most hosting companies.
1 solution i came across is an handy script called "big-dump".
you can get it from here http://www.ozerov.de/bigdump.php

now before continue any firther you are required to make a new DB.
i'll sum this very shorty, as this is rather long tutorial already:
inside cpanel after you clicked the "mysql databases" you need to write db name near "New Database:" & click "create database". then also create new user same way, and then just assign new user to database.
now after this step be sure you have the next details:
- database name (as shown, could be your hosting will have some prefix set to it)
- database user
- database pass

after you download the bigdump script you'll notice inside it (lines 35-44)

PHP Code:

// Database configuration

$db_server   = 'localhost';
$db_name     = '';
$db_username = '';
$db_password = '';
// Other Settings

$filename        = '';     // Specify the dump filename to suppress the file selection dialog 


just fill in the details (leave server as 'loclhost').
be sure to write the file name you've exported in the previous stage correctly

now use some ftp client (or internal file manager located on your cpanel, whatever you prefer) & upload both the bigdump.php file & the .sql backup file you've exported in the previous stage. into some folder.
open your browser & point it to the bigdump.php file & just hit "next"/"continue" (don't recall the exact button name there) till eventually you have your entire main database copied into another database.

next step is to use your ftp client & download all files currently on your main domain folder to some temp folder, and then re-upload them into new dev folder.
note: be sure after you upload (or before - depands if you want to edit locally & then upload or upload & edit remotely) it to edit the /includes/config.php file to update with it your new mysql data (db name / user / pass).

Cookie problem fix:
now, we are almost done with this step, just minor issue in case you've decided to upload this site into subdomain after all.
point your browser into devboard admincp url (be sure to clear all cookies on browser before you do this).
then inside go into: admincp->vbulletin options - >cookies & http header options, and scroll down you'll see this screen:

just change combobox from blank to ".domain" & save settings.
Note: this must be done with both boards (dev & main), otherwise 1 visit will still conflict the other (also be sure to clear all cookies before fxing both, to avoid any login problem)

Password Limit Security (htaccess)
at this point you should have exact copy of board into dev board.
now i'll dicuss few security messaures, specifically htaccess protections.
the first & best way to do this is via cpanel, you have something like this pic:

where inside you just check the dev folder & set password for it.
this avoid any manual creation of .htaccess & .htpasswd files & gettings tools to encrypt it (especially if you are non-linux user or windows users without any copy of apache server)


Few extra notes regarding some pop-up questions you reffered to:
1. LINUX vs. WIN BOX:
for hosting i would suggest LINUX & not windows. Linux are far more stable, with better uptime. also running php to linux is native, as where windows env (IIS) is usually designed for running ASP (Active Server Pages) - which is M$ version of dynamic scripting, and usually inntended to run with msql rather than mysql. true you have out there windows servers running php & mysql (not much), but i would not recommended them.
2. upgrade to 3.6.x:
since now you should have seperate copy of main board, just use jellsoft upgrade utility to upgrade your board, and later on when needed manaully edit specific modifications to fit 3.6.x as well.
also use support communities like ours & vb.org (& others) to get support from original hack authors to help you fix their 3.5.4 mod into 3.6.x (in case it's not released yet)

anyway, that's it for this tutorial, took me about 2h+ of wriitng this one, so i'll hope you appreciate the time spent to it.
i'm aware it can always be more detailed but this is the best i could do.

hope this helps you & others with whats needed.
greets.

[eJM]

You did an excellent job, Idan, and I appreciate it very much. I imagine (and hope) that others will have additional information to offer this discussion to make it a complete resource for setting up and running a test/development board for your forums.

Allow me to add what I can in regard to test board security:

It is the policy of vBulletin, as well as that of some other add-ons, plug-ins and hacks, to allow you to run the software on a test/development environment as long as it is not publicly accessible. You must prevent casual surfers and search engine spiders from using and indexing your test site. Idan has offer one solution for this via the cpanel feature, Password Protect Directories. Another solution is by using .htaccess and .htpasswd files.

In the directory that contains your test forum, you can edit an existing or create an .htaccess file that contains the following:

AuthName "Restricted Area" 
AuthType Basic 
AuthUserFile /actual/server/path/to/your/.htpasswd 
AuthGroupFile /dev/null 
require valid-user

This will cause a box to pop up when you try to enter that directory and you will have to enter a name and password. But not just anyone can enter a name and password. The name and password have to be included in the .htpasswd file. Create the file using a text editor (not a word processor) and it will look like this:

yourname:eNcryPT3dPAsSw04D
ANOTHERname:pASsWorDEnC4p7eD

You can use any one of a number of password encryption utilities online by doing a google for "htpasswd". You can put the file in the same directory with the .htaccess file or in another directory that is at a higher level than the .htaccess file.

Both the .htaccess and .htpasswd files can be uploaded to your server, but there are some instances where the file must be named htaccess.txt and htpasswd.txt until they are on the server and then renamed to their correct file names.

Protecting your test/dev board from casual visitors is honoring the rights to use the software that you agreed to when you downloaded the programs. It's an excellent way for you to practice, try out new hacks and template edits, and prepare for disaster such as a database crash or being hacked. Thanks again to Idan for your hard work in putting this tutorial on an excellent forum in support of the thousands of members who use vBulletin and other products to give their communities a better experience.

Jim