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Creating a Virtual Server Development Environment of our live website.

I am looking for some advice, opinion and research suggestions for creating a development/staging environment on a virtual server, using the same domain name as is used on our live site on the internet.

We have a live php/mysql website hosted outside of our walls on a Linux server that includes a public site and an https:/ password protected portal/application.  I want to create within our firewall, a duplicate of the live site, portal and database for development purposes.  I want the development environment to utilize the same domain name we use in the real world - in order to allow for some url hard linking that is unfortunately still lurking in the code.  

It has been recommended that I create a virtual server hosted on one of my DELL/Server 2003 boxes that duplicates the online website.  It was suggested that if the virtual Linux server hosts its own DNS we will be able to use the actual live site's domain name in the development environment, thus avoiding hard link problems transfering the work between each environment (until we can eventually fix all hard links).  

I am a novice with DNS and Virtual Server environments.
1.  I am looking for some general opinion on the viability of this. Is there an easier/better way?

2.  We are open to using either VMWare or MS Virtual Server to create the environment.  Opinions?

3.  I am trying to find some reading on setting up virtual development environments that does not assume a high level of expertise with virtual servers.

4.  If we do set this up - what are the mechanics of accessing the virtual site from within our firewall - and more importantly, how does its presence within the firewall affect other users (if at all) when they are trying to hit the actual live site?  Will I have to mess with user hosts files, or is this a non-issue as long as we don't add the domain entry to our WAN DNS (Microsoft)?

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arrkerr1024
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cbns

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Well, duh!  
But seriously, thanks.  Using the hosts file is so much easier than what I was imagining.  That's the beauty of seeking a new perspective.  

The entire answer is well-worth full credit.