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I was told by our VAR that there is no way to "downgrade" PDM once it's been upgraded. You would have to do a complete reinstall of PDM. So far we haven't had any problems with our add-ins and such after we upgraded... but I didn't have much set up either, so there wasn't a lot that could break.
I'm not sure about setup on a local machine, perhaps someone else can chime in there on what the impact would be of that.
Our upgrade process went pretty smooth though. It took significantly longer to backup the database before upgrading than what it did actually performing the upgrade. We set the database backup to run overnight and the upgrade was done and client-machines upgraded within a couple hours.
A test environment will require another server. You will need a copy of the database and the file vault from your production server.
The test server can be a normal desktop computer but it will need Server 2003 as the OS. You can install all four components on the server (MS SQL Server, Database server, Archive server, Client). I don't think Solidworks will install on a server OS so you will need a seperate computer with the newer client to test the new features. PDMWE clients are not backwards compatable.
Our upgrade from 2008 to 2009 took about 10 hrs mostly because our vault is 500 Gb.
I use a virtual machine. (vmware) It works out great. I especially like the snap-shot feature of the software; if I break something beyond repair I can just go back to the last working state. (just like system restore.)
We used VMware for our last test upgrade. It is a good option as long as you have the spare RAM, disk space, and capable processor(s). In our case the database server uses almost 4 Gb RAM and the upgrade process is very processor intensive.
My previous test server was 4 yrs older than our production server and it took almost 2 days to run the test upgrade. An underpowered test server also makes it difficult to test the client perfomance, but this is a good option if you are limited on resourses and all you want is to make sure the upgrade works and check out the new features.