I'd say best to develop your mod on the clean installation, then if you wanna test compatability, just copy the .esp over to your regular install and test it with the mods.

IMHO - You can't test for compatibility with all mods, that's just impossible. You can't even suppose that if you have a mod conflict, its due solely to your own mod. And, you can't adjust your mod for every other conflict that may occur. I have found, since the release of my mod, a few conflicts with other mods, some of them are even the more "popular" mods. In each case so far, the problem has been with the other mod overwriting vanilla assets - which is something my mod does not do at all (well, very little. I had to add an entrance to my mod to the vanilla worldspace). It is my (possibly elitist) belief, that making a mod that does not conflict with the vanilla is good enough and I mostly refuse to accommodate for poor modding habits used by other modders.

Alright alright Any 'precautionary steps' I should take before installing a second version of FO3? Will it overwrite the .ini's in \my games\Fallout 3\ directory and that sort of thing? I am on XP.

Yes, it could overwrite all the stuff in the My Documents and Settings\My games\Fallout3 folder which also includes save games as well as the Geck and fallout 3 ini files. So you may want to back them up first just in case. I'm also not sure if you install a second copy what will happen to the first due to the overwrite of the registry entries that a new install would perform. I am not actually sure a second copy is the way to go unless you use a different PC or have a dual boot with a different copy of XP on each partition. Game manufacturers don't usually allow a second copy of the game to reside on a single PC like that.

Well that's not good news. I am sure I read some people who had alternate installations of Oblivion and/or Fallout 3, but I just don't recall what they did to make that possible. If we had Wrye Bash, it would be easy since you can have savegames based on alternate load orders. I just need a clean environment to test mods. Maybe I should look into Gary Bash.

I just want you to know that I am guessing here. I have never tried to put in a second copy of fallout on the same PC. It may work just fine. But on the other hand how would the game know which \data folder to look at?