I don't know how big the test area was, other than what is visible. I was around when Larian released the first three screenshots of what they were then only referring to as their 'next gen' game (one, two, three), in May of 2005. There was a fair bit of speculation in the forum about what the other place name was, and how Aleroth and Verdistis may have changed since DD, etc. Larian (don't recall who exactly) chimed in to say that it was just a test area, and that the sign post didn't necessarily mean anything about the game.

In December of 2006 they released a fourth screenshot, which was actually from the game. However, at some point during development, the swamp area was removed (they didn't say why).