+1 to jhudalla. Remember these LBSs are 'for profit' business no different than any other. Would you 'feel bad' about test driving a car and buying the same model instead from ebay motors? Would you feel bad if you tried on a shirt in the mall and instead found it on an online retailer?

On to your questions:
1. Get fit at the store and test ride it. Maybe you buy it from them. Maybe not.

2. Absolutely fine. You would do that with any retailer for a purchase in that range. For example, let's say you are looking at a bike and it is $3,000 online and shipping is $75. If your LBS happens to list it for $3,000 (not likely, probably more), the tax is about $250 (at least it would be here), so the difference is that it is $175 more to buy the bike from the LBS. (If you are seeing a $400 'LBS' premium, that is way steep.)

Granted, buying online probably means you'll have to pay the LBS to assemble for you. In this case, they may charge you $175 and at that point, it is a wash. But you do get a few LBS amenities: lifetime adjustments, easy swaps on stems, etc.

I would still negotiate heavily. First, I would ask the LBS to match the online price, AND give me $175 credit since I have to pay tax. And if I'm really feeling pushy, I'd ask for a 3% credit on top of that if I'm paying with cash and they don't have to pay the credit card merchant fee (or whatever % their merchant fee is).

3. How do you maintain a good relationship with your LBS? Be honest and tell them upfront that you've found a bike online - one that they retail on their shop floor - and you'd like to give them the opportunity to match it. Provide them with specs (frame, wheel set, build group, etc.) and flatter them. "Hey, I like your shop, but I can't see spending an extra $400 just to buy here. Can you work with me on this? Assuming a comparable build group, can you match this price?" And if they say yes, then say, "Oh, and you pay my tax too since the online merchant doesn’t charge sales tax and has cheap shipping."

If they don't match, then you are guilt free. You tried. You might even remind them of that when you bring in a bunch of boxes and ask them to assemble the bike for you.

Tel the LBS that you are looking at some bikes at different places (and name a couple they don't carry) and that you'd like to see how they fit you. Take out the one you want, then ride something else they have, tell them "thanks" and disappear for a couple hours. Call them up, tell them you like the bike, but have just noticed it is listed somewhere else for $400 less and see what deal they can give you. Either they read the situation as it is and feel offended that you used them to test ride a bike you never intended to purchase from them, at which point you can always buy the bike online and have a different shop assemble it, or put it together yourself (there's a shop in Chicago where you can go and actually rent tools for a couple hours to put your bike together if you don't have all the special ones like BB wrench and cassette lockring adapter). Or, they actually want your money (and your future money) and treat you to a discount that lets you to buy there again and again.

thanks for the quick replies, some good advice and some good points, appreciate it.

I went to 4 LBS's here before I settled on my road bike. All were cool. I test road a couple from each shop. Finally settled on the one closest to my house which actually made me a deal on an '08 and knocked about $400 off the price....so, there is definitely room to negotiate. The cool thing is now, I am in there buying lights, seat bag, bottles, etc and they seem me enough that they do freebies here and there....one of the bennies of dealing with your LBS.

I think negotiating is the way to go, and under most circumstances they will oblige. You also have to think about what others have said here: buying a bike for "more" at an LBS may be more upfront - but along with that come discounts and "special treatment" for things down the road. It's like a family - you get to know the local guy and they help you out.

I tend to believe, and I may be on my own here, that using a shop to demo things knowing in advance that you are going to purchase it elsewhere is taking advantage of their policies. To me it kind of seems deceptive. Test driving a car costs the company money - gas, insurance, time of the employee - and if you go there knowing you're just going to fool them into letting you drive the car and then buy it somewhere else, then it just doesn't seem like an honest way of doing things, respectfully. But that's just my personal feeling.

Just wanted to give an update, since all of you were kind enough to give me some advice.
Well, I took the advice about being straight up, went to the shop, I explained to them my situation, what I was looking for, that I had seen this particular bike in their store, in the size that I think might fit me, but I found it online for significantly cheaper. I didn’t ask to try the bike out, because I figured I wanted to get the important stuff first. Basically they told me they could only take off $100 off the price. They justified this by saying that they really don’t make a lot of money off bikes, and that the service included in the purchase price(two tune ups, and the fitting) justifies them not having match. I told them I would think about it and that’s that. I was a little disappointed, $100 is not bad, but I just didn’t like the way they were acting as soon as I mentioned the other advertised price. It was almost like they were offended that I should ask for a discount. I can see the some of their points in regards to the free service, and if you add it up, it kind of makes sense, but it’s the attitude that kind of got me. Not sure if I am going to purchase now. But thanks for the advice.

My heart doesn't really bleed for bike shops because I've heard way too many stories from friends who aren't doing their own maintenance, that take their bikes in for a simple fix and get severely gouged and taken advantage of in the process. Besides, it's your money, and this is a free market. I was a long time supporter of the LBS but when I was quoted a price online for my BMC pro machine that was roughly half
of what the LBS quoted me, I was converted forever. Besides, a shop like "Competitive Cyclist" will send a bike, wheelset and even a seat to demo right to your front door. How amazing is that!! Bikes are a long term investment so you want to get the most bang for your buck. The guilt of not using a shop will subside but that great deal will go the distance and then some.