Vehicle-in-the-loop simulation is an extension of the well-known hardware-in-the-loop technique, where a vehicle moves in real space while a simulator generates input for onboard sensors real-time. VIL frameworks designed for unmanned aerial vehicles have many open challenges. This paper introduces an indoor VIL for micro aerial vehicles in a drone arena equipped with precise positioning system and reliable wireless communication. This indoor setup stands as a prototype and predecessor for other outdoor VIL simulators for large scale applications. The raw optical navigation performance is tested which is the building block for sensor fusion and on-board fast sensor consistency check. A use-case of a companion drone in cooperative navigation is also presented.