Hope these answers help...
1. The assemblies in \PhysicsHelper\Common\PhysicsBehaviors\ClientBin\ are compiled for Silverlight 3 and will work in both in-browser and out-of-browser applications.
2. Keep in mind this is a Blend Beta. The core problem in the Beta is that they removed the \Libraries\Silverlight\v3.0\ subfolder and do not yet have a WPF 4.0 folder or WindowsPhone folder. So it is difficult (impossible?) to install all of these different
versions of the Physics Helper components into Blend for the current Beta. I have contacted the Blend team about this and it should be fixed by release.
For now, I would actually recommend targeting Silverlight 3 (note that Blend 4 still supports SL3 development) for two reasons: Windows Phone uses a Silverlight 3 version, and Silverlight 4 doesn't really offer anything for Games Development.
But if you absolutely need to target Silverlight 4, for now you can pop open the Silverlight Physics Helper solution, and change its target to Silverlight 4, recompile, and then use those assemblies to reference from Blend. I think that will fix the problem