What are the pros and cons of using Blend starting with these 2 project types?
Is there any special setup needed to use the WpfControLibrary vs the WpfApplication?

I am developing in Unity and I don't really have a "main window". Instead there are a bunch of panels and HUD controls that get brought in and dismissed as the gameplay goes. So I was thinking WpfControlLibrary would be more suitable. However the use of WpfControlLibrary doesnt seem to be covered in either the Blend user's guide or the Noesis docs. It just mentions that Noesis supports the ControlLibrary.

Edition of xaml files with Blend is explained through this tutorial: http://www.noesisengine.com/docs/Gui.Co ... unity.html

You don't have to worry about the App.xaml and MainWindow.xaml that Blend creates by default. You will only use that Blend project to link to your existing xaml files in the Unity's project folder, and use Blend as your xaml editor.