Oh, that's a note to themselves. It would appear they have a centralized file that will auto generate a php.ini file to be used on live servers. This isn't an uncommon practice.
php.ini.local is not a valid file for PHP itself. If there's any php.ini.local file being used, it's for custom inhouse use. PHP, itself, does not understand php.ini.local.
Yup, and I would highly recommend going to PHP5 if it's at all possible. PHP4 needs to get phased out. If the script your using requires PHP4, then I would harp on the author to update his scripts or find a new script.