Does Visual Studio compile test classes into an assembly?

Assuming you've got a separate test project, yes that's really just another class library project. (If you're expecting VS to split classes from a single project into "test" and "non-test" assemblies, then the answer is no... and you shouldn't do that :)

Unit testing internal classes is entirely reasonable - and is by far the most important reason for InternalsVisibleToAttribute. You make your production internal classes visible to your test project, and then you can test them.