Project references are for additional projects in the same solution. The
output of each build will be referenced. Assembly references are for compiled
assemblies. Those are the framework dlls, extra assemblies in the GAC, and
3rd party assemblies.
When dealing with your own code use project references. If the project is
not part of the solution, add it. This way if the code for any of the
referred projects, those projects will automatically be rebuilt and the new
dlls will be brought in and referenced by your exe.