what are dll.refresh extension files?

It tells VS where to look for updated versions of the dll with the same base name. They're text files, you can open them and see the path it's using.

Their purpose is to prevent you from having to copy new versions yourself. In VS2003, the project file would contain the source location of the reference, but since VS2005 doesn't use project files for ASP.NET projects, this is the replacement for that particular functionality.