>Is it possible to hide excluded report files (excluded from EXE) from users. So that users don't see any FRX FRT files. But the application should be able to use Customized reports.
>I have heard about software to embed DLLs into EXE (Molebox). Is there any software to encapsulate some files into a single file and allow modification to contained files through a software only?

I have used a zip file for this purpose before.
I changed the zip file extension to .dll - though I imagine this might upset Vista somehow these days.
Reports.dll and CustomReports.dll
If the file was not in CustomReports.dll I looked in the regular Reports.dll
Extract to a temp location, run your report, overwrite the temp file with junk, and then delete it.

You might do even better with an oddball compression algorithm - there are hundreds if not thousands of them.