If the reports are included they are embedded inside the exe. Cetin's example is the way to go if you want them included. It's the same as including a dbf/table in your project.
Excluding the reports makes the exe smaller but you have to remember to "include" the reports with your distribution setup. 99% of the time I include the reports. The 1% I don't always burns me when I update a non-included report & forget to send it to a client. That having been said, either include ALL or NONE of your reports in the exe, that way you'll more likely remember.