<p>I am developing a .NET application which uses a few projects that I've pieced together from other internal projects.  I was thinking about merging the .exe and the DLLS into a single executable file with a tool called <a href="http://research.microsoft.com/~mbarnett/ilmerge.aspx" rel="nofollow noreferrer">ILMerge</a>.</p>

<p>I may be sending the executable outside the company, so merging everything into a single file would be easier to pass out.  But, I was wondering if there are any downsides to merging DLLs with the executable?  </p>

As long as they're your libraries, I don't think there's any big problem with it. Unless it makes the image absolutely and monstrously huge, I think it's better if the executable relies on itself as much as it can (exceptions being, of course, when you're replicating system functionality... no point in that).
On the other hand, if the libraries don't actually belong to you, you had better make sure that their terms of use allow for this. You may not be allowed to package them up into your executable and distribute them as your own code (even if you give your product away and the library was "free", you may still have to acknowledge that you use it some how so make sure to check the terms of use for
all
the libraries you include).