A direct report is an employee who reports directly to someone else. For example, a director might have five managers who report directly to him. They are considered his direct reports. However, those people who work for each manager are not the direct reports of the director.
In most organizations, direct reports and indirect reports exist. An indirect report is somebody who is connected to a manager or director by a dotted line. This means that an employee might report to a manager for some responsibilities, but that specific manager is not the person who makes decisions regarding the indirect report's status as an employee or other HR-related decisions.