That is normally caused by the account you are using as the "trusted
account" does not have the correct permission to the reporting  services
databases. Check your permissions.

I checked the account permissions, the account I am using to set
server defaults  is an admin  on th report server  box and dbo on all
associated databases. when i take out require ssl encryption from the
report server configuration tool, I can set  server defaults but now
the reports generation fails with the sharepoint site is sending
anonymous calls to the report  site which fails with a 401.

Make sure you have the standard or enterprise version of sql server  and
not an edition of express or workgroup. They don't support connections
to remote  databases. I had similar errors when my company only
contracted for the workgroup edition of sql  server.

Thanks I have the enterprise version.

To reslove this problem, I made sure all involved websites were
porperly configured to negotaite Kerboros. Then Although the reporting
services site uses SSL I uncheked "require SSL " in the reporting
services configuration tool. This worked and I still have my data
secure.