On second thought, I'm not sure this is the same error I was seeing. To start your troubleshooting you should check the server's logfiles to see if the web service logged an error during the call to GenerateModel. The log files are typically located at:
c:\Program Files\Microsoft SQL Server\MSSQL.1\Reporting Services\LogFiles
You can do a simple search for the string "ERROR:" in all logfiles to see if any errors were logged.
Good luck,
Lance