I've been working with SSRS for years now and still come across this error from time to time. Generally the issue I find is that there are domain/networking issues that prevent the SSRS server from accessing the database server. In some instances if there is no transitive trusts between the domains than you'll need to create a local user on the db server with the same username/password as the account you're trying to use to connect.

Delmar - Can you provide some more details about your network setup in regards to the SSRS and DB servers? This will help with any suggestions on resolving your connectivity issues.

Generally for the data source config I choose to use 'Credentials stored securely in the report server' with a domain account and the 'Use as Windows credentials when connecting to the data source' box checked...

Hope this helps!