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SSRS reports will not run within an ASP.Net app. Returns unauthorized.

I have a Web Server & Database Server on the same machine (say machine1).  I have a reporting services server on another machine (say machine2).

Inside my web app which is being housed on machine1 I'm using the reportviewer control to access a SSRS report on machine2.  This report gets information from a few different databases one of which is housed on machine1.

I'm getting this error:
The request failed with HTTP status 401: Unauthorized

This runs fine on my local development machine but once I publish the ap to machine1 I start getting this error.  I have permissions to run the report if I manually run it but perhaps it is using a different user when it runs from within the application on the production server.  I do not understand how this works at all and everything I read is very confusing and contridicting.

One last note, the datasources for the SSRS reports have a user name and password setup in them.  They are not using windows authentication or anything at that point.

Any suggestions on how to overcom this?
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plusone3055
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had to add delegation on my server