Error: Unable to connect to the specified SQL Server Reporting Services on <MachineName>
I got this error while creating new team project

There can be multiple reasons for this error. Here is what I did. One of them may resolve your problem
My resolution:
1. Report Server was not configured on my box. So.... I configured it with "Reporting Serivces Configuration Manager". It has self explanatory UI for the configuration. You can find this utility under Start è Programs è Microsoft SQL Server 2005 è Configuration tools
2. Ensure that http://<ServerName>/Reports is working. In my case I was getting "Service Unavailable" error because respective (ReportServer) "Application Pool" was not running. I assigned proper credentials for the App pool and restarted.
Above resolved my problem. Other potential reason could be "You do not have enough access rights". You must ensure that the credentials you are using while creating project is added into relevant TFS Groups.