Hi Steve,
I had totally intended to reference the third-party modules that certainly exist to fill this niche; though I do not have any direct experience with them, they may very well provide exactly what you're looking for. There are some excellent products out there.
It was critical that we coordinate authentication between DNN and SSRS because (i) we did not want to require users to double-authenticate, and (ii) our custom reports are partitioned by user, portal, and role membership. Without authentication integration, reports must be executed under the same SSRS user (or per-user SSRS authentication must somehow be maintained). You may be able to utilize AD to mitigate some of these issues, but this is not something that I have direct experience with. If your reports do not require this sort of context (many reports do not), then you should be fine running everyone in the same context.
I suggest trying out the core reporting module to determine what sort of functionality you'll ultimately need (I believe it uses the same authentication for all reports, on a per-module basis). Then you can step up to third-party modules and/or custom development as you better understand your particular details.
We have a dedicated SSRS server separate from our MSSQL instance; your exact hardware needs will depend many factors. Many hosts will allow you to step-up from shared services to dedicated or co-location. A shared server might be able to generate hundreds of very simple reports; extremely complex reports might require dedicated hardware. You're likely to be the only one who can determine where on this spectrum you fall.
Brandon