IIS is not the problem here!
It is the DATABASE USER
State 38 means user doesn't have access to database it is trying to connect to.
You need to grant the user TESTNOP03 who is set up for IIS Application Pool
the access in DATABASE:
Go to Microsoft Database Management Console, NOT IIS
Apply the user TESTNOP03
grant the user access to the database
set user to db_datareader, db_datawriter.
