Hmmm. My head hurts after reading this. >< As Peter suggested, you should have the files you are trying to execute on the same machine that IIS is on and not try to map a UNC path as a virutal directory.
The error you are getting is related to access being denied to the SQL Server, obviously. It appears as though windows authentication is working correctly, however I have a question for you. Is this: 'DANDR\MAILSERVER$' a valid domain and user account? Moreover, if it is, have you ensured that the MAILSERVER$ user has the necessary rights to access the SQL Server?
Unfortunately, I think that the user that is trying to log on to your SQL Server is the actual machine and not a domain user account. (You noted in your url that the name of the machine that IIS is on is MAILSERVER) Of course this is an assumption since I know nothing about your network.
Have you tried supplying a Username and password in your connection string to verifiy that you can connect to the server correctly?
Those are some things to check out anyway.
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Read this if you want to know how to get a correct reply for your question:
http://www.catb.org/~esr/faqs/smart-questions.html
^^Took that from planoie's profile^^
^^Modified text taken from gbianchi profile^^
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