anonymous vs windows authentication

The following makes no sense to me ... what am I misunderstanding ?

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web.config





IIS Web Site properties - check "Anonymous access" , check "Integrated
Windows authentication"

perform iisreset

http://localhost successful

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web.config








IIS Web Site properties - uncheck "Anonymous access" , check "Integrated
Windows authentication"

perform iisreset

http://localhost give error :

"Security permissions are misconfigured on this machine. Turn off anonymouse
access, turn on NTLM, and protect the directory with permissions to restrict
access to authorized people only."

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