"Video Annotations" is essentially a picture-in-a-picture feature. There is a lot going on inside your box to make that happen. Cam Studio is taking the input from your web cam and super imposing it over the display output and recording it real-time.
Due to different operating systems and different web cam drivers, there have been a number of problems and few solutions for them. See if you read anything in the support forum on the subject that might offer some help:
http://camstudio.org/forum/comments.php?DiscussionID=2