How to configure annotator and annotation modules in Drupal 7?
I stumbled across the same problem today. Proper way to install everything:


Download the annotator libraries in /sites/all/libraries/annotator
Download jquery_update and set jquery v.1.8 to be used
Download and enable the annotator module and its dependencies (e.g. libraries)
Download and enable the annotation module
Do not change any configuration options


For a minimal installation, I have just used the markup and store plugins. Some things that might get in the way of the annotations being saved:


You need to have Clean URLs installed
If Drupal is not installed in the root of your domain (for example if it's in http://example.com/subsite instead of http://example.com) you may have to change the configuration of the store plugin to point at /subsite/annotation/api instead of /annotation/api


You can manage the permissions to create, edit, view or delete annotations through the permission system of the annotation module.

Also, keep in mind, that if you create the annotation while you are browsing node/3 through the URL: http://test.drupal/node/3#overlay-context=node/6, the annotation WILL NOT appear if you visit: http://test.drupal/node/3. That caused me a lot of headaches. You can check whether your annotations have been saved in the admin/content/annotation path.

NOTICE:
When downloading the annotator library from github make sure that you download the annotator-full.1.2.9.zip not annotator.1.2.9.zip.