The "Server" preference should be set to the URL of the annotation server. (For example, the W3C test server is at http://annotest.w3.org/annotations.)
NB when you request the body of an annotation, you will be asked for your user name and password again, this is because the body of the annotation is retrieved by a different mechanism. You can use Password Manager to remember the values here though.
If you are using the W3C test server, then you can probably find some annotations attached to the Annotea page.
You can also configure:
whether the annotations, when you select them, appear in an area in the sidebar, or in a new browser window
whether to (a) try to determine the text that the annotation applies to, and (b) insert an icon in the main browser window to indicate the annotation.
whether to load annotation bodies in an area of the sidebar, or in a new window
For languages, the options are these:
You can specify "only view annotations in my preferred language". This only
affects annotations which have a language specified.
You can decide whether or not to view annotations without any language
information specified. (At the moment, I think that Annozilla is the only Annotea client which can specify the language of annotations).