An annotated bibliography is an organized list of sources (like a reference list). It differs from a straightforward bibliography in that each reference is followed by a paragraph length annotation, usually 100–200 words in length.
What it is: Chicago-formatted source citations, accompanied by a summary and/or evaluation of each of the sources.
What it does (adapted from Purdue’s OWL site): An annotated bibliography helps you learn about your topic during the research stage, because when you have to write annotations for each source, you're forced to read each source more carefully. You begin to read more critically instead of just collecting information.
An annotated bibliography helps you see what research has already been done, so you have context for your own research, and it helps you develop or refine your thesis. By reading and responding to a variety of sources on a topic, you'll start to see what the issues are, what people are arguing about, and you'll then be able to develop your own point of view.
An annotated bibliography is also invaluable to other historians and historical researchers doing work in your field.
Details on each of the steps, as detailed on the Purdue OWL site: