The application simulation button calls to Captivate. The capture, and editing of the simulation is done through Captivate, and the published SWF is placed in the Presenter presentation.
You may find the Adobe Presenter Video Creator more inline with what you are expecting to happen. This can be accessed by selecting the Record Video button in the Presenter ribbon. It will record your screen and webcam and you can select to display your screen, webcam or both at any point in the resulting video. And, all without using Captivate.
Thank you Jorma, I like the video portion as well, I am just curious as to why I get this error. Other designers on my team have both captivate and Presenter and they arent getting this error code when they try application simulation.
Sorry, I read too deep between the lines and came up with 'I don't want to use Captivate'. It may be a matter of admin rights, or it could be that Presenter 8 was intended to use with Captivate 6, and something changed in Captivate 7 (thought I suspect is is the former). It may be worth investigating what is different between your setup and the setup of the other designers to see what may be causing the conflict. A conversation with IT may also be worthwhile to see if they can enable Captivate and/or Presenter to run as administrator on your computer.