Be absolutely, positively sure that you have the cables hooked up right. Check the VCR to make sure the composite cables are plugged into the outputs, not the inputs.
I can't see a practical reason for the Y splitters. Take them off unless you can see a need for them.
As I said in the previous post, everything should be turned on before you open Studio.
Even though the cables are color-coded with the yellow designated for video, for all practical purposes, it doesn't matter what color you plug into each jack as long as you're consistent. IOW, if you use red for the video out on the VCR, plug the other red end into the video input on the Dazzle unit. I would suggest you also plug the USB cable directly into a USB port on the computer, not into a USB extension box.
It's possible you have a bad cable. Switching them around can help determine that.
Maybe someone with a Dazzle unit will chime in on this too.
Joe
P.S. I just looked on youtube for setup videos. Almost all that I saw that used the Y-splitters were for xbox or PS3's. You're hooking up to a VCR so you don't need them.