To have adequate confidence in the proposed design of the internally and externally (I&E) cooled annular fuel, it is important to identify the fuel operational constraints from a materials performance perspective. To accomplish this goal, a capability for modeling I&E cooled annular fuel has been developed for two manufacturing approaches: (a) the sintered and pressed pellet approach and (b) the vibrationally compacted (VIPAC) particle approach. New models for the burnup and power radial distribution, fuel thermal and irradiation dimensional changes as well as fuel-cladding interaction mechanisms for annular fuels have been developed and incorporated into a modified version of the FRAPCON code. Fission gas release from the sintered fuel is found to be lower for the same burnup than the traditional solid fuel but slightly higher for the VIPAC fuel. The VIPAC internal rod pressure, however, remains below that of the solid fuel for much higher burnup. The power density constraints and design limits are studied, as well as sensitivity of the annular fuel design to fabrication and operation uncertainties. It is concluded that such fuel can be operated at 30 to 50% higher core power density than the current operating light water reactors, and to a burnup of 80 to 100 MWd/kg U. The major issue for the pellet fuel rod design is the asymmetry in heat transfer that might develop when the outer gap is closed early in the irradiation due to the outward thermal expansion of the fuel. Solutions to this issue via smaller initial inner gap, small roughness and tolerances on fuel and clad surfaces, or the addition of a highly porous ZrO2 layer on the outer pellet surface are evaluated. The main issue for the VIPAC fuel is selection of the particle sizes, which control both the effective density of the fuel and the fission gas release.