Camtasia is our tool of choice for that. Not just for recording but for editing as well.
It's blindingly easy to do the video, compress things, add audio by just dropping in clips to the timeline and even removing boring bits that might take too long in a software demo which has the added bonus that your software seems faster if you do it seamlessly.
Lucky software demos aren't delivered under oath :-)
It's not a bad price and you can even download a reasonably long trial version if you just want to whack out a quick demo. I would still pay for it though - you should, as a software developer (especially you're making a living from it), never pirate software.
Early versions were annoying because you needed to install a special codec to play the movies but they now have a camplay.exe executable so that's no longer necessary.