Gamecam pro can record sound and its the best software for recording game playback. For recording other desktop activities use Camtasia.
But none of these are free.
I can tell you a simple work around but I am not sure if it works.
you can record audio separatly and then use windows movie maker to combine them.
to record audio separatly, set audio device as line out and use any audio recrder line soud recorder of windows.
i would try camatasia, i'm not sure if it is free or not. I'm not sure, but i thought fraps was free, you might want to try to search for fraps. another option is to record audio seperately, which would result in better quality in the long run.
FRAPs isn't free, but it gives you a fully functional trial. The only thing with the trial is that on your video, there's a "www.fraps.com" stamp. That is easily removed with some patient editing. I didn't think it cost $40 though. I think I paid 20 for my reg for it.
I agree with the separate audio recording. It allows for more editability. Makes the whole process easier... unless, of course, you want the original sounds and timing. But even then, you can still re-edit in something like Video Vegas or Premiere.