[Taken from Challenge-TV]

Watch the demo ahead of time, with the timer on, making notes of what times the best clips would be. Then pad it 3 or so seconds on each side. 
When you watch a demo, make sure you either have "timedemo 1" in your cfg file, or you type /timedemo 1 in the console. Bind a key to "cl_avidemo 30" - this will start taking screenshots. The number is how many screens/second. This is to start taking screens at the time you want, it will probably look like your computer is choking. (Note: if you use Geekboys to watch demos, it is best to but these binds in geekboys.cfg.) 

Bind another key to "cl_avidemo 0" to stop the screenshot madness when you have the clip you want. 

Now, you should have a whole bunch of tga files in your screenshot directory, and depending on your resolution they can be quite huge (1MB or more each).

Download bmp2avi, a nice program to string all those screens together to make an avi (it works with tga files).

From here, you can choose a codec to use for compression, and you can also add a wav file for a soundtrack (convert from mp3 first), although some people recommend using "Microsoft Video 1" and compressing with another utility. Using the Windows Media On-Demand Producer will get that file to a pretty small asf, for example. It will also allow you to string several clips together to make a series of cool shots, and you can also add in your wav file at this step.