Does anyone know of a good way to record an application being used on Windows Phone 7 that includes markers as to where on the screen it is being touched?
Currently there is no public tool available to do this. Microsoft has them for sure since it was used at a couple of events (incluing PDC and other general presentations around the US), but it is not released anywhere else.
Your best bet is recording the screen data directly from the emulator via a desktop screen capture application.