Let's start with codecs: that's the stuff that you need to play certain videos that are digitally encoded using a certain encoder. Codec stands for Coder-Decoder and, as this implies, it also contains the necessary whatever to decode the video so that one can view it.
Now, wether you need codecs or not depends on wether you want to use WMP for video playback or wether you don't care if you use another player.
The reason for this is that if you want WMP at all costs, then you're gonna have to download codecs. If you don't care or want to avoid using WMP (for reasons which I will not elaborate here), however, you can download another (free) player that will do the job just fine. For example
VLC is a free player and needs no additional codecs.
As per the burning thing, if your CD player burns CDs then it can burn (theoretically) .mp3 CDs, data discs, VCDs, SVCDs and music CDs. All you need for all that is an adequate CD burning application that will let you take full advantage of your CD burner.
Nero is probably the most widely known Windows burning application. I've used it several times on a friend's PC and can say that it's pretty good.
Also, the 700MB applies to .avi files. An .avi movie of around 700 Megs will have a satisfying quality.
If you want to burn DVDs out of it, then it's a little more complicated than that.