Short for compressor/decompressor, an encoding algorithm used for recording digital audio or video. A codec compresses transmitted data at the sending end and decompresses it at the receiving end.
Microsoft NetShow uses different codecs to provide streaming multimedia information over a TCP/IP network such as the Internet.
NetShow provides a number of different codecs for different purposes. You can select a codec to give you the audio or image quality and image size that you want for your transmission.
Codec packs are pieces of software that attempt to make the process easier by installing a number of different codecs at once, so you don't have to deal with finding each one individually.
One of the most complete set of Codec's is K-Lite. You can download it for free.
Some codec examples are MP3, WMA, RealVideo, RealAudio, DivX and XviD, but there are many other obscure codecs.
AVI, though a common file extension you see attached to lots of video files, is not in itself a codec but instead is a common "container format" that many different codecs can use.
Because there are hundreds of codecs out there that are compatible with AVI content, it can get very confusing which codec(s) you will need to play your video files.