Codec is an acronym for "Compressor-Decompressor". A codec is an algorithm or specialized computer program that encodes or reduces the number of bytes consumed by large files and programs, and later decodes the file for display. Files encoded with a specific codec require the same codec for decoding. Some codecs you may encounter in MediaPortal are DivX, MPEG-1, MPEG-2, XviD for video and MP3 for audio.
See also: Preparing Your System > Codecs for a detailed guide to installing and using Codes in MediaPortal