Hehe, we're all so eager to give advice...
I agree with the previous posters - I've even done it on a Pentium II 266MHz. Burning DVD's doesn't require a lot of CPU power, nor even RAM. All you need is good data transfer speed from your hard disk to the writer (which most any properly configured PC can handle). Just don't multi-task, don't do on-the-fly encoding/decoding, switch off your screensaver, automatic virus scans etc. while burning.
I understand you're considering an external USB 2.0 drive? That'll have the advantage you'll depend less on the quality of the Power Supply in your PC. You can probably also exchange your internal CD-writer for a DVD-unit (cheaper), as they fit in the same drive-bay and use the same type of connections. I wouldn't keep both the CD and DVD-drive in the PC though, for reasons of power supply and heat dissipation. For software, find a burner that comes with OEM-versions of Nero Express and PowerDVD (for example) for burning and watching DVD Video.
Upgrading with a USB 2.0 PCI-card would be a good idea however (for use with memory sticks, external hard disks, etc. as well). You'll find these based on either a NEC, VIA or ALI chip (the main chip on the card) in various guises (with 2 to 6 ports), but all of them will fit in a standard PCI-slot and they'll work without special drivers in XP (plug 'n play). It's difficult to give a recommendation on which is best, you'll have to try your luck (maybe with a NEC). It's best not to use all available slots with different cards (there's only so much power and bandwith the PCI-bus can handle), so if there's any installed that you don't need, take them out. You may also have to try the USB-card in different slots to get it working properly.
Then there's memory. If you plan on using this computer for some time yet, you'll want to add that second 256MB stick. You'll need PC100 as PC133 may not work (OEM PC's can be difficult to upgrade in this respect). Take out the one you have and look at the specs on the label (handle it with care, don't touch the chips or contacts). If you buy online, you can search for RAM that's certified to work with your "Pavilion 510n" (just Google). Personally, I'd go to a shop where you can easily return or exchange it if it's not compatible. In theory any PC100 stick should work, but practice may be different.
Hard disk: 40GB isn't abundant, but it's sufficient if you keep it less than half full and defragment regularly. Obviously you won't be able to store more than one DVD on it (temporarily for copying/re-authoring purposes). You can add an external or a second internal hard disk for your data storage needs.
And if you add it all up ($20 for USB, $50 for RAM, $50-100 for int/ext DVD, $50-100 for int/ext HDD = $170-270), how about looking for a deal on a new desktop (without a monitor obviously), which has all of the above and more power and new features to boot. Upgrading is fun, but with today's prices for new PC's, I think you should at least consider this option, before spending any money on your old one.