You could use the way ed21x suggests, and make sure to compress to MPEG while you're recording, as an AVI will fill the CD in no time at all... Also, when a CD is formatted with DirectCD (not sure about inCD, but most likely the same), you lose about 100MB (for a 650MB CD) so you have less room for your video.
Basically, I haven't seen this done, and it's probably going to be more trouble than it's worth. You would need a quick CD Burner, and a quick machine to do the encoding in realtime. You'd probably have to buffer most of the data on your drive and wait for it to burn to the CD anyways, so the solution wouldn't save you from using your drive... if you were just trying to avoid the step of having to burn later, it might work fine, but considering it takes so little time to drag a file onto the cd layout and burn, it's probably not worth it.
Anyhow, that's mostly speculation... seemed like an interesting topic when I came in, so I thought I'd write something.