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Region codes in this instance mean flags implemented in DVD-Video discs that determine the geographic area where the DVD-Video disc is being sold and where it can be watched.
Region codes are controlled normally by the DVD players. According to DVD Forum (the association that controls DVD patents) rules, all DVD-Video capable stand-alone players need to have region control measurements built-in. This means that a DVD player bought from the manufacturer, which is set to use Europe's region code (region code 2, same as in Japan and in South Africa), can only play DVD-Video discs that are either region free (region code 0) or have same region as the player (==only discs sold in Japan/Europe/South Africa work). So, with such player, it is impossible to watch DVDs sold in the U.S. (region code 1, same as in Canada) -- and obviously vice versa, American DVD players can't be used to watch DVD-Video discs sold in Europe.
The region controls are also implemented in PC's DVD-ROM drives, normally in three levels. First of all, if the DVD-ROM drive is manufactured after 1st of January, 2000, the drive itself has physical locks implemented in it to permit playback of only specific region code (for more information about this, read also RPC-1 and RPC-2). Secondly, all newer operating systems, including Windows 2000 and Windows XP, have region control measurements built-in. And finally, the DVD player software, such as WinDVD or PowerDVD, have region control measurements built-in.