The monitor has to have a DVI/HDMI connection, I think that's the only limitation. But not all DVI monitors are HDCP capable, they have to distinctly state that they are. It's a confusing mess, like every other Industry endeavor to limit consumer choice, and to force compliance.
As to what it is.. I believe it's a sort of authentication process. The DVD, video card/drivers and monitor have a digital signature, or an encrypted key. For the HD-DVD to function as it's supposed to the signal has to be verified and authenticated on each level, only then is the feed displayed on screen. It might be more complicated than this, but this is how I understand it. :shrugs: