Linux is released under the GPL which basically says that everything in Linux is free and open to the public, including the source code, ie why Linux is called "open-source" and Windows is "closed-source". For more info on the GNU GPL check this site:
http://www.linux.org/info/gnu.html
Under the GPL, anyone can distribute, edit, hack, whatever they want to do to the code. What they can't do is take something under the GPL and sell it as thier own. I'll bet you're wondering how companies like RedHate and SuSe sell Linux... they don't. They only sell documentation, the physical media the programs on, and support with the OS. You can still download the OS for free, but you don't get anything but the digital files.
As far as SCO is concerned, they're claiming that they own the copyright to some code that is located in the Linux kernel. What most people believe is that SCO is a desperate company trying to litigate themselves out of bancruptcy, hence the scorn and derision you hear about them.
I'm sure I've left things out, can someone back me up?