Linux usually refers to a Unix-like operating system, using the Linux kernel developed by Linus Torvalds in 1991. It's a very stable and secure operating system, and it's popularity is growing exponentially.
Linux is found in anything from a laptop or desktop PC, right through to servers that form the backbone of the internet. Embedded versions of Linux can be found in mobile phones, MP3 players, games consoles etc.
It can be controlled by a graphical environment (similar to a Windows or Mac desktop), or via the command line interface. There is a growing list of applications that run on Linux, most of which are totally free to install.
There are many variations of the Linux operating system (or distributions). Some are themed towards music or graphics, others are more mainstream. Some can be run from directly a CD, requiring no installation. These "Live CD's" allow you to get the feeling for a particular Linux distribution before actually installing it on your hardware.