AT&T employees created UNIX in the early 1970s. At the time, the monster telephone company was forbidden to compete in the computer industry. The telecommunications company used UNIX internally, but could not transform it into a commercial product. As such, AT&T was willing to license the UNIX software and its source code to universities for a nominal fee. This worked well for all parties: AT&T got a few pennies and a generation of computer scientists who cut their teeth on AT&T technology, the universities avoided high operating system license fees, and the students were able to dig around inside the source code and see how computers really worked.
Compared to some of the other operating systems of the time, the original UNIX wasn't very good. But all these students had the source code for it and could improve the parts that they didn't like. If an instructor found a certain bug particularly vexing, he could assign his students the job of fixing it. If a university network engineer, professor, or student needed a feature, he could use the source code to quickly implement it. As the Internet grew in the early 1980s, these additions and features were exchanged between universities in the form of patches. The Computer Science Research Group (CSRG) at the University of California, Berkeley, acted as a central clearinghouse for these patches. The CSRG distributed these patches to anyone with a valid AT&T source code license. The resulting collection of patches became known as the Berkeley Software Distribution, or BSD.
This continued for a long, long time. If you look at the copyright for any BSD-derived code, you will see the following text.
Copyright 1979, 1980, 1983, 1986, 1988, 1989, 1991, 1992, 1993, 1994 The Regents of the University of California. All rights reserved.
Fifteen years of continuous development by the brightest students of the best computer science programs in the world, moderated by the faculty of one of the top technical schools in the country. That's more than a lifetime in software development. As you might imagine, the result was pretty darn good — almost everyone who used UNIX was really using BSD. The CSRG was quite surprised, near the end of these years, when it found that it had replaced almost all of the original AT&T code!