Have you looked at the recent Liberated Pixel Cup resources? 

http://lpc.opengameart.org/static/lpc-style-guide/assets.html

http://lpc.opengameart.org/lpc.opengameart.org/static/lpc-assets/lpc_ful...

http://opengameart.org/content/liberated-pixel-cup-0

@sthreet lemme take a crack at explaining perhaps what is meant by open source games.

There are many gradations of what open source game is. The simplest way is where the source-code of the game is open. For e.g. if you see 'Doom' and any of the engines which is there, sooner or later that code is opened up so people can study it,use the logic and the code therein for their game. The source code can be licensed under many different licenses, one of the more popular is GPLv3 .The thing to understand here though is that while the source code is open, the art assets i.e. buildings, heroes, costumes etc. are not. 

On the other hand we have games such as 0ad, Battle of Wesnoth, Freeciv, Freecol, Konquest, Megaglest,SupertuxKart, FLARE and many others where both the source code and the art assets are shareable (You can google the names and download or/and play the different games I have listed above).Here the source code may be in gplv3 or some appropriate licenses and the art is in CC0 or something similar.  I am not getting into licensing because it can be a long discussion but just gave couple of examples so you know and hear them.

Now for why would people want to do that ? Because most of the Free and Open Source Software (FOSS) distributions (distribution is hundreds to thousands of FOSS software packaged both in binary and source form distributed via Internet or whatever method is good.) like Ubuntu, Debian, Slackware, Fedora etc. need software to make it compelling.Also it's a good way to share knowledge and letting others implement things.

Now what Opengameart.org does is providing a service so at one level people can use it as a sort of archive and art which is and can be re-used in different games.

Now how games do this, they use collaborative tools like git,mercurial,bazaar,subversion etc. and collaborate between themselves using the service somewhere.

Money is usually through donations from the community either through digital money or in kind (art etc.) .

One of the other things I would suggest is to not be over-ambitious, try going for a 16-bit or 32-bit game before going to something like you have shared above (as you said before you haven't done anything like before.)

Disclaimer :- I am just your average gamer. People in the fora are much wiser than me. This is just my opinion so take with few kilos of salt.

A lot of people like to use the GIMP for image manipulation.  It's free (as in free beer and free speech). It is not exactly a Photoshop replacement, but it has many of the same features. Other people use Blender for 3d modelling (also free).

Also, I think shirish, you shouldn't sell your explanation short.  You got a lot of it in a nuthsell.  The only thing I would add is that open source games tend to be very easy to create more content for - there are probably hundreds of hours of gameplay for Battle for Wesnoth floating out there by this point!

@sthreet don't really understand why you couldn't get gimp. There are at least 30 odd ftp and http mirrors to help you. See http://www.gimp.org/downloads/ . If you are on MS-Windows you just need a download manager although Mozilla or/and Chrome's internal download manager is good enough.

As far as morrowind is concerned, I'm not sure. While there are a few projects who are trying to have the same feature-set as morrowind, openmw comes the closest so far. See http://openmw.org/en/

Their idea is first to have it do almost all the things that morrowind has and then create and ask people to create original content so it becomes free and open-source in the truest form.

If there's no "source" code, it's not Open Source.  The basic Morrowind code doesn't allow the kind of collaboration that real open sourcing encourages, nor the freedoms guaranteed by free software.  

Open Source software is defined here:

http://opensource.org/docs/osd

And Free Software is defined here:

http://www.gnu.org/philosophy/free-sw.html

Morrowind doesn't allow access to the source code.  This access is necessary to see how they made their product, which allows modification and study, two key freedoms of free software, and a hallmark of open source software.  Also, both Free/Libre and Open Source Software (often abbreviated as FLOSS) include the right to restribution - I can't just host Morrowind on my own website without getting the living snot sued out of me.  On the other hand, FLOSS like LibreOffice, Firefox, or the GIMP, I can host on my website or burn to CD and give to a friend.

http://www.gimp.org/windows/ for a Windows installer.  

If you're looking to place tiles, there's a few ways to do it.  When you paste something into the gimp, you do have the option to dictate where it pastes using exact pixel coordinates, which is one of the reasons I prefer it to photoshop.

If you're making tiled maps, you can also use a program called Tiled, which is heavily linked around these forums.

@sthreet nobody is able to edit your posts except the mod team and they do it sparingly (if something inappropriate or abusive terminology is used).

tiled would mapeditor.org

@sthreet: Gimp takes a bit of getting used to.  If you're looking to draw a solid rectangle, use Rectangle Select (usually the top-left tool) to select an area, then use the Bucket Fill Tool to fill the selected area.

To do a hollow rectangle, do the above procedure, then click on Select -> Shrink in the menu and enter how many pixels to shrink your selected area by.  Once that's done, just press Delete to remove the insides of the rectangle, leaving a hollow shape.  I usually create a new Layer for the rectangle, draw it/delete the innards, and then Merge Down to finally paste the rectangle into the Layer it's destined for.

There's probably an easier way out there - I'm still kind of a beginner myself.  Hope it helps!

@sthreet: Sorry, turns out I HAVE been doing this the hard way:

Draw regular shapes in Gimp

Short(er) version: Pick a color, click/drag a rectangle with Rectangle Select, and use the 'Edit -> Stroke Selection' menu option.