Basically, a Photoshop Tennis contest involves, after maybe setting some ground rules like a consistent theme or having to use a certain image/logo in each design, person A making a design and passing it (or 'serving' it) to person B. Person B then has to make an altered version of that image, keeping in line with the rules you agree. Person B then plays the image back to Person A. This gets repeated for a predetermined number of rounds (or the players get bored) and a winner is decided. The winner can be decided by the players or by an independent judge who scores based on the number of 'best shots' - you sometimes don't even NEED a winner as it is, after all, just a bit of fun!
I've also posted about this on the Drupal.org forum where, hopefully, they might inspire more people to create some Drupal wallpapers! It would also be nice if it appeared on the frontpage (if any moderators read this... *hint thint*... ;-) hehe)