Open Source Software
The term "open source software" refers to computer programs for which the source code is available, which may be freely used for any purpose, and which may be freely shared in original or modified form.
The origins of open source software
The first commercial computers were produced in the 1960's, and they came with software that could be freely shared among users, it came with source code, and it could be improved and modified.
This changed in the late 1960s, and by the mid-1970s it had become usual to find "closed-source" software, in the sense that users were not allowed to redistribute it, that source code was not available, and that users could not modify the programs.
In spite of this, communities of computer users where programs were shared freely in an "open source" manner have always continued to exit. During the 1970's and early 1980's, this liberal sharing of computer programs was generally facilitated through releasing the programs into the public domain. (Until the US joined the Berne Convention in 1989, publicly distributing the source code for a program without copyright notice put the program into the public domain as far as US copyright law was concerned). There was also a lot of software with restrictions such as "educational use only", "no commercial use", "postcard-ware" which are outside of the scope of the term "open source software" as it is understood today.
The GNU system
In the mid-1980's Richard Stallman developed his strongly ideological "free software philosophy". (For all practical purposes, what Stallman calls "free software" is the same thing as what is today popularly known as "open source software", even though the precise definitions are different.) Stallman considers it a serious violation of essential personal freedom rights to be forced to use computer programs which are not free software, and he decided to solve the problem of not having a complete free software computer operating system by creating one, the "GNU system".
The GNU project with the aim to develop develop this operating system was launched in 1985 with the GNU Manifesto. Stallman created a precise definition of what is "free software" and he feels that it is important to ensure that everyone who receives a copy of the GNU system have the freedom use, study, modify and redistribute the programs which comprise the system. With this objective he created the GNU General Public License (often referred to as "the GPL"), which grants rights to redistribute the software in original or modified form, subject to the condition that the recipient will also have the same rights.
Stallman's rhetoric was very successful and he effectively co-opted most of the existing software sharing communities into what became known as "the free software community", in which Stallman's influence was so significant that many authors of free software used the GPL as the license of their programs without considering that there might be alternative forms of licensing.
The GNU project has achieved great success with the creation of many components of the desired free software operating system, including a text editor, compiler, system libraries, command interpreter and various utility programs. This is a huge success for a self-funded, volunteer-driven project.
The arrival of Linux
The only essential component where the GNU project ran into serious trouble (which caused great delays) was the operating system kernel. In this area, the Finnish computer science student Linus Torvalds achieved success with a less ambitious, "monolithic" design for the operating system kernel he called "Linux". However, he used the term "Linux" also for the entire operating system consisting of his kernel and all the other operating system components which had been created by the GNU project. This has led to the popular myth that "Linux" is "an operating system developed by Linus Torvalds" with the facts that Torvalds only created the operating system kernel, and that most of the rest of the system has come from the GNU project, generally known only to experts. This common popular misperception is a dissapointment to the free software community.
Another serious blow to Stallman's influence was the successful launch in 1998 of the Open Source Initiative (OSI), self-described as a "marketing program for free software" and "a pitch for 'free software' on solid pragmatic grounds rather than ideological tub-thumping". The campaign for replacing the term "free software" with "open source" and dropping Stallman's ideological emphasis on freedom rights has been so successful that OSI has, as some argue, co-opted much of what used to be the free software movement and turned it into the "open source" movement which has a significantly different philosophical basis.
Since then, the "Linux" operating system (in reality the GNU system combined with Linus Torvalds' kernel) and other "open source" software have seen endorsement and contributions from many corporations, and have developed into the main threat to the monopolistic business plans of Microsoft Corporation.
One of Microsoft's strategies in response has been "think-tank FUD", as summarized here: http://www.cse.unsw.edu.au/~lambert/blog/computers/tanks.html