-Edit-
OP's desired effect is grayscale<->color, not opacity.
OP's ref: http://themes.quemalabs.com/elitist/
Updated fiddle: http://jsfiddle.net/bwbNH/
OP,
From what I understand, you want to fade out all images whenever the user hovers over any of the images. While I don't know your use case, this might be confusing as it's not exactly standard. In any case, I'd suggest binding your events to the parent ul.gallery
and assigning the animation to its children: $(this).children('li')
Fiddle : http://jsfiddle.net/KaZFL/
JS
$(document).ready(function () {
$(".gallery").mouseenter(function () {
$(this).children('li').stop().animate({
"opacity": "0"
}, "slow");
}).mouseleave(function () {
$(this).children('li').stop().animate({
"opacity": "1"
}, "slow");
});
});