Paul_o_b - 10:46 am on May 9, 2012 (gmt 0)
Yes the text must fit in the space but this is rarely an issue as in the case of a menu you would be adding text to match the menu images and usually that would be one word.
Even if the word does get clipped slightly when images are off that makes no difference to screenreaders or SEO as they still get the full text.
The same applies if you used alt attributes for images as all versions of IE will cut the text off if it doesn't fit inside the image dimensions - so images fail on this point also.
Do a search for Gilder/Levin image replacement as that is similar to to the method I use (except I was using it long before they gave a name to it).