Google's Matt Cutts explains ALT attributes for images

Google's Matt Cutts recently posted a video about how to use ALT attributes for images

The ALT attribute provides alternative or substitute text, for use when the image cannot be seen by a visually impaired person or by a search engine.

In both cases they can't see the image so you have to describe it in a way that tells them what the image shows. For example if it's a photo of a Siamese cat than you might use:

<img src="cat.jpg" alt="siamese cat">

This is great for the visually impaired person and also for SEO purposes because the search engine engine has a label to attach to that photo for use in their Image search.

For more information, I'll handover to Matt's video (3min 10sec):