Google understands what’s shown in an images by reading alt attributes (you may have heard them called alt tags) in the HTML code of a webpage. An alt attribute is text behind the image, visible only when the image cannot display like during page load or in email messages.
The text you use in the alt attribute has a multiplication affect because it counts as important text on the page (helping your page rank), adds keyword credit when the image is linked, and may help your images appear in Google image searches. Make sure to read my post 5 Things to Know When Writing Photo Alt Text for more on that subject.
Matt Cuts from Google gives his own explanation and rationale for alternate attributes in this video, saying to use them on ALL IMAGES!
Alt text is displayed in HTML as
<img src=”/image.jpg” alt=”Short description of the image” title=”Text that appears on mouse over” />
You may have noticed the title attribute in the above tag. Google Webmaster Central explains in its post, Using Alt Attributes Smartly:
Some of you have asked about the difference between the “alt” and “title” attributes. According to the W3C recommendations, the “alt” attribute specifies an alternate text for user agents that cannot display images, forms or applets. The “title” attribute is a bit different: it “offers advisory information about the element for which it is set.” As the Googlebot does not see the images directly, we generally concentrate on the information provided in the “alt” attribute. Feel free to supplement the “alt” attribute with “title” and other attributes if they provide value to your users!
Let me read through the technical speak here and say that you mainly need to focus on the alternate text and not worry much about the title text. If it makes you feel better, I rarely use title text for my images (but I always use alt text).