Image a site that has images for their navigational links. Now, if you turn CSS off, you will see a new version of the navigation, using standard text version of the links.
Susan Moskwa, one of Google's new Webmaster Central Google Groups support people, said it is acceptable, based on intent.
If your intent is purely to improve the visual user experience (e.g. by replacing some text with a fancier image of that same text), you don't need to worry.
However, if your intent is "to deceive the search engines, we frown on that," said Susan Moskwa. She explained that she spoke with Matt Cutts on this, I guess all new Googlers run some of these questions by Matt, and added, "Matt did say that hiding text moves you a step further towards the gray area."
So if you are hiding text even for non-evil purposes, it does move you closer to the "gray area."
Forum discussion at Google Groups.