Hi Dart,
I am experiencing the same problem. The CSS won't replace the image I use in the menu with the image specified in the hover: line in the CSS file.
Also, when I look at the code for the page (rightmouseclick and select page source) there is no list, but a table in which the images are defined with an anchor <a> in each cell.
In admin, when you look at the menu item that is created there is an id created by Joomla, in my case id's 1,5,6,7,8 but I don't see that in the page code that is created.
See
www.webcoast.nl/test/ and the vertical menu on the left.
Regards, Leo